UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019
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 Baldwin Tower | ||
| Eddystone, Pennsylvania | 19022 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(484) 654-2200
Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer o | Accelerated Filer o |
| Non-Accelerated Filer x | Smaller Reporting Company x |
| Emerging Growth Company o |
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x
The aggregate market value of common stock, par value $0.001 per share, held by non-affiliates at June 28, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter) was $1,330,769. Such aggregate market value was computed by reference to the closing price of the common stock of the registrant on the Over-the-Counter Bulletin Board on June 28, 2019.
As of March 25, 2020, there were 59,673,655 shares of the registrant’s common stock, par value $0.001 per share, outstanding.
Documents incorporated by reference
None.
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain of the statements contained in this Annual Report on Form 10-K, including in the Business description, the “Management’s Discussion and Analysis of Financial Condition and Results” 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 our operations and other similar statements. Various factors, including competitive pressures, market interest rates, regulatory changes, customer defaults or insolvencies, litigation, acquisition of businesses that do not perform as we expect or that are difficult for us to integrate or control, adverse resolution of any contract or other disputes with customers could cause actual outcomes and results to differ materially from those described in forward-looking statements.
The words “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. While we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report on Form 10-K, 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 Annual Report on Form 10-K 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.
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| Item 1. | Business. |
Overview
InsPro Technologies Corporation (“InsPro Technologies”, “we”, “our”) is a technology company that provides InsPro EnterpriseTM, which is a software application, used by insurance companies and administrators in the insurance industry.
We acquired Atiam Technologies, L.P. on October 1, 2007. HBDC Acquisition, LLC, which changed its name to InsPro Technologies, LLC (“InsPro LLC”) on May 14, 2009, develops, sells and supports our InsPro Enterprise software application. InsPro Enterprise is a comprehensive, web-based insurance administration software application, which was introduced by Atiam Technologies, L.P. in 2004. InsPro Enterprise clients include insurance carriers and third party administrators. We market InsPro Enterprise as a licensed software application, and we realize revenue from the sale of the software licenses, application service provider fees, software maintenance fees and consulting and implementation services.
During 2005 through October 1, 2007 our operations were primarily that of our former Telesales business, which we effectively sold in 2009.
InsPro Enterprise
Product Evolution and Development
InsPro LLC, and its predecessor, Systems Consulting Associates, Inc. (“SCA”), was founded in 1986 by Robert J. Oakes as a programming and consulting services company. In 1988, SCA entered into a long-term contract with Provident Mutual Insurance Company to develop, maintain, install, support and enhance IMACS, which was an insurance direct marketing and administration software system. IMACS was the precursor to InsPro Enterprise. InsPro Technologies dedicated four years, from 2001 to 2005, to developing its principal product, the initial version of InsPro Enterprise, which is a comprehensive, scalable and modular web-based insurance marketing, claims administration and policy servicing platform.
Product and Services
We offer both a licensed and an application service provider (“ASP”) use of InsPro Enterprise, which is used for insurance administration and marketing for group and individual insurance business lines. InsPro Enterprise efficiently processes agent, direct market, worksite and web site generated business.
During 2019, we earned $14,892,216 in revenue of which 27% was earned from Physicians Mutual Insurance Company, 19% earned from various subsidiaries of CapGemini S.A and 10% from Aetna Senior Supplemental Insurance.
InsPro Enterprise incorporates a modular design, which enables the customer to purchase only the functionality needed, thus minimizing the customer’s implementation cost and time necessary to implement InsPro Enterprise. InsPro Enterprise can be tailored to the requirements of a wide range of customers from the largest insurance companies and marketing organizations to small third party administrators, operating in environments ranging from a single server environment to mainframe installations. InsPro Enterprise currently supports a wide range of insurance distribution channels, including the Internet, traditional direct marketing, agent-generated, individual and group plans, worksite and association-booked business, and supports underwritten as well as guaranteed issue insurance products including long term care, Medicare supplement, critical illness, long and short term disability, whole and term life, comprehensive major, hospital indemnity and accidental death and dismemberment.
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An InsPro EnterpriseTM software license entitles the purchaser a perpetual license to a copy of the InsPro Enterprise software installed at a single client location, which may be used to drive a production and model office instance of the application. The ASP Hosting Service enables a client to lease InsPro Enterprise, paying only for that capacity required to support its business. ASP hosting clients access an instance of InsPro Enterprise installed on our servers located at a third party’s site. The ASP Hosting Service can also enable a client to outsource its application management of its perpetually licensed InsPro Enterprise software to InsPro Technologies.
Software maintenance fees apply to both licensed and ASP clients. Maintenance fees cover periodic updates to the application and the InsPro Enterprise Help Desk.
Consulting and implementation services are generally associated with the implementation of an InsPro Enterprise instance for either an ASP or licensed client, and cover such activity as InsPro Enterprise installation, configuration, modification of InsPro Enterprise functionality, client insurance plan set-up, client insurance document design and system documentation.
InsPro Enterprise software agreements with our clients often involve multiple elements. We allocate revenue to each element based on the relative fair value or the residual method, as applicable using vendor specific objective evidence to determine fair value, which is based on prices charged when the element is sold separately. Software revenue is recognized when persuasive evidence of an arrangement exists, the software is delivered in accordance with all terms and conditions of the customer contracts, the fee is fixed or determinable and collectability is probable. Maintenance revenue, which pertains to post-contract customer support, including technical support and unspecified when-and-if available software upgrades, is recognized ratably over the maintenance agreement term. If fair value does not exist for any undelivered element, revenue is not recognized until the earlier of (i) delivery of such element or (ii) when fair value of the undelivered element is established, unless the undelivered element is a service, in which case revenue is recognized as the service is performed once the service is the only undelivered element.
Sales, Marketing and Operations
InsPro Technologies markets its products and services directly to prospective insurance carriers and third party administrators via trade shows, advertising in industry publications and direct mail.
InsPro Technologies also provides professional services to its clients, which include system implementation, legacy system migration to InsPro Enterprise, InsPro Enterprise application management, web development, InsPro Enterprise help desk and hosting service support.
InsPro Technologies utilizes several outside IT consulting firms, who assist with InsPro Technologies’ implementation and post implementation services to our clients. Implementation services include assisting clients in setting up their insurance products in InsPro Enterprise, providing modifications to InsPro Enterprise’s functionality to support the client’s business, interfacing InsPro Enterprise with the client’s other systems, automation of client correspondence to their customers and data conversion from the client’s existing systems to InsPro Enterprise. Post implementation services include these same services to existing clients supporting their ongoing utilization of InsPro Enterprise.
Recent Events
On January 30, 2020, the Company, Majesco, a California corporation (the “Buyer”), and Majesco Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Buyer (“Merger Sub”) entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, at the closing (the “Closing”) of the Merger (the “Effective Time”), Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of the Buyer. Pursuant to the Merger Agreement, the Company is required to solicit stockholder approval of the Merger Agreement and to file a proxy statement relating to such solicitation with the Securities and Exchange Commission (SEC) within a specified time period.
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If the Merger is consummated, the Buyer will pay the Company $12 million in cash, subject to certain adjustments as set forth in the Merger Agreement (including for cash and certain debt of the Company) (the “Merger Consideration”).
At the Effective Time, and subject to the terms and conditions of the Merger Agreement, the outstanding shares of the Company’s preferred and common stock, other than shares with respect to which appraisal rights are properly exercised and not withdrawn under Delaware law, will automatically be converted into the right to receive allocations of the Merger Consideration pursuant to the Merger Agreement and the Company’s Certificate of Incorporation and all amendments thereto (collectively, the “Company Charter”).
Proceeds of the Merger will be allocated in accordance with the Company’s Charter. Because the amount of Merger Consideration is substantially less than the aggregate minimum liquidation preferences of the Series C Preferred Stock and Series B Preferred Stock, all Merger Consideration will be paid to the holders of those series of preferred stock. In particular, the holders of the Company’s Common Stock and Series A Preferred Stock, will not receive any consideration in the Merger. Additionally, each Company option or warrant outstanding immediately prior to the Effective Time, whether or not then vested and exercisable, will be cancelled without the receipt of any consideration.
The Company expects that the Merger will be completed early in the second quarter of 2020, subject to the satisfaction of all closing conditions. See Note 10 – Subsequent Events.
Competition
The market for insurance policy administration systems and services is very competitive, rapidly evolving, highly fragmented and subject to technological change. Many of our competitors are more established than we are and have greater name recognition, a larger customer base and greater financial, technical and marketing resources than InsPro Technologies.
InsPro Technologies is focused on the group voluntary (workplace) life and health products, senior health, disability, affinity, long term care and association segments of the insurance industry. InsPro Technologies competes with companies such as Accenture (Accenture Life Insurance & Annuity Platform), Synnex Corporation (Concentrix/GIAS and Genelco Software Solutions), Computer Sciences Corporation (FutureFirst), EXLService Holdings (LifePro), Majesco, and Fiserv Inc. (ID3), as well as with such smaller enterprises as Management Data, Inc., Flexible Architecture, and Simplified Technology, which is a privately held company that provides Fast Insurance Components. To compete we use best practice technologies and methods incorporated into InsPro EnterpriseTM, which provides customers with a user-friendly, flexible, modular and cost-effective insurance administrative software system. InsPro Enterprise’s modular design, scalability and ASP hosting service option makes InsPro Enterprise a compelling insurance administrative system for clients ranging from small third party administrators to the largest insurance carriers.
Employees
As of December 31, 2019 we had 50 full time and 3 part time employees for a total of 53 employees. None of our employees are members of any labor union and we are not a party to any collective bargaining agreement. We believe that the relationship between our management and our employees is good.
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Intellectual Property and Proprietary Rights
We rely on a combination of trademark, copyright and trade secret laws in the United States and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand.
Corporate Information
We were incorporated under the laws of the state of Nevada on October 21, 2004 as Darwin Resources Corp. (“Darwin-NV”), an exploration stage company engaged in mineral exploration. On November 22, 2005, Darwin-NV merged with and into its newly-formed wholly-owned subsidiary, Darwin Resources Corp., a Delaware corporation (“Darwin-DE”), solely for the purpose of changing the company’s state of incorporation from Nevada to Delaware. On November 23, 2005, HBDC II, Inc., a newly-formed wholly-owned subsidiary of Darwin-DE, was merged with and into Health Benefits Direct Corporation, a privately-held Delaware corporation engaged in direct marketing and distribution of health and life insurance and related products primarily over the Internet, and the name of the resulting entity was changed from Health Benefits Direct Corporation to HBDC II, Inc. Following this merger, Darwin-DE changed its name to Health Benefits Direct Corporation and, as a result, HBDC II, Inc. became our wholly-owned subsidiary. We formed HBDC Acquisition, LLC on September 6, 2007 in connection with our acquisition of Atiam Technologies, L.P. on October 1, 2007. HBDC Acquisition, LLC, which changed its name to InsPro Technologies, LLC on May 14, 2009, develops, sells and supports our InsPro EnterpriseTM software application. On November 29, 2010, Health Benefits Direct Corporation changed its name to InsPro Technologies Corporation. On September 5, 2019, InsPro Hosting Services LLC (a Delaware Corporation), a wholly-owned subsidiary of InsPro Technologies Corporation, was formed for the purpose of secure hosting business and maintain PCI compliance. Our principal executive offices and the officers are located at 1510 Chester Pike, Suite 400 Baldwin Tower, Eddystone, Pennsylvania 19022. Our telephone number is (484) 654-2200. The web site of our wholly-owned subsidiary InsPro Technologies, LLC is www.inspro.com.
Investor Information
All periodic and current reports, registration statements and other material that we are required to file with the Securities and Exchange Commission (the “Commission”), including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, may be obtained free of charge by writing to us at InsPro Technologies Corporation, 1510 Chester Pike, Suite 400 Baldwin Tower, Eddystone, Pennsylvania 19022 or e-mailing us at finance@inspro.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the Commission. Our Internet websites and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
The public may also read and copy any materials we have filed with the Commission at the Commission’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an Internet site, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission.
| Item 1A. | Risk factors. |
As a “smaller reporting company,” we are not required to provide the information required by this Item.
| ITEM 1B. | Unresolved Staff Comments. |
As a “smaller reporting company,” we are not required to provide the information required by this Item.
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| Item 2. | PropertIES. |
We do not own any real estate.
We lease approximately 17,567 square feet of space in Eddystone, Pennsylvania. We lease this office space under a lease agreement with BPG Officer VI Baldwin Tower L.P. The term of this lease, as amended, commenced on August 1, 2007, and will expire on January 31, 2022. The monthly rent was $28,546 per month from January 1, 2017 through January 31, 2018, and was increased to $30,010 per month from January 1, 2018 through January 31, 2022.
| Item 3. | legal proceedings. |
From time to time we may be 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 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
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| Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Market Information
Our common stock has been quoted on the OTCBB since December 6, 2010 under the symbol ITCC.OB, and from December 13, 2005 until December 3, 2010 under the symbol HBDT.OB. Prior to December 13, 2005, there was no active market for our common stock.
The following table sets forth the high and low bid prices for our common stock for the periods indicated, as reported by the OTCBB. The prices state inter-dealer quotations, which do not include retail mark-ups, mark-downs or commissions. Such prices do not necessarily represent actual transactions.
| 2018 | High | Low | ||||||
| First quarter, ended March 31, 2018 | $ | 0.065 | $ | 0.030 | ||||
| Second quarter, ended June 30, 2018 | 0.1698 | 0.065 | ||||||
| Third quarter, ended September 30, 2018 | 0.143 | 0.0775 | ||||||
| Fourth quarter, ended December 31, 2018 | 0.09 | 0.0311 | ||||||
| 2019 | ||||||||
| First quarter, ended March 31, 2019 | 0.0648 | 0.04 | ||||||
| Second quarter, ended June 30, 2019 | 0.0598 | .0317 | ||||||
| Third quarter, ended September 30, 2019 | 0.045 | 0.026 | ||||||
| Fourth quarter, ended December 31, 2019 | 0.038 | 0.02 | ||||||
| 2020: | ||||||||
| First quarter through March 23, 2020 | .003 | .003 | ||||||
Holders of Record
Based on information furnished by our transfer agent, as of March 30, 2020, we had approximately 104 holders of record of our common stock.
Dividends
We have not declared any cash dividends on our common stock during the last two fiscal years. We have no intention of paying cash dividends in the foreseeable future on our common stock.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
We have not issued any unregistered securities that were not previously disclosed on our quarterly reports on Form 10-Q or current reports on Form 8-K filed during the fiscal year.
| ITEM 6. | SELECTED FINANCIAL DATA |
As a “smaller reporting company,” we are not required to provide the information required by this Item.
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| Item 7. | 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 InsPro Technologies, LLC subsidiary (“InsPro LLC”).
InsPro EnterpriseTM is a comprehensive, web-based insurance administration software application. InsPro Enterprise was introduced by Atiam Technologies L.P. in 2004. InsPro Enterprise clients include insurance carriers and third party administrators. We market InsPro Enterprise as a licensed software application, and we realize revenue from the sale of the software licenses, application service provider fees, software maintenance fees and professional services.
On January 30, 2020, we entered into an agreement and plan of merger (the “Merger Agreement”) with Majesco, a California corporation (the “Buyer”) and Majesco Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Buyer (“Merger Sub”), pursuant to which and upon the terms and subject to the conditions thereof, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of the Buyer, as discussed in more detail under the heading “Recent Events” beginning on page 6 and in Note 10 to the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K beginning on page F-33.
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Critical Accounting Policies
Financial Reporting Release No. 60, which was released by 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. The preparation of financial statements 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 2019 and 2018 include the allowance for doubtful accounts, valuation of stock-based compensation, the useful lives and valuation of property and equipment, and deferred revenue. Actual results may differ from these estimates under different assumptions or conditions.
The Company offers InsPro Enterprise on 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 service enables a client to lease the InsPro Enterprise software, paying only for that capacity required to support their business. ASP and hosting clients access InsPro Enterprise installed on clients’ 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 clients. Maintenance fees cover periodic updates to the application and the InsPro Enterprise help desk.
The Company’s consulting and implementation services are generally associated with the implementation of InsPro Enterprise for either an ASP or licensed client, and cover such activity as InsPro Enterprise installation, configuration, modification of InsPro Enterprise functionality, client insurance plan set-up, and client insurance document design and system documentation.
The Company’s revenue is recognized under FASB ASC 606 Revenue from Contracts with Customers (“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.
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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.
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. 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.
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 customer’s 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”). 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.
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 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.
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Results of Operations for the Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
Revenues
For the year ended December 31, 2019 (“2019”) and 2018 (“2018”) our revenues include the following:
| For the Years Ended December 31, | Increase (Decrease) | |||||||||||||||
| 2019 | 2018 | Dollars | Percentage | |||||||||||||
| Professional services | $ | 3,842,058 | $ | 11,018,426 | $ | (7,176,368 | ) | -65.1 | % | |||||||
| ASP and hosting revenue | 8,026,348 | 8,145,399 | (119,051 | ) | -1.5 | % | ||||||||||
| Sales of software licenses | 422,793 | 132,060 | 290,733 | 220.2 | % | |||||||||||
| Maintenance revenue | 2,209,493 | 1,785,708 | 423,785 | 23.7 | % | |||||||||||
| Reseller fee revenue | 375,000 | 500,000 | (125,000 | ) | -25.0 | % | ||||||||||
| Sale of equipment | - | 23,797 | (23,797 | ) | -100.0 | % | ||||||||||
| Other revenue | 16,524 | 28,965 | (12,441 | ) | -43.0 | % | ||||||||||
| Total | $ | 14,892,216 | $ | 21,634,355 | $ | (6,742,139 | ) | -31.2 | % | |||||||
| · | In 2019, 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 in 2019. The Company ended implementation services to our largest client in 2019 and this client terminated all services in the 4th quarter of 2019. 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 2019, our ASP and hosting revenue decreased as a result of the loss of a client in the fourth quarter of 2018 partially offset by an increase in volume 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 2019, we earned $422,793 of software license revenue, of which $400,000 was the amount recognized upon the completion of the implementation of insurance products for an existing client. |
| · | In 2019, our maintenance revenue increased primarily due to increased fees from one of our largest clients. |
| · | In 2019, our reseller fee revenue decreased as compared to 2018. The remaining reseller fees are amortized as defined in the agreement. The refundability period terminated on September 1, 2019. |
| · | In 2018, we sold computer equipment to a client in connection with their use of InsPro EnterpriseTM . In 2019, no computer equipment was sold to clients. |
| · | In 2019, other revenue decreased primarily due to the decline in renewal insurance commissions received in connection with the Company’s former telesales call center and external agent produced agency business, The Company ceased selling insurance products in 2019. |
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Cost of Revenues
Our cost of revenues consisted of the following:
| For the Years Ended December 31, | Increase (Decrease) | |||||||||||||||
| 2019 | 2018 | Dollars | Percentage | |||||||||||||
| Compensation, employee benefits and related taxes | $ | 5,948,781 | $ | 6,614,016 | $ | (665,235 | ) | -10.1 | % | |||||||
| Professional fees | 4,109,305 | 6,492,893 | (2,383,588 | ) | -36.7 | % | ||||||||||
| Depreciation | 506,371 | 186,380 | 319,991 | 171.7 | % | |||||||||||
| Rent, utilities, telephone and communications | 423,545 | 397,587 | 25,958 | 6.5 | % | |||||||||||
| Other cost of revenues | 287,205 | 376,410 | (89,205 | ) | -23.7 | % | ||||||||||
| $ | 11,275,207 | $ | 14,067,286 | $ | (2,792,079 | ) | -19.8 | % | ||||||||
| · | In 2019, our compensation, employee benefits and related taxes component of cost of revenues decreased as compared to 2018 primarily as a result of a decrease to employee staffing. |
| · | In 2019, our professional fees component of cost of revenues decreased as compared to 2018 primarily as a result of decreased utilization of several outside consulting firms, which were assisting us with modifications to InsPro Enterprise’s functionality and a client’s implementation of InsPro EnterpriseTM , which was largely completed in 2018. |
| · | In 2019, our depreciation expense component of cost of revenues increased as compared to 2018 as a result of depreciation associated with the acquisition of certain third party perpetual licenses acquired in 2019. |
| · | In 2019, our other cost component of cost of revenues decreased as compared to 2018 primarily due to the cost of 3rd party software, which was ultimately resold, in First 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 $3,617,009 in 2019, as compared to $7,567,069 in 2018.
14
Selling, General and Administrative Expenses
Our selling, general and administrative expense consisted of the following:
| For the Years Ended December 31, | Increase (Decrease) | |||||||||||||||
| 2019 | 2018 | Dollars | Percentage | |||||||||||||
| Compensation, employee benefits and related taxes | $ | 2,456,544 | $ | 3,223,286 | $ | (766,742 | ) | -23.8 | % | |||||||
| Advertising and other marketing | 21,965 | 70,961 | (48,996 | ) | -69.0 | % | ||||||||||
| Depreciation | 158,269 | 71,797 | 86,472 | 120.4 | % | |||||||||||
| Rent, utilities, telephone and communications | 143,880 | 161,307 | (17,427 | ) | -10.8 | % | ||||||||||
| Professional fees | 1,023,921 | 457,054 | 566,867 | 124.0 | % | |||||||||||
| Other general and administrative | 877,918 | 942,487 | (64,569 | ) | -6.9 | % | ||||||||||
| $ | 4,682,497 | $ | 4,926,892 | $ | (244,395 | ) | -5.0 | % | ||||||||
| · | In 2019 our compensation, employee benefits and related taxes decreased as compared to 2018 primarily as a result of decreased employee staffing. |
| · | In 2019 our depreciation expense increased as compared to 2018 as a result of depreciation associated with the acquisition of certain third party perpetual licenses acquired in late 2018 and in First Quarter 2019. |
| · | In 2019 our professional fees increased as compared to 2018 primarily due to higher legal expenses related to contract activity. |
| · | In 2019 our other general and administrative expenses decreased as compared to 2018 primarily due to lower computer software subscription and maintenance expense contracted in early 2019 offset by favorable impact of a release of a consulting expense accrual. |
Income from operations
As a result of the aforementioned factors, we reported a loss from continuing operations before income taxes of $1,065,488 in 2019, as compared to income of $2,640,177 in 2018.
Other income (expenses)
In 2019 our interest expense of $ 129,247 increased as compared to 2018 interest expense of $30,722 primarily due to interest on equipment loans, which originated in First Quarter 2019. Interest expense is attributable to interest on the equipment loans, finance leases and notes payable.
15
Income before income taxes
As a result of the aforementioned factors, we reported a loss before income taxes of $1,194,735 in 2019, as compared to net income before income taxes of $2,609,455 in 2018.
Provision for income tax expense
In 2019, due to the loss before income taxes, our tax provision for income taxes was $0 as compared to $131,000 in 2018. In 2018 our provision for income taxes was $131,000, which consisted of a $13,000 federal income tax benefit and $144,000 of Pennsylvania corporate income tax. The effective tax rate for 2018 differed from the U.S. federal statutory rate primarily due to net operating losses carried forward from prior years (“NOLs”), which offsets 100% of current federal income tax expense. In computing the Company’s state corporate income tax in 2018 the Company’s state NOL’s are limited to 35% of the Company’s state income tax.
Net income (loss)
As a result of these factors discussed above, we reported net loss of $1,194,735, or $0.03 and $0.03 per share on a basic and a fully diluted basis, respectively, in 2019 as compared to a net income of $2,478,455, or $0.06 and $0.01 per share on a basic and a fully diluted basis, respectively, in 2018.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2019, we had a cash balance of $4,259,775 and working capital of $279,038.
Net cash provided by operations was $229,489 in 2019 as compared to net cash provided by operations of $705,602 in 2018. Impacting our cash flow from operations was our net loss of $1,194,735 in 2019 as compared to net income of $2,478,455 in 2018 and:
| · | Decrease in accounts receivable of $1,677,515 in 2019, which is primarily the result of enhanced collection in 2019 as compared to 2018. |
| · | Decreases in prepaid assets of $108,433 in 2019, which is primarily the result of amortization of prepaid software maintenance. |
| · | Decreases in accounts payable of $79,177 in 2019, which is primarily the result of the payment of amounts owed to outside IT consulting firms incurred prior to 2019. |
| · | Decreases in accrued expenses of $183,547 in 2019 was primarily due to the release of prior period accrued consulting fees. |
In addition to cash used in operating activities, we incurred non-cash gain and expenses, which were included in our net loss, including:
| · | Recorded depreciation expense of $664,640 and $258,177 in 2019 and 2018, respectively. |
| · | Recorded stock-based compensation expense of $6,250 and $6,099 in 2019 and 2018, respectively. |
16
Net cash used in investing activities in 2019 was $216,839 as compared to $353,982 in 2018. The decrease was primarily the result of reduced purchases and increases in financed 3rd party software.
Net cash used in financing activities in 2019 was $853,535 as compared to cash used in financing activities in 2018 of $268,499.
| · | On January 5, 2019, InsPro LLC entered into a financing arrangement with an unaffiliated company. Payment terms include 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 an unaffiliated company. Payment terms include 24 equal monthly payments of principal, interest of $51,456, which commenced in March, 2019 and will end on February 1, 2021 |
| · | Payments on finance lease obligations pertain to leases to finance the purchase of equipment used for operations. |
| · | Payments on notes payable pertain to financing two of the Company’s corporate insurance policy premiums. |
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 year ended December 31, 2019, the Company’s net loss was $1,194,735 and cash provided by operations was $229,489. As of December 31, 2019, the Company had $4,259,775 of cash, working capital of $279,038 and the Company’s shareholder’s equity was $1,680,562.
Our liquidity needs for the next 12 months and beyond are principally for the funding of our operations, payments on finance 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 7A. | Quantitative and Qualitative Disclosures About Market Risk |
As a “smaller reporting company”, we are not required to provide the information required by this Item.
17
| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
FINANCIAL STATEMENTS
TABLE OF CONTENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of InsPro Technologies Corporation.
Opinion on the Financial Statement
We have audited the accompanying Consolidated Balance Sheet of InsPro Technologies Corporation (theCompany) as of December 31, 2019 and 2018 and the related Consolidated Statement of Operations, Changes inShareholders’ Equity, and Cash Flows for each of the years in the two year period ended December 31, 2019,and the related Notes (collectively referred to as the financial statements). In our opinion, the financial statementspresent fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018and the results of its operations and its cash flows for each of the years in the two year period ended December31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibilityis to express an opinion on the Company’s consolidated financial statements based on our audit. We are a publicaccounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) andare required to be independent with respect to the Company in accordance with the U.S. federal securities lawsand the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we planand perform the audit to obtain reasonable assurance about whether the consolidated financial statements arefree of material misstatement, whether due to error or fraud. The Company is not required to have, nor were weengaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are requiredto obtain an understanding of internal control over financial reporting, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we expressno such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements,whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includedexamining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financialstatements. Our audit also included evaluating the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the financial statements. We believe that our auditprovide a reasonable basis for our opinion.
/s/ Assurance Dimensions
We have served as the Company’s auditor since 2017.
Margate, Florida
March 25, 2020
F-2
| INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES |
| CONSOLIDATED BALANCE SHEETS |
| As of | ||||||||
| December 31, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 4,259,775 | $ | 5,100,660 | ||||
| Accounts receivable, net | 1,469,082 | 3,146,597 | ||||||
| Tax receivable | 14,631 | 13,000 | ||||||
| Prepaid expenses | 468,983 | 305,643 | ||||||
| Total current assets | 6,212,471 | 8,565,900 | ||||||
| LONG TERM ASSETS: | ||||||||
| Property and equipment, net | 1,514,055 | 594,767 | ||||||
| Operating lease right of use asset | 702,867 | - | ||||||
| Prepaid assets | 135,887 | - | ||||||
| Total long term assets | 2,352,809 | 594,767 | ||||||
| Total assets | $ | 8,565,280 | $ | 9,160,667 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Notes payable | $ | 41,869 | $ | 39,025 | ||||
| Accounts payable | 1,134,580 | 1,213,758 | ||||||
| Accrued expenses | 327,800 | 905,531 | ||||||
| Current portion of finance lease obligations | 149,992 | 115,771 | ||||||
| Current portion of equipment loans | 854,205 | - | ||||||
| Current portion of operating lease obligations | 326,270 | - | ||||||
| Deferred revenue | 3,098,718 | 2,850,976 | ||||||
| Income tax payable | - | 141,000 | ||||||
| Total current liabilities | 5,933,434 | 5,266,061 | ||||||
| LONG TERM LIABILITIES: | ||||||||
| Deferred revenue, less current portion | - | 875,000 | ||||||
| Finance lease obligations, less current portion | 188,975 | 150,559 | ||||||
| Equipment loans, less current portion | 385,712 | - | ||||||
| Operating lease obligations, less current portion | 376,597 | - | ||||||
| Total long term liabilities | 951,284 | 1,025,559 | ||||||
| Total liabilities | 6,884,718 | 6,291,620 | ||||||
| SHAREHOLDERS' EQUITY: | ||||||||
| Preferred stock ($.001 par value; 20,000,000 shares authorized) | ||||||||
| Series A convertible preferred stock; 3,437,500 shares designated, 1,270,250 | ||||||||
| shares issued and outstanding (liquidation value $12,702,500) | 1,271 | 1,271 | ||||||
| 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, | ||||||||
| 41,673,655 shares issued and outstanding) | 41,673 | 41,673 | ||||||
| Additional paid-in capital | 65,377,611 | 65,371,361 | ||||||
| Accumulated deficit | (63,746,554 | ) | (62,551,819 | ) | ||||
| Total shareholders' equity | 1,680,562 | 2,869,047 | ||||||
| Total liabilities and shareholders' equity | $ | 8,565,280 | $ | 9,160,667 | ||||
See accompanying notes to consolidated financial statements.
F-3
See accompanying notes to consolidated financial statements.
F-4
| INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY |
| FOR THE YEARS ENDED DECEMBER 31, 2019 and 2018 |
| Series A Preferred Stock, | Series B Preferred Stock, | Series C Preferred Stock, | Common Stock, $.001 | |||||||||||||||||||||||||||||||||||||||||
| $.001 Par Value | $.001 Par Value | $.001 Par Value | Par Value | Shareholders' | ||||||||||||||||||||||||||||||||||||||||
| Number
of Shares |
Amount | Number
of Shares |
Amount | Number
of Shares |
Amount | Number
of Shares |
Amount | Paid-in Capital |
Accumulated Deficit |
Equity (Deficit) |
||||||||||||||||||||||||||||||||||
| Balance - December 31, 2017 | 1,276,750 | $ | 1,277 | 5,307,212 | $ | 5,307 | 1,254,175 | $ | 1,254 | 41,543,655 | $ | 41,543 | $ | 65,365,386 | $ | (65,030,274 | ) | $ | 384,493 | |||||||||||||||||||||||||
| Amortization of deferred compensation | 6,099 | 6,099 | ||||||||||||||||||||||||||||||||||||||||||
| Net income for the period | 2,478,455 | 2,478,455 | ||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series A Preferred Stock into Common Stock | (6,500 | ) | (6 | ) | 130,000 | 130 | (124 | ) | - | |||||||||||||||||||||||||||||||||||
| Balance - December 31, 2018 | 1,270,250 | $ | 1,271 | 5,307,212 | $ | 5,307 | 1,254,175 | $ | 1,254 | 41,673,655 | $ | 41,673 | $ | 65,371,361 | $ | (62,551,819 | ) | $ | 2,869,047 | |||||||||||||||||||||||||
| Amortization of deferred compensation | 6,250 | 6,250 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss for the period | (1,194,735 | ) | (1,194,735 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance - December 31, 2019 | 1,270,250 | $ | 1,271 | 5,307,212 | $ | 5,307 | 1,254,175 | $ | 1,254 | 41,673,655 | $ | 41,673 | $ | 65,377,611 | $ | (63,746,554 | ) | $ | 1,680,562 | |||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
F-5
| INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| For the Years Ending December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net (loss) income | $ | (1,194,735 | ) | $ | 2,478,455 | |||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
| Depreciation | 664,640 | 258,177 | ||||||
| Stock-based compensation | 6,250 | 6,099 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 1,677,515 | (1,603,208 | ) | |||||
| Tax Receivable | (1,631 | ) | (13,000 | ) | ||||
| Prepaid expenses | 108,432 | 135,709 | ||||||
| Other current assets | - | 3,806 | ||||||
| Accounts payable | (79,177 | ) | (270,946 | ) | ||||
| Accrued expenses | (183,547 | ) | (221,065 | ) | ||||
| Deferred revenue | (627,258 | ) | (39,425 | ) | ||||
| Total other income | (141,000 | ) | (29,000 | ) | ||||
| Net cash provided by operating activities | 229,490 | 705,602 | ||||||
| Cash Flows From Investing Activities: | ||||||||
| Purchase of property and equipment | (216,839 | ) | (353,982 | ) | ||||
| Net cash used in investing activities | (216,839 | ) | (353,982 | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds on notes payable | 2,844 | (87,145 | ) | |||||
| Payments on capital leases | (146,741 | ) | (181,354 | ) | ||||
| Payments on equipment loans | (709,638 | ) | - | |||||
| Net cash used in financing activities | (853,535 | ) | (268,499 | ) | ||||
| Net increase (decrease) in cash | (840,885 | ) | 83,121 | |||||
| Cash - beginning of the period | 5,100,660 | 5,017,539 | ||||||
| Cash - end of the period | $ | 4,259,775 | $ | 5,100,660 | ||||
| Supplemental Disclosures of Cash Flow Information | ||||||||
| Cash payments for income taxes | $ | 141,000 | $ | 173,000 | ||||
| Cash payments for interest | $ | 129,247 | $ | 30,722 | ||||
| Non cash investing and financing activities: | ||||||||
| Equipment acquired through capital leases | $ | 219,378 | $ | 228,968 | ||||
| Equipment and prepaid assets aquired through equipment loans | $ | 1,949,555 | $ | - | ||||
| Operating lease right of use asset and operating lease liabilities | $ | 702,867 | $ | - | ||||
See accompanying notes to consolidated financial statements.
F-6
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 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 EnterpriseTM 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, InsPro Hosting Services, LLC and Insurance Specialist Group. All material inter-company balances and transactions have been eliminated.
Use of estimates
The preparation of consolidated 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 2019 and 2018 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 equivelents
The Company had no cash equivalents during the two years ended December 31, 2019 and 2018. The Company considers all liquid debt instruments with original maturities of three months or less to be cash equivelents.
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, 2019 and 2018, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amount of $0.
F-7
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2019 and 2018 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. The Company did not record an impairment charge for the years ended December 31, 2019 and 2018.
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.
F-8
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
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, 2019. As of December 31, 2019, the tax years ended December 31, 2019, 2018 and 2017 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 Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Common stock | 41,673,655 | 41,673,655 | ||||||
| Conversion of series A convertible preferred stock issued and outstanding into common stock | - | 25,405,000 | ||||||
| Conversion of series B convertible preferred stock issued and outstanding into common stock | - | 106,144,240 | ||||||
| Conversion of series C convertible preferred stock issued and outstanding into common stock | - | 25,083,500 | ||||||
| Shares used in computing fully diluted net income (loss) per share | 41,673,655 | 198,306,395 | ||||||
For the year ended December 31, 2019, the effects of common stock equivalents and potentially dilutive securities outstanding during this period, are excluded from the calculation of diluted loss per common share because they are anti-dilutive. The total number of shares including potentially dilutive shares is 198,306,395 as of December 31, 2019.
For the year ended December 31, 2019, the effects of warrants to purchase the Company’s common stock, which were outstanding during this period, 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 December 31, 2019.
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.
F-9
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
The Company offers InsPro EnterpriseTM on both a licensed and an ASP basis. An InsPro Enterprise software license entitles the purchaser a perpetual license to a copy of the InsPro Enterprise software installed at a single client location or hosted by 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, and 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.
F-10
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 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™ 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, | ||||||||
| 2019 | 2018 | |||||||
| Compensation, employee benefits and related taxes | $ | 5,948,781 | $ | 6,614,016 | ||||
| Professional fees | 4,109,305 | 6,492,893 | ||||||
| Depreciation | 506,371 | 186,380 | ||||||
| Rent, utilities, telephone and communications | 423,545 | 397,587 | ||||||
| Other cost of revenues | 287,205 | 376,410 | ||||||
| $ | 11,275,207 | $ | 14,067,286 | |||||
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, | ||||||||
| 2019 | 2018 | |||||||
| Compensation, employee benefits and related taxes | $ | 2,456,544 | $ | 3,223,286 | ||||
| Advertising and other marketing | 21,965 | 70,961 | ||||||
| Depreciation | 158,269 | 71,797 | ||||||
| Rent, utilities, telephone and communications | 143,880 | 161,307 | ||||||
| Professional fees | 1,023,921 | 457,054 | ||||||
| Other general and administrative | 877,918 | 942,487 | ||||||
| $ | 4,682,497 | $ | 4,926,892 | |||||
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.
F-11
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 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”). As of December 31, 2019 and 2018, the Company had $4,269,194 and $5,161,810 of cash in United States bank deposits, of which $500,000 and $501,177 was federally insured and $3,769,194 and $4,660,633 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, 2019 | December 31, 2018 | ||||||||
| Client #1 | 37 | % | 35 | % | |||||
| Client #2 | 24 | % | 20 | % | |||||
| Client #3 | 22 | % | 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, | |||||||||
| 2019 | 2018 | ||||||||
| Client #1 | 27 | % | 33 | % | |||||
| Client #2 | 19 | % | 17 | % | |||||
| Client #3 | 10 | % | 14 | % | |||||
Stock-based compensation
The Company accounts for employee stock-based compensation in accordance with ASC 718-10, "Share-Based Payment," which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock awards, and employee stock purchases based on estimated fair values.
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, suppliers, 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 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 in a retrospective approach for each period presented. Management implemented this standard on January 1, 2019.
Determining Fair Value Under ASC 718-10
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The Company's determination of fair value using an option-pricing model is affected by the stock price as well as assumptions regarding the number of highly subjective variables.
F-12
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company estimates volatility based upon the historical stock price of the Company and estimates the expected term for employee stock options using the simplified method for employees and directors and the contractual term for non-employees. The risk-free rate is determined based upon the prevailing rate of United States Treasury securities with similar maturities.
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and non-lease components in a contract in accordance with the new revenue guidance in ASC 606. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. The Company adopted this guidance effective January 1, 2019. See Note 6 – Operating and Financial Lease Obligations
Recent accounting pronouncements
In August 2018, the FASB issued ASU 2018-13, “Changes to Disclosure Requirements for Fair Value Measurements”, which will improve the effectiveness of disclosure requirements for recurring and nonrecurring fair
value measurements. The standard removes, modifies, and adds certain disclosure requirements, and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is assessing ASU 2018-07 and does not expect it to have a material impact on its accounting and disclosures.
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.
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.
Liquidity
During year ended December 31, 2019, the Company’s net loss was $1,194,735 and cash provided by operations was $229,489. As of December 31, 2019, the Company had $4,259,775 of cash, working capital of $279,038 and the Company’s shareholder’s equity was $1,680,562.
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.
F-13
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
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, | ||||||||
| 2019 | 2018 | |||||||
| Professional services | $ | 3,842,058 | $ | 11,018,426 | ||||
| ASP and hosting revenue | 8,026,348 | 8,145,399 | ||||||
| Sales of software licenses | 422,793 | 132,060 | ||||||
| Maintenance revenue | 2,209,493 | 1,785,708 | ||||||
| Reseller fee revenue | 375,000 | 500,000 | ||||||
| Sale of equipment | - | 23,797 | ||||||
| Other revenue | 16,524 | 28,965 | ||||||
| Total | $ | 14,892,216 | $ | 21,634,355 | ||||
Professional services consist of pre- and post-implementation services pertaining to InsPro Enterprise installation, configuration and modification of InsPro EnterpriseTM 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.
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 3rd party software and sells 3rd 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.
F-14
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 2 – REVENUE AND DEFERRED REVENUE (continued)
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.
The following table discloses changes in unearned revenue as of December 31, 2019 and 2018.
| As of December 31, 2019 | As of December 31, 2018 | |||||||
| Short Term | ||||||||
| Balance at December 31 | $ | 2,850,976 | $ | 2,765,401 | ||||
| Deferral of revenue | 2,014,416 | 2,496,412 | ||||||
| Reclassification of unearned revenue from long term to short term | 875,000 | 125,000 | ||||||
| Recognition of unearned revenue | (2,641,674 | ) | (2,535,837 | ) | ||||
| Balance at December 31 | $ | 3,098,718 | $ | 2,850,976 | ||||
| Long Term | ||||||||
| Balance at December 31 | $ | 875,000 | $ | 1,000,000 | ||||
| Reclassification of unearned revenue from long term to short term | (875,000 | ) | (125,000 | ) | ||||
| Balance at December 31 | $ | - | $ | 875,000 | ||||
Deferral of revenue in the years ended December 31, 2019 and 2018 was $2,014,416 and $2,496,412, 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, 2019 and 2018.
Revenue recognized in the years ended December 31, 2019 and 2018, which was included in the unearned revenue liability balance at the beginning of each year, was $2,641,674 and $2,535,837, respectively. This revenue represents maintenance, professional services, software license fees and Reseller Agreement performance obligations performed during the years ended December 31, 2019 and 2018.
F-15
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 2 – REVENUE AND DEFERRED REVENUE (continued)
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, 2019 and 2018, respectively.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
| Useful Life (Years) | December 31, 2019 | December 31, 2018 | ||||||||||
| Computer equipment and software | 3 | $ | 6,742,089 | $ | 5,158,316 | |||||||
| Office equipment | 4.6 | 145,229 | 145,229 | |||||||||
| Leasehold improvements | 5.4 | 81,933 | 81,933 | |||||||||
| 6,969,251 | 5,385,478 | |||||||||||
| Less accumulated depreciation | (5,455,196 | ) | (4,790,711 | ) | ||||||||
| $ | 1,514,055 | $ | 594,767 | |||||||||
The following table discloses depreciation expense as reported in the statement of operations.
| For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Depreciation included in cost of revenues | $ | 506,371 | $ | 186,380 | ||||
| Depreciation included in selling, general and administrative | 158,269 | 71,797 | ||||||
| Total depreciation | $ | 664,640 | $ | 258,177 | ||||
F-16
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 4 – NOTES PAYABLE
Notes payable at December 31, 2019, consist of two notes payable for insurance premium financing on two of the Company’s insurance policies. The first note commenced on May 3, 2019, has an annual interest rate of 11.01% and consists of 11 monthly payments of principal and interest of $2,974 per month commencing on June 3, 2019 and ending on April 3, 2020. The balance for this note was $11,629 as of December 31, 2019. For the year ended December 31, 2019, the interest expense incurred on this note was $1,464. The second note commenced on July 30, 2019, has an annual interest rate of 8.24% and consisted of eleven payments of principal and interest of $5,173 per month commencing on August 27, 2019 and ending June 27, 2020. The balance for this note was $30,240 as of December 31, 2019. For the year ended December 31, 2019 the interest expense on this note was $1,679.
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
Equipment Loans
On January 5, 2019, InsPro LLC entered into a financing arrangement with an unaffiliated company to finance the purchase of certain third party perpetual software licenses and software subscription and maintenance. The amount financed was $801,843, which included $756,456 cost of purchased software licenses and software subscription and maintenance services 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. The balance for this loan was $550,662 as of December 31, 2019. The Company’s right to use the purchased software licenses and software subscription and maintenance services is contingent on the Company remaining in compliance with the terms of this loan. As of December 31, 2019, the Company is in compliance with this loan. For the year ended December 31, 2019, the interest expense on this loan was $41,998.
On February 28, 2019, InsPro LLC entered into a financing arrangement with an unaffiliated company to finance the purchase of perpetual software licenses for third party software 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. The balance for this loan was $689,255 as of December 31, 2019. The Company’s right to use the purchased software licenses and software subscription and maintenance services is contingent on the Company remaining in compliance with the terms of this loan. As of December 31, 2019, the Company is in compliance with this loan. For the year ended December 31, 2019, the interest expense on this loan was $56,102.
F-17
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 5 – SHAREHOLDERS’ EQUITY
Common Stock
As of December 31, 2019 and 2018, the Company was authorized to issue 750,000,000 and 750,000,000 shares of common stock with a par value of $0.001 per share (“Common Stock”), respectively. As of December 31, 2019 and 2018, the Company had 41,673,655 and 41,673,655 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, 2019 | December 31, 2018 | ||
| Exercise of options issued and outstanding to purchase common stock | - | 700,000 | |
| Issuance of common shares available under the 2010 Equity Compensation Plan | 28,296,980 | 28,296,980 | |
| Conversion of series A convertible preferred stock issued and outstanding into common stock | 25,405,000 | 25,405,000 | |
| 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 | |
| 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 | 185,429,720 | 242,529,720 |
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, 2019 and 2018, the Company’s board of directors has designated 3,437,500 shares of Series A Preferred Stock. As of December 31, 2019 and 2018, the Company had 1,270,250 shares of its Series A Preferred Stock issued and outstanding. 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, 2019 and 2018, 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.
F-18
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 5 – 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 as of December 31, 2019 and 2018 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 as of December 31, 2019 and 2018 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, 2019 and 2018, the Company’s board of directors has designated 11,000,000 shares of Series B Preferred Stock. As of December 31, 2019 and 2018, the Company had 5,307,212 of its Series B Preferred Stock issued and outstanding. As of December 31, 2019 and 2018, the Company has reserved 2,820,000 shares of Series B Preferred Stock for the exercise of warrants issued and outstanding to purchase its Series B Preferred Stock.
F-19
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 5 – SHAREHOLDERS’ 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, 2019 and 2018, 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, 2019 and 2018, the Board has designated 4,000,000 shares of Series C Preferred Stock. As of December 31, 2019 and 2018, 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.
F-20
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 5 – SHAREHOLDERS’ 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.
Stock Options
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.
2019
During the year ended December 31, 2019, options for 700,000 shares of Common Stock, 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 in the amount of $6,250 for the year ended December 31, 2019.
As of December 31, 2019, 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.
F-21
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 5 – SHAREHOLDERS’ EQUITY (continued)
A summary of the Company’s outstanding stock options as of and for the years ended December 31, 2019 and 2018 are as follows:
| Number | Weighted | Weighted | ||||||||||||||||||||||
| Of Shares | Average | Weighted | Average | Aggregate | Aggregate | |||||||||||||||||||
| Underlying | Exercise | Average | Remaining | Intrinsic | Exercise | |||||||||||||||||||
| Options | Price | Fair Value | Contractual Life | Value | Price | |||||||||||||||||||
| Outstanding at December 31, 2017 | 825,000 | $ | 0.10 | $ | 0.10 | 3.0 | $ | - | $ | 82,500 | ||||||||||||||
| For the period ended December 31, 2018 | ||||||||||||||||||||||||
| Granted | - | - | - | $ | - | |||||||||||||||||||
| Exercised | - | - | - | |||||||||||||||||||||
| Expired | (125,000 | ) | 0.10 | 0.04 | $ | (12,500 | ) | |||||||||||||||||
| Outstanding at December 31, 2018 | 700,000 | 0.10 | 0.05 | 2.0 | $ | - | $ | 70,000 | ||||||||||||||||
| For the period ended December 31, 2019 | ||||||||||||||||||||||||
| Granted | - | - | - | $ | - | |||||||||||||||||||
| Exercised | - | - | - | |||||||||||||||||||||
| Expired | (700,000 | ) | 0.10 | 0.10 | $ | (70,000 | ) | |||||||||||||||||
| Outstanding at December 31, 2019 | - | $ | - | $ | - | - | $ | - | $ | - | ||||||||||||||
| Outstanding and exercisable at December 31, 2019 | - | $ | - | $ | - | - | $ | - | ||||||||||||||||
Common Stock Warrants
During the year ended December 31, 2018 warrants to purchase 120,000 common shares expired in accordance with the terms of such warrants. No warrants were issued in year ended December 31, 2019.
A summary of the status of the Company's outstanding common stock warrants as of and for the years ended December 31, 2019 and 2018 are as follows:
| Weighted | ||||||||
| Common | Average | |||||||
| Stock | Exercise | |||||||
| Warrants | Price | |||||||
| 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 | - | $ | - | |||||
| For the year ended December 31, 2019 | ||||||||
| Issued | - | $ | - | |||||
| Exercised | - | - | ||||||
| Expired | - | - | ||||||
| Outstanding and exercisable at December 31, 2019 | - | $ | - | |||||
F-22
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 5 – SHAREHOLDERS’ EQUITY (continued)
Series A Preferred Stock warrants
Outstanding warrants to purchase the Company’s Series A Preferred Stock as of December 31, 2019, have a remaining contractual life of 2.6 years.
A summary of the status of the Company's outstanding Series A Preferred Stock warrants as of and for the years ended December 31, 2019 and 2018 are as follows:
| Weighted | ||||||||
| Preferred | Average | |||||||
| Stock | Exercise | |||||||
| Warrants | Price | |||||||
| 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 | |||||
| For the year ended December 31, 2019 | ||||||||
| Granted | - | - | ||||||
| Exercised | - | - | ||||||
| Expired | - | - | ||||||
| Outstanding and exercisable at December 31, 2019 | 25,000 | $ | 4.00 | |||||
Series B Preferred Stock Warrants
During the year ended December 31, 2019, warrants to purchase 2,820,000 shares of Series B Preferred Stock, which were previously issued to former executives and directors, expired in accordance with the terms of these warrants.
F-23
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 5 – SHAREHOLDERS’ EQUITY (continued)
A summary of the status of the Company's outstanding Series B Preferred Stock warrants as of and for the years ended December 31, 2019 and 2018 are as follows:
| Weighted | ||||||||
| Preferred | Average | |||||||
| Stock | Exercise | |||||||
| Warrants | Price | |||||||
| 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 | |||||
| For the year ended December 31, 2019 | ||||||||
| Granted | - | - | ||||||
| Exercised | - | - | ||||||
| Expired | (2,820,000 | ) | 3.00 | |||||
| Outstanding and exercisable at December 31, 2019 | - | $ | - | |||||
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.
F-24
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 5 – SHAREHOLDERS’ EQUITY (continued)
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, 2019, the Company has not received a demand notice in connection with any registration rights agreement. As of December 31, 2019, 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, 2019.
NOTE 6 – OPERATING AND FINANCIAL LEASE OBLIGATIONS
On May 10, 2018, InsPro LLC and Baldwin Tower Office Building, LLC (“Landlord”) entered into an eighth amendment to the lease agreement between InsPro LLC and the Landlord for the Company’s Eddystone Pennsylvania office (“Lease Agreement” and “Operating Lease”), 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. InsPro LLC may 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.
F-25
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 6 – OPERATING AND FINANCIAL LEASE OBLIGATIONS (continued)
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 adopted ASU 2016-02 effective January 1, 2019, on a modified retrospective basis, without adjusting comparative periods presented. Effective January 1, 2019, the Company established a right-of-use model (ROU) asset in the amount of $1,009,878, an operating lease liability - current in the amount of $307,010 and operating lease liability – long term in the amount of $702,868 for the Lease Agreement, which is the Company’s only lease with a term greater than 12 months. The adoption of ASU 2016-02 did not materially affect our consolidated statement of operations or our consolidated statements of cash flows. We made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet and to recognize all lease payments for leases with a term greater than 12 months on a straight-line basis over the lease term in our consolidated statements of operations.
Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the Company’s statement of operations.
The Company’s subsidiary, InsPro LLC, has entered into several finance lease obligations to purchase equipment used for operations (“Finance Leases”). The Company has the option to purchase the equipment at the end of each finance 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) | December 31, 2019 | December 31, 2018 | ||||||||||
| Computer equipment and software | 3 | $ | 2,120,127 | $ | 1,900,711 | |||||||
| Less accumulated depreciation | (1,831,013 | ) | (1,654,075 | ) | ||||||||
| $ | 289,114 | $ | 246,636 | |||||||||
F-26
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 6 – OPERATING AND FINANCE LEASE OBLIGATIONS (Continued)
Supplemental cash flow information related to leases is as follows:
| For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Lease expense is reported in the statement of operations as follows: | ||||||||
| Operating lease expense | ||||||||
| Cost of revenues | $ | 274,418 | $ | 260,062 | ||||
| Selling, general and administrative expenses | 85,706 | 98,597 | ||||||
| Total operating lease expense | $ | 360,124 | $ | 358,659 | ||||
| Finance lease expense | ||||||||
| Interest expense | $ | 27,042 | $ | 26,750 | ||||
F-27
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 6 – OPERATING AND FINANCE LEASE OBLIGATIONS (Continued)
Supplemental cash flow information related to leases is as follows:
| For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating cash flows from operating leases | $ | 360,124 | $ | 358,659 | ||||
| Financing cash flows from finance leases | $ | 146,741 | $ | 181,354 | ||||
| Right-of-use assets obtained in exchange for operating lease obligations | $ | 1,009,878 | $ | - | ||||
| Equipment acquired through finance lease obligations | $ | 219,378 | $ | 228,968 | ||||
Supplemental balance sheet information related to leases is as follows:
| December 31, 2019 | December 31, 2018 | |||||||
| Operating Lease | ||||||||
| Operating lease right-of-use-asset | $ | 702,867 | $ | - | ||||
| Operating lease - current liability | $ | 326,270 | $ | - | ||||
| Operating lease - long term liability | 376,597 | - | ||||||
| Total operating lease liabilities | $ | 702,867 | $ | - | ||||
| Finance Leases | ||||||||
| Property and equipment, gross | $ | 2,120,127 | $ | 1,900,711 | ||||
| Accumulated depreciation | (1,831,013 | ) | (1,654,075 | ) | ||||
| Property and equipment, net | $ | 289,114 | $ | 246,636 | ||||
| Finance leases - current liabilities | $ | 149,992 | $ | 115,771 | ||||
| Finance leases - long term liabilities | 188,975 | 150,559 | ||||||
| Total finance lease liabilities | $ | 338,967 | $ | 266,330 | ||||
| Weighted average remaining lease term (years) | ||||||||
| Operating lease | 2.1 | - | ||||||
| Finance leases | 2.4 | 2.7 | ||||||
| Weighted average discount rate | ||||||||
| Operating lease | 6.1 | % | - | |||||
| Finance leases | 8.5 | % | 9.3 | % |
F-28
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 6 – OPERATING AND FINANCE LEASE OBLIGATIONS (Continued)
Future minimum payments required under operating and finance leases are as follows:
| Operating Lease | Finance Leases | |||||||
| 2020 | $ | 360,124 | $ | 172,590 | ||||
| 2021 | 360,123 | 118,916 | ||||||
| 2022 | 30,010 | 71,209 | ||||||
| 2023 | - | 13,758 | ||||||
| Total future payments | 750,257 | 376,473 | ||||||
| Less amount representing interest | (47,390 | ) | (37,506 | ) | ||||
| Total future payments less interest | 702,867 | 338,967 | ||||||
| Less current portion | 326,270 | 149,992 | ||||||
| Long-term portion | $ | 376,597 | $ | 188,975 | ||||
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 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”). Effective December 31, 2019 the Company increased the elective contribution to the plan of 25% of the employees contribution up to up to 6%. 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 $88,554 and $70,236 for the years ended December 31, 2019 and 2018, respectively.
F-29
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 8 – 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.
F-30
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 8 – 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.
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. On January 5, 2019, InsPro LLC entered into a financing arrangement with PNC Equipment Finance, LLC to finance this amount plus the cost of additional services. See Note 4 – Notes Payable.
NOTE 8 – COMMITMENTS AND CONTINGENCIES (continued)
Future minimum payments required under other agreements at December 31, 2019 are as follows:
| 2020 | $ | 218,978 | ||
| 2021 | - | |||
| 2022 | - | |||
| thereafter | - | |||
| Total | $ | 218,978 |
F-31
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 9 – INCOME TAXES
The Company has net operating loss carry forwards for federal income tax purposes of approximately $48,000,000 at December 31, 2019. There is no expiration date for approximately $1,000,000 of these losses. The remaining losses expire 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, 2019 and 2018, were as follows:
Components of income tax:
| For the Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Federal | $ | (6,716 | ) | $ | (13,000 | ) | ||
| State | - | 144,000 | ||||||
| $ | (6,716 | ) | $ | 131,000 | ||||
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, 2019 and 2018:
| For the Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| U.S. statutory rate | 21.0 | % | 21.0 | % | ||||
| State income taxes | 8.0 | % | 8.0 | % | ||||
| Amortization/impairment of acquisition related assets | 0.3 | % | (0.1 | )% | ||||
| Stock based compensation | (0.2 | )% | 0.1 | % | ||||
| Other permanent differences | 0.8 | % | (0.7 | )% | ||||
| Valuation allowance | (29.3 | )% | (23.2 | )% | ||||
| 0.6 | % | 5.1 | % | |||||
F-32
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 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 years ended December 31, 2019 and 2018 were as follows:
| December 31, 2019 | December 31, 2018 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforward | $ | 11,696,394 | $ | 11,435,167 | ||||
| Depreciation | 11,883 | (2,436 | ) | |||||
| Compensation expense | 53,805 | 53,804 | ||||||
| Deferred revenue | 403,825 | 449,500 | ||||||
| Total deferred tax asset | 12,165,907 | 11,936,035 | ||||||
| Deferred tax liabilities | - | - | ||||||
| Net deferred tax asset | 12,165,907 | 11,936,035 | ||||||
| Less: valuation allowance | (12,165,907 | ) | (11,936,035 | ) | ||||
| $ | - | $ | - | |||||
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, 2019, was increased by $229,872 as compared to December 31, 2018.
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.
NOTE 10 – SUBSEQUENT EVENTS
On January 30, 2020, the Company, Majesco, a California corporation (the “Buyer”), and Majesco Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Buyer (“Merger Sub”) entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, at the closing (the “Closing”) of the Merger (the “Effective Time”), Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of the Buyer.
If the Merger is consummated, the Buyer will pay the Company $12 million in cash, subject to certain adjustments as set forth in the Merger Agreement (including for cash and certain debt of the Company) (the “Merger Consideration”).
At the Effective Time, and subject to the terms and conditions of the Merger Agreement, the outstanding shares of the Company’s preferred and common stock, other than shares with respect to which appraisal rights are properly exercised and not withdrawn under Delaware law, will automatically be converted into the right to receive allocations of the Merger Consideration pursuant to the Merger Agreement and the Company’s Certificate of Incorporation and all amendments thereto (collectively, the “Company Charter”).
Proceeds of the Merger will be allocated in accordance with the Company’s Charter. Because the amount of Merger Consideration is substantially less than the aggregate minimum liquidation preferences of the Series C Preferred Stock and Series B Preferred Stock, all Merger Consideration will be paid to the holders of those series of preferred stock. In particular, the holders of the Company’s Common Stock and Series A Preferred Stock, will not receive any consideration in the Merger. Additionally, each Company option or warrant outstanding immediately prior to the Effective Time, whether or not then vested and exercisable, will be cancelled without the receipt of any consideration.
F-33
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 10 – SUBSEQUENT EVENTS (continued)
All members of the Board unanimously approved the Merger Agreement and the consummation of the Merger upon the terms and subject to the conditions set forth in the Merger Agreement at a meeting on January 30, 2020.
The completion of the Merger is subject to customary closing conditions, including, without limitation, adoption of the Merger Agreement by the requisite vote of the Company’s stockholders.
Pursuant to the Merger Agreement, Co-Investment and Independence Blue Cross entered into a voting agreement (the “Voting Agreement”) with the Buyer and Merger Sub and agreed to vote their shares of the Company’s (i) Common Stock, (ii) Series A Preferred Stock, (iii) Series B Preferred Stock and (iv) Series C Preferred Stock, in each case, in favor of, among other things, the adoption of the Merger Agreement and the consummation of the Merger and the other transactions contemplated by the Merger Agreement.
The Company has agreed not to solicit or enter into an agreement regarding alternative acquisition proposals, and, subject to certain exceptions, is not permitted to enter into discussions or negotiations concerning, or provide non-public information to a third party in connection with, any alternative acquisition proposals. However, the Company may, prior to the obtaining the requisite approval from the Company’s stockholders, engage in discussions or negotiations and provide non-public information to a third party which has made an unsolicited bona fide written acquisition proposal if the Company’s board of directors determines in good faith, after consultation with the Company’s outside legal counsel and financial advisor, that such acquisition proposal constitutes, or is reasonably likely to lead to, a Superior Proposal (as defined in the Merger Agreement) and that the failure to do so would be reasonably likely to be inconsistent with the director’s duties set forth under Delaware law.
The Merger Agreement contains certain termination rights, including the right of the Company to terminate the Merger Agreement in connection with a Superior Proposal or the Buyer to terminate the Merger Agreement in connection with the determination of the Company’s Board to terminate the Merger Agreement or effected or resolved to effect a change in its recommendation in accordance with the terms of the Merger Agreement (a “Company Board Recommendation Change”). However, in such circumstances, the Company would be obligated to pay the Buyer a termination fee equal to $720,000 in cash. In addition, either party has the right to terminate the Merger Agreement if the Merger does not occur by April 30, 2020.
The foregoing description of the Merger Agreement and Voting Agreement are not complete and each are qualified in its entirety by reference to the Merger Agreement or Voting Agreement, which are filed as Exhibit 2.1 and Exhibit 99.1, respectively, to our Current Report on Form 8-K, filed with the SEC on January 31, 2020.
On February 26, 2020 The Co-Investment Fund II, L.P. converted 900,000 shares of Series A preferred Stock into 18,000,000 shares of Common Stock. The Series A Preferred shares were issued pursuant to a rights offering which was declared effective on Form S-1 (File No. 333-162712) on January 22, 2010, and is convertible into common stock. The ratio is 20 common shares to 1 Series A Preferred share.
F-34
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
| NONE. |
| Item 9A. | Controls and Procedures. |
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 Principal 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 that assessment, the Principal Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective for their intended purposes as of December 31, 2019.
Internal Control over Financial Reporting.
The Company’s internal control over financial reporting is a process to provide reasonable assurance that the information required to be disclosed by the Company 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 the Company’s principal executive and principal financial officers, or person performing similar functions, as appropriate to allow timely decisions regarding required recording and 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.
As of December 31, 2019 management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on that assessment, our Principal Executive Officer and Chief Financial Officer have concluded that our internal control over financial reporting was effective as of December 31, 2019.
Changes in internal control over financial reporting.
There were no changes in the Company’s internal control over financial reporting during the quarter and year ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
| Item 9B. | OTHER INFORMATION. |
NONE.
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| Item 10. | Directors, executive officers and corporate governance. |
Directors of the Registrant
Michael Azeez, 63, has served as one of our directors since December, 2011. Mr. Azeez is a managing member of Azeez Investors, LLC. Mr. Azeez co-founded Unitel in 1988 and served its President from 1988 until 2002. Mr. Azeez served in various executive positions at American Cellular Network Corporation from 1982 until 1988 and his positions included Vice President, General Manager of various divisions and as assistant to the President. Mr. Azeez is the Executive Chairman of Acrometis Strategic Software Services, which provides software solutions to insurance companies for workers compensation claims management. Mr. Azeez is a member of the board of directors of the Friends of Impact Israel. Mr. Azeez is the Chairman and founder of the Sam Azeez Museum of Woodbine Heritage. Mr. Azeez is also the Managing Partner of Vermeil Wines. Mr. Azeez's significant executive and business development experience in the telecommunications industry and his civic service for various non-profit organizations qualifies him to be a member of our board of directors.
Donald R. Caldwell, 73, served as one of our directors and as one of the Co-Chairmen of our board of directors from April 2008 through November 24, 2009 and has served as our Chairman since November 24, 2009. He also served as our Chief Executive Officer from January 26, 2015 through October 9, 2017. Mr. Caldwell founded Cross Atlantic Capital Partners (“XACP”) in 1999, and presently serves as its Chairman and Chief Executive Officer. In this role, he serves as a director and on the Board committees for several XACP portfolio companies including InsPro Technologies Corporation as described above: director of Lightning Gaming, Inc. (OTC) and chairman of its Audit Committee since 2005; director of Rubicon Technology, Inc. (NASDAQ: RBCN) and chairman of its Compensation Committee from 2001 until his resignation on November 16, 2017; and director of Amber Road, Inc. (NYSE: AMBR) and a member of its Nominating/Governance and Compensation Committees from 2005 until his resignation on December 31, 2016. Mr. Caldwell was appointed chairman of Simplicity Esports and Gaming Company (NASDAQ:WINR) in August 2017 and chairs its Audit and Compensation Committees. He has served as a director on the Board of Quaker Houghton (formerly known as Quaker Chemical Corporation prior to its merger with Houghton International in August 2019) (NYSE:KWR) since 1997 and was appointed lead director in 2016. He also serves as chairman of Quaker Houghton’s Executive Committee and as a member of its Audit and Compensation Committees. He was a director of Fox Chase Bancorp, Inc. (NASDAQ:FXCB) from October 2014 until it was acquired by Univest Corporation of Pennsylvania on July 1, 2016. During that time, he chaired Univest’s Audit Committee and served as a member of its Risk Management Committee. He served on the board of directors at Diamond Management & Technology Consultants, Inc. (NASDAQ) from 1994 until its sale to PriceWaterhouse in 2010 and was appointed lead director in 2006. He also served as a member of Diamond’s Compensation and Audit Committees. Mr. Caldwell was a director of Kanbay International, Inc. from 1999 through 2007 when it was purchased by Capgemini. Prior to founding XACP, Mr. Caldwell was President and Chief Operating Officer and a director of Safeguard Scientifics, Inc. Mr. Caldwell holds a BS degree from Babson College and an MBA from Harvard University. He was a Certified Public Accountant in the State of New York. Mr. Caldwell’s experience serving as a director and officer of numerous public companies qualifies him to be a member of our board of directors.
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Kenneth M. Harvey, 59, has served as a director since May 2014. From 1989 until 2011, Mr. Harvey was employed by HSBC—Global Bank, serving as Chief Information Officer/Chief Operating Officer from 2008 to 2011 and as Group General Manager and Chief Information Officer from 2004 to 2007. He was president of HSBC Technology and Services, a wholly-owned subsidiary of HSBC, from 2003 to 2004. Mr. Harvey is currently serving as Chairman of CLS Group Holdings AG. From 2012 to 2014 he was the Chairman of the Technology and Operations Committee. Mr. Harvey has Mr. Harvey also serves on the Senior Advisory Board of Oliver Wyman; a global management consulting firm. Mr. Harvey also served as a Director and Chair of the Nominating and Governance Committee of Amber Road from 2008 to 2017, as a director of Kanbay, Inc. from 2004 until 2007 and as a Director of Vertical Networks, Inc. from 2002 until 2004. Mr. Harvey’s experience as an executive in the information technology field qualifies him to be a member of our board of directors.
Alan Krigstein, 68, has served as a director since June 2014. Mr. Krigstein was Executive Vice President and Chief Financial Officer of Independence Blue Cross, a health insurer organization and independent licensee of the Blue Cross and Blue Shield Association from 2009 through 2017. Mr. Krigstein previously served as Senior Vice President and Chief Financial Officer of AmeriHealth Mercy Family of Companies from 1994 to 2009. Mr. Krigstein also serves as trustee of Plan Investment Fund, Inc., a mutual fund company that is open only to members and licensees of the Blue Cross and Blue Shield Association and certain related organizations, from 2011 to the present. Mr. Krigstein is the Chairman, Board of Directors of GeoBlue, an international health insurance company. Mr. Krigstein is also a Member Board of Directors of Bellrock Intelligence, a healthcare technology company that provides predictive analytics for payers and health systems. Mr. Krigstein’s experience as an executive in the health insurance field qualifies him to be a member of our board of directors.
Sanford Rich, 62, has served as one of our directors since April 2006. Mr. Rich is currently the Executive Director at New York City Board of Education Retirement System since January 2016. Mr. Rich was Chief of Negotiations and Restructuring at the Pension Benefit Guaranty Corporation, a U.S. government agency, from November 2012 to January 2016. He is a director and the Audit Committee Chairman at Aspen Group Inc., an online for Profit University. Mr. Rich served as director and Chief Executive Officer at In the Car, LLC from October 2011 to November 2012. Mr. Rich was a FINRA Registered Managing Director with Whitemarsh Capital Advisors LLC, a broker-dealer, from February 2009 through December 2014. Mr. Rich served as a director, audit committee chairman and Commission qualified audit committee financial expert of Interclick, Inc. from 2007 to 2010. From 1995 to May 2008, Mr. Rich was director, Senior Vice President and Portfolio Manager at GEM Capital Management Inc. From 1993 to 1995, Mr. Rich was a Managing Director of High Yield Finance, Capital Markets & North American Loan Syndicate, Sales and Trading at Citicorp Securities. From 1985 to 1993, he served as Managing Director of Debt Capital Markets at Merrill Lynch. From 1978 to 1985, Mr. Rich held various Analyst positions in numerous companies, including Cypress Capital Management, Inc. (Vice President and Analyst from 1983 to 1985), FIAMCO (Distressed/High Yield Bond Analyst from 1981 to 1983),
Progressive Corporation (Financial Analyst from 1980 to 1981) and Prescott, Ball and Turben (Distressed/High Yield Bond Analyst from 1978 to 1980). Mr. Rich’s 30+ years of experience in the financial sector qualifies him to be a member of our board of directors.
Frederick C. Tecce, 82, has served as one of our directors since August 2016 and he previously served as one of our directors from August 2, 2007through August 14. 2012. He has also served on the board of several publicly traded companies as well as numerous privately held companies. In addition, he served on the Board of Independence Blue Cross for 2 different terms. On a day to day basis, he serves as Of Counsel to the law firm of Buchanan Ingersoll and Rooney as well as being Of Counsel and Partner to Cross Atlantic Capital Partners. In addition to his pursuits in the private sector, Mr. Tecce has also served in the public sector where he was appointed by Pennsylvania Governor Tom Ridge to serve on the transition team. His board experience includes being an active member of the Board of the $50 billion Public School Employees Retirement Systems (PSERS), where he held the title of chairman of the Finance Committee for 6 years until his retirement in 2001. Mr. Tecce also served in the federal sector as a member of the Federal Judicial Nominating Committee. He has served in a management position in several for-profit businesses, some of which he has founded. Mr. Tecce’s numerous legal, business and government experiences qualify him to be a member of our board of directors.
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Anthony R. Verdi, 71, has served as one of our directors since June 2008, as our Chief Financial Officer and Assistant Secretary since November 2005, as our Chief Operating Officer since April 2008, as Acting Principal Executive Officer from June 20, 2008 through May 18, 2011 and as Principal Executive Officer from May 18, 2011 through January 26, 2015 and from October 29, 2018 to the present. From 2001 until November 2005, Mr. Verdi provided consulting services to life, health and property and casualty insurance company agency and venture capital clients. Mr. Verdi served as Chief Operating Officer of Provident American Corporation and Chief Financial Officer of HealthAxis, Inc. From January 1990 until December 1998, Mr. Verdi served as Chief Financial Officer of Provident American Corporation. From July 1986 until January 1990, he was the Vice President and Controller of InterCounty Hospitalization and Health Plans, a nonprofit group medical insurer. From April 1971 until July 1986, he served in various finance and accounting capacities for the Academy Insurance Group, ultimately serving as the Assistant Controller. Mr. Verdi’s extensive experience in the health insurance industry and his financial and accounting background qualifies him to be a member of our board of directors.
Edmond J. Walters, 58, has served as one of our directors since April 2008. Mr. Walters is Founder and was the Chief Executive Officer of eMoney Advisor, a wealth planning and management solutions provider for financial advisors that Mr. Walters founded in 2000 and is now a wholly-owned subsidiary of Commerce Bancorp. Prior to forming eMoney Advisor in 2000, Mr. Walters spent more than 20 years in the financial services industry, advising high net worth clients. From 1983 to 1992 he was associated with Kistler, Tiffany & Company in Wayne, PA. In 1992, Walters helped found the Wharton Business Group, a financial advising firm, in Malvern, PA. Mr. Walters’ 20+ years of experience in the financial sector qualify him to be a member of our board of directors.
The Board has determined that Messrs. Azeez, Harvey, Krigstein, Rich, Tecce and Walters are “independent” directors as defined by Rule 4200(a)(15) of the NASDAQ listing standards and as defined by Rule 10A-3(b)(1)(ii) promulgated by the Commission.
Executive Officers of the Registrant
The following table sets forth the name, age and title of persons currently serving or who have served as our executive officers during 2019. Our executive officers are appointed by, and serve at the discretion of, our board of directors.
|
Name |
Age |
Position | ||
| Anthony R. Verdi | 71 | President, Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and Assistant Secretary |
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Anthony R. Verdi has served as our President, Chief Executive Officer, Chief Financial Officer and Assistant Secretary since October, 2018, Chief Financial Officer and Assistant Secretary since November 2005, as our Chief Operating Officer since April 2008, as Acting Principal Executive Officer from June 20, 2008 through May 18, 2011 and as Principal Executive Officer from May 18, 2011 through January 26, 2015. From 2001 until November 2005, Mr. Verdi has provided consulting services to life, health and property and casualty insurance company agency and venture capital clients. From December 1998 until March 2001, Mr. Verdi served as Chief Operating Officer of Provident American Corporation and Chief Financial Officer of HealthAxis, Inc. From January 1990 until December 1998, Mr. Verdi served as Chief Financial Officer of Provident American Corporation. From July 1986 until January 1990, he was the Vice President and Controller of InterCounty Hospitalization and Health Plans, a nonprofit group medical insurer. From April 1971 until July 1986, he served in various finance and accounting capacities for the Academy Insurance Group, ultimately serving as the Assistant Controller.
Board Leadership Structure and Risk Oversight
The role of Chief Executive Officer and Chairman of the board were separate positions through January 26, 2015, were combined into a single position with Mr. Caldwell’s appointment as Chief Executive Officer on January 26, 2015, and became separate positions on October 9, 2017, with the appointment of Mr. Anderson as Chief Executive Officer. We believe it is the Chief Executive Officer’s responsibility to oversee the Company’s operations and the Chairman’s responsibility to coordinate the appropriate functioning of the board.
The audit committee is primarily responsible for overseeing the Company’s risk management processes on behalf of the full board. The audit committee receives reports from management at least quarterly regarding the Company’s assessment of risks. In addition, the Audit Committee regularly meets with management to discuss the Company’s policies with respect to risk assessment and risk management, the Company’s major financial risk exposures and the steps management has taken to monitor and mitigate these exposures. The audit committee reports regularly to the full board of directors, which also considers the Company’s risk factors. While the board oversees the Company’s risk management, company management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our Company and that our board leadership structure supports this approach.
Code of Business Conduct and Ethics
We adopted an amended and restated Code of Business Conduct and Ethics on January 29, 2008. Our Code of Business Conduct and Ethics, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K, applies globally to our corporate directors, executive officers, senior financial officers and other employees. Our Code of Business Conduct and Ethics is intended to promote honest and ethical conduct, full and accurate reporting, and compliance with laws, as well as other matters. A printed copy of our Code of Business Conduct and Ethics may be obtained free of charge by writing to us at InsPro Technologies Corporation, 1510 Chester Pike, 400 Baldwin Tower, Eddystone, Pennsylvania 19022.
Corporate Governance and Committees
Our board of directors currently is composed of Messrs. Azeez, Caldwell, Harvey, Krigstein, Rich, Tecce, Verdi and Walters. Mr. Caldwell is the Chairman of our board of directors. Directors serve until the next annual meeting of stockholders, until their successors are elected or appointed or qualified, or until their resignation or removal. Our executive officers are appointed by, and serve at the discretion of, our board of directors. Our board of directors has established an audit committee, a compensation committee and a nominating and governance committee. Pursuant to our bylaws, our board of directors may from time to time establish other committees to facilitate the management of our business and operations.
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Audit Committee
The members of our audit committee were Messrs. Caldwell, Rich, Rowell through August 2018 and effective August 2018 Mr. Azeez replaced Mr. Rowell. Mr. Rich became chairman of the committee effective upon his appointment by the board on January 26, 2015. Our board of directors has determined that Mr. Rich is an “audit committee financial expert,” as such term is defined in Item 407(d)(5) of Regulation S-K promulgated by the Commission. Although our common stock is not listed on NASDAQ and, as a result, we are not subject to NASDAQ’s listing standards, we voluntarily strive to comply with such standards with the exception of Mr. Caldwell’s membership on the audit committee. Our board of directors, in applying the above-referenced standards, has affirmatively determined that each of Messrs. Azeez and Rich are “independent” and that Mr. Rowell was “independent” during the time he served on the audit committee. Mr. Caldwell is not “independent” whereas NASDAQ rule 4200(a)(15), specifies that each member of the audit committee must be “independent”.
Compensation Committee
The members of our compensation committee are Messrs. Krigstein, Rich and Tecce. Mr. Krigstein chairs the committee.
Nominating and Governance Committee
The members of our nominating and governance committee were Messrs. Harrison, Rowell and Walters until the resignations of Messrs Harrison and Rowell from our board of directors. Currently Mr. Walters remains a member of the nominating and governance committee. This committee is responsible for recommending qualified candidates to the board of directors for election as directors, including the slate of directors that the board proposes for election by stockholders at annual meetings. While the committee does not have a formal diversity “policy,” the committee recommends candidates based upon many factors, including the diversity of their business or professional experience, the diversity of their background and their array of talents and perspectives. We believe that the committee’s existing nominations process is designed to identify the best possible nominees for the board, regardless of the nominee’s gender, racial background, religion or ethnicity. The committee identifies candidates through a variety of means, including recommendations from members of the board and suggestions from our management, including our Chairman and Principal Executive Officer. In addition, the committee considers candidates recommended by third parties, including stockholders. Stockholders wishing to recommend director candidates for consideration by the committee may do so by writing our Secretary and giving the recommended candidate’s name, biographical data and qualifications.
The Nominating and Corporate Governance Committee operates under a formal charter adopted by the board that governs its duties and standards of performance. Copies of the Nominating and Corporate Governance Committee charter can be obtained free of charge by writing to us at InsPro Technologies Corporation, 1510 Chester Pike, 400 Baldwin Tower, Eddystone, Pennsylvania 19022.
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors and persons who own more than 10% of our common stock to file reports of beneficial ownership and changes in beneficial ownership of our common stock and any other equity securities with the Commission. Executive officers, directors, and persons who own more than 10% of our common stock are required by Commission regulations to furnish us with copies of all Section 16(a) forms they file.
Based solely on our review of the copies of Forms 3, 4 and 5 furnished to us, or representations from certain reporting persons that no Forms 3, 4 or 5 were required to be filed by such persons, we believe that all of our executive officers, directors and persons who own more than ten percent of our common stock complied with all Section 16(a) filing requirements applicable to them.
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| Item 11. | Executive Compensation |
Summary Compensation Table
The following table summarizes the compensation paid to, awarded to or earned during the fiscal years ended December 31, 2019 and 2018 by our Principal Executive Officer and each of our three other most highly compensated executive officers whose total salary and bonus exceeded $100,000 for services rendered to us in all capacities during 2019 and 2018. The executive officers listed in the table below are referred to in this report as our “named executive officers”. There was no non-qualified deferred compensation earnings for any of the named executive officers for the fiscal years ended December 31, 2019 and 2018.
| Name and Principal Position | Fiscal Year | Salary ($) | Bonus ($) (5) | Stock Awards ($) (6) | Option Awards ($) (8) | All Other Compensation ($) (7) | Total ($) | |||||||||||||||||||||
| David M. Anderson (2) | 2019 | 34,545 | - | - | - | 9,742 | 44,287 | |||||||||||||||||||||
| Chief Executive Officer | 2018 | 317,986 | - | - | - | 174,389 | 492,375 | |||||||||||||||||||||
| Anthony R. Verdi (1) | 2019 | 380,000 | 150,000 | - | - | 17,477 | 547,477 | |||||||||||||||||||||
| Chief Financial Officer & Chief | 2018 | 334,565 | - | - | - | 15,751 | 350,316 | |||||||||||||||||||||
| Operating Officer | ||||||||||||||||||||||||||||
| David J. Medlock (3) | 2019 | 240,000 | - | - | - | 9,250 | 249,250 | |||||||||||||||||||||
| Chief Architect | 2018 | 240,000 | 47,500 | - | - | 15,359 | 302,859 | |||||||||||||||||||||
(1) Mr. Verdi was appointed as our Chief Financial Officer on November 10, 2005, Chief Operating Officer on April 1, 2008, interim Principal Executive Officer on June 20, 2008 and Principal Executive Officer from May 18, 2011 through January 25, 2015 and appointed our President and Chief Executive Officer on October 30, 2018.
(2) Mr. Anderson was appointed Chief Executive Officer on October 9, 2017. Mr. Anderson resigned as Chief Executive Officer and as a member of our board of directors on October 30, 2018 and his employment terminated effective November 2, 2018. All amounts owed to Mr. Anderson subsequent to the termination of his employment are included in All Other Compensation.
(3) Mr. Medlock resigned as Chief Architect on April 23, 2019. . All amounts owed to Mr. Medlock subsequent to the termination of his employment are included in All Other Compensation.
(4) Mr. Verdi received a discretionary bonus of $150,000 in 2019, which was approved by the Company’s Board. Mr. Medlock received $45,000 in 2018, as part of a stay bonus arrangement. Mr. Medlock also received a discretionary bonus of $2,500 in 2018.
(5) There were no stock awards or stock option awards to any of the named executive officers for the fiscal years ended December 31, 2019 and 2018.
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(6) All other compensation paid to our named executive officers in the fiscal year ended December 31, 2019 consisted of the following:
| Name | Payments for Auto and Equipment ($) (a) | Company Paid Health, Life and Disability Insurance ($) (b) | Severance ($) (f) | Company Matching of Employee 401(k) Contributions $ (c) | Post Employment Consulting Fees $ (d) | Reimbursement of Personal Expenses $ (e) | Total ($) | |||||||||||||||||||||
| David M. Anderson | - | 9,742 | - | - | - | - | 9,742 | |||||||||||||||||||||
| Anthony R. Verdi | 12,600 | 677 | - | 4,200 | - | - | 17,477 | |||||||||||||||||||||
| Robert J. Oakes | - | - | - | - | - | - | - | |||||||||||||||||||||
| David J. Medlock | 189 | 7,927 | - | 1,135 | - | - | 9,250 | |||||||||||||||||||||
(a) Payments for auto and equipment represent monthly allowances for auto and cell phones.
(b) Company-paid health, life and disability insurance represent the cost of company-paid insurance premiums covering the named executive officers and, in the case of health insurance premiums, their dependents. The Company paid approximately 71% of the health insurance and 100% of the life and disability insurance premiums for the named executive officers. Health insurance premiums vary based on several factors, including the coverage selected and the age of the named executive officer and the number of their covered dependents.
(c) Company matching of employee 401(k) contributions represents 25% of the employee’s contribution up to 6% of the employee’s compensation, which were fully vested for Messrs., Verdi and Medlock.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information for the outstanding equity awards held by our named executive officers for the year ended December 31, 2019. There have been no stock awards granted in 2019.
| Option Awards | |||||||||||||||||||
| Number of Securities Underlying Unexercised Options (#) | Number of Securities Underlying Unexercised Options (#) | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options | Option Exercise Price | Option Expiration | |||||||||||||||
| Name | Exercisable | Unexercisable | (#) | ($) | Date | ||||||||||||||
| David M. Anderson | - | - | - | - | - | ||||||||||||||
| Anthony R. Verdi | - | - | - | - | - | ||||||||||||||
| David J. Medlock (a) | 25,000 | - | - | - | 8/16/2022 | ||||||||||||||
| (a) | Warrant to purchase 25,000 shares of the Company’s Series A convertible preferred stock at an exercise price of $4.00 per share. |
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Compensation Committee Interlocks and Insider Participation
No members of our compensation committee are currently, or have been, employed by us as officers or employees. None of our executive officers currently serve, or in the past three years have served, as a member of the board of directors, compensation committee or other board committee performing equivalent functions of another entity that has one or more executive officers serving on our board or compensation committee.
Employment, Severance and Other Agreements
David M. Anderson
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 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 receive an annual bonus for each calendar year, commencing with the 2018 calendar year, based on individual and corporate performance goals established by the Company’s Board. 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.
In addition, the Employment Agreement also provided for certain payments and benefits in the event of a termination of his employment under specific circumstances. If, during the term of the Employment Agreement, his employment is terminated by the Company other than for “cause” or death, or by Mr. Anderson for “good reason” (each as defined in the Employment Agreement), he would be entitled to (1) continuation of his base salary at the rate in effect immediately prior to the termination date for 12 months following the termination date, (2) a lump sum payment equal to a pro-rata portion of his annual bonus as calculated based on the number of days worked in the year in which termination occurs, which bonus will be paid at the same time as bonuses are paid to other employees of the Company, and (3) if Mr. Anderson is eligible for and timely elects to receive continued health coverage under the Company’s health plan under COBRA, reimbursement of the cost of continuing coverage of the applicable benefit plans under COBRA until the earlier of (A) the date on which Mr. Anderson first becomes covered by any other equally advantageous health plan and (B) 12 months following the termination date.
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 travel commuting to and from his home in North Carolina and for his temporary living expenses in Pennsylvania. Furthermore the Employment Agreement also provides for a reimbursement of his out of pocket relocation expenses incurred through October 31, 2018, up to $25,000.
Pursuant to the Employment Agreement, Mr. Anderson also agreed to customary restrictions with respect to the disclosure and use of the Company’s confidential information, and has agreed that work product or inventions developed or conceived by him while employed with the Company relating to its business is the Company’s property. In addition, during the term of his employment and for the 18 month period following his termination of employment for any reason, other than his termination without “cause” or his resignation for “good reason” (each as defined in the Employment Agreement), Mr. Anderson has agreed not to (1) perform services on behalf of a competing business which was the same or similar to the types services he was authorized, conducted, offered or provided to the Company, (2) solicit, seek to employ, or seek to retain any of the Company’s employees, independent contractors or outside agents of the Company, or (3) make any written or oral statements that are maliciously false or defamatory about the Company.
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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 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.
Anthony R. Verdi
Pursuant to an amended and restated employment agreement Mr. Verdi serves as our President, Chief Executive Officer, Chief Financial Officer and Chief Operating Officer. His amended and restated employment agreement automatically renewed for a one year term on March 31, 2018, 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, increased to $300,000 effective November 1, 2015, increased to $325,000 effective October 1, 2017 and 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.
In the event of Mr. Verdi’s termination without cause or for good reason, he or his estate would receive his then current base annual salary, plus unpaid accrued employee benefits, which is primarily accrued vacation, plus the continuation of his employee benefits for a period of 18 months, less all applicable taxes. In the event of his voluntary termination, death or disability, he or his estate would receive unpaid accrued employee benefits, plus the continuation of his employee benefits for a period of one month, less all applicable taxes.
David J. Medlock
Pursuant to an employment agreement Mr. Medlock served as our Chief Architect. His employment agreement automatically renewed for a one year term on March 27, 2019, and, if not terminated, will automatically renew for one year periods. His annual base salary was $180,000 per year from March 27, 2015 through July 1, 2015, was then increased to $210,000 effective July 1, 2015, was then increased to $220,000 effective November 1, 2015, was then increased to $235,000 effective August 16, 2017, and was then increased to $240,000 effective October 1, 2017. He is entitled to receive such bonus compensation programs available to executive employees of the Company and InsPro Technologies, LLC.
In the event of Mr. Medlock’s termination without cause or for good reason, he or his estate would receive his then current base annual salary, plus unpaid accrued employee benefits, which is primarily accrued vacation, for a period of 6 months, less all applicable taxes. In the event of his voluntary termination, death or disability, he or his estate would receive unpaid accrued employee benefits, plus the continuation of his employee benefits for a period of one month, less all applicable taxes.
Pursuant to a letter agreement dated January 27, 2015, Mr. Medlock was entitled to receive retention bonuses in the amount of $22,500, $22,500 and $45,000 payable to him on January 31, 2016, 2017 and 2018, respectively, net of applicable taxes.
On April 23, 2019, David J. Medlock resigned as the Chief Architect. The resignation was not the result of any disagreement between the Company and Mr. Medlock on any matter relating to the Company’s operations, policies or practices.
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Compensation of Directors
The following table sets forth information concerning the compensation of all individuals who served on our board of directors during the fiscal year ended December 31, 2019. There were no option awards and no non-equity incentive plan compensation or nonqualified deferred compensation earnings paid to any of our directors for the year ended December 31, 2019. Directors who are employees receive no additional or special compensation for serving as directors. All compensation for Messrs. Anderson and Verdi is included in the Summary Compensation Table. Mr. Caldwell’s compensation as a non- employee director subsequent to October 9, 2017 appears in the following table. Messrs. Tecce and Caldwell have assigned all of their compensation to The Co-Investment Fund II, L.P. Messrs. Tecce and Caldwell are stockholders, directors and officers of Co-Invest II Capital Partners, Inc., which is the general partner of Co-Invest Management II, L.P., which is the general partner of The Co-Investment Fund II, L.P.
| Name | Fees Earned
or Paid in Cash ($) (1) | Stock
Awards ($) | Option
Awards ($) | Total ($) | ||||||||||||
| Michael Azeez | 6,000 | - | - | 6,000 | ||||||||||||
| Donald R. Caldwell (2) | 7,500 | - | - | 7,500 | ||||||||||||
| Kenneth Harvey | 4,500 | - | - | 4,500 | ||||||||||||
| Alan Krigstein | 4,500 | - | - | 4,500 | ||||||||||||
| Sanford Rich | 8,000 | - | - | 8,000 | ||||||||||||
| Frederick Tecce (2) | 6,000 | - | - | 6,000 | ||||||||||||
| Edmond Walters | 4,500 | - | - | 4,500 | ||||||||||||
| Total | 41,000 | - | - | 41,000 | ||||||||||||
| (1) | Represents board and committee meeting fees paid to our directors under our Non-Employee Director Compensation Plan. |
| (2) | Messrs. Caldwell and Tecce have assigned all of their board compensation to The Co-Investment Fund II, L.P. |
There are no options or warrants outstanding as of December 31, 2019.
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Director Compensation Plan
Directors who are employees receive no additional or special compensation for serving as directors. Non-employee directors receive the following compensation under the terms of our Non- Employee Director Compensation Plan, which was amended on December 13, 2011, to remove all equity compensation and annual cash retainer components from the plan and to increase the per Board meeting cash fee effective January 2, 2012:
The compensation of the Company’s non-employee directors is as follows:
| · | $1,500 meeting fee for each director for each meeting of the Board attended in person or via conference telephone. | |
| · | $500 meeting fee for each committee member for each meeting of a committee of the Board, attended in person or via conference telephone. |
We also purchase directors’ and officers’ liability insurance for the benefit of our directors and officers as a group. We also reimburse our non-employee directors for their reasonable out-of-pocket expenses incurred in attending meetings of our board of directors or its committees in accordance with the Company’s expense reimbursement policies in effect from time to time. No fees are payable to directors for attendance at specially called meetings of the board.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
Security Ownership of Certain Beneficial Owners and Management
The following table shows information known by us with respect to the beneficial ownership of our common stock, Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock as of March 29, 2020, for each of the following persons:
| · | our directors; |
| · | our named executive officers; |
| · | all of our directors, director nominees and executive officers as a group; and |
| · | each person or group of affiliated persons or entities known by us to beneficially own 5% or more of our common stock, Series A Convertible Preferred Stock or Series B Convertible Preferred Stock. |
The number of shares beneficially owned, beneficial ownership and percentage ownership are determined in accordance with the rules of the Commission. Under these rules, beneficial ownership includes (i) any shares as to which the individual or entity has sole or shared voting power or investment power and (ii) any shares that an individual or entity has the right to acquire beneficial ownership of within 60 days of March 29, 2019 through the exercise of any warrant, stock option or other right. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares underlying options and warrants that are exercisable within 60 days of March 29, 2019 are considered to be outstanding. To our knowledge, except as indicated in the footnotes to the following table and subject to community property laws where applicable, the persons named in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them. The following table is based on 59,673,655 shares of Common Stock, 370,250 shares of Series A Convertible Preferred Stock, 5,307,212 shares of Series B Convertible Preferred Stock, and 1,254,175 shares of Series C Convertible Preferred Stock outstanding as of March 29, 2019. Unless otherwise indicated, the address of all individuals and entities listed below is InsPro Technologies Corporation, 1510 Chester Pike, 400 Baldwin Tower, Eddystone, Pennsylvania 19022.
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| Name of Beneficial Owner | Number
of Shares Beneficially Owned |
Title of Class | Percent
of Shares Beneficially Owned |
|||||||
| Directors and Executive Officers: | ||||||||||
| David M. Anderson | - | Common Stock | * | |||||||
| Michael Azeez | 10,166,660 | (3)(4) | Common Stock | 14.6 | % | |||||
| 433,333 | (4) | Series B Preferred Stock | 8.2 | % | ||||||
| 75,000 | (3) | Series C Preferred Stock | 6.1 | % | ||||||
| Donald R. Caldwell | 94,701,690 | (1)(2) | Common Stock | 76.9 | % | |||||
| 350,000 | (2) | Series A Preferred Stock | 92.9 | % | ||||||
| 1,827,186 | (2) | Series
B Preferred Stock |
34.4 | % | ||||||
| 1,000,000 | (2) | Series
C Preferred Stock |
80.8 | % | ||||||
| David J. Medlock | 500,00 | (5) | Common Stock | * | ||||||
| 25,000 | (7) | Series A Preferred Stock | 6.2 | % | ||||||
| Kenneth Harvey | - | Common Stock | * | |||||||
| Alan Krigstein | - | Common Stock | * | |||||||
| Sanford Rich | 115,000 | (9) | Common Stock | * | ||||||
| 1,250 | Series A Preferred Stock | * | ||||||||
| Frederick Tecce | 94,190,594 | (1)(2) | Common Stock | 76.4 | % | |||||
| 350,000 | (2) | Series A Preferred Stock | 92.9 | % | ||||||
| 1,827,186 | (2) | Series B Preferred Stock | 34.4 | % | ||||||
| 1,000,000 | (2) | Series C Preferred Stock | 80.8 | % | ||||||
| Anthony R. Verdi | 85,000 | (9) | Common Stock | * | ||||||
| 1,250 | Series A Preferred Stock | * | ||||||||
| Edmond Walters | 3,504,953 | (15) | Common Stock | 5.6 | % | |||||
| 166,666 | Series B Preferred Stock | 3.1 | % | |||||||
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| Name of Beneficial Owner | Number
of Shares Beneficially Owned |
Title of Class | Percent
of Shares Beneficially Owned |
|||||||
| All
directors and executive officers as a group (10 persons) |
108,676,217 | (1)(2)(3)(4)(5) (8)(9)(10)(11)(12) (15) |
Common Stock | 79.2 | % | |||||
| 377,550 | (7) | Series A Preferred Stock | 94.0 | % | ||||||
| 2,427,185 | (2) (3) |
Series B Preferred Stock | 45.7 | % | ||||||
| 1,075,000 | (2) (3) |
Series C Preferred Stock | 86.8 | % | ||||||
| Holders of More than Five Percent of Our Common Stock, Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock: | ||||||||||
| The Co-Investment Fund II, L. P. | 94,190,594 | (1) | Common Stock | 76.4 | % | |||||
| 350,000 | Series A Preferred Stock | 92.9 | % | |||||||
| 1,827,186 | Series B Preferred Stock | 34.4 | % | |||||||
| 1,000,000 | Series C Preferred Stock | 80.8 | % | |||||||
| Independence Blue Cross | 50,000,000 | (11) | Common Stock | 45.6 | % | |||||
| 2,500,000 | Series B Preferred Stock | 47.1 | % | |||||||
| Azeez Investors, LLC | 5,666,660 | (4) | Common Stock | 8.7 | % | |||||
| 283,333 | Series B Preferred Stock | 5.3 | % | |||||||
| Azeez Enterprises, LP | 4,500,000 | (14) | Common Stock | 7.0 | % | |||||
| 150,000 | Series B Preferred Stock | 2.8 | % | |||||||
| 75,000 | Series C Preferred Stock | 6.1 | % | |||||||
| John Scarpa | 4,500,000 | (16) | Common Stock | 7.0 | % | |||||
| 150,000 | Series B Preferred Stock | 2.8 | % | |||||||
| 75,000 | Series C Preferred Stock | 6.1 | % | |||||||
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| Name of Beneficial Owner | Number
of Shares Beneficially Owned |
Title of Class | Percent
of Shares Beneficially Owned |
|||||||
| Scarpa Family Trust, 2005 | 4,333,340 | (12) | Common Stock | 6.5 | % | |||||
| 366,667 | Series B Preferred Stock | 6.9 | % | |||||||
| Bruce L. Evans | 3,562,255 | (6) | Common Stock | 5.8 | % | |||||
| 95,925 | (8) | Series C Preferred Stock | 7.7 | % | ||||||
| Alvin H. Clemens | 2,292,080 | (13) | Common Stock | 4.9 | % | |||||
______________
* Less than 1%
| (1) | Includes 31,157,970 shares of common stock; 7,000,000 shares underlying 350,000 shares of Series A Convertible Preferred Stock, which are convertible, at the sole option of the holder, into twenty shares of our common stock per share of Series A Convertible Preferred Stock; 36,543,720 shares underlying 1,827,186 shares of Series B Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series B Convertible Preferred Stock; and 20,000,000 shares underlying 1,000,000 shares of Series C Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series C Convertible Preferred Stock, which are beneficially owned by Co-Investment, designee of Cross Atlantic Capital Partners, Inc. |
| (2) | Represents securities owned by Co-Investment, the designee of Cross Atlantic Capital Partners, Inc., of which Frederick Tecce is the managing director and of which Donald R. Caldwell is managing partner. Mr. Caldwell is also a shareholder, director and officer of Co-Invest II Capital Partners, Inc., which is the general partner of Co-Invest Management II, L.P., which is the general partner of Co-Investment. Mr. Caldwell and Mr. Tecce both disclaim beneficial ownership of these securities, except to the extent of their pecuniary interest therein. |
| (3) | Includes securities owned by Azeez Investors, LLC and Azeez Enterprises, LP. Mr. Azeez is a managing member of Azeez Investors, LLC and Azeez Enterprises, LP. Mr. Azeez disclaims beneficial ownership of these securities, except to the extent of his pecuniary interest therein. |
| (4) | Includes 5,666,660 shares underlying 283,333 shares of Series B Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series B Convertible Preferred Stock. |
| (5) | Includes 500,000 shares underlying a warrant which is exercisable within 60 days of March 29, 2019, to purchase 25,000 shares of Series A Convertible Preferred Stock which are also convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series A Convertible Preferred Stock. |
| (6) | Includes 1,766,000 shares underlying 88,300 shares of Series C Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series C Convertible Preferred Stock. Includes 149,010 shares of common stock and 152,500 shares underlying 7,625 shares of Series C Convertible Preferred Stock, which are convertible, at the sole option of the holder, into twenty shares of our common stock per share of Series C Convertible Preferred Stock, which are beneficially owned by Kathryn M. Evans, wife of Bruce M. Evans. |
| (7) | Includes 25,000 shares underlying warrants which are exercisable within 60 days of March 30, 2020 |
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| (8) | Includes 7,625 shares of Series C Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series C Convertible Preferred Stock, which are beneficially owned by Kathryn M. Evans, wife of Bruce M. Evans. |
| (9) | Includes 25,000 shares underlying 1,250 shares of Series A Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series A Convertible Preferred Stock. |
| (10) | Includes 7,000,000 shares underlying 350,000 shares of Series A Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series A Convertible Preferred Stock. Includes 36,543,720 shares underlying 1,827,186 shares of Series B Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series B Convertible Preferred Stock. Includes 20,000,000 shares underlying 1000,000 shares of Series C Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series C Convertible Preferred Stock. |
| (11) | Includes 50,000,000 shares underlying 2,500,000 shares of Series B Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series B Convertible Preferred Stock. |
| (12) | Includes 7,333,340 shares underlying 366,667 shares of Series B Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series B Convertible Preferred Stock. |
| (13) | Includes 1,000,000 shares of common stock held by The Clemens-Beaver Creek Limited Partnership, of which Alvin H. Clemens is the general partner. Also includes 100,000 shares held by Mr. Clemens’s minor children. |
| (14) | Includes 3,000,000 shares underlying 150,000 shares of Series B Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series B Convertible Preferred Stock. Also includes 1,500,000 shares underlying 75,000 shares of Series C Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series C Convertible Preferred Stock. |
| (15) | Includes 3,333,320 shares underlying 166,666 shares of Series B Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series B Convertible Preferred Stock. Includes 600,000 shares underlying a warrant which is exercisable within 60 days of March 29, 2019, to purchase 30,000 shares of Series B Convertible Preferred Stock which are also convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series B Convertible Preferred Stock. |
| (16) | Includes 3,000,000 shares underlying 150,000 shares of Series B Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series B Convertible Preferred Stock. Also includes 1,500,000 shares underlying 75,000 shares of Series C Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series C Convertible Preferred Stock. |
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Equity Compensation Plan Information
The following table shows certain information concerning our common stock to be issued in connection with our equity compensation plans as of December 31, 2019:
EQUITY COMPENSATION PLAN
| Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants, Convertible Preferred Stock and Rights | Weighted- Average Exercise Price of Outstanding Options, Warrants, Convertible Preferred Stock and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the first Column) | |||||||||
| Equity compensation plans approved by security holders | 0 | 0 | 28,296,980 | |||||||||
| Equity compensation plans not approved by security holders(1) | 500,000 | $ | 0.20 | 0 | ||||||||
| Total(1) | 500,000 | $ | 0.20 | 28,296,980 | ||||||||
| (1) | On August 16, 2017, the board of directors of the Company granted a warrant to purchase 25,000 shares of Series A Preferred Stock to Mr. Medlock. This warrant will expire on August 16, 2022. Assumes the warrants to purchase 25,000 shares of Series A Preferred Stock at an exercise price equal to $4.00 per share are converted into 20 shares of common stock for each share of Series A Preferred Stock, or 500,000 shares of common stock in aggregate, with an exercise price of $0.20 per common stock share. |
A description of the material terms of our equity compensation plans can be found in Note 5 – Shareholders’ Equity– Stock Options and in the notes to the consolidated financial statements contained in Item 7 of this Annual Report on Form 10-K.
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| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
Transactions With Related Persons
From the beginning of our fiscal year preceding until the date of this Annual Report on Form 10-K, there has been no transaction, nor is there any transaction currently proposed, to which we were, are, or would be a participant, in which the amount involved exceeded or would exceed the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years and in which any of our directors or executive officers, any holder of more than 5% of our common stock or any member of the immediate family of any of these persons or entities had or will have a direct or indirect material interest.
Director Independence
Although our common stock is not listed on NASDAQ and, as a result, we are not subject to NASDAQ’s listing standards, we voluntarily strive to comply with such standards. As required under the NASDAQ listing standards, a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by a company’s board of directors. Our board of directors, in applying the standards for independence as defined by Rule 4200(a)(15) of the NASDAQ listing standards and Rule 10A-3(b)(1)(ii) promulgated by the Commission, has affirmatively determined that Messrs. Azeez, Harvey, Krigstein, Rich, Tecce and Walters are “independent” directors and that Messrs. Harrison, Rowell and Soltoff were an “independent” director during the time they served on our board of directors.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
A summary of the fees of Assurance Dimensions, Inc. for the years ended December 31, 2019 and 2018, are set forth below:
2019 | 2018 Fees | |||||||
| Audit Fees (1) | $ | 87,500 | $ | 87,500 | ||||
| Audit Related Fees | - | - | ||||||
| All Other Fees | - | - | ||||||
| Total Fees | $ | 87,500 | $ | 87,500 | ||||
| (1) | Audit fees were for professional services rendered for the audit and interim quarterly reviews of our consolidated financial statements, which are normally provided in connection with statutory and regulatory filings or engagements. |
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors.
The audit committee pre-approves all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services.
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| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
The following documents are filed as part of this Form 10-K:
1. Financial Statements. See Financial Statements on page F-1 of this Annual Report on Form 10-K.
2. Financial Statement Schedules. None, as all information required in these schedules is included in the consolidated financial statements or the notes thereto.
3. Exhibits. The Exhibits listed below are filed or incorporated by reference as part of this Annual Report on Form 10-K. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated below.
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37
38
39
40
41
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| Exhibit Number | Description | |
| 32.1** | Principal Executive Officer Certification pursuant to 18 U.S.C Section 1350, as adapted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2** | Principal Financial Officer Certification pursuant to 18 U.S.C Section 1350, as adapted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 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
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| INSPRO TECHNOLOGIES CORPORATION | ||
| By: | /s/ Anthony R. Verdi | |
| Anthony R. Verdi | ||
| President, Chief Executive Officer, Chief Financial Officer (Principal Executive, Financial and Accounting Officer) | ||
We, the undersigned officers and directors of InsPro Technologies Corporation, hereby severally constitute and appoint Anthony R. Verdi our true and lawful attorney with full power to him to sign for us and in our names in the capacities indicated below, the Annual Report on Form 10-K filed herewith and any and all subsequent amendments to said Annual Report, and generally to do all such things in our names and on our behalf in our capacities as officers and directors to enable InsPro Technologies Corporation to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney, or any of them, to said Annual Report and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| /s/ Anthony R. Verdi | President, Chief Executive Officer, Chief Financial Officer | March 19, 2020 | ||
| Anthony R. Verdi | (Principal Executive, Financial and Accounting Officer) | |||
| /s/ Donald R. Caldwell | Chairman of the Board of Directors | March 19, 2020 | ||
| Donald R. Caldwell | ||||
| /s/ Michael Azeez | Director | March 19, 2020 | ||
| Michael Azeez | ||||
| /s/ Kenneth Harvey | Director | March 20, 2020 | ||
| Kenneth Harvey | ||||
| /s/ Alan Krigstein | Director | March 20, 2020 | ||
| Alan Krigstein | ||||
| /s/ Sanford Rich | Director | March 19, 2020 | ||
| Sanford Rich | ||||
| Frederick Tecce | Director | March [__], 2020 | ||
| Director | March [__], 2020 | |||
| Edmond Walters |
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