NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
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' customers include insurance carriers and third party administrators. The Company realizes revenue
from the sale of software licenses, application service provider fees, hosting fees, software maintenance fees and consulting and
implementation services.
Basis of presentation and principles of consolidation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”)
for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, the consolidated
financial statements do not include all of the information and footnotes required by US GAAP for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments
are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial
statements for the year ended December 31, 2017 and notes thereto and other pertinent information contained in our Annual Report
on Form 10-K as filed with the Securities and Exchange Commission (the “Commission”) on March 30, 2018.
The consolidated financial statements of the Company include
the Company and its wholly-owned subsidiaries. All material inter-company balances and transactions have been eliminated.
For purpose of comparability, certain prior
period amounts have been reclassified to conform to the 2018 presentation. Prior year amounts pertaining to the Company’s
discontinued operations have been reclassified to continuing operations due to the amounts being immateriality of the amounts.
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 2018 and 2017 include the allowance for doubtful accounts,
stock-based compensation, the useful lives and valuation of property and equipment, valuation of deferred tax assets, and deferred
revenue.
Cash and cash equivalents
The Company considers all liquid debt instruments with original
maturities of three months or less to be cash equivalents.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Accounts receivable and allowance for uncollectable accounts
The Company has a policy of establishing an allowance for uncollectible
accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically
reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other
factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged
to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. At September
30, 2018 and December 31, 2017, the Company has established, based on a review of its outstanding balances, an allowance for doubtful
accounts in the amount of $0 and $11,675, respectively.
Fair value of financial instruments
The carrying amounts of financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and capital leases approximated fair
value as of September 30, 2018 and December 31, 2017, because of the relatively short-term maturity of these instruments and their
market interest rates.
The Company follows Financial Accounting
Standards Board (“FASB”) ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for
assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be
applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework
for measuring fair value, and expands disclosure about such fair value measurements.
Property and equipment
Property and equipment are carried at cost.
The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are
retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses
are included in income in the year of disposition. In accordance with Statement of Financial Accounting Standards ASC 360, “Accounting
for the Impairment or Disposal of Long-Lived Assets,” the Company examines the possibility of decreases in the value of fixed
assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Impairment of long-lived assets
The Company periodically reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company
recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset.
The amount of impairment is measured as the difference between the asset's estimated fair value and its book value.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Income taxes
The Company accounts for income taxes pursuant to the provisions
of FASB ASC 740-10, “Accounting for Income Taxes” (“ASC 740-10”), which requires, among other things, an
asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which
management believes it is more likely than not that the net deferred asset will not be realized.
The Company follows the provisions of the ASC 740-10 related
to
Accounting for Uncertain Income Tax Positions.
When tax returns are filed, it is highly certain that some positions taken
would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the
position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10,
the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be sustained upon examination, including the resolution of
appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that
meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent
likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits
in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities
upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the
Company has not recorded a liability for uncertain tax benefits.
The Company has adopted FASB ASC 740-10-25
Definition of
Settlement,
which provides guidance on how an entity should determine whether a tax position is effectively settled for the
purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the
completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively
settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than
not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. As of September
30, 2018, the tax years ended December 31, 2017, 2016 and 2015 are still subject to audit.
Income (loss) per common share
Basic earnings per share is computed by dividing income (loss)
from continuing operations by the weighted average number of shares of common stock outstanding during the period. Diluted earnings
per share is computed by dividing the adjusted net income (loss) from operations for diluted earnings per share by the weighted
average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each
period.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
The Company's weighted average common shares outstanding used
in computing fully diluted net income per common share include the following:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
41,543,655
|
|
|
|
41,543,655
|
|
|
|
41,543,655
|
|
|
|
41,543,655
|
|
Conversion of series A convertible preferred stock issued and outstanding into common stock
|
|
|
25,535,000
|
|
|
|
25,535,000
|
|
|
|
25,535,000
|
|
|
|
25,535,000
|
|
Conversion of series B convertible preferred stock issued and outstanding into common stock
|
|
|
106,144,240
|
|
|
|
106,144,240
|
|
|
|
106,144,240
|
|
|
|
106,144,240
|
|
Conversion of series C convertible preferred stock issued and outstanding into common stock
|
|
|
25,083,500
|
|
|
|
23,747,340
|
|
|
|
25,083,500
|
|
|
|
14,699,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing fully diluted net income (loss) per share
|
|
|
198,306,395
|
|
|
|
196,970,235
|
|
|
|
198,306,395
|
|
|
|
187,922,335
|
|
The effects of options and warrants to purchase
the Company’s common stock, which were outstanding during the three and nine months ended September 30, 2018 and 2017, are
excluded from the calculation of common stock equivalents because they are out-of-the-money (their exercise prices are greater
than the market price of the Company’s Common Stock as of September 30, 2018 and 2017).
The Company’s issued and outstanding convertible preferred
stock is convertible into common stock at a ratio of 20 common shares for each share of preferred stock.
Revenue recognition and deferred revenue
The Company offers InsPro Enterprise
TM
on both a
licensed and an ASP basis. An InsPro Enterprise software license entitles the purchaser a perpetual license to a copy of the InsPro
Enterprise software installed at a single client location or hosted by the Company. Alternatively, ASP and hosting service enables
a client to lease the InsPro Enterprise software, paying only for that capacity required to support their business. ASP and hosting
customers access InsPro Enterprise installed on customers’ servers or on the Company’s servers located at a third party’s
site.
The Company’s software maintenance fees apply to both
licensed and ASP customers. Maintenance fees cover periodic updates to the application and the InsPro Enterprise help desk.
The Company’s consulting and implementation services are
generally associated with the implementation or post implementation of InsPro Enterprise for either an ASP or licensed client.
Implementation services include InsPro Enterprise installation, configuration and modification of InsPro Enterprise functionality,
client insurance plan set-up, client insurance document design and system documentation. Post implementation services include these
same services to existing customers supporting their ongoing utilization of InsPro Enterprise.
The Company’s revenue is recognized under FASB ASC 606
(“ASC 606”).
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Cost of revenues
Cost of revenues includes
direct labor and associated costs for employees and independent contractors performing InsPro Enterprise
TM
design, development,
implementation and testing together with customer management, training and technical support, as well as the cost of the resale
of third party software and hardware and to a portion of facilities costs and depreciation. The following table discloses cost
of revenue as reported in the statement of operations.
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation, employee benefits and related taxes
|
|
$
|
1,551,902
|
|
|
$
|
1,593,138
|
|
|
$
|
4,844,716
|
|
|
$
|
4,873,531
|
|
Professional fees
|
|
|
1,743,669
|
|
|
|
1,566,611
|
|
|
|
5,091,801
|
|
|
|
5,101,022
|
|
Depreciation
|
|
|
51,805
|
|
|
|
53,394
|
|
|
|
137,508
|
|
|
|
202,884
|
|
Rent, utilities, telephone and communications
|
|
|
97,297
|
|
|
|
86,250
|
|
|
|
293,502
|
|
|
|
286,452
|
|
Other cost of revenues
|
|
|
143,692
|
|
|
|
71,606
|
|
|
|
308,986
|
|
|
|
233,257
|
|
|
|
$
|
3,588,365
|
|
|
$
|
3,370,999
|
|
|
$
|
10,676,513
|
|
|
$
|
10,697,146
|
|
Selling, general and administrative expenses
Selling, general and administrative expenses include all selling,
marketing, and other expenses not classified as cost of revenues. The following table discloses selling, general and administrative
expenses as reported in the statement of operations.
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation, employee benefits and related taxes
|
|
$
|
754,131
|
|
|
$
|
741,978
|
|
|
$
|
2,377,818
|
|
|
$
|
3,102,939
|
|
Advertising and other marketing
|
|
|
38,146
|
|
|
|
10,297
|
|
|
|
50,181
|
|
|
|
26,719
|
|
Depreciation
|
|
|
20,301
|
|
|
|
20,728
|
|
|
|
54,861
|
|
|
|
83,386
|
|
Rent, utilities, telephone and communications
|
|
|
40,500
|
|
|
|
37,278
|
|
|
|
122,303
|
|
|
|
188,631
|
|
Professional fees
|
|
|
95,346
|
|
|
|
201,929
|
|
|
|
370,132
|
|
|
|
554,789
|
|
Other general and administrative
|
|
|
219,389
|
|
|
|
176,960
|
|
|
|
602,826
|
|
|
|
567,747
|
|
|
|
$
|
1,167,813
|
|
|
$
|
1,189,170
|
|
|
$
|
3,578,121
|
|
|
$
|
4,524,211
|
|
Advertising and other marketing
Advertising and other marketing costs are expensed as incurred
and are reported in selling, general and administrative expenses. See the previous table under selling, general and administrative
expenses for advertising and other marketing expenses reported in the statement of operations.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Concentrations of credit risk
The Company maintains its cash and restricted cash in bank deposit
accounts, which exceed the federally insured limits as provided through the Federal Deposit Insurance Corporation (“FDIC”).
At September 30, 2018, the Company had $5,313,530 of cash in United States bank deposits, of which $501,119 was federally insured
and $4,812,411 was not federally insured.
The following table lists the percentage of the Company’s
accounts receivable balance from the Company’s customers representing 10% or more of the accounts receivable balances as
of the periods listed below.
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Client #1
|
|
|
42
|
%
|
|
|
52
|
%
|
Client #2
|
|
|
13
|
%
|
|
|
10
|
%
|
Client #3
|
|
|
11
|
%
|
|
|
-
|
|
The following table lists the percentage of the Company’s
revenue earned from the Company’s customers representing 10% or more of the revenue earned in each of the periods listed
below.
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Client #1
|
|
|
36
|
%
|
|
|
33
|
%
|
Client #2
|
|
|
17
|
%
|
|
|
22
|
%
|
Client #3
|
|
|
12
|
%
|
|
|
-
|
|
Client #4
|
|
|
-
|
|
|
|
-
|
|
Stock-based compensation
The Company accounts for stock based compensation transactions
using a fair-value-based method and recognizes compensation cost for share-based payments to employees based on their grant-date
fair value from the beginning of the fiscal period in which the recognition provisions are first applied.
Non-employee stock based compensation
The cost of stock based compensation awards issued to non-employees
for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services,
whichever is more readily determinable, based on their grant-date fair value from the beginning of the fiscal period in which the
recognition provisions are first applied.
Registration rights agreements
At September 30, 2018, the Company does not
believe that it will incur a penalty in connection with the Company’s registration rights agreements. Accordingly, no liability
in respect thereof was recorded as of September 30, 2018. See Note 5 - Stockholders Equity – Registration and Participation
Rights.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Recent accounting pronouncements
From time to time, new accounting pronouncements are issued
by FASB, which are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that
the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated
financial statements upon adoption.
On January 1, 2018, the Company adopted ASC 606, which provides
guidance for revenue recognition. See Note 2 - Revenue and deferred 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.
In February 2018, the FASB issued ASU No. 2018-02 ,
Income
Statement - Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
(Topic 220)
(“ASU 2018-02”) , which allows for a reclassification from accumulated other comprehensive income to
retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act"). ASU 2018-02 is effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2018-02 is effective
for the Company at the beginning of fiscal year 2019 and early adoption is permitted. We are currently evaluating the impact of
the adoption of ASU 2016-02 on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13 “Financial
Instruments – Credit Losses (Topic 326) (“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.
Liquidity
During the nine months ended September 30, 2018, the Company’s
net income was $2,169,046 and cash provided by operations was $376,846. As of September 30, 2018, the Company had $5,187,447 of
cash, working capital of $3,210,007 and the Company’s shareholders’ equity was $2,558,388.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Our liquidity needs for the next 12 months and beyond are principally
for the funding of our operations, payments on capital leases and the purchase of property and equipment. Based on the foregoing,
management believes the Company has sufficient funds to finance its operations for twelve months from the date this report was
issued.
NOTE 2 – REVENUE AND DEFERRED REVENUE
We adopted ASC 606 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, which means ASC 606
has been applied to the Company’s 2018 financial statements and disclosures going forward, but that prior period financial
statements and disclosures reflect the prior revenue recognition standard. The adoption of ASC 606 did not result in a change to
the opening balance of accumulated deficit.
During the implementation
of ASC 606 we identified five broad revenue streams: 1) professional services, 2) sale of perpetual software licenses and sale
of equipment, 3) ASP and hosting revenue, 4) maintenance revenue, and 5) Reseller Fee (as defined below). The following table discloses
revenue by revenue stream.
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services
|
|
$
|
2,203,773
|
|
|
$
|
3,088,140
|
|
|
$
|
8,576,241
|
|
|
$
|
8,072,811
|
|
ASP and hosting revenue
|
|
|
2,088,867
|
|
|
|
1,926,310
|
|
|
|
6,121,462
|
|
|
|
5,684,742
|
|
Sales of software licenses
|
|
|
90,000
|
|
|
|
143,728
|
|
|
|
90,000
|
|
|
|
143,728
|
|
Maintenance revenue
|
|
|
423,666
|
|
|
|
406,639
|
|
|
|
1,249,655
|
|
|
|
1,204,337
|
|
Reseller fee revenue
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
500,000
|
|
Sale of equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
23,797
|
|
|
|
-
|
|
Other revenue
|
|
|
5,329
|
|
|
|
13,000
|
|
|
|
22,077
|
|
|
|
45,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,311,635
|
|
|
$
|
6,077,817
|
|
|
$
|
16,583,232
|
|
|
$
|
15,651,018
|
|
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 customers 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”). Under ASC 606, 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.
Revenue recognition is deemed to be consistent under both ASC 606 and the previous standard.
The unearned portion of the Company’s revenue, which is
revenue collected or billed but not yet recognized as earned, has been included in the consolidated balance sheet as a liability
for deferred revenue.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 2 – REVENUE AND DEFERRED REVENUE (Continued)
The following table discloses changes in unearned revenue as
of September 30, 2018 and 2017.
|
|
As of September 30, 2018
|
|
|
|
|
|
Short Term
|
|
|
|
|
Balance at December 31
|
|
$
|
2,765,401
|
|
Deferral of revenue
|
|
|
1,488,912
|
|
Reclassification of unearned revenue from long term to short term
|
|
|
125,000
|
|
Recognition of unearned revenue
|
|
|
(1,986,109
|
)
|
|
|
|
|
|
Balance at September 30
|
|
$
|
2,393,204
|
|
|
|
|
|
|
Long Term
|
|
|
|
|
Balance at December 31
|
|
$
|
1,000,000
|
|
Deferral of revenue
|
|
|
-
|
|
Reclassification of unearned revenue from long term to short term
|
|
|
(125,000
|
)
|
Recognition of unearned revenue
|
|
|
-
|
|
|
|
|
|
|
Balance at September 30
|
|
$
|
875,000
|
|
Deferral of revenue in the nine months ended September 30, 2018
and 2017 was $1,488,912 and $1,871,906, respectively. This deferred revenue represents annual maintenance fees, which were invoiced
at the beginning of customers’ annual maintenance contracts, and collected professional services fees, which pertain to performance
obligations not realized as of September 30, 2018 and 2017.
Revenue recognized in the nine months ended September 30, 2018
and 2017, which was included in the unearned revenue liability balance at the beginning of each year, was $1,986,109 and $1,587,965,
respectively. This revenue represents maintenance, professional services and Reseller Agreement performance obligations performed
during the nine months ended September 30, 2018 and 2017.
Long term unearned revenue pertains to the portion of the Reseller
Fee associated with Refund Events that will occur more than 12 months from September 30, 2018 and 2017, respectively.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the
following:
|
|
Useful
Life
(Years)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Computer equipment and software
|
|
3
|
|
$
|
4,895,519
|
|
|
$
|
4,590,221
|
|
Office equipment
|
|
4.6
|
|
|
145,229
|
|
|
|
145,228
|
|
Leasehold improvements
|
|
5.4
|
|
|
81,933
|
|
|
|
81,933
|
|
|
|
|
|
|
5,122,681
|
|
|
|
4,817,382
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
|
|
(4,724,678
|
)
|
|
|
(4,547,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
398,003
|
|
|
$
|
269,994
|
|
See Note 6 – Capital Lease Obligations.
The following table discloses depreciation
expense as reported in the statement of operations.
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation included in cost of revenues
|
|
$
|
51,805
|
|
|
$
|
53,394
|
|
|
$
|
137,508
|
|
|
$
|
202,884
|
|
Depreciation included in selling, general and administrative
|
|
|
20,301
|
|
|
|
20,728
|
|
|
|
54,861
|
|
|
|
83,386
|
|
Total depreciation
|
|
$
|
72,106
|
|
|
$
|
74,122
|
|
|
$
|
192,369
|
|
|
$
|
286,270
|
|
NOTE 4 – NOTES PAYABLE
Notes payable at 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, had
an annual interest rate of 7.99% and consisted 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 balance for this note was $17,147 as of December 31, 2018. For the year ended
December 31, 2018, the interest expense incurred on this note was $1,575. 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 for this note was $28,646 as of December 31, 2018. For the year ended
December 31, 2018, the interest expense incurred on this note was $1,442.
Notes payable at September 30, 2018, consist of two notes payable
for insurance premium financing on one of the Company’s insurance policies. The first note commenced on May 3, 2018, has
an annual interest rate of 9.98% and consists of 11 monthly payments of principal and interest of $3,204 per month commencing on
June 3, 2018 and ending on April 3, 2019. The balance for this note was $21,697 as of September 30, 2018. For the nine months ended
September 30, 2018, the interest expense incurred on this note was $969. The second note commenced on July 30, 2018, has an annual
interest rate of 8.76% and consists of 9 monthly payments of principal and interest of $5,434.53 per month commencing on September
28, 2017 and ending on May 28, 2018. The balance for this note was $46,835 as of September 30, 2018. For the nine months ended
September 30, 2018, the interest expense on this note was $410.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 5 – STOCKHOLDERS’ EQUITY
Common Stock
As of September 30, 2018 and December 31, 2017, the Company
was authorized to issue 750,000,000 and 500,000,000 shares of common stock, respectively, with a par value of $0.001 per share
(“Common Stock”). As of September 30, 2018 and December 31, 2017, the Company had 41,543,655 shares of its Common Stock
issued and outstanding.
The Company has reserved shares of Common Stock, on an as-if-converted
basis, as follows:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Exercise of options issued and outstanding to purchase common stock
|
|
|
700,000
|
|
|
|
825,000
|
|
Issuance of common shares available under the 2010 Equity Compensation Plan
|
|
|
28,296,980
|
|
|
|
28,171,980
|
|
Exercise of warrants issued and outstanding to purchase common stock
|
|
|
-
|
|
|
|
120,000
|
|
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
|
|
|
|
500,000
|
|
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
|
|
|
57,000,000
|
|
|
|
65,000,000
|
|
Conversion of Series C convertible preferred stock issued and outstanding into common stock
|
|
|
25,083,500
|
|
|
|
25,083,500
|
|
|
|
|
|
|
|
|
|
|
Total common stock reserved for issuance
|
|
|
243,259,720
|
|
|
|
251,379,720
|
|
The above table includes Common Stock reserved for unvested
stock options, which are not exercisable, and Common Stock reserved for the issuance of stock options in the future under the Company’s
2010 Equity Compensation Plan.
Series A Preferred Stock
As of September 30, 2018 and December 31, 2017,
the
Board has designated
3,437,500 shares of Series A Convertible Preferred Stock par value $0.001 per share (“Series
A Preferred Stock”). As of September 30, 2018 and December 31, 2017, the Company had 1,276,750 shares of its Series A Preferred
Stock issued and outstanding. As of September 30, 2018 and December 31, 2017, the Company has reserved 25,000 shares of Series
A Preferred Stock for the exercise of warrants issued and outstanding to purchase its Series A Preferred Stock.
The Series A Preferred Stock is entitled to vote as a single
class with the holders of the Company’s Common Stock and preferred stock, with each share of Series A Preferred Stock having
the right to 20 votes.
Upon the liquidation, sale or merger of the Company, each share
of Series A Preferred Stock is entitled to receive an amount equal to the greater of (A) a liquidation preference equal to two
and a half (2.5) times the Series A Preferred Stock original issue price, or $12,767,500 in aggregate, subject to certain customary
adjustments, or (B) the amount such share of Series A Preferred Stock would receive if it participated
pari passu
with the
holders of Common Stock on an as-converted basis. The liquidation preference is calculated by taking the product of the issued
and outstanding shares of Series A Preferred Stock times $10.00. Series A Preferred Stock is junior to Series B Convertible Preferred
Stock par value $0.001 per share (“Series B Preferred Stock”) and the Series C Convertible Preferred Stock, par value
$0.001 per share (“Series C Preferred Stock”), as it pertains to liquidation preferances.
Each share of Series A Preferred Stock is convertible into 20
shares of Common Stock, subject to adjustment and at the option of the holder of the Series A Preferred Stock.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 5 – STOCKHOLDERS’ EQUITY (Continued)
For so long as any shares of Series A Preferred Stock are outstanding,
the vote or consent of the holders of at least two-thirds of the Series A Preferred Stock is required to approve any amendment
to the Company’s certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special
rights of the Series A Preferred Stock or any amendment to the Company’s certificate of incorporation to create any shares
of capital stock that rank senior to the Series A Preferred Stock. In addition to the voting rights described above, for so long
as 1,000,000 shares of Series A Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the
shares of Series A Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of the
Company or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series A Preferred
Stock with an amount per share equal to two and a half (2.5) times the Series A Preferred Stock original issue price, or $12,767,500,
in aggregate for all issued and outstanding Series A Preferred Stock.
Series B Preferred Stock
As of September 30, 2018 and December 31, 2017,
the
Board has designated
11,000,000 shares of Series B Convertible Preferred Stock par value $0.001 per share (“Series
B Preferred Stock”). As of September 30, 2018 and December 31, 2017, the Company had 5,307,212 of its Series B Preferred
Stock issued and outstanding. As of September 30, 2018 and December 31, 2017, the Company has reserved 2,850,000 shares of Series
B Preferred Stock for the exercise of warrants issued and outstanding to purchase its Series B Preferred Stock.
The Series B Preferred Stock is entitled to vote as a single
class with the holders of the Company’s Common Stock and preferred stock, with each share of Series B Preferred Stock having
the right to 20 votes.
As of September 30, 2018 and December 31, 2017, upon the liquidation,
sale or merger of the Company, each share of Series B Preferred Stock is entitled to receive an amount equal to the greater of
(A) a liquidation preference equal to the Series B Preferred Stock original issue price, or $15,921,636 in aggregate, subject to
certain customary adjustments, or (B) the amount such share of Series B Preferred Stock would receive if it participated
pari
passu
with the holders of Common Stock and preferred stock on an as-converted basis. The liquidation preference is calculated
by taking the product of the issued and outstanding shares of Series B Preferred Stock times $3.00. Series B Preferred Stock is
senior to Series A Preferred Stock, and junior to the Series C Preferred Stock, as it pertains to liquidation preferances.
Each share of Series B Preferred Stock is convertible into 20
shares of Common Stock, subject to adjustment and at the option of the holder of the Series B Preferred Stock.
For so long as any shares of Series B Preferred Stock are outstanding,
the vote or consent of the holders of at least two-thirds of the Series B Preferred Stock is required to approve (Y) any amendment
to the Company’s certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special
rights of the Series B Preferred Stock or (Z) any amendment to the Company’s certificate of incorporation to create any shares
of capital stock that rank senior to the Series B Preferred Stock. In addition to the voting rights described above, for so long
as 1,000,000 shares of Series B Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the
shares of Series B Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of the
Company or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series B Preferred
Stock with an amount per share equal the Series B Preferred Stock original issue price, or $15,921,636, in aggregate for all issued
and outstanding Series B Preferred Stock.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 5 – STOCKHOLDERS’ EQUITY (Continued)
Series C Preferred Stock
As of September 30, 2018 and December 31, 2017,
the
Board has designated
4,000,000 shares of Series C Convertible Preferred Stock par value $0.001 per share (“Series
C Preferred Stock”). As of September 30, 2018 and December 31, 2017, the Company had 1,254,175 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.
Stock Options
During the nine months ended September 30, 2018, options for
125,000 shares of Common Stock, which were previously granted to a former executive of the Company, expired in accordance with
the terms of such stock options.
As of September 30, 2018, there were 30,000,000 shares of our
Common Stock authorized to be issued under the Company’s 2010 Equity Compensation Plan, of which 28,296,980 shares of our
Common Stock remain available for future stock option grants.
The Company recorded compensation expense pertaining to employee
stock options and warrants in the amount of $4,849 and $130,031 for the nine months ended September 30, 2018 and 2017, respectively.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 5 – STOCKHOLDERS’ EQUITY (Continued)
The value of equity compensation not yet expensed pertaining
to unvested equity compensation for options to purchase common stock was $7,500 as of September 30, 2018, which will be recognized
over a weighted average 1.5 years in the future.
A summary of the Company's outstanding stock options to purchase
Common Stock is 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, 2017
|
|
|
825,000
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
|
3.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(125,000
|
)
|
|
|
0.10
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
700,000
|
|
|
$
|
0.10
|
|
|
$
|
0.00
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at September 30, 2018
|
|
|
450,000
|
|
|
$
|
0.10
|
|
|
$
|
0.00
|
|
|
|
-
|
|
|
$
|
-
|
|
(1) The aggregate intrinsic value is based on the $0.085 closing
price as of September 28, 2018, for the Company’s Common Stock.
Common Stock Warrants
During the nine months ended September 30, 2018, warrants to
purchase 120,000 shares of Common stock expired in accordance with the terms of such stock warrants.
A summary of the status of the Company's outstanding common
stock warrants is as follows:
|
|
|
|
|
Weighted
|
|
|
|
Common
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2017
|
|
|
120,000
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
For the period ended September 30, 2018
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(120,000
|
)
|
|
|
0.15
|
|
Outstanding and exercisable at September 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 5 – STOCKHOLDERS’ EQUITY (Continued)
Series A Preferred Stock Warrants
Outstanding warrants to purchase the Company’s Series
A Preferred Stock at September 30, 2018, have a remaining contractual life of 3.9 years.
A summary of the status of the Company's outstanding Series
A Preferred Stock warrants is as follows:
|
|
|
|
|
Weighted
|
|
|
|
Preferred
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2017
|
|
|
25,000
|
|
|
$
|
4.00
|
|
|
|
|
|
|
|
|
|
|
For the period ended September 30, 2018
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at September 30, 2018
|
|
|
25,000
|
|
|
$
|
4.00
|
|
Series B Preferred Stock Warrants
During the nine months ended September 30, 2018, warrants to
purchase 400,000 shares of Series B Preferred Stock expired in accordance with the terms of such warrants.
Outstanding preferred stock warrants to purchase the Company’s
Series B Preferred Stock at September 30, 2018, have a remaining contractual life of 0.6 years. A summary of the status of the
Company's outstanding Series B Preferred Stock warrants is as follows:
|
|
|
|
|
Weighted
|
|
|
|
Preferred
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2017
|
|
|
3,250,000
|
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
For the period ended September 30, 2018
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(400,000
|
)
|
|
|
3.00
|
|
Outstanding and exercisable at September 30, 2018
|
|
|
2,850,000
|
|
|
$
|
3.00
|
|
Registration and Participation Rights
As of September 30, 2018, the Company has not received a demand
notice in connection with any of the Company’s various registration rights agreements.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 6 – CAPITAL LEASE OBLIGATIONS
The Company’s subsidiary, InsPro Technologies, LLC (“InsPro
LLC”), has entered into several capital lease obligations to purchase equipment used for operations. The Company has the
option to purchase the equipment at the end of each lease agreement for one dollar. The underlying assets and related depreciation
were included in the appropriate fixed asset category, and related depreciation account.
Property and equipment includes the following amounts for leases
that have been capitalized:
|
|
Useful Life (Years)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Computer equipment and software
|
|
3
|
|
$
|
1,900,711
|
|
|
$
|
1,671,742
|
|
Less accumulated depreciation
|
|
|
|
|
(1,550,067
|
)
|
|
|
(1,454,084
|
)
|
|
|
|
|
$
|
350,644
|
|
|
$
|
217,658
|
|
Future minimum payments required under capital leases at September
30, 2018, are as follows:
Three months ending December 31, 2018
|
|
$
|
50,954
|
|
2019
|
|
|
134,707
|
|
2020
|
|
|
89,124
|
|
2021
|
|
|
35,626
|
|
2022
|
|
|
27,516
|
|
2023
|
|
|
13,757
|
|
|
|
|
|
|
Total future payments
|
|
|
351,684
|
|
Less amount representing interest
|
|
|
42,267
|
|
|
|
|
|
|
Total future payments less interest
|
|
|
309,417
|
|
Less current portion
|
|
|
134,795
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
174,622
|
|
NOTE 7 – DEFINED CONTRIBUTION 401(k) PLAN
The Company implemented a 401(k) plan on January 1, 2007. Eligible
employees contribute to the 401(k) plan. Employees become eligible after attaining age 19 and after 6 months of employment with
the Company. An employee may become a participant of the 401(k) plan on the first day of the month following the completion of
the eligibility requirements. Effective January 1, 2007 the Company implemented an elective contribution to the plan of 25% of
the employee’s contribution up to 4% of the employee’s compensation. The contributions are subject to a vesting schedule
and become fully vested after one year of service, retirement, death or disability, whichever occurs first. The Company made contributions
of $53,531 and $51,912 for the nine months ended September 30, 2018 and 2017, respectively.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 8 – COMMITTMENTS AND CONTINGENCIES
On September 14, 2007, InsPro LLC entered into a lease agreement
(the “Lease Agreement”) with BPG Officer VI Baldwin Tower L.P. (“BPG”). On April 28, 2015, InsPro LLC and
BPG entered into a fifth amendment to the Lease Agreement whereby InsPro LLC and BPG agreed to amend the Lease Agreement to increase
the leased office space by 6,801 rentable square feet effective April 1, 2015, through March 31, 2016, at an incremental monthly
rent of $10,000. On June 9, 2016, InsPro LLC and BPG entered into a sixth amendment to the Lease Agreement whereby InsPro LLC and
BPG agreed to amend the Lease Agreement to extend the term through January 31, 2018 for 17,567 of rentable square feet at a monthly
cost of $28,546 for the period February 1, 2017 through January 31, 2018. On June 7, 2017, InsPro LLC and Baldwin Tower Office
Building, LLC (“Landlord”), which is the new owner and landlord for the Company’s Eddystone office building,
entered into a seventh amendment to the Lease Agreement whereby InsPro LLC and Landlord agreed to amend the Lease Agreement to
extend the term through January 31, 2019 for 17,567 of rentable square feet at a monthly cost of $30,010 for the period February
1, 2018 through January 31, 2019. On May 10, 2018, InsPro LLC and Landlord entered into an eighth amendment to the Lease Agreement
whereby InsPro LLC and Landlord agreed to amend the Lease Agreement to extend the term through January 31, 2022 for 17,567 of rentable
square feet at a monthly cost of $30,010 for the period February 1, 2019 through January 31, 2022. The eighth amendment allows
InsPro LLC to terminate the Lease Agreement effective January 31, 2021, provided InsPro LLC notifies Landlord of an early termination
and pays Landlord an early termination fee of $30,000 by October 31, 2020.
Future minimum payments required under operating leases and
service agreements at September 30, 2018, are as follows:
Three months ending December 31, 2018
|
|
$
|
167,869
|
|
2019
|
|
|
668,391
|
|
2020
|
|
|
429,049
|
|
2021
|
|
|
30,010
|
|
thereafter
|
|
|
-
|
|
|
|
|
|
|
Total
|
|
$
|
1,295,319
|
|
The Company leases certain real and personal property under
non-cancelable operating leases. Rent expense was $90,846 and $87,279 for the three months ended September 30, 2018 and 2017, respectively.
Rent expense was $270,803 and $317,588 for the nine months ended September 30, 2018 and 2017, respectively.
Mr. Robert Oakes resigned as an executive employee effective
June 30, 2017. Pursuant to Mr. Oakes’ employment agreement, Mr. Oakes will be entitled to receive; (i) continuation of his
$300,000 per year base salary for a period of 12 months in accordance with the Company's normal payroll practices, less any applicable
income tax withholding required under federal or state law, and subject to Section 409A of the Internal Revenue Code of 1986, as
amended, and applicable guidance issued there under, and (ii) continuation for a period of 18 months after the date of termination
of the benefits under benefit plans extended from time to time by the Company to its senior executives. As of September 30, 2018,
the Company recorded a severance accrual connection with Mr. Oakes termination in the amount of $3,816. 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.
Effective December 31, 2017, an executive’s employment
was terminated by the Company. Pursuant to this executive’s employment agreement, the executive was subject to non-competition
and non-solicitation covenants for a period of six months following his termination. As of June 30, 2018, the Company has fully
paid the severance in connection with this executive’s termination.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 9 - INCOME TAXES
The Company has net operating loss carry forwards for federal
income tax purposes of approximately $47,300,000 at September 30, 2018, the unused portion of which expires in years 2026 through
2038. 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 were as follows:
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
138,000
|
|
|
|
14,500
|
|
|
|
$
|
138,000
|
|
|
$
|
14,500
|
|
The differences between the Company’s
effective tax rate and the statutory federal rate were as follows:
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
U.S. statutory rate
|
|
|
21.0
|
%
|
|
|
28.0
|
%
|
State income taxes
|
|
|
8.0
|
%
|
|
|
3.0
|
%
|
Amortization/impairment of acquisition related assets
|
|
|
(0.1)
|
%
|
|
|
(0.7
|
)%
|
Stock based compensation
|
|
|
0.1
|
%
|
|
|
9.6
|
%
|
Other permanent differences
|
|
|
0.1
|
%
|
|
|
5.9
|
%
|
Valuation allowance
|
|
|
(23.1
|
)%
|
|
|
(42.4
|
)%
|
|
|
|
6.0
|
%
|
|
|
3.4
|
%
|
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
NOTE 9 - 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 periods ended September 30, 2018 and December 31, 2017 were as follows:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
11,502,094
|
|
|
$
|
14,201,084
|
|
Depreciation
|
|
|
(319
|
)
|
|
|
67,099
|
|
Compensation expense
|
|
|
57,947
|
|
|
|
123,093
|
|
Accrued expense
|
|
|
-
|
|
|
|
41,681
|
|
Deferred revenue
|
|
|
449,500
|
|
|
|
449,500
|
|
All miscellaneous other
|
|
|
-
|
|
|
|
3,386
|
|
Total deferred tax asset
|
|
|
12,009,222
|
|
|
|
14,885,843
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
Net deferred tax asset
|
|
|
12,009,222
|
|
|
|
14,885,843
|
|
Less: valuation allowance
|
|
|
(12,009,222
|
)
|
|
|
(14,885,843
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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 as of September 30, 2018 was decreased by $2,876,621 as compared to December
31, 2017.
In 2018 the Company wrote off $28,900,000 of Florida state net
operating loss carry forwards due to operations in Florida having previously ceased and due to management making the determination
that operations would not resume in the state of Florida in future. As a result, the deferred tax asset and related valuation allowance
were decreased by approximately $2,300,000.
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%.
NOTE 10 – SUBSEQUENT
EVENTS
On October 24, 2018, David M. Anderson resigned as the
Chief Executive Officer and as a member of the Board of the Company. The resignation was not the result of any disagreement
between the Company and Mr. Anderson on any matter relating to the Company’s operations, policies or practices. On
November 2, 2018, the Company and Mr. Anderson entered into a Separation Agreement and Mutual Release (the “Separation
Agreement”). The Company and Mr. Anderson were also parties to an employment agreement, dated October 9, 2017 (the
“Employment Agreement”).
The Separation Agreement provides for the payment of certain
severance and other benefits (“Severance”) to Mr. Anderson, including the following: (a) salary continuation for three
months from the November 2, 2018, Termination Date in accordance with the Company’s normal monthly payroll practices, (b)
the monthly reimbursement for payments Mr. Anderson makes for coverage pursuant to the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended, for the period beginning on December 1, 2018 through ending February 28, 2019 and (c) the waiver of Mr.
Anderson’s obligation to repay to the Company the relocation benefits paid to Mr. Anderson as set forth in the Employment
Agreement. The Company will record approximately $103,000 of expense for Severance in the Company’s December 31, 2018, financial
statements.
Pursuant to the Separation Agreement, the Company waives its
right to enforce the non-competition provisions contained in the Employment Agreement, and Mr. Anderson agrees to comply with the
non-solicit and non-disparagement obligations contained in the Employment Agreement. In addition, the Separation Agreement includes
mutual releases by Mr. Anderson and the Company related to Mr. Anderson’s employment with the Company or the termination
of such employment.
On October 29, 2018, the Board appointed Anthony R. Verdi effective
immediately as the Company’s President and Chief Executive Officer. Mr. Verdi remains the Company’s Chief Financial
Officer, which roll he has held since November 2005, and a member of the Board, where he has served since June 2008. On October
30, 2018, the Board approved an increase to Mr. Verdi’s base annual salary from $325,000 to $380,000, effective as of October
30, 2018, in connection with his promotion to President and Chief Executive Officer of the Company.
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
Certain of the statements contained in this Quarterly Report
on Form 10-Q, including in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
and elsewhere in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on management’s
current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations
contained in the forward-looking statements. The forward-looking statements herein include, among others, statements addressing
management’s views with respect to future financial and operating results and costs associated with the Company’s operations
and other similar statements. Various factors, including competitive pressures, regulatory changes, customer defaults or insolvencies,
adverse resolution of any contract or other disputes with customers, or the loss of one or more key client relationships, could
cause actual outcomes and results to differ materially from those described in forward-looking statements.
The words “may,” “will,” “expect,”
“intend,”, “estimate,” “believe,” “continue” and similar expressions may identify
forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. While
we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q,
we caution you that these statements are based on a combination of facts and factors currently known by us and projections of the
future about which we cannot be certain. Many factors, including general business and economic conditions affect our ability to
achieve our objectives. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly
Report on Form 10-Q will prove to be accurate. In addition, if our forward-looking statements prove to be inaccurate, the inaccuracy
may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements
as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame,
if at all. We may not update these forward-looking statements, even though our situation may change in the future.
We qualify all the forward-looking statements contained in this
Quarterly Report on Form 10-Q by the foregoing cautionary statements.