INSPRO TECHNOLOGIES CORPORATION Overview
The current operations of
InsPro EnterpriseTM is a comprehensive, web-based insurance administration software application. InsPro Enterprise was introduced byAtiam 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. OnJanuary 30, 2020 , we entered into an agreement and plan of merger (the "Merger Agreement") with Majesco, aCalifornia corporation (the "Buyer") andMajesco Merger Sub, Inc. , aDelaware 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. 10 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 withUnited 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 byInsPro 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 effectiveJanuary 1, 2018 to (i) all new contracts entered into afterJanuary 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. 11 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 byInsPro 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 licensedInsPro Enterprise software to the Company. ASP and hosting customer's accessInsPro Enterprise installed onInsPro 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. EffectiveAugust 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. 12
Results of Operations for the Year Ended
Revenues
For the year ended
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
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 onSeptember 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
· 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
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
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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
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 ofPennsylvania corporate income tax. The effective tax rate for 2018 differed from theU.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
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
result of enhanced collection in 2019 as compared to 2018.
· Decreases in prepaid assets of
of amortization of prepaid software maintenance.
· Decreases in accounts payable of
of the payment of amounts owed to outside IT consulting firms incurred prior to
2019.
· Decreases in accrued expenses of
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
respectively.
· Recorded stock-based compensation expense of
2018, respectively.
16
Net cash used in investing activities in 2019 was
Net cash used in financing activities in 2019 was
· On
unaffiliated company. Payment terms include 36 equal monthly payments of
principal, interest and applicable sales tax of
1, 2019 and ending onJanuary 1, 2022 .
· On
unaffiliated company. Payment terms include 24 equal monthly payments of
principal, interest of
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 endedDecember 31, 2019 , the Company's net loss was$1,194,735 and cash provided by operations was$229,489 . As ofDecember 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.
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