NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2017
NOTE 1 – BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
InsPro Technologies Corporation (the “Company”,
“ITCC”, “we”, “us” or “our”) is a technology company that provides software applications
for use by insurance administrators in the insurance industry. Our business focuses primarily on our InsPro Enterprise
TM
software application, which was introduced in 2004.
The Company offers InsPro Enterprise on both a licensed and
an Application Service Provider (“ASP”) basis. InsPro Enterprise is an insurance administration and marketing system
that supports group and individual business lines, and efficiently processes agent, direct market, worksite and web site generated
business. InsPro Technologies' clients include insurance carriers and third party administrators. The Company realizes revenue
from the sale of software licenses, application service provider fees, hosting fees, software maintenance fees and consulting and
implementation services.
Basis of presentation and principles of consolidation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”)
for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, the consolidated
financial statements do not include all of the information and footnotes required by US GAAP for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments
are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial
statements for the year ended December 31, 2016 and notes thereto and other pertinent information contained in our Annual Report
on Form 10-K as filed with the Securities and Exchange Commission (the “Commission”).
The consolidated financial statements of the Company include
the Company and its wholly owned subsidiaries. All material inter-company balances and transactions have been eliminated.
For purpose of comparability, certain
prior period amounts have been reclassified to conform to the 2017 presentation.
Use of estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates. Significant estimates in 2017 and 2016 include the allowance for doubtful accounts,
stock-based compensation, the useful lives and valuation of property and equipment, 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
June 30, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Accounts receivable and allowance for uncollectable accounts
The Company has a policy of establishing an allowance for uncollectible
accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically
reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other
factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged
to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. At June
30, 2017 and December 31, 2016, the Company has established, based on a review of its outstanding balances, an allowance for doubtful
accounts in the amounts of $0.
Fair value of financial instruments
The carrying amounts of financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and capital leases approximated fair
value as of June 30, 2017 and December 31, 2016, because of the relatively short-term maturity of these instruments and their market
interest rates.
The Company follows Financial Accounting
Standards Board (“FASB”) ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for
assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be
applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework
for measuring fair value, and expands disclosure about such fair value measurements.
Property and equipment
Property and equipment are carried at cost. The cost of repairs
and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed
of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income
in the year of disposition. In accordance with Statement of Financial Accounting Standards ASC 360, “Accounting for the Impairment
or Disposal of Long-Lived Assets,” the Company examines the possibility of decreases in the value of fixed assets when events
or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Impairment of long-lived assets
The Company periodically reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company
recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset.
The amount of impairment is measured as the difference between the asset's estimated fair value and its book value.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Income taxes
The Company accounts for income taxes pursuant to the provisions
of FASB ASC 740-10, “Accounting for Income Taxes” (“ASC 740-10”), which requires, among other things, an
asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which
management believes it is more likely than not that the net deferred asset will not be realized.
The Company follows the provisions of the ASC 740-10 related
to
Accounting for Uncertain Income Tax Positions.
When tax returns are filed, it is highly certain that some positions taken
would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the
position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10,
the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be sustained upon examination, including the resolution of
appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that
meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent
likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits
in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities
upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the
Company has not recorded a liability for uncertain tax benefits.
The Company has adopted FASB ASC 740-10-25
Definition of
Settlement,
which provides guidance on how an entity should determine whether a tax position is effectively settled for the
purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the
completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively
settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than
not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. As of June
30, 2017, the tax years ended December 31, 2016, 2015 and 2014 are still subject to audit.
Income (loss) per common share
Basic earnings per share is computed by dividing income (loss)
from continuing operations by the weighted average number of shares of common stock outstanding during the period. Diluted earnings
per share is computed by dividing the adjusted net income (loss) from operations for diluted earnings per share by the weighted
average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each
period. The effects of common stock equivalents and potentially dilutive securities outstanding during 2017 and 2016 are excluded
from the calculation of diluted income (loss) per common share because they are anti-dilutive.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
The Company's common stock equivalents include the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Series A convertible preferred stock issued and outstanding
|
|
|
25,535,000
|
|
|
|
25,535,000
|
|
Series B convertible preferred stock issued and outstanding
|
|
|
106,144,240
|
|
|
|
106,144,240
|
|
Series C convertible preferred stock issued and outstanding
|
|
|
23,000,000
|
|
|
|
-
|
|
Options to purchase common stock issued and outstanding
|
|
|
1,200,000
|
|
|
|
4,000,000
|
|
Warrants to purchase common stock issued and outstanding
|
|
|
25,098,330
|
|
|
|
25,098,330
|
|
Warrants to purchase series A convertible preferred stock, issued and outstanding
|
|
|
7,600,000
|
|
|
|
7,600,000
|
|
Warrants to purchase series B convertible preferred stock, issued and outstanding
|
|
|
65,000,000
|
|
|
|
65,000,000
|
|
|
|
|
253,577,570
|
|
|
|
233,377,570
|
|
Revenue recognition and deferred revenue
The Company offers InsPro Enterprise
TM
on both a
licensed and an ASP basis. An InsPro Enterprise software license entitles the purchaser a perpetual license to a copy of the InsPro
Enterprise software installed at a single client location or hosted by InsPro Technologies. Alternatively, ASP hosting service
enables a client to lease the InsPro Enterprise software, paying only for that capacity required to support their business. ASP
and hosting clients access InsPro Enterprise installed on clients’ servers or on the Company’s servers located at a
third party’s site.
The Company’s software maintenance fees apply to both
licensed and ASP clients. Maintenance fees cover periodic updates to the application and the InsPro Enterprise help desk.
The Company’s consulting and implementation services
are generally associated with the implementation of InsPro Enterprise for either an ASP or licensed client, and cover such activity
as InsPro Enterprise installation, configuration, modification of InsPro Enterprise functionality, client insurance plan set-up,
client insurance document design and system documentation.
The Company’s revenue is generally recognized under FASB
ASC 985-605 (“ASC 985-605”). For software arrangements involving multiple elements, which are license fees, professional
services, ASP services and maintenance services, the Company allocates revenue to each element based on the relative fair value
or the residual method, as applicable using vendor specific objective evidence to determine fair value, which is based on prices
charged when the element is sold separately. Software revenue accounted for under ASC 985-605 is recognized when persuasive evidence
of an arrangement exists, the software is delivered in accordance with all terms and conditions of the customer contracts, the
fee is fixed or determinable and collectability is probable. Revenue related to post-contract customer support (“PCS”),
including technical support and unspecified when-and-if available software upgrades, is recognized ratably over the PCS term. Under
ASC 985-605, if fair value does not exist for any undelivered element, revenue is not recognized until the earlier of (i) delivery
of such element or (ii) when fair value of the undelivered element is established, unless the undelivered element is a service,
in which case revenue is recognized as the service is performed once the service is the only undelivered element.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company recognizes revenue from software
license agreements when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or
determinable, and collectability is probable. The Company considers fees relating to arrangements with payment terms extending
beyond one year to not be fixed or determinable and revenue for these arrangements is recognized as payments become due from the
customer. In software arrangements that include more than one InsPro Enterprise
TM
module, the Company allocates the
total arrangement fee among the modules based on the relative fair value of each of the modules.
License revenue allocated to software products
generally is recognized upon delivery of the products or deferred and recognized in future periods to the extent that an arrangement
includes one or more elements to be delivered at a future date and for which fair values have not been established. Revenue allocated
to maintenance agreements is recognized ratably over the maintenance term and revenue allocated to training and other service elements
is recognized as the services are performed.
Effective August 18, 2015, the Company entered into a five year
software and services reseller agreement (the “Reseller Agreement”) with an unaffiliated 3
rd
party (the
“Reseller”) whereby the Company granted the Reseller the exclusive right to market InsPro Enterprise to prospective
clients for their administration of long term care insurance products for an initial fee of $2,500,000 (the “Reseller Fee”).
Pursuant to the Reseller Agreement, the Reseller Fee is fully or partially refundable to the Reseller in the event that the Company
materially breaches the Reseller Agreement or the Company becomes insolvent, goes into liquidation or seeks protection under bankruptcy
during the term of the Reseller Agreement (each a “Refund Event”). The Reseller Fee was fully refundable if a Refund
Event occurred before August 31, 2016. A Refund Event did not occur as of December 31, 2016, and as a result the Company recognized
$500,000 of Reseller Fee as revenue in the year ended December 31, 2016. The Company shall refund the following amounts to the
Reseller if a Refund Event occurs between the following dates; $2,000,000 between September 1, 2016 and August 31, 2017, $1,500,000
between September 1, 2017 and August 31, 2018, and $1,000,000 between September 1, 2018 and August 31, 2019. As of June 30, 2017
the Company has recorded the $2,000,000 unearned portion of the Reseller Fee in deferred revenue ($500,000 included in current
liabilities and $1,500,000 included in long term liabilities).
The unearned portion of the Company’s revenue, which is
revenue collected or billed but not yet recognized as earned, has been included in the consolidated balance sheet as a liability
for deferred revenue.
See Note 2 - Discontinued Operations - Revenue Recognition for
Discontinued Operations.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Cost of revenues
Cost of revenues includes
direct labor and associated costs for employees and independent contractors performing InsPro Enterprise
TM
design, development,
implementation and testing together with customer management, training and technical support, as well as a portion of facilities
costs and depreciation. The following table discloses cost of revenue as reported in the statement of operations.
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation, employee benefits and related taxes
|
|
$
|
1,359,970
|
|
|
$
|
1,797,351
|
|
|
$
|
3,280,393
|
|
|
$
|
4,029,706
|
|
Professional fees
|
|
|
1,619,427
|
|
|
|
2,555,576
|
|
|
|
3,534,411
|
|
|
|
5,567,930
|
|
Depreciation
|
|
|
61,341
|
|
|
|
96,093
|
|
|
|
149,490
|
|
|
|
196,307
|
|
Rent, utilities, telephone and communications
|
|
|
93,714
|
|
|
|
97,663
|
|
|
|
200,202
|
|
|
|
235,333
|
|
Other cost of revenues
|
|
|
82,726
|
|
|
|
115,372
|
|
|
|
161,651
|
|
|
|
212,349
|
|
|
|
$
|
3,217,178
|
|
|
$
|
4,662,055
|
|
|
$
|
7,326,147
|
|
|
$
|
10,241,625
|
|
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 June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Compensation, employee benefits and related taxes
|
|
$
|
1,228,003
|
|
|
$
|
798,352
|
|
|
$
|
2,360,961
|
|
|
$
|
1,806,438
|
|
Advertising and other marketing
|
|
|
7,687
|
|
|
|
7,734
|
|
|
|
16,422
|
|
|
|
49,454
|
|
Depreciation
|
|
|
27,869
|
|
|
|
31,886
|
|
|
|
62,658
|
|
|
|
57,307
|
|
Rent, utilities, telephone and communications
|
|
|
51,840
|
|
|
|
103,277
|
|
|
|
151,353
|
|
|
|
204,208
|
|
Professional fees
|
|
|
214,560
|
|
|
|
143,750
|
|
|
|
352,860
|
|
|
|
404,552
|
|
Other general and administrative
|
|
|
192,949
|
|
|
|
190,946
|
|
|
|
375,152
|
|
|
|
384,121
|
|
|
|
$
|
1,722,908
|
|
|
$
|
1,275,945
|
|
|
$
|
3,319,406
|
|
|
$
|
2,906,080
|
|
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
June
30, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Concentrations of credit risk
The Company maintains its cash and restricted cash in bank deposit
accounts, which exceed the federally insured limits as provided through the Federal Deposit Insurance Corporation (“FDIC”).
At June 30, 2017, the Company had $3,338,173 of cash in United States bank deposits, of which $500,818 was federally insured and
$2,837,355 was not federally insured.
The following table lists the percentage of the Company’s
accounts receivable balance from the Company’s clients representing 10% or more of the accounts receivable balances as of
the periods listed below.
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
|
|
|
Client #1
|
|
57%
|
|
30%
|
Client #2
|
|
10%
|
|
12%
|
Client #3
|
|
9%
|
|
13%
|
The following table lists the percentage of the Company’s
revenue earned from the Company’s clients representing 10% or more of the revenue earned in each of the periods listed below.
|
|
For the 6 Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Client #1
|
|
30%
|
|
24%
|
Client #2
|
|
19%
|
|
18%
|
Client #3
|
|
-
|
|
13%
|
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 June 30, 2017, the Company does not believe
that it will incur a penalty in connection with the Company’s registration rights agreements. Accordingly, no liability in
respect thereof was recorded as of June 30, 2017. See Note 6 - Stockholders Deficit – Registration and Participation Rights.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Recent accounting pronouncements
From time to time, new accounting pronouncements are issued
by FASB, which are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that
the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated
financial statements upon adoption.
In May 2014, the FASB issued Accounting Standards Update (“ASU”)
ASU No. 2014-09
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”), that outlines a
comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. In July 2015, the FASB approved a one-year deferral of the effective date
of ASU 2014-09 to the beginning of 2018 for public companies, with an option that would permit companies to adopt the standard
as early as the original effective date of 2017. The updated standard will replace most existing revenue recognition guidance in
U.S. GAAP. ASU 2014-09 may be adopted either retrospectively or on a modified retrospective basis whereby it would be applied to
new contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch-up
adjustment recorded to beginning retained earnings at the effective date for those contracts. The updated standard is effective
for us in the first quarter of 2018 and we do not plan to early adopt. We have not yet selected a transition method and we are
currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.[update]
In November 2015, the FASB issued ASU No. 2015-17 “Balance
Sheet Classification of Deferred Taxes”, which requires that all deferred tax liabilities and assets be classified as noncurrent
amounts on the balance sheet. ASU 2015-17 will be effective for interim and annuals periods beginning after December 15, 2016
and may be applied prospectively or retrospectively. Early adoption of the standard is permitted. The new standard is effective
for the Company at the beginning of fiscal year 2017. We are currently evaluating the impact of adopting this ASU on our consolidated
financial statements and do not expect adoption to have a material impact.
In February 2016, the FASB issued ASU No. 2016-02
Leases
(Topic 842)
(“ASU 2016-02”), which requires all leases with a term greater than 12 months to be recognized
on the balance sheet, while lease expenses would continue to be recognized in the statement of operations in a manner similar to
current accounting guidance. The new standard establishes a right-of-use model (ROU) asset and lease liability on the balance sheet
for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the statement of operations. ASU 2016-02 is effective for the Company
at the beginning of fiscal year 2019 and early adoption is permitted. Entities must adopt ASU 2016-02 on a modified retrospective
basis whereby it would be applied at the beginning of the earliest comparative year. The new standard is effective for us in the
first quarter of 2019 and we do not plan to early adopt. We are currently evaluating the impact of the adoption of ASU 2016-02
on our consolidated financial statements. We believe our current lease for our Eddystone office, which was extended for a 1 year
term that expires on January 31, 2019, would continue to be accounted for as an operating lease under the new standard. We may
enter into a new lease for office space, which may have a term greater than 12 months, in the future.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
In June 2016, the FASB issued ASU No. 2016-13 “Financial
Instruments – Credit Losses (Topic 326).” For most financial assets, such as trade and other receivables, loans and
other instruments, this standard changes the current incurred loss model to a forward-looking expected credit loss model, which
generally will result in the earlier recognition of allowances for losses. The new standard is effective for the Company at the
beginning of fiscal year 2019. Entities are required to apply the provisions of the standard through a cumulative-effect adjustment
to retained earnings as of the effective date. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated
financial statements.
In August 2014, the FASB issued ASU No. 2014-15 “Presentation
of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue
as a Going Concern”. Under US GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing
financial statements unless and until the entity's liquidation becomes imminent. Preparation of financial statements under this
presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes
imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30,
Presentation of Financial Statements - Liquidation Basis of Accounting. Even when an entity's liquidation is not imminent, there
may be conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. In those situations,
financial statements should continue to be prepared under the going concern basis of accounting, but the provisions in this ASU
should be followed to determine whether to disclose information about the relevant conditions and events. ASU No. 2014-15 was effective
for us as of December 31, 2016.
In March 2016, the FASB issued ASU 2016-09 “Improvements
to Employee Share-Based Payment Accounting (Topic 718)”, which simplifies several aspects of the accounting for employee
share-based payment transactions, including the accounting for the related income taxes, forfeitures, statutory tax withholding
requirements and classification in the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning
after December 15, 2016, including interim periods within those annual reporting periods. Early adoption is permitted. The
new standard was effective for the Company at the beginning of fiscal year 2017 and there was no material impact of adopting this
ASU on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15 “Classification
of Certain Cash Receipts and Cash Payments (Topic 230)”, which provides guidance for eight specific cash flow issues with
the objective of reducing the existing diversity in practice. ASU 2016-15 is effective retrospectively for annual reporting periods
beginning after December 15, 2017, including interim periods within those annual reporting periods. Early adoption is permitted.
The new standard is effective for the Company at the beginning of fiscal year 2018. We are currently evaluating the impact of adopting
this ASU on our consolidated financial statements and do not expect adoption to have a material impact.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Liquidity
During the six months ended June 30, 2017, the Company’s
net loss was $1,092,163 and cash used in operations was $2,085,013. As of June 30, 2017, the Company had $3,177,992 of cash, a
working capital deficit of $1,230,758 and the Company’s shareholder deficit was $2,485,618. During 2016 the Company implemented
cost reduction initiatives, which resulted in the reduction of expenses in 2016 as compared to 2015. During the six months ended
June 30, 2017, the Company implemented additional cost reduction initiatives, which resulted in the reduction of cost of revenues
of $2,915,478 as compared to the same period in 2016. During the second quarter of 2017 the Company obtained $2,300,000 of cash
from existing stockholders, which is described in Note 5 – Transactions with Related Parties.
Our liquidity needs for the next 12 months and beyond are principally
for the funding of our operations, payments on capital leases and the purchase of property and equipment. Based on the forgoing,
management believes the Company has sufficient funds to finance its operations for twelve months from the date of this report was
issued.
NOTE 2 – DISCONTINUED OPERATIONS
The Company has classified its former telesales call center
and external agent produced agency business as discontinued operations. During the first quarter of 2009, the Company ceased the
direct marketing and sale of health and life insurance and related products to individuals and families in its telesales call center.
The Company also determined to discontinue selling health and life insurance and related products to individuals and families through
its non-employee agents. On February 20, 2009, the Company entered into and completed the sale of its agency business to an unaffiliated
third party, pursuant to the terms of a client transition agreement.
The financial position of discontinued
operations was as follows:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Accounts receivable
|
|
$
|
4,054
|
|
|
$
|
8,636
|
|
Net current assets of discontinued operations
|
|
$
|
4,054
|
|
|
$
|
8,636
|
|
The results of discontinued operations do not include any allocated
or common overhead expenses. The results of operations of discontinued operations were as follows:
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission and other revenue from carriers
|
|
$
|
2,029
|
|
|
$
|
2,492
|
|
|
$
|
4,407
|
|
|
$
|
5,559
|
|
Transition policy commission pursuant to the Agreement
|
|
|
12,059
|
|
|
|
30,264
|
|
|
|
27,993
|
|
|
|
46,412
|
|
|
|
|
14,088
|
|
|
|
32,756
|
|
|
|
32,400
|
|
|
|
51,971
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other general and administrative
|
|
|
9,636
|
|
|
|
7,479
|
|
|
|
15,635
|
|
|
|
13,478
|
|
|
|
|
9,636
|
|
|
|
7,479
|
|
|
|
15,635
|
|
|
|
13,478
|
|
Income from discontinued operations
|
|
$
|
4,452
|
|
|
$
|
25,277
|
|
|
$
|
16,765
|
|
|
$
|
38,493
|
|
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the
following:
|
|
Useful
Life
(Years)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Computer equipment and software
|
|
3
|
|
$
|
4,509,487
|
|
|
$
|
4,419,412
|
|
Office equipment
|
|
4.6
|
|
|
145,228
|
|
|
|
158,732
|
|
Office furniture and fixtures
|
|
6.7
|
|
|
-
|
|
|
|
189,857
|
|
Leasehold improvements
|
|
5.4
|
|
|
81,933
|
|
|
|
94,620
|
|
|
|
|
|
|
4,736,648
|
|
|
|
4,862,621
|
|
Less accumulated depreciation
|
|
|
|
|
(4,410,622
|
)
|
|
|
(4,349,661
|
)
|
|
|
|
|
$
|
326,026
|
|
|
$
|
512,960
|
|
The following table discloses depreciation
expense as reported in the statement of operations.
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation included in cost of revenues
|
|
$
|
61,341
|
|
|
$
|
96,093
|
|
|
$
|
149,490
|
|
|
$
|
196,307
|
|
Depreciation included in selling, general and administrative
|
|
|
27,869
|
|
|
|
31,886
|
|
|
|
62,658
|
|
|
|
57,307
|
|
Total depreciation
|
|
$
|
89,210
|
|
|
$
|
127,979
|
|
|
$
|
212,148
|
|
|
$
|
253,614
|
|
NOTE 4 – NOTES PAYABLE
Notes payable at June 30, 2017, consist of a note payable for
insurance premium financing on one of the Company’s insurance policies. The 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.
Notes payable at December 31, 2016, consist of two notes payable
for insurance premium financing on two of the Company’s insurance policies. The first note commenced on April 28, 2016, has
an annual interest rate of 8.75% and consists of 11 monthly payments of principal and interest of $7,456 per month commencing on
May 28, 2016 and ending on March 28, 2017. The second note commenced on May 3, 2016, has an annual interest rate of 7.99% and consists
of 11 monthly payments of principal and interest of $4,358 per month commencing on June 3, 2016 and ending on April 3, 2017.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
NOTE 5 – TRANSACTIONS WITH RELATED PARTIES
Private Placements to Existing Stockholders
On April 20, 2017, the Company completed a private placement
(the “Private Placement”) with The Co-Investment Fund II, L.P. (“Co-Investment”), which hold more than
5% of our common stock. Donald Caldwell, who is the CEO and chairman of the board of directors of the Company, is the CEO for Cross
Atlantic Capital Partners, Inc., which is the managing partner of Co-Investment. The Company issued and Co-Investment purchased
1,000,000 shares of our Series C Convertible Preferred Stock at a per share price of $2.00 for an aggregate total investment of
$2,000,000 pursuant to the terms of a securities purchase agreement (the “Purchase Agreement”). The Company intends
to use the net proceeds of the Private Placement for working capital purposes.
The Company agreed, pursuant to the terms of the Purchase Agreement,
that for a period of 90 days after the effective date (the “Initial Standstill”) of the Purchase Agreement, the Company
shall not, subject to certain exceptions, offer, sell, grant any option to purchase, or otherwise dispose of any equity securities
or equity equivalent securities, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument
that is at any time convertible into or exchangeable for, or otherwise entitles the holder thereof to receive, capital stock and
other securities of the Company. In addition, pursuant to the Purchase Agreement, the Company was permitted to sell up to an additional
500,000 shares of Series C Preferred Stock Units to other existing stockholders within 90 days following the Closing on substantially
the same terms and conditions described above and as set forth in the Purchase Agreement.
The Purchase Agreement also provides for a customary participation
right for Co-Investment, subject to certain exceptions and limitations, which grants Co-Investment the right to participate in
any future capital raising financings of the Company occurring from the effective date of the Purchase Agreement until 24 months
after the effective date of the Purchase Agreement. Co-Investment may participate in such financings at a level based on Co-Investment’s
ownership percentage of the Company on a fully-diluted basis prior to such financing.
On May 11, 2017, the Company completed a private placement (the
“Second Private Placement”) with Azeez Enterprises, L.P., which hold more than 5% of our Series C Preferred Stock.
Michael Azeez is a member of the board of directors of the Company and is the managing partner of Azeez Enterprises, L.P. The Company
issued and Azeez Enterprises, L.P. purchased 75,000 shares of our Series C Convertible Preferred Stock at a per share price of
$2.00 for an aggregate total investment of $150,000 pursuant to the terms of a securities purchase agreement at essentially the
same terms as those contained in the Purchase Agreement (the “Second Purchase Agreement”). Also as part of the Second
Private Placement and Second Purchase Agreement with John Scarpa, which hold more than 5% of our Series B Preferred Stock. The
Company issued and John Scarpa purchased 75,000 shares of our Series C Convertible Preferred Stock at a per share price of $2.00
for an aggregate total investment of $150,000 pursuant to the terms of the Second Purchase Agreement.
See Note 6 - Shareholders’ Deficit – Series C Preferred
Stock.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT
Common Stock
As of June 30, 2017 and December 31, 2016, the Company was authorized
to issue 500,000,000 shares of common stock with a par value of $0.001 per share (“Common Stock”). As of June 30, 2017
and December 31, 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:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Exercise of options issued and outstanding to purchase common stock
|
|
|
1,200,000
|
|
|
|
4,000,000
|
|
Issuance of common shares available under the 2010 Equity Compensation Plan
|
|
|
25,596,980
|
|
|
|
24,996,980
|
|
Exercise of warrants issued and outstanding to purchase common stock
|
|
|
25,098,330
|
|
|
|
25,098,330
|
|
Conversion of series A convertible preferred stock issued and outstanding into common stock
|
|
|
25,535,000
|
|
|
|
25,535,000
|
|
Exercise of warrants to purchase series A convertible preferred stock issued and outstanding
|
|
|
|
|
|
|
|
|
and converted into common stock
|
|
|
7,600,000
|
|
|
|
7,600,000
|
|
Conversion of series B convertible preferred stock issued and outstanding into common stock
|
|
|
106,144,240
|
|
|
|
106,144,240
|
|
Exercise of warrants to purchase series B convertible preferred stock issued and outstanding
|
|
|
|
|
|
|
|
|
and converted into common stock
|
|
|
65,000,000
|
|
|
|
65,000,000
|
|
Conversion of series C convertible preferred stock issued and outstanding into common stock
|
|
|
23,000,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total common stock reserved for issuance
|
|
|
279,174,550
|
|
|
|
258,374,550
|
|
The above table includes Common Stock reserved for non exercisable,
unvested stock options and Common Stock reserved for the issuance of stock options in the future under the Company’s 2010
Equity Compensation Plan.
Series A Preferred Stock
As of June 30, 2017 and December 31, 2016,
the
Company’s board of directors has designated
3,437,500 shares of Series A Convertible Preferred Stock par value $0.001
per share (“Series A Preferred Stock”). As of June 30, 2017 and December 31, 2016, the Company had 1,276,750 shares
of its Series A Preferred Stock issued and outstanding. As of June 30, 2017 and December 31, 2016, the Company has reserved 380,000
shares of Series A Preferred Stock for the exercise of warrants issued and outstanding to purchase its Series A Preferred Stock.
The Series A Preferred Stock is entitled to vote as a single
class with the holders of the Company’s Common Stock and preferred stock, with each share of Series A Preferred Stock having
the right to 20 votes.
Upon the liquidation, sale or merger of the Company, each share
of Series A Preferred Stock is entitled to receive an amount equal to the greater of (A) a liquidation preference equal to two
and a half (2.5) times the Series A Preferred Stock original issue price, or $12,767,500 in aggregate, subject to certain customary
adjustments, or (B) the amount such share of Series A Preferred Stock would receive if it participated
pari passu
with the
holders of Common Stock on an as-converted basis. The liquidation preference is calculated by taking the product of the issued
and outstanding shares of Series A Preferred Stock times $10.00. Series A Preferred Stock is junior to Series B Convertible Preferred
Stock par value $0.001 per share (“Series B Preferred Stock”) and the Series C Preferred Stock as it pertains to liquidation
preferances.
Each share of Series A Preferred Stock is convertible into 20
shares of Common Stock, subject to adjustment and at the option of the holder of the Series A Preferred Stock.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
For so long as any shares of Series A Preferred Stock are outstanding,
the vote or consent of the holders of at least two-thirds of the Series A Preferred Stock is required to approve any amendment
to the Company’s certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special
rights of the Series A Preferred Stock or any amendment to the Company’s certificate of incorporation to create any shares
of capital stock that rank senior to the Series A Preferred Stock. In addition to the voting rights described above, for so long
as 1,000,000 shares of Series A Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the
shares of Series A Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of the
Company or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series A Preferred
Stock with an amount per share equal to two and a half (2.5) times the Series A Preferred Stock original issue price, or $12,767,500,
in aggregate for all issued and outstanding Series A Preferred Stock.
Series B Preferred Stock
As of June 30, 2017 and December 31, 2016,
the
Company’s board of directors has designated
11,000,000 shares of Series B Preferred Stock. As of June 30, 2017 and
December 31, 2016, the Company had 5,307,212 of its Series B Preferred Stock issued and outstanding. As of June 30, 2017 and December
31, 2016, the Company has reserved 3,250,000 shares of Series B Preferred Stock for the exercise of warrants issued and outstanding
to purchase its Series B Preferred Stock.
The Series B Preferred Stock is entitled to vote as a single
class with the holders of the Company’s Common Stock and preferred stock, with each share of Series B Preferred Stock having
the right to 20 votes.
As of June 30, 2017 and December 31, 2016, upon the liquidation,
sale or merger of the Company, each share of Series B Preferred Stock is entitled to receive an amount equal to the greater of
(A) a liquidation preference equal to the Series B Preferred Stock original issue price, or $15,921,636 in aggregate, subject to
certain customary adjustments, or (B) the amount such share of Series B Preferred Stock would receive if it participated
pari
passu
with the holders of Common Stock and preferred stock on an as-converted basis. The liquidation preference is calculated
by taking the product of the issued and outstanding shares of Series B Preferred Stock times $3.00. Series B Preferred Stock is
senior to Series A Preferred Stock, and junior to the Series C Preferred Stock, as it pertains to liquidation preferances.
Each share of Series B Preferred Stock is convertible into 20
shares of Common Stock, subject to adjustment and at the option of the holder of the Series B Preferred Stock.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
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.
2016
On February 2, 2016 the Company filed a registration statement
for a rights offering on Form S-1/A, which the Commission declared effective on February 5, 2016, to distribute to shareholders
excluding residents of Arizona and California at no charge, one non-transferable subscription right for each 16,615 shares of our
Common Stock, 831 shares of our Series A Preferred Stock and 830 shares of our Series B Preferred Stock owned as of January 31,
2016 (the “Record Date”), either as a holder of record or, in the case of shares held of record by brokers, dealers,
custodian banks, or other nominees on shareholders’ behalf, as a beneficial owner of such shares. If the rights offering
was fully subscribed the gross proceeds from the rights offering would have been approximately $2.5 million. This rights offering
was designed to give all of the holders of the Company’s capital stock the opportunity to participate in an equity investment
in the Company on the same economic terms as the private placement completed by the Company for an aggregate of 1,163,141 shares
of Series B Preferred Stock and warrants to purchase 11,631,410 shares of Common Stock with certain accredited investors, including
Co-Investment and Donald Caldwell, who is the CEO and chairman of the board of directors of the Company, Edmond Walters, who is
a director of the Company, and Azeez Enterprises, LP, which is affiliated with Michael Azeez, who is a director of the Company.
The basic subscription right entitled the holder to purchase
one unit (“Subscription Unit”) at a subscription price of $240. A Subscription Unit consisted of 80 shares of Series
B Preferred Stock and a warrant to purchase 800 shares of Common Stock that expires on November 20, 2017 at an exercise price of
$0.15 per share. In the event that a holder of a Subscription Unit purchased all of the basic Subscription Units available to the
holder then pursuant to their basic subscription right, the holder had the option to choose to subscribe for a portion of any Subscription
Units that were not purchased by all other holders of Subscription Units through the exercise of their basic subscription rights.
Effective with the expiration of the subscription rights, which
occurred on March 14, 2016, holders of subscription rights exercised in aggregate 17 basic subscription rights and 0 over subscription
rights for a total 17 Subscription Units. The Company received $4,080 in gross proceeds as a result of the exercise of Subscription
Units. As a result of the exercise of 17 Subscription Units the Company issued effective on March 14, 2016 in aggregate 1,360 shares
of Series B Preferred Stock and of warrants to purchase in aggregate 13,600 shares of Common Stock that expires on November 20,
2017 at an exercise price of $0.15 per share (the “2016 Warrants”). Effective with the expiration of the subscription
rights all unexercised subscription rights expired.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
The Company allocated $451 of the $4,080 proceeds received as
a result of the rights offering, which represent the fair value of the 2016 Warrants, to additional paid in capital using a Black-Scholes
option pricing model with the following assumptions: expected volatility of 259%, a risk-free interest rate of 0.51%, an expected
remaining term of 1.7 years and 0% dividend yield. The remaining $3,629 of the proceeds received was allocated to the Series B
Preferred Stock.
Series C Preferred Stock
In connection with the Private Placement, the board of directors
of the Company approved a Certificate of Designation of Series C Convertible Preferred Stock of the Company (the “Certificate
of Designation”) setting forth the rights, preferences and limitations of the Series C Preferred Stock. T
he
Company’s board of directors has designated 4,000,000 shares of Series C Preferred stock.
On April 19, 2017, the Company
filed the Certificate of Designation with the Secretary of State of the State of Delaware.
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.
As of June 30, 2017 and December 31, 2016,
the
Company’s board of directors has designated
4,000,000 and 0 shares of Series C Preferred Stock, respectively. As of
June 30, 2017 and December 31, 2016, the Company had 1,150,000 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 $5,750,000 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 $5,750,000,
in aggregate for all issued and outstanding Series C Preferred Stock.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
Stock Options
During the three months ended June 30, 2017, options for 2,800,000
common shares, which were previously granted to former executives of the Company, expired in accordance with the terms of such
stock options.
As of June 30, 2017, there were 30,000,000 shares of our Common
Stock authorized to be issued under the Company’s 2010 Equity Compensation Plan, of which 27,796,980 shares of our Common
Stock remain available for future stock option grants.
The Company recorded compensation expense pertaining to employee
stock options and warrants in the amount of $107,760 for the six months ended June 30, 2017.
The value of equity compensation expense not yet expensed pertaining
to unvested equity compensation for both options to purchase common stock and Series A Preferred Stock was $30,933 as of June 30,
2017, which will be recognized over a weighted average 2.6 years in the future.
A summary of the Company's outstanding stock options are as
follows:
|
|
Number
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Of Shares
|
|
|
Average
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Underlying
|
|
|
Exercise
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Fair Value
|
|
|
Contractual Life
|
|
|
Value (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
4,000,000
|
|
|
$
|
0.10
|
|
|
$
|
0.06
|
|
|
|
3.4
|
|
|
$
|
-
|
|
For the period ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(2,800,000
|
)
|
|
|
0.10
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
1,200,000
|
|
|
$
|
0.10
|
|
|
$
|
0.11
|
|
|
|
3.6
|
|
|
$
|
-
|
|
Outstanding and exercisable at June 30, 2017
|
|
|
383,333
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
|
3.4
|
|
|
$
|
-
|
|
(1) The aggregate intrinsic value is based on the $0.035 closing
price as of June 30, 2017, for the Company’s Common Stock.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
Common Stock Warrants
Outstanding warrants at June 30, 2017, have an average weighted
average remaining contractual life of 0.4 years. A summary of the status of the Company's outstanding common stock warrants are
as follows:
|
|
|
|
|
Weighted
|
|
|
|
Common
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
25,098,330
|
|
|
$
|
0.15
|
|
For the period ended June 30, 2017
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at June 30, 2017
|
|
|
25,098,330
|
|
|
$
|
0.15
|
|
Series A Preferred Stock Warrants
Outstanding warrants to purchase the Company’s Series
A Preferred Stock at June 30, 2017, have a remaining contractual life of 0.2 year. A summary of the status of the Company's outstanding
Series A Preferred Stock warrants are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Preferred
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
380,000
|
|
|
$
|
4.00
|
|
For the period ended June 30, 2017
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at June 30, 2017
|
|
|
380,000
|
|
|
$
|
4.00
|
|
Series B Preferred Stock Warrants
Outstanding preferred stock warrants to purchase the Company’s
Series B Preferred Stock at June 30, 2017 have a remaining contractual life of 1.9 years. A summary of the status of the Company's
outstanding Series B Preferred Stock warrants are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Preferred
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
3,250,000
|
|
|
$
|
3.00
|
|
For the period ended June 30, 2017
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at June 30, 2017
|
|
|
3,250,000
|
|
|
$
|
3.00
|
|
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
Registration and Participation Rights
As of June 30, 2017, the Company has not received a demand
notice in connection with any of the Company’s various registration rights agreements.
NOTE 7 – CAPITAL LEASE OBLIGATIONS
The Company’s subsidiary, InsPro LLC, has entered into
several capital lease obligations to purchase equipment used for operations. The Company has the option to purchase the equipment
at the end of each lease agreement for one dollar. The underlying assets and related depreciation were included in the appropriate
fixed asset category, and related depreciation account.
Property and equipment includes the following amounts for leases
that have been capitalized:
|
|
Useful Life (Years)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Computer equipment and software
|
|
3
|
|
$
|
1,576,226
|
|
|
$
|
1,576,226
|
|
Leasehold improvements
|
|
3
|
|
|
15,011
|
|
|
|
15,011
|
|
|
|
|
|
|
1,591,237
|
|
|
|
1,591,237
|
|
Less accumulated depreciation
|
|
|
|
|
(1,376,007
|
)
|
|
|
(1,260,944
|
)
|
|
|
|
|
$
|
215,230
|
|
|
$
|
330,293
|
|
Future minimum payments required under capital leases at June
30, 2017, are as follows:
Six months ending December 31, 2017
|
|
$
|
71,093
|
|
2018
|
|
|
130,693
|
|
2019
|
|
|
30,307
|
|
Total future payments
|
|
|
232,093
|
|
Less amount representing interest
|
|
|
14,306
|
|
Present value of future minimum payments
|
|
|
217,787
|
|
Less current portion
|
|
|
136,901
|
|
Long-term portion
|
|
$
|
80,886
|
|
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
NOTE 8 – DEFINED CONTRIBUTION 401(k) PLAN
The Company implemented a 401(k) plan on January 1, 2007. Eligible
employees contribute to the 401(k) plan. Employees become eligible after attaining age 19 and after 6 months of employment with
the Company. An employee may become a participant of the 401(k) plan on the first day of the month following the completion of
the eligibility requirements. Effective January 1, 2007 the Company implemented an elective contribution to the plan of 25% of
the employee’s contribution up to 4% of the employee’s compensation. The contributions are subject to a vesting schedule
and become fully vested after one year of service, retirement, death or disability, whichever occurs first. The Company made contributions
of $36,984 and $43,137 for the three months ended June 30, 2017 and 2016, respectively.
NOTE 9 – COMMITTMENTS AND CONTINGENCIES
On July 7, 2006, the Company entered into a lease agreement
with Radnor Properties-SDC, L.P. (the “Landlord”) for the lease of 7,414 square feet of office space located in Radnor
Financial Center, Building B, 150 North Radnor-Chester Road, Radnor, Pennsylvania. The term of the lease commenced on November
1, 2006, which was the date the Company, with the Landlord’s prior consent, assumed possession of the premises and the date
the Landlord tendered possession of the premises to the Company following the substantial completion of the improvements required
to be made by the Landlord under the lease agreement, and will expire on the last day of the 125
th
month following the
commencement of the lease term. The annual rent increased every 12 months, starting at approximately $161,592 plus a proportionate
share of the Landlord’s building expenses after the second month and ending at approximately $258,378 plus a proportionate
share of the Landlord’s building expenses. Under the terms of the lease agreement, rent was waived for the first five months
of the lease term with respect to 5,238 square feet and for the first twelve months for the remaining 2,176 square feet. The lease
expired on March 31, 2017, in accordance with the terms of the lease.
On September 14, 2007, InsPro LLC entered into a lease agreement
(the “Lease Agreement”) with BPG Officer VI Baldwin Tower L.P. (“BPG”). On April 28, 2015, InsPro LLC and
BPG entered into a fifth amendment to the Lease Agreement whereby InsPro LLC and BPG agreed to amend the Lease Agreement to increase
the leased office space by 6,801 rentable square feet effective April 1, 2015, through March 31, 2016, at an incremental monthly
rent of $10,000. On June 9, 2016, InsPro LLC and BPG entered into a sixth amendment to the Lease Agreement whereby InsPro LLC and
BPG agreed to amend the Lease Agreement to extend the term through January 31, 2018 for 17,567 of rentable square feet at a monthly
cost of $28,546 for the period February 1, 2017 through January 31, 2018. On June 7, 2017, InsPro LLC and Baldwin Tower Office
Building, LLC (“Landlord”) , which is the new owner and landlord for the Company’s Eddystone office building,
entered into a seventh amendment to the Lease Agreement whereby InsPro LLC and Landlord agreed to amend the Lease Agreement to
extend the term through January 31, 2019 for 17,567 of rentable square feet at a monthly cost of $30,010 for the period February
1, 2018 through January 31, 2019.
Future minimum payments required under operating leases and
service agreements at June 30, 2017, are as follows:
Six months ending December 31, 2017
|
|
$
|
517,618
|
|
2018
|
|
|
596,704
|
|
2019
|
|
|
255,118
|
|
2020
|
|
|
15,932
|
|
thereafter
|
|
|
-
|
|
Total
|
|
$
|
1,385,372
|
|
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
NOTE 9 – COMMITTMENTS AND CONTINGENCIES (Continued)
The Company leases certain real and personal property under
non-cancelable operating leases. Rent expense was $111,825 and $142,910 for the three months ended June 30, 2017 and 2016, respectively.
Rent expense was $230,309 and $330,567 for the six months ended June 30, 2017 and 2016, respectively.
Mr. Robert Oakes resigned as an executive employee effective
June 30, 2017. Pursuant to Mr. Oakes’ employment agreement, Mr. Oakes will be entitled to receive; (i) continuation of his
$300,000 per year base salary for a period of 12 months in accordance with the Company's normal payroll practices, less any applicable
income tax withholding required under federal or state law, and subject to Section 409A of the Internal Revenue Code of 1986, as
amended, and applicable guidance issued there under, and (ii) continuation for a period of 18 months after the date of termination
of the benefits under benefit plans extended from time to time by the Company to its senior executives. As of June 30, 2017, the
Company recorded a severance accrual connection with Mr. Oakes termination in the amount of $334,168, 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.
NOTE 10 – SUBSEQUENT EVENTS
Rights Offering
On July 21, 2017 the Company filed a registration statement
for a rights offering on form S-1/A, which the Commission declared effective on July 21, 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. If the rights offering
is fully subscribed the gross proceeds from the rights offering will be approximately $1 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 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 Unit 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 will expire on August 29, 2017 unless
the Company extends the rights.
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
Certain of the statements contained in this Quarterly Report
on Form 10-Q, including in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
and elsewhere in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on management’s
current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations
contained in the forward-looking statements. The forward-looking statements herein include, among others, statements addressing
management’s views with respect to future financial and operating results and costs associated with the Company’s operations
and other similar statements. Various factors, including competitive pressures, regulatory changes, customer defaults or insolvencies,
adverse resolution of any contract or other disputes with customers, or the loss of one or more key client relationships, could
cause actual outcomes and results to differ materially from those described in forward-looking statements.
The words “may,” “will,” “expect,”
“intend,” “anticipate,” “estimate,” “believe,” “continue” and similar
expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement
is not forward-looking. While we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly
Report on Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us
and projections of the future about which we cannot be certain. Many factors, including general business and economic conditions
affect our ability to achieve our objectives. As a result of these factors, we cannot assure you that the forward-looking statements
in this Quarterly Report on Form 10-Q will prove to be accurate. In addition, if our forward-looking statements prove to be inaccurate,
the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard
these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any
specified time frame, if at all. We may not update these forward-looking statements, even though our situation may change in the
future.
We qualify all the forward-looking statements contained in this
Quarterly Report on Form 10-Q by the foregoing cautionary statements.