Property and Equipment (Net of Accumulated Depreciation)

9 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Property and Equipmentr (Net of Accumulated Depreciation)

NOTE 6 – PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:

		September 30			December 31
		2015			2014
Building, furniture, fixtures, equipment and leasehold improvements located in Calabasas, California	$	7,546,846		$	7,269,449
Furniture, fixtures, equipment and leasehold improvements located in Woodland Hills, California		2,844,550			2,633,536
Accumulated depreciation and amortization		(2,986,945	)		(2,637,966	)
Land located in Calabasas, California		1,787,485			1,787,485
Computer software under development		172,127			1,457,802
Property and equipment, net	$	9,364,063		$	10,510,306

Depreciation on the Calabasas building is computed using the straight line method over 39 years. Depreciation on furniture, fixtures and equipment in the Calabasas building is computed using the straight line method over 3 to 15 years. Amortization of leasehold improvements in the Calabasas building is being computed using the shorter of the useful life of the leasehold improvements or the remaining years of the lease.

Depreciation on furniture, fixtures and equipment located in Woodland Hills is computed using the straight line method over 3 to 7 years. Amortization of leasehold improvements on property located in Woodland Hills is computed using the shorter of the useful life of the leasehold improvements or the remaining years of the lease.

Depreciation and amortization expense on all property and equipment for the three and nine months ended September 30, 2015, was $114,634 and $348,979, respectively, and for the three and nine months ended September 30, 2014, was $144,074 and $422,009, respectively.

The Calabasas building has generated rental revenues in the amount of $51,552 and $140,518 for the three and nine months ended September 30, 2015, respectively, and $292,974 and $756,565 for the three and nine months ended September 30, 2014, respectively. The Calabasas building has incurred operating expenses, which included depreciation, in the amount of $180,146 and $524,351 for the three and nine months ended September 30, 2015, respectively, and $226,794 and $610,584 for the three and nine months ended September 30, 2014, respectively. These amounts are included in other income from insurance company operation and other operating expenses, respectively, in the Company’s consolidated statements of operations.

On September 7, 2014, a lease from a single tenant occupying approximately 32,403 square feet of the Calabasas building ended, and the tenant has vacated the premises. On October 9, 2015, the Company moved its home office into the vacated space. The Company’s month-to-month lease of the home office in Woodland Hills, California, ended effective October 15, 2015.

The total square footage of the Calabasas building is 46,884, including common areas. As of September 30, 2015, 10,292 square feet of the Calabasas building was leased to non-affiliated entities, and 4,189 square feet was vacant and available to be leased to non-affiliated entities.

The Company capitalizes certain computer software costs purchased from outside vendors for internal use. These costs also include configuration and customization activities, coding, testing and installation. Training costs and maintenance are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditure will result in additional functionality. The capitalized costs will not be depreciated until the software is placed into production.

On October 9, 2015, the Company concluded that a charge for impairment of the Company’s capitalized computer software costs, related to a contract entered into on November 1, 2012, was required under GAAP. The capitalized costs which were all incurred through the quarter ended June 30, 2015, included $1,287,460 of paid and $223,442 of accrued unpaid invoices from the software vendor, Insurance Systems, Inc. (“ISI”). The impact of this impairment to the Company’s consolidated statements of operations is a charge of $1,287,460 before income taxes in the quarter ended September 30, 2015. The Company does not intend to pay the accrued unpaid invoices which have been reversed from the accrued expenses and other liabilities and capitalized computer software costs as of September 30, 2015. In accordance with Accounting Standards Codification (“ASC”) Topic 855, “Subsequent Events,” this impairment is reported as a subsequent event on the Company’s consolidated financial statements as of September 30, 2015. The decision to impair the asset was based on the Company’s beliefs that the ISI software had not achieved and would not be able to achieve the Company’s expected implementation targets and that the Company was unable to renegotiate the terms of its agreement with ISI. The fair value of the capitalized costs was deemed to be $0. The charge is included in other operating expenses in the consolidated statements of operations for the three and nine months ended September 30, 2015.