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EX-31.1 - EXHIBIT 31.1 - InsPro Technologies Corpt82924_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - InsPro Technologies Corpt82924_ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - InsPro Technologies Corpt82924_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - InsPro Technologies Corpt82924_ex31-2.htm

 

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

 

FORM 10-Q

 

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

 

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 ☒  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         ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐  No ☒

 

As of August 14, 2015, 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 June 30, 2015 (UNAUDITED) and December 31, 2014   3
    Consolidated Statements of Operations (UNAUDITED) for the three and six months ended June 30, 2015 and 2014   4
    Consolidated Statements of Cash Flows (UNAUDITED) for the six months ended June 30, 2015 and 2014   5
         
    Notes to UNAUDITED Consolidated Financial Statements   6
         
Item 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations   26
         
Item 4   Controls and Procedures   39
         
PART II
OTHER INFORMATION
         
Item 1   Legal Proceedings   39
         
Item 6   Exhibits   39
         
    Signatures   40

 

Page 2
 

  

PART I.
FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES 

CONSOLIDATED BALANCE SHEETS 

           
   June 30, 2015   December 31, 2014 
   (Unaudited)   (1) 
ASSETS          
           
CURRENT ASSETS:          
Cash  $3,179,256   $3,431,001 
Accounts receivable, net   2,622,563    2,244,812 
Prepaid expenses   366,236    321,228 
Other current assets   2,642    2,796 
Assets of discontinued operations   16,598    19,783 
           
Total current assets   6,187,295    6,019,620 
           
Property and equipment, net   810,676    1,104,441 
Other assets   50,000    50,000 
           
Total assets  $7,047,971   $7,174,061 
           
LIABILITIES AND SHAREHOLDERS’ DEFICIT          
           
CURRENT LIABILITIES:          
Notes payable  $95,575   $549,329 
Notes payable to related party and accrued interest   2,054,358    - 
Accounts payable   5,705,305    4,834,128 
Accrued expenses   602,424    373,310 
Current portion of capital lease obligations   169,036    182,388 
Due to related parties   500,000    - 
Deferred revenue   3,503,894    2,251,688 
           
Total current liabilities   12,630,592    8,190,843 
           
LONG TERM LIABILITIES:          
Warrant liability   -    5,760 
Capital lease obligations   145,730    231,207 
           
Total long term liabilities   145,730    236,967 
           
Total liabilities   12,776,322    8,427,810 
           
SHAREHOLDERS’ DEFICIT:          
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, 3,809,378 shares issued and outstanding (liquidation value $11,428,134)   7,709,919    7,709,919 
Common stock ($.001 par value; 400,000,000 shares authorized, 41,543,655 shares issued and outstanding)   41,543    41,543 
Additional paid-in capital   45,975,099    45,738,974 
Accumulated deficit   (62,319,016)   (57,608,289)
           
Total shareholders’ deficit   (5,728,351)   (1,253,749)
           
Total liabilities and shareholders’ deficit  $7,047,971   $7,174,061 

 

(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 June 30,   For the Six Months Ended June 30, 
   2015   2014   2015   2014 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
                     
Revenues  $5,588,153   $4,267,656   $9,320,926   $7,844,255 
                     
Cost of revenues   5,600,260    3,614,767    11,015,370    6,567,200 
                     
Gross profit (loss)   (12,107)   652,889    (1,694,444)   1,277,055 
                     
Selling, general and administrative expenses:                    
Salaries, employee benefits and related taxes   682,823    2,385,650    1,699,513    3,043,145 
Advertising and other marketing   69,230    91,319    91,649    143,248 
Depreciation   21,877    42,139    64,547    78,854 
Rent, utilities, telephone and communications   90,223    103,427    177,936    194,089 
Professional fees   317,250    366,434    497,396    537,099 
Other general and administrative   304,606    211,564    504,451    392,979 
                     
Total selling, general and administrative expenses   1,486,009    3,200,533    3,035,492    4,389,414 
                     
Operating loss from continuing operations   (1,498,116)   (2,547,644)   (4,729,936)   (3,112,359)
                     
Other income (expense):                    
Gain on the change of the fair value of warrant liability   -    10,120    -    10,120 
Gain on the sale of equipment   20,669    -    20,669    - 
Interest income   -    -    -    - 
Interest expense   (52,770)   (11,234)   (81,196)   (18,678)
                     
Total other expense   (32,101)   (1,114)   (60,527)   (8,558)
                     
Loss from continuing operations   (1,530,217)   (2,548,758)   (4,790,463)   (3,120,917)
                     
Income from discontinued operations   41,018    61,617    79,736    132,017 
                     
Net loss  $(1,489,199)  $(2,487,141)  $(4,710,727)  $(2,988,900)
                     
Net income (loss) per common share - basic and diluted:                    
Loss from continuing operations  $(0.04)  $(0.06)  $(0.11)  $(0.07)
Income from discontinued operations   -    -    -    - 
Net loss per common share  $(0.04)  $(0.06)  $(0.11)  $(0.07)
                     
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 Six Months Ended June 30, 
   2015   2014 
   (Unaudited)   (Unaudited) 
Cash Flows From Operating Activities:          
Net loss  $(4,710,727)  $(2,988,900)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   354,908    383,686 
Stock-based compensation   230,365    1,707,922 
(Gain) on change of fair value of warrant liability   -    (10,120)
(Gain) on the sale of equipment   (20,669)   - 
Changes in assets and liabilities:          
Accounts receivable   (377,751)   (505,663)
Prepaid expenses   (45,008)   (76,633)
Other current assets   154    (1,835)
Accounts payable   871,177    204,980 
Accrued interest on secured note from related party   54,358    - 
Accrued expenses   229,114    249,940 
Deferred revenue   1,252,206    1,316,930 
Assets of discontinued operations   3,185    9,506 
           
Net cash (used in) provided by operating activities   (2,158,688)   289,813 
           
Cash Flows From Investing Activities:          
Purchase of property and equipment   (70,691)   (203,583)
Sale of equipment   30,217    - 
           
Net cash used in investing activities   (40,474)   (203,583)
           
Cash Flows From Financing Activities:          
Payments on notes payable   (453,754)   (44,859)
Gross proceeds from secured note from related party   2,000,000    - 
Gross proceeds loan payable to related party   500,000    - 
Payments on capital leases   (98,829)   - 
           
Net cash provided by (used in) financing activities   1,947,417    (44,859)
           
Net decrease in cash   (251,745)   41,371 
           
Cash - beginning of the period   3,431,001    2,569,536 
           
Cash - end of the period  $3,179,256   $2,610,907 
           
Supplemental Disclosures of Cash Flow Information Cash payments for interest  $26,838   $16,819 
           
Non cash financing activities:          
Accrued interest on loan payable  $54,358   $- 
Fair value of warrants reclassified to additional paid in capital  $5,760   $- 
Property and equipment acquired under capital leases  $-   $381,049 

 

See accompanying notes to unaudited consolidated financial statements.

 

Page 5
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  

Organization

  

InsPro Technologies Corporation (the “Company”, “ITCC”, “we”, “us” or “our”) is a technology company that provides software applications for use by insurance administrators in the insurance industry. Our business focuses primarily on our InsPro EnterpriseTM software application, which was introduced in 2004.

  

The Company offers InsPro Enterprise on both a licensed and an ASP (Application Service Provider) basis. InsPro Enterprise is an insurance administration and marketing system that supports group and individual business lines, and efficiently processes agent, direct market, worksite and web site generated business. InsPro Technologies’ clients include insurance carriers and third party administrators. The Company realizes revenue from the sale of software licenses, application service provider fees, hosting fees, software maintenance fees and consulting and implementation services.

  

Basis of presentation and principles of consolidation

  

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2014 and notes thereto and other pertinent information contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the “Commission”).

  

The consolidated financial statements of the Company include the Company and its wholly owned subsidiaries. All material inter-company balances and transactions have been eliminated.

  

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 2015 and 2014 include the warrant liability, allowance for doubtful accounts, stock-based compensation, the useful lives and valuation of property and equipment, and deferred revenue.

  

Cash and cash equivalents

  

The Company considers all liquid debt instruments with original maturities of three months or less to be cash equivalents.

  

Page 6
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

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 June 30, 2015 and December 31, 2014, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $247,700 and $125,146, respectively.

  

Fair value of financial instruments

  

The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and capital leases approximated fair value as of June 30, 2015 and December 31, 2014, because of the relatively short-term maturity of these instruments and their market interest rates.

  

The Company follows Financial Accounting Standards Board (“FASB”) ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. See Note 9 Fair Value Measurements.

  

Property and equipment

  

Property and equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. In accordance with Statement of Financial Accounting Standards ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

  

Impairment of long-lived assets

  

The Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.

 

Page 7
 

 

 INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

  

Income taxes

  

The Company accounts for income taxes pursuant to the provisions of FASB ASC 740-10, “Accounting for Income Taxes” (“ASC 740-10”), which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.

  

The Company follows the provisions of the ASC 740-10 related to Accounting for Uncertain Income Tax Positions. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits.

  

The Company has adopted FASB ASC 740-10-25 Definition of Settlement, which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. As of June 30, 2015, the tax years ended December 31, 2014, 2013, 2012 and 2011 are still subject to audit.

  

Income (loss) per common share

  

Basic earnings per share is computed by dividing income (loss) from continuing operations by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing the adjusted net income (loss) from operations for diluted earnings per share by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. The effects of common stock equivalents and potentially dilutive securities outstanding during 2015 and 2014 are excluded from the calculation of diluted income (loss) per common share because it is anti-dilutive.

 

Page 8
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The Company’s common stock equivalents include the following:

 

     
   June 30,
2015
   December 31,
2014
 
       
Series A convertible preferred stock issued and outstanding   25,535,000    25,535,000 
Series B convertible preferred stock issued and outstanding   76,187,560    76,187,560 
Options to purchase common stock issued and outstanding   6,725,000    6,725,000 
Warrants to purchase common stock issued and outstanding   38,093,780    45,473,780 
Warrants to purchase series A convertible preferred stock, issued and outstanding   9,200,000    6,000,000 
Warrants to purchase series B convertible preferred stock, issued and outstanding   23,400,000    23,400,000 
    179,141,340    183,321,340 

 

Revenue recognition

 

The Company offers InsPro EnterpriseTM on both a licensed and an ASP basis. An InsPro Enterprise software license entitles the purchaser a perpetual license to a copy of the InsPro Enterprise software installed at a single client location or hosted by InsPro Technologies. Alternatively, ASP hosting service enables a client to lease the InsPro Enterprise software, paying only for that capacity required to support their business. ASP and hosting clients access InsPro Enterprise installed on the Company’s servers located at a third party’s site.

 

The Company’s software maintenance fees apply to both licensed and ASP clients. Maintenance fees cover periodic updates to the application and the InsPro Enterprise help desk.

 

The Company’s consulting and implementation services are generally associated with the implementation of InsPro Enterprise for either an ASP or licensed client, and cover such activity as InsPro Enterprise installation, configuration, modification of InsPro Enterprise functionality, client insurance plan set-up, client insurance document design and system documentation.

 

The Company’s revenue is generally recognized under FASB ASC 985-605 (“ASC 985-605”). For software arrangements involving multiple elements, which are license fees, professional services, ASP services and maintenance services, the Company allocates revenue to each element based on the relative fair value or the residual method, as applicable using vendor specific objective evidence to determine fair value, which is based on prices charged when the element is sold separately. Software revenue accounted for under ASC 985-605 is recognized when persuasive evidence of an arrangement exists, the software is delivered in accordance with all terms and conditions of the customer contracts, the fee is fixed or determinable and collectability is probable. Revenue related to post-contract customer support (“PCS”), including technical support and unspecified when-and-if available software upgrades, is recognized ratably over the PCS term. Under ASC 985-605, if fair value does not exist for any undelivered element, revenue is not recognized until the earlier of (i) delivery of such element or (ii) when fair value of the undelivered element is established, unless the undelivered element is a service, in which case revenue is recognized as the service is performed once the service is the only undelivered element.

 

Page 9
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The Company recognizes revenue from software license agreements when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. The Company considers fees relating to arrangements with payment terms extending beyond one year to not be fixed or determinable and revenue for these arrangements is recognized as payments become due from the customer. In software arrangements that include more than one InsPro EnterpriseTM 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 EnterpriseTM design, development, implementation and testing together with customer management, training and technical support, as well as a portion of facilities costs and depreciation. For the three and six months ended June 30, 2015 and 2014, cost of revenues consisted of the following:

 

   For the Three Months Ended June 30,    For the Six Months Ended June 30,  
   2015    2014    2015    2014  
             
             
Compensation, employee benefits and related taxes  $2,012,230   $1,769,310   $4,010,124   $3,648,875 
Professional fees   3,184,734    1,417,693    5,948,174    2,120,172 
Depreciation   193,903    201,266    290,361    304,832 
Rent, utilities, telephone and communications   48,932    102,858    232,957    241,598 
Other cost of revenues   160,461    123,640    533,754    251,723 
   $5,600,260   $3,614,767   $11,015,370   $6,567,200 

 

Advertising and other marketing

 

Advertising and other marketing costs are expensed as incurred. For the three months ended June 30, 2015 and 2014, advertising and other marketing costs were $69,230 and $91,319, respectively. For the six months ended June 30, 2015 and 2014, advertising and other marketing costs were $91,649 and $143,248, respectively.

 

Concentrations of credit risk

 

The Company maintains its cash and restricted cash in bank deposit accounts, which exceed the federally insured limits as provided through the Federal Deposit Insurance Corporation (“FDIC”). At June 30, 2015, the Company had $3,179,256 of cash in United States bank deposits, of which $500,260 was federally insured and $2,678,996 was not federally insured. In 2010 the FDIC insurance coverage limit was increased to $250,000 per depositor, per institution as a result of the Dodd-Frank Wall Street and Consumer Protection Act.

 

Page 10
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The following table lists the percentage of the Company’s accounts receivable balance from the Company’s InsPro EnterpriseTM clients representing 10% or more of the accounts receivable balances as of the periods listed below.

 

    June 30, 2015   December 31, 2014 
            
Client #1    25%   16%
Client #2    21%   14%
Client #3    -    13%
Client #4    -    12%

 

The following table lists the percentage of the Company’s revenue earned from the Company’s InsPro Enterprise clients representing 10% or more of the revenue earned in each of the periods listed below. 

        
    For the 6 Months Ended June 30, 
    2015   2014 
          
Client #1    17%   20%
Client #2    12%   17%
Client #3    10%   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.

 

Non-employee stock based compensation

 

The cost of stock based compensation awards issued to non-employees for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, based on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied.

 

Registration rights agreements

 

At June 30, 2015, the Company does not believe that it will incur a penalty in connection with the Company’s registration rights agreements. Accordingly, no liability was recorded as of June 30, 2015. See Note 6 - Stockholders Deficit – Registration and Participation Rights.

 

Page 11
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent accounting pronouncements

 

From time to time, new accounting pronouncements are issued by FASB, which are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.

 

NOTE 2 – DISCONTINUED OPERATIONS

 

The Company has classified its former telesales call center and external agent produced agency business as discontinued operations. During the first quarter of 2009, the Company ceased the direct marketing and sale of health and life insurance and related products to individuals and families in its telesales call center. The Company also determined to discontinue selling health and life insurance and related products to individuals and families through its non employee ISG agents. On February 20, 2009, the Company entered into and completed the sale of its agency business to an unaffiliated third party, pursuant to the terms of a client transition agreement.

 

The financial position of discontinued operations was as follows:

 

   June 30, 2015   December 31, 2014 
         
Accounts receivable  $16,598   $19,783 
Net current assets of discontinued operations  $16,598   $19,783 

 

The results of discontinued operations do not include any allocated or common overhead expenses. The results of operations of discontinued operations were as follows:

 

   For the Three Months Ended June 30,   For the 6 Months Ended June 30, 
   2015   2014   2015   2014 
Revenues:                    
Commission and other revenue from carriers  $4,780   $7,417   $8,687   $17,238 
Transition policy commission pursuant to the Agreement   42,238    60,200    86,527    129,567 
                     
    47,018    67,617    95,214    146,805 
                     
Operating expenses:                    
Other general and administrative   6,000    6,000    15,478    14,788 
                     
    6,000    6,000    15,478    14,788 
                     
Income from discontinued operations  $41,018   $61,617   $79,736   $132,017 

 

Page 12
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 3 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

             
   Useful         
   Life         
   (Years)   June 30, 2015   December 31, 2014 
Computer equipment and software   3   $3,970,644   $3,927,491 
Office equipment   4.6   $158,732    148,381 
Office furniture and fixtures   6.7    189,857    189,857 
Leasehold improvements   5.4    94,620    94,620 
         4,413,853    4,360,349 
                
Less accumulated depreciation        (3,603,177)   (3,255,908)
                
        $810,676   $1,104,441 

 

The following table discloses depreciation expense as reported in the statement of operations.

 

   For the Three Months Ended June 30,   For the Six Months Ended June 30, 
   2015   2014   2015   2014 
                 
Depreciation included in cost of revenues  $193,903   $201,266   $290,361   $304,832 
Depreciation included in selling, general and administrative   21,877    42,139    64,547    78,854 
Total depreciation  $215,780   $243,405   $354,908   $383,686 

 

NOTE 4 – NOTES PAYABLE

 

Notes payable consisted of the following:

         
   June 30, 2015   At December 31, 2014 
         
Notes payable for insurance premium financing  $95,575   $24,329 
Loan from Silicon Valley Bank   -    525,000 
           
   $95,575   $549,329 

 

On June 24, 2015, the Company together with InsPro Technologies, LLC (“InsPro LLC”) and Atiam Technologies L. P., which is a wholly owned subsidiary of the Company, (collectively the “InsPro Parties”) advised Silicon Valley Bank (“SVB”) of their desire to terminate the Amended and Restated Loan and Security Agreement dated December 2, 2014 (the “Loan Agreement”), between the InsPro Parties and SVB. Prior to June 24, 2015, the InsPro Parties paid off the amount borrowed under the Loan Agreement, and on June 24, 2015 the InsPro Parties paid SVB early termination fees of $52,500 and SVB released all security interests in the InsPro Parties’ assets.

 

Page 13
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 5 – LOANS FROM RELATED PARTIES

 

Secured Convertible Promissory Note to Co-Investment Fund II, LP.

 

On January 30, 2015, the Company and InsPro Technologies issued a Secured Convertible Promissory Note (“Note”) to The Co-Investment Fund II, L.P., a holder of more than 5% of our common stock on an as converted basis (“Co-Investment”), pursuant to a Secured Convertible Promissory Note Purchase Agreement (the “Note Purchase Agreement”). In connection with the Note Purchase Agreement, the Company, InsPro LLC (collectively the “Borrowers”) and Co-Investment entered into a Security Agreement (the “Security Agreement”, and together with the Note and the Note Purchase Agreement, the “Financing Agreements”). Pursuant to the terms and subject to the conditions set forth in the Financing Agreements, Co-Investment provided a loan in the amount of $1,000,000 (“Loan”) to the Company and InsPro Technologies, which is secured by all assets of the Company and InsPro Technologies other than copyright applications, copyright registration, patents, patent applications, trademarks, services markets and other intellectual property (“Collateral”). Pursuant to the Note (“Note”), interest in the amount of 8% per annum, calculated on a 365 or 366 day year, as the case may be, and the principal amount of $1,000,000 and accrued interest will be paid on or before June 30, 2016. Co-Investment has the right to convert principal and accrued interest into the equity securities of the Company in the event that the Company issues and sells equity securities to investors on or before the repayment in full of the Note in an equity financing resulting in gross proceeds to the Company of at least $1,000,000. In the event that the Company consummates a consolidation, merger of reorganization in which the stockholders of the Company do not hold at least a majority of the voting power of the surviving entity in substantially the same proportion immediately after such consolidation, merger or reorganization, or the Company consummates a transaction or series of related transaction in which in excess of fifty percent (50%) of the voting power is transferred, then upon notice to Co-Investment the Company shall repay the entire outstanding principal balance and all unpaid accrued interest under the Note upon the closing of such transaction. The Borrowers may prepay the Note at any time in whole or in part without payment of penalty or unearned interest.

 

Pursuant to the Security Agreement, the Borrowers shall not, without Co-Investment’s prior consent, sell, lease or otherwise dispose of any equipment or fixtures constituting Collateral. In addition, the Borrowers will furnish Co-Investment with such information and documents regarding the Collateral and their financial condition, business, assets and liabilities as is reasonably requested by Co-Investment.

 

In connection with the Financing Agreements, Co-Investment entered into a Subordination Agreement (“Subordination Agreement”) with SVB, the terms of such agreement were approved by the Company, InsPro LLC and Atiam Technologies L.P. Pursuant to the Subordination Agreement, Co-Investment agreed, among other things, that all obligations under the Loan Agreement and any other obligations to SVB would be senior to the outstanding indebtedness under the Financing Agreements.

 

On March 27, 2015, the Borrowers issued a second Secured Convertible Promissory Note (the “Second Note”) in the amount of $1,000,000 to Co-Investment pursuant to a second Secured Convertible Promissory Note Purchase Agreement (the “Second Note Purchase Agreement”). The terms of the Second Note are essentially identical to the terms of the Note and the terms of the Second Note Purchase Agreement are essentially identical to the terms of the Note Purchase Agreement.

 

Page 14
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 5 – LOANS FROM RELATED PARTIES (continued)

 

As of June 30, 2015, the Company has not issued or sold equity securities that would allow Co-Investment to convert the Note or the Second Note into equity securities of the Company or determine the terms of the conversion of the Note or Second Note into equity securities of the Company. As of June 30, 2015, the Note or the Second Note are not convertible into any equity securities of the Company and the Company has not accounted for the conversion feature of the Note and the Second Note.

 

Loan Payable to Related Party

 

On March 17, 2015, the Company received a loan from Edmond Walters, a current director of the Company, in the amount of $500,000 (the “Walters Loan”). The Walters Loan was a pre-payment by Mr. Walters in connection with any future issuance of equity securities of the Company, and is convertible into equity securities of the Company in connection with any such future issuance of equity securities as agreed to by the Company and Mr. Walters. The Loan from Mr. Walters is refundable to Mr. Walters on demand, without interest, if the Company does not consummate an equity financing within a time period to be determined by the Company and Mr. Walters.

 

As of June 30, 2015, the Company has not issued or sold equity securities that would allow Mr. Walters to convert the Walters Loan into equity securities of the Company or determine the terms of the conversion of the Walters Loan into equity securities of the Company. As of June 30, 2015, Walters Loan is not convertible into any equity securities of the Company and the Company has not accounted for the conversion feature of the Walters Loan.

 

NOTE 6 – STOCKHOLDERS’ DEFICIT

 

Common Stock

 

As of June 30, 2015 and December 31, 2014, the Company was authorized to issue 400,000,000 shares of common stock with a par value of $0.001 per share (“Common Stock”). As of June 30, 2015 and December 31, 2014, the Company had 41,543,655 shares of its Common Stock issued and outstanding. The Company has reserved shares of Common Stock, on an as-if-converted basis, as follows:

 

   June 30, 2015   December 31, 2014 
         
Exercise of options issued and outstanding to purchase common stock   6,725,000    6,725,000 
Issuance of common shares available under the 2010 Equity Compensation Plan   22,271,980    22,271,980 
Exercise of warrants issued and outstanding to purchase common stock   38,093,780    45,473,780 
Conversion of series A convertible preferred stock issued and outstanding into common stock   25,535,000    25,535,000 
Exercise of warrants to purchase series A convertible preferred stock issued and outstanding          
and converted into common stock   9,200,000    6,000,000 
Conversion of series B convertible preferred stock issued and outstanding into common stock   76,187,560    76,187,560 
Exercise of warrants to purchase series B convertible preferred stock issued and outstanding and converted into common stock   23,400,000    23,400,000 
           
Total common stock reserved for issuance   201,413,320    205,593,320 

 

The above table includes Common Stock reserved for non exercisable stock options and Common Stock reserved for the issuance of stock options in the future under the Company’s 2010 Equity Compensation Plan.

 

Page 15
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)

 

Series A Convertible Preferred Stock

  

As of June 30, 2015 and December 31, 2014, the Company was authorized to issue 3,437,500 shares of Series A Convertible Preferred Stock with a par value of $0.001 per share (“Series A Preferred Stock”). As of June 30, 2015 and December 31, 2014, the Company had 1,276,750 shares of its Series A Preferred Stock issued and outstanding. As of June 30, 2015 and December 31, 2014, the Company has reserved 460,000 and 300,000 shares of Series A Preferred Stock, respectively, for the exercise of warrants issued and outstanding to purchase its Series A Preferred Stock.

  

The Series A Preferred Stock is entitled to vote as a single class with the holders of the Company’s Common Stock and preferred stock, with each share of Series A Preferred Stock having the right to 20 votes. Upon the liquidation, sale or merger of the Company, each share of Series A Preferred Stock is entitled to receive an amount equal to the greater of (A) a liquidation preference equal to two and a half (2.5) times the Series A Preferred Stock original issue price or $12,767,500, subject to certain customary adjustments, or (B) the amount such share of Series A Preferred Stock would receive if it participated pari passu with the holders of Common Stock on an as-converted basis. Each share of Series A Preferred Stock becomes convertible into 20 shares of Common Stock, subject to adjustment and at the option of the holder of the Series A Preferred Stock. For so long as any shares of Series A Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the Series A Preferred Stock is required to approve (Y) any amendment to the Company’s certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special rights of the Series A Preferred Stock or (Z) any amendment to the Company’s certificate of incorporation to create any shares of capital stock that rank senior to the Series A Preferred Stock. In addition to the voting rights described above, for so long as 1,000,000 shares of Series A Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the shares of Series A Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of the Company or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series A Preferred Stock with an amount per share equal to two and a half (2.5) times the Series A Preferred Stock original issue price or $12,767,500 in aggregate for all issued and outstanding Series A Preferred Stock.

  

Series B Convertible Preferred Stock

  

As of June 30, 2015 and December 31, 2014, the Company was authorized to issue 5,000,000 shares of Series B Convertible Preferred Stock with a par value of $0.001 per share (“Series B Preferred Stock”). As of June 30, 2015 and December 31, 2014, the Company had 3,809,378 of its Series B Preferred Stock issued and outstanding, respectively. As of June 30, 2015 and December 31, 2014, the Company has reserved 1,170,000 shares of Series B Preferred Stock for the exercise of warrants issued and outstanding to purchase its Series B Preferred Stock.

  

Page 16

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)

  

The Series B Preferred Stock is entitled to vote as a single class with the holders of the Company’s Common Stock and preferred stock, with each share of Series B Preferred Stock having the right to 20 votes. Upon the liquidation, sale or merger of the Company, each share of Series B Preferred Stock is entitled to receive an amount equal to the greater of (A) a liquidation preference equal to the Series B Preferred Stock original issue price or $11,428,134, subject to certain customary adjustments, or (B) the amount such share of Series B Preferred Stock would receive if it participated pari passu with the holders of Common Stock and preferred stock on an as-converted basis. Each share of Series B Preferred Stock becomes convertible into 20 shares of Common Stock, subject to adjustment and at the option of the holder of the Series B Preferred Stock. For so long as any shares of Series B Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the Series B Preferred Stock is required to approve (Y) any amendment to the Company’s certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special rights of the Series B Preferred Stock or (Z) any amendment to the Company’s certificate of incorporation to create any shares of capital stock that rank senior to the Series B Preferred Stock. In addition to the voting rights described above, for so long as 1,000,000 shares of Series B Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the shares of Series B Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of the Company or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series B Preferred Stock with an amount per share equal the Series B Preferred Stock original issue price or $11,428,134 in aggregate for all issued and outstanding Series B Preferred Stock.

  

Stock Options

  

During the six months ended June 30, 2015, 200,000 options, which were previously granted to former employees of the Company, expired in accordance with the terms of such stock options.

  

On March 27, 2015, the Company granted to an executive of the Company an option to purchase a total of 200,000 shares of the Company’s Common Stock, which vests as follows: 66,666 shares of Common Stock on March 27, 2016 and 66,667 shares of Common Stock on March 27 of each year from 2017 through 2018. This option has a five year term and an exercise price of $0.10 per share, which exceeded the $0.067 closing price of one share of the Company’s Common Stock as quoted on the OTCBB on March 27, 2015. The fair value of the option granted was estimated on the date of the grant to be $14,000 using the Black-Scholes option-pricing model based on the following assumptions: expected volatility: 792%, risk-free interest rate: 0.12%, expected life in years: 5 based on the contract life of the option grant, and assumed dividend yield: 0%. The Company recorded compensation expense pertaining to this option in salaries, commission and related taxes of $1,231 in the six months ended June 30, 2015.

  

As of June 30, 2015, there were 30,000,000 shares of our Common Stock authorized to be issued under the Company’s 2010 Equity Compensation Plan, of which 22,271,980 shares of our Common Stock remain available for future stock option grants.

 

The Company recorded compensation expense pertaining to employee stock options and warrants in salaries, commission and related taxes of $230,365 for the six months ended June 30, 2015, which included $25,109 of expense pertaining to stock options, $14,765 of expense pertaining to warrants to purchase Series A Preferred Stock and $190,491 of expense pertaining to an amended and restated warrant to purchase Series A Preferred Stock. See Note 6 – Stockholders Deficit – Series A Preferred Stock warrants. The Company recorded compensation expense pertaining to employee stock options and warrants in salaries, commission and related taxes of $43,522 for the six months ended June 30, 2014.

 

Page 17

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)

 

The value of equity compensation expense not yet expensed pertaining to unvested equity compensation for both options to purchase common stock and Series A Preferred Stock was $360,629 as of June 30, 2015, which will be recognized over a weighted average 3.2 years in the future.

  

A summary of the Company’s outstanding stock options as of and for the six months ended June 30, 2015 are as follows:

                
   Number
Of Shares
Underlying
Options
  Weighted
Average
Exercise
Price
  Weighted
Average
Fair Value
  Weighted
Average
Remaining
Contractual Life
  Aggregate
Intrinsic
Value (1)
            (in years)   
Outstanding at December 31, 2014   6,725,000   $0.46   $0.30    1.66   $- 
                          
For the year ended December 31, 2014                         
Granted   200,000    0.10    0.07           
Exercised   -    -    -           
Expired   (200,000)   0.10    0.10           
                          
Outstanding at June 30, 2015   6,725,000   $0.46   $0.30    2.80   $- 
                          
Outstanding and exercisable at June 30, 2015   3,475,000   $0.77   $0.53    1.24   $- 

 

(1) The aggregate intrinsic value is based on the $0.06 closing price as of June 30, 2015 for the Company’s Common Stock.

  

The following information applies to options outstanding at June 30, 2015:

                            
 Options Outstanding   Options Exercisable 
Exercise
Price
   Number of
Shares Underlying Options
   Weighted Average Remaining Contractual
Life
   Exercise
Price
   Number Exercisable   Exercise
Price
 
$0.065    200,000    0.3   $0.065    150,000   $0.065 
 0.100    3,800,000    4.5    0.100    600,000    0.100 
 0.111    1,500,000    0.4    0.111    1,500,000    0.111 
 1.000    750,000    0.6    1.000    750,000    1.000 
 3.500    75,000    1.0    3.500    75,000    3.500 
$3.600    400,000    1.1   $3.600    400,000   $3.600 
      6,725,000              3,475,000      

 

Page 18

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)

 

Common Stock Warrants

  

A summary of the status of the Company’s outstanding stock warrants as of and for the six months ended June 30, 2015 are as follows:

       
   Common
Stock
Warrants
  Weighted
Average
Exercise
Price
       
Outstanding and exercisable at December 31, 2014   45,473,780   $0.15 
           
For the period ended June 30, 2015          
Granted   -    - 
Exercised   -    - 
Expired   (7,380,000)   0.15 
Outstanding and exercisable at June 30, 2015   38,093,780   $0.15 

 

Outstanding warrants at June 30, 2015 have an average weighted average remaining contractual life of 0.9 years.

  

The following information applies to warrants outstanding at June 30, 2015:

                                 
Warrant
Issue Date
  Warrant
Exercise
Price
  Warrant
Expiration
Date
  Weighted
Average
Remaining
Life
  Anti-dilution
Provision
Expiration
Date
  Outstanding
Common
Stock
Warrants
 
9/30/2010   $ 0.15     9/30/2015     0.3     expired     18,000,010  
11/29/2010     0.15     11/29/2015     0.4     expired     2,000,000  
12/22/2010     0.15     12/22/2015     0.5     expired     7,973,780  
11/20/2012     0.15     11/20/2017     2.4     expired     4,999,990  
3/14/2013     0.15     3/14/2018     2.7     expired     120,000  
9/12/2013   $ 0.15     11/20/2017     2.4     expired     5,000,000  
                                 
                              38,093,780  

 

Page 19

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)

  

Series A Preferred Stock warrants

  

On March 27, 2015, the Company granted to two executives of the Company warrants to purchase a total of 160,000 shares of the Company’s Series A Preferred Stock, which in total vests as follows: 40,000 shares of Series A Preferred Stock on March 27 of each year from 2016 through 2019. These warrants each have a five year term and an exercise price of $4.00 per share. The fair value of these warrants granted were estimated on the date of the grant to be $224,000 using the Black-Scholes option-pricing model based on the following assumptions: expected volatility: 768%, risk-free interest rate: 0.12%, expected life in years: 5 based on the contract life of the warrant grant, and assumed dividend yield: 0%. The Company recorded compensation expense pertaining to these warrants in salaries, commission and related taxes of $14,765 in the six months ended June 30, 2015.

  

On March 27, 2015, the Company amended and restated a warrant to purchase a total of 150,000 shares of the Company’s Series A Preferred Stock originally granted to Mr. Robert J. Oakes on August 18, 2010. The original warrant had an expiration date of August 18, 2015, whereas the amended and restated warrant has an expiration date of September 14, 2016. The warrant is fully exercisable and has an exercise price of $4.00 per share. The fair value of the amendment to the warrant was estimated on the date of the amendment to be $190,491 using the Black-Scholes option-pricing model based on the following assumptions: expected volatility: 375%, risk-free interest rate: 0.12%, expected life in years: 1.5 based on the contract life of the warrant grant, and assumed dividend yield: 0%. The Company recorded compensation expense pertaining to this option in salaries, commission and related taxes of $190,491 in the six months ended June 30, 2015.

  

Outstanding preferred stock warrants to purchase the Company’s Series A Preferred Stock at June 30, 2015 have a remaining contractual life of 2.1 years. A summary of the status of the Company’s outstanding Series A Preferred Stock warrants as of and for the six months ended June 30, 2015 are as follows:

           
   Preferred
Stock
Warrants
   Weighted
Average
Exercise
Price
 
Outstanding and exercisable at December 31, 2014   300,000   $4.00 
           
For the period ended June 30, 2015          
Granted   160,000    4.00 
Exercised   -    - 
Expired   -    - 
Outstanding and exercisable at June 30, 2015   460,000   $4.00 

 

Page 20

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)

 

Series B Preferred Stock Warrants

 

Outstanding preferred stock warrants to purchase the Company’s Series A Preferred Stock at June 30, 2015 have a remaining contractual life of 3.9 years. A summary of the status of the Company’s outstanding Series B Preferred Stock warrants as of and for the six months ended June 30, 2015 are as follows:

       
   Preferred
Stock
Warrants
   Weighted
Average
Exercise
Price
 
       
Outstanding and exercisable at December 31, 2014   1,170,000   $3.00 
           
For the period ended June 30, 2015          
Granted   -    - 
Exercised   -    - 
Expired   -    - 
Outstanding and exercisable at June 30, 2015   1,170,000   $3.00 

  

Registration and Participation Rights

  

As of June 30, 2015, the Company has not received a demand notice in connection with any of the Company’s various registration rights agreements.

  

NOTE 7 – CAPITAL LEASE OBLIGATIONS

  

The Company’s subsidiary InsPro LLC has entered into several capital lease obligations to purchase equipment used for operations. The Company has the option to purchase the equipment at the end of each lease agreement for one dollar. The underlying assets and related depreciation were included in the appropriate fixed asset category, and related depreciation account.

  

Property and equipment includes the following amounts for leases that have been capitalized as of June 30, 2015 and December 31, 2014:

                
        June 30, 2015   December 31, 2014 
   Useful Life (Years)           
Computer equipment and software   3   $1,179,211   $1,179,211 
Phone System   3    15,011    15,011 
         1,194,222    1,194,222 
Less accumulated depreciation        (890,773)   (803,353)
        $303,449   $390,869 

 

Page 21

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 7 – CAPITAL LEASE OBLIGATIONS (continued)

  

Future minimum payments required under capital leases at June 30, 2015 are as follows:

 

2015  $89,703 
2016   179,406 
2017   58,673 
      
Total future payments   327,782 
Less amount representing interest   13,016 
      
Present value of future minimum payments   314,766 
Less current portion   169,036 
      
Long-term portion  $145,730 

 

NOTE 8 – DEFINED CONTRIBUTION 401(k) PLAN

  

The Company implemented a 401(k) plan on January 1, 2007. Eligible employees contribute to the 401(k) plan. Employees become eligible after attaining age 19 and after 6 months of employment with the Company. An employee may become a participant of the 401(k) plan on the first day of the month following the completion of the eligibility requirements. Effective January 1, 2007 the Company implemented an elective contribution to the plan of 25% of the employee’s contribution up to 4% of the employee’s compensation. The contributions are subject to a vesting schedule and become fully vested after one year of service, retirement, death or disability, whichever occurs first. The Company made contributions of $41,927 and $39,524 for the six months ended June 30, 2015 and 2014, respectively.

  

NOTE 9 – OPERATING LEASES

  

On July 7, 2006, the Company entered into a lease agreement with Radnor Properties-SDC, L.P. (the “Landlord”) for the lease of 7,414 square feet of office space located in Radnor Financial Center, Building B, 150 Radnor-Chester Road, Radnor, Pennsylvania. The term of the lease commenced on November 1, 2006, which was the date the Company, with the Landlord’s prior consent, assumed possession of the premises and the date the Landlord tendered possession of the premises to the Company following the substantial completion of the improvements required to be made by the Landlord under the lease agreement, and will expire on the last day of the 125th month following the commencement of the lease term. The annual rent increases every 12 months, starting at approximately $161,592 plus a proportionate share of Landlord’s building expenses after the second month and ending at approximately $258,378 plus a proportionate share of Landlord’s building expenses. Under the terms of the lease agreement, rent was waived for the first five months of the lease term with respect to 5,238 square feet and for the first twelve months for the remaining 2,176 square feet. The Company recorded a liability for deferred rent in accrued liabilities in the amount of $50,169 as of June 30, 2015.

 

On September 14, 2007, InsPro LLC entered into a lease agreement (the “Lease Agreement”) with BPG Officer VI Baldwin Tower L.P. (“BPG”). On April 28, 2015, InsPro LLC and BPG entered into a fifth amendment to the Lease Agreement whereby InsPro LLC and BPG agreed to amend the Lease Agreement to increase the leased office space by 6,801 rentable square feet effective April 1, 2015, through March 31, 2016, at an incremental monthly rent of $10,000.

 

The Company leases certain real and personal property under non-cancelable operating leases. Rent expense was $316,481 and $283,999 for the six months ended June 30, 2015 and 2014, respectively.

 

Page 22

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 10 – FAIR VALUE MEASUREMENTS

  

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 following tables provide a summary of the fair values of the Company’s assets and liabilities.

                           
    As of June 30, 2015        
    Fair Value Measurements Using   Liabilities at  
    Level 1   Level 2   Level 3   Fair Value  
                           
LIABILITIES:                          
Warrant liability   $ -   $ -   $ -   $ -  
                           
Total liabilities   $ -   $ -   $ -   $ -  

                           
    As of December 31, 2014        
    Fair Value Measurements Using   Liabilities at  
    Level 1   Level 2   Level 3   Fair Value  
                           
LIABILITIES:                          
Warrant liability   $ -   $ -   $ 5,760   $ 5,760  
                           
Total liabilities   $ -   $ -   $ 5,760   $ 5,760  

 

Warrant liability

  

The Company issued warrants, which contain certain anti-dilution provisions that reduce the exercise price of the warrants in certain circumstances.  See Note 5 - Equity - Common Stock Warrants. The Company has classified the warrant liability as non-current based an evaluation of the contractual obligations of the warrants and management’s expectation as to the settlement date of the warrant liability. The Company measured its warrant liability using Level 3 inputs as defined by ASC 820.

  

Upon the Company’s adoption of the Derivative and Hedging Topic of the FASB Accounting Standards Codification (“ASC 815”) on January 1, 2009, the Company determined that the warrants with provisions that reduce the exercise price of the warrants did not qualify for a scope exception under ASC 815 as they were determined to not be indexed to the Company’s stock as prescribed by ASC 815.

 

Page 23

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015

 

NOTE 10 – FAIR VALUE MEASUREMENTS (continued)

  

The Company determined the fair value of the warrant liability at June 30, 2015 was $0. As of June 30, 2015, there were no warrants with provisions that reduce the exercise price of the warrants. Accordingly all warrants qualify for a scope exception under ASC 815.

  

The following table presents a reconciliation of the warrant liability measured at fair value on a recurring basis using significant unobservable input (Level 3) for the three months ended June 30, 2015:

 

Warrant liability balance as of December 31, 2014   $ 5,760  
Fair value of warrants whose anti-dilution provisions expired during the period     (5,760 )
Warrant liability balance as of June 30, 2015   $ -  

 

Page 24

 

 

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 25

 

 

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 subsidiary InsPro Technologies, LLC (“InsPro LLC”).

 

InsPro EnterpriseTM is a comprehensive, web-based insurance administration software application. InsPro Enterprise was introduced by Atiam Technologies, L.P. 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 license fees, 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 United States generally accepted accounting principles (“US GAAP”). 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 2015 and 2014 include the warrant liability, allowance for doubtful accounts, stock-based compensation, the useful lives and valuation of property and equipment, and deferred revenue. Actual results may differ from these estimates under different assumptions or conditions.

 

The Company 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 the Company’s servers located 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 26
 

 

The Company’s revenue is generally recognized under FASB ASC 985-605 (“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 collectability is probable. Revenue related to post-contract customer support (“PCS”), including technical support and unspecified when-and-if available software upgrades, is recognized ratably over the PCS term. Under ASC 985-605, if fair value does not exist for any undelivered element, revenue is not recognized until the earlier of (i) delivery of such element or (ii) when fair value of the undelivered element is established, unless the undelivered element is a service, in which case revenue is recognized as the service is performed once the service is the only undelivered element.

 

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 collectability 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 EnterpriseTM 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 27
 

 

RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2015 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2014

 

Revenues

 

For the three months ended June 30, 2015 (“Second Quarter 2015”), we earned revenues of $5,588,153 compared to $4,267,656 for the three months ended June 30, 2014 (“Second Quarter 2014”), an increase of $1,320,497 or 31%. Revenues include the following:

 

   For the Three Months Ended June 30, 
   2015   2014 
           
Professional services  $2,749,149   $2,736,843 
ASP revenue   1,522,731    1,144,927 
Sales of software licenses   850,000    - 
Maintenance revenue   448,142    385,886 
Sub-leasing and other revenue   18,131    - 
           
Total  $5,588,153   $4,267,656 

 

  In Second Quarter 2015 our professional services revenue increased $12,306, or 0.4%, as a result of slightly lower implementation services. The Company received a $625,000 payment from a client in Second Quarter 2015 for professional services rendered, which the Company has not yet determined that it has earned as of June 30, 2015. This payment is recorded in deferred revenue as of June 30, 2015. Implementation services included assisting clients in setting up their insurance products in InsPro EnterpriseTM, 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 Second Quarter 2015 our ASP revenue increased $377,804, or 33%, as a result of increased fees from ongoing and recent implementations of InsPro Enterprise 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 servers located at a third party’s site.
     
  In Second Quarter 2015 we earned $850,000 of license fee revenue, which pertained to a license fee for InsPro Enterprise recognized for a recently implemented client.
     
  In Second Quarter 2015 our maintenance revenue increased $62,256 or 16% as a result of increased fees from several clients’ recent implementations of InsPro Enterprise.
     
  Other revenue consists of reimbursements of office and administrative expenses pertaining to various agreements with related and unrelated parties.

 

Page 28
 

 

Cost of Revenues

 

Our cost of revenues for Second Quarter 2015 was $5,600,260 as compared to $3,614,767 for Second Quarter 2014 for an increase of $1,985,493, or 55%, as compared to Second Quarter 2014. Cost of revenues consisted of the following:

       
   For the Three Months Ended June 30,  
   2015    2014  
       
Compensation, employee benefits and related taxes  $2,012,230   $1,769,310 
Professional fees   3,184,734    1,417,693 
Depreciation   193,903    201,266 
Rent, utilities, telephone and communications   48,932    102,858 
Other cost of revenues   160,461    123,640 
   $5,600,260   $3,614,767 

 

In Second Quarter 2015 our salaries, employee benefits and related taxes component of cost of revenues increased $242,920, or 14%, as compared to Second Quarter 2014. Salaries, employee benefits and related taxes increased primarily as a result of increased employee staffing.

 

In Second Quarter 2015 our professional fees component of cost of revenues increased $1,767,040, or 125%, as compared to Second Quarter 2014. Professional fees increased as a result of increased utilization of several outside consulting firms, which were assisting us with modifications to InsPro Enterprise’s functionality and new clients’ implementations of InsPro EnterpriseTM. In the third quarter 2014 the Company engaged a third party consulting firm to be a preferred system integrator for InsPro Enterprise, which contributed to the increase in cost.

 

In Second Quarter 2015 our depreciation expense component of cost of revenues decreased $7,363, or 4%, as compared to Second Quarter 2014. Depreciation expense decreased as a result of certain assets having been fully depreciated in accordance with the original depreciation schedule for such assets.

 

In Second Quarter 2015 our rent, utilities, telephone and communications component of cost of revenues decreased $53,926, or 52%, as compared to Second Quarter 2014 primarily due to lower utilities and building expenses pertaining to our Eddystone office.

 

In Second Quarter 2015 our other cost of revenues component of cost of revenues increased $36,821, or 30%, as compared to Second Quarter 2014. The increase was primarily the result of increased travel and lodging costs associated with multiple implementations of InsPro Enterprise and increased computer processing costs associated with increase in the number of InsPro LLC’s clients. Other cost of revenues consisted of the cost of 3rd party licensed software resold to clients, computer processing incurred primarily to provide ASP hosting services, hardware and software, travel and entertainment, and office expenses.

 

Gross (Loss) Profit

 

As a result of the aforementioned factors, we reported a gross loss of $12,108 in Second Quarter 2015, as compared to a gross profit of $652,889 in Second Quarter 2014. The results from operations in Second Quarter 2015 were unfavorably impacted by $625,000 of unearned professional services revenue in Second Quarter 2015 and higher cost of revenues, a result of increased utilization of several outside consulting firms, to assist with modifications to InsPro Enterprise’s functionality and new clients’ implementations of InsPro Enterprise™.

 

Page 29
 

 

Selling, General and Administrative Expenses

 

Our selling, general and administrative expenses for Second Quarter 2015 was $1,486,008 as compared to $3,200,533 for Second Quarter 2014 for a decrease of $1,714,525, or 54%, as compared to Second Quarter 2014. Selling, marketing and administrative expenses consisted of the following:

 

   For the Three Months Ended June 30, 
   2015   2014 
           
Compensation, employee benefits and related taxes  $682,823   $2,385,650 
Advertising and other marketing   69,230    91,319 
Depreciation   21,877    42,139 
Rent, utilities, telephone and communications   90,223    103,427 
Professional fees   317,250    366,434 
Other general and administrative   304,605    211,564 
   $1,486,008   $3,200,533 

 

In Second Quarter 2015 our salaries, employee benefits and related taxes decreased $1,702,827, or 71%, as compared to Second Quarter 2014. The decrease is primarily the result of $1,664,400 of equity compensation expense to directors in Second Quarter 2014.

 

In Second Quarter 2015 our advertising and other marketing expenses decreased $22,089, or 24%, as compared to Second Quarter 2014 primarily as a result of reduced marketing activities.

 

In Second Quarter 2015 our depreciation expense decreased $20,262, or 48%, as compared to Second Quarter 2014. Depreciation expense decreased as a result of a greater percentage of depreciation allocated to cost of revenues and a lesser percentage allocated to selling, general and administrative expense and as a result of certain assets having been fully depreciated in accordance with the original depreciation schedule for these assets.

 

In Second Quarter 2015 our rent, utilities, telephone and communications expense decreased $13,204, or 13%, as compared to Second Quarter 2014 primarily due to lower utilities and building expenses pertaining to our Eddystone office.

 

In Second Quarter 2015 our professional fees decreased $49,184, or 13%, as compared to Second Quarter 2014. The decrease is primarily the result of a lower royalty expense incurred to an outside consulting firm. The Company and a consulting firm agreed that the consulting firm would reduce the fees that it charged the Company in 2013 for consideration of a royalty payment.

 

In Second Quarter 2015 our other general and administrative expenses increased $93,041, or 44%, as compared to Second Quarter 2014. The increase is primarily the result of an $88,629 increase in the allowance for doubtful collection of accounts receivable.

 

Operating loss from continuing operations

 

As a result of the aforementioned factors, we reported a loss from continuing operations of $1,498,116 in Second Quarter 2015, as compared to $2,547,644 in Second Quarter 2014.

 

Page 30
 

 

Other income (expenses)

 

Gain on the sale of equipment was the result of the sale of certain computer equipment to an InsPro Enterprise client.

 

Interest expense is attributable to interest on the Company’s loans with Co-Investment Fund II, L. P., Silicon Valley Bank (“SVB”), capital leases and note payable for premium financing on a portion of the Company’s insurance coverages. The increase in interest expense is primarily the result of interest on the Company’s loan with Co-Investment Fund II, L. P. and the early termination of the loan with SVB, which resulted in the payment by the Company to SVB of an early termination fee of $52,500.

 

Gain on discontinued operations

 

Results from discontinued operations were as follows: 

 

   For the Three Months Ended June 30, 
   2015   2014 
Revenues:          
Commission and other revenue from carriers  $4,780   $7,417 
eHealth Agreement   42,238    60,200 
           
    47,018    67,617 
           
Operating expenses:          
Other general and administrative   6,000    6,000 
           
    6,000    6,000 
           
Income from discontinued operations  $41,018   $61,617 

 

For Second Quarter 2015 we earned revenues from discontinued operations of $47,018 as compared to $67,617 in the Second Quarter 2014, a decrease of $20,599, or 30%. Revenues include the following:

 

In Second Quarter 2015 our commission and other revenue from carriers decreased due to the declines in our discontinued telesales call center produced agency business.

 

On February 20, 2009, the Company entered into and completed the sale of its agency business to eHealth Insurance Services, Inc., an unaffiliated third party, pursuant to the terms of a client transition agreement. In Second Quarter 2015 our transition policy commission pursuant to the agreement decreased due to the declines in our telesales call center produced agency business.

 

As a result of the aforementioned factors, we reported a gain from discontinued operations of $41,018 or $0.00 gain from discontinued operations per share in Second Quarter 2015 as compared to $61,617 or $0.00 gain from discontinued operations per share in Second Quarter 2014.

 

Net loss

 

As a result of these factors discussed above, we reported a net loss of $1,489,199, or $0.04 net loss per share, in Second Quarter 2015 as compared to a net loss of $2,487,141 or $0.06 net loss per share in Second Quarter 2014.

 

Page 31
 

 

RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 2015 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2014

 

Revenues

 

For the six months ended June 30, 2015 (“2015 To Date”), we earned revenues of $9,320,926 compared to $7,844,255 for the six months ended June 30, 2014 (“2014 To Date”), an increase of $1,476,671 or 19%. Revenues include the following:

 

   For the Six Months Ended June 30, 
   2015   2014 
           
Professional services  $4,359,375   $4,882,872 
ASP revenue   2,990,003    2,191,096 
Sales of software licenses   1,036,624    - 
Maintenance revenue   898,735    770,287 
Sub-leasing and other revenue   36,189    - 
           
Total  $9,320,926   $7,844,255 

 

In 2015 To Date our professional services revenue decreased $523,497, or 11%, as a result of lower billable implementation services. The Company received a $625,000 payment from a client in Second Quarter 2015 for professional services rendered, which the Company has not yet determined that it has earned as of June 30, 2015. This payment is recorded in deferred revenue as of June 30, 2015. Implementation services included assisting clients in setting up their insurance products in InsPro EnterpriseTM, 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 2015 To Date our ASP revenue increased $798,907, or 37%, as a result of increased fees from ongoing and recent implementations of InsPro Enterprise 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 servers located at a third party’s site.

 

In 2015 To Date we earned $1,036,624 of license fee revenue, which included an $850,000 license fee for InsPro Enterprise recognized for a recently implemented client and the re-sale of third party software licenses to clients in the process of implementing InsPro Enterprise.

 

In 2015 To Date our maintenance revenue increased $128,448 or 17% as a result of increased fees from several clients’ recent implementations of InsPro Enterprise.

 

Other revenue consists of reimbursements of office and administrative expenses pertaining to various agreements with related and unrelated parties.

 

Page 32
 

 

Cost of Revenues

 

Our cost of revenues for 2015 To Date was $11,015,370 as compared to $6,567,200 for 2014 To Date for an increase of $4,448,170, or 68%, as compared to 2014 To Date. Cost of revenues consisted of the following:

 

   For the Six Months Ended June 30, 
   2015   2014 
           
Compensation, employee benefits and related taxes  $4,010,124    3,648,875 
Professional fees   5,948,174    2,120,172 
Depreciation   290,361    304,832 
Rent, utilities, telephone and communications   232,957    241,598 
Other cost of revenues   533,754    251,723 
   $11,015,370   $6,567,200 

 

In 2015 To Date our salaries, employee benefits and related taxes component of cost of revenues increased $361,249, or 10%, as compared to 2014 To Date. Salaries, employee benefits and related taxes increased primarily as a result of increased employee staffing.

 

In 2015 To Date our professional fees component of cost of revenues increased $3,828,002, or 181%, as compared to 2014 To Date. Professional fees increased as a result of increased utilization of several outside consulting firms, which were assisting us with modifications to InsPro Enterprise’s functionality and new clients’ implementations of InsPro Enterprise. In the third quarter 2014 the Company engaged a third party consulting firm to be a preferred system integrator for InsPro Enterprise, which contributed to the increase in cost.

 

In 2015 To Date our depreciation expense component of cost of revenues decreased $14,471, or 5%, as compared to 2014 To Date. Depreciation expense decreased as a result of certain assets having been fully depreciated in accordance with the original depreciation schedule for these assets.

 

In 2015 To Date our other cost of revenues component of cost of revenues increased $282,031, or 112%, as compared to 2014 To Date. The increase was primarily the result of $177,675 cost of 3rd party licensed software resold to two clients, increased computer processing costs associated with increase in the number of InsPro LLC’s clients and increased travel and lodging costs associated with multiple implementations of InsPro Enterprise. Other cost of revenues consisted of the cost of 3rd party licensed software resold to clients, computer processing incurred primarily to provide ASP hosting services, hardware and software, travel and entertainment, and office expenses.

 

Gross (Loss) Profit

 

As a result of the aforementioned factors, we reported a gross loss of $1,694,444 in 2015 To Date, as compared to a gross profit of $1,277,055 in 2014 To Date. The results from operations in 2015 To Date were unfavorably impacted by $625,000 of unearned professional services revenue in Second Quarter 2015 and higher cost of revenues, a result of increased utilization of several outside consulting firms, to assist with modifications to InsPro Enterprise’s functionality and new clients’ implementations of InsPro Enterprise™.

 

Page 33
 

 

Selling, General and Administrative Expenses

 

Our selling, general and administrative expense for 2015 To Date was $3,035,492 as compared to $4,389,414 for 2014 To Date for a decrease of $1,353,922, or 31%, as compared to 2014 To Date. Selling, marketing and administrative expenses consisted of the following:

 

   For the Six Months Ended June 30, 
   2015   2014 
           
Compensation, employee benefits and related taxes  $1,699,513   $3,043,145 
Advertising and other marketing   91,649    143,248 
Depreciation   64,547    78,854 
Rent, utilities, telephone and communications   177,936    194,089 
Professional fees   497,396    537,099 
Other general and administrative   504,451    392,979 
   $3,035,492   $4,389,414 

 

In 2015 To Date our salaries, employee benefits and related taxes decreased $1,343,632, or 44%, as compared to 2014 To Date. The decrease was primarily the result $1,477,557 of lower equity compensation to directors and certain executives of InsPro LLC partially offset by accrued severance expense in 2015 To Date associated with the termination of an executive of InsPro LLC.

 

oOn March 27, 2015, the Company amended and restated a warrant to purchase a total of 150,000 shares of the Company’s Series A Preferred Stock originally granted to Mr. Robert J. Oakes on August 18, 2010. The original warrant had an expiration date of August 18, 2015, whereas the amended and restated warrant has an expiration date of September 14, 2016. The warrant is fully exercisable and has an exercise price of $4.00 per share. The fair value of the amendment to the warrant was estimated on the date of the amendment to be $190,491 using the Black-Scholes option-pricing model based on the following assumptions: expected volatility: 375%, risk-free interest rate: 0.12%, expected life in years: 1.5 based on the contract life of the warrant grant, and assumed dividend yield: 0%. The Company recorded compensation expense pertaining to this option in salaries, commission and related taxes of $190,491 in 2015 to Date.

 

oOn May 22, 2014, the board of directors of the Company granted warrants to purchase 1,140,000 shares of Series B Convertible Preferred Stock at an exercise price equal to $3.00 per share to the directors of the Company. The warrants are immediately exercisable, non transferrable and expire on May 22, 2019. The Company estimated the fair value of the warrants to be $1,664,400 as of the date of grant using the Black-Scholes option-pricing model based on the following assumptions: expected volatility: 769%, risk-free interest rate: 0.05%, expected life in years: 5, and assumed dividend yield: 0%.

 

In 2015 To Date our advertising and other marketing expenses decreased $51,599, or 40%, as compared to 2014 To Date primarily as a result of reduced marketing activities.

 

In 2015 To Date our depreciation expense decreased $14,307, or 18%, as compared to 2014 To Date. Depreciation expense decreased as a result of a greater percentage of depreciation allocated to cost of revenues and a lesser percentage allocated to selling, general and administrative expense and as a result of certain assets having been fully depreciated in accordance with the original depreciation schedule for these assets.

 

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In 2015 To Date rent, utilities, telephone and commissions decreased $16,153, or 8%, as compared to 2014 To Date primarily due to lower utilities and building expenses pertaining to our Eddystone office.

 

In 2015 To Date professional fees decreased $39,703, or 7%, as compared to 2014 To Date. The decrease is primarily the result of lower royalty expense incurred to an outside consulting firm in the Second Quarter of 2014. The Company and a consulting firm agreed that the consulting firm would reduce the fees that it charged the Company in 2013 for consideration of a royalty payment.

 

In 2015 To Date our other general and administrative expenses increased $111,472, or 28%, as compared to 2014 To Date. The increase is primarily the result of $125,146 increase in the allowance for doubtful collection of accounts receivable.

 

Operating loss from continuing operations

 

As a result of the aforementioned factors, we reported a loss from continuing operations of $4,729,936 in 2015 To Date, as compared to $3,112,359 in 2014 To Date.

 

Other income (expenses)

 

Gain on the sale of equipment was the result of the sale of certain computer equipment to an InsPro Enterprise client.

 

Interest expense is attributable to interest on the Company’s loans with Co-Investment Fund II, L. P., Silicon Valley Bank (“SVB”), capital leases and note payable for premium financing on a portion of the Company’s insurance coverages. The increase in interest expense is primarily the result of interest on the Company’s loan with Co-Investment Fund II, L. P. and the early termination of the loan with SVB, which resulted in the payment of an early termination fee of 52,500.

 

Gain on discontinued operations

 

Results from discontinued operations were as follows:

 

   For the 6 Months Ended June 30, 
   2015   2014 
Revenues:          
Commission and other revenue from carriers  $8,687   $17,238 
Transition policy commission pursuant to the Agreement   86,527    129,567 
           
    95,214    146,805 
           
Operating expenses:          
Other general and administrative   15,478    14,788 
           
    15,478    14,788 
           
Income from discontinued operations  $79,736   $132,017 

 

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For 2015 To Date we earned revenues from discontinued operations of $95,214 as compared to $146,805 in the 2014 To Date, a decrease of $51,591, or 35%. Revenues include the following:

 

In 2015 To Date our commission and other revenue from carriers decreased due to the declines in our discontinued telesales call center produced agency business.

 

On February 20, 2009, the Company entered into and completed the sale of its agency business to eHealth Insurance Services, Inc., an unaffiliated third party, pursuant to the terms of a client transition agreement. In 2015 To Date our transition policy commission pursuant to the agreement decreased due to the declines in our telesales call center produced agency business.

 

As a result of the aforementioned factors, we reported a gain from discontinued operations of $79,736 or $0.00 gain from discontinued operations per share in 2015 To Date as compared to $132,017 or $0.00 gain from discontinued operations per share in 2014 To Date.

 

Net loss

 

As a result of these factors discussed above, we reported a net loss of $4,710,727, or $0.11 net loss per share, in 2015 To Date as compared to a net loss of $2,988,900 or $0.07 net loss per share in 2014 To Date.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At June 30, 2015, we had a cash balance of $3,179,256 and a working capital deficit of ($6,443,297).

 

Net cash used by operations was $2,158,688 in 2015 To Date as compared to net cash provided of $289,813 in 2014 To Date. Impacting our cash flow from operations was our net loss of $4,710,727 in 2015 To Date as compared to our net loss of $2,988,900 in 2014 To Date and:

 

Increases in accounts receivable of $377,751 in 2015 To Date, which is primarily the result of increased billings to clients primarily for unearned licensed fees and annual maintenance billings and to a lesser extent higher billings for ASP and hosting fees.

 

Increases in accounts payable of $871,177 in 2015 To Date, which is primarily the result of increased cost to several outside IT consulting firms.

 

Increases in accrued expenses of $229,114 in 2015 To Date, which is primarily the result of increased IT consulting services.

 

Increases in deferred revenue of $1,252,206 in 2015 To Date, which is primarily the result of unearned license fees and annual maintenance fee deposits, which were collected but not earned in 2015 To Date.

 

In addition to cash used in operating activities, we incurred the following non-cash gain and expenses, which were included in our net loss, including:

 

Recorded depreciation expense of $354,908 and $383,686 in 2015 To Date and 2014 To Date, respectively.

 

Recorded stock-based compensation and consulting expense of $230,365 and $1,707,922 in 2015 To Date and 2014 To Date, respectively.

 

Net cash used by investing activities in 2015 To Date was $40,474 as compared to $203,583 in 2014 To Date.

 

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Net cash provided by financing activities in 2015 To Date was $1,947,417 as compared to $44,859 of cash used in 2014 To Date.

 

On June 24, 2015, the Company together with InsPro LLC and Atiam Technologies L. P., which is a wholly owned subsidiary of the Company, (collectively the “InsPro Parties”) advised Silicon Valley Bank (“SVB”) of their desire to terminate the Amended and Restated Loan and Security Agreement. Dated December 2, 2014 (the “Loan Agreement”), between the InsPro Parties and SVB. Prior to June 24, 2015, the InsPro Parties paid off the amount borrowed under the Loan Agreement, and on June 24, 2015 the InsPro Parties paid SVB early termination fees of $52,500 and SVB released all security interests in the InsPro Parties’ assets.

 

On January 30, 2015, the Company and InsPro LLC (collectively, the “Borrows”) issued a Secured Convertible Promissory Note (“Note”) to The Co-Investment Fund II, L.P., a holder of more than 5% of our common stock on an as converted basis (“Co-Investment”), pursuant to a Secured Convertible Promissory Note Purchase Agreement (the “Note Purchase Agreement”). In connection with the Note Purchase Agreement, the Borrowers entered into a Security Agreement (the “Security Agreement”, and together with the Note and the Note Purchase Agreement, the “Financing Agreements”). Pursuant to the terms and subject to the conditions set forth in the Financing Agreements, Co-Investment provided a loan in the amount of $1,000,000 (“Loan”) to the Borrowers, which is secured by all assets of the Company and InsPro Technologies other than copyright applications, copyright registration, patents, patent applications, trademarks, services markets and other intellectual property (“Collateral”). Pursuant to the Note, interest in the amount of 8% per annum, calculated on a 365 or 366 day year, as the case may be, and the principal amount of $1,000,000 and accrued interest will be paid on or before June 30, 2016. Co-Investment has the right to convert principal and accrued interest into the equity securities of the Company in the event that the Company issues and sells equity securities to investors on or before the repayment in full of the Note in an equity financing resulting in gross proceeds to the Company of at least $1,000,000. In the event that the Company consummates a consolidation, merger of reorganization in which the stockholders of the Company do not hold at least a majority of the voting power of the surviving entity in substantially the same proportion immediately after such consolidation, merger or reorganization, or the Company consummates a transaction or series of related transaction in which in excess of fifty percent (50%) of the voting power is transferred, then upon notice to Co-Investment the Company shall repay the entire outstanding principal balance and all unpaid accrued interest under the Note upon the closing of such transaction. The Borrowers may prepay the Note at any time in whole or in part without payment of penalty or unearned interest.

 

On March 17, 2015, the Company received a loan from Edmond Walters, a current director of the Company, in the amount of $500,000 (the “Walters Loan”). The Walters Loan was a pre-payment by Mr. Walters in connection with any future issuance of equity securities of the Company, and is convertible into equity securities of the Company in connection with any such future issuance of equity securities as agreed to by the Company and Mr. Walters. The Walters Loan is refundable to Mr. Walters on demand, without interest, if the Company does not consummate an equity financing within a time period to be determined by the Company and Mr. Walters.

 

On March 27, 2015, the Borrowers issued a second Secured Convertible Promissory Note (“The Second Note”) in the amount of $1,000,000 to Co-Investment pursuant to a second Secured Convertible Promissory Note Purchase Agreement (the “Second Note Purchase Agreement”). The terms of the Second Note are essentially identical to the terms of the Note and the terms of the Second Note Purchase Agreement are essentially identical to the terms of the Note Purchase Agreement.

 

Payments on notes payable pertain to repayment of the borrowed amount under the Loan Agreement with SVB and notes payable, which we entered into in order to finance two of the Company’s corporate insurance premiums.

 

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InsPro LLC has entered into various capital lease obligations to purchase equipment used for operations.

 

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.

 

PART II.

OTHER INFORMATION

Item 1. Legal Proceedings

 

From time to time we are involved in various investigations, claims and lawsuits arising in the normal conduct of our business, none of which, in our opinion, are material to our business. We cannot assume 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 6. Exhibits

 

Exhibit No.   Description
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 †

 

 

* 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: August 14, 2015 INSPRO TECHNOLOGIES CORPORATION  
       
  By: /s/ ANTHONY R. VERDI  
    Anthony R. Verdi  
    Chief Financial Officer  
    (Principal Financial Officer)  

 

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EXHIBIT INDEX

 

Exhibit No.   Description
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 †

 

 

* Filed herewith.

† Furnished herewith.

 

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