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EX-31.2 - EX-31.2 - COVER ALL TECHNOLOGIES INCd28214ex31-2.htm
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EX-32.1 - EX-32.1 - COVER ALL TECHNOLOGIES INCd28214ex32-1.htm


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended March 31, 2011

 

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from ________________ to ________________


Commission file number:  0-13124


COVER-ALL TECHNOLOGIES INC.

 (Exact Name of Registrant as Specified in Its Charter)

Delaware

 

13-2698053

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

55 Lane Road, Fairfield, New Jersey

 

07004

(Address of principal executive offices)

 

(Zip code)

973-461-5200

(Registrant’s telephone number, including area code)

None

 (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]    No  [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [   ]     No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

   Large accelerated filer [   ]   Accelerated filer [   ]
  Non-accelerated filer [   ] (Do not check if a smaller reporting company)   Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes [   ]     No  [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 

Class

 

Outstanding at May 9, 2011

Common Stock, $.01 par value per share

 

25,184,801 shares








COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2011

PART I:
           
FINANCIAL INFORMATION
               
Item 1.
           
Financial Statements
              
 
           
Consolidated Balance Sheets as of March 31, 2011 (Unaudited)
and December 31, 2010
         3    
 
           
Consolidated Statements of Operations for the three
months ended March 31, 2011 and 2010 (Unaudited)
         5    
 
           
Consolidated Statements of Cash Flows for the three
months ended March 31, 2011 and 2010 (Unaudited)
         6    
 
           
Notes to Consolidated Financial Statements (Unaudited)
         7    
Item 2.
           
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
         12    
Item 3.
           
Quantitative and Qualitative Disclosures
About Market Risk
         19    
Item 4.
           
Controls and Procedures
         19    
PART II:
           
OTHER INFORMATION
              
Item 1A.
           
Risk Factors
         20    
Item 5.
           
Other Information
         20    
Item 6.
           
Exhibits
         20    
SIGNATURES
     21    



.   .   .   .   .   .   .   .   .   .



2




PART I:

FINANCIAL INFORMATION

Item 1.

Financial Statements.

COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


CONSOLIDATED BALANCE SHEETS


        March 31,
2011
    December 31,
2010
        (Unaudited)    
Assets:
                                     
Current Assets:
                                       
Cash and Cash Equivalents
              $ 4,364,561          $ 5,892,649   
Accounts Receivable (Less Allowance for Doubtful Accounts of $25,000)
                 2,946,513             1,895,205   
Prepaid Expenses
                 754,358             691,020   
Deferred Tax Asset
                 800,000             800,000   
 
                                     
Total Current Assets
                 8,865,432             9,278,874   
 
                                     
Property and Equipment — At Cost:
                                       
Furniture, Fixtures and Equipment
                 956,269             956,269   
Less: Accumulated Depreciation
                 573,387             530,701   
 
                                     
Property and Equipment — Net
                 382,882             425,568   
 
                                     
Goodwill
                 1,039,114             1,039,114   
 
                                     
Capitalized Software (Less Accumulated Amortization of $12,879,567 and $12,584,710, Respectively)
                 6,734,380             5,804,093   
 
                                     
Customer Lists/Relationships (Less Accumulated Amortization of $71,093 and $52,759, Respectively)
                 148,907             167,241   
 
                                     
Non-Competition Agreements (Less Accumulated Amortization of $62,044 and $46,045, Respectively)
                 97,956             113,955   
 
                                     
Deferred Tax Asset
                 2,467,500             2,467,500   
 
                                     
Other Assets
                 216,446             217,015   
 
                                     
Total Assets
              $ 19,952,617          $ 19,513,360   


The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.



3



COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


CONSOLIDATED BALANCE SHEETS



        March 31,
2011
    December 31,
2010
        (Unaudited)    
Liabilities and Stockholders’ Equity:
                                       
Current Liabilities:
                                       
Accounts Payable
              $ 274,734          $ 273,910   
Note Payable
                 300,000             400,000   
Accrued Expenses Payable
                 504,142             1,363,706   
Taxes Payable
                 37,385                
Deferred Charges
                 52,545             52,545   
Unearned Revenue
                 2,199,359             2,175,683   
 
                                     
Total Current Liabilities
                 3,368,165             4,265,844   
 
                                     
Long-Term Liabilities:
                                     
Deferred Charges
                 30,652             43,788   
 
                                     
Total Liabilities
                 3,398,817             4,309,632   
 
                                     
Commitments and Contingencies
                                 
 
                                     
Stockholders’ Equity:
                                     
Common Stock, $.01 Par Value, Authorized 75,000,000 Shares; 25,376,671 and 25,201,671 Shares Issued and 25,174,801 and 24,999,801 Shares Outstanding, Respectively
                 253,767             252,017   
 
                                     
Paid-In Capital
                 30,593,095             30,450,122   
 
                                     
Accumulated Deficit
                 (14,128,168 )            (15,333,517 )  
 
                                     
Treasury Stock — 201,870 Shares — At Cost
                 (164,894 )            (164,894 )  
 
                                     
Total Stockholders’ Equity
                 16,553,800             15,203,728   
 
                                     
Total Liabilities and Stockholders’ Equity
              $ 19,952,617          $ 19,513,360   


The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.




4




COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



        Three months ended March 31,
   
        2011
    2010
Revenues:
                                     
Licenses
              $ 1,961,161          $ 1,051,124   
Support Services
                 2,114,243             1,953,776   
Professional Services
                 1,122,039             748,571   
Total Revenues
                 5,197,443             3,753,471   
Cost of Revenues:
                                     
Licenses
                 517,244             326,521   
Support Services
                 1,138,120             1,048,365   
Professional Services
                 1,309,107             346,368   
Total Cost of Revenues
                 2,964,471             1,721,254   
Direct Margin
                 2,232,972             2,032,217   
Operating Expenses:
                                     
Sales and Marketing
                 390,142             359,786   
General and Administrative
                 452,326             442,856   
Acquisition Costs
                              285,240   
Research and Development
                 153,812             152,565   
Total Operating Expenses
                 996,280             1,240,447   
Operating Income
                 1,236,692             791,770   
Other (Income) Expense:
                                     
Interest Expense
                 3,750                
Interest Income
                 (83 )            (80 )  
Other Income
                 (9,709 )            (19,813 )  
Total Other (Income) Expense
                 (6,042 )            (19,893 )  
Income Before Income Taxes
                 1,242,734             811,663   
Income Taxes
                 37,385             91,249   
Net Income
              $ 1,205,349          $ 720,414   
Basic Earnings Per Common Share
              $ 0.05          $ 0.03   
Diluted Earnings Per Common Share
              $ 0.05          $ 0.03   
Weighted Average Number of Common Shares
Outstanding for Basic Earnings
Per Common Share
                 25,085,000             24,734,000   
Weighted Average Number of Common Shares
Outstanding for Diluted Earnings
Per Common Share
                 26,208,000             25,371,000   




The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.


5



COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



        Three months ended March 31,
   
        2011
    2010
Cash Flows Provided From (Used For) Operating Activities:
                                      
Net Income
              $ 1,205,349          $ 720,414   
Adjustments to Reconcile Net Income to
                                       
Net Cash Provided From (Used For) Operating Activities:
                                       
Depreciation
                 42,686             21,970   
Amortization of Capitalized Software
                 294,856             189,275   
Amortization of Customer Lists/Relationships
                 18,334                
Amortization of Non-Competition Agreements
                 16,000                
Amortization of Stock-Based Compensation
                 104,605             106,668   
Stock Based Compensation Provided for Services
                 5,118             12,889   
Changes in Assets and Liabilities:
                                       
(Increase) Decrease in:
                                       
Accounts Receivable
                 (1,051,308 )            2,210,160   
Prepaid Expenses
                 (63,338 )            (429,558 )  
Other Assets
                 569              (237 )  
Increase (Decrease) in:
                                       
Accounts Payable
                 824              183,915   
Accrued Liabilities
                 (859,564 )            (455,601 )  
Taxes Payable
                 37,385             (56,609 )  
Deferred Charges
                 (13,136 )            (5,625 )  
Unearned Revenue
                 23,676             476,893   
Net Cash Provided From (Used For) Operating Activities
                 (237,944 )            2,974,554   
 
                                     
Cash Flows Used For Investing Activities:
                                     
Capital Expenditures
                              (64,206 )  
Capitalized Software Expenditures
                 (1,225,144 )            (565,682 )  
Net Cash Used For Investing Activities
                 (1,225,144 )            (629,888 )  
 
                                     
Cash Flows Provided From (Used For) Financing Activities:
                                     
Payment of Debt
                 (100,000 )               
Proceeds from Exercise of Warrants
                 35,000             30,500   
Net Cash Provided From (Used for) Financing Activities
                 (65,000 )            30,500   
 
                                     
Increase (Decrease) in Cash and Cash Equivalents
                 (1,528,088 )            2,375,166   
 
                                     
Cash and Cash Equivalents — Beginning of Periods
                 5,892,649             4,324,446   
Cash and Cash Equivalents — End of Periods
              $ 4,364,561          $ 6,699,612   
 
                                     
Supplemental Disclosures of Cash Flow Information
                                     
Cash Paid During the Periods for:
                                      
Interest
              $ 3,750          $    
Income Taxes
              $           $ 190,786   

   

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.



6



COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



[1]  General

For a summary of significant accounting policies, refer to Note 1 of Notes to Consolidated Financial Statements included in Cover-All Technologies Inc.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2010.  While the Company believes that the disclosures herein presented are adequate to make the information not misleading, these consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest annual report.  The financial statements include, on a consolidated basis, the results of its wholly owned subsidiary, Cover-All Systems, Inc.  All material intercompany transactions and balances have been eliminated.

Previously, the Company separately reported the revenue and cost of revenue categories, “Maintenance” and “Application Service Provider (“ASP”) services,” on the results of their operations. For the three months ended March 31, 2011 and 2010, and thereafter, the Company will be reporting these revenue categories as “Support Services.” Previously reported numbers have been reclassified to conform to this new presentation.

In the opinion of management, the accompanying consolidated financial statements include all adjustments which are necessary to present fairly the Company’s consolidated financial position as of March 31, 2011, and the results of their operations for the three month periods ended March 31, 2011 and 2010, and their cash flows for the three month periods ended March 31, 2011 and 2010.  Such adjustments are of a normal and recurring nature.  The results of operations for the three month periods ended March 31, 2011 and 2010 are not necessarily indicative of the results to be expected for a full year.

[2]  Earnings Per Share Disclosures

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (“EPS”) computations:


        For the three months ended
March 31, 2011
   
        Income
(Numerator)
    Shares
(Denominator)
    Per Share
Amount
Basic EPS:
                                                    
Income Available to Common Stockholders
              $ 1,205,349             25,084,801          $ 0.05   
Effect of Dilutive Securities:
                                                    
Exercise of Options and Restricted Stock
                              1,124,277                
Diluted EPS:
                                                    
Income Available to Common Stockholders
Plus Assumed Exercises
              $ 1,205,349             26,209,078          $ 0.05   







7



COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




        For the three months ended
March 31, 2010
   
        Income
(Numerator)

    Shares
(Denominator)

    Per Share
Amount

Basic EPS:
                                                     
Income Available to Common
Stockholders
              $ 720,414             24,733,786          $ 0.03   
Effect of Dilutive Securities:
                                                     
Exercise of Options and Restricted Stock
                              559,306                
Exercise of Warrants
                              72,000                
Diluted EPS:
                                                     
Income Available to Common Stockholders
Plus Assumed Exercises
              $ 720,414             25,365,092          $ 0.03   


An aggregate of 554,963 restricted shares of common stock and shares of common stock underlying options at exercise prices ranging from $1.38 to $1.40 per share were outstanding at March 31, 2010 but were not included in the computation of diluted EPS because the exercise prices of the options were greater than the average market price of the common shares.


[3]  Stock Option and Stock Purchase Plans


Stock Options


In the three months ended March 31, 2011 and 2010, we recognized approximately $110,000 and $120,000, respectively, stock-based compensation expense in our consolidated financial statements.  

In June 2005, we adopted the 2005 Stock Incentive Plan (which was amended in 2006 and in 2008).  Options and stock awards for the purchase of up to 5,000,000 shares may be granted by the Board of Directors to our employees and consultants at an exercise or grant price determined by the Board of Directors on the date of grant.  Options may be granted as incentive or nonqualified stock options with a term of not more than ten years.  The 2005 Plan allows the Board of Directors to grant restricted or unrestricted stock awards or awards denominated in stock equivalent units, securities or debentures convertible into common stock, or any combination of the foregoing and may be paid in common stock or other securities, in cash, or in a combination of common stock or other securities and cash.  At March 31, 2011, an aggregate of 2,238,037 shares were available for grant under the 2005 Stock Incentive Plan.

The Company uses the Black-Scholes-Merton option-pricing model (“Black-Scholes”) to measure fair value of the share-based awards.  The Black-Scholes model requires us to make significant judgments regarding the assumptions used within the model, the most significant of which are the expected stock price volatility, the expected life of the option award, the risk-free interest rate of return and dividends during the expected term.

-

Expected volatilities are based on historical volatility of the Company’s stock during the preceding periods.  The Company uses “Level 1” inputs, which are our trading market values in active markets.

-

The Company uses historical data to estimate expected life of the option award.  The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding.

-

The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

-

The Company does not anticipate issuance of dividends during the expected term.



8



COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


        2011
    2010
Expected volatility
                 45%–50 %            45%–50 %  
Weighted-average volatility
                 47 %            47 %  
Expected dividends
                 0 %            0 %  
Expected term (in years)
                 3–5              3–5    
Risk-free interest rate
                 3 %            3 %  

As of March 31, 2011, there was approximately $692,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements previously granted by the Company.  That cost is expected to be recognized over a weighted-average period of 1.3 years.  

A summary of the changes in outstanding common stock options for all outstanding plans is as follows:

        Shares
    Exercise Price
Per Share

    Weighted-Average
Remaining
Contractual Life

    Weighted-Average
Exercise Price

Balance, January 1, 2011
                 2,284,963          $ 0.36 – 1.55             2.3 years          $ 1.05   
Canceled
                 (20,000 )            1.55                          1.55   
Balance, March 31, 2011
                 2,264,963          $ 0.36 – 1.55             2.1 years          $ 1.04   


Of the stock options outstanding, an aggregate of 1,385,963 are currently exercisable.

The Black-Scholes-Merton option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

Warrants


There were no warrants outstanding at March 31, 2011.


A summary of the changes in outstanding warrants is as follows:


        Outstanding and
Exercisable
Warrants
    Exercise Price
Per Warrant

    Weighted-Average
Remaining
Contractual Life

    Weighted-Average
Exercise Price

Balance, January 1, 2011
                 100,000          $ 0.35             1.11 years          $ 0.35   
Exercised
                 (100,000 )            0.35                          0.35   
Balance, March 31, 2011
                           $                        $    


Time-Based Restricted Stock Units


A summary of our time-based restricted stock units, or RSUs, for the three months ended March 31, 2011 is as follows:


9



COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



        Shares
    Weighted-Average
Grant Date Fair Value
Per Share

Balance, January 1, 2011
                 469,500          $ 1.28   
Vested
                 (75,000 )            1.12   
Forfeited or Expired
                 (20,000 )            1.55   
Balance, March 31, 2011
                 374,500          $ 1.30   


The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

We follow Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, Accounting for Stock Options and Other Stock-Based Compensation.  Among other items, ASC 718 requires companies to record compensation expense for shared-based awards issued to employees and directors in exchange for services provided.  The amount of the compensation expense is based on the estimated fair value of the awards on their grant dates and is recognized over the required service periods.  Our share-based awards include stock options and restricted stock awards.  For restricted stock awards, the calculation of compensation expense under ASC 718 is based on the intrinsic value of the grant.

[4]  Income Taxes

At December 31, 2010, the Company had a net operating tax loss carryforward of approximately $16,000,000 expiring at various dates through 2026.  The deferred tax asset related to this amount has been offset by a valuation allowance.  The anticipated use of net operating loss carryforwards to offset current taxable income resulted in a decrease in that allowance of approximately $98,000 for the three months ended March 31, 2011.    

[5]  Recently Issued Accounting Standards

In January 2010, the FASB issued updated accounting guidance related to fair value measurements and disclosures which amends and clarifies existing disclosure requirements. This updated accounting guidance requires new disclosures related to amounts transferred into and out of Level I and 2 fair value measurements as well as separate disclosures of purchases, sales, issuances, and settlements related to amounts reported as Level 3 fair value measurements. This guidance also clarifies existing fair value disclosure requirements related to the level of disaggregation and the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This guidance is effective for interim and annual periods beginning after December 15, 2009, except for the separate disclosures of purchases, sales, issuances, and settlements related to amounts reported as Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010. The adoption of this guidance has not had a material impact on our consolidated financial position or results of operations.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



In September, 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, and ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements - a consensus of the FASB Emerging Issues Task Force, to amend the existing revenue recognition guidance. ASU No. 2009-13 amends ASC 605, Revenue Recognition, 25, Multiple-Element Arrangements, as follows: modifies criteria used to separate elements in a multiple-element arrangement, introduces the concept of "best estimate of selling price" for determining the selling price of a deliverable, establishes a hierarchy of evidence for determining the selling price of a deliverable, requires use of the relative selling price method and prohibits use of the residual method to allocate arrangement consideration among units of accounting, and expands the disclosure requirements for all multiple-element arrangements within the scope of ASC 605-25.

ASU No. 2009-14 amends the scope of ASC 985, Software, 605, Revenue Recognition, to exclude certain tangible products and related deliverables that contain embedded software from the scope of this guidance. Instead, the excluded products and related deliverables must be evaluated for separation, measurement, and allocation under the guidance of ASC 605-25, as amended by ASU No. 2009-13. The amended guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. An entity may elect retrospective application to all revenue arrangements for all periods presented using the guidance in ASC 250, Accounting Changes and Error Corrections.  Entities must adopt the amendments resulting from both of these ASUs in the same period using the same transition method, where applicable. Management is reviewing ASU No. 2009-13 and ASU No. 2009-14 for applicability to the Company's revenue recognition policies. The Company adopted these standards for our fiscal year beginning January 1, 2011.






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Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Certain of the matters discussed in this report, including, without limitation, matters discussed under this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act) and are subject to the occurrence of certain contingencies which may not occur in the time frames anticipated or otherwise, and, as a result, could cause actual results to differ materially from such statements.  In addition to other factors and matters discussed elsewhere in this report on Form 10-Q and in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 24, 2011, and other periodic reports filed, these risks, uncertainties and contingency include, but are not limited to, risks associated with increased competition, customer decisions, the successful completion of continuing development of new products, the successful negotiation, execution and implementation of anticipated new software contracts, the successful addition of personnel in the marketing and technical areas and our ability to complete development and sell and license our products at prices which result in sufficient revenues to realize profits, and other business factors beyond our control.

Overview

We are a supplier of software products for the property and casualty insurance industry, supplying a wide range of professional services that support product customization, conversion from existing systems and data integration with other software or reporting agencies.  We also offer on-going support services including incorporating recent insurance rate and rule changes in our solutions.  These support services also include analyzing the changes, developments, quality assurance, documentation and distribution of insurance rate and rule changes.

We earn revenue from software contract licenses, fees for servicing the product, which we call support services, and professional services.  Total revenue for the three months ended March 31, 2011 increased to $5,197,000 from $3,753,000 for the three months ended March 31, 2010, due to an increase in all revenue categories.  

The following is an overview of the key components of our revenue and other important financial data for the three months ended March 31, 2011:

Software Licenses.  Our license revenue in the three months ended March 31, 2011 of $1,961,000 was from existing customers who chose to renew, add onto or extend their use of our software.  For the three months ended March 31, 2010, we generated $1,051,000 in license revenue.  Our new software license revenue is affected by the strength of general economic and business conditions and the competitive position of our software products.  New software license sales are characterized by long sales cycles and intense competition.  Timing of new software license sales can substantially affect our quarterly results.

Support Services.  Support services revenue was $2,114,000 in the three months ended March 31, 2011 compared to $1,954,000 in the same period in 2010.  The increase in the first three months of 2011 was mainly due to the annual renewal of existing customers’ support services and support services from new customer contracts signed in 2010.  Support services revenue is influenced primarily by the following factors: the renewal rate from our existing customer base, the amount of new support services associated with new license sales and annual price increases.

Professional Services.  The increase in professional services revenue, from $748,000 in the three months ended March 31, 2010 to $1,122,000 in the same period of 2011 was a result of increased demand for new software capabilities and customizations from our current customer base.

Income before Provision for Income Taxes.  Income before provision for income taxes was $1,243,000 in the three months ended March 31, 2011 compared to $812,000 in the same period of 2010 as a result of increases in all revenue categories.



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Net Income.  Net income for the three months ended March 31, 2011 increased to $1,205,000 from $720,000 in the same period of 2010 as a result of increases in all revenue categories.

Cash Flow.  We ended the first three months of 2011 with $4,365,000 in cash and cash equivalents and $2,947,000 in accounts receivable.

We continue to face competition for growth in 2011 mainly in the marketing and selling of our products and services to new customers, caused by a number of factors, including long sales cycles and general economic and business conditions.  In addition, there are risks related to customers’ acceptance and implementation delays which could affect the timing and amount of license revenue we are able to recognize.  However, given the positive response to our new software from existing customers, the significant expansion of our relationship with a very large customer and the introduction of additional software capabilities, we are expanding our sales and marketing efforts to both new and existing customers.  Consequently, we are incurring additional sales and marketing expense in advance of generating the corresponding revenue.

Results of Operations

The following table sets forth, for the periods indicated, certain items from the consolidated statements of operations expressed as a percentage of total revenues:

        Three Months Ended March 31,
   
        2011
    2010
Revenues:
                                      
License
                 37.7 %            28.0 %  
Support Services
                 40.7             52.1   
Professional Services
                 21.6             19.9   
Total Revenues
                 100.0             100.0   
Cost of Revenues:
                                      
License
                 10.0             8.7   
Support Services
                 21.9             28.0   
Professional Services
                 25.1             9.2   
Total Cost of Revenues
                 57.0             45.9   
Direct Margin
                 43.0             54.1   
Operating Expenses:
                                      
Sales and Marketing
                 7.5             9.6   
General and Administrative
                 8.7             11.8   
Acquisition Expenses
                              7.6   
Research and Development
                 3.0             4.0   
Total Operating Expenses
                 19.2             33.0   
Operating Income
                 23.8             21.1   
Other Expense (Income):
                                      
Interest Expense
                 0.1                
Interest Income
                                 
Other Income
                 (0.2 )            (0.5 )  
Total Other Expense (Income)
                 (0.1 )            (0.5 )  
Income Before Income Taxes
                 23.9             21.6   
Income Taxes
                 0.7             2.4   
Net Income
                 23.2 %            19.2 %  


Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

Total revenues for the three months ended March 31, 2011 were $5,197,000 as compared to $3,753,000 for the same period in 2010.  License fees were $1,961,000 for the three months ended March 31, 2011 as compared $1,051,000 in the same period in 2010, as a result of increased demand from our existing customer base for new



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products.  For the three months ended March 31, 2011, support services revenues were $2,114,000 as compared to $1,954,000 in the same period of the prior year primarily due to the annual renewals from our existing customers and the new customer contracts signed in 2010.  Professional services revenue contributed $1,122,000 in the three months ended March 31, 2011 as compared to $748,000 in the first quarter of 2010 as a result of increased demand for new software capabilities and customizations from our current customer base.  

Cost of sales increased to $2,964,000 for the three months ended March 31, 2011 as compared to $1,721,000 for the same period in 2010 due to increased costs in line with our revenue growth.  We are expanding our delivery bandwidth while maintaining our costs in line with our revenues through improved productivity and new technology in order to meet our continually increasing demand.  Non-cash capitalized software amortization was $295,000 for the three months ended March 31, 2011 as compared to $189,000 for the same period in 2010.  The Company capitalized $1,225,000 of software development costs in the first three months of 2011 as compared to $566,000 in the same period in 2010.

Research and development expenses increased to $154,000 for the three months ended March 31, 2011 as compared to $153,000 for the same period in 2010, primarily as a result of our efforts to develop new capability to better service our customers.  We are continuing our ongoing efforts to enhance the functionality of our products and solutions and believe that investments in research and development are critical to our remaining competitive in the marketplace.  

Sales and marketing expenses were $390,000 for the three months ended March 31, 2011 as compared to $360,000 in the same period of 2010.  This increase in 2011 was primarily due to an increase in our marketing and sales personnel-related costs.

Acquisition expenses were approximately $-0- for the three months ended March 31, 2011 as compared to $285,000 in the same period of 2010.  These expenses were in connection with the acquisition of substantially all of the assets (excluding working capital) of Moore Stephens Business Solutions, LLC (“MSBS”) in 2010.

General and administrative expenses were $452,000 in the three months ended March 31, 2011 as compared to $443,000 in the same period in 2010.  This increase in 2011 was mainly due to legal fees related to a customer suit.

Liquidity and Capital Resources

Sources of Liquidity

We have funded our operations primarily from cash flow from operations.  Cash from operations results primarily from net income from the income statement plus non-cash expenses (depreciation and amortization) and changes in working capital from the balance sheet.

Our largest source of operating cash flows is cash collections from our customers following the purchase or renewal of software licenses, product support agreements and other related services.  Payments from customers for software licenses are generally received at the beginning of the contract term.  Payments from customers for support services are generally received in advance on a quarterly basis.  Payments for professional services are generally received 30 days after the services are performed.  

At March 31, 2011, we had cash and cash equivalents of $4,365,000 compared to cash and cash equivalents of $6,700,000 at March 31, 2010.  The decrease in cash and cash equivalents is primarily attributable to the payment of the 2010 bonuses in the three months ended March 31, 2011 and fewer new customer contracts signed at the end of 2010.



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Cash Flows

Our ability to generate cash has depended on a number of different factors, primarily our ability to continue to secure and retain existing customers and generate new license sales and related product support agreements.  In order to attract new customers and maintain or grow existing revenue streams, we utilize our existing sources of capital to invest in sales and marketing, technology infrastructure and research and development.

Our ability to continue to control expenses, maintain existing revenue streams and anticipate new revenue will impact the amounts and certainty of cash flows.  We intend to maintain our expenses in line with existing revenue streams from support services and professional services.  

Balance sheet items that should be considered in assessing our liquidity include cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued liabilities.  Statement of operations items that should be considered in assessing our liquidity include revenues, cost of revenues (net of depreciation and amortization), operating expenses (net of depreciation and amortization) and other expenses.  Statement of cash flows items that should be considered in assessing our liquidity include net cash flows from operating activities, net cash flows from investing activities and net cash flows from financing activities.

At March 31, 2011, we had working capital of approximately $5,497,000 compared to working capital of approximately $7,671,000 at March 31, 2010.  This decrease in our working capital resulted primarily from a decrease in cash due to the payment of 2010 bonuses in the first three months of 2011 and fewer new customer sales at the end of 2010. For the three months ended March 31, 2011, net cash provided from (used for) operating activities totaled approximately $(238,000) compared to approximately $2,975,000 for the three months ended March 31, 2010.  In 2011, cash flow from operating activities represented the Company’s principal source of cash and results primarily from net income, plus non-cash expense and changes in working capital.  

For the three months ended March 31, 2011, net cash used for investing activities was approximately $1,225,000 as compared to approximately $630,000 for the three months ended March 31, 2010.  The Company expects capital expenditures and capital software expenditures to continue to be funded by cash generated from operations.  For the three months ended March 31, 2011, net cash provided from (used for) financing activities was approximately $(65,000) compared to approximately $31,000 for the three months ended March 31, 2010.  The cash provided from financing activities in 2011 consisted of proceeds from the exercise of warrants and the payment of debt.

In connection with claims for indemnification asserted by the Company against the seller arising out of the Company’s 2010 acquisition of certain assets of MSBS, the Company has suspended all payments of interest and principal on the promissory note issued by the Company to the seller pending resolution of the indemnification claims.

Funding Requirements

Our primary uses of cash are for personnel-related expenditures, facilities and technology costs.

We do not anticipate any large capital expenditures that will require us to seek new sources of capital.  We lease computer equipment for terms of three years in order to have the latest available technology to serve our customers and develop new products.

We prepare monthly cash flow projections on a rolling twelve-month basis based on a detailed review of anticipated receipts and revenue from licenses, support services and professional services.  We also perform a detailed review of our disbursements, including fixed costs, variable costs, legal costs, payroll costs and other specific payments, on a rolling twelve-month basis.  

We believe that our current cash balances and anticipated cash flows from operations will be sufficient to meet our normal operating needs for at least the next twelve months.  We do not anticipate any material changes in



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our sources of and needs for capital.  Our ability to fund our working capital needs, address planned capital expenditures will depend on our ability to generate cash in the future.  We anticipate generating future working capital through sales to new customers and continued sales and services to our existing customers.

Our future liquidity and capital resource requirements will depend on many factors, including but not limited to the following trends and uncertainties we face:

·

Our ability to generate cash is subject to general economic, financial, competitive and other factors beyond our control.

·

Our need to invest resources in product development in order to continue to enhance our current product, develop new products, attract and retain customers and keep pace with competitive product introductions and technological developments.

·

We experience competition in our industry and continuing technological changes.

·

Insurance companies typically are slow in making decisions and have numerous bureaucratic and institutional obstacles, which can make our efforts to attain new customers difficult.

·

We compete with a number of larger companies who have greater resources than those of ours.  We compete on the basis of insurance knowledge, products, services, price, technological advances and system functionality and performance.

·

Our operations continue to depend upon the continuing business of our existing customers and our ability to attract new customers.

·

A decline in software spending in the insurance industry could result in a decrease in our revenue.


Material risks to cash flow from operations include delayed or reduced cash payments accompanying sales of new licenses or a decline in our services business.  There can be no assurance that changes in our plans or other events affecting our operations will not result in materially accelerated or unexpected expenditures.

We do not expect for there to be a change in the mix or relative cost of our sources of capital.  

Net Operating Loss Carryforwards

At December 31, 2010, we had approximately $16,000,000 of federal net operating tax loss carryforwards expiring at various dates through 2026.  The Tax Reform Act of 1986 enacted a complex set of rules which limits a company’s ability to utilize net operating loss carryforwards and tax credit carryforwards in periods following an ownership change.  These rules define ownership change as a greater than 50 percent point change in stock ownership within a defined testing period which is generally a three-year period.  As a result of stock which may be issued by us from time to time, including the stock which may be issued relating to a potential merger or acquisition or the result of other changes in ownership of our outstanding stock, we may experience an ownership change and consequently our utilization of net operating loss carryforwards could be significantly limited.

Off-Balance Sheet Transactions

We do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Estimates

The SEC has issued cautionary advice to elicit more precise disclosure in this Item 2, MD&A, about accounting policies that management believes are most critical in portraying our financial results and in requiring management’s most difficult subjective or complex judgments.

The preparation of financial documents in conformity with accounting principles generally accepted in the United States of America requires management to make judgments and estimates.  On an ongoing basis, we evaluate



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our estimates, the most significant of which include establishing allowances for doubtful accounts, a valuation allowance for our deferred tax assets and determining the recoverability of our long-lived assets.  The basis for our estimates are historical experience and various assumptions that are believed to be reasonable under the circumstances, given the available information at the time of the estimate, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources.  Actual results may differ from the amounts estimated and recorded in our financial statements.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

·

Revenue Recognition

·

Valuation of Capitalized Software

·

Valuation of Allowance for Doubtful Accounts Receivable

·

Business Combinations and Goodwill


Revenue Recognition

Revenue recognition rules are very complex, and certain judgments affect the application of our revenue policy.  The amount and timing of our revenues is difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter.  In addition to determining our results of operations for a given period, our revenue recognition determines the timing of certain expenses, such as commissions, royalties and other variable expenses.

Our revenues are recognized in accordance with FASB ASC 986-605, “Software Revenue Recognition,” as amended.   Revenue from the sale of software licenses is predominately related to the sale of standardized software and is recognized when these software modules are delivered and accepted by the customer, the license term has begun, the fee is fixed or determinable and collectibility is probable.  Revenue from support services is recognized ratably over the life of the contract.  Revenue from professional consulting services is recognized when the service is provided.

Amounts invoiced to our customers in excess of recognizable revenues are recorded as deferred revenues.  The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenues in any given period.

Our revenues are derived from the licensing of our software products, professional services and support services.  We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable.


License Revenue.  We recognize our license revenue upon delivery, provided that collection is determined to be probable and no significant obligations remain.

Services and Support Revenue.  Our services and support revenue is composed of professional services (such as consulting services and training) and support services (maintenance, support and ASP services).  Our professional services revenue is recognized when the services are performed.  Our support services are recognized ratably over the term of the arrangement.


Multiple Element Arrangement.  We enter into revenue arrangements in which a customer may purchase a combination of software, support and professional services (multiple-element arrangements).  When vendor-specific objective evidence (“VSOE”) of fair value exists for all elements, we allocate revenue to each element based on the relative fair value of each of the elements.  VSOE of fair value is established by the price charged when that element is sold separately.  For support services, VSOE of fair value is established by renewal rates when they are sold separately.  For arrangements where VSOE of fair value exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the



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amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met.


Valuation of Capitalized Software


Costs for the conceptual formulation and design of new software products are expensed as incurred until technological feasibility has been established.  Once technological feasibility is established, we capitalize costs to produce the finished software products.  Capitalization ceases when the product is available for general release to customers.  Costs associated with product enhancements that extend the original product’s life or significantly improve the original product’s marketability are also capitalized once technological feasibility for that particular enhancement has been established.  Amortization is calculated on a product-by-product basis as the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining economic life of the product.  At each balance sheet date, the unamortized capitalized costs of each computer software product is compared to the net realizable value of that product.  If an amount of unamortized capitalized costs of a computer software product is found to exceed the net realizable value of that asset, such amount will be written off.  The net realizable value is the estimated future gross revenues from that product reduced by the estimated future costs of completing and deploying of that product, including the costs of performing maintenance and customer support required to satisfy our responsibility set forth at the time of sale.


Valuation of Allowance for Doubtful Accounts Receivable

Management’s estimate of the allowance for doubtful accounts is based on historical information, historical loss levels, and an analysis of the collectibility of individual accounts.  We routinely assess the financial strength of our customers and based upon factors concerning credit risk, establish an allowance for uncollectible accounts.  Management believes that accounts receivable credit risk exposure beyond such allowance is limited.

Business Combination, Goodwill and Other Intangible Assets

ASC 805, Business Combinations, requires that the purchase method of accounting be used for all business combinations.  It further specifies criteria as to intangible assets acquired in a business combination that must be recognized and reported separately from goodwill.  The intangible assets, other than goodwill, acquired in the MSBS transaction will be amortized using the straight-line method over their estimated useful lives.

Goodwill represents the cost of the MSBS assets in excess of the fair value of identifiable tangible and intangible net assets purchased.  Goodwill is not amortized but is tested for impairment.  We review our goodwill for impairment annually in the fourth quarter.  We also analyze whether any indicators of impairment exist each quarter.  A significant amount of judgment is involved in determining if an indicator of impairment has occurred.  Such indicators may include a sustained, significant decline in our share price and market capitalization, a decline in our expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, the testing for recoverability of our assets, and/or slower growth rates, among others.

We estimate the fair value of MSBS using discounted expected future cash flows, supported by the results of various market approach valuation models.  If the fair value of MSBS exceeds net book value, goodwill is not impaired, and no further testing is necessary.  If the net book value exceeds fair value, we perform a second test to measure the amount of impairment loss.  To measure the amount of any impairment charge, we determine the implied fair value of goodwill in the same manner as in a business combination.

Specifically, we allocate fair value to all assets and liabilities, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill.  If the implied fair value of goodwill is less than the goodwill recorded on our consolidated balance sheet, we record an impairment charge for the difference.



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Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company and this Item is not applicable to us.

Item 4.

Controls and Procedures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).  Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and (2) accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


* * * * * * * * *

Statements in this Form 10-Q, other than statements of historical information are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements involve known and unknown risks which may cause the Company’s actual results in future periods to differ materially from expected results.  Those risks include, among others, risks associated with increased competition, customer decisions, the successful completion of continuing development of new products, the successful negotiation, execution and implementation of anticipated new software contracts, the successful addition of personnel in the marketing and technical areas and our ability to complete development and sell and license our products at prices which result in sufficient revenues to realize profits, and other business factors beyond our control.  Those and other risks are described in the Company’s filings with the SEC over the last 12 months, including our Form 10-K filed with the SEC on March 24, 2011, copies of which are available from the SEC or may be obtained upon request from the Company.



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PART II:

OTHER INFORMATION

Item 1A.

Risk Factors.

The risk factors included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the SEC on March 24, 2011, have not materially changed.

Item 5.

Other Information.

On May 11, 2011, the Audit Committee of the Board of Directors adopted an Amended and Restated Audit Committee Charter.  The Amended and Restated Audit Committee Charter is available on the Company’s website at www.cover-all.com.  Please note that information on the Company’s website is not incorporated by reference in this Report.  In addition, on May 11, 2011, the Board of Directors appointed Earl Gallegos as a member of the Compensation Committee of the Board of Directors. Mr. Gallegos replaces John Roblin as a member of the Compensation Committee effective May 11, 2011.  Mr. Roblin decided to step down from this committee in order to allow for the committee to be comprised solely of independent directors.  Mr. Gallegos is independent within the meaning of the NYSE Amex listing standards.

The adoption of the Amended and Restated Audit Committee Charter and the change in the composition of the Compensation Committee have been made in order to align the Company’s corporate governance structure with the listing requirements of the NYSE Amex.

Item 6.

Exhibits.

Exhibit

 

 

No.

 

Description

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COVER-ALL TECHNOLOGIES INC.

Date:  May 13, 2011

By:

/s/ John W. Roblin                                                                      

John W. Roblin, Chairman of the Board of Directors and Chief Executive Officer




Date:  May 13, 2011

By: /s/ Ann F. Massey                                                                      

Ann F. Massey, Chief Financial Officer





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