UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2018

 

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 000-51701

 

 

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.)

 

1510 Chester Pike

Suite 400

Eddystone, Pennsylvania 19022

(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 filled all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x  No ¨

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x  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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

 

Large Accelerated Filer     ¨			Accelerated Filer                           ¨
Non-Accelerated Filer       x			Smaller Reporting Company        x Emerging Growth Company         ¨

 

If an emerging growth company, indicated by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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

 

As of November 14, 2018, there were 41,543,655 outstanding shares of common stock, par value $0.001 per share, of the registrant.

 

 

 

INSPRO TECHNOLOGIES Corporation
Form 10-Q Quarterly Report
INDEX

 

	PART I FINANCIAL INFORMATION
Item 1	Financial Statements
	Consolidated Balance Sheets as of September 30, 2018 (UNAUDITED) and December 31, 2017	3
	Consolidated Statements of Operations (UNAUDITED) for the three and nine months ended September 30, 2018 and 2017	4
	Consolidated Statements of Cash Flows (UNAUDITED) for the nine months ended September 30, 2018 and 2017	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	38
	PART II OTHER INFORMATION
Item 1	Legal Proceedings	38
Item 6	Exhibits	38
	Signatures	39

 

 

PART I.
FINANCIAL INFORMATION

Item 1. Financial Statements

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		September 30, 2018				December 31, 2017
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash		$	5,187,447			$	5,017,539
Accounts receivable, net			2,293,112				1,543,389
Prepaid expenses			366,698				360,975
Other current assets			-				3,806
Total current assets			7,847,257				6,925,709
Property and equipment, net			398,003				269,994
Total assets		$	8,245,260			$	7,195,703
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable		$	68,532			$	45,793
Accounts payable			1,229,719				1,484,704
Accrued expenses			676,000				1,126,596
Current portion of capital lease obligations			134,795				143,855
Deferred revenue			2,393,204				2,765,401
Income tax payable			135,000				170,000
Total current liabilities			4,637,250				5,736,349
LONG TERM LIABILITIES:
Deferred revenue			875,000				1,000,000
Capital lease obligations			174,622				74,861
Total long term liabilities			1,049,622				1,074,861
Total liabilities			5,686,872				6,811,210
COMMITMENTS AND CONTINGENCIES: (See Note 8)
SHAREHOLDERS' EQUITY:
Preferred stock ($.001 par value; 20,000,000 shares authorized)
Series A convertible preferred stock; 3,437,500 shares designated, 1,276,750 shares issued and outstanding (liquidation value $12,767,500)			1,277				1,277
Series B convertible preferred stock; 11,000,000 shares designated, 5,307,212 shares issued and outstanding (liquidation value $15,921,636)			5,307				5,307
Series C convertible preferred stock; 4,000,000 shares designated, 1,254,175 shares issued and outstanding (liquidation value $6,270,875)			1,254				1,254
Common stock ($.001 par value; 750,000,000 shares authorized, 41,543,655 shares issued and outstanding)			41,543				41,543
Additional paid-in capital			65,370,235				65,365,386
Accumulated deficit			(62,861,228	)			(65,030,274	)
Total shareholders' equity			2,558,388				384,493
Total liabilities and shareholders' equity		$	8,245,260			$	7,195,703

 

See accompanying notes to unaudited consolidated financial statements.

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For the Three Months ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Revenues		$	5,311,635			$	6,077,817			$	16,583,232			$	15,651,018
Cost of revenues			3,588,365				3,370,999				10,676,513				10,697,146
Gross profit			1,723,270				2,706,818				5,906,719				4,953,872
Selling, general and administrative expenses			1,167,813				1,189,170				3,578,121				4,524,211
Operating income (loss) from operations			555,457				1,517,648				2,328,598				429,661
Other income (expense):
Gain on the sale of equipment			-				-				-				5,380
Interest expense			(8,643	)			(7,186	)			(21,552	)			(16,742	)
Total other income (expense)			(8,643	)			(7,186	)			(21,552	)			(11,362	)
Income before income taxes			546,814				1,510,462				2,307,046				418,299
Provision for income taxes			67,000				14,500				138,000				14,500
Net income		$	479,814			$	1,495,962			$	2,169,046			$	403,799
Net income per common share - basic		$	0.01			$	0.04			$	0.05			$	0.01
Net income per common share - fully diluted		$	-			$	0.01			$	0.01			$	-
Weighted average common shares outstanding - basic			41,543,655				41,543,655				41,543,655				41,543,655
Weighted average common shares outstanding - fully diluted			198,306,395				196,970,235				198,306,395				187,922,335

 

See accompanying notes to unaudited consolidated financial statements.

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For the Nine Months Ended September 30,
		2018				2017
		(Unaudited)				(Unaudited)
Cash Flows From Operating Activities:
Net income		$	2,169,046			$	403,799
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation			192,369				286,270
Stock-based compensation			4,849				130,031
(Gain) on the sale of used equipment			-				(5,380	)
Bad debt expense			(11,675	)			-
Changes in assets and liabilities:
Accounts receivable			(738,048	)			(276,352	)
Prepaid expenses			(5,723	)			52,014
Other current assets			3,806				36,004
Accounts payable			(254,985	)			(3,492,776	)
Accrued expenses			(450,596	)			669,582
Deferred revenue			(497,197	)			283,940
Income tax payable			(35,000	)			14,500
Net cash provided by (used in) operating activities			376,846				(1,898,368	)
Cash Flows From Investing Activities:
Purchase of property and equipment			(91,410	)			(25,445	)
Proceeds from the sale of equipment			-				5,380
Net cash used in investing activities			(91,410	)			(20,065	)
Cash Flows From Financing Activities:
Gross proceeds from sale of preferred stock			-				2,508,350
Fees paid in connection with sale of preferred stock			-				(102,163	)
Payments on notes payable			22,739				(60,062	)
Payments on capital leases			(138,267	)			(164,574	)
Net cash (used in) provided by financing activities			(115,528	)			2,181,551
Net increase in cash			169,908				263,118
Cash - beginning of the period			5,017,539				3,161,617
Cash - end of the period		$	5,187,447			$	3,424,735
Supplemental Disclosures of Cash Flow Information
Cash payments for interest		$	21,552			$	16,742
Cash payments for income taxes		$	173,000			$	-
Non cash investing and financing activities:
Acquisition of equipment acquired through capital leases		$	228,968			$	80,505

 

See accompanying notes to unaudited consolidated financial statements.

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

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

 

Organization

 

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

 

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

 

Basis of presentation and principles of consolidation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2017 and notes thereto and other pertinent information contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the “Commission”) on March 30, 2018.

 

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

 

For purpose of comparability, certain prior period amounts have been reclassified to conform to the 2018 presentation. Prior year amounts pertaining to the Company’s discontinued operations have been reclassified to continuing operations due to the amounts being immateriality of the amounts.

 

Use of estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates in 2018 and 2017 include the allowance for doubtful accounts, stock-based compensation, the useful lives and valuation of property and equipment, valuation of deferred tax assets, and deferred revenue.

 

Cash and cash equivalents

 

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

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

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

 

Accounts receivable and allowance for uncollectable accounts

 

The Company has a policy of establishing an allowance for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. At September 30, 2018 and December 31, 2017, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amount of $0 and $11,675, respectively.

 

Fair value of financial instruments

 

The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and capital leases approximated fair value as of September 30, 2018 and December 31, 2017, because of the relatively short-term maturity of these instruments and their market interest rates.

 

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

 

Property and equipment

 

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

 

Impairment of long-lived assets

 

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

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

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

 

Income taxes

 

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

 

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

 

The Company has adopted FASB ASC 740-10-25 Definition of Settlement, which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. As of September 30, 2018, the tax years ended December 31, 2017, 2016 and 2015 are still subject to audit.

 

Income (loss) per common share

 

Basic earnings per share is computed by dividing income (loss) from continuing operations by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing the adjusted net income (loss) from operations for diluted earnings per share by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

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

 

The Company's weighted average common shares outstanding used in computing fully diluted net income per common share include the following:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Common stock			41,543,655				41,543,655				41,543,655				41,543,655
Conversion of series A convertible preferred stock issued and outstanding into common stock			25,535,000				25,535,000				25,535,000				25,535,000
Conversion of series B convertible preferred stock issued and outstanding into common stock			106,144,240				106,144,240				106,144,240				106,144,240
Conversion of series C convertible preferred stock issued and outstanding into common stock			25,083,500				23,747,340				25,083,500				14,699,440
Shares used in computing fully diluted net income (loss) per share			198,306,395				196,970,235				198,306,395				187,922,335

 

The effects of options and warrants to purchase the Company’s common stock, which were outstanding during the three and nine months ended September 30, 2018 and 2017, are excluded from the calculation of common stock equivalents because they are out-of-the-money (their exercise prices are greater than the market price of the Company’s Common Stock as of September 30, 2018 and 2017).

 

The Company’s issued and outstanding convertible preferred stock is convertible into common stock at a ratio of 20 common shares for each share of preferred stock.

 

Revenue recognition and deferred revenue

 

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

 

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

 

The Company’s consulting and implementation services are generally associated with the implementation or post implementation of InsPro Enterprise for either an ASP or licensed client. Implementation services include InsPro Enterprise installation, configuration and modification of InsPro Enterprise functionality, client insurance plan set-up, client insurance document design and system documentation. Post implementation services include these same services to existing customers supporting their ongoing utilization of InsPro Enterprise.

 

The Company’s revenue is recognized under FASB ASC 606 (“ASC 606”).

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

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

 

Cost of revenues

 

Cost of revenues includes direct labor and associated costs for employees and independent contractors performing InsPro Enterprise^TM design, development, implementation and testing together with customer management, training and technical support, as well as the cost of the resale of third party software and hardware and to a portion of facilities costs and depreciation. The following table discloses cost of revenue as reported in the statement of operations.

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Compensation, employee benefits and related taxes		$	1,551,902			$	1,593,138			$	4,844,716			$	4,873,531
Professional fees			1,743,669				1,566,611				5,091,801				5,101,022
Depreciation			51,805				53,394				137,508				202,884
Rent, utilities, telephone and communications			97,297				86,250				293,502				286,452
Other cost of revenues			143,692				71,606				308,986				233,257
		$	3,588,365			$	3,370,999			$	10,676,513			$	10,697,146

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses include all selling, marketing, and other expenses not classified as cost of revenues. The following table discloses selling, general and administrative expenses as reported in the statement of operations.

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Compensation, employee benefits and related taxes		$	754,131			$	741,978			$	2,377,818			$	3,102,939
Advertising and other marketing			38,146				10,297				50,181				26,719
Depreciation			20,301				20,728				54,861				83,386
Rent, utilities, telephone and communications			40,500				37,278				122,303				188,631
Professional fees			95,346				201,929				370,132				554,789
Other general and administrative			219,389				176,960				602,826				567,747
		$	1,167,813			$	1,189,170			$	3,578,121			$	4,524,211

 

Advertising and other marketing

 

Advertising and other marketing costs are expensed as incurred and are reported in selling, general and administrative expenses. See the previous table under selling, general and administrative expenses for advertising and other marketing expenses reported in the statement of operations.

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

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

 

Concentrations of credit risk

 

The Company maintains its cash and restricted cash in bank deposit accounts, which exceed the federally insured limits as provided through the Federal Deposit Insurance Corporation (“FDIC”). At September 30, 2018, the Company had $5,313,530 of cash in United States bank deposits, of which $501,119 was federally insured and $4,812,411 was not federally insured.

 

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

 

		September 30, 2018				December 31, 2017
Client #1			42	%			52	%
Client #2			13	%			10	%
Client #3			11	%			-

 

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

 

		For the Nine Months Ended September 30,
		2018				2017
Client #1			36	%			33	%
Client #2			17	%			22	%
Client #3			12	%			-
Client #4			-				-

 

Stock-based compensation

 

The Company accounts for stock based compensation transactions using a fair-value-based method and recognizes compensation cost for share-based payments to employees based on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied.

 

Non-employee stock based compensation

 

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

 

Registration rights agreements

 

At September 30, 2018, the Company does not believe that it will incur a penalty in connection with the Company’s registration rights agreements. Accordingly, no liability in respect thereof was recorded as of September 30, 2018. See Note 5 - Stockholders Equity – Registration and Participation Rights.

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

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

 

Recent accounting pronouncements

 

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

 

On January 1, 2018, the Company adopted ASC 606, which provides guidance for revenue recognition. See Note 2 - Revenue and deferred revenue.

 

In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”), which requires all leases with a term greater than 12 months to be recognized on the balance sheet, while lease expenses would continue to be recognized in the statement of operations in a manner similar to current accounting guidance. The new standard establishes a right-of-use model (ROU) asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations. ASU 2016-02 is effective for the Company at the beginning of fiscal year 2019 and early adoption is permitted. Entities must adopt ASU 2016-02 on a modified retrospective basis whereby it would be applied at the beginning of the earliest comparative year. The new standard is effective for us in the first quarter of 2019 and we do not plan to early adopt. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.

 

In February 2018, the FASB issued ASU No. 2018-02 , Income Statement - Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220) (“ASU 2018-02”) , which allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act"). ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2018-02 is effective for the Company at the beginning of fiscal year 2019 and early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”).” For most financial assets, such as trade and other receivables, loans and other instruments, this standard changes the current incurred loss model to a forward-looking expected credit loss model, which generally will result in the earlier recognition of allowances for losses. The new standard is effective for the Company at the beginning of fiscal year 2019. Entities are required to apply the provisions of the standard through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.

 

Liquidity

 

During the nine months ended September 30, 2018, the Company’s net income was $2,169,046 and cash provided by operations was $376,846. As of September 30, 2018, the Company had $5,187,447 of cash, working capital of $3,210,007 and the Company’s shareholders’ equity was $2,558,388.

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

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

 

Our liquidity needs for the next 12 months and beyond are principally for the funding of our operations, payments on capital leases and the purchase of property and equipment. Based on the foregoing, management believes the Company has sufficient funds to finance its operations for twelve months from the date this report was issued.

 

NOTE 2 – REVENUE AND DEFERRED REVENUE

 

We adopted ASC 606 effective January 1, 2018 to (i) all new contracts entered into after January 1, 2018 and (ii) all existing contracts for which all (or substantially all) of the revenue has not been recognized under legacy revenue guidance, using the modified retrospective transition method, which means ASC 606 has been applied to the Company’s 2018 financial statements and disclosures going forward, but that prior period financial statements and disclosures reflect the prior revenue recognition standard. The adoption of ASC 606 did not result in a change to the opening balance of accumulated deficit.

 

During the implementation of ASC 606 we identified five broad revenue streams: 1) professional services, 2) sale of perpetual software licenses and sale of equipment, 3) ASP and hosting revenue, 4) maintenance revenue, and 5) Reseller Fee (as defined below). The following table discloses revenue by revenue stream.

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Professional services		$	2,203,773			$	3,088,140			$	8,576,241			$	8,072,811
ASP and hosting revenue			2,088,867				1,926,310				6,121,462				5,684,742
Sales of software licenses			90,000				143,728				90,000				143,728
Maintenance revenue			423,666				406,639				1,249,655				1,204,337
Reseller fee revenue			500,000				500,000				500,000				500,000
Sale of equipment			-				-				23,797				-
Other revenue			5,329				13,000				22,077				45,400
Total		$	5,311,635			$	6,077,817			$	16,583,232			$	15,651,018

 

Effective August 18, 2015, the Company entered into a five year software and services reseller agreement (the “Reseller Agreement”) with an unaffiliated third party (the “Reseller”) whereby the Company granted the Reseller the exclusive right to market InsPro Enterprise to prospective customers for their administration of long term care insurance products for an initial fee of $2,500,000 (the “Reseller Fee”). Pursuant to the Reseller Agreement, the Reseller Fee is fully or partially refundable to the Reseller in the event that the Company materially breaches the Reseller Agreement or the Company becomes insolvent, goes into liquidation or seeks protection under bankruptcy during the term of the Reseller Agreement (each a “Refund Event”). Under ASC 606, the Company believes the contractual specific refund amounts and time frames pertaining to a Refund Event represent separate performance obligations over the duration of the Reseller Agreement, which the Reseller Agreement has contractually specified the prices for each separate performance deliverable. Revenue recognition is deemed to be consistent under both ASC 606 and the previous standard.

 

The unearned portion of the Company’s revenue, which is revenue collected or billed but not yet recognized as earned, has been included in the consolidated balance sheet as a liability for deferred revenue.

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

NOTE 2 – REVENUE AND DEFERRED REVENUE (Continued)

 

The following table discloses changes in unearned revenue as of September 30, 2018 and 2017.

 

		As of September 30, 2018
Short Term
Balance at December 31		$	2,765,401
Deferral of revenue			1,488,912
Reclassification of unearned revenue from long term to short term			125,000
Recognition of unearned revenue			(1,986,109	)
Balance at September 30		$	2,393,204
Long Term
Balance at December 31		$	1,000,000
Deferral of revenue			-
Reclassification of unearned revenue from long term to short term			(125,000	)
Recognition of unearned revenue			-
Balance at September 30		$	875,000

 

Deferral of revenue in the nine months ended September 30, 2018 and 2017 was $1,488,912 and $1,871,906, respectively. This deferred revenue represents annual maintenance fees, which were invoiced at the beginning of customers’ annual maintenance contracts, and collected professional services fees, which pertain to performance obligations not realized as of September 30, 2018 and 2017.

 

Revenue recognized in the nine months ended September 30, 2018 and 2017, which was included in the unearned revenue liability balance at the beginning of each year, was $1,986,109 and $1,587,965, respectively. This revenue represents maintenance, professional services and Reseller Agreement performance obligations performed during the nine months ended September 30, 2018 and 2017.

 

Long term unearned revenue pertains to the portion of the Reseller Fee associated with Refund Events that will occur more than 12 months from September 30, 2018 and 2017, respectively.

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

NOTE 3 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

		Useful Life (Years)		September 30, 2018				December 31, 2017
Computer equipment and software		3		$	4,895,519			$	4,590,221
Office equipment		4.6			145,229				145,228
Leasehold improvements		5.4			81,933				81,933
					5,122,681				4,817,382
Less accumulated depreciation					(4,724,678	)			(4,547,388	)
				$	398,003			$	269,994

 

See Note 6 – Capital Lease Obligations.

 

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

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Depreciation included in cost of revenues		$	51,805			$	53,394			$	137,508			$	202,884
Depreciation included in selling, general and administrative			20,301				20,728				54,861				83,386
Total depreciation		$	72,106			$	74,122			$	192,369			$	286,270

 

NOTE 4 – NOTES PAYABLE

 

Notes payable at December 31, 2017, consist of two notes payable for insurance premium financing on one of the Company’s insurance policies. The first note commenced on May 3, 2017, had an annual interest rate of 7.99% and consisted of 11 monthly payments of principal and interest of $4,358 per month commencing on June 3, 2017 and ending on April 3, 2018. The balance for this note was $17,147 as of December 31, 2018. For the year ended December 31, 2018, the interest expense incurred on this note was $1,575. The second note commenced on September 28, 2017, has an annual interest rate of 8.99% and consists of 10 monthly payments of principal and interest of $4,920 per month commencing on September 28, 2017 and ending on July 28, 2018. The balance for this note was $28,646 as of December 31, 2018. For the year ended December 31, 2018, the interest expense incurred on this note was $1,442.

 

Notes payable at September 30, 2018, consist of two notes payable for insurance premium financing on one of the Company’s insurance policies. The first note commenced on May 3, 2018, has an annual interest rate of 9.98% and consists of 11 monthly payments of principal and interest of $3,204 per month commencing on June 3, 2018 and ending on April 3, 2019. The balance for this note was $21,697 as of September 30, 2018. For the nine months ended September 30, 2018, the interest expense incurred on this note was $969. The second note commenced on July 30, 2018, has an annual interest rate of 8.76% and consists of 9 monthly payments of principal and interest of $5,434.53 per month commencing on September 28, 2017 and ending on May 28, 2018. The balance for this note was $46,835 as of September 30, 2018. For the nine months ended September 30, 2018, the interest expense on this note was $410.

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

NOTE 5 – STOCKHOLDERS’ EQUITY

 

Common Stock

 

As of September 30, 2018 and December 31, 2017, the Company was authorized to issue 750,000,000 and 500,000,000 shares of common stock, respectively, with a par value of $0.001 per share (“Common Stock”). As of September 30, 2018 and December 31, 2017, the Company had 41,543,655 shares of its Common Stock issued and outstanding.

 

The Company has reserved shares of Common Stock, on an as-if-converted basis, as follows:

 

		September 30, 2018				December 31, 2017
Exercise of options issued and outstanding to purchase common stock			700,000				825,000
Issuance of common shares available under the 2010 Equity Compensation Plan			28,296,980				28,171,980
Exercise of warrants issued and outstanding to purchase common stock			-				120,000
Conversion of Series A convertible preferred stock issued and outstanding into common stock			25,535,000				25,535,000
Exercise of warrants to purchase Series A convertible preferred stock issued and outstanding and converted into common stock			500,000				500,000
Conversion of Series B convertible preferred stock issued and outstanding into common stock			106,144,240				106,144,240
Exercise of warrants to purchase Series B convertible preferred stock issued and outstanding and converted into common stock			57,000,000				65,000,000
Conversion of Series C convertible preferred stock issued and outstanding into common stock			25,083,500				25,083,500
Total common stock reserved for issuance			243,259,720				251,379,720

 

The above table includes Common Stock reserved for unvested stock options, which are not exercisable, and Common Stock reserved for the issuance of stock options in the future under the Company’s 2010 Equity Compensation Plan.

 

Series A Preferred Stock

 

As of September 30, 2018 and December 31, 2017, the Board has designated 3,437,500 shares of Series A Convertible Preferred Stock par value $0.001 per share (“Series A Preferred Stock”). As of September 30, 2018 and December 31, 2017, the Company had 1,276,750 shares of its Series A Preferred Stock issued and outstanding. As of September 30, 2018 and December 31, 2017, the Company has reserved 25,000 shares of Series A Preferred Stock for the exercise of warrants issued and outstanding to purchase its Series A Preferred Stock.

 

The Series A Preferred Stock is entitled to vote as a single class with the holders of the Company’s Common Stock and preferred stock, with each share of Series A Preferred Stock having the right to 20 votes.

 

Upon the liquidation, sale or merger of the Company, each share of Series A Preferred Stock is entitled to receive an amount equal to the greater of (A) a liquidation preference equal to two and a half (2.5) times the Series A Preferred Stock original issue price, or $12,767,500 in aggregate, subject to certain customary adjustments, or (B) the amount such share of Series A Preferred Stock would receive if it participated pari passu with the holders of Common Stock on an as-converted basis. The liquidation preference is calculated by taking the product of the issued and outstanding shares of Series A Preferred Stock times $10.00. Series A Preferred Stock is junior to Series B Convertible Preferred Stock par value $0.001 per share (“Series B Preferred Stock”) and the Series C Convertible Preferred Stock, par value $0.001 per share (“Series C Preferred Stock”), as it pertains to liquidation preferances.

 

Each share of Series A Preferred Stock is convertible into 20 shares of Common Stock, subject to adjustment and at the option of the holder of the Series A Preferred Stock.

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

NOTE 5 – STOCKHOLDERS’ EQUITY (Continued)

 

For so long as any shares of Series A Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the Series A Preferred Stock is required to approve any amendment to the Company’s certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special rights of the Series A Preferred Stock or any amendment to the Company’s certificate of incorporation to create any shares of capital stock that rank senior to the Series A Preferred Stock. In addition to the voting rights described above, for so long as 1,000,000 shares of Series A Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the shares of Series A Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of the Company or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series A Preferred Stock with an amount per share equal to two and a half (2.5) times the Series A Preferred Stock original issue price, or $12,767,500, in aggregate for all issued and outstanding Series A Preferred Stock.

 

Series B Preferred Stock

 

As of September 30, 2018 and December 31, 2017, the Board has designated 11,000,000 shares of Series B Convertible Preferred Stock par value $0.001 per share (“Series B Preferred Stock”). As of September 30, 2018 and December 31, 2017, the Company had 5,307,212 of its Series B Preferred Stock issued and outstanding. As of September 30, 2018 and December 31, 2017, the Company has reserved 2,850,000 shares of Series B Preferred Stock for the exercise of warrants issued and outstanding to purchase its Series B Preferred Stock.

 

The Series B Preferred Stock is entitled to vote as a single class with the holders of the Company’s Common Stock and preferred stock, with each share of Series B Preferred Stock having the right to 20 votes.

 

As of September 30, 2018 and December 31, 2017, upon the liquidation, sale or merger of the Company, each share of Series B Preferred Stock is entitled to receive an amount equal to the greater of (A) a liquidation preference equal to the Series B Preferred Stock original issue price, or $15,921,636 in aggregate, subject to certain customary adjustments, or (B) the amount such share of Series B Preferred Stock would receive if it participated pari passu with the holders of Common Stock and preferred stock on an as-converted basis. The liquidation preference is calculated by taking the product of the issued and outstanding shares of Series B Preferred Stock times $3.00. Series B Preferred Stock is senior to Series A Preferred Stock, and junior to the Series C Preferred Stock, as it pertains to liquidation preferances.

 

Each share of Series B Preferred Stock is convertible into 20 shares of Common Stock, subject to adjustment and at the option of the holder of the Series B Preferred Stock.

 

For so long as any shares of Series B Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the Series B Preferred Stock is required to approve (Y) any amendment to the Company’s certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special rights of the Series B Preferred Stock or (Z) any amendment to the Company’s certificate of incorporation to create any shares of capital stock that rank senior to the Series B Preferred Stock. In addition to the voting rights described above, for so long as 1,000,000 shares of Series B Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the shares of Series B Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of the Company or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series B Preferred Stock with an amount per share equal the Series B Preferred Stock original issue price, or $15,921,636, in aggregate for all issued and outstanding Series B Preferred Stock.

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

NOTE 5 – STOCKHOLDERS’ EQUITY (Continued)

 

Series C Preferred Stock

 

As of September 30, 2018 and December 31, 2017, the Board has designated 4,000,000 shares of Series C Convertible Preferred Stock par value $0.001 per share (“Series C Preferred Stock”). As of September 30, 2018 and December 31, 2017, the Company had 1,254,175 of its Series C Preferred Stock issued and outstanding.

 

The Series C Preferred Stock is entitled to vote as a single class with the holders of the Company’s Common Stock and preferred stock, with each share of Series C Preferred Stock having the right to 20 votes.

 

Upon the liquidation, sale or merger of the Company, each share of Series C Preferred Stock is entitled to receive an amount equal to the greater of (A) a liquidation preference equal to two and a half (2.5) times the Series C Preferred Stock original issue price, or $6,270,875 in aggregate, subject to certain customary adjustments, or (B) the amount such share of Series C Preferred Stock would receive if it participated pari passu with the holders of Common Stock on an as-converted basis. The liquidation preference is calculated by taking the product of the issued and outstanding shares of Series C Preferred Stock times $5.00. Series C Preferred Stock is senior to Series A Preferred Stock and to Series B Preferred Stock as it pertains to liquidation preferances.

 

Each share of Series C Preferred Stock is convertible into 20 shares of Common Stock, subject to adjustment and at the option of the holder of the Series C Preferred Stock.

 

For so long as any shares of Series C Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the Series C Preferred Stock is required to approve (Y) any amendment to the Company’s certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special rights of the Series C Preferred Stock or (Z) any amendment to the Company’s certificate of incorporation to create any shares of capital stock that rank senior to the Series C Preferred Stock. In addition to the voting rights described above, for so long as 1,000,000 shares of Series C Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the shares of Series C Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of the Company or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series C Preferred Stock with an amount per share equal to two and a half (2.5) times the Series C Preferred Stock original issue price, or $6,270,875, in aggregate for all issued and outstanding Series C Preferred Stock.

 

Stock Options

 

During the nine months ended September 30, 2018, options for 125,000 shares of Common Stock, which were previously granted to a former executive of the Company, expired in accordance with the terms of such stock options.

 

As of September 30, 2018, there were 30,000,000 shares of our Common Stock authorized to be issued under the Company’s 2010 Equity Compensation Plan, of which 28,296,980 shares of our Common Stock remain available for future stock option grants.

 

The Company recorded compensation expense pertaining to employee stock options and warrants in the amount of $4,849 and $130,031 for the nine months ended September 30, 2018 and 2017, respectively.

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

NOTE 5 – STOCKHOLDERS’ EQUITY (Continued)

 

The value of equity compensation not yet expensed pertaining to unvested equity compensation for options to purchase common stock was $7,500 as of September 30, 2018, which will be recognized over a weighted average 1.5 years in the future.

 

A summary of the Company's outstanding stock options to purchase Common Stock is as follows:

 

		Number				Weighted								Weighted
		Of Shares				Average				Weighted				Average				Aggregate
		Underlying				Exercise				Average				Remaining				Intrinsic
		Options				Price				Fair Value				Contractual Life				Value (1)
														(in years)
Outstanding at December 31, 2017			825,000			$	0.10			$	0.10				3.0			$	-
For the period ended September 30, 2018
Granted			-				-				-
Exercised			-				-				-
Expired			(125,000	)			0.10				0.04
Outstanding at September 30, 2018			700,000			$	0.10			$	0.00				-			$	-
Outstanding and exercisable at September 30, 2018			450,000			$	0.10			$	0.00				-			$	-

 

(1) The aggregate intrinsic value is based on the $0.085 closing price as of September 28, 2018, for the Company’s Common Stock.

 

Common Stock Warrants

 

During the nine months ended September 30, 2018, warrants to purchase 120,000 shares of Common stock expired in accordance with the terms of such stock warrants.

 

A summary of the status of the Company's outstanding common stock warrants is as follows:

 

						Weighted
		Common				Average
		Stock				Exercise
		Warrants				Price
Outstanding and exercisable at December 31, 2017			120,000			$	0.15
For the period ended September 30, 2018
Issued			-				-
Exercised			-				-
Expired			(120,000	)			0.15
Outstanding and exercisable at September 30, 2018			-			$	-

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

NOTE 5 – STOCKHOLDERS’ EQUITY (Continued)

 

Series A Preferred Stock Warrants

 

Outstanding warrants to purchase the Company’s Series A Preferred Stock at September 30, 2018, have a remaining contractual life of 3.9 years.

 

A summary of the status of the Company's outstanding Series A Preferred Stock warrants is as follows:

 

						Weighted
		Preferred				Average
		Stock				Exercise
		Warrants				Price
Outstanding and exercisable at December 31, 2017			25,000			$	4.00
For the period ended September 30, 2018
Granted			-				-
Exercised			-				-
Expired			-				-
Outstanding and exercisable at September 30, 2018			25,000			$	4.00

 

Series B Preferred Stock Warrants

 

During the nine months ended September 30, 2018, warrants to purchase 400,000 shares of Series B Preferred Stock expired in accordance with the terms of such warrants.

 

Outstanding preferred stock warrants to purchase the Company’s Series B Preferred Stock at September 30, 2018, have a remaining contractual life of 0.6 years. A summary of the status of the Company's outstanding Series B Preferred Stock warrants is as follows:

 

						Weighted
		Preferred				Average
		Stock				Exercise
		Warrants				Price
Outstanding and exercisable at December 31, 2017			3,250,000			$	3.00
For the period ended September 30, 2018
Granted			-				-
Exercised			-				-
Expired			(400,000	)			3.00
Outstanding and exercisable at September 30, 2018			2,850,000			$	3.00

 

Registration and Participation Rights

 

As of September 30, 2018, the Company has not received a demand notice in connection with any of the Company’s various registration rights agreements.

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

NOTE 6 – CAPITAL LEASE OBLIGATIONS

 

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

 

Property and equipment includes the following amounts for leases that have been capitalized:

 

 

		Useful Life (Years)		September 30, 2018				December 31, 2017
Computer equipment and software		3		$	1,900,711			$	1,671,742
Less accumulated depreciation					(1,550,067	)			(1,454,084	)
				$	350,644			$	217,658

 

Future minimum payments required under capital leases at September 30, 2018, are as follows:

 

Three months ending December 31, 2018		$	50,954
2019			134,707
2020			89,124
2021			35,626
2022			27,516
2023			13,757
Total future payments			351,684
Less amount representing interest			42,267
Total future payments less interest			309,417
Less current portion			134,795
Long-term portion		$	174,622

 

NOTE 7 – DEFINED CONTRIBUTION 401(k) PLAN

 

The Company implemented a 401(k) plan on January 1, 2007. Eligible employees contribute to the 401(k) plan. Employees become eligible after attaining age 19 and after 6 months of employment with the Company. An employee may become a participant of the 401(k) plan on the first day of the month following the completion of the eligibility requirements. Effective January 1, 2007 the Company implemented an elective contribution to the plan of 25% of the employee’s contribution up to 4% of the employee’s compensation. The contributions are subject to a vesting schedule and become fully vested after one year of service, retirement, death or disability, whichever occurs first. The Company made contributions of $53,531 and $51,912 for the nine months ended September 30, 2018 and 2017, respectively.

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

NOTE 8 – COMMITTMENTS AND CONTINGENCIES

 

On September 14, 2007, InsPro LLC entered into a lease agreement (the “Lease Agreement”) with BPG Officer VI Baldwin Tower L.P. (“BPG”). On April 28, 2015, InsPro LLC and BPG entered into a fifth amendment to the Lease Agreement whereby InsPro LLC and BPG agreed to amend the Lease Agreement to increase the leased office space by 6,801 rentable square feet effective April 1, 2015, through March 31, 2016, at an incremental monthly rent of $10,000. On June 9, 2016, InsPro LLC and BPG entered into a sixth amendment to the Lease Agreement whereby InsPro LLC and BPG agreed to amend the Lease Agreement to extend the term through January 31, 2018 for 17,567 of rentable square feet at a monthly cost of $28,546 for the period February 1, 2017 through January 31, 2018. On June 7, 2017, InsPro LLC and Baldwin Tower Office Building, LLC (“Landlord”), which is the new owner and landlord for the Company’s Eddystone office building, entered into a seventh amendment to the Lease Agreement whereby InsPro LLC and Landlord agreed to amend the Lease Agreement to extend the term through January 31, 2019 for 17,567 of rentable square feet at a monthly cost of $30,010 for the period February 1, 2018 through January 31, 2019. On May 10, 2018, InsPro LLC and Landlord entered into an eighth amendment to the Lease Agreement whereby InsPro LLC and Landlord agreed to amend the Lease Agreement to extend the term through January 31, 2022 for 17,567 of rentable square feet at a monthly cost of $30,010 for the period February 1, 2019 through January 31, 2022. The eighth amendment allows InsPro LLC to terminate the Lease Agreement effective January 31, 2021, provided InsPro LLC notifies Landlord of an early termination and pays Landlord an early termination fee of $30,000 by October 31, 2020.

 

Future minimum payments required under operating leases and service agreements at September 30, 2018, are as follows:

 

Three months ending December 31, 2018		$	167,869
2019			668,391
2020			429,049
2021			30,010
thereafter			-
Total		$	1,295,319

 

The Company leases certain real and personal property under non-cancelable operating leases. Rent expense was $90,846 and $87,279 for the three months ended September 30, 2018 and 2017, respectively. Rent expense was $270,803 and $317,588 for the nine months ended September 30, 2018 and 2017, respectively.

 

Mr. Robert Oakes resigned as an executive employee effective June 30, 2017. Pursuant to Mr. Oakes’ employment agreement, Mr. Oakes will be entitled to receive; (i) continuation of his $300,000 per year base salary for a period of 12 months in accordance with the Company's normal payroll practices, less any applicable income tax withholding required under federal or state law, and subject to Section 409A of the Internal Revenue Code of 1986, as amended, and applicable guidance issued there under, and (ii) continuation for a period of 18 months after the date of termination of the benefits under benefit plans extended from time to time by the Company to its senior executives. As of September 30, 2018, the Company recorded a severance accrual connection with Mr. Oakes termination in the amount of $3,816. Pursuant to Mr. Oakes’ employment agreement, he is subject to non-competition and non-solicitation covenants during the term of his employment agreement and for a period of one year following his termination.

 

Effective December 31, 2017, an executive’s employment was terminated by the Company. Pursuant to this executive’s employment agreement, the executive was subject to non-competition and non-solicitation covenants for a period of six months following his termination. As of June 30, 2018, the Company has fully paid the severance in connection with this executive’s termination.

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

NOTE 9 - INCOME TAXES

 

The Company has net operating loss carry forwards for federal income tax purposes of approximately $47,300,000 at September 30, 2018, the unused portion of which expires in years 2026 through 2038. The Company accounts for income taxes under Accounting Standards Codification 740, Income Taxes (“ASC 740”). ASC 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Internal Revenue Code Section 382 (“IRC 382”) places a limitation on the amount of taxable income that can be offset by carry forwards after a change in control (generally greater than a 50 percent change in ownership). The issuance of the Company’s Series A Preferred Stock on January 15, 2009 resulted in a change of control as defined under IRC 382.

 

Components of income taxes were as follows:

 

		For the Nine Months Ended September 30,
		2018				2017
Federal		$	-			$	-
State			138,000				14,500
		$	138,000			$	14,500

 

The differences between the Company’s effective tax rate and the statutory federal rate were as follows:

 

		For the Nine Months Ended September 30,
		2018				2017
U.S. statutory rate			21.0	%			28.0	%
State income taxes			8.0	%			3.0	%
Amortization/impairment of acquisition related assets			(0.1)	%			(0.7	)%
Stock based compensation			0.1	%			9.6	%
Other permanent differences			0.1	%			5.9	%
Valuation allowance			(23.1	)%			(42.4	)%
			6.0	%			3.4	%

 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018

 

NOTE 9 - INCOME TAXES (Continued)

 

Deferred tax assets and liabilities are provided for significant income and expense items recognized in different years for tax and financial reporting purposes. The components of the net deferred tax assets for the periods ended September 30, 2018 and December 31, 2017 were as follows:

 

		September 30, 2018				December 31, 2017
Deferred tax assets:
Net operating loss carryforward		$	11,502,094			$	14,201,084
Depreciation			(319	)			67,099
Compensation expense			57,947				123,093
Accrued expense			-				41,681
Deferred revenue			449,500				449,500
All miscellaneous other			-				3,386
Total deferred tax asset			12,009,222				14,885,843
Deferred tax liabilities			-				-
Net deferred tax asset			12,009,222				14,885,843
Less: valuation allowance			(12,009,222	)			(14,885,843	)
		$	-			$	-

 

The Company has fully reserved the deferred tax asset in excess of the deferred tax liabilities due to the limitation on taxable income that can be offset by net operating loss carry forwards in future periods under IRC section 382 as a result of changes in control and substantial uncertainty of the realization of any tax assets in future periods. The valuation allowance as of September 30, 2018 was decreased by $2,876,621 as compared to December 31, 2017.

 

In 2018 the Company wrote off $28,900,000 of Florida state net operating loss carry forwards due to operations in Florida having previously ceased and due to management making the determination that operations would not resume in the state of Florida in future. As a result, the deferred tax asset and related valuation allowance were decreased by approximately $2,300,000.

 

On December 22, 2017 the Tax Cuts and Jobs Act (H.R. 1) was signed into law. This act includes, among other items, a permanent reduction to the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. The new bill reduced the blended tax rate for the Company from 38% to 29%.

 

NOTE 10 – SUBSEQUENT EVENTS

 

On October 24, 2018, David M. Anderson resigned as the Chief Executive Officer and as a member of the Board of the Company. The resignation was not the result of any disagreement between the Company and Mr. Anderson on any matter relating to the Company’s operations, policies or practices. On November 2, 2018, the Company and Mr. Anderson entered into a Separation Agreement and Mutual Release (the “Separation Agreement”). The Company and Mr. Anderson were also parties to an employment agreement, dated October 9, 2017 (the “Employment Agreement”).

 

The Separation Agreement provides for the payment of certain severance and other benefits (“Severance”) to Mr. Anderson, including the following: (a) salary continuation for three months from the November 2, 2018, Termination Date in accordance with the Company’s normal monthly payroll practices, (b) the monthly reimbursement for payments Mr. Anderson makes for coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, for the period beginning on December 1, 2018 through ending February 28, 2019 and (c) the waiver of Mr. Anderson’s obligation to repay to the Company the relocation benefits paid to Mr. Anderson as set forth in the Employment Agreement. The Company will record approximately $103,000 of expense for Severance in the Company’s December 31, 2018, financial statements.

 

Pursuant to the Separation Agreement, the Company waives its right to enforce the non-competition provisions contained in the Employment Agreement, and Mr. Anderson agrees to comply with the non-solicit and non-disparagement obligations contained in the Employment Agreement. In addition, the Separation Agreement includes mutual releases by Mr. Anderson and the Company related to Mr. Anderson’s employment with the Company or the termination of such employment.

 

On October 29, 2018, the Board appointed Anthony R. Verdi effective immediately as the Company’s President and Chief Executive Officer. Mr. Verdi remains the Company’s Chief Financial Officer, which roll he has held since November 2005, and a member of the Board, where he has served since June 2008. On October 30, 2018, the Board approved an increase to Mr. Verdi’s base annual salary from $325,000 to $380,000, effective as of October 30, 2018, in connection with his promotion to President and Chief Executive Officer of the Company.

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain of the statements contained in this Quarterly Report on Form 10-Q, including in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and elsewhere in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained in the forward-looking statements. The forward-looking statements herein include, among others, statements addressing management’s views with respect to future financial and operating results and costs associated with the Company’s operations and other similar statements. Various factors, including competitive pressures, regulatory changes, customer defaults or insolvencies, adverse resolution of any contract or other disputes with customers, or the loss of one or more key client relationships, could cause actual outcomes and results to differ materially from those described in forward-looking statements.

 

The words “may,” “will,” “expect,” “intend,”, “estimate,” “believe,” “continue” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. While we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and projections of the future about which we cannot be certain. Many factors, including general business and economic conditions affect our ability to achieve our objectives. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report on Form 10-Q will prove to be accurate. In addition, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, if at all. We may not update these forward-looking statements, even though our situation may change in the future.

 

We qualify all the forward-looking statements contained in this Quarterly Report on Form 10-Q by the foregoing cautionary statements.

 

 

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 Enterprise^TM is a comprehensive, web-based insurance administration software application. InsPro Enterprise was introduced by Atiam Technologies, L.P. in 2004. InsPro Enterprise customers 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 2018 and 2017 include the allowance for doubtful accounts, stock-based compensation, the useful lives and valuation of property and equipment, valuation of deferred tax assets, and deferred revenue. Actual results may differ from these estimates under different assumptions or conditions.

 

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

 

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

 

The Company’s consulting and implementation services are generally associated with the implementation or post implementation of InsPro Enterprise for either an ASP or licensed client. Implementation services include InsPro Enterprise installation, configuration and modification of InsPro Enterprise functionality, client insurance plan set-up, client insurance document design and system documentation. Post implementation services include these same services to existing customers supporting their ongoing utilization of InsPro Enterprise.

 

The Company’s revenue is recognized under FASB ASC 606 (“ASC 606”).

 

 

We adopted ASC 606 effective January 1, 2018 to (i) all new contracts entered into after January 1, 2018 and (ii) all existing contracts for which all (or substantially all) of the revenue has not been recognized under legacy revenue guidance, using the modified retrospective transition method, which means ASC 606 has been applied to the Company’s 2018 financial statements and disclosures going forward, but that prior period financial statements and disclosures reflect the prior revenue recognition standard. The adoption of ASC 606 did not result in a change to the opening balance of accumulated deficit.

 

During the implementation of ASC 606 we identified five broad revenue streams: 1) professional services, 2) sale of perpetual software licenses and sale of equipment, 3) ASP and hosting revenue, 4) maintenance revenue, and 5) Reseller Fee (as defined below).

 

Professional services consist of pre- and post-implementation services pertaining to InsPro Enterprise installation, configuration and modification of InsPro Enterprise functionality, client insurance plan set-up, client insurance document design and system documentation, training and data migration. Once these services are performed for a client they cannot be returned by the client to the Company and the Company cannot provide the same services to any other client without substantial rework needed to satisfy another client’s needs. We primarily invoice professional services revenue on a time and materials basis. Under ASC 606, we elect to apply the "right to invoice" practical expedient outlined in ASC 606-10-55-18. The invoice amount represents the number of hours of time worked by each worker multiplied by the contractual bill rate for the type of work billed. As such, the Company recognizes revenue in the amount for which it has the right to invoice. Revenue recognition is deemed to be consistent under both ASC 606 and the previous standard.

 

Sale of perpetual licenses 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. The Company also sells perpetual licenses to third party software and sells third party equipment to a client in connection with the client’s use of InsPro Enterprise software on hardware owned by the client. Prior to ASC 606 we recognized revenue on the sale of perpetual software licenses and sale of equipment when persuasive evidence of an arrangement exists, the software is delivered in accordance with all terms and conditions of the customer contracts (“Delivery Has Occurred”), the fee is fixed or determinable and collectability is probable. Historically the criteria Delivery Has Occurred has been the last criteria satisfied in terms of determining revenue recognition for sale of software licenses and sale of equipment. Therefore prior to ASC 606 we recognized the sale of software licenses and sale of equipment revenue when Delivery Has Occurred. Under ASC 606, we recognize the sale of software licenses and the sale of equipment revenue at the point in time when control has transferred to the client, which typically is when Delivery Has Occurred. Revenue recognition is deemed to be consistent under both ASC 606 and the previous standard.

 

ASP and hosting enables a client to effectively lease the InsPro Enterprise software, paying only for that capacity required to support their business during the contracted time period. The hosting service can also enable a client to outsource its application management of its perpetually licensed InsPro Enterprise software to the Company. ASP and hosting customers access InsPro Enterprise installed on InsPro Technologies owned servers. Maintenance enables a client to periodic updates to their InsPro Enterprise software and access to customer support from the Company. Prior to ASC 606 we recognized ASP and hosting and maintenance revenue based on contractually defined fixed fees over the contract period on a straight line basis. Under ASC 606, we have determined the Company’ continuous service and support represent a series of performance obligations that are delivered over time on a stand-ready basis. Revenue recognition is deemed to be consistent under both ASC 606 and the previous standard.

 

Effective August 18, 2015, the Company entered into a five year software and services reseller agreement (the “Reseller Agreement”) with an unaffiliated third party (the “Reseller”) whereby the Company granted the Reseller the exclusive right to market InsPro Enterprise to prospective customers for their administration of long term care insurance products for an initial fee of $2,500,000 (the “Reseller Fee”). Pursuant to the Reseller Agreement, the Reseller Fee is fully or partially refundable to the Reseller in the event that the Company materially breaches the Reseller Agreement or the Company becomes insolvent, goes into liquidation or seeks protection under bankruptcy during the term of the Reseller Agreement (each a “Refund Event”). Prior to ASC 606 we recognized Reseller Fee revenue whenever a portion of the Reseller Fee was no longer subject to refund as a result of a Refund Event and at which time no portion of the Reseller Fee was subject to refund. Under ASC 606, the Company believes the contractual specific refund amounts and time frames pertaining to a Refund Event represent separate performance obligations over the duration of the Reseller Agreement, which the Reseller Agreement has contractually specified the prices for each separate performance deliverable. Revenue recognition is deemed to be consistent under both ASC 606 and the previous standard.

 

 

The unearned portion of the Company’s revenue, which is revenue collected or billed but not yet recognized as earned, has been included in the consolidated balance sheet as a liability for deferred revenue.

 

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.

 

RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2018 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2017

 

Revenues

 

For the three months ended September 30, 2018 (“Third Quarter 2018”) and for the three months ended September 30, 2017, (“Third Quarter 2017”) our revenues include the following:

 

		For the Three Months Ended September 30,								Increase (Decrease)
		2018				2017				Dollars				Percentage
Professional services		$	2,203,773			$	3,088,140			$	(884,367	)			-28.6	%
ASP and hosting revenue			2,088,867				1,926,310				162,557				8.4	%
Sales of software licenses			90,000				143,728				(53,728	)			-37.4	%
Maintenance revenue			423,666				406,639				17,027				4.2	%
Reseller fee revenue			500,000				500,000				-				0.0	%
Other revenue			5,329				13,000				(7,671	)			-59.0	%
Total		$	5,311,635			$	6,077,817			$	(766,182	)			-12.6	%

 

·

In Third Quarter 2018 our professional services revenue decreased primarily as a result of lower implementation services provided to the Company’s largest client as measured by earned revenue. Implementation services included assisting customers 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 customers supporting their ongoing utilization of InsPro Enterprise.

 

·

In Third Quarter 2018 our ASP and hosting revenue increased as a result of increased fees from ongoing and recent implementations of InsPro Enterprise from several existing customers. ASP and 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 and hosting customers’ access InsPro Enterprise installed on customers’ servers or on the Company’s servers located at a third party’s site.

 

 

·

In Third Quarter 2018 we earned $90,000 of license fee revenue as a result of our sale of third party software to the Company’ second largest client as measured by earned revenue in 2018. The third party software is associated with their use of InsPro Enterprise. In Third Quarter 2017 we earned $143,728 of license fee revenue also from the Company’ second largest client. The license agreement with this client included a provision for an additional license fee as a result of the client’s policy counts exceeding a contractual threshold.

 

·

In Third Quarter 2018 and Third Quarter 2017 we earned $500,000 of reseller fee revenue. Effective August 18, 2015, the Company entered into a 5 year software and services reseller agreement (the “Reseller Agreement”) with an unaffiliated third party (the “Reseller”) whereby the Company granted the Reseller the exclusive right to market InsPro Enterprise to prospective clients for their administration of long term care insurance products for an initial fee of $2,500,000 (the “Reseller Fee”). Pursuant to the Reseller Agreement, the Reseller Fee is fully or partially refundable to the Reseller in the event that the Company material breaches the Reseller Agreement or the Company becomes insolvent, goes into liquidation, seeks protection under bankruptcy, or materially breaches the Reseller Agreement during the term of the Reseller Agreement (each a “Refund Event”). A Refund Event did not occur as of September 30, 2018 and 2017, and as a result the Company recognized $500,000 of Reseller Fee as revenue in Third Quarter 2018 and Third Quarter of 2017. The Company shall refund the following amounts to the Reseller if a Refund Event occurs between the following dates; $1,500,000 between September 1, 2017 and August 31, 2018, and $1,000,000 between September 1, 2018 and August 31, 2019.

 

·

In Third Quarter 2018 other revenue decreased primarily due to lower renewal commissions received in connection with the Company’s former telesales call center and external agent produced agency business. In 2009 the Company ceased selling health and related products to individuals and families through its former non-employee agents.

 

Cost of Revenues

 

Our cost of revenues consisted of the following:

 

		For the Three Months Ended September 30,								Increase (Decrease)
		2018				2017				Dollars				Percentage
Compensation, employee benefits and related taxes		$	1,551,902			$	1,593,138			$	(41,236	)			-2.6	%
Professional fees			1,743,669				1,566,611				177,058				11.3	%
Depreciation			51,805				53,394				(1,589	)			-3.0	%
Rent, utilities, telephone and communications			97,297				86,250				11,047				12.8	%
Other cost of revenues			143,692				71,606				72,086				100.7	%
		$	3,588,365			$	3,370,999			$	217,366				6.4	%

 

·

In Third Quarter 2018 our professional fees component of cost of revenues increased as compared to Third Quarter 2017 primarily as a result of management consulting expense incurred in Third Quarter 2018 and increased utilization of several outside consulting firms, which were assisting us with modifications to InsPro Enterprise’s functionality and the Company’s largest client’s implementation of InsPro EnterpriseTM.

 

·

In Third Quarter 2018 our rent, utilities, telephone and communications component of cost of revenues increased as compared to Third Quarter 2017 primarily due to a higher allocation of occupancy cost to cost of revenue and a lower allocation of cost to selling, general and administrative expense as a result of changes in employee staffing.

 

 

·

In Third Quarter 2018 our other cost component of cost of revenues increased as compared to Third Quarter 2017 primarily due to the cost of 3rd party software resold in Third Quarter 2018. Other cost of revenues consisted of the cost of 3rd party licensed software resold to customers, equipment sold to customers, computer processing incurred primarily to provide ASP and hosting services, hardware and software, travel and entertainment, and office expenses.

 

Gross Profit

 

As a result of the aforementioned factors, we reported a gross profit of $1,723,270 in Third Quarter 2018, as compared to a gross profit of $2,706,818 in Third Quarter 2017. The results from operations in Third Quarter 2018 were unfavorably impacted by lower revenues especially lower professional services revenues.

 

Selling, General and Administrative Expenses

 

Our selling, general and administrative expenses consisted of the following:

 

		For the Three Months Ended September 30,								Increase (Decrease)
		2018				2017				Dollars				Percentage
Compensation, employee benefits and related taxes		$	754,131			$	741,978			$	12,153				1.6	%
Advertising and other marketing			38,146				10,297				27,849				270.5	%
Depreciation			20,301				20,728				(427	)			-2.1	%
Rent, utilities, telephone and communications			40,500				37,278				3,222				8.6	%
Professional fees			95,346				201,929				(106,583	)			-52.8	%
Other general and administrative			219,389				176,960				42,429				24.0	%
		$	1,167,813			$	1,189,170			$	(21,357	)			-1.8	%

 

·

In Third Quarter 2018 our advertising and marketing expense increased primarily as a result of costs associated with Company’s new logo and web site.

 

·

In Third Quarter 2018 our professional fees decreased as compared to Third Quarter 2017 primarily due to lower employee recruiting expenses.

 

·

In Third Quarter 2018 our other general and administrative expenses increased as compared to Third Quarter 2017 primarily due to higher 3rd party software maintenance fees and higher travel expense.

 

 

Operating income (loss) from operations before income taxes

 

As a result of the aforementioned factors, we reported income from operations before income taxes of $555,457 in Third Quarter 2018, as compared to $1,517,648 in Third Quarter 2017.

 

Other income (expenses)

 

Interest expense is attributable to interest on the capital leases and note payable for premium financing on a portion of the Company’s insurance coverages.

 

Income (loss) before income taxes

 

As a result of the aforementioned factors, we reported income before income taxes of $546,814, in Third Quarter 2018, as compared to loss before income taxes of $1,510,462 in Third Quarter 2017.

 

Income tax expense

 

In Third Quarter 2018 our tax provision for income taxes was $67,000, which consisted of Pennsylvania corporate income tax, as compared to $14,500 in Third Quarter 2017, which consisted of federal income tax.

 

The effective tax rate for Third Quarter 2018 differed from the U.S. federal statutory rate primarily due to net operating losses carried forward from prior years (“NOLs”), which offset current federal income tax expense. In computing the Company’s state corporate income tax in Third Quarter 2018 the Company’s state NOL’s are limited to 35% of the Company’s state income tax.

 

The effective tax rate for Third Quarter 2017 differed from the U.S. federal statutory rate primarily due to NOLs. In computing the Company’s alternative minimum taxable income (“AMTI”) in Third Quarter 2017 the deduction of the Company’s NOLs were limited to 90% of the Company’s NOLs without regard to alternative minimum tax. In computing the Company’s state corporate income tax in Third Quarter 2017 the Company’s state NOL’s offset the Company’s state income tax.

 

Net Income

 

As a result of these factors discussed above, we reported net income of $479,814, or $0.01 per share basic and $0.00 per share on a fully diluted basis, in Third Quarter 2018, as compared to $1,495,962, or $0.04 per share basic and $0.01 per share on a fully diluted basis in Third Quarter 2017.

 

 

RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2018 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2017

 

Revenues

 

For the nine months ended September 30, 2018 (“2018 To Date”) and for the nine months ended September 30, 2017, (“2017 To Date”) our revenues include the following:

 

		For the Nine Months Ended September 30,								Increase (Decrease)
		2018				2017				Dollars				Percentage
Professional services		$	8,576,241			$	8,072,811			$	503,430				6.2	%
ASP and hosting revenue			6,121,462				5,684,742				436,720				7.7	%
Sales of software licenses			90,000				143,728				(53,728	)			-37.4	%
Maintenance revenue			1,249,655				1,204,337				45,318				3.8	%
Reseller fee revenue			500,000				500,000				-				0.0	%
Sale of equipment			23,797				-				23,797				100.0	%
Other revenue			22,077				45,400				(23,323	)			-51.4	%
Total		$	16,583,232			$	15,651,018			$	932,214				6.0	%

 

·

In 2018 To Date our professional services revenue increased primarily as a result of higher implementation services provided to the Company’s largest client as measured by earned revenue. Implementation services included assisting customers 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 customers supporting their ongoing utilization of InsPro Enterprise.

 

·

In 2018 To Date our ASP and hosting revenue increased as a result of increased fees from ongoing and recent implementations of InsPro Enterprise from several existing customers. ASP and 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 and hosting customers’ access InsPro Enterprise installed on customers’ servers or on the Company’s servers located at a third party’s site.

 

·

In 2018 To Date we earned $90,000 of license fee revenue from an existing client for the resale of third party software to the Company’ second largest client as measured by earned revenue in 2018, which is associated with their use of InsPro Enterprise. In 2017 To Date we earned $143,728 of license fee revenue also from the Company’ second largest client. The license agreement with this client included a provision for an additional license fee as a result of the client’s policy counts exceeding a contractual threshold.

 

 

·

In Third Quarter 2018 and Third Quarter 2017 we earned $500,000 of reseller fee revenue. Effective August 18, 2015, the Company entered into a 5 year software and services reseller agreement (the “Reseller Agreement”) with an unaffiliated third party (the “Reseller”) whereby the Company granted the Reseller the exclusive right to market InsPro Enterprise to prospective clients for their administration of long term care insurance products for an initial fee of $2,500,000 (the “Reseller Fee”). Pursuant to the Reseller Agreement, the Reseller Fee is fully or partially refundable to the Reseller in the event that the Company material breaches the Reseller Agreement or the Company becomes insolvent, goes into liquidation, seeks protection under bankruptcy, or materially breaches the Reseller Agreement during the term of the Reseller Agreement (each a “Refund Event”). A Refund Event did not occur as of September 30, 2018 and 2017, and as a result the Company recognized $500,000 of Reseller Fee as revenue in Third Quarter 2018 and Third Quarter of 2017. The Company shall refund the following amounts to the Reseller if a Refund Event occurs between the following dates; $1,500,000 between September 1, 2017 and August 31, 2018, and $1,000,000 between September 1, 2018 and August 31, 2019.

 

·

In 2018 To Date we sold computer equipment to a client in connection with their use of InsPro Enterprise.

 

·

In 2018 To Date other revenue decreased primarily due to lower reimbursements of office and administrative expenses pertaining to various agreements with related and unrelated parties pertaining to our former Radnor office, which ended in the first quarter of 2017. Other revenue also includes renewal commissions received in connection with the Company’s former telesales call center and external agent produced agency business. In 2009 the Company ceased selling health and related products to individuals and families through its former non-employee agents.

 

Cost of Revenues

 

Our cost of revenues consisted of the following:

 

		For the Nine Months Ended September 30,								Increase (Decrease)
		2018				2017				Dollars				Percentage
Compensation, employee benefits and related taxes		$	4,844,716			$	4,873,531			$	(28,815	)			-0.6	%
Professional fees			5,091,801				5,101,022				(9,221	)			-0.2	%
Depreciation			137,508				202,884				(65,376	)			-32.2	%
Rent, utilities, telephone and communications			293,502				286,452				7,050				2.5	%
Other cost of revenues			308,986				233,257				75,729				32.5	%
		$	10,676,513			$	10,697,146			$	(20,633	)			-0.2	%

 

·

In 2018 To Date our depreciation expense component of cost of revenues decreased as compared to 2017 To Date as a result of certain assets having been fully depreciated in accordance with the original depreciation schedule for such assets.

 

·

In 2018 To Date our other cost of revenues increased as compared to 2017 To Date due to the cost of 3rd party software resold in Third Quarter 2018. Other cost of revenues consisted of the cost of 3rd party licensed software resold to customers, equipment sold to customers, computer processing incurred primarily to provide ASP and hosting services, hardware and software, travel and entertainment, and office expenses.

 

 

Gross Profit

 

As a result of the aforementioned factors, we reported a gross profit of $5,906,719 in 2018 To Date, as compared to a gross profit of $4,953,872 in 2017 To Date. The results from operations in 2018 To Date were favorably impacted by higher revenues especially professional services and ASP and hosting revenues.

 

Selling, General and Administrative Expenses

 

Our selling, general and administrative expenses consisted of the following:

 

		For the Nine Months Ended September 30,								Increase (Decrease)
		2018				2017				Dollars				Percentage
Compensation, employee benefits and related taxes		$	2,377,818			$	3,102,939			$	(725,121	)			-23.4	%
Advertising and other marketing			50,181				26,719				23,462				87.8	%
Depreciation			54,861				83,386				(28,525	)			-34.2	%
Rent, utilities, telephone and communications			122,303				188,631				(66,328	)			-35.2	%
Professional fees			370,132				554,789				(184,657	)			-33.3	%
Other general and administrative			602,826				567,747				35,079				6.2	%
		$	3,578,121			$	4,524,211			$	(946,090	)			-20.9	%

 

·

2018 To Date our salaries, employee benefits and related taxes component of cost of revenues decreased as compared to 2017 To Date primarily as a result of severance expense pertaining to the resignation of Robert Oakes in second quarter of 2017 and lower employee staffing costs.

 

·

In 2018 To Date our advertising and marketing expense increased primarily as a result of costs associated with Company’s new logo and web site.

 

·

In 2018 To Date our depreciation expense decreased as a result of certain assets having been fully depreciated in accordance with the original depreciation schedule for such assets.

 

·

In 2018 To Date our rent, utilities, telephone and communications expense decreased as compared to 2017 To Date primarily due to the elimination of our former Radnor office and to a lesser extent a higher allocation of occupancy cost to cost of revenue and a lower allocation of cost to selling, general and administrative expense as a result of employee staffing.

 

·

In 2018 To Date our professional fees decreased as compared to 2017 To Date primarily due to lower legal and employee recruiting expenses.

 

Operating income (loss) from operations before income taxes

 

As a result of the aforementioned factors, we reported income from operations before income taxes of $2,328,598 in 2018 To Date, as compared to $429,661 in 2017 To Date.

 

Other income (expenses)

 

Interest expense is attributable to interest on the capital leases and note payable for premium financing on a portion of the Company’s insurance coverages.

 

 

Income (loss) before income taxes

 

As a result of the aforementioned factors, we reported income before taxes of $2,307,046 in 2018 To Date, as compared to loss before income taxes of $418,299 in 2017 To Date.

 

Income tax expense

 

In 2018 To Date our tax provision for income taxes was $138,000, which consisted of Pennsylvania corporate income tax, as compared to $14,500 in 2017 To Date, which consisted of federal income tax.

 

The effective tax rate for 2018 To Date differed from the U.S. federal statutory rate primarily due to net operating losses carried forward from prior years (“NOLs”), which offset current federal income tax expense. In computing the Company’s state corporate income tax in 2018 To Date the Company’s state NOL’s are limited to 35% of the Company’s state income tax.

 

The effective tax rate for 2017 To Date differed from the U.S. federal statutory rate primarily due to NOLs. In computing the Company’s alternative minimum taxable income (“AMTI”) in 2017 To Date the deduction of the Company’s NOLs were limited to 90% of the Company’s NOLs without regard to alternative minimum tax. In computing the Company’s state corporate income tax in 2017 To Date the Company’s state NOL’s offset the Company’s state income tax.

 

Net Income

 

As a result of the factors discussed above, we reported net income of $2,169,046 or $0.05 per share basic and $0.01 per share on a fully diluted basis, in 2018 To Date, as compared to $403,799, or $0.01 per share basic and $0.00 on a fully diluted basis in 2017 To Date.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At September 30, 2018, we had a cash balance of $5,187,447 and working capital of $3,210,007.

 

Net cash provided by operations was $376,846 in 2018 To Date as compared to net cash used in operations of $1,903,852 in 2017 To Date. Impacting our cash flow from operations was our net income of $2,169,046 in 2018 To Date as compared to $403,799 in 2017 To Date and:

 

·

Increase in accounts receivable of $749,723 in 2018 To Date, which is primarily the result of increased billings to customers for professional services incurred in 2018 To Date.

 

·

Decrease in accounts payable of $254,985 in 2018 To Date, which is primarily the result of the payment of amounts owed to outside IT consulting firms incurred in 2017.

 

·

Decrease in accrued expenses of $450,596 in 2018 To Date, which is primarily the result of the payment in 2018 To Date of severance expense incurred in 2017.

 

·

Decrease in deferred revenue of $497,197 in 2018 To Date, which is primarily the result of professional services revenue and to a lesser extent annual maintenance fees, which were earned in 2018 To Date but collected in 2017.

 

 

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 $192,369 and $286,270 in 2018 To Date and 2017 To Date, respectively.

 

·

Recorded stock-based compensation expense of $4,849 and $130,031 in 2018 To Date and 2017 To Date, respectively.

 

Net cash used in investing activities in 2018 To Date was $91,410 as compared to $24,406 in 2017 To Date. The increase is the result of the increased purchases of computer hardware and software.

 

Net cash used in financing activities in 2018 To Date was $195,905 as compared to net cash provided of $2,181,551 in 2017 To Date.

 

·

On April 20, 2017, the Company completed a private placement (the “Private Placement”) with The Co-Investment Fund II, L.P. (“Co-Investment”), which hold more than 5% of our common stock. Donald Caldwell, who is chairman of the board of directors and former CEO of the Company, is the CEO for Cross Atlantic Capital Partners, Inc., which is the managing partner of Co-Investment. The Company issued and Co-Investment purchased 1,000,000 shares of our Series C Convertible Preferred Stock at a per share price of $2.00 for an aggregate total investment of $2,000,000 pursuant to the terms of a securities purchase agreement (the “Purchase Agreement”). The Company intends to use the net proceeds of the Private Placement for working capital purposes.

 

·

On May 11, 2017, the Company completed a private placement (the “Second Private Placement”) with Azeez Enterprises, L.P., which hold more than 5% of our Series C Preferred Stock. Michael Azeez is a member of the board of directors of the Company and is the managing partner of Azeez Enterprises, L.P. The Company issued and Azeez Enterprises, L.P. purchased 75,000 shares of our Series C Convertible Preferred Stock at a per share price of $2.00 for an aggregate total investment of $150,000 pursuant to the terms of a securities purchase agreement on substantially the same terms as those contained in the Purchase Agreement (the “Second Purchase Agreement”). Also as part of the Second Private Placement and Second Purchase Agreement the Company issued and John Scarpa, who holds more than 5% of our Series B Preferred Stock, purchased 75,000 shares of our Series C Convertible Preferred Stock at a per share price of $2.00 for an aggregate total investment of $150,000 pursuant to the terms of the Second Purchase Agreement.

 

·

Payments on notes payable pertain to notes payable, which we entered into in order to finance two of the Company’s corporate insurance premiums.

 

·

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.

 

 

Liquidity and Other Considerations

 

During the nine months ended September 30, 2018, the Company’s net income was $2,169,046 and cash provided by operations was $376,846. As of September 30, 2018, the Company had $5,187,447 of cash, working capital of $3,210,007 and the Company’s shareholder equity was $2,558,388.

 

Our liquidity needs for the next 12 months and beyond are principally for the funding of our operations, payments on capital leases and the purchase of property and equipment. Based on the foregoing, management believes the Company has sufficient funds to finance its operations for twelve months from the date this report was issued.

 

 

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 †
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

 

* Filed herewith.

† Furnished herewith.

 

 

SIGNATURES

 

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

 

Date: November 14, 2018	INSPRO TECHNOLOGIES CORPORATION
	By:	/s/ ANTHONY R. VERDI
		Anthony R. Verdi
		President, Chief Executive Officer and Chief Financial Officer
		(Principal Executive Officer and Principal Financial Officer)

 

 

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 †
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

 

* Filed herewith.

† Furnished herewith.