We also lease approximately 13,600 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 Atiam business segment, or Atiam, is a provider of comprehensive, web-based insurance administration software applications. Atiam’s flagship software product is InsPro, which was introduced in 2004. Atiam’s clients include insurance carriers and third party administrators. Atiam realizes revenue from the sale of software licenses, application service provider fees, software maintenance fees and consulting and implementation services.
The Telesales business segment, or Telesales, specializes in the direct marketing of health and life insurance and related products to individuals and families. Telesales has developed proprietary technologies and processes to connect prospective insurance customers with Telesales’ agents and service personnel using an integrated on-line platform with call center follow up. Telesales employs licensed agents supported by tele-application, customer service and technology employees for the purpose of providing immediate information to prospective customers and selling insurance products. Telesales receives commission and other fees from the insurance companies for the sale of their products.
On February 20, 2009, we entered into a Client Transition Agreement with eHealth, pursuant to which we transferred to eHealth certain lead information relating to health insurance prospects and broker of record status and the right to receive commissions on certain of the in-force individual and family major medial health insurance policies and ancillary dental, life and vision insurance policies issued by Aetna, Inc., Golden Rule Insurance Company, Humana, Inc., PacifiCare, Inc., Time Insurance Company (marketed under the name Assurant Health) and United Healthcare Insurance Co. on which we were designated as the broker of record as of that date. Certain policies and products were excluded from the transaction, including our agency business generated through our ISG agents, all short term medical products and all business produced through carriers other than the specified carriers. As consideration for such transfer, eHealth agreed to pay us approximately $1,280,000 in cash and to assume certain of our liabilities relating to historical commission advances on the transferred policies in an aggregate amount of approximately $1,385,000. eHealth has also agreed to pay us a portion of each commission payment received by eHealth relating to a transferred policy for the duration of the policy, provided that eHealth remains broker of record on such policy. Additionally, eHealth agreed to construct one or more websites for the purpose of selling health insurance products and to pay us a portion of all first year and renewal commissions received by eHealth from policies sold through such websites that result from marketing to prospects using leads that we delivered to eHealth.
We have not yet completed a determination of the impairment of long term assets as a result of the cessation of direct marketing and sales and eHealth transaction. The long term assets, which may be impaired, and their net book value as of December 31, 2008, include property and equipment net of depreciation of approximately $434,067, internet domain name www.healthbenefitsdirect.com of $22,389, intangible assets net of accumulated amortization acquired from ISG, including the value of purchased commission override revenue of $227,779 and value of acquired carrier contracts and agent relationships of $1,032,294. We anticipate completing an impairment determination during the first quarter of 2009.
The preparation of financial statements in conformity with U.S. generally accepted accounting principals requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate the application of these estimates, including those related to the recoverability of investments, useful lives of intangible assets, valuation of goodwill, product development costs, revenue recognition and deferred revenue and accounting for income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts could differ significantly from these estimates.
The Company recognizes revenues in accordance with AICPA Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9 (Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions). Revenue from software license agreements is recognized when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectibility is probable. The Company considers fees relating to arrangements with payment terms extending beyond one year to not be fixed or determinable and revenue for these arrangements is recognized as payments become due from the customer. In software arrangements that include more than one InsPro module, the Company allocates the total arrangement fee among the modules based on the relative fair value of each of the modules.
We review the carrying value of property and equipment and intangible assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.
Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R), “Share-Based Payment,” under the modified prospective method. SFAS No. 123(R) eliminates accounting for share-based compensation transactions using the intrinsic value method prescribed under APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and requires instead that such transactions be accounted for using a fair-value-based method. Under the modified prospective method, we are required to recognize compensation cost for share-based payments to employees based on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied. For periods prior to adoption, the financial statements are unchanged, and the pro forma disclosures previously required by SFAS No. 123, as amended by SFAS No. 148, will continue to be required under SFAS No. 123(R) to the extent those amounts differ from those in the Statement of Operations.
RESULTS OF OPERATIONS FOR YEAR ENDED DECEMBER 31, 2008 COMPARED TO THE YEAR ENDED DECEMBER 31, 2007
For the twelve months ended December 31, 2008, we earned revenues of $24,128,027 compared to $20,709,750 for the twelve months ended December 31, 2007, an increase of $3,418,277 or 17%. The increase in revenues is primarily attributable to an increase in Atiam segment revenues. We acquired Atiam on October 1, 2007. The results of Atiam’s operations prior to our October 1, 2007 acquisition have been excluded from our financial statements. The results of our Atiam business segment have been included in the Company’s statement of operations as of October 1, 2007. Thus Atiam segment’s results from operations for years ended December 31, 2008 and 2007 are not comparable. Telesales segment revenues declined due to lower periodic bonus revenue from carriers, which was caused by lower marketing and selling activity. Revenues include the following:
We had 31 licensed insurance agent employees at December 31, 2008 as compared to 118 at December 31, 2007. In March 2008, we closed our New York sales office, which accounted for approximately 20% of our sales activity for 2007. We also reduced sales and sales support staff in our Florida office. As a result of the closure, we terminated 34 licensed sales agents and eliminated eight open licensed sales positions, which were vacated subsequent to December 31, 2007. In October 2008, we further reduced our Telesales sales and sales support staff in our Florida office. In October 2008, we terminated 51 employees, including 22 agents. Management believes the reduction in future revenues will be mitigated by significant reductions in future expenses.
In 2008, we earned revenues of $408,120 relating to the sale of leads to third parties as compared to $859,890 in 2007. We re-sell certain leads that we purchase in order to recoup a portion of our lead cost. The primary reason for the decrease in lead sales revenue is a decrease in lead cost spending, which resulted in a reduced number of leads available for sale. As a result of the cessation of direct marketing in the first quarter of 2009, management does not anticipate receiving material lead revenue in the future.
In 2008, we earned revenues of $97,177 relating to Insurint technology fees. Our Insurint subsidiary provides a proprietary, professional-grade, web based agent portal to support and assist insurance agents in the business of marketing and selling health insurance and related products. Insurint’s technology fees commenced in the second quarter of 2008.
In 2008 we earned revenue of $460,640 relating to the sub-lease of a portion of our Florida office and our former New York sales office. Sub-lease revenue includes base rent, additional rent pertaining to utilities and occupancy costs and certain telephony, technology and facility services provided by us to certain of our sub-tenants.
On February 21, 2008 the Company entered into a sub-lease agreement with a third party whereby the third party sub-leased approximately 5,200 square feet of our Deerfield Beach office space beginning March 1, 2008 through February 28, 2009. This sub-lease agreement was amended and restated on October 3, 2008 to increase the sub-leased square footage to 13,900 and extend the lease term through January 31, 2010.
Our total operating expenses in 2008 were $33,091,737 as compared to $35,037,791 for 2007, for a decrease of $1,946,054 or 6%. Total operating expenses consisted of the following:
Our operating expenses for 2008 included approximately $3.0 million of non-recurring charges pertaining to severance, acceleration of equity compensation, expenses related to the closing of our New York office and litigation.
Interest income was attributable to interest-bearing cash deposits resulting from the capital raised in private placements. The decrease in interest income is the result of a decline in interest rates and to a lesser extent a decline in cash balances.
Subsequent to December 31, 2008, we ceased the direct marketing and sale of health and life insurance and related products to individuals and families in our Telesales call center. We continue to sell health and life insurance and related products to individuals and families through our non-employee ISG agents. Our Telesales business segment eliminated 43 positions including all of its licensed employee sales agents, along with other Telesales service and support personnel, and eliminated another 20 positions in Telesales through attrition. Management believes these reductions will result in the reduced expenses in excess of reduced revenue.
In 2008, we earned revenue of $1,404,244 relating to ISG as compared to $1,821,958 in 2007. ISG revenue declined as a result of reduced new sales, the lapse of inforce business and reduced commission overrides earned on the Telesales segment on new and inforce business. As a result of the transactions with eHealth in February 2009, management anticipates a significant decline in ISG commission revenue as a result of the elimination of commission overrides for all Telesales business.
In 2008, we earned revenues of $408,120 relating to the sale of leads to third parties as compared to $859,890 in 2007. We re-sell certain leads that we purchase in order to recoup a portion of our lead cost. The primary reason for the decrease in lead sales revenue is a decrease in lead cost spending, which results in a reduced number of leads available for sale. As a result of the cessation of direct marketing in the first quarter of 2009, management does not anticipate receiving material lead revenue in the future.
In 2008, we earned revenue of $460,640 relating to the sub-lease of a portion of our Florida office and our former New York sales office. Sub-lease revenue includes base rent, additional rent pertaining to utilities and occupancy costs and certain telephony, technology and facility services provided by us to certain of our sub-tenants.
On April 17, 2008 the Company entered into a sub-lease agreement with a third party whereby the third party will sub-lease our New York office space for the balance of the Company’s Sublease Agreement and pay the Company sub-lease payments essentially equal to the Company’s costs under the Sublease Agreement. The third party commenced paying sub-sublease payments to the Company in September 2008 however the third party failed to pay their December 2008, January and February 2009 rent when due. The Company is a beneficiary to a letter of credit in the amount of $151,503, which is available for the Company to draw against in the event of the third party’s failure to pay their rent when due. We have notified the third party that they have breached their lease and that we will make draws against the letter of credit for amounts past due.
Our Telesales segment’s total operating expenses in 2008 were $26,781,420 as compared to $34,219,253 in 2007, for a decrease of $7,437,833 or 22%. Total operating expenses consisted of the following:
This decrease is the result of the reduced personnel employed by the Telesales segment.
The Telesales segment had 89 employees at December 31, 2008 as compared to 253 at December 31, 2007.
Subsequent to December 31, 2008, we ceased the direct marketing and sale of health and life insurance and related products to individuals and families in our Telesales call center. We continue to sell health and life insurance and related products to individuals and families through our non-employee ISG agents. Our Telesales business segment eliminated 43 positions including all of its licensed employee sales agents along with other Telesales service and support personnel and eliminated another 20 positions in Telesales through attrition. Management believes these reductions will result in the reduced expenses in excess of reduced revenue.
The decrease in 2008 as compared to 2007 was in part the result of an expense in 2007 pertaining to the modification of the expiration dates and vesting of two former executives’ options in the amount of $212,426 and vesting schedules of stock options issued in 2006.
Employee benefits expense was $347,011 in 2008 as compared to $433,099 in 2007. This decrease is the result of the reduced personnel employed by the Telesales segment. Our employee benefit cost consists of the company-paid portion of group medical, dental and life insurance coverage and partial matching of employee contributions to our 401(k) plan.
In 2008, we incurred depreciation expense of $625,405 as compared to $590,705 in 2007. The increase pertains to the impairment of furniture and equipment located at the Company’s former New York sales office.
In 2008, we incurred rent, utilities and other occupancy expense of $2,609,673 as compared to $1,848,632 in 2007. The increase was primarily attributable to a $629,326 accrual for the non-terminable lease for Telesales’ New York sales office. In March 2008, we closed our sales office located in New York. On April 17, 2008, we entered into a sub-lease agreement with a third party, whereby the third party will sub-lease our New York office space for the balance of our lease and pay us sub-lease payments essentially equal to the payments under the lease. The terms of the sublease agreement required us to make certain leasehold improvements. The third party commenced paying sub-lease payments to us in September 2008; however, the third party failed to pay its December 2008 and January and February 2009 rent when due. We are a beneficiary to a letter of credit in the amount of $151,503, which is available for us to draw against in the event of the third party’s failure to pay its rent when due. Effective December 31, 2008, we have accrued $629,396 related to the non-terminable lease for the abandoned facilities, which is net present value of our future lease payments due under the remaining sublease agreement term, plus management’s estimate of utility payments, which are estimated to be $773,311, less management’s estimate of future sub-lease revenue secured by the letter of credit, which is estimated to be $120,023.
In March 2008, we closed our New York sales office and also reduced sales and sales support staff in our Florida office. As a result, we terminated 34 licensed sales agents and eliminated eight open licensed sales positions, which were vacated subsequent to December 31, 2007. In October 2008, we further reduced our Telesales sales and sales support staff in our Florida office and terminated 51 employees, including 22 agents.
In 2008, we had a decrease of $658,891, or 36%, in travel, entertainment and office expense as compared to 2007, due to the closing of the New York sales office and an overall reduction in travel.
In 2008, we earned software license revenue from a single InsPro client.
Lead, advertising and other marketing was $15,017 in 2008 as compared to $11,052 in 2007 and consisted primarily of marketing and conference fees.
In 2008, we incurred amortization expense of $43,574 for software development cost for external marketing.
In 2008, we incurred rent, utilities, telephone and communications expense, which consisted of the following:
In 2008, we incurred professional fees of $1,276,053, which pertain primarily to outsourced system development costs and to a lesser extent employee recruiting services.
As a result of these factors described above, we reported a loss from operations of $731,806 in 2008 in our Atiam business segment.
Net cash used by operations was $8,354,232 in 2008 as compared to cash used by operations of $5,500,884 in 2007. In 2008, we used cash to fund:
Decreases in unearned commission advances of $5,428,424 relating to decreased commission payments from certain of our insurance carriers that advance our future commission revenue.
We have an advance agreement with Golden Rule that is contractually limited to a maximum of $9,000,000, can be terminated by either party at any time, and in the event of termination, our outstanding advance balance (including interest, if any) can be called by Golden Rule with seven days’ written notice. This advance agreement expired on December 31, 2008 and, as a result, Golden Rule will no longer advance first year premium commissions to us going forward. As of December 31, 2008, our outstanding advance balance with Golden Rule was $2,317,003. Subsequent to December 31, 2008 in connection with the eHealth transactions, eHealth paid Golden Rule a total of $966,097, which represented a partial repayment of our outstanding advance balance owed to Golden Rule. eHealth advanced these funds from amounts that otherwise would have been due to us from eHealth under the terms of the eHealth transaction. In addition, eHealth assumed approximately $794,000 of our outstanding advance balance with Golden Rule as of the date of the eHealth transaction.
As of December 31, 2008, our outstanding advance balance with Assurant was $236,064. Subsequent to December 31, 2008, in connection with the eHealth transaction, eHealth assumed approximately $220,000 of our outstanding advance balance with Assurant as of the date of the eHealth transaction.
The payment of $157,288 of income tax liabilities assumed as a result of our acquisition of Atiam in 2007.
Increases in accrued expense of $599,307 in 2008, which is primarily the result of increased professional services in the fourth quarter of 2008.
Stock-based compensation and consulting expense of $1,516,686 and $1,772,031 in 2008 and 2007, respectively.
$135,401 loss on impairment of property and equipment pertaining to furniture and lease-hold improvements located at our former New York sales office.
Net cash used by investing activities in 2008 was $760,558 as compared to $1,887,020 in 2007. Investing activities pertain to internal development of software for internal and external use and the purchase of property and equipment supporting current and future operations. Investing activities in 2007 included $1.35 million for the purchase of Atiam on October 1, 2007.
In 2008, our Atiam business segment has entered into several capital lease obligations to purchase equipment used for operations.
The letters of credit pertaining to the lease for our Florida office and our New York office were collateralized in the form of a money market account, which as of December 31, 2008, had a balance of $1,150,000. This money market account is on deposit with the issuer of the letters of credit and is classified as restricted cash on our balance sheet. The terms of the money market account allow us to receive interest on the principal but prohibits us from withdrawing the principal for the life of the letters of credit.
As consideration for the grant of the rights and licenses under the License Agreement, we paid to Realtime a $10,000 nonrefundable cash deposit and upon delivery of the STP software and other materials we will pay a license fee in the form of 216,612 unregistered shares of our common stock. Concurrent with entering into the License Agreement, HBDC and Realtime entered into a Registration Rights Agreement that provides for piggyback registration rights for the to be issued shares.
Consolidated Statements of Operations for the Years Ended December 31, 2008 and December 31, 2007
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008 and December 31, 2007
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States and include those policies and procedures that:
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States;
Provide reasonable assurance that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, such as resource constraints, human error, lack of knowledge or awareness and the possibility of intentional circumvention of these controls, internal control over financial reporting may not prevent or detect misstatements. Furthermore, the design of any control system is based, in part, upon assumptions about the likelihood of future events, which assumptions may ultimately prove to be incorrect. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of its internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2008.
HBDC was formed in January 2004 for the purpose of acquiring, owning and operating businesses engaged in direct marketing and distribution of health and life insurance products, primarily utilizing the Internet. On September 9, 2005, HBDC acquired three affiliated Internet health insurance marketing companies, namely Platinum Partners, LLC, a Florida limited liability company, Health Benefits Direct II, LLC, a Florida limited liability company, and Health Benefits Direct III, LLC, a Florida limited liability company. HBDC issued 7,500,000 shares of its common stock and a warrant to purchase 50,000 shares of its common stock, in the aggregate, in exchange for 100% of the limited liability company interests of these companies.
Telesales specializes in the direct marketing of health and life insurance and related products to individuals and families. Telesales has developed proprietary technologies and processes to connect prospective insurance customers with Telesales’ agents and service personnel using an integrated on-line platform with call center follow up. Telesales employs licensed agents supported by tele-application, customer service and technology employees for the purpose of providing immediate information to prospective customers and selling insurance products. Telesales receives commission and other fees from the insurance companies on behalf of which it sells insurance products for the sale of such products. See Note 14 - Subsequent Events “Cessation of Direct Marketing and Sales in the Telesales Call Center, Transactions with eHealth and Reduction in Staffing”.
Atiam is a provider of comprehensive, web-based insurance administration software applications. Atiam’s flagship software product is InsPro, which was introduced in 2004. InsPro incorporates a modular design, which enables the customer to purchase only the functionality needed. Atiam’s clients include insurance carriers and third party administrators. Atiam realizes revenue from the sale of software licenses, application service provider fees, software maintenance fees and consulting and implementation services. See Note 5 - Atiam Acquisition and Note 16 Segment Information.
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 subsidiaries. All material inter-company balances and transactions have been eliminated.
For purposes of comparability, certain prior period amounts have been reclassified to conform to the 2008 presentation.
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates in 2008 and 2007 include the allowance for doubtful accounts, stock-based compensation, the useful lives of property and equipment and intangible assets, revenue recognition and deferred compensation advances to employees.
The carrying amounts of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and capital leases approximated fair value as of December 31, 2008 and December 31, 2007, because of the relatively short-term maturity of these instruments and their market interest rates.
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 (SFAS) No. 144, “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.
Intangible assets consist of assets acquired in connection with the acquisitions of Insurance Specialist Group, Inc. (“ISG”) and Atiam, costs incurred in connection with the development of the Company’s software and website and the purchase of internet domain names. See Note 3 - ISG Acquisition, Note 3 - Atiam Acquisition and Note 5 - Intangible Assets.
As a result of termination of Ivan Spinner’s employment the Company has determined the value of an employment and non-compete agreement acquired pertaining to Mr. Spinner impaired as of December 31, 2008 and recorded an impairment charge of $85,078.
We follow the guidance of the Commission’s Staff Accounting Bulletin 104 for revenue recognition. In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectibility is reasonably assured.
Our Telesales business segment generates revenue primarily from the receipt of commissions paid to the Company by insurance companies based upon the insurance policies sold to consumers by the Company. These revenues are in the form of first year, bonus and renewal commissions that vary by company and product. We recognize commission revenue primarily from the sale of health insurance, after we receive notice that the insurance company has received payment of the related premium. First year commission revenues per policy can fluctuate due to changing premiums, commission rates, and types or amount of insurance sold. Insurance premium commission revenues are recognized pro-rata over the terms of the policies. Revenues for renewal commissions are recognized after we receive notice that the insurance company has received payment for a renewal premium. Renewal commission rates are significantly less than first year commission rates and may not be offered by every insurance company or with respect to certain types of products. The unearned portion of premium commissions has been included in the consolidated balance sheet as a liability for unearned commission advances.
The Company also generates revenue from the sub-lease of our leased New York City office and a portion of our leased Deerfield Beach Florida office, which are both leased under operating leases. The terms of the Company’s sub-lease of our New York City office is under similar terms as our lease. The Company sub-leases portions of our Deerfield Beach office to two unaffiliated parties through January 31, 2010. Sub-lease revenue includes base rent, additional rent representing a portion of occupancy expenses under the terms of the sub-leases and certain technology and facility services provided. We recognize sub-lease revenue when lease rent payments are due in accordance with the sub-lease agreements in accordance with SFAS No. 13 “Accounting for Leases.” Recognition of sub-lease revenue commences when control of the facility has been given to the tenant. We record a provision for losses on accounts receivable equal to the estimated uncollectible amounts. This estimate is based on our historical experience and a review of the current status of the Company’s receivables.
Consulting and implementation services are generally associated with the implementation of an InsPro instance for either an ASP or licensed client, and cover such activity as InsPro installation, configuration, modification of InsPro functionality, client insurance plan set-up, client insurance document design and system documentation.
The unearned portion of Atiam’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 Company regularly advanced commissions to independent sales agents and sales employees, which are accounted for as deferred compensation advances. If the Company does not ultimately receive its revenue pertaining to the underlying product sales for which the Company has advanced commissions, the Company deducts such advanced commissions from the sales agent’s or sales employee’s current or future commissions. Deferred compensation advances are charged to expense when earned by the sales agent or sales employee, which approximates the Company’s recognition of earned revenue for the underlying product sales. The recoverability of deferred compensation advances is periodically reviewed by management and is net of management’s estimate for uncollectability. Management believes deferred compensation advances as reported are fully realizable.
During the year ended December 31, 2008, approximately 36% and 16% of the Company’s revenue was earned from each of the Company’s two largest insurance carriers. During the years ended December 31, 2007, approximately 50% and 16% of the Company’s revenue was earned from each of the Company’s two largest insurance carriers. See Note 14 - Subsequent Events.
The Company follows the provisions of SFAS No. 123(R), “Share-Based Payment,” under the modified prospective method. SFAS No. 123(R) requires stock based compensation transactions be accounted for using a fair-value-based method. Under the modified prospective method, the Company is required to recognize compensation cost for share-based payments to employees based on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied.
The cost of stock based compensation awards issued to non-employees for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in Emerging Issues Task Force Issue (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”).
The Company has adopted View C of EITF 05-4 “The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject” to EITF Issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Company’s Own Stock” (“EITF 05-4”). Accordingly, the Company classifies as liability instruments the fair value of registration rights agreements when such agreements (i) require it to file, and cause to be declared effective under the Securities Act, a registration statement with the Commission within contractually fixed time periods, and (ii) provide for the payment of liquidating damages in the event of its failure to comply with such agreements. Under View C of EITF 05-4, (i) registration rights with these characteristics are accounted for as derivative financial instruments at fair value and (ii) contracts that are (a) indexed to and potentially settled in an issuer’s own stock and (b) permit gross physical or net share settlement with no net cash settlement alternative are classified as equity instruments.
The Company adopted the provisions of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” on January 1, 2007. The adoption did not result in the recording of a liability for unrecognized tax benefits. The Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and local jurisdictions. While the Company’s past tax returns are not currently under examination, generally all past returns are subject to examination by the relevant taxing authorities. The Company has not recorded any liability for uncertain tax positions since management believes the tax return position taken reflects the most likely outcome upon audit and that any audit adjustment would not result in any additional tax liability as a result of the Company’s material tax losses.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which provides companies with an option to report selected financial assets and liabilities at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. The Company believes that the adoption of SFAS No. 159 will not have a material effect on the Company’s financial statements.
In December 2007 FASB issued FAS 141(R) “Business Combinations” (“FAS 141 (R)”) and FAS 160 “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”). These statements are effective for fiscal years, and interim periods within those fiscal years in case of FAS 160, beginning on or after December 15, 2008. Earlier adoption is prohibited. Together these statements revise the accounting rules with respect to accounting for business combinations. Specifically, the objective of FAS 141(R) is to improve the relevance, representational faithfulness and comparability of the information that the reporting entity provides in its financial reports about a business combination and its effects. This statement thus establishes principles and requirements for how the acquirer:
Recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
The ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity.
Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. A parent’s ownership interest in a subsidiary changes if the parent purchases additional ownership interests in its subsidiary or if the parent sells some of its ownership interests in its subsidiary. It also changes if the subsidiary reacquires some of its ownership interests or the subsidiary issues additional ownership interests. All of those transactions are economically similar, and this statement requires that they be accounted for similarly, as equity transactions.
Together these statements are not currently expected to have a significant impact on the Company’s consolidated financial statements. A significant impact may however be realized on any future acquisition(s) by the Company. The amounts of such impact cannot be currently determined and will depend on the nature and terms of such future acquisition(s), if any.
In October 2008 the FASB issued FASB Staff Position SFAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP”). This FSP clarifies the application of SFAS No. 157 in an inactive market and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective October 10, 2008 and must be applied to prior periods for which financial statements have not been issued. The application of this FSP did not have a material impact to our consolidated financial statements.
On December 11, 2008, the FASB issued FSP FAS 140-4 and FASB Interpretation (“FIN”) 46(R)-8, Disclosures about Transfers of Financial Assets and Interests in Variable Interest Entities (“FSP FAS 140-4 and FIN 46(R)-8”). This FSP requires additional disclosures by public entities with continuing involvement in transfers of financial assets to special purpose entities and with variable interests in VIEs. FSP FAS 140-4 and FIN 46(R)-8 was effective for reporting periods ending after December 15, 2008. Management believes FSP FAS 140-4 and FIN 46(R)-8 have no material impact on the consolidated financial statements of the Company.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
The Company accounted for the acquisition of ISG using the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141 “Business Combinations”. The Company’s purchase price for ISG in the aggregate was $5,154,329 and consisted of the following:
Intangible assets acquired from ISG were assigned the following values: value of purchased commission override revenue with an assigned value of $1,411,594 amortized over five years in proportion to expected future value; value of acquired carrier contracts and agent relationships with an assigned value of $2,752,143 amortized over five years in proportion to expected future value; and value of an employment and non-compete agreement acquired with an assigned value of $800,593 amortized straight line over the contractual period, which is a weighted average expected useful life of 3.1 years. Intangible assets acquired from ISG had the following unamortized values as of December 31, 2008: value of purchased commission override revenue of $227,779 and value of acquired carrier contracts and agent relationships of $1,032,294. As a result of Ivan Spinner’s termination of employment the Company has determined the value of an employment and non-compete agreement acquired pertaining to Mr. Spinner impaired as of December 31, 2008 and recorded an impairment charge of $85,078 in depreciation and amortization expense.
The Company accounted for the acquisition of Atiam using the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141 “Business Combinations”. Our calculation for the consideration paid for Atiam in connection with the Bilenia Agreement and the Atiam Merger Agreement in the aggregate was $3,080,744 and consisted of the following:
In connection with the Atiam acquisition, Atiam entered into three-year employment agreements with four key employees of Atiam effective October 1, 2007. These employment agreements provide that these four key employees will be compensated at an aggregate annual base salary of $700,000 with bonus compensation at the discretion of the Company’s board. These agreements may be terminated by the Company for “cause” (as such term is defined in the agreements) and without “cause” upon 30 days notice. These agreements may be terminated by the Company without “cause”, in which case the terminated employee will be entitled to their base salary for a period ranging from six to twelve months. These agreements also contain non-competition and non-solicitation provisions for the duration of the agreements plus a period ranging from six to twelve months after termination of employment.
For the years ended December 31, 2008 and 2007, depreciation expense was $759,457 and $605,536, respectively.
For the years ended December 31, 2008 and 2007, amortization expense was $1,808,688 and $1,681,231 respectively.
The Company’s advance agreement with Humana, Inc. (“Humana”) allows the insurance carrier to terminate future advances and convert the outstanding advance balance into a promissory note, which if not repaid within 30 days, would incur interest expense. As of December 31, 2008 the Company’s outstanding advance balance with Humana was $353,808. Subsequent to December 31, 2008 in connection with the eHealth transaction eHealth assumed $370,794 of the Company’s outstanding advance balance with Humana as of the date of the eHealth transaction. Effective January 31, 2009 Humana notified the Company that it will no longer advance first year premium commissions and charged back to the Company the remaining unearned commission advance as of January 31, 2009.
As of December 31, 2008 the Company’s outstanding advance balance with Time Insurance Company (marketed under the name Assurant Health) (“Assurant”) was $236,064. Subsequent to December 31, 2008 in connection with the eHealth transactions eHealth assumed approximately $220,000 of the Company’s outstanding advance balance with Assurant as of the date of the eHealth transactions.
On March 30, 2007, the Company’s Co-Chairman and former CEO, Alvin H. Clemens, participated in a private placement along with other accredited and institutional investors wherein he purchased 1,000,000 shares of the Company’s Common Stock and a warrant to purchase 500,000 shares of the Company’s Common Stock for a total purchase price of $2,225,000.
On March 31, 2008, Co-Investment Trust II, L.P., designee of Cross Atlantic Capital Partners, Inc. participated in a private placement along with other accredited and institutional investors wherein it purchased 5.0 million investment units for a purchase price of $4,000,000.
SendTec, Inc. (“SendTec”) provided certain marketing and advertising services in 2007 at a cost of $14,950. Paul Soltoff, a director of the Company, is the Chief Executive Officer of SendTec. The Company paid SendTec $32,741 in 2007 and recorded a related party liability of $3,500 as of December 31, 2007, which was subsequently paid in 2008.
On February 15, 2007, the Company granted 125,000 restricted shares of Common Stock to each of Charles A. Eissa, the Company’s President, and Ivan M. Spinner, the Company’s former Senior Vice President, in accordance with the terms of the Plan. The shares granted to Messrs. Eissa and Spinner were valued at $3.00 per share and vest as follows: 50,000 shares on February 15, 2008; 50,000 additional shares on February 15, 2009; 2,083 shares per month on the 15th day of each month thereafter beginning on March 15, 2009 through January 15, 2010; and 2,087 shares on February 15, 2010.
On March 30, 2007, the Company entered into Securities Purchase Agreements (“Purchase Agreements”) and completed a private placement with certain institutional and individual accredited investors and issued 5,000,000 shares of its Common Stock and warrants to purchase 2,500,000 shares of its Common Stock. Pursuant to the Purchase Agreements, the Company sold investment units (each, a “2007 Unit”) in the 2007 Private Placement at a per unit purchase price equal to $2.25. Each 2007 Unit sold in the 2007 Private Placement consisted of one share of Common Stock and a Warrant to purchase one-half (1/2) of one share of Common Stock at an initial exercise price of $3.00 per share, subject to adjustment. The gross proceeds from the 2007 Private Placement were $11,250,000. Alvin H. Clemens purchased 1,000,000 2007 Units in the 2007 Private Placement.
On April 1, 2008, the Company issued 99,010 restricted shares of its Common Stock to Mr. Edmond Walters upon the effective date of his becoming a director of the Company in accordance with the Company’s Non Employee Director Compensation Plan and the Company’s 2006 Omnibus Equity Compensation Plan. Mr. Walters was granted shares valued at $100,000 in aggregate based on the $1.01 closing price of our Common Stock on the OTCBB on April 1, 2008, and will vest as follows: 33,003 shares on April 1, 2008; 33,003 additional shares on April 1, 2009; 33,004 shares on April 1, 2010. Pursuant to the Company’s 2006 Omnibus Equity Compensation Plan, Mr. Walters has voting, dividend and distribution rights pertaining to his unvested shares, but he is restricted from selling or otherwise disposing of his restricted shares until vesting occurs.
The Amendment also provided that, in the event Mr. Brauser was removed as an officer or employee of the Company at any time on or before December 31, 2007, 100% of the Option Shares that are unexercisable as of the removal date will become fully vested upon such removal. Alternatively, in the event Mr. Brauser resigned as an employee of the Company at any time after June 30, 2007 but before December 31, 2007, 50% of the Option Shares that are unexercisable as of the resignation date would become exercisable upon such resignation.
Finally, the Amendment provides that, upon the termination of Mr. Brauser’s employment with the Company for any reason, the vested portion of the Option Shares as of the date of such termination will remain exercisable by Mr. Brauser for one year following such termination.
On December 7, 2007, the Company and Mr. Frohman entered into an Amendment to the Separation Agreement, which, among other things, extended the exercisable period of Mr. Frohman’s exercisable options for an additional year and terminated all future severance payments from the Company to Mr. Frohman. The Company recorded $105,501 of compensation expense as a result of the modification of Mr. Frohman’s options, which was valued as of December 7, 2007 using the Black-Scholes option-pricing model based on the following assumptions: expected volatility of 48%, risk free interest rate of 3.32%, expected life of 1 year and 0% assumed dividend yield.
The following information applies to options outstanding at December 31, 2008:
The total intrinsic value of stock options granted during 2008 and 2007 was $0 and $0, respectively. The total intrinsic value of stock options outstanding and exercisable as of December 31, 2008 and December 31, 2007 was $0 and $0, respectively.
In March 2007, in connection with the 2007 Private Placement, the Company issued warrants to purchase an aggregate of 2,500,000 shares of common stock at an exercise price of $3.00 per share to the participating investors in the 2007 Private Placement, which provides that the holder thereof shall have the right, at any time after March 30, 2007, but prior to the earlier of (i) ten business days’ after the Company has properly provided written notice to all such holders of a Call Event (as defined below) or (ii) the fifth anniversary of the date of issuance of the warrant, to acquire shares of Common Stock upon the payment of the exercise price. The Company also has the right, at any point after which the volume weighted average trading price per share of the Common Stock for a minimum of 20 consecutive trading days is equal to at least two times the Exercise Price per share, provided that certain other conditions have been satisfied to call the outstanding Warrants (a “Call Event”), in which case such Warrants will expire if not exercised within ten business days thereafter. The Warrants also include a cashless exercise and weighted average anti-dilution adjustment provisions for issuances of securities below the exercise price during the first two years following the date of issuance of the warrants, subject to customary exceptions.
Also in March 2007, in connection with the 2007 Private Placement, the Company issued to the placement agents warrants to purchase in the aggregate 350,000 shares of the Company’s Common Stock, which have an exercise price of $2.80 and are exercisable from September 30, 2007 through March 30, 2010.
On March 31, 2008, in connection with the 2008 Private Placement the Company issued warrants to purchase 6,250,000 shares of its Common Stock at an exercise price of $0.80 per share to the participating investors in the 2008 Private Placement. The 2008 Warrants provide that the holder thereof shall have the right, at any time after March 31, 2008 but prior to the earlier of (i) ten business days’ after the Company has properly provided written notice to all such holders of a 2008 Call Event (as defined below) or (ii) the fifth anniversary of the date of issuance of the 2008 Warrant, to acquire shares of Common Stock upon the payment of $0.80 per Warrant Share (the “2008 Exercise Price”). The Company also has the right, at any point after which the volume weighted average trading price per share of the Common Stock for a minimum of 20 consecutive trading days is equal to at least two times the 2008 Exercise Price per share, provided that certain other conditions have been satisfied to call the outstanding 2008 Warrants (a “2008 Call Event”), in which case such 2008 Warrants will expire if not exercised within ten business days thereafter. The 2008 Warrants also include full ratchet anti-dilution adjustment provisions for issuances of Common Stock or Common Stock equivalents below $0.80 during the first two years following the date of issuance of the Warrants.
Effective March 31, 2008, in connection with the 2008 Private Placement, the Company adjusted the 2007 Warrants pursuant to the weighted average anti-dilution adjustment provisions of the 2007 Warrants. The exercise price of the 2007 Warrants was adjusted from $3.00 to $2.48 and the number of issued, exercisable and outstanding 2007 Warrants was adjusted from 2,500,000 to 3,024,186.
A summary of the status of the Company’s outstanding stock warrants granted as of December 31, 2008 and changes during the period is as follows:
The following information applies to warrants outstanding at December 31, 2008:
Future minimum payments required under capital leases at December 31, 2008 are as follows:
The Company implemented a 401(k) plan on January 1, 2007. Eligible employees contribute to the 401(k) plan. Employees become eligible after attaining age 19 and after 6 months of employment with the Company. 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 contribution (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 $57,556 and $73,236 for the years ended December 31, 2008 and 2007.
On March 31, 2008, in connection with our 2008 Private Placement and Mr. Clemens’ resignation as our Chief Executive Officer and appointment as Co-Chairman of our board of directors, Mr. Clemens’ amended and restated employment agreement was terminated effective upon his resignation on April 1, 2008. Also in connection with our 2008 Private Placement, the Company and Mr. Clemens agreed to enter into a new employment agreement within 15 days of the effective date of Mr. Clemens’ resignation as Chief Executive Officer, which agreement will provide for a one year term and a salary of $300,000, which salary shall be effective as of the date of Mr. Clemens’ resignation.
Mr. Verdi was appointed to the Board on June 20, 2008.
On July 7, 2006, the Company entered into a lease agreement with Radnor Properties-SDC, L.P. (the “Landlord”) for the lease of 7,414 square feet of office space located in Radnor Financial Center, Building B, 150 Radnor-Chester Road, Radnor, Pennsylvania. The term of the lease commenced on November 1, 2006, which was the date the Company, with the Landlord’s prior consent, assumed possession of the premises and the date the Landlord tendered possession of the premises to the Company following the substantial completion of the improvements required to be made by the Landlord under the lease agreement, and will expire on the last day of the 125 th month following the commencement of the lease term. The annual rent increases every 12 months, starting at approximately $161,592 plus a proportionate share of landlord’s building expenses after the second month and ending at approximately $258,378 plus a proportionate share of landlord’s building expenses. Under the terms of the lease agreement, rent is waived for the first five months of the lease term with respect to 5,238 square feet and for the first twelve months for the remaining 2,176 square feet. The Company recorded an expense charge and liability for deferred rent in the amount of $38,578 as of December 31, 2006.
The Company paid to the Landlord a security deposit of $100,000 under the lease (the “Security Deposit”) during the third quarter of 2006, which is accounted for as a deposit in other assets. The Company will not earn interest on the Security Deposit. The Security Deposit will decrease and the Landlord will return to the Company $10,000 on the third anniversary of the commencement date of the lease and on each anniversary thereafter until the required Security Deposit has been reduced to $20,000. The Security Deposit will be returned to the Company 30 days after the end of the lease provided the Company has complied with all provisions of the lease.
On March 7, 2006, the Company entered into a sublease for approximately 13,773 square feet of office space located on the 7th floor at 1120 Avenue of the Americas, New York, New York (“Sublease Agreement”). The initial term of the Sublease Agreement commences in March 2006, and terminates on December 31, 2010. The monthly rent increases every 12 months, starting at approximately $303,000 per annum plus a proportionate share of landlord’s building expenses and ending at approximately $341,000 per annum plus a proportionate share of landlord’s building expenses. In connection with the Sublease Agreement, the Company provided a $151,503 letter of credit to the landlord as a security deposit for the Company’s obligations under the sublease. On May 15, 2006 the Company received the landlord’s consent, dated April 18, 2006, to the Sublease Agreement. In March 2008, the Company closed its sales office located in New York. On April 17, 2008 the Company entered into a sub-lease agreement with a third party (“2008 Sublease Agreement”) whereby the third party will sub-lease the Company’s New York office space for the balance of the Company’s Sublease Agreement and pay the Company sub-lease payments essentially equal to the Company’s costs under the Sublease Agreement. The terms of the 2008 Sublease Agreement required the Company to make certain leasehold improvements. The third party commenced paying sub-sublease payments to the Company in September 2008 however the third party failed to pay their December 2008, January and February 2009 rent when due. The Company is a beneficiary to a letter of credit in the amount of $151,503, which is available for the Company to draw against in the event of the third party’s failure to pay their rent when due. Effective December 31, 2008, the Company has accrued $629,396 related to the non-cancelable lease for the abandoned facilities, which is net present value of the Company’s future lease payments due under the remaining Sublease Agreement term plus management’s estimate of utility payments, which is estimated to be $773,311, less management’s estimate of future sub-lease revenue under the 2008 Sublease Agreement secured by the letter of credit, which is estimated to be $120,023.
Future minimum payments required under operating leases, severance and employment agreements and service agreements at December 31, 2008 are as follows:
On August 7, 2008, a former employee of the Company (the “Plaintiff”) filed a putative collective action in the United States District Court for the Southern District of Florida, case no. 08-CV-61254-Ungaro-Simonton, alleging that the Company and a co-defendant, who is an officer of the Company, unlawfully failed to pay overtime to its insurance sales agents in violation of the Fair Labor Standards Act (“FLSA”). Plaintiff purported to bring claims on behalf of a class of current and former insurance sales agents who were classified as non-exempt by the Company and compensated at an hourly rate, plus commissions (“Agents”). On October 16, 2008, the Court conditionally certified a collective action under the FLSA covering all Agents who worked for the Company within the last three years. Plaintiff and all Agents who opt to participate in the collective action seek payment from the Company of compensation for all overtime hours worked at the rate of one and one-half times their regular rate of pay, liquidated damages, attorneys’ fees, costs, and interest. On March 2, 2009, the parties reached an agreement to settle this case. That settlement will be submitted to the court for necessary approval. As of December 31, 2008 the Company recorded $200,000 of expense in other general and administrative expense, which represents the estimated cost of the settlement.
The Company is a party to sales and marketing agreements whereby the Company has guaranteed the repayment of unearned commission advances paid directly from third parties including certain of the Company’s insurance carriers to the Company’s non-employee ISG agents. Under these agreements certain third parties pay commissions directly to the Company’s non-employee ISG agents and such payments include advances of first year premium commissions before the commissions are earned. Unearned commission advances from the Company’s insurance carriers to the Company’s non-employee ISG agents are earned after the insurance company has received payment of the related premium. In the event that the insurance company does not receive payment of the related premium pertaining to an unearned commission advance the third parties generally deduct the unearned commission advance from its commission payments to the Company’s non-employee ISG agents in the form of charge-backs. In the event that commission payments from these third parties to the Company’s non-employee ISG agents do not exceed the charge-backs these third parties may deduct the unearned commission advance to non-employee ISG agents from their payments to the Company or demand repayment of the non-employee ISG agents’ unearned commission balance from the Company. The current amount of the unearned commission advances these third parties to the Company’s non-employee ISG agents, which is the maximum potential amount of future payments the Company could be required to make to these third parties, is estimated to be approximately $643,000 as of December 31, 2008. As of December 31, 2008 the Company has recorded a liability of $76,651 in accrued expenses for the estimated amount the Company anticipates it will pay pertaining to these guarantees. Unearned commission advances from these third parties are collateralized by the future commission payments to the non-employee ISG agents and to the Company. The Company has recourse against certain non-employee ISG agents in the event the Company must pay the unearned commission advances.
As of December 31, 2008 the Company has not taken delivery of the STP software or issued Common Stock in connection with the License Agreement.
We acquired Atiam on October 1, 2007. The results of Atiam’s operations prior to our October 1, 2007 acquisition have been excluded from our financial statements. The results of our Atiam business segment have been included in the Company’s statement of operations as of October 1, 2007. Thus Atiam segment’s results from operations for years ended December 31, 2008 and 2007 are not comparable.
The table below summarizes the differences between the Company’s effective tax rate and the statutory federal rate as follows for the periods ended December 31, 2008 and 2007:
On January 10, 2009, warrants to purchase 2,762,500 shares of the Company’s Common Stock at an exercise price of $1.50 per share expired in accordance with the terms of the warrants.
Pursuant to the Purchase Agreement, the Company agreed to sell to Co-Investment 1,000,000 investment units (each, a “2009 Unit”) in the 2009 Private Placement at a per 2009 Unit purchase price equal to $4.00. Each 2009 Unit sold in the 2009 Private Placement consisted of one share of Preferred Stock and a Warrant to purchase one share of Preferred Stock at an initial exercise price of $4.00 per share, subject to adjustment (the “2009 Warrant”).
The Company is also required, under the terms of the 2009 Purchase Agreement, to file a proxy statement (the “Proxy Statement”) and hold a special meeting of the Company’s stockholders (the “Special Meeting”) within 75 days of the effective date of the Purchase Agreement for the purpose of approving a certificate of amendment to the Company’s certificate of incorporation to increase the total number of the Company’s authorized shares of Common Stock from 90,000,000 to 250,000,000 (the “Charter Amendment”). Under the terms of the 2009 Purchase Agreement, Co-Investment has agreed to vote all Preferred Shares and shares of Common Stock beneficially owned by it in favor of the Charter Amendment at the Special Meeting.
During the first quarter of 2009, the Company ceased the direct marketing and sale of health and life insurance and related products to individuals and families in its Telesales call center. The Company continues to sell health and life insurance and related products to individuals and families through its non employee ISG agents. The Company’s Telesales business segment eliminated 43 positions including all of its licensed employee sales agents along with other Telesales service and support personnel and eliminated another 20 positions in Telesales through attrition.
We have not completed a determination of the impairment of long term assets as a result of the cessation of direct marketing and sales and the Agreement. The long term assets, which may be impaired, and their net book value as of December 31, 2008 include property and equipment net of depreciation of approximately $434,000, intangible assets net of accumulated amortization acquired from ISG including value of purchased commission override revenue of $227,779 and value of acquired carrier contracts and agent relationships of $1,032,294. We anticipate completing an impairment determination during the first quarter of 2009.
Amendments to Articles of Incorporation Pertaining to the Convertibility of Preferred Shares into Common Shares
Effective March 25, 2009, in connection with our shareholders’ approval of an amendment to our certificate of incorporation, the Company adjusted the 2007 Warrants pursuant to the weighted average anti-dilution adjustment provisions of the 2007 Warrants. The exercise price of the 2007 Warrants was adjusted from $2.48 to $1.51 and the number of issued, exercisable and outstanding 2007 Warrants were adjusted from 3,024,186 to 4,968,491.
Also effective March 25, 2009, in connection with our shareholders’ approval of an amendment to our certificate of incorporation, the Company adjusted the 2008 Warrants pursuant to the full ratchet anti-dilution adjustment provisions of the 2008 Warrants. The exercise price of the 2008 Warrants was adjusted from $0.80 to $0.20 and the number of issued, exercisable and outstanding 2008 Warrants were adjusted from 6,250,000 to 25,000,000.