NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization
InsPro Technologies Corporation (the “Company”, “ITCC”, “we”, “us” or “our”)
is a technology company that provides software applications for use by insurance administrators in the insurance industry. Our
business focuses primarily on our InsPro Enterprise
TM
software application, which was introduced in 2004.
The Company offers InsPro Enterprise on both a licensed and
an application service provider (“ASP”) basis. InsPro Enterprise is an insurance administration and marketing system
that supports group and individual business lines, and efficiently processes agent, direct market, worksite and web site generated
business. InsPro Technologies' clients include insurance carriers and third party administrators. The Company realizes revenue
from the sale of software licenses, application service provider fees, hosting fees, software maintenance fees and consulting and
implementation services.
Basis of presentation and principles of consolidation
The consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United States of America (“US GAAP“). The consolidated financial
statements of the Company include the Company and its wholly-owned subsidiaries InsPro Technologies, LLC, Atiam Technologies GP,
LLC, Atiam Technologies, LP, HBDC II, Inc., HBDC Sub, Inc. Corporation, Platinum Partners, LLC and Insurance Specialist Group.
All material inter-company balances and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates. Significant estimates in 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 had no cash equivelents during the two years ended
December 31, 2018. The Company considers all liquid debt instruments with original maturities of three months or less to be cash
equivalents.
Accounts receivable
The Company has a policy of establishing an allowance for uncollectible
accounts receivable 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. As of December 31, 2018 and 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, notes payable and capital lease obligations approximated
fair value as of December 31, 2018, and December 31, 2017, because of the relatively short-term maturity of these instruments and
their market interest rates.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1 – BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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. The Company
did not record an impairment charge for the years ended December 31, 2018 and 2017.
Income taxes
The Company accounts for income taxes pursuant to the provisions
of ASC 740-10, ”
Accounting for Income Taxes
,” 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 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.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
The Company has adopted 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. The Company has not yet filed its tax returns for
the tax year ended December 31, 2018. As of December 31, 2018, the tax years ended December 31, 2017, 2016 and 2015 are still subject
to audit.
Income (loss) per common share
The Company's weighted average common shares
outstanding used in computing fully diluted net income (loss) per common share include the following:
|
|
For The Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
41,550,066
|
|
|
|
41,543,655
|
|
Conversion of series A convertible preferred stock issued and outstanding into common stock
|
|
|
25,528,589
|
|
|
|
25,535,000
|
|
Conversion of series B convertible preferred stock issued and outstanding into common stock
|
|
|
106,144,240
|
|
|
|
106,144,240
|
|
Conversion of series C convertible preferred stock issued and outstanding into common stock
|
|
|
25,083,500
|
|
|
|
16,672,420
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing fully diluted net income (loss) per share
|
|
|
198,306,395
|
|
|
|
189,895,315
|
|
The Company’s issued and outstanding convertible preferred
stock is convertible into common stock at a ratio of 20 common shares for each preferred share.
Revenue recognition
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
Revenue from Contracts with Customers (“ASC 606”). See Note 2 Revenue and Deferred Revenue.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Cost of revenues
Cost of revenues includes
direct labor and associated costs for employees and independent contractors performing InsPro Enterprise
™
design,
development, implementation and testing together with customer management, training and technical support, as well as a portion
of facilities costs. Cost of revenues consisted of the following:
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Compensation, employee benefits and related taxes
|
|
$
|
6,614,016
|
|
|
$
|
6,194,794
|
|
Professional fees
|
|
|
6,492,893
|
|
|
|
6,713,060
|
|
Depreciation
|
|
|
186,380
|
|
|
|
248,292
|
|
Rent, utilities, telephone and communications
|
|
|
397,587
|
|
|
|
378,301
|
|
Other cost of revenues
|
|
|
376,410
|
|
|
|
308,376
|
|
|
|
$
|
14,067,286
|
|
|
$
|
13,842,823
|
|
Selling, general and
administrative expenses
Selling, general and administrative
expenses include all selling, marketing, and other expenses not classified as cost of revenues. Selling, general and administrative
expenses consisted of the following:
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Compensation, employee benefits and related taxes
|
|
$
|
3,223,286
|
|
|
$
|
3,986,164
|
|
Advertising and other marketing
|
|
|
70,961
|
|
|
|
35,127
|
|
Depreciation
|
|
|
71,797
|
|
|
|
100,622
|
|
Rent, utilities, telephone and communications
|
|
|
161,307
|
|
|
|
227,103
|
|
Professional fees
|
|
|
457,054
|
|
|
|
838,624
|
|
Other general and administrative
|
|
|
942,487
|
|
|
|
911,304
|
|
|
|
$
|
4,926,892
|
|
|
$
|
6,098,944
|
|
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 CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Concentrations of credit risk
The Company maintains its cash and restricted cash in bank deposit
accounts, which exceed the federally insured limits as provided through the Federal Deposit Insurance Corporation (“FDIC”).
As of December 31, 2018 and 2017, the Company had $5,161,810 and $5,254,967 of cash in United States bank deposits, of which $501,177
and $500,926 was federally insured and $4,660,633 and $4,754,926 was not federally insured, respectively.
The following table lists the percentage of the Company’s
accounts receivable balance from the Company’s InsPro Enterprise
™
clients representing 10% or more of the accounts
receivable balances as of the periods listed below.
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Client #1
|
|
|
35
|
%
|
|
|
52
|
%
|
Client #2
|
|
|
20
|
%
|
|
|
10
|
%
|
Client #3
|
|
|
13
|
%
|
|
|
-
|
|
The following table lists the percentage of the Company’s
revenue earned from the Company’s InsPro Enterprise clients representing 10% or more of the revenue earned in each of the
periods listed below.
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Client #1
|
|
|
33
|
%
|
|
|
38
|
%
|
Client #2
|
|
|
17
|
%
|
|
|
20
|
%
|
Client #3
|
|
|
14
|
%
|
|
|
-
|
|
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.
Recent accounting pronouncements
From time to time, new accounting pronouncements are issued
by the 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.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
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. We will make an accounting policy election that will keep leases with an initial term of 12
months or less off of the balance sheet and will result in recognizing those lease payments in our consolidated statements of operations
on a straight-line basis over the lease term. 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
will be effective for the Company on January 1, 2019. We anticipate adopting ASU 2016-02 on a modified retrospective basis
effective January 1, 2019, without adjusting comparative periods presented. We believe our lease for our Eddystone office, which
has no provision for automatic renewal and which expires on January 31, 2022, will be accounted for as a
ROU
asset and lease liability
under ASU 2016-02.
We estimate adoption of
ASU
2016-02
will result in the recognition of additional ROU assets and lease liabilities of
approximately $1,010,000 as of January 1, 2019. We do not believe the adoption of
ASU 2016-02
will
materially affect our consolidated statement of operations or our consolidated statements of cash flows.
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. The adoption of ASU 2016-13 is not expected to have a material effect
on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15 “Classification
of Certain Cash Receipts and Cash Payments (Topic 230)” (“ASU 2016-15”), which provides guidance for eight specific
cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective retrospectively for
annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. Early
adoption is permitted. The new standard is effective for the Company at the beginning of fiscal year 2018. The adoption of ASU
2016-15 did not have a material effect on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation –
Stock Compensation (Topic 718). This update is intended to reduce cost and complexity and to improve financial reporting for share-based
payments issued to non-employees (for example, service providers, external legal counsel, supplies, etc.) The ASU expands the scope
of Topic 718, Compensation – Stock Compensation, which currently only includes share-based payments issued to employees,
to also include share based payments issued to non-employees for goods and services. Consequently, the accounting for share based
payments to non-employees and employees will be substantially aligned. This standard will be effective for the financial statements
issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standard
is permitted. The standard will be applied on a retrospective approach for each period presented. The adoption of ASU 2018-07 is
not expected to have a material effect on the Company’s consolidated financial statements.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Liquidity
During year ended December 31, 2018, the Company’s net
income was $2,478,455 and cash provided by operations was $705,602. As of December 31, 2018, the Company had $5,100,660 of cash,
working capital of $3,299,839 and the Company’s shareholder equity was $2,869,047.
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 Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Professional services
|
|
$
|
11,018,426
|
|
|
$
|
11,749,129
|
|
ASP and hosting revenue
|
|
|
8,145,399
|
|
|
|
7,690,976
|
|
Sales of software licenses
|
|
|
132,060
|
|
|
|
143,728
|
|
Maintenance revenue
|
|
|
1,785,708
|
|
|
|
1,611,088
|
|
Reseller fee revenue
|
|
|
500,000
|
|
|
|
500,000
|
|
Sale of equipment
|
|
|
23,797
|
|
|
|
-
|
|
Other revenue
|
|
|
28,965
|
|
|
|
57,526
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,634,355
|
|
|
$
|
21,752,447
|
|
Professional services consist of pre- and post-implementation
services pertaining to InsPro Enterprise installation, configuration and modification of InsPro Enterprise
TM
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 recognize
professional services revenue on a time and materials basis. Under the new standard, 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.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 2 – REVENUE AND DEFERRED REVENUE (continued)
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 3
rd
party software and sells 3
rd
party equipment to a client in
connection with the client’s use of InsPro Enterprise software on hardware owned by the client. We recognize sale of software
licenses and sale of equipment revenue at the point in time when control has transferred to the client.
ASP hosting enables a client to effectively lease the
InsPro Enterprise software, paying only for that capacity required to support their business during the contacted time period.
Hosting Service can also enable a client to outsource its application management of its perpetually licensed InsPro Enterprise
software to the Company. ASP hosting clients 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. We have
determined the Company’s continuous service and support represent a series of performance obligations that are delivered
over time on a stand-ready basis.
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.
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 CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 2 – REVENUE AND DEFERRED REVENUE (continued)
The following table discloses changes in unearned revenue
as of December 31, 2018 and 2017.
|
|
As
of December 31,
2018
|
|
|
As
of December 31,
2017
|
|
|
|
|
|
|
|
|
Short Term
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
2,765,401
|
|
|
$
|
2,285,139
|
|
Deferral of revenue
|
|
|
2,496,412
|
|
|
|
1,895,704
|
|
Reclassification of unearned revenue from long term to short term
|
|
|
125,000
|
|
|
|
500,000
|
|
Recognition of unearned revenue
|
|
|
(2,535,837
|
)
|
|
|
(1,915,442
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
2,850,976
|
|
|
$
|
2,765,401
|
|
|
|
|
|
|
|
|
|
|
Long Term
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
1,000,000
|
|
|
$
|
1,500,000
|
|
Deferral of revenue
|
|
|
-
|
|
|
|
-
|
|
Reclassification of unearned revenue from long term to short term
|
|
|
(125,000
|
)
|
|
|
(500,000
|
)
|
Recognition of unearned revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
875,000
|
|
|
$
|
1,000,000
|
|
Deferral of revenue in the years ended December 31, 2018
and 2017 was $2,496,412 and $1,895,704, 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 December 31, 2018 and 2017.
Revenue recognized in the years ended December 31, 2018
and 2017, which was included in the unearned revenue liability balance at the beginning of each year, was $2,535,837 and $1,915,442,
respectively. This revenue represents maintenance, professional services and Reseller Agreement performance obligations performed
during the years ended December 31, 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 December 31, 2018 and 2017, respectively.
INSPRO TECHNOLOGIES CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted
of the following:
|
|
Useful
Life
(Years)
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Computer equipment and software
|
|
3
|
|
$
|
5,158,316
|
|
|
$
|
4,590,221
|
|
Office equipment
|
|
4.6
|
|
|
145,229
|
|
|
|
145,228
|
|
Leasehold improvements
|
|
5.4
|
|
|
81,933
|
|
|
|
81,933
|
|
|
|
|
|
|
5,385,478
|
|
|
|
4,817,382
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
|
|
(4,790,711
|
)
|
|
|
(4,547,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
594,767
|
|
|
$
|
269,994
|
|
The following table
discloses depreciation expense as reported in the statement of operations.
|
|
For
the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Depreciation included in cost of revenues
|
|
$
|
186,380
|
|
|
$
|
248,292
|
|
Depreciation included in selling, general and administrative
|
|
|
71,797
|
|
|
|
100,622
|
|
Total depreciation
|
|
$
|
258,177
|
|
|
$
|
348,914
|
|
NOTE 4 – NOTES PAYABLE
Notes payable at December 31, 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 $12,552 as of December 31, 2018. For the year ended
December 31, 2018, the interest expense incurred on this note was $1,435. 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, 2018 and ending on May 28, 2019. The balance for this note was $26,473 as of December 31, 2018. For the year ended December
31, 2018, the interest expense on this note was $1,376.
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, 2017. 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, 2017. For the year ended
December 31, 2017, the interest expense incurred on this note was $1,442.
INSPRO TECHNOLOGIES CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 5 – TRANSACTIONS WITH RELATED PARTIES
Private Placements to Existing Stockholders
On April 20, 2017, the Company completed a private placement
(the “Private Placement”) with The Co-Investment Fund II, L.P. (“Co-Investment”), which holds more than
5% of our common stock. Donald Caldwell, who is the chairman of the board of directors of the Company (the “Board”)
and former CEO, 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, par value $0.001 per share (“Series
C Preferred Stock”), at a per share price of $2.00 for an aggregate total investment of $2,000,000 pursuant to the terms
of a securities purchase agreement (the “Purchase Agreement”). The Company intends to use the net proceeds of the Private
Placement for working capital purposes.
The Company agreed, pursuant to the terms of the Purchase
Agreement, that for a period of 90 days after the effective date of the Purchase Agreement, to not, subject to certain exceptions,
offer, sell, grant any option to purchase, or otherwise dispose of any equity securities or equity equivalent securities, including
without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into
or exchangeable for, or otherwise entitles the holder thereof to receive, capital stock and other securities of the Company. In
addition, pursuant to the Purchase Agreement, the Company was permitted to sell up to an additional 500,000 shares of Series C
Preferred Stock to other existing stockholders within 90 days following the Closing on substantially the same terms and conditions
described above and as set forth in the Purchase Agreement.
The Purchase Agreement also provides for a customary participation
right for Co-Investment, subject to certain exceptions and limitations, which grants Co-Investment the right to participate in
any future capital raising financings of the Company occurring from the effective date of the Purchase Agreement until 24 months
after the effective date of the Purchase Agreement. Co-Investment may participate in such financings at a level based on Co-Investment’s
ownership percentage of the Company on a fully-diluted basis prior to such financing.
On May 11, 2017, the Company completed a private placement
(the “Second Private Placement”) with Azeez Enterprises, L.P., which holds more than 5% of our Series C Preferred Stock,
and John Scarpa, who holds more than 5% of our Series B Preferred Stock. Michael Azeez is a member of the Board and is the managing
partner of Azeez Enterprises, L.P. The Company issued and both Azeez Enterprises, L.P. and Mr. Scarpa purchased 75,000 shares each,
of our Series C Convertible Preferred Stock at a per share price of $2.00 for an aggregate total investment of $300,000 pursuant
to the terms of a securities purchase agreement at essentially the same terms as those contained in the Purchase Agreement.
See Note 6 - Shareholders’ Equity – Series
C Preferred Stock.
INSPRO TECHNOLOGIES CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 6 – SHAREHOLDERS’ EQUITY
Common Stock
As of December 31, 2018 and 2017, the Company was authorized
to issue 750,000,000 and 500,000,000 shares of common stock with a par value of $0.001 per share (“Common Stock”),
respectively. As of December 31, 2018 and 2017, the Company had 41,673,655 and 41,543,655 and shares of its Common Stock issued
and outstanding, respectively.
On December 14, 2018, a stockholder elected to convert
6,500 shares of Series A Convertible Preferred Stock with a par value of $0.001 per share (“Series A Preferred Stock”)
into 130,000 shares of Common Stock. Each share of Series A Preferred Stock is convertible into 20 shares of Common Stock at the
option of the holder.
The Company has reserved shares of Common Stock, on an
as-if-converted basis, as follows:
|
|
December
31, 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
|
|
|
25,405,000
|
|
|
|
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
|
|
|
56,400,000
|
|
|
|
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
|
|
|
242,529,720
|
|
|
|
251,379,720
|
|
The above table includes common stock reserved for non
exercisable stock options and common stock reserved for the issuance of stock options in the future under the Company’s 2010
Equity Compensation Plan.
Series A Convertible Preferred Stock
As of December 31, 2018 and 2017, the Company’s
board of directors has designated 3,437,500 shares of Series A Preferred Stock. As of December 31, 2018 and 2017, the Company had
1,270,250 and 1,276,750 shares of its Series A Preferred Stock issued and outstanding, respectively. On December 14, 2018, a stockholder
elected to convert 6,500 shares of Series A Preferred Stock into 130,000 shares of Common Stock. As of December 31, 2018 and 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.
INSPRO TECHNOLOGIES CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 6 – SHAREHOLDERS’ EQUITY (continued)
The Series A Preferred Stock is entitled to vote as a
single class with the holders of the Company’s common 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 $12,702,500 and $12,767,500 as of December 31, 2018 and 2017, respectively, 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. Each share of Series A Preferred Stock becomes convertible into
20 shares of common stock, subject to adjustment and at the option of the holder of the Series A Preferred Stock. For so long as
any shares of Series A Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the Series
A Preferred Stock is required to approve (Y) any amendment to the Company’s certificate of incorporation or bylaws that would
adversely alter the voting powers, preferences or special rights of the Series A Preferred Stock or (Z) any amendment to the Company’s
certificate of incorporation to create any shares of capital stock that rank senior to the Series A Preferred Stock. In addition
to the voting rights described above, for so long as 1,000,000 shares of Series A Preferred Stock are outstanding, the vote or
consent of the holders of at least two-thirds of the shares of Series A Preferred Stock is required to effect or validate any merger,
sale of substantially all of the assets of the Company or other fundamental transaction, unless such transaction, when consummated,
will provide the holders of Series A Preferred Stock with an amount per share equal to two and a half (2.5) times the Series A
Preferred Stock original issue price or $12,702,500 and $12,767,500 as of December 31, 2018 and 2017, respectively, in aggregate
for all issued and outstanding Series A Preferred Stock.
Series A Preferred Stock is junior to Series B Convertible
Preferred Stock par value $0.001 per share (“Series B Preferred Stock”) and Series C Preferred Stock as it pertains
to liquidation preferences.
Series B Convertible Preferred Stock
As of December 31, 2018 and 2017, the Company’s
board of directors has designated 11,000,000 shares of Series B Preferred Stock. As of December 31, 2018 and 2017, the Company
had 5,307,212 of its Series B Preferred Stock issued and outstanding. As of December 31, 2018 and 2017, the Company has reserved
2,820,000 and 3,250,000, respectively, shares of Series B Preferred Stock for the exercise of warrants issued and outstanding to
purchase its Series B Preferred Stock.
INSPRO TECHNOLOGIES CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 6 – STOCKHOLDERS’ EQUITY (continued)
The Series B Preferred Stock is entitled to vote as a
single class with the holders of the Company’s common and preferred stock, with each share of Series B Preferred Stock having
the right to 20 votes. Upon the liquidation, sale or merger of the Company, each share of Series B Preferred Stock is entitled
to receive an amount equal to the greater of (A) a liquidation preference equal to the Series B Preferred Stock original issue
price or $15,921,636 as of December 31, 2018 and 2017, 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 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. Each share of Series B Preferred Stock becomes convertible into 20 shares of common stock, subject
to adjustment and at the option of the holder of the Series B Preferred Stock. For so long as any shares of Series B Preferred
Stock are outstanding, the vote or consent of the holders of at least two-thirds of the Series B Preferred Stock is required to
approve (Y) any amendment to the Company’s certificate of incorporation or bylaws that would adversely alter the voting powers,
preferences or special rights of the Series B Preferred Stock or (Z) any amendment to the Company’s certificate of incorporation
to create any shares of capital stock that rank senior to the Series B Preferred Stock. In addition to the voting rights described
above, for so long as 1,000,000 shares of Series B Preferred Stock are outstanding, the vote or consent of the holders of at least
two-thirds of the shares of Series B Preferred Stock is required to effect or validate any merger, sale of substantially all of
the assets of the Company or other fundamental transaction, unless such transaction, when consummated, will provide the holders
of Series B Preferred Stock with an amount per share equal to the Series B Preferred Stock original issue price or $15,921,636
in aggregate, for all issued and outstanding Series B Preferred Stock.
Series B Preferred Stock is senior to Series A Preferred
Stock, and junior to Series C Preferred Stock, as it pertains to liquidation preferences.
Series C Preferred Stock
As of December 31, 2018 and 2017, the Board has designated
4,000,000 shares of Series C Preferred Stock. As of December 31, 2018 and 2017, the Company had 1,254,175 shares 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 preferences.
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.
INSPRO TECHNOLOGIES CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 6 – STOCKHOLDERS’ EQUITY (continued)
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.
In connection with the Private Placement, the Board approved
a Certificate of Designation of Series C Convertible Preferred Stock of the Company (the “Certificate of Designation”)
setting forth the rights, preferences and limitations of the Series C Preferred Stock. The Company’s board of directors has
designated 4,000,000 shares of Series C Preferred stock. On April 19, 2017, the Company filed the Certificate of Designation with
the Secretary of State of the State of Delaware.
The Company recorded the $2,300,000 of proceeds received
as a result of the Private Placement and Second Private Placement (collectively the “2017 Private Placements”) less
$12,154 of legal expenses incurred in connection with the 2017 Private Placements to Series C Preferred Stock in the amount of
$1,150 and additional paid in capital in the amount of $2,286,696. See Note 5 – Transactions With Related Parties.
On July 17, 2017 the Company filed a registration statement
for a rights offering (the “Rights Offering”) on form S-1/A, which the Commission declared effective on July 17, 2017,
to distribute to shareholders excluding residents of California at no charge, one non-transferable subscription right for each
9,651 shares of our Common Stock, 483 shares of our Series A Preferred Stock, 483 shares of our Series B Preferred Stock and 483
shares of our Series C Preferred Stock owned as of July 17, 2017, the record date, either as a holder of record or, in the case
of shares held of record by brokers, dealers, custodian banks, or other nominees on shareholders’ behalf, as a beneficial
owner of such shares. The Rights Offering was designed to give all of the holders of the Company’s capital stock the opportunity
to participate in an equity investment in the Company on the same economic terms as the 2017 Private Placements.
The basic subscription right entitled the holder to purchase
one unit (“Subscription Unit”) at a subscription price of $50. A Subscription Unit consisted of 25 shares of Series
C Preferred Stock. In the event that a holder of a subscription right purchases all of the basic Subscription Units available to
the holder pursuant to their basic subscription right, the holder will have the option to choose to subscribe for a portion of
any Subscription Units that were not purchased by all other holders of Subscription Units through the exercise of their basic subscription
rights. The subscription rights expired on August 29, 2017.
Effective with the expiration of the Rights Offering,
which occurred on August 29, 2017, holders of subscription rights exercised in aggregate 167 basic subscription rights and 4,000
over subscription rights for a total of 4,167 Subscription Units. As a result of the exercise of 4,167 Subscription Units the Company
received $208,350 in gross proceeds and issued effective on August 29, 2017, in aggregate 104,175 shares of Series C Preferred
Stock. Effective with the expiration of the Rights Offering all unexercised subscription rights expired. The Company incurred $90,011
of legal and other expenses as a result of the Rights Offering. As a result of the Rights Offering the Company recorded $104 to
Series C Preferred Stock, which is the par value of the 104,175 shares issued, and $118,235 to additional paid in capital.
INSPRO TECHNOLOGIES CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 6 – STOCKHOLDERS’ EQUITY (continued)
Stock Options
2017
During the year ended December 31, 2017, options for 3,175,000,
which were previously granted to former executives of the Company, expired in accordance with the terms of such stock options.
The Company recorded compensation expense pertaining to
employee stock options and warrants to purchase Series A Preferred Stock in the amount of $144,948 for the year ended December
31, 2017, which included $126,344 of expense pertaining to stock options and $18,604 of expense pertaining to the amendment of
warrants to purchase Series A Preferred Stock. See Note 6 – Stockholders’ Equity – Series A Preferred Stock Warrants.
2018
During the year ended December 31, 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.
The Company recorded compensation expense pertaining to
employee stock options in the amount of $6,099 for the year ended December 31, 2018.
The value of equity compensation expense not yet expensed
pertaining to unvested equity compensation was $6,250 as of December 31, 2018, which will be recognized over a weighted average
1.5 years in the future.
As of December 31, 2018, there were 30,000,000 shares
of our Common Stock authorized to be issued under the 2010 Equity Compensation Plan, of which 28,296,980 shares of our common stock
remain available for future stock option grants.
A summary of the Company’s outstanding stock options
as of and for the years ended December 31, 2018 and 2017 are as follows:
|
|
Number
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Of Shares
|
|
|
Average
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Underlying
|
|
|
Exercise
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Fair
Value
|
|
|
Contractual
Life
|
|
|
Value
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
years)
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
4,000,000
|
|
|
$
|
0.10
|
|
|
$
|
0.06
|
|
|
|
3.4
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(3,175,000
|
)
|
|
|
0.10
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
825,000
|
|
|
|
0.10
|
|
|
|
0.10
|
|
|
|
3.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(125,000
|
)
|
|
|
0.10
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
700,000
|
|
|
$
|
0.10
|
|
|
$
|
0.05
|
|
|
|
2.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2018
|
|
|
450,000
|
|
|
$
|
0.10
|
|
|
$
|
0.05
|
|
|
|
1.8
|
|
|
$
|
-
|
|
(1) The aggregate intrinsic value is based on the $0.0425
closing price as of December 31, 2018 for the Company’s Common Stock.
INSPRO TECHNOLOGIES CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 6 – STOCKHOLDERS’ EQUITY (continued)
Common Stock Warrants
During the years ended December 31, 2018 and 2017, warrants
to purchase 120,000 and 24,978,330 common shares, respectively, expired in accordance with the terms of such warrants.
A summary of the status of the Company's outstanding common
stock warrants as of and for the years ended December 31, 2018 and 2017 are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Common
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
25,098,330
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(24,978,330
|
)
|
|
|
-
|
|
Outstanding and exercisable at December 31, 2017
|
|
|
120,000
|
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2018
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(120,000
|
)
|
|
|
0.15
|
|
Outstanding and exercisable at December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
Series A Preferred Stock warrants
On August 16, 2017, the Company granted to David J. Medlock
a warrant to purchase 25,000 shares of the Company’s Series A Preferred Stock. This warrant is immediately exercisable, has
a five year term and an exercise price of $4.00 per share. The fair value of these warrants granted were estimated on the date
of the grant to be $18,604 using the Black-Scholes option-pricing model based on the following assumptions: expected volatility:
261%, risk-free interest rate: 1.03%, expected life in years: 5 based on the contract life of the warrant grant, and assumed dividend
yield: 0%. The Company recorded compensation expense pertaining to this warrant in salaries, commission and related taxes of $18,604
in the year ended December 31, 2017.
During the year ended December 31, 2017, warrants to purchase
380,000 shares of the Company’s Series A Preferred Stock, which were previously granted to Mr. Oakes, Mr. Verdi and a former
executive of the Company, expired in accordance with the terms of such warrants.
Outstanding warrants to purchase the Company’s Series
A Preferred Stock as of December 31, 2018, have a remaining contractual life of 0.4 years.
INSPRO TECHNOLOGIES CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 6 – STOCKHOLDERS’ EQUITY (continued)
A summary of the status of the Company's outstanding Series
A Preferred Stock warrants as of and for the years ended December 31, 2018 and 2017 are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Preferred
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
380,000
|
|
|
$
|
4.00
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017
|
|
|
|
|
|
|
|
|
Granted
|
|
|
25,000
|
|
|
|
4.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(380,000
|
)
|
|
|
4.00
|
|
Outstanding and exercisable at December 31, 2017
|
|
|
25,000
|
|
|
$
|
4.00
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2018
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at December 31, 2018
|
|
|
25,000
|
|
|
$
|
4.00
|
|
Series B Preferred Stock Warrants
During the year ended December 31, 2018, warrants to purchase
430,000 shares of Series B Preferred Stock, which were previously issued to former executives and directors, expired in accordance
with the terms of these warrants.
Outstanding Series B Warrants as of December 31, 2018,
have a remaining contractual life of 0.3 years.
A summary of the status of the Company's outstanding Series
B Preferred Stock warrants as of and for the years ended December 31, 2018 and 2017 are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Preferred
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
3,250,000
|
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at December 31, 2017
|
|
|
3,250,000
|
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2018
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(430,000
|
)
|
|
|
3.00
|
|
Outstanding and exercisable at December 31, 2018
|
|
|
2,820,000
|
|
|
$
|
3.00
|
|
INSPRO TECHNOLOGIES CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 6 – STOCKHOLDERS’ EQUITY (continued)
Registration and Participation Rights
In connection with the Company’s acquisition of
Atiam Technologies L. P., the Company and certain owners of Atiam Technologies L.P. entered into a registration rights agreement.
In connection with the Company’s 2008 private placement,
the Company and the participating investors also entered into a Registration Rights Agreement (the “2008 Registration Rights
Agreement”). Under the terms of the 2008 Registration Rights Agreement, the Company agreed to prepare and file with the SEC,
a registration statement on Form S-1 covering the resale of the shares and the warrant shares, which was filed with the SEC on
February 1, 2008 and declared effective by the SEC on April 22, 2008. Subject to limited exceptions, the Company also agreed to
use its reasonable best efforts to keep the registration statement effective under the Securities Act until the date that all of
the registrable securities covered by the registration statement have been sold or may be sold without volume restrictions pursuant
to Rule 144(b)(i)) promulgated under the Securities Act. The 2008 Registration Rights Agreement also provides for payment of partial
damages to the investors under certain circumstances relating to failure to file or obtain or maintain effectiveness of the registration
statement, subject to adjustment.
In connection with the Company’s 2009 private placement,
the Company and the participating investor also entered into a Registration Rights Agreement (the “2009 Registration Rights
Agreement”). Under the terms of the 2009 Registration Rights Agreement, the Company agreed to prepare and file with the SEC,
within 30 days following the receipt of a demand notice of a holder of registrable securities, a registration statement on
Form S-1 covering the resale of the shares and the warrant shares. Subject to limited exceptions, the Company also agreed to use
its reasonable best efforts to cause the registration statement to be declared effective under the Securities Act, and to use its
reasonable best efforts to keep the registration statement effective under the Securities Act until the date that all of the registrable
securities covered by the registration statement have been sold or may be sold without volume restrictions pursuant to Rule 144(b)(i)
promulgated under the Securities Act. In addition, if the Company proposes to register any of its securities under the Securities
Act in connection with the offering of such securities for cash, the Company shall, at such time, promptly give each holder of
registrable securities notice of such intent, and such holders shall have the option to register their registrable securities on
such additional registration statement. The 2009 Registration Rights Agreement also provides for payment of partial damages to
the investor under certain circumstances relating to failure to file or obtain or maintain effectiveness of the Registration Statement,
subject to adjustment.
In connection with the Company’s 2010 private placement,
the Company and the participating investors also entered into a Registration Rights Agreement (the “2010 Registration Rights
Agreement”), which provided the investors with demand and “piggyback” registration rights on substantially the
same terms as the 2009 Registration Rights Agreement.
In connection with Co-Investment’s note conversion,
the Company and Co-Investment also entered into a Registration Rights Agreement, in substantially the same form as the 2010 Registration
Rights Agreement.
In connection with the private placements that occurred
during 2012, 2013, 2015 and 2017, the Company and the participating investors also entered into registration rights agreements,
in substantially the same form as the 2010 Registration Rights Agreement.
As of December 31, 2018, the Company has not received
a demand notice in connection with any registration rights agreement. As of December 31, 2018, the Company does not believe that
it is probable that the Company will incur a penalty in connection with the Company’s registration rights agreements. Accordingly
no liability was recorded as of December 31, 2018.
INSPRO TECHNOLOGIES CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 7 – CAPITAL LEASE OBLIGATIONS
InsPro LLC has entered into several capital lease obligations
to purchase equipment used for operations. InsPro LLC has the option to purchase the equipment at the end of the lease agreements
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:
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
Useful Life (Years)
|
|
|
|
|
|
|
Computer equipment and software
|
|
3
|
|
$
|
1,900,711
|
|
|
$
|
1,671,742
|
|
Leasehold improvements
|
|
3
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,900,711
|
|
|
|
1,671,742
|
|
Less accumulated depreciation
|
|
|
|
|
(1,654,075
|
)
|
|
|
(1,454,084
|
)
|
|
|
|
|
$
|
246,636
|
|
|
$
|
217,658
|
|
Future minimum payments required under capital leases
as of December 31, 2018 are as follows:
2019
|
|
$
|
134,707
|
|
2020
|
|
|
89,124
|
|
2021
|
|
|
36,165
|
|
2022
|
|
|
27,516
|
|
2023
|
|
|
13,757
|
|
|
|
|
|
|
Total future payments
|
|
|
301,269
|
|
Less amount representing interest
|
|
|
34,939
|
|
|
|
|
|
|
Total future payments less interest
|
|
|
266,330
|
|
Less current portion
|
|
|
115,771
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
150,559
|
|
NOTE 8 – DEFINED CONTRIBUTION 401(k) PLAN
The Company implemented a 401(k) plan on January 1, 2007.
Eligible employees contribute to the 401(k) plan. Employees become eligible after attaining age 19 and after 3 months of employment
with the Company. The 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 “Contribution”). The Contributions
are subject to a vesting schedule and become fully vested after one year of service, retirement, death or disability, whichever
occurs first. The Company made contributions of $70,236 and $67,181 for the years ended December 31, 2018 and 2017, respectively.
INSPRO TECHNOLOGIES CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Employment Agreements
On October 9, 2017 the Company and Mr. David M. Anderson
entered into a written employment agreement (the “Employment Agreement”) for an initial one-year term, which term automatically
extended for successive one-year terms unless either the Company or Mr. Anderson provides notice of non-renewal prior to the expiration
of the then current term. Pursuant to the Employment Agreement, Mr. Anderson received a base salary of $380,000 per year. Mr. Anderson
was eligible to participate in the Company’s employee benefit plans as in effect from time to time on the same basis as generally
made available to other senior executives of the Company. The Employment Agreement also provided for a monthly allowance equal
to $5,000 per month, starting in October 2017 through October 31, 2018, to assist in offsetting Mr. Anderson’s commuting
expense to and from his home and for his temporary living expenses in Pennsylvania. The Employment Agreement also provided for
a reimbursement of his out of pocket relocation expenses incurred through October 31, 2018, up to $25,000.
On October 24, 2018, David M. Anderson resigned as the
Chief Executive Officer and as a member of the Board. 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 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 November 2, 2018 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. As of December 31, 2018, the Company recorded approximately $103,417 of severance expense as a result
of the Separation Agreement.
On March 31, 2008, Anthony R. Verdi, our Chief Financial
Officer, was also appointed to the position of Chief Operating Officer, effective April 8, 2008. Mr. Verdi was appointed to the
Board on June 20, 2008 and was appointed our Principal Executive Officer on May 18, 2011 through January 26, 2015. On October 29,
2018, the Board appointed Mr. Verdi as the Company’s President, Chief Executive Officer and Chief Financial Officer.
Mr. Verdi’s amended and
restated employment agreement automatically renewed for a one year term on March 31, 2015, and, if not terminated, will automatically
renew for one year periods. His annual base salary was $225,000 per year from March 31, 2008 through May 30, 2011 and was then
increased by the board of directors to $250,000 effective June 1, 2011, again increased to $300,000 effective November 1, 2015,
again increased to $325,000 effective October 1, 2017 and again increased to $380,000 effective October 30, 2018. He is entitled
to receive such bonus compensation as a majority of our board of directors may determine from time to time.
INSPRO TECHNOLOGIES CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 9 – COMMITMENTS AND CONTINGENCIES (continued)
If we terminate Mr. Verdi’s
employment for cause or Mr. Verdi terminates his employment agreement without good reason, Mr. Verdi will be entitled to receive
(i) all accrued and unpaid salary and vacation pay through the date of termination and (ii) continued participation for one month
in our benefit plans. Otherwise if we terminate Mr. Verdi’s employment or Mr. Verdi terminates his employment agreement for
good reason including if he is permanently disabled he will be entitled to receive 18 months’ base salary at the then current
rate, payable in accordance with our usual practices, continued participation for 18 months in our benefit plans and payment, within
a commercially reasonable time and on a prorated basis, of any bonus or other payments earned in connection with our bonus plan
existing at the time of termination. In addition, if Mr. Verdi’s employment is terminated in accordance with the foregoing
sentence within two months prior to, or 24 months following, a change in control (as described in the employment agreement), Mr.
Verdi will be entitled to receive 18 months’ base salary at the then current rate upon the date of termination, regardless
of our usual practices, and all stock options held by Mr. Verdi at the date of termination will immediately become 100% vested
and all restrictions on such options will lapse.
If Mr. Verdi’s employment
is terminated due to a permanent disability we may credit any such amounts against any proceeds paid to Mr. Verdi with respect
to any disability policy maintained and paid for by us for Mr. Verdi’s benefit. If Mr. Verdi dies during the term of his
employment agreement, the employment agreement will automatically terminate and Mr. Verdi’s estate or beneficiaries will
be entitled to receive (i) three months’ base salary at the then current rate, payable in a lump sum and (ii) continued participation
for one year in our benefit plans.
Mr. Robert Oakes resigned as an executive employee effective
June 30, 2017. Pursuant to Mr. Oakes’ employment agreement, Mr. Oakes was 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 December 31, 2017, the Company
recorded a severance accrual connection with Mr. Oakes termination in the amount of $327,529, which is recorded in selling, general
and administrative expenses and accrued liabilities. As of December 31, 2018, the Company has fully paid Mr. Oakes’ severance.
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.
As of December 31, 2017, the
Company recorded a severance accrual connection with an executive’s termination effective December 31, 2017, in the amount
of $103,882, which was recorded in selling, general and administrative expenses and accrued liabilities. As of December 31, 2018,
the Company has fully paid the severance for this former executive.
As of December 31, 2017, the
Company has employment agreements with Mr. Medlock and another executive that will automatically renew for a one year term in 2019.
These employment agreements provide that these executives will be compensated at an aggregate annual base salary of $430,920. These
agreements may be terminated by the Company for “cause” (as such term is defined in the agreements) and without “cause”
upon 30 days’ notice. These agreements may be terminated by the Company without “cause”, in which case the terminated
employee will be entitled to their base salary for a period of six months. In the event of termination without cause or for good
reason, these executives would receive their then current base annual salary for a period of six months, plus unpaid accrued employee
benefits, which is primarily accrued vacation, less all applicable taxes. In the event of the voluntary termination of any of these
executives’, death or disability, they or their estate would receive unpaid accrued employee benefits, less all applicable
taxes. These agreements also contain non-competition and non-solicitation provisions for the duration of the agreements plus a
period of six months after termination of employment.
INSPRO TECHNOLOGIES CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 9 – COMMITMENTS AND CONTINGENCIES (continued)
Operating Leases
On September 14, 2007, InsPro LLC entered into a lease
agreement with BPG Officer VI Baldwin Tower L.P. (“BPG”) for approximately 5,524 square feet of office space at Baldwin
Towers in Eddystone, Pennsylvania. On March 26, 2008, and again on December 2, 2008, the Company and BPG agreed to amend the lease
to increase the leased office space by 1,301 and 6,810 square feet, respectively (as amended the “BPG Lease”). The
original term of the lease commenced on October 1, 2007 and expired on January 31, 2013. The annual rent increases every 12 months,
starting at approximately $102,194 plus a proportionate share of landlord’s building expenses and ending at approximately
$286,335 plus a proportionate share of landlord’s building expenses.
On March 15, 2012, InsPro LLC and BPG agreed to amend
the BPG Lease to extend its term to January 31, 2017, and after BPG completes certain building improvements InsPro Technologies
will move from its current location to another floor of the same building and lease 17,567 square feet of furnished office space
from BPG. Effective April 1, 2015, InsPro LLC and BPG agreed to amend the BPG Lease to lease 6,810 square feet of furnished office
space from BPG on another floor of the same building. The Company’s monthly rent shall be $24,887 per month commencing with
InsPro Technologies’ occupancy of the new office space, which occurred in June 2012 through January 31, 2013. InsPro Technologies’
monthly rent increased to $25,619 per month February 1, 2013 through January 31, 2014, increased to $26,351 per month February
1, 2014 through January 31, 2015, increased to $27,082 per month February 1, 2015 through March 31, 2015, increased to $37,082
through January 31, 2016, will increase to $37,814 per month February 1, 2016 through March 31, 2016, and will decrease to $27,814
per month from April 1, 2016 through January 31, 2017. 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 BPG entered into a seventh amendment to the Lease Agreement whereby InsPro LLC and BPG 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.
The Company leases certain real and personal property
under non-cancelable operating leases. Rent expense was $361,649 and $403,831 for the years ended December 31, 2018 and 2017, respectively.
As of December 31, 2018, accrued liabilities included
$394,185 pertaining to InsPro LLC’s purchase of Microsoft perpetual software licenses and software subscription and maintenance
services. Subsequent to December 31, 2018, InsPro LLC entered into a financing arrangement with PNC Equipment Finance, LLC to finance
this amount plus the cost of additional services. See Note 11 – Subsequent Events.
INSPRO TECHNOLOGIES CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 9 – COMMITMENTS AND CONTINGENCIES (continued)
Future minimum payments required under operating leases
and other agreements at December 31, 2018 are as follows:
2019
|
|
$
|
804,278
|
|
2020
|
|
|
534,936
|
|
2021
|
|
|
496,010
|
|
2022
|
|
|
30,010
|
|
thereafter
|
|
|
-
|
|
|
|
|
|
|
Total
|
|
$
|
1,865,234
|
|
NOTE 10 - INCOME
TAXES
The Company has net operating loss carry forwards for
federal income tax purposes of approximately $47,000,000 at December 31, 2018, the unused portion of which expires in years 2026
through 2037. 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 for the
years ending December 31, 2018 and 2017, were as follows:
|
|
For
the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(13,000
|
)
|
|
$
|
28,000
|
|
State
|
|
|
144,000
|
|
|
|
142,000
|
|
|
|
$
|
131,000
|
|
|
$
|
170,000
|
|
The table below summarizes the differences
between the Company’s effective tax rate and the statutory federal rate as follows for the years ended December 31, 2018
and 2017:
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
U.S. statutory rate
|
|
|
21.0
|
%
|
|
|
35.0
|
%
|
State income taxes
|
|
|
8.0
|
%
|
|
|
6.5
|
%
|
Amortization/impairment of acquisition related assets
|
|
|
(0.1
|
)%
|
|
|
(0.3
|
)%
|
Stock based compensation
|
|
|
0.1
|
%
|
|
|
3.6
|
%
|
Other permanent differences
|
|
|
(0.7
|
)%
|
|
|
1.7
|
%
|
Valuation allowance
|
|
|
(23.2
|
)%
|
|
|
(36.8
|
)%
|
|
|
|
5.1
|
%
|
|
|
9.7
|
%
|
INSPRO TECHNOLOGIES CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 10 - 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 years ended December 31, 2018 and 2017 were as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
11,435,167
|
|
|
$
|
14,201,084
|
|
Depreciation
|
|
|
(2,436
|
)
|
|
|
67,099
|
|
Compensation expense
|
|
|
53,804
|
|
|
|
123,093
|
|
Accrued expense
|
|
|
-
|
|
|
|
41,681
|
|
Deferred revenue
|
|
|
449,500
|
|
|
|
449,500
|
|
All miscellaneous other
|
|
|
-
|
|
|
|
3,386
|
|
Total deferred tax asset
|
|
|
11,936,035
|
|
|
|
14,885,843
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
Net deferred tax asset
|
|
|
11,936,035
|
|
|
|
14,885,843
|
|
Less: valuation allowance
|
|
|
(11,936,035
|
)
|
|
|
(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 December 31, 2018, was decreased by $2,949,808 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%. The change in the
blended tax rate reduced the 2017 net operating loss carry forward deferred tax assets by approximately $4,407,232.
NOTE 11 – SUBSEQUENT EVENTS
On January 5, 2019, InsPro LLC entered into a financing
arrangement with PNC Equipment Finance, LLC to finance the purchase of certain Microsoft perpetual software licenses and software
subscription and maintenance. The amount financed was $801,843, which included $756,456 cost of purchased software plus $45,387
of applicable sales tax. The financing arrangement commenced on January 5, 2019, has an annual interest rate of 6.1% and consists
of 36 equal monthly payments of principal, interest and applicable sales tax of $24,432 commencing on February 1, 2019 and ending
on January 1, 2022.
On February 28, 2019, InsPro LLC entered into a financing
arrangement with IBM Credit, LLC to finance the purchase of perpetual software licenses for certain IBM products. The amount financed
was $1,147,712. The financing arrangement has an annual interest rate of 7.13% and consists of 24 equal monthly payments of principal,
interest of $51,456, which commenced in March, 2019 and will end on February 1, 2021.