We do not own any real property. We currently lease approximately 50,000 square feet of office space in Deerfield Beach, Florida under a lease agreement with 2200 Deerfield Florida LLC. The lease expires on March 31, 2016 and we have the option to extend the term for two additional 36-month periods. The Company has a one time option to cancel the Lease effective March 31, 2011 provided the Company: a) is not in default of the Lease, b) no part of the Deerfield Beach office is sub-let beyond March 31, 2011, c) the Company and its sub-tenants vacate the Deerfield Beach office on or before March 31, 2011 and d) the Company gives written notice to FG2200, LLC on or before June 30, 2010 accompanied with a payment to FG2200, LLC equal to the sum of 9 months’ installments of base rent plus 9 months’ installments of additional rent for the Company’s share of operating costs under the Lease. The monthly rent increases every 12 months, starting at $62,500 and ending at approximately $81,550.
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 term of this lease commenced on August 1, 2007, and will expire on December 31, 2012. The monthly rent increases every 12 months, starting at approximately $8,500 and ending at approximately $23,900.
The current operations of Health Benefits Direct Corporation (the “Company”, “we”, “us” or “our”) consist of InsPro Technologies, LLC and Insurint Corporation.
InsPro is a comprehensive, web-based insurance administration software application. InsPro was introduced by Atiam Technologies, L.P. (now our InsPro Technologies, LLC subsidiary) in 2004. InsPro clients include health insurance carriers and third party administrators. Unlike our Insurint platform, we market InsPro 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.
Insurint™ is a proprietary, professional-grade, web-based agent portal that aggregates real-time quotes and underwriting information from multiple highly-rated carriers of health and life insurance and related products. We market Insurint using a Software as a Service (SaaS) model instead of software licensing model, which offers easy web-based distribution and pay-as-you-go pricing. We market Insurint primarily to insurance agents, agencies, and other organizations selling health insurance products to families and individuals. Unlike existing health insurance quote engines, Insurint also enables an agent to input responses to a set of questions about the health of proposed insureds, which enables the agent to place an insurance policy faster and more accurately. In addition, Insurint offers a suite of sales tools that agents can use to increase their overall sales production.
Use of Estimates - Management's Discussion and Analysis or Plan of Operation is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management 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 ongoing basis, management evaluates these estimates, including those related to allowances for doubtful accounts receivable and long-lived assets such as intangible assets. Management bases these 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 of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Significant estimates in 2009 and 2008 include the allowance for doubtful accounts, stock-based compensation, the useful lives of property and equipment and intangible assets, accrued expenses pertaining to abandoned facilities, warrant liability and revenue recognition. Actual results may differ from these estimates under different assumptions or conditions.
InsPro Technologies offers InsPro on a licensed and an application service provider (“ASP”) basis. An InsPro software license entitles the purchaser a perpetual license to a copy of the InsPro 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 the InsPro software, paying only for that capacity required to support their business. ASP clients access an instance of InsPro installed on InsPro Technologies owned servers located at InsPro Technologies’ offices or at a third party’s site.
Software maintenance fees apply to both licensed and ASP clients. Maintenance fees cover periodic updates to the application and the InsPro Help Desk.
Insurint Corporation offers Insurint™, which is a proprietary, professional-grade, web-based agent portal that aggregates real-time quotes and underwriting information from multiple highly-rated carriers of health and life insurance and related products. Insurint typically charges its clients a one time account set up fee, which is recognized as earned when collected and the service has been provided, and recurring access fees, which are typically monthly in frequency and are recognized as the service is provided.
The Company recognizes revenues from software license agreements 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.
Consulting and implementation services are from seven InsPro clients. The increase in consulting and implementation services in 2009 as compared to 2008 is attributable to an increase in work modification enhancements and data conversion required for additional clients. Implementation services provided to these clients included assisting clients in setting up their insurance products in InsPro, providing modifications to InsPro’s functionality to support the client’s business, interfacing InsPro with the client’s other systems, automation of client correspondence to their customers and data conversion from the client’s existing systems to InsPro.
In 2009 and 2008 we earned $1,162,500 and $115,000, respectively, from sales of software licenses from 3 InsPro clients in 2009 and 1 client in 2008.
Salaries, wages and bonuses were $6,030,576 in 2009 as compared to $4,800,916 in 2008, an increase of $1,229,660 or 26%. The increase is the result of the hiring of additional staff in InsPro Technologies’ sales and technology departments and Insurint’s sales departments to promote the growth in revenue and to service an expanding client base and $328,366 of bonuses in 2009.
Share based employee and director compensation expense was $555,161 in 2009 as compared to $1,448,836 in 2008, a decrease of $893,675 or 62%.
The decrease is attributable to expense pertaining to an option grant to Mr. Alvin Clemens, who is our former CEO, in the Second Quarter 2008, and due to the vesting of an option grant to a director and options to directors and employees. Share based employee and director compensation consist of stock option and restricted stock grants, which are valued at fair-value at the date of the grant and expensed over the stock option’s vesting period or the duration of employment, whichever is shorter.
Commissions to employees represents commissions paid to InsPro Technologies and Insurint sales personnel.
Employee benefits expense increased as a result of the hiring of additional staff in InsPro Technologies and Insurint. Our employee benefit cost consists of the company paid portion of group medical, dental and life insurance coverage and partial company matching of employee contributions to a 401(k) plan. The increase was the result of an increase in InsPro Technologies’ and Insurint’s staffing.
Payroll taxes expense increased as a result of the hiring of additional staff in InsPro Technologies and Insurint partially offset by a greater number of salaries exceeding the maximum FICA contribution limit.
Advertising and other marketing in 2009 was $282,456 as compared to $32,497 in 2008. The increase was due to the use of outside agencies for services rendered in connection with the development of InsPro Technologies’ marketing strategy including creating the corporate brand and message and redesign of all sales and marketing material, company web site, brochures and sales presentation.
In 2009 we incurred amortization expense of $468,080 for the intangible assets acquired from InsPro Technologies on October 1, 2007. Intangible assets acquired from InsPro Technologies were assigned the following values:
In 2009 we incurred depreciation expense of $330,453 as compared to $307,696 in 2008. The decrease was due to the impairment of assets on discontinued operations.
In 2009 we incurred professional fees of $3,244,018 as compared to $2,407,073 in 2008, an increase of $836,945 or 35%. Professional fees consisted of the following:
In 2009 we had an increase in legal fees as compared to 2008, which was primarily due to legal costs incurred in connection with litigation with certain shareholders.
We incur travel and entertainment expense in connection with marketing, sales and implementation of InsPro at client locations.
During the first quarter of 2009, we ceased the direct marketing and sale of health and life insurance and related products to individuals and families in its Telesales call center. We also discontinued the sale of health and life insurance and related products to individuals and families through our non employee ISG agents. During the first quarter of 2009 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.
On February 20, 2009, we completed the sale of our Telesales call center produced agency business to eHealth Insurance Services, Inc., an unaffiliated third party.
Under the terms of our sale to eHealth, we transferred to eHealth broker of record status and the right to receive commissions on certain of the in-force individual and family major medical health insurance policies and ancillary dental, life and vision insurance policies issued by Aetna, Inc., Golden Rule, Humana, PacifiCare, Inc., Assurant and United Healthcare Insurance Co. on which we were designated as broker of record. 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 those noted above. In addition, we also transferred to eHealth certain lead information relating to health insurance prospects.
The aggregate initial amount of consideration paid by eHealth to us during the first quarter of 2009 was approximately $1,280,000. In addition, eHealth assumed from us certain liabilities relating to historical commission advances on the transferred policies made by the specified carriers in an aggregate amount of approximately $1,385,000. eHealth has also agreed to pay to HBDC II, Inc., a Delaware corporation and our wholly-owned subsidiary, a portion of each commission payment received by eHealth and reported by the specified carrier relating to a transferred policy for the duration of the policy, provided that eHealth remains broker of record on such transferred policy.
Simultaneous with our sale to eHealth, we also entered into a Marketing and Referral Agreement with eHealth. Pursuant to the terms of this agreement, eHealth agreed to construct one or more websites for the purpose of selling health insurance products and to pay to HBDC II a portion of all first year and renewal commissions received by eHealth from policies sold through the Referral Sites that result from marketing to prospects using the lead database or other leads delivered by us to eHealth. This agreement is scheduled to terminate in August 2010 and is terminable by us or eHealth upon material breach by the other party.
For 2009 we earned revenues in discontinued operations of $8,286,627 compared to $18,452,338 in 2008, a decrease of $10,165,711 or 55%. Revenues include the following:
During 2009 we recognized $1,786,480 from commission payments from eHealth subsequent to the sale of our agency business. We recognize as revenue commission payments received from eHealth upon our notification by eHealth of such amounts.
During 2009 we earned sub-lease revenue of $1,442,238 as compared to $460,640 in 2008 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 we entered into a sub-lease agreement with a third party whereby the third party agreed to sub-lease our New York office space for the balance of our sublease agreement and pay us sub-lease payments essentially equal to our costs under the sublease agreement. The third party commenced paying sub-sublease payments to us in September 2008; however the third party failed to pay its December 2008 and subsequent rent when due. We were a beneficiary to a letter of credit in the amount of $151,503, which we had drawn against as a result of the third party’s failure to pay its rent when due. On July 23, 2009 we entered into a settlement agreement with the third party whereby we cancelled the sub-lease, the third party surrendered the sub-leased premises back to us and we and the third party each released each other from all claims.
The primary reason for the decrease in operating expenses of discontinued operations is attributable to the cessation of direct marketing and selling activities in the first quarter of 2009.
During the first quarter of 2009 we determined certain long term assets were impaired as a result of the cessation of direct marketing and sales in the Telesales call center. We recorded expense in 2009 to write-off the value of these long term assets, which included property and equipment net of depreciation of $416,764, intangible assets net of accumulated amortization acquired from ISG of $1,200,428 and the value of internet domain name www.healthbenefitsdirect.com net of accumulated amortization of $22,389.
During the second quarter we recorded $2,031,210 of rent expense related to the non-cancelable lease for the abandoned portion of the Deerfield Beach office. Effective December 31, 2009, we have accrued $1,848,674 related to the non-cancelable lease for the abandoned portion of the Deerfield Beach office, which is the net present value of our future lease payments through March 31, 2011 and consideration for early termination due under the lease plus management’s estimate of contractually required expenses pertaining to the Deerfield Beach office, which are estimated to be $2,861,749, less a portion of the Deerfield Beach office used in operations, which is estimated to be $62,396, less future sub-lease revenue, which is estimated to be $938,786.
Gain on change in fair value of warrants liabilities of $534,391 in 2009, which we were not required to recognize in 2008, represents the mark to market adjustment for the increase in fair value of warrants issued on March 30, 2007, March 31, 2008 and January 15, 2009, which contain provisions that adjust the exercise price of these warrants in the event the Company issues Common Stock or other securities convertible into Common Stock at price lower than the exercise price of these warrants.
At December 31, 2009, we had a cash balance of $1,403,653 and negative working capital of ($3,277,394).
On December 22, 2009, the Company entered into a Loan Agreement (the “Loan Agreement”) and a $1,250,000 Secured Promissory Note, or the Note, with The Co-Investment Fund II, L.P., or Co-Investment,. Co-Investment is the controlling stockholder of the Company and a designee of Cross Atlantic Capital Partners, Inc., of which Frederick C. Tecce, one of our directors, is a managing partner and of which Donald Caldwell, also one of our directors and Chairman of our board of directors, is Chairman and Chief Executive Officer.
Pursuant to the terms of the Loan Agreement and the Note, Co-Investment extended the principal sum of $1,250,000, or the Loan, to the Company and the Subsidiaries, or collectively, the Borrowers. Pursuant to the Note, the Borrowers agreed to pay to the order of Co-Investment, the outstanding principal amount of the Note plus interest. Interest will accrue on the unpaid principal balance of the Note at an annual rate of 8%, except in the case of an event of default as set forth in the Loan Agreement, in which case the rate of interest will increase to 11% until such event of default is cured. All principal and accrued interest is due and payable on December 22, 2010. Co-Investment may accelerate payment of the Loan in the event of default on the Loan as set forth in Loan Agreement.
Pursuant to the Loan Agreement, the Borrowers are prohibited from, among other things: (a) (i) entering into any merger, consolidation or reorganization with or acquiring all or substantially all of the assets or equity interests of any other entity, or (ii) selling, leasing, transferring or otherwise disposing of their properties or assets except in the ordinary course of business; (b) creating or suffering to exist any lien upon any of their property or assets, except as permitted; (c) becoming liable upon the obligations or liabilities of any person or entity; (d) purchasing or acquiring obligations or equity interests of, or any other interest in any person or entity; (e) making advances, loans or extensions of credit to any person or entity; (f) creating, incurring, assuming or suffering to exist any indebtedness or (g) violating any law, ordinance or regulation of any governmental entity.
Decreases in accounts receivable of $557,515, which is primarily the result of decreased billings to certain of InsPro Technologies’ clients.
Recorded stock-based compensation and consulting expense of $619,721 (compared to $1,516,686 in the year ended December 31, 2008).
We recorded $534,391 pertaining to the gain on change in fair value of warrants liabilities, which we were not required to recognize in 2008.
We recorded $7,211 pertaining to the provision for bad debts (compared to $46,748 in the year ended December 31, 2008).
Net cash provided by financing activities in the year ended December 31, 2009 was $5,193,395 as compared to $5,169,624 in the year ended December 31, 2008.
In first quarter 2009, we completed a private placement with Co-Investment and issued 1,000,000 shares of our Preferred Stock and warrants to purchase 1,000,000 shares of our Preferred Stock. Our gross proceeds were $4,000,000 and we incurred $55,617 of legal and other expenses paid in connection with this 2009 private placement.
In first quarter 2008, we completed a private placement with certain institutional accredited investors and issued 6,250,000 shares of our common stock and warrants to purchase 6,250,000 shares of our common stock. Our gross proceeds were $5,000,000 and we incurred $70,238 of legal and other expenses in connection with this private placement.
As consideration for the grant of the rights and licenses under the agreement, we paid to Realtime a $10,000 nonrefundable cash deposit and, upon delivery of the STP software and other materials, we agreed to pay to Realtime a license fee in the form of 216,612 unregistered shares of our common stock.
As of December 31, 2009 we had not taken delivery of the STP software or issued common stock in connection with the Realtime agreement.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Health Benefits Direct Corporation and Subsidiaries as of December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for the years ended December 31, 2009 and December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
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.
These financial statements have been restated to reflect discontinued operations. During the first quarter of 2009 we ceased marketing and selling activities in Telesales and sold the majority of our call center-produced agency business to eHealth Insurance Services, Inc. (“eHealth”). Telesales specialized in the direct marketing of health and life insurance and related products to individuals and families. 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 2 - Discontinued Operations.
The Company considers all cash and cash equivalents held in restricted accounts pertaining to the Company’s letters of credit as restricted cash.
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued
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, 2009 and December 31, 2008, 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 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.
The Company issued warrants to purchase the Company’s Common Stock in connection securities purchase agreements dated March 30, 2007, March 31, 2008 and January 14, 2009 which contain certain anti-dilution provisions that reduce the exercise price of the warrants. See Note 8 - Equity - Common Stock Warrants.
The Company determined the fair value of the warrant liability at January 1, 2009 was $678,891 as the initial fair value at the adoption date of EITF No. 07-05. The fair value was determined using the Black Scholes Option Pricing Model based on the following assumptions: dividend yield: 0%; volatility: 231%, risk free rate: 0.2% and the following:
The Company determined the fair value of the warrants issued on January 15, 2009 was $1,877,412 and recorded that amount in warrant liability. See Note 8 - Equity - Preferred Stock.
For the year ended December 31, 2009, the Company recorded a gain on the change in fair value of derivative liability of $534,391 to mark to market for the increase in fair value of the warrants during the year ended December 31, 2009. Under ASC 815, the warrants will be carried at fair value and adjusted at each reporting period.
The Company determined the fair value of the warrant liability at December 31, 2009 was $2,021,912. The fair value was determined using the Black Scholes Option Pricing Model based on the following assumptions: dividend yield: 0%; volatility: 331%, risk free rate: 0.2% and the following:
The Company accounts for income taxes under the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Diluted loss per common share is not presented because it is anti-dilutive. The Company's common stock equivalents at December 31, 2009 include the following:
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.
InsPro Technologies’ software maintenance fees apply to both licensed and ASP clients. Maintenance fees cover periodic updates to the application and the InsPro help desk.
The Company recognizes revenue from software license agreements 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.
The following table lists the percentage of the Company’s revenue was earned from the Company’s two largest InsPro clients.
The cost of stock based compensation awards issued to non-employees for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, based on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied.
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. 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.
At December 31, 2009, the Company does not believe that it is probable that the Company will incur a penalty in connection with registration rights agreements, which we entered into in connection with the 2008 and 2009 private placements. Accordingly no liability was recorded as of December 31, 2009.
In September 2006, the FASB issued guidance in the Fair Value Measurements and Disclosures Topic of the Codification. This guidance defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. In February 2008, the FASB deferred the effective date of this guidance for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We adopted the guidance effective January 1, 2008 for all financial assets and liabilities. As of January 1, 2009, we adopted the guidance for all non-financial assets and all non-financial liabilities. There is no impact on our financial statements as of December 31, 2009. In December 2007, the FASB issued guidance in the Business Combinations Topic of the Codification. This guidance requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective acquisition-date fair values including contingent consideration. In addition, this guidance changes the recognition of assets acquired and liabilities assumed arising from preacquisition contingencies and requires the expensing of acquisition-related costs as incurred. The guidance applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. We adopted this guidance effective January 1, 2009. Any impact would be on future acquisitions.
In December 2007, the FASB issued guidance in the Consolidation Topic of the Codification on the accounting for noncontrolling interests in consolidated financial statements. This guidance clarifies the classification of noncontrolling interests in consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and holders of such noncontrolling interests. This guidance is effective as of the beginning of an entity’s first fiscal year that begins on or after December 15, 2008 and is required to be adopted prospectively, except for the reclassification of noncontrolling interests to equity and the recasting of net income (loss) attributable to both the controlling and noncontrolling interests, which are required to be adopted retrospectively. We adopted this guidance effective January 1, 2009. There is no impact on our financial statements as of December 31, 2009.
In June 2008, FASB issued guidance in the Earnings Per Share Topic of the Codification on determining whether instruments granted in share-based payment transactions are participating securities. The guidance clarified that all unvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities and provides guidance on how to compute basic EPS under the two-class method. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We adopted this guidance effective January 1, 2009 and it had no impact on our financial statements.
In April 2009, the FASB issued guidance in the Fair Value Measurements and Disclosures Topic of the Codification on determining fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly. The guidance emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. The guidance provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The guidance is effective for interim or annual reporting periods ending after June 15, 2009, and shall be applied prospectively. We adopted this guidance effective for the quarter ending June 30, 2009. There is no impact of the adoption on our financial statements as of December 31, 2009.
In April 2009, FASB issued guidance in the Financial Instruments Topic of the Codification on interim disclosures about fair value of financial instruments. The guidance requires disclosures about the fair value of financial instruments for both interim reporting periods, as well as annual reporting periods. The guidance is effective for all interim and annual reporting periods ending after June 15, 2009 and shall be applied prospectively. The adoption of this guidance had no impact on our financial statements as of December 31, 2009.
In June 2009, the FASB issued guidance which will amend the Consolidation Topic of the Codification. The guidance addresses the effects of eliminating the qualifying special-purpose entity (QSPE) concept and responds to concerns over the transparency of enterprises’ involvement with variable interest entities (VIEs). The guidance is effective beginning on January 1, 2010. We do not expect the adoption of this guidance to have an impact on our financial statements.
In December 2009, the FASB issued Accounting Standards Update 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for Statement 166. (See FAS 166 effective date below)
In January 2010, the FASB issued Accounting Standards Update 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This amendment to Topic 810 clarifies, but does not change, the scope of current US GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between guidance in that Subtopic and asset derecognition and gain or loss recognition guidance that may exist in other US GAAP. An entity will be required to follow the amended guidance beginning in the period that it first adopts FAS 160 (now included in Subtopic 810-10). For those entities that have already adopted FAS 160, the amendments are effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009. The amendments should be applied retrospectively to the first period that an entity adopted FAS 160. The Company does not expect the provisions of ASU 2010-02 to have a material effect on the financial position, results of operations or cash flows of the Company.
In February 2010, the FASB issued ASU 2010-09, which addresses certain implementation issues related to an entity’s requirement to perform and disclose subsequent events procedures. The ASU (1) exempts entities that file their financial statements with, or furnish them to, the SEC from disclosing the date through which subsequent events procedures have been performed and (2) clarifies the circumstances in which an entity’s financial statements would be considered restated and in which the entity would therefore be required to update its subsequent events evaluation since the originally issued or available to be issued financial statements. ASU 2010-09 became effective immediately upon issuance, and the Company has adopted its disclosure requirements within this Form 10-K for the year ended December 31, 2009.
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 also determined to discontinue selling health and life insurance and related products to individuals and families through its non employee ISG agents. During the first quarter of 2009 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.
On February 20, 2009 (the “Closing Date”), the Company entered into and completed the sale of the Company’s Telesales call center produced agency business (the “Agency Business”) to eHealth Insurance Services, Inc. (“eHealth”), an unaffiliated third party, pursuant to the terms of a Client Transition Agreement (the “Agreement”).
The aggregate initial amount of consideration paid by eHealth to the Company pursuant to the Agreement during the first quarter of 2009 was approximately $1,280,000. In addition, on the Closing Date, eHealth agreed to assume from the Company certain liabilities relating to historical commission advances on the Transferred Policies made by the Specified Carriers in an aggregate amount of approximately $1,385,000. In addition, eHealth has agreed to pay to HBDC II, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company (“HBDC II”) a portion of each commission payment received by eHealth and reported by the Specified Carrier relating to a Transferred Policy for the duration of the policy, provided that eHealth remains broker of record on such Transferred Policy.
The Company recognizes as revenue commission payments received from eHealth in connection with the Agreement upon the Company’s notification by eHealth of such amounts.
The Company generated revenue from the sale of leads to third parties. Such revenues are recognized when the Company delivers the leads and bills the purchaser of the leads.
During the first quarter of 2009 we determined certain long term assets were impaired as a result of the cessation of direct marketing and sales in the Telesales call center. The Company recorded expense in 2009 to write-off the value of these long term assets in the results from discontinued operations, which included property and equipment net of depreciation of $416,764, intangible assets net of accumulated amortization acquired from ISG of $1,200,428 and the value of internet domain name www.healthbenefitsdirect.com net of accumulated amortization of $22,389.
The Company recorded a liability for severance payments due to employees of discontinued operations of $0 and $266,739 at December 31, 2009 and 2008, respectively.
The gain on the execution of the Agreement together with the results of the Telesales call center, ISG and real estate sub-leasing of the Company’s former New York and Florida sales offices are all classified as discontinued operations for all periods presented. The results of discontinued operations do not include any allocated or common overhead expenses except for a portion of expenses pertaining to our Florida office. The results of operations of discontinued operations were as follows:
The aggregate amount paid by HBDC Sub to the Bilenia Partners for the Atiam partnership interests under the Bilenia Agreement was $1,000,000, consisting of $500,000 in cash and 224,216 shares of the Company’s common stock, which shares had an aggregate value of $500,000 based on the average closing price per share ($2.23) of Company Common Stock on The Over the Counter Bulletin Board (“OTCBB”) on the five consecutive trading days preceding the Closing Date.
The Company accounted for the acquisition of InsPro Technologies 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 InsPro Technologies in connection with the Bilenia Agreement and the Atiam Merger Agreement in the aggregate was $3,080,744 and consisted of the following:
For the years ended December 31, 2009 and 2008, depreciation expense was $330,453 and $307,696, respectively.
Amortization expense subsequent to the period ended December 31, 2009 is as follows:
On December 22, 2009, the Company and its subsidiaries entered into a Loan Agreement (the “Loan Agreement”) and a $1,250,000 Secured Promissory Note (the “Note”) with The Co-Investment Fund II, L.P. (“Co-Investment”). Co-Investment is the controlling stockholder of the Company and a designee of Cross Atlantic Capital Partners, Inc., of which Frederick C. Tecce, one of our directors, is a managing partner and of which Donald Caldwell, also one of our directors and Chairman of our board of directors, is Chairman and Chief Executive Officer.
The Note is secured by a perfected first-priority security interest in substantially all of the assets of the Borrowers, including all of the intellectual property assets of the Borrowers, and 100% of the stock the Subsidiaries, pursuant to the terms of a Security Agreement, Intellectual Property Security Agreement and Pledge Agreement with Co-Investment, each of which were executed by the Borrowers and Co-Investment on December 22, 2009, concurrent with the execution of the Loan Agreement and the Note.
On March 31, 2008, Co-Investment 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.
On January 14, 2009, Co-Investment purchased 1,000,000 shares (each, a “Preferred Share”) of our Preferred Stock, par and warrants to purchase 1,000,000 shares of our Preferred Stock (each, a “Preferred Warrant Share”), pursuant to the terms of the Securities Purchase Agreement (the “2009 Purchase Agreement”) for a purchase price of $4,000,000.
As of December 31, 2008, the Company recorded $4,315 due to related parties, which consisted of director travel expense reimbursement to Cross Atlantic Capital Partners for Messrs. Caldwell and Tecce’s travel expense to board of director meetings.
On December 22, 2009 the Company paid Co-Investment $290,541, which represented $240,041 reimbursement of Co-Investment’s legal expenses incurred in connection with the 2009 Purchase Agreement, the Company’s indemnification of Co-Investment in connection with certain litigation, and the Loan Agreement together with $50,500 of director fees pertaining to Messrs. Caldwell and Tecce. Messrs. Caldwell and Tecce assigned their director fees to the Co-Investment Fund II, L.P.
On March 31, 2008, the Company entered into Securities Purchase Agreements (the “2008 Purchase Agreements”) with certain institutional and individual accredited investors (collectively, the “2008 Investors”) and completed a private placement (the “2008 Private Placement”) of an aggregate of 6,250,000 shares of our Common Stock and warrants to purchase 6,250,000 shares of our Common Stock. Pursuant to the 2008 Purchase Agreement, the Company sold investment units (each, a “2008 Unit”) at a per unit purchase price equal to $0.80. Each 2008 Unit sold in the 2008 Private Placement consisted of one share of Common Stock and a Warrant to purchase one share of Common Stock at an initial exercise price of $0.80 per share, subject to adjustment (the “2008 Warrant”). The gross proceeds from the 2008 Private Placement were $5,000,000 and we incurred $70,238 of legal and other expenses in connection with the 2008 Private Placement.
Effective March 25, 2009, our shareholders approved an amendment to our certificate of incorporation, as amended, to increase the number of authorized shares of common stock from 90,000,000 shares to 200,000,000.
As a result, the Company filed a Certificate of Amendment with the Secretary of State of the State of Delaware. The Certificate of Amendment was approved by the Company’s board of directors on January 12, 2009 and became effective upon filing on March 25, 2009. Upon the filing of the Certificate of Amendment, all outstanding shares of the Company’s Series A convertible preferred stock became immediately convertible, at the election of each holder, into twenty shares of the Company’s common stock and the 2009 Warrants (as defined below) issued in the 2009 Private Placement (as defined below) automatically became exercisable for twenty shares of common stock and are no longer exercisable into Preferred Shares (as defined below).
On January 14, 2009, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware. The Certificate of Designation was approved by the Company’s Board of Directors on January 12, 2009 and became effective upon filing. The Certificate of Designation provides for the terms of the Company’s Series A convertible preferred stock (the “Preferred Stock”) issued pursuant to the 2009 Purchase Agreement (as defined below).
On February 5, 2009 the Company issued to Mr. Verdi a stock option grant to purchase a total of 650,000 shares of the Company’s common stock, which vests as follows: 130,000 shares of common stock on each of May 31, 2009, September 30, 2009, May 31, 2010 and September 30, 2010; 65,000 shares of common stock on May 31, 2011; and 32,500 shares of common stock on each of September 30, 2011 and May 31, 2012.
On May 20, 2009 the Company issued options under the 2008 Plan to purchase 250,000 shares of common stock to an outside consultant at an option exercise price of $0.10. These options have a term of 3 years and will vest 20,000 shares on June 20, 2009 and 10,000 shares vesting monthly starting July 20, 2009 through April 20, 2011.
During 2009 a total of 989,552 options previously granted were forfeited as a result of the termination of the employment of various employees in accordance with the terms of the stock options.
The Company recorded compensation expense pertaining to director and employee stock options and restricted and unrestricted stock grants as follows:
A summary of the Company's outstanding stock options as of and for the years ended December 31, 2009 and 2008 are as follows:
The following information applies to options outstanding at December 31, 2009:
As of December 31, 2009, there were 7,000,000 shares of our common stock authorized to be issued under the 2008 Plan, of which 320,332 shares of our common stock remain available for future stock option grants.
The total intrinsic value of stock options granted during 2009 and 2008 was $0 and $0, respectively. The total intrinsic value of stock options outstanding and exercisable as of December 31, 2009 and December 31, 2008 was $0 and $0, respectively.
Effective March 31, 2008, in connection with the 2008 Private Placement, the Company adjusted the 2007 Investor Warrants pursuant to the weighted average anti-dilution adjustment provisions of the 2007 Investor Warrants. The exercise price of the 2007 Investor 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.
Effective March 25, 2009, in connection with our shareholders’ approval of an amendment to our certificate of incorporation, the Company adjusted the warrants issued in connection with the Company’s private placement completed in March 2007 (the “2007 Investor 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 4,966,887.
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.
Outstanding warrants at December 31, 2009 have a weighted average remaining contractual life of 3.4 years.
On March 30, 2007 and in connection with 2007 Private Placement, the Company and the participating investors entered into a Registration Rights Agreement (the “Registration Rights Agreement”). Under the terms of the Registration Rights Agreement, the Company agreed to prepare and file with the Commission, as soon as possible but in any event within 30 days following the later of (i) the date the Company is required to file with the Commission its Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006, or (ii) the date of the Registration Rights Agreement, a registration statement on Form SB-2 covering the resale of the shares and the warrant shares collectively, the “Registrable Securities”). 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 of 1933 as amended (the “Securities Act”) as soon as practicable and agreed to use its reasonable best efforts to keep the registration statement effective under the Securities Act until the date that is two years after the date that the registration statement is declared effective by the Commission or such earlier date when all of the Registrable Securities covered by the Registration Statement have been sold or may be sold without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act. The Registration Rights Agreement also provides for payment of partial damages to the 2007 Private Placement investors under certain circumstances relating to failure to file or obtain or maintain effectiveness of the registration statement, subject to adjustment.
On April 22, 2008, the Commission declared effective the Company’s Registration Statement on Form SB-2 filed with the Commission on February 1, 2008 as amended.
In connection with the signing of the 2009 Purchase Agreement, the Company and the 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 (the “Registration Statement”) covering the resale of the Shares and the Warrant Shares (collectively, the “Registrable Securities”). 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 of 1933, as amended (the “Securities Act”), as soon as practicable but, in any event, no later than 60 days following the date of the 2009 Registration Rights Agreement (or 120 days following the date of the 2009 Registration Rights Agreement in the event the Registration Statement is subject to review by the SEC), and 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. 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.
Future minimum payments required under capital leases at December 31, 2009 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 $42,247 and $57,556 for the years ended December 31, 2009 and 2008.
On March 31, 2008, following Mr. Clemens’ resignation as our Chief Executive Officer, Anthony R. Verdi, our Chief Financial Officer, was also appointed to the position of Chief Operating Officer, effective April 8, 2008. Mr. Verdi shall have the authority, as our Chief Operating Officer, to lead the Company as the principal executive officer in the absence of a Chief Executive Officer and Mr. Verdi shall have such authority until we appoint a new Chief Executive Officer or until such time as our board of directors determines otherwise.
Pursuant to a written employment agreement effective November 2, 2009, Mr. Louis Donofrio serves as our Chief Operating Officer of InsPro Technologies. Pursuant to his employment agreement his annual base salary is $180,000 per year through November 2, 2011. He is entitled to receive such employee benefits and bonus compensation as provided to executives of the Company. Mr. Donofrio’s employment agreement may be terminated upon 60 days written notice and will otherwise automatically renew on November 2, 2011 for a 1 year term.
The Company paid to the Landlord a security deposit of $110,000 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.
Effective during the first quarter of 2007, 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. Effective February 12, 2009 the money market account, which collateralized the letter of credit pertaining to our New York Office, was transferred into a certificate of deposit (“CD”). These bank deposits are on deposit with the issuer of the letters of credit and are classified as restricted cash on the Company’s balance sheet, which as of December 31, 2009 and December 31, 2008 had a balances of $1,154,044 and $1,150,000, respectively. The terms of the money market account allow the Company to receive interest on the principal but prohibits the Company from withdrawing the principal for the life of the Deerfield Beach letter of credit. The terms of the CD allow the Company to receive interest upon the maturity of the CD, which matures on March 12, 2010. The Company is prohibited from withdrawing the interest on the CD until the March 12, 2010 maturity of the CD and the CD’s principal for the life of the New York letter of credit.
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 commenced on 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.
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 (the “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 subsequently failed to pay their certain rent when due and on July 23, 2009 the Company and the third party entered into a settlement agreement whereby both parties agreed to terminate the 2008 Sublease Agreement. Effective December 31, 2009, the Company has accrued $385,005 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.
The Company leases certain real and personal property under non-cancelable operating leases. Rent expense was $3,583,972 and $2,482,008 for the years ended December 31, 2009 and 2008, respectively.
Future minimum payments required under operating leases, severance and employment agreements and service agreements at December 31, 2009 are as follows:
On August 28, 2008, one of our former employees, the plaintiff, filed a national class action complaint in the Seventeenth Judicial Circuit of Florida, Broward County, case no. 062008 CA 042798 XXX CE, alleging that we breached a contract with employees by failing to provide certain commissions and/or bonuses. The complaint also contained claims for an accounting and for declaratory relief relating to the alleged compensation agreement. The plaintiff purported to bring these claims on behalf of a class of current and former insurance sales agents. We filed a motion to dismiss the complaint. In response, at the hearing on our Motion to Dismiss, the plaintiff stated that he would amend the complaint. The amended complaint is no longer pled as a class action but, instead, includes 64 named plaintiffs. The plaintiffs seek payment from us of all commissions allegedly owed to them, triple damages, attorneys’ fees, costs, and interest. We are in the process of responding to the amended complaint. In addition, the parties are engaging in the exchange of discovery requests and responses. We believe that the plaintiffs’ claims are without merit and intend to vigorously defend the litigation.
On October 27, 2009 we entered into an agreement with the stockholders who brought the New York action in which they agreed to withdraw from the Philadelphia litigation and provided a general release of all claims against us, our board of directors and the other defendants. These stockholders discontinued their claims against the defendants in the writ of summons filed in August. The terms of this settlement agreement required Co-Investment Fund to purchase all of the shares of common stock held by the settling plaintiffs (which amounted to 6,108,997 shares).
As of December 31, 2009 the Company has not taken delivery of the STP software or issued Common Stock in connection with the License Agreement.
On March 31, 2010, the Company entered into and completed an asset purchase agreement of sale for Insurint (“Insurint Sale Agreement”) with an unaffiliated third party. Pursuant to the terms of the Insurint Sale Agreement the Company sold essentially all assets used in the Company’s Insurint’s business including the Insurint software, www.insurint.com web site, other intellectual property specific to Insurint including but not limited to the customer base and all future revenue pertaining to Insurint. The buyer agrees to assume future Insurint commitments and expenses subsequent to March 31, 2010.
Pursuant to the Insurint Sale Agreement the Company will receive in aggregate $625,000 in cash from the buyer of Insurint, of which $312,500 was received on April 1, 2010 and the $312,500 balance will be received over twenty three equal monthly installments in the amount of $13,020.83, with the first monthly payment being due on May 1, 2010, and a last monthly payment being in the amount of $13,020.91 and being due on April 1, 2012.
As of December 31, 2009 the Company’s assets and liabilities pertaining to Insurint were $7,906 and $20,753 respectively. As of December 31, 2009 the Company’s long lived assets pertaining to Insurint were fully depreciated or fully amortized. The Company’s revenue and expense pertaining to Insurint for the year ended December 31, 2009 was $163,783 and $1,557,901, respectively. The Company’s revenue and expense pertaining to Insurint will cease effective March 31, 2010.
The Company anticipates recording a gain on the sale of Insurint of approximately $625,000 on March 31, 2010.
On April 13, 2010 the Company and Co-Investment agreed to modify the terms of the Loan Agreement and the Note such that; i) the $1,250,000 Loan can be increased upon demand by the Board of Directors of Parent (with 10 days written notice) by an additional amount of up to $1,000,000 under the same terms and conditions as in the Loan Agreement and Note, and ii) the date the Loan and accrued interest will be due and payable was changed from December 22, 2010 to July 1, 2011.