Attached files
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EX-10.1 - EXHIBIT 10.1 - InsPro Technologies Corp | v328756_ex10-1.htm |
EX-32.2 - EXHIBIT 32.2 - InsPro Technologies Corp | v328756_ex32-2.htm |
EX-31.2 - EXHIBIT 31.2 - InsPro Technologies Corp | v328756_ex31-2.htm |
EX-32.1 - EXHIBIT 32.1 - InsPro Technologies Corp | v328756_ex32-1.htm |
EX-31.1 - EXHIBIT 31.1 - InsPro Technologies Corp | v328756_ex31-1.htm |
EXCEL - IDEA: XBRL DOCUMENT - InsPro Technologies Corp | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
Amendment No. 1
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
¨ 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 333-123081
INSPRO TECHNOLOGIES Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 98-0438502 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) |
150 North Radnor-Chester Rd.
Radnor Financial Center, Suite B101
Radnor, Pennsylvania 19087
(Address of Principal Executive Offices) (Zip Code)
(484) 654-2200
(Registrant’s Telephone Number, Including Area Code)
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 Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for 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 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 ¨ | 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
As of November 14, 2012, there were 41,543,655 outstanding shares of common stock, par value $0.001 per share, of the registrant.
INSPRO
TECHNOLOGIES Corporation
Form 10-Q Quarterly Report
INDEX
PART I FINANCIAL INFORMATION | |||
Item 1 | Financial Statements | ||
Consolidated Balance Sheets as of September 30, 2012 (UNAUDITED) and December 31, 2011 | 3 | ||
Consolidated Statements of Operations (UNAUDITED) for the three and nine months ended September 30, 2012 and 2011 | 4 | ||
Consolidated Statements of Cash Flows (UNAUDITED) for the nine months ended September 30, 2012 and 2011 | 5 | ||
Notes to UNAUDITED Consolidated Financial Statements | 6 | ||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 | |
Item 4 | Controls and Procedures | 36 | |
PART II OTHER INFORMATION | |||
Item 1 | Legal Proceedings | 37 | |
Item 5 | Other Information | 37 | |
Item 6 | Exhibits | 38 | |
Signatures | 39 |
XBRL EXPLANATORY NOTE
The purpose of this Amendment No. 1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 is to submit Exhibit 101 in accordance with Rule 405 of Regulation S-T. Exhibit 101 consists of the Interactive Data Files relating to this Amendment No. 1 to the Registrant’ s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012.
Pursuant to Rule 406T of Regulation S-T, the XBRL files contained in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
Page 2 |
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2012 | December 31, 2011 | |||||||
(Unaudited) | (1) | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash | $ | 2,091,032 | $ | 3,702,053 | ||||
Accounts receivable, net | 2,444,375 | 1,506,234 | ||||||
Tax receivable | 766 | 766 | ||||||
Prepaid expenses | 285,143 | 116,649 | ||||||
Other current assets | 396 | 2,139 | ||||||
Assets of discontinued operations | 87,817 | 104,002 | ||||||
Total current assets | 4,909,529 | 5,431,843 | ||||||
Property and equipment, net | 1,501,835 | 496,692 | ||||||
Intangibles, net | - | 260,050 | ||||||
Other assets | 80,608 | 80,608 | ||||||
Total assets | $ | 6,491,972 | $ | 6,269,193 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Note payable | $ | 66,686 | $ | 8,586 | ||||
Accounts payable | 1,906,096 | 644,563 | ||||||
Accrued expenses | 712,777 | 521,383 | ||||||
Current portion of capital lease obligations | 74,319 | 109,872 | ||||||
Deferred revenue | 1,672,039 | 622,500 | ||||||
Total current liabilities | 4,431,917 | 1,906,904 | ||||||
LONG TERM LIABILITIES: | ||||||||
Warrant liability | - | 1,674,226 | ||||||
Capital lease obligations | 95,776 | 113,943 | ||||||
Total long term liabilities | 95,776 | 1,788,169 | ||||||
SHAREHOLDERS' EQUITY: | ||||||||
Preferred stock ($.001 par value; 20,000,000 shares authorized) | ||||||||
Series A convertible preferred stock; 3,437,500 shares authorized, 1,276,750 shares issued and outstanding (liquidation value $12,767,500) | 2,864,104 | 2,864,104 | ||||||
Series B convertible preferred stock; 5,000,000 shares authorized, 2,797,379 shares issued and outstanding (liquidation value $8,392,137) | 5,427,604 | 5,427,604 | ||||||
Common stock ($.001 par value; 300,000,000 shares authorized, 41,543,655 shares issued and outstanding) | 41,544 | 41,543 | ||||||
Additional paid-in capital | 43,293,255 | 37,038,318 | ||||||
Accumulated deficit | (49,662,228 | ) | (42,797,449 | ) | ||||
Total shareholders' equity | 1,964,279 | 2,574,120 | ||||||
Total liabilities and shareholders' equity | $ | 6,491,972 | $ | 6,269,193 |
(1) Derived from audited financial statements.
See accompanying notes to unaudited consolidated financial statements.
Page 3 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Revenues | $ | 3,372,990 | $ | 1,699,802 | $ | 8,835,150 | $ | 5,636,023 | ||||||||
Cost of revenues | 3,237,929 | 1,587,656 | 7,844,648 | 5,035,330 | ||||||||||||
Gross profit | 135,061 | 112,146 | 990,502 | 600,693 | ||||||||||||
Selling, general and administrative expenses: | ||||||||||||||||
Salaries, employee benefits and related taxes | 580,579 | 765,496 | 1,735,783 | 2,053,281 | ||||||||||||
Advertising and other marketing | 84,802 | 27,199 | 145,119 | 81,243 | ||||||||||||
Depreciation and amortization | 255,316 | 166,521 | 717,072 | 521,309 | ||||||||||||
Rent, utilities, telephone and communications | 99,652 | 93,526 | 281,353 | 282,363 | ||||||||||||
Professional fees | 176,905 | 99,199 | 385,407 | 307,856 | ||||||||||||
Other general and administrative | 178,323 | 141,432 | 425,264 | 419,575 | ||||||||||||
1,375,577 | 1,293,373 | 3,689,998 | 3,665,627 | |||||||||||||
Loss from operations | (1,240,516 | ) | (1,181,227 | ) | (2,699,496 | ) | (3,064,934 | ) | ||||||||
Gain from discontinued operations | 138,818 | 198,529 | 409,094 | 638,034 | ||||||||||||
Other income (expense): | ||||||||||||||||
Gain (loss) on the change of the fair value of warrant liability | - | 103 | (4,508,078 | ) | 929,671 | |||||||||||
Interest income | 419 | 5,087 | 4,008 | 19,483 | ||||||||||||
Interest expense | (53,300 | ) | (5,301 | ) | (70,307 | ) | (18,802 | ) | ||||||||
Total other income (expense) | (52,881 | ) | (111 | ) | (4,574,377 | ) | 930,352 | |||||||||
Net loss | $ | (1,154,579 | ) | $ | (982,809 | ) | $ | (6,864,779 | ) | $ | (1,496,548 | ) | ||||
Net income (loss) per common share - basic and diluted: | ||||||||||||||||
Income (loss) from operations | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.18 | ) | $ | (0.06 | ) | ||||
Gain from discontinued operations | 0.00 | 0.01 | 0.01 | 0.02 | ||||||||||||
Net income (loss) per common share | $ | (0.03 | ) | $ | (0.02 | ) | $ | (0.17 | ) | $ | (0.04 | ) | ||||
Weighted average common shares outstanding - basic and diluted | 41,543,655 | 41,543,655 | 41,543,655 | 41,543,655 |
See accompanying notes to unaudited consolidated financial statements.
Page 4 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30 | ||||||||
2012 | 2011 | |||||||
(Unaudited) | (Unaudited) | |||||||
Cash Flows From Operating Activities: | ||||||||
Net loss | $ | (6,864,779 | ) | $ | (1,496,548 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 717,072 | 521,309 | ||||||
Stock-based compensation | 72,632 | 250,354 | ||||||
(Gain) loss on change of fair value of warrant liability | 4,508,078 | (929,671 | ) | |||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (938,141 | ) | (261,290 | ) | ||||
Tax receivable | - | 2,840 | ||||||
Prepaid expenses | (168,494 | ) | (10,518 | ) | ||||
Other current assets | 1,743 | (151 | ) | |||||
Other assets | - | 1,950 | ||||||
Accounts payable | 738,392 | (348,106 | ) | |||||
Accrued expenses | 191,394 | 118,309 | ||||||
Deferred revenue | 1,049,539 | 531,537 | ||||||
Assets of discontinued operations | 16,185 | (84,197 | ) | |||||
Net cash used in operating activities | (676,379 | ) | (1,704,182 | ) | ||||
Cash Flows From Investing Activities: | ||||||||
Purchase of property and equipment | (939,022 | ) | (98,235 | ) | ||||
Net cash used in investing activities | (939,022 | ) | (98,235 | ) | ||||
Cash Flows From Financing Activities: | ||||||||
Gross proceeds from note payable | 118,206 | 37,540 | ||||||
Payments on note payable | (60,106 | ) | (33,650 | ) | ||||
Fees paid in connection with secured note from related party | - | (8,370 | ) | |||||
Gross proceeds from capital leases | 27,442 | - | ||||||
Payments on capital leases | (81,162 | ) | (117,535 | ) | ||||
Restricted cash in connection with letters of credit | - | 1,152,573 | ||||||
Net cash provided by financing activities | 4,380 | 1,030,558 | ||||||
Net (decrease) in cash | (1,611,021 | ) | (771,859 | ) | ||||
Cash - beginning of the period | 3,702,053 | 4,429,026 | ||||||
Cash - end of the period | $ | 2,091,032 | $ | 3,657,167 | ||||
Supplemental Disclosures of Cash Flow Information Cash payments for interest | $ | 21,604 | $ | 18,802 | ||||
Non cash financing activities: Accrued Interest on acounts payable | $ | 48,703 | $ | - |
See accompanying notes to unaudited consolidated financial statements.
Page 5 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
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, 2011 and notes thereto and other pertinent information contained in the Annual Report on Form 10-K of InsPro Technologies Corporation (the “Company”, “we”, “us” or “our”) as filed with the Securities and Exchange Commission (the “Commission”).
The consolidated financial statements of the Company include the Company and its subsidiaries. All material inter-company balances and transactions have been eliminated.
For purposes of comparability, certain prior period amounts have been reclassified to conform to the 2012 presentation.
The results of operations for the nine months ended September 30, 2012 are not necessarily indicative of the results for the full fiscal year ending December 31, 2012.
Organization
InsPro Technologies, LLC, our wholly owned subsidiary (“InsPro Technologies”), is a provider of comprehensive, web-based insurance administration software applications. InsPro Technologies’ flagship software product is InsPro Enterprise, which was introduced in 2004. InsPro Technologies offers InsPro Enterprise on 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. InsPro Technologies realizes revenue from the sale of software licenses, application service provider fees, software maintenance fees and professional services.
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 2012 and 2011 include the allowance for doubtful accounts, stock-based compensation, the useful lives of property and equipment and intangible assets, warrant liability and revenue recognition.
Cash and cash equivalents
The Company considers all liquid debt instruments with original maturities of three months or less to be cash equivalents.
Page 6 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounts receivable
The Company has a policy of establishing an allowance for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. At September 30, 2012 and December 31, 2011, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amount of $0. The Company had no write-offs of accounts receivable during the nine months ended September 30, 2012 and 2011.
Accounts receivable from the two largest InsPro Technologies clients accounted for 36% and 19%, respectively, of the Company’s total accounts receivable balance at September 30, 2012.
Fair value of financial instruments
The carrying amounts of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and capital leases approximated fair value as of September 30, 2012 and December 31, 2011, because of the relatively short-term maturity of these instruments and their market interest rates.
Effective January 1, 2008, the Company adopted Financial Accounting Standards Board (the “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. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results, but did expand certain disclosures.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1: | Observable inputs such as quoted market prices in active markets for identical assets or liabilities. | |
Level 2: | Observable market-based inputs or unobservable inputs that are corroborated by market data. | |
Level 3: | Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions. |
The Company measured its warrant liability using Level 3 inputs as defined by ASC 820.
Page 7 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and equipment
Property and equipment are carried at cost. The cost of repairs and maintenance are 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 FASB 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.
Intangible assets
Intangible assets consist of assets acquired in connection with the acquisition of InsPro Technologies and costs incurred in connection with the development of the Company’s software. See Note 4 – Intangible Assets.
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.
Warrant liability
Effective September 30, 2012, the full ratchet anti-dilution provisions pertaining to warrants issued during 2009 and 2010 expired. Consequently, the Company has determined that effective September 30, 2012, all of the Company’s issued and outstanding warrants qualify for a scope exception under ASC 815-40-15 as they are indexed to the Company’s stock. Effective September 30, 2012, the Company recorded the elimination of the warrant liability by recording a debit to warrant liability in the amount of $6,182,309 and a credit to additional paid in capital in the amount of $6,182,309. See Note 5 Shareholders’ Equity – Common Stock Warrants. For the nine months ended September 30, 2012, the Company recorded a loss on the change in fair value of derivative liability of $4,508,078 to mark-to-market for the increase in fair value of the warrants.
Page 8 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
The Company accounts for income taxes under the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Earnings (loss) per common share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Diluted loss per common share is not presented because it is anti-dilutive. The Company's common stock equivalents at September 30, 2012, include the following:
Series A convertible preferred stock issued and outstanding | 25,535,000 | |||
Series B convertible preferred stock issued and outstanding | 55,947,580 | |||
Options, issued, outstanding and exercisable | 4,885,000 | |||
Warrants to purchase common stock, issued, outstanding and exercisable | 87,020,457 | |||
Warrants to purchase series A convertible preferred stock, issued, outstanding and exercisable | 6,000,000 | |||
179,388,037 |
Revenue recognition
InsPro Technologies offers InsPro Enterprise software on a licensed and an ASP basis. An InsPro Enterprise license entitles the purchaser a perpetual license to a copy of the InsPro Enterprise installed at a single client location.
Alternatively, ASP hosting service enables a client to lease InsPro Enterprise, paying only for that capacity required to support their business. ASP clients access InsPro Enterprise installed on InsPro Technologies’ owned servers located at InsPro Technologies’ office or at a third party’s site.
InsPro Technologies’ software maintenance fees apply to both licensed and ASP clients. Maintenance fees cover periodic updates to the application and the InsPro Enterprise help desk.
InsPro Technologies’ consulting and implementation services are generally associated with the implementation of an InsPro Enterprise instance for either an ASP or licensed client, and cover such activity as InsPro Enterprise installation, configuration, modification of InsPro Enterprise functionality, client insurance document design and system documentation.
Page 9 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
InsPro Technologies’ revenue is generally recognized under ASC 985-605. For software arrangements involving multiple elements, 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 collectibility is probable. Revenue related to post-contract customer support (“PCS”), including technical support and unspecified when-and-if available software upgrades, is recognized ratably over the PCS term. Under ASC 985-605, if fair value does not exist for any undelivered element, revenue is not recognized until the earlier of (i) delivery of such element or (ii) when fair value of the undelivered element is established, unless the undelivered element is a service, in which case revenue is recognized as the service is performed once the service is the only undelivered element.
The Company recognizes revenue from software license agreements when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectibility 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 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.
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.
Cost of revenues
Cost of revenues includes direct labor and associated costs for employees and independent contractors performing InsPro Enterprise design, development, implementation, testing together with customer management, training and technical support, as well as facilities, equipment and software costs.
Advertising and other marketing
Advertising and other marketing costs are expensed as incurred.
Page 10 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations of credit risk
The Company maintains its cash in bank deposit accounts, which exceed the federally insured limits as provided through the Federal Deposit Insurance Corporation (“FDIC”). In 2010 the FDIC insurance coverage limit was permanently increased to $250,000 per depositor, per institution as a result of the Dodd-Frank Wall Street and Consumer Protection Act. Beginning December 31, 2010, the FDIC has implemented a new temporary insurance category to provide unlimited FDIC insurance coverage for funds held in noninterest-bearing transaction accounts at insured banks. This temporary category will remain in effect through December 31, 2012.
At September 30, 2012, the Company had $2,091,032 of cash in United States bank deposits, of which $2,091,032 was federally insured.
The following table lists the percentage of the Company’s revenue, which was earned from the Company’s two largest InsPro Enterprise clients.
For the Nine Months ended September 30, | ||||||||
2012 | 2011 | |||||||
Largest InsPro client | 36 | % | 28 | % | ||||
Second largest InsPro client | 12 | % | 11 | % |
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.
Registration rights agreements
The Company classifies as liability instruments the fair value of registration rights agreements when such agreements (i) require it to file, and cause to be declared effective under the Securities Act of 1933, as amended, a registration statement with the Commission within contractually fixed time periods, and (ii) provide for the payment of liquidating damages in the event of its failure to comply with such agreements and such failure is probable. Registration rights with these characteristics are accounted for as derivative financial instruments at fair value and contracts that are (a) indexed to and potentially settled in an issuer's own stock and (b) permit gross physical or net share settlement with no net cash settlement alternative are classified as equity instruments.
At September 30, 2012, the Company does not believe that it is probable that the Company will incur a penalty in connection with the Company’s registration rights agreements. Accordingly no liability was recorded as of September 30, 2012.
Page 11 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements
Various accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
NOTE 2 – DISCONTINUED OPERATIONS
The Company has classified its former telesales call center and external (ISG) agent produced agency business (the “Agency Business”), its former Insurint business and its leased offices located in New York and Florida as discontinued operations.
The financial position of discontinued operations was as follows:
September 30, 2012 | December 31, 2011 | |||||||
Accounts receivable, less allowance for doubtful accounts $0 | $ | 84,817 | $ | 49,779 | ||||
Other current assets | 3,000 | 54,223 | ||||||
Net current assets of discontinued operations | $ | 87,817 | $ | 104,002 |
Page 12 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012
NOTE 2 – DISCONTINUED OPERATIONS (continued)
The results of discontinued operations were as follows:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenues: | ||||||||||||||||
Commission and other revenue from carriers | $ | 14,135 | $ | 34,310 | $ | 64,001 | $ | 145,278 | ||||||||
Transition policy commission pursuant to the Agreement | 131,579 | 176,028 | 374,790 | 564,697 | ||||||||||||
Sub-lease revenue | - | - | - | 150,100 | ||||||||||||
145,714 | 210,338 | 438,791 | 860,075 | |||||||||||||
Operating expenses: | ||||||||||||||||
Salaries, employee benefits and related taxes | - | - | - | 11,118 | ||||||||||||
Rent, utilities, telephone and communications | - | - | - | 171,510 | ||||||||||||
Professional fees | - | - | - | (1,961 | ) | |||||||||||
Other general and administrative | 6,896 | 11,809 | 29,697 | 41,374 | ||||||||||||
6,896 | 11,809 | 29,697 | 222,041 | |||||||||||||
Gain from discontinued operations | $ | 138,818 | $ | 198,529 | $ | 409,094 | $ | 638,034 |
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Useful Life (Years) | At September 30, 2012 | At December 31, 2011 | ||||||||
Computer equipment and software | 3 | $ | 2,730,282 | $ | 1,354,525 | |||||
Office equipment | 4.6 | 230,266 | 204,442 | |||||||
Office furniture and fixtures | 6.7 | 189,857 | 189,857 | |||||||
Leasehold improvements | 5.4 | 94,620 | 34,034 | |||||||
3,245,025 | 1,782,858 | |||||||||
Less accumulated depreciation | (1,743,189 | ) | (1,286,166 | ) | ||||||
$ | 1,501,836 | $ | 496,692 |
For the three months ended September 30, 2012 and 2011, depreciation expense was $168,632 and $79,837, respectively. For the nine months ended September 30, 2012 and 2011, depreciation expense was $457,021 and $261,257, respectively. For the nine months ended September 30, 2012, depreciation expense includes $41,896 of additional, accelerated depreciation expense as a result of InsPro Technologies’ abandonment of certain furniture and equipment in the second quarter of 2012, which occurred as a result of InsPro Technologies move to newly furnished office space in Baldwin Towers. See Note 8 – Operating Leases and future commitments.
Page 13 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012
NOTE 4 – INTANGIBLE ASSETS
Intangible assets consisted of the following:
Useful Life (Years) | At September 30, 2012 | At December 31, 2011 | ||||||||
InsPro Technologies intangible assets acquired | 4.7 | $ | 2,097,672 | $ | 2,097,672 | |||||
Software development costs for external marketing | 2 | 174,296 | 174,296 | |||||||
2,271,968 | 2,271,968 | |||||||||
Less: accumulated amortization | (2,271,968 | ) | (2,011,918 | ) | ||||||
$ | - | $ | 260,050 |
For the three months ended September 30, 2012 and 2011, amortization expense was $86,683 and $86,684, respectively. For the nine months ended September 30, 2012 and 2011, amortization expense was $260,050 and $260,052, respectively.
NOTE 5 – SHAREHOLDERS’ EQUITY
Stock options
On May 20, 2012, 250,000 options, which were previously granted to an outside consultant, expired in accordance with the terms of the stock options. On August 4, 2012, 250,000 options, which were previously granted to the former vice chairman of the Company’s board of directors, expired in accordance with the terms of the stock options.
The Company recorded compensation expense pertaining to employee stock options in salaries, commission and related taxes of $72,632 and $70,354 for the nine months ended September 30, 2012 and 2011, respectively.
The value of equity compensation expense not yet expensed pertaining to unvested equity compensation was $131,225 as of September 30, 2012, which will be recognized over a weighted average 3.3 years in the future.
The total intrinsic value of stock options outstanding and exercisable as of September 30, 2012 was $21,345.
Page 14 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012
NOTE 5 – SHAREHOLDERS’ EQUITY (continued)
A summary of the Company's outstanding stock options as of and for the three months ended September 30, 2012 are as follows:
Number | Weighted | |||||||||||
Of Shares | Average | Weighted | ||||||||||
Underlying | Exercise | Average | ||||||||||
Options | Price | Fair Value | ||||||||||
Outstanding at December 31, 2011 | 6,835,000 | $ | 0.47 | $ | 0.32 | |||||||
For the period ended September 30, 2012 | ||||||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | - | |||||||||
Expired | (500,000 | ) | 0.10 | 0.10 | ||||||||
Outstanding at September 30, 2012 | 6,335,000 | $ | 0.47 | $ | 0.33 | |||||||
Outstanding and exercisable at September 30, 2012 | 4,885,000 | $ | 0.57 | $ | 0.40 |
The following information applies to options outstanding at September 30, 2012:
Options Outstanding | Options Exercisable | |||||||||||||||||||||
Exercise Price | Number of Shares Underlying Options | Weighted Average Remaining Contractual Life | Exercise Price | Number Exercisable | Exercise Price | |||||||||||||||||
$ | 0.060 | 405,000 | 2.4 | $ | 0.060 | 405,000 | $ | 0.060 | ||||||||||||||
0.065 | 500,000 | 3.0 | 0.065 | 400,000 | 0.065 | |||||||||||||||||
0.100 | 2,705,000 | 1.6 | 0.100 | 2,105,000 | 0.100 | |||||||||||||||||
0.111 | 1,500,000 | 3.1 | 0.111 | 750,000 | 0.111 | |||||||||||||||||
1.000 | 750,000 | 3.4 | 1.000 | 750,000 | 1.000 | |||||||||||||||||
3.500 | 75,000 | 3.8 | 3.500 | 75,000 | 3.500 | |||||||||||||||||
$ | 3.600 | 400,000 | 3.8 | $ | 3.600 | 400,000 | $ | 3.600 | ||||||||||||||
6,335,000 | 4,885,000 |
As of September 30, 2012, there were 30,000,000 shares of our common stock authorized to be issued under the Company’s 2010 Equity Compensation Plan, of which 22,661,980 shares of our common stock remain available for future stock option grants.
Page 15 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012
NOTE 5 – SHAREHOLDERS’ EQUITY (continued)
Common stock warrants
On March 30, 2012, warrants to purchase 4,966,887 shares of the Company’s common stock at an exercise price of $1.51 per share expired in accordance with the terms of the warrants.
On September 30, 2012, the full ratchet anti-dilution adjustment provisions pertaining to warrants issued on January 15, 2009 and during 2010 expired in accordance with the terms of the warrants.
A summary of the status of the Company's outstanding common stock warrants as of and for the three months ended September 30, 2012 are as follows:
Weighted | ||||||||
Common | Average | |||||||
Stock | Exercise | |||||||
Warrants | Price | |||||||
Outstanding and exercisable at December 31, 2011 | 91,987,344 | 0.24 | ||||||
For the period ended September 30, 2012 | ||||||||
Granted | - | - | ||||||
Exercised | - | - | ||||||
Expired | (4,966,887 | ) | 1.51 | |||||
Outstanding and exercisable at September 30, 2012 | 87,020,457 | 0.17 |
The following information applies to common stock warrants outstanding at September 30, 2012:
Warrant Issue Date | Warrant Exercise Price | Warrant Expiration Date | Weighted Average Remaining Life | Anti-dilution Provision Expiration Date | Outstanding
Common Stock Warrants | |||||||||||
3/31/2008 | 0.20 | 3/31/2013 | 0.5 | expired | 25,000,000 | |||||||||||
1/15/2009 | 0.15 | 1/14/2014 | 1.3 | 9/30/2012 | 26,666,667 | |||||||||||
3/26/2010 | 0.15 | 3/26/2015 | 2.5 | 9/30/2012 | 7,380,000 | |||||||||||
9/30/2010 | 0.15 | 9/30/2015 | 3.0 | 9/30/2012 | 18,000,010 | |||||||||||
11/29/2010 | 0.15 | 11/29/2015 | 3.2 | 9/30/2012 | 2,000,000 | |||||||||||
12/22/2010 | 0.15 | 12/22/2015 | 3.2 | 9/30/2012 | 7,973,780 | |||||||||||
87,020,457 |
Page 16 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012
NOTE 5 – SHAREHOLDERS’ EQUITY DEFICIT) (continued)
Preferred stock warrants
A summary of the status of the Company's outstanding Series A preferred stock warrants as of and for the period ended September 30, 2012 are as follows:
Weighted | ||||||||
Preferred | Average | |||||||
Stock | Exercise | |||||||
Warrants | Price | |||||||
Outstanding at December 31, 2011 | 300,000 | 4.00 | ||||||
For the period ended September 30, 2012 | ||||||||
Granted | - | - | ||||||
Exercised | - | - | ||||||
Expired | - | - | ||||||
Outstanding at September 30, 2012 | 300,000 | 4.00 | ||||||
Exercisable at September 30, 2012 | 300,000 | $ | 4.00 |
Outstanding Series A preferred stock warrants at September 30, 2012 have a remaining contractual life of 3.4 years.
NOTE 6 – CAPITAL LEASE OBLIGATIONS
InsPro Technologies has entered into several capital lease obligations to purchase equipment used for operations. InsPro Technologies has the option to purchase the equipment at the end of the 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:
September 30, 2012 | December 31, 2011 | |||||||||||
Useful Life (Years) | ||||||||||||
Computer equipment and software | 3 | $ | 672,027 | 654,690 | ||||||||
Phone System | 3 | 15,011 | 15,011 | |||||||||
Leasehold improvements | - | - | ||||||||||
687,038 | 669,701 | |||||||||||
Less accumulated depreciation | (610,516 | ) | (555,141 | ) | ||||||||
$ | 76,522 | $ | 114,560 |
Page 17 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012
NOTE 6 – CAPITAL LEASE OBLIGATIONS (continued)
Future minimum payments required under capital leases at September 30, 2012 are as follows:
2012 | $ | 27,025 | ||
2013 | 69,638 | |||
2014 | 66,541 | |||
2015 | 17,324 | |||
Total future payments | 180,528 | |||
Less amount representing interest | 10,433 | |||
Present value of future minimum payments | 170,095 | |||
Less current portion | 74,319 | |||
Long-term portion | $ | 95,776 |
NOTE 7 – DEFINED CONTRIBUTION 401(k) PLAN
The Company implemented a 401(k) plan on January 1, 2007. Eligible employees contribute to the 401(k) plan. Employees become eligible after attaining age 19 and after 90 days of employment with the Company. Effective January 1, 2007, the Company implemented an elective contribution to the plan of 25% of the employee’s contribution up to 4% of the employee’s compensation (the “Contribution”). The Contributions are subject to a vesting schedule and become fully vested after one year of service, retirement, death or disability, whichever occurs first. The Company made contributions of $42,618 and $33,914 for the nine months ended September 30, 2012 and 2011, respectively.
NOTE 8 – OPERATING LEASES AND FUTURE COMMITMENTS
On September 14, 2007, InsPro Technologies entered into a lease agreement with BPG Officer VI Baldwin Tower L.P. (“BPG”) for approximately 5,524 square feet of office space at Baldwin Towers in Eddystone, Pennsylvania (the “BPG Lease”). On March 26, 2008, and again on December 2, 2008, the Company and BPG agreed to amend the BPG Lease to increase the leased office space by 1,301 and 6,810 square feet, respectively. The term of the lease commenced on October 1, 2007 and was to expire on January 31, 2013. Under the terms of the BPG Lease, rent was waived for the first, second, tenth and twenty-fifth months of the lease term.
On March 15, 2012, InsPro Technologies and BPG agreed to amend the BPG Lease to extend its term to January 31, 2017, and after BPG completes certain building improvements InsPro Technologies will move from its current location to another floor of the same building and lease 17,567 square feet of furnished office space from BPG. InsPro Technologies’ monthly rent shall be $24,887 per month commencing with InsPro Technologies’ occupancy of the new office space, which occurred in June 2012 through January 31, 2013. InsPro Technologies' monthly rent will increase to $25,619 per month February 1, 2013 through January 31, 2014, increase to $26,351 per month February 1, 2014 through January 31, 2015, increase to $27,082 per month February 1, 2015 through January 31, 2016, and finally increase to $27,814 per month through February 1, 2016 through January 31, 2017.
Page 18 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012
NOTE 8 – OPERATING LEASES AND FUTURE COMMITMENTS (continued)
The Company recorded a liability for deferred rent pertaining to its lease with Radnor Properties-SDC, L.P. in the amount of $110,357 as of September 30, 2012.
The Company leases certain real and personal property under non-cancelable operating leases. Rent expense was $403,527 and $532,751 for the nine months ended September 30, 2012 and 2011, respectively.
Future minimum payments required under operating leases and service agreements at September 30, 2012 are as follows:
2012 | $ | 169,740 | ||
2013 | 560,032 | |||
2014 | 571,317 | |||
2015 | 581,709 | |||
2016 | 594,197 | |||
thereafter | 93,335 | |||
Total | $ | 2,570,330 |
NOTE 9 – SUBSEQUENT EVENTS
Management has evaluated the effects of events subsequent to September 30, 2012 and has concluded that any events requiring adjustment to or disclosure in the financial statements have been made.
Loan and Security Agreement with Silicon Valley Bank
On October 3, 2012, the Company together with InsPro Technologies (the “Borrowers”) entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”).
The Loan Agreement established a revolving credit facility for the Borrowers in the principal amount of up to $2,000,000 (the “Revolving Facility”). Availability under the Revolving Facility is tied to a borrowing base formula that is based on 80% of the Borrowers’ eligible accounts receivable, plus 20% of the aggregate unrestricted cash balance held at SVB (the “Borrowing Base”). Advances under the Revolving Facility may be repaid and reborrowed in accordance with the Loan Agreement. No advances were made at closing however an advance of $525,000 was made on October 15, 2012. Pursuant to the Loan Agreement, the Borrowers agreed to pay to SVB the outstanding principal amount of all advances (the “Advances”), the unpaid interest thereon, and all other obligations incurred with respect to the Loan Agreement on October 3, 2014. Interest will accrue on the unpaid principal balance of the Advances at a floating per annum rate equal to 1% above the prime rate. During an event of default the rate of interest will increase 5% above the otherwise applicable rate, until such event of default is cured or waived. All accrued and unpaid interest is payable monthly on the first day of each month.
Page 19 |
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2012
NOTE 9 – SUBSEQUENT EVENTS (continued)
Subject to certain exceptions, the Loan Agreement contains covenants prohibiting the Borrowers from, among other things: (a) conveying, selling, leasing, transferring or otherwise disposing of their properties or assets; (b) liquidating or dissolving; (c) engaging in any business other than the business currently engaged in or reasonably related thereto; (d) entering into any merger or consolidation, or acquiring all or substantially all of the capital stock or property of another entity; (e) becoming liable for any indebtedness; (f) allowing any lien or encumbrance on any of their property; (g) paying any dividends; and (h) making payment on subordinated debt. Further, the Borrowers must maintain a minimum “adjusted quick ratio,” tested as of the last day of each month, of at least 1.75:1.00 commencing August 31, 2012. The adjusted quick ratio (the “AQR”) is the ratio of (x) the Borrowers’ consolidated, unrestricted cash maintained with SVB (and, for 90 days after the closing date, maintained with PNC Bank) plus net unbilled accounts receivable to (y) the Borrowers’ liabilities to SVB plus, without duplication, the aggregate amount of the Borrowers’ liabilities that mature within 1 year (excluding subordinated debt), minus the current portion of deferred revenue.
The Loan is secured by a first priority perfected security interest in substantially all of the assets of the Borrowers, excluding the intellectual property of the Borrowers. The Loan Agreement contains a negative covenant prohibiting the Borrowers from granting a security interest in their intellectual property to any party.
Under the terms of the Loan Agreement, the Borrowing Base under the Revolving Facility was $1,563,414 and the AQR was 1.64 as of September 30, 2012, which is below the required 1.75:1.00 AQR. The Company has notified SVB that the AQR as of September 30, 2012, is lower than the required amount, which represented a default on the Loan Agreement by the Company. On November 13, 2012 SVB agreed to waive the default and the Company and SVB agreed to amend the Loan Agreement to lower the Company’s requirement to maintain an AQR of 1.75 to 1.0 to 1.50 to 1.0 commencing with the month ending November 30, 2012 and as of the last day of each month thereafter.
Page 20 |
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.
Page 21 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The current operations of InsPro Technologies Corporation (the “Company”, “we”, “us” or “our”) consist of the operations of our wholly owned InsPro Technologies, LLC subsidiary (“InsPro Technologies”).
InsPro Enterprise is a comprehensive, web-based insurance administration software application. InsPro Enterprise was introduced by Atiam Technologies, L.P. (now our InsPro Technologies, LLC subsidiary) in 2004. InsPro Enterprise clients include health insurance carriers and third party administrators. We market InsPro Enterprise as a licensed software application, and we realize revenue from the sale of the software licenses, application service provider fees, software maintenance fees and professional services.
Critical Accounting Policies
Financial Reporting Release No. 60, which was released by the Securities and Exchange Commission (the “Commission”), encourages all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Our consolidated financial statements include a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements. Management believes the following critical accounting policies affect the significant judgments and estimates used in the preparation of the consolidated financial statements.
Use of Estimates - Management's Discussion and Analysis is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates these estimates, including those related to allowances for doubtful accounts receivable and long-lived assets such as intangible assets. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Significant estimates in 2012 and 2011 include the allowance for doubtful accounts, stock-based compensation, the useful lives of property and equipment and intangible assets, accrued expenses pertaining to abandoned facilities, warrant liability and revenue recognition. Actual results may differ from these estimates under different assumptions or conditions.
InsPro Technologies offers InsPro Enterprise on a licensed and an application service provider (“ASP”) basis. An InsPro Enterprise software license entitles the purchaser a perpetual license to a copy of the InsPro Enterprise installed at a single client location, which may be used to drive a production and model office instance of the application. The ASP hosting service enables a client to lease the InsPro Enterprise, paying only for that capacity required to support their business. ASP clients access an instance of InsPro Enterprise installed on InsPro Technologies’ servers located at InsPro Technologies’ office or at a third party’s site.
Software maintenance fees apply to both licensed and ASP clients. Maintenance fees cover periodic updates to the application and the InsPro Enterprise Help Desk.
Professional services are generally associated with the implementation of InsPro Enterprise instance 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.
Page 22 |
InsPro Technologies revenue is generally recognized under ASC 985-605. For software arrangements involving multiple elements, we allocate 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 collectibility 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.
We recognize revenues from software license agreements when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectibility is probable. We consider 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 module, we allocate 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.
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.
We review the carrying value of property and equipment and intangible assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.
Page 23 |
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2011
Revenues
For the three months ended September 30, 2012 (“Third Quarter 2012”), we earned revenues of $3,372,990 compared to $1,699,802 for the three months ended September 30, 2011 (“Third Quarter 2011”), an increase of $1,673,188 or 98%. Revenues include the following:
For the Three Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Professional services | $ | 2,361,674 | $ | 933,017 | ||||
ASP revenue | 752,525 | 562,374 | ||||||
Maintenance revenue | 258,791 | 197,290 | ||||||
Sub-leasing and other revenue | - | 7,121 | ||||||
Total | $ | 3,372,990 | $ | 1,699,802 |
· | In Third Quarter 2012 our professional services revenue increased $1,428,657 or 153% as a result of higher implementation services for four new clients in 2012 partially offset by lower post implementation services for existing clients. Implementation services included assisting clients in setting up their insurance products in InsPro Enterprise, providing modifications to InsPro Enterprise’s functionality to support the client’s business, interfacing InsPro Enterprise with the client’s other systems, automation of client correspondence to their customers and data conversion from the client’s existing systems to InsPro Enterprise. Post implementation services include these same services to existing clients supporting their ongoing utilization of InsPro Enterprise. |
· | In Third Quarter 2012 our ASP revenue increased $190,151 or 34% as a result of increased fees from ongoing and recent implementations of InsPro Enterprise and increased fees from several existing clients. ASP hosting service enables a client to either lease InsPro Enterprise software, paying only for that capacity required to support their business, or for a client to outsource the operation of their licensed InsPro Enterprise installation to the Company. ASP hosting clients access InsPro Enterprise installed on the Company’s owned servers located at the Company’s office or at a third party’s site. |
· | In Third Quarter 2012 our maintenance revenue increased $61,501 or 31% as a result of increased fees from a client’s recently implemented InsPro Enterprise software partially offset by decreased fees from an existing client. |
Page 24 |
· | We earned sub-leasing revenue from the sub leasing of space in our Radnor office to a third party, which is on a month to month basis. The Company’s sublease revenue varies month to month based on the amount of space the Company’s sub-tenant utilized. |
Cost of Revenues
Our cost of revenues for Third Quarter 2012 was $3,237,929 as compared to $1,587,656 for Third Quarter 2011 for an increase of $1,650,273 or 104% as compared to Third Quarter 2011. Cost of revenues consisted of the following:
For the Three Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Salaries, employee benefits and related taxes | $ | 1,677,420 | $ | 1,131,251 | ||||
Professional fees | 1,382,394 | 405,495 | ||||||
Rent, utilities, telephone and communications | 115,119 | 85,357 | ||||||
Other cost of revenues | 62,996 | (34,447 | ) | |||||
$ | 3,237,929 | $ | 1,587,656 |
· | In Third Quarter 2012 our salaries, employee benefits and related taxes component of cost of revenues increased $546,169 or 48% as compared to Third Quarter 2011. Salaries, employee benefits and related taxes increased primarily a result of increased employee staffing related to the increase in the number of InsPro Technologies’ clients and to a lesser extent as a result of $220,691 of post employment expense pertaining to a Separation of Employment Agreement and General Release between the Company and InsPro Technologies’ and a former vice president of InsPro Technologies. |
· | In Third Quarter 2012 our professional fees component of cost of revenues increased $976,899 or 241% as compared to Third Quarter 2011. Professional fees increased as a result of increased utilization of several outside consulting firms, which are assisting us with modifications to InsPro Enterprise’s functionality and new clients’ implementation of InsPro Enterprise. |
· | In Third Quarter 2012 our rent, utilities, telephone and communications component of cost of revenues increased $29,762 or 35% as compared to Third Quarter 2011. The increase was the result of higher telephone and communications costs and higher utilities and building expenses pertaining to InsPro Technologies office. |
· | In Third Quarter 2012 our other cost of revenues component of cost of revenues increased $97,443 or 283% as compared to Third Quarter 2011. The increase was the result of a non recurring $160,029 expense credit in Third Quarter 2011 pertaining to the settlement of amounts owed to a vendor partially offset by cost reduction initiatives pertaining to computer processing. Other cost of revenues consisted of computer processing incurred primarily to provide ASP hosting services, hardware and software, travel and entertainment, and office expenses. |
Gross Profit
As a result of the aforementioned factors, we reported a gross profit of $135,061 in Third Quarter 2012 as compared to a gross profit of $112,146 in Third Quarter 2011.
Page 25 |
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for Third Quarter 2012 was $1,375,576 as compared to $1,293,373 for Third Quarter 2011 for an increase of $82,202 or 6% as compared to Third Quarter 2011. Selling, marketing and administrative expenses consisted of the following:
For the Three Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Salaries, employee benefits and related taxes | $ | 580,579 | $ | 765,496 | ||||
Advertising and other marketing | 84,802 | 27,199 | ||||||
Depreciation and amortization | 255,315 | 166,521 | ||||||
Rent, utilities, telephone and communications | 99,652 | 93,526 | ||||||
Professional fees | 176,905 | 99,199 | ||||||
Other general and administrative | 178,323 | 141,432 | ||||||
$ | 1,375,576 | $ | 1,293,373 |
In Third Quarter 2012 we incurred salaries, employee benefits and related taxes of $580,579 as compared to $765,496 for Third Quarter 2011, a decrease of $184,917 or 24%. The decrease is primarily the result of lower corporate staffing.
Depreciation and amortization expense consisted of the following:
For the Three Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Amortization of intangibles acquired as a result of the InsPro acquisition | $ | 86,683 | $ | 86,684 | ||||
Depreciation expense | 168,632 | 79,837 | ||||||
Total | $ | 255,315 | $ | 166,521 |
· | We incurred amortization expense pertaining to the intangible assets acquired from InsPro Technologies (formerly Atiam Technologies, L.P.) on October 1, 2007. |
· | In Third Quarter 2012 we incurred depreciation expense of $168,632 as compared to $79,837 in Third Quarter 2011. The increase was primarily due to assets acquired on April 30, 2012, whereby InsPro Technologies entered into an Application Provider Hosting Agreement (“Micro Focus Agreement”) with Micro Focus (US) Inc. (“Micro Focus”). As part of the Micro Focus Agreement InsPro Technologies expanded its perpetual license rights to a Micro Focus software product used by InsPro Technologies in conjunction with hosting its InsPro Enterprise software. |
In Third Quarter 2012 our professional fees increased as a result of higher legal fees associated with our Loan and Security Agreement with Silicon Valley Bank, technology consulting expenses, human resource management consulting and accounting fees for tax preparation services.
In Third Quarter 2012 our other expense increased primarily as a result of increased maintenance expense on computer hardware and software especially costs associated with assets acquired in connection with the Micro Focus Agreement.
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Loss from operations
As a result of the aforementioned factors, we reported a loss from operations of $1,240,515 in Third Quarter 2012 as compared to a loss from operations of $1,181,227 in Third Quarter 2011.
Gain on discontinued operations
Results from discontinued operations were as follows:
For the Three Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Revenues: | ||||||||
Commission and other revenue from carriers | $ | 14,135 | $ | 34,310 | ||||
Transition policy commission pursuant to the Agreement | 131,579 | 176,028 | ||||||
145,714 | 210,338 | |||||||
Operating expenses: | ||||||||
Other general and administrative | 6,896 | 11,809 | ||||||
6,896 | 11,809 | |||||||
Gain from discontinued operations | $ | 138,818 | $ | 198,529 |
For Third Quarter 2012 we earned revenues from discontinued operations of $145,714 as compared to $210,338 in the Third Quarter 2011, a decrease of $64,624 or 31%. Revenues include the following:
· | In Third Quarter 2012 our commission and other revenue from carriers decreased due to the declines in our telesales call center produced agency business. We continue to receive commissions from carriers other than certain carriers and commissions on policies other than transferred policies, which were transferred to the acquirer. |
· | On February 20, 2009, the Company entered into and completed the sale of the agency business to eHealth Insurance Services, Inc., an unaffiliated third party, pursuant to the terms of a Client Transition Agreement. In Third Quarter 2012 our transition policy commission pursuant to the agreement decreased due to the declines in our telesales call center produced agency business. |
Total operating expenses of discontinued operations for Third Quarter 2012 was $6,896 as compared to $11,809 for Third Quarter 2011. The primary reason for the decrease is the expiration of the lease for our former Florida office and the elimination of rent and other associated costs.
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Gain from discontinued operations
As a result of the aforementioned factors, we reported a gain from discontinued operations of $138,818 or $0.00 gain from discontinued operations per share in Third Quarter 2012 as compared to a gain from discontinued operations of $198,529 or $0.01 gain from discontinued operations per share in Third Quarter 2011.
Other income (expenses)
Effective September 30, 2012, the full ratchet anti-dilution provisions pertaining to warrants issued during 2009 and 2010 expired. Consequently, the Company has determined that effective September 30, 2012, all of the Company’s issued and outstanding warrants qualify for a scope exception under ASC 815-40-15 as they are indexed to the Company’s stock. Effective September 30, 2012, the Company recorded the elimination of the warrant liability by recording a debit to warrant liability in the amount of $6,182,309 and a credit to additional paid in capital in the amount of $6,182,309. The gain in the Third Quarter 2011 represents the mark to market adjustments for the change in fair value of warrants, which contain provisions that adjust the exercise price of these warrants in the event we issue our common stock or other securities convertible into our common stock at price lower than the exercise price of these warrants.
Interest income is attributable to interest-bearing cash deposits. The decrease in interest income is the result of a decline in interest rates and a decline in cash balances.
Interest expense is attributable to interest on accounts payable, capital leases and note payable for premium financing on a portion of the Company’s insurance coverages. The increase in interest expense is the result of an increase in notes payable for premium financing.
Net loss
As a result of these factors discussed above, we reported a net loss of $1,154,579 or $0.03 net loss per share in Third Quarter 2012 as compared to a net loss of $982,809 or $0.02 loss per share in Third Quarter 2011.
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RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2011
Revenues
For the nine months ended September 30, 2012 (“2012 To Date”), we earned revenues of $8,835,150 as compared to $5,636,023 for the nine months ended September 30, 2011 (“2011 To Date”), an increase of $3,199,127 or 57%. Revenues include the following:
For the Nine Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Professional services | $ | 5,824,189 | $ | 3,231,819 | ||||
ASP revenue | 2,299,290 | 1,458,578 | ||||||
Sales of software licenses | - | 335,000 | ||||||
Maintenance revenue | 704,021 | 592,365 | ||||||
Sub-leasing and other revenue | 7,650 | 18,261 | ||||||
Total | $ | 8,835,150 | $ | 5,636,023 |
· | In 2012 To Date our professional services revenue increased $2,592,370 or 80% as a result of higher implementation services from four new clients in 2012 partially offset by lower post implementation services for existing clients. Implementation services included assisting clients in setting up their insurance products in InsPro Enterprise, providing modifications to InsPro Enterprise’s functionality to support the client’s business, interfacing InsPro Enterprise with the client’s other systems, automation of client correspondence to their customers and data conversion from the client’s existing systems to InsPro Enterprise. Post implementation services include these same services to existing clients supporting their ongoing utilization of InsPro Enterprise. |
· | In 2012 To Date our ASP revenue increased $840,712 or 57% as a result of increased fees from recent implementations of InsPro Enterprise to several clients and increased fees from several existing clients. ASP hosting service enables a client to either lease InsPro Enterprise software, paying only for that capacity required to support their business, or for a client to outsource the operation of their licensed InsPro Enterprise installation to the Company. ASP hosting clients access InsPro Enterprise installed on the Company’s owned servers located at the Company’s office or at a third party’s site. |
· | In 2011 To Date we earned $335,000 of license fee revenue, which represented a license fee recognized upon the completion of the implementation of InsPro Enterprise for a client. |
· | In 2012 To Date our maintenance revenue increased $111,656 or 19% as a result of increased fees from a client’s recently implemented InsPro Enterprise software partially offset by decreased fees from an existing client. |
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· | We earned sub-leasing revenue from the sub leasing of space in our Radnor office to third parties, which are on a month to month basis. The Company’s sublease revenue varies month to month based on the amount of space the Company’s sub-tenants utilizes. The Company’s sub-tenant ceased sub-leasing our Radnor office during the second quarter of 2012. |
Cost of Revenues
Our cost of revenues for 2012 To Date was $7,844,648 as compared to $5,035,330 for 2011 To Date for an increase of $2,809,318 or 56% as compared to 2011 To Date. Cost of revenues consisted of the following:
For the Nine Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Salaries, employee benefits and related taxes | $ | 4,327,799 | $ | 3,364,826 | ||||
Professional fees | 3,011,577 | 1,191,263 | ||||||
Rent, utilities, telephone and communications | 288,331 | 255,750 | ||||||
Other cost of revenues | 216,941 | 223,491 | ||||||
$ | 7,844,648 | $ | 5,035,330 |
· | In 2012 To Date our salaries, employee benefits and related taxes component of cost of revenues increased $962,973 or 29% as compared to 2011 To Date. Salaries, employee benefits and related taxes increased primarily a result of increased employee staffing related to the increase in the number of InsPro Technologies’ clients and to a lesser extent as a result of $220,691 of post employment expense pertaining to a Separation of Employment Agreement and General Release between the Company and InsPro Technologies’ and a former vice president of InsPro Technologies recorded in Third Quarter 2012. |
· | In 2012 To Date our professional fees component of cost of revenues increased $1,820,314 or 153% as compared to 2011 To Date. Professional fees increased as a result of increased utilization of several outside consulting firms, which are assisting us with modifications to InsPro Enterprise’s functionality and new clients’ implementation of InsPro Enterprise. |
· | In 2012 To Date our rent, utilities, telephone and communications component of cost of revenues increased $32,581 or 13% as compared to 2011 To Date. The increase was the result of higher telephone and communications costs and higher utilities and building expenses pertaining to InsPro Technologies office. |
· | In 2012 To Date our other cost of revenues component of cost of revenues decreased $6,550 or 3% as compared to 2011 To Date. The decrease was the result of lower travel expenses. Other cost of revenues consisted of computer processing incurred primarily to provide ASP hosting services, hardware and software, travel and entertainment, and office expenses. |
Gross Profit
As a result of the aforementioned factors, we reported a gross profit of $990,502 in 2012 To Date as compared to a gross profit of $600,693 in 2011 To Date.
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Selling, General and Administrative Expenses
Our selling, general and administrative expenses for 2012 To Date was $3,689,997 as compared to $3,665,627 for 2011 To Date for an increase of $24,370 or 1% as compared to 2011 To Date. Selling, marketing and administrative expenses consisted of the following:
For the Nine Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Salaries, employee benefits and related taxes | $ | 1,735,783 | $ | 2,053,283 | ||||
Advertising and other marketing | 145,119 | 81,243 | ||||||
Depreciation and amortization | 717,071 | 521,309 | ||||||
Rent, utilities, telephone and communications | 281,353 | 282,363 | ||||||
Professional fees | 385,407 | 307,856 | ||||||
Other general and administrative | 425,264 | 419,573 | ||||||
$ | 3,689,997 | $ | 3,665,627 |
In 2012 To Date we incurred salaries, employee benefits and related taxes of $1,735,783 as compared to $2,053,283 for 2011 To Date, a decrease of $317,500 or 16%. The decrease is primarily the result of lower corporate staffing.
Depreciation and amortization expense consisted of the following:
For the Nine Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Amortization of intangibles acquired as a result of the InsPro acquisition | $ | 260,050 | $ | 260,052 | ||||
Depreciation expense | 457,021 | 261,257 | ||||||
Total | $ | 717,071 | $ | 521,309 |
· | We incurred amortization expense pertaining to the intangible assets acquired from InsPro Technologies (formerly Atiam Technologies, L.P.) on October 1, 2007. |
· | In 2012 To Date we incurred depreciation expense of $457,021 as compared to $261,257 in 2011 To Date. The increase was primarily due to assets acquired pursuant to the Micro Focus Agreement as described above. In addition, 2012 To Date included $41,896 of additional, accelerated depreciation expense as a result of InsPro Technologies’ abandonment of certain furniture and equipment in the second quarter of 2012 when InsPro Technologies moved into newly furnished office space in a different section of Baldwin Towers. |
In 2012 To Date our professional fees increased as a result of higher legal fees associated with our Loan and Security Agreement with Silicon Valley Bank, technology consulting expenses and human resource management consulting services.
In 2012 To Date our other expense decreased primarily as a result of cost reductions in our corporate areas including lower insurance costs due to the elimination of the Company’s former Florida office.
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Loss from operations
As a result of the aforementioned factors, we reported a loss from operations of $2,699,495 in 2012 To Date as compared to a loss from operations of $3,064,934 in 2011 To Date.
Gain on discontinued operations
Results from discontinued operations were as follows:
For the Nine Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Revenues: | ||||||||
Commission and other revenue from carriers | $ | 64,001 | $ | 145,278 | ||||
Transition policy commission pursuant to the Agreement | 374,790 | 564,697 | ||||||
Sub-lease revenue | - | 150,100 | ||||||
438,791 | 860,075 | |||||||
Operating expenses: | ||||||||
Salaries, employee benefits and related taxes | - | 11,118 | ||||||
Rent, utilities, telephone and communications | - | 171,510 | ||||||
Professional fees | - | (1,961 | ) | |||||
Other general and administrative | 29,697 | 41,374 | ||||||
29,697 | 222,041 | |||||||
Gain (loss) from discontinued operations | $ | 409,094 | $ | 638,034 |
For 2012 To Date we earned revenues from discontinued operations of $438,791 as compared to $860,075 in the 2011 To Date, a decrease of $421,284 or 49%. Revenues include the following:
· | In 2012 To Date our commission and other revenue from carriers decreased due to the declines in our telesales call center produced agency business. We continue to receive commissions from carriers other than certain carriers and commissions on policies other than transferred policies, which were transferred to the acquirer. |
· | On February 20, 2009, the Company entered into and completed the sale of the agency business to eHealth Insurance Services, Inc., an unaffiliated third party, pursuant to the terms of a Client Transition Agreement. In 2012 To Date our transition policy commission pursuant to the agreement decreased due to the declines in our telesales call center produced agency business. |
Total operating expenses of discontinued operations for 2012 To Date was $29,697 as compared to $222,041 for 2011 To Date. The primary reason for the decrease is the expiration of the lease for our former Florida office and the elimination of rent and other associated costs.
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Gain from discontinued operations
As a result of the aforementioned factors, we reported a gain from discontinued operations of $409,094 or $0.01 gain from discontinued operations per share in 2012 To Date as compared to a gain from discontinued operations of $638,034 or $0.02 gain from discontinued operations per share in 2011 To Date.
Other income (expenses)
Effective September 30, 2012, the full ratchet anti-dilution provisions pertaining to warrants issued during 2009 and 2010 expired. Consequently, the Company has determined that effective September 30, 2012, all of the Company’s issued and outstanding warrants qualify for a scope exception under ASC 815-40-15 as they are indexed to the Company’s stock. Effective September 30, 2012, the Company recorded the elimination of the warrant liability by recording a debit to warrant liability in the amount of $6,182,309 and a credit to additional paid in capital in the amount of $6,182,309. The loss in 2012 To Date and the gain in the 2011 To Date represents the mark to market adjustments for the change in fair value of warrants, which contain provisions that adjust the exercise price of these warrants in the event we issue our common stock or other securities convertible into our common stock at price lower than the exercise price of these warrants.
Interest income is attributable to interest-bearing cash deposits. The decrease in interest income is the result of a decline in interest rates and a decline in cash balances.
Interest expense is attributable to interest on account payable, capital leases and note payable for premium financing on a portion of the Company’s insurance coverages. The increase in interest expense is the result of an increase in the note payable for premium financing.
Net loss
As a result of these factors discussed above, we reported a net loss of $6,864,779 or $0.17 net loss per share in 2012 To Date as compared to a net loss of $1,496,548 or $0.04 loss per share in 2011 To Date.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2012, we had a cash balance of $2,091,032 and working capital of $477,612.
Net cash used by operations was $676,379 in 2012 To Date as compared to $1,704,182 cash used in 2011 To Date. The improvement in cash flow from operations was primarily the result of increased collections of earned and unearned revenue in 2012 as compared to 2011. Impacting our cash flow from operations was our net loss of $6,864,779 in 2012 To Date as compared to our net loss of $1,496,548 in 2011 To Date and:
· | Increases in accounts receivable of $938,141 in 2012 To Date, which are primarily the result of increased billings in 2012 To Date to clients primarily for professional services. |
· | Increases in prepaid expenses in 2012 To Date of $168,494, which are primarily the result of premium obligations for various insurance policies and expenditures for software maintenance agreements. |
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· | Increases in accounts payable of $738,392 in 2012 To Date, which are primarily the result of increased utilization of outside IT consulting firms and the associated increase in the amounts owed to these vendors. |
· | Increases in deferred revenue of $1,049,539 in 2012 To Date, which are primarily the result of unearned license fees and to a lesser extent annual maintenance fees to various clients 2012 To Date. |
· | Decreases in net assets of discontinued operations of $16,185 in 2012 To Date, which are primarily the result of the collection of commission amounts owed pertaining to our former agency business and amounts owed from the buyer of our Insurint business. |
In addition to cash used in operating activities we incurred the following non cash gain and expenses in 2012 To Date, which were included in our net income (loss), including:
· | Recorded depreciation and amortization expense of $717,071 and $521,309 in 2012 To Date and 2011 To Date, respectively. |
· | Recorded stock-based compensation and consulting expense of $72,632 and $250,354 in 2012 To Date and 2011 To Date, respectively. |
· | Recognized a loss on change in fair value of warrants liabilities of $4,508,078 and a gain of $929,671 in 2012 To Date and 2011 To Date, respectively. |
Net cash used by investing activities in 2012 To Date was $939,022 as compared to $98,235 in 2011 To Date. The increase is primarily the result of the partial payments for computer software acquired from Micro Focus in connection with existing and new clients utilizing the Company’s hosting service for InsPro Enterprise.
Net cash provided by financing activities in 2012 To Date was $4,380 as compared to cash provided in 2011 of $1,030,558.
· | We entered into two notes payable to finance insurance premiums for two of the Company’s various corporate insurance coverages during 2012. |
· | InsPro Technologies has entered into various capital lease obligations to purchase equipment used for operations. |
· | During the first quarter of 2011 the letters of credit pertaining to the former leases for our Florida and New York offices, which were collateralized with assets in the form of a money market account and certificate of deposit and classified as restricted cash as of December 31, 2010, were terminated as a result of the expiration of these leases. As a result of the termination of these letters of credit the restrictions on the money market account and certificate of deposit were lifted, and $1,152,573 was reclassified from restricted cash to cash during the first quarter of 2011. |
On October 3, 2012, the Company together with InsPro Technologies (the “Borrowers”) entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”).
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The Loan Agreement established a revolving credit facility for the Borrowers in the principal amount of up to $2,000,000 (the “Revolving Facility”). Availability under the Revolving Facility is tied to a borrowing base formula that is based on 80% of the Borrowers’ eligible accounts receivable, plus 20% of the aggregate unrestricted cash balanced held at SVB (the “Borrowing Base”). Advances under the Revolving Facility may be repaid and reborrowed in accordance with the Loan Agreement. No advances were made at closing however an advance of $525,000 was made on October 15, 2012. Pursuant to the Loan Agreement, the Borrowers agreed to pay to SVB the outstanding principal amount of all advances (the “Advances”), the unpaid interest thereon, and all other obligations incurred with respect to the Loan Agreement on October 3, 2014. Interest will accrue on the unpaid principal balance of the Advances at a floating per annum rate equal to 1% above the prime rate. During an event of default the rate of interest will increase 5% above the otherwise applicable rate, until such event of default is cured or waived. All accrued and unpaid interest is payable monthly on the first day of each month.
Subject to certain exceptions, the Loan Agreement contains covenants prohibiting the Borrowers from, among other things: (a) conveying, selling, leasing, transferring or otherwise disposing of their properties or assets; (b) liquidating or dissolving; (c) engaging in any business other than the business currently engaged in or reasonably related thereto; (d) entering into any merger or consolidation, or acquiring all or substantially all of the capital stock or property of another entity; (e) becoming liable for any indebtedness; (f) allowing any lien or encumbrance on any of their property; (g) paying any dividends; and (h) making payment on subordinated debt. Further, the Borrowers must maintain a minimum “adjusted quick ratio,” tested as of the last day of each month, of at least 1.75:1.00 commencing August 31, 2012. The adjusted quick ratio (the “AQR”) is the ratio of (x) the Borrowers’ consolidated, unrestricted cash maintained with SVB (and, for 90 days after the closing date, maintained with PNC Bank) plus net unbilled accounts receivable to (y) the Borrowers’ liabilities to SVB plus, without duplication, the aggregate amount of the Borrowers’ liabilities that mature within 1 year (excluding subordinated debt), minus the current portion of deferred revenue.
The Loan is secured by a first priority perfected security interest in substantially all of the assets of the Borrowers, excluding the intellectual property of the Borrowers. The Loan Agreement contains a negative covenant prohibiting the Borrowers from granting a security interest in their intellectual property to any party.
Under the terms of the Loan Agreement, the Borrowing Base under the Revolving Facility was $1,563,414 and the AQR was 1.64 as of September 30, 2012, which is below the required 1.75:1.00 AQR. The Company has notified SVB that the AQR as of September 30, 2012, is lower than the required amount, which represented a default on the Loan Agreement by the Company. On November 13, 2012 SVB agreed to waive the default and the Company and SVB agreed to amend the Loan Agreement to lower the Company’s requirement to maintain an AQR of 1.75 to 1.0 to 1.50 to 1.0 commencing with the month ending November 30, 2012 and as of the last day of each month thereafter.
Off-Balance Sheet Arrangements
We do not currently have any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet or other contractually narrow or limited purposes.
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Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Under the supervision of our Chief Executive Officer and Chief Financial Officer, our management conducted an assessment of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on the results of such assessment, management has concluded that the our disclosure controls and procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and is accumulated and communicated to management, including our principal executive and principal financial officers, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
(b) Change in Internal Control over Financial Reporting.
There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various investigations, claims and lawsuits arising in the normal conduct of our business, none of which, in our opinion, will harm our business. We cannot assure that we will prevail in any litigation. Regardless of the outcome, any litigation may require us to incur significant litigation expense and may result in significant diversion of our attention.
Item 5. Other Information
On November 13, 2012, InsPro Technologies Corporation, a Delaware corporation (the “Company”), and certain of the Company’s subsidiaries (collectively, the “Borrowers”) entered into a First Amendment to Loan and Security Agreement (the “Loan Amendment”) with Silicon Valley Bank (“SVB”).
The Loan Amendment amended the Loan and Security Agreement (the “Loan Agreement”) between the Borrowers and SVB, which was entered into on October 3, 2012.
Pursuant to the Loan Amendment, SVB agreed to waive the Borrowers’ default of the Loan Agreement, and the Borrowers and SVB agreed to lower the Borrowers’ requirement to maintain an adjusted quick ratio as defined in the Loan Agreement from 1.75 to 1.0 to 1.50 to 1.0 commencing with the month ending November 30, 2012 and as of the last day of each month thereafter. The foregoing is a summary description of certain terms of the Loan Amendment and Loan Agreement and, by its nature, is incomplete. A copy of the Loan Amendment is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and is incorporated herein by reference. A copy of the Loan Agreement was previously filed by the Company on October 10, 2012 as Exhibit No. 99.1 to its Current Report on Form 8-K and is incorporated herein by reference. All readers are encouraged to read the entire text of the Loan Amendment and the Loan Agreement.
The foregoing is a summary description of certain terms of the Loan Amendment and Loan Agreement and, by its nature, is incomplete. A copy of the Loan Amendment is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and is incorporated herein by reference. A copy of the Loan Agreement was previously filed by the Company on October 10, 2012 as Exhibit No. 99.1 to its Current Report on Form 8-K and is incorporated herein by reference. All readers are encouraged to read the entire text of the Loan Amendment and the Loan Agreement.
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Item 6. Exhibits
Exhibit No. |
Description | |
10.1 | First Amendment to Loan and Security Agreement, dated as of November 13, 2012, by and among InsPro Technologies Corporation, InsPro Technologies, LLC, Atiam Technologies L.P. and Silicon Valley Bank * | |
31.1 | Chief Executive Officer’s Rule 13a-14(a)/15d-14(a) Certification * | |
31.2 | Chief Financial Officer’s Rule 13a-14(a)/15d-14(a) Certification * | |
32.1 | Chief Executive Officer’s Section 1350 Certification † | |
32.2 | Chief Financial Officer’s Section 1350 Certification † | |
101 | Financial statements from the quarterly report on Form 10-Q of InsPro Technologies Corporation for the quarter ended September 30, 2012, formatted in XBRL: (i) the Balance Sheet, (ii) the Statement of Income, (iii) the Statement of Cash Flows and (iv) the Notes to the Financial Statements. Filed herewith* |
* Filed herewith.
† Furnished herewith.
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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.
Date: November 19, 2012 | INSPRO TECHNOLOGIES CORPORATION | |
By: | /s/ ANTHONY R. VERDI | |
Anthony R. Verdi | ||
Chief Executive Officer, Chief Financial Officer and | ||
Chief Operating Officer | ||
(Principal Executive and Financial Officer) |
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EXHIBIT INDEX
Exhibit No. | Description | |
10.1 | First Amendment to Loan and Security Agreement, dated as of November 13, 2012, by and among InsPro Technologies Corporation, InsPro Technologies, LLC, Atiam Technologies L.P. and Silicon Valley Bank * | |
31.1 | Principal Executive Officer’s Rule 13a-14(a)/15d-14(a) Certification * | |
31.2 | Chief Financial Officer’s Rule 13a-14(a)/15d-14(a) Certification * | |
32.1 | Principal Executive Officer’s Section 1350 Certification † | |
32.2 | Chief Financial Officer’s Section 1350 Certification † | |
101 | Financial statements from the quarterly report on Form 10-Q of InsPro Technologies Corporation for the quarter ended September 30, 2012, formatted in XBRL: (i) the Balance Sheet, (ii) the Statement of Income, (iii) the Statement of Cash Flows and (iv) the Notes to the Financial Statements. Filed herewith* |
* Filed herewith.
† Furnished herewith.
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