XASE:COVR Cover-All Technologies Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended March 31, 2012

 

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from __________ to __________


Commission file number:  1-09228


COVER-ALL TECHNOLOGIES INC.

 (Exact Name of Registrant as Specified in Its Charter)

Delaware

 

13-2698053

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

55 Lane Road, Fairfield, New Jersey

 

07004

(Address of principal executive offices)

 

(Zip code)

973-461-5200

(Registrant’s telephone number, including area code)

None

 (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [X]     No  [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]     No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer

[   ]

Accelerated filer [   ]

Non-accelerated filer

[   ]  (Do not check if a smaller reporting company)

Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes [   ]     No  [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

 

Outstanding at May 9, 2012

Common Stock, $.01 par value per share

 

25,857,730 shares








COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2012

PART I:

FINANCIAL INFORMATION


Item 1.

Financial Statements

Consolidated Balance Sheets as of March 31, 2012 (Unaudited)

and December 31, 2011

3

Consolidated Statements of Operations for the three

months ended March 31, 2012 and 2011 (Unaudited)

5

Consolidated Statements of Cash Flows for the three

months ended March 31, 2012 and 2011 (Unaudited)

6

Notes to Consolidated Financial Statements (Unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

12

Item 3.

Quantitative and Qualitative Disclosures
About Market Risk

20

Item 4.

Controls and Procedures

20


PART II:

OTHER INFORMATION


Item 1A.

Risk Factors

21


Item 6.

Exhibits

21


SIGNATURES

22





.   .   .   .   .   .   .   .   .   .



2





PART I:   FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


CONSOLIDATED BALANCE SHEETS


       
   March 31,
2012
  December 31,
2011
   (Unaudited)   
Assets:          
Current Assets:          
Cash and Cash Equivalents  $1,190,745   $3,281,965 
Accounts Receivable (Less Allowance for Doubtful Accounts
of $25,000)
   1,999,569    1,817,793 
Prepaid Expenses   1,146,735    576,522 
Deferred Tax Asset   1,099,000    1,099,000 
Total Current Assets   5,436,049    6,775,280 
           
Property and Equipment – At Cost:          
Furniture, Fixtures and Equipment   976,153    912,527 
Less:  Accumulated Depreciation   (630,429   (633,356)
           
Property and Equipment – Net   345,724    279,171 
           
Goodwill   1,039,114    1,039,114 
           
Capitalized Software (Less Accumulated Amortization of
$14,871,794 and $14,134,024, Respectively)
   10,317,293    8,799,711 
           
Customer Lists/Relationships (Less Accumulated Amortization of
$165,426 and $126,093, Respectively)
   236,574    93,907 
           
Non-Competition Agreements (Less Accumulated Amortization of
$126,044 and $110,044, Respectively)
   33,956    49,956 
           
Deferred Tax Asset   2,168,500    2,168,500 
           
Business Acquisition   —      1,035,821 
           
Other Assets   216,971    216,971 
           
Total Assets  $19,794,181   $20,458,431 


The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.



3





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


CONSOLIDATED BALANCE SHEETS


       
   March 31,
2012
  December 31,
2011
   (Unaudited)   
Liabilities and Stockholders’ Equity:          
Current Liabilities:          
Accounts Payable  $1,224,891   $440,635 
Accrued Expenses Payable   586,974    753,888 
Deferred Charges   30,652    43,788 
Unearned Revenue   2,378,555    2,298,985 
           
Total Current Liabilities   4,221,072    3,537,296 
           
Long-Term Liabilities:          
Deferred Charges   —      —   
           
Total Liabilities   4,221,072    3,537,296 
           
Commitments and Contingencies   —      —   
           
Stockholders’ Equity:          
Common Stock, $.01 Par Value, Authorized 75,000,000 Shares;
25,857,730 and 25,782,730 Shares Issued and 25,857,730 and 25,782,730 Shares Outstanding in 2012 and 2011, Respectively
   258,577    257,827 
           
Paid-In Capital   30,924,678    30,812,059 
           
Accumulated Deficit   (15,610,146)   (14,148,751)
           
Total Stockholders’ Equity   15,573,109    16,921,135 
           
Total Liabilities and Stockholders’ Equity  $19,794,181   $20,458,431 


The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.




4





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


       
   Three months ended March 31,
   2012  2011
Revenues:          
Licenses  $129,998   $1,961,161 
Support Services   2,140,177    2,114,243 
Professional Services   1,281,919    1,122,039 
Total Revenues   3,552,094    5,197,443 
Cost of Revenues:          
Licenses   987,770    517,244 
Support Services   1,498,499    1,138,120 
Professional Services   1,278,290    1,309,107 
Total Cost of Revenues   3,764,559    2,964,471 
Direct Margin   (212,465)   2,232,972 
Operating Expenses:          
Sales and Marketing   536,447    390,142 
General and Administrative   421,481    452,326 
Acquisition Costs   136,957    —   
Research and Development   154,175    153,812 
Total Operating Expenses   1,249,060    996,280 
Operating Income   (1,461,525)   1,236,692 
Other (Income) Expense:          
Interest Expense   —      3,750 
Interest Income   (32)   (83)
Other Income   (98)   (9,709)
Total Other (Income)   (130)   (6,042)
(Loss) Income Before Income Taxes   (1,461,395)   1,242,734 
Income Taxes   —      37,385 
Net (Loss) Income  $(1,461,395)  $1,205,349 
Basic Earnings (Loss) Per Common Share  $(0.06)  $0.05 
Diluted Earnings (Loss) Per Common Share  $(0.06)  $0.05 
Weighted Average Number of Common Shares
Outstanding for Basic Earnings (Loss)
Per Common Share
   25,858,000    25,085,000 
Weighted Average Number of Common Shares
Outstanding for Diluted Earnings (Loss)
Per Common Share
   25,858,000    26,208,000 


The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.



5





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


       
   Three months ended March 31,
   2012  2011
Cash Flows Used For Provided From Operating Activities:          
Net Income  $(1,461,395)  $1,205,349 
Adjustments to Reconcile Net Income to          
Net Cash Provided From (Used For) Operating Activities:          
Depreciation   39,860    42,686 
Amortization of Capitalized Software   737,770    294,856 
Amortization of Customer Lists/Relationships   39,333    18,334 
Amortization of Non-Competition Agreements   16,000    16,000 
Amortization of Stock-Based Compensation   104,669    104,605 
Stock Based Compensation Provided for Services   8,700    5,118 
Changes in Assets and Liabilities:          
(Increase) Decrease in:          
Accounts Receivable   (181,776)   (1,051,308)
Prepaid Expenses   (557,050)   (63,338)
Other Assets   —      569 
Increase (Decrease) in:          
Accounts Payable   784,256    824 
Accrued Liabilities   (166,914)   (859,564)
Taxes Payable   —      37,385 
Deferred Charges   (13,136)   (13,136)
Unearned Revenue   79,570    23,676 
Net Cash Used For Operating Activities   (570,113)   (237,944)
           
Cash Flows Used For Investing Activities:          
Capital Expenditures   (95,755)   —   
Capitalized Software Expenditures   (1,425,352)   (1,225,144)
Net Cash Used For Investing Activities   (1,521,107)   (1,225,144)
           
Cash Flows Used For Financing Activities:          
Payment of Debt   —      (100,000)
Proceeds from Exercise of Warrants   —      35,000 
Net Cash Used for Financing Activities   —      (65,000)
           
Decrease in Cash and Cash Equivalents

   (2,091,220)   (1,528,088)
           
Cash and Cash Equivalents – Beginning of Periods   3,281,965    5,892,649 
Cash and Cash Equivalents – End of Periods  $1,190,745   $4,364,561 
           
Supplemental Disclosures of Cash Flow Information          
Cash Paid During the Periods for:          
Interest  $—     $3,750 
Income Taxes  $—     $—   

   

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.



6





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



[1]  General

For a summary of significant accounting policies, refer to Note 1 of Notes to Consolidated Financial Statements included in Cover-All Technologies Inc.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2011.  While the Company believes that the disclosures herein presented are adequate to make the information not misleading, these consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest annual report.  The financial statements include, on a consolidated basis, the results of its wholly owned subsidiary, Cover-All Systems, Inc.  All material intercompany transactions and balances have been eliminated.

In the opinion of management, the accompanying consolidated financial statements include all adjustments which are necessary to present fairly the Company’s consolidated financial position as of March 31, 2012, and the results of their operations for the three month periods ended March 31, 2012 and 2011, and their cash flows for the three month periods ended March 31, 2012 and 2011.  Such adjustments are of a normal and recurring nature.  The results of operations for the three month periods ended March 31, 2012 and 2011 are not necessarily indicative of the results to be expected for a full year.

[2]  Earnings Per Share Disclosures

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (“EPS”) computations:


          
   For the three months ended
March 31, 2012
   Loss
(Numerator)
  Shares
(Denominator)
  Per Share
Amount
Basic EPS:               
 Loss Available to Common
   Stockholders
  $(1,461,395)   25,857,730   $(0.06)
Effect of Dilutive Securities:               
  Exercise of Options and Restricted Stock   —      —      —   
Diluted EPS:               
  Loss Available to Common Stockholders
    Plus Assumed Exercises
  $(1,461,395)   25,857,730   $(0.06)





7





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




          
   For the three months ended
March 31, 2011
   Income
(Numerator)
  Shares
(Denominator)
  Per Share
Amount
Basic EPS:               
 Income Available to Common
   Stockholders
  $1,205,349    25,084,801   $0.05 
Effect of Dilutive Securities:               
  Exercise of Options and Restricted Stock   —      1,124,277    —   
Diluted EPS:               
 Income Available to Common Stockholders
    Plus Assumed Exercises
  $1,205,349    26,209,078   $0.05 


[3]  Stock-Based Compensation and Stock Purchase Plans


Stock Options


In the three months ended March 31, 2012 and 2011, we recognized approximately $113,000 and $110,000, respectively, stock-based compensation expense in our consolidated financial statements.  

In June 2005, we adopted the 2005 Stock Incentive Plan (which was amended in 2006 and in 2008).  Options and stock awards for the purchase of up to 5,000,000 shares may be granted by the Board of Directors to our employees and consultants at an exercise or grant price determined by the Board of Directors on the date of grant.  Options may be granted as incentive or nonqualified stock options with a term of not more than ten years.  The 2005 Plan allows the Board of Directors to grant restricted or unrestricted stock awards or awards denominated in stock equivalent units, securities or debentures convertible into common stock, or any combination of the foregoing and may be paid in common stock or other securities, in cash, or in a combination of common stock or other securities and cash.  At March 31, 2012, an aggregate of 861,803 shares were available for grant under the 2005 Stock Incentive Plan.

The Company uses the Black-Scholes-Merton option-pricing model (“Black-Scholes”) to measure fair value of the share-based awards.  The Black-Scholes model requires us to make significant judgments regarding the assumptions used within the model, the most significant of which are the expected stock price volatility, the expected life of the option award, the risk-free interest rate of return and dividends during the expected term.

Expected volatilities are based on historical volatility of the Company’s stock during the preceding periods.  The Company uses “Level 1” inputs, which are our trading market values in active markets.

The Company uses historical data to estimate expected life of the option award.  The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding.

The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

The Company does not anticipate issuance of dividends during the expected term.




8





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




  2012 2011
     
Expected volatility 41%–50% 45%–50%
Weighted-average volatility 41% 47%
Expected dividends 0% 0%
Expected term (in years) 3-5 3-5
Risk-free interest rate 3% 3%
     

As of March 31, 2012, there was approximately $891,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements previously granted by the Company.  That cost is expected to be recognized over a weighted-average period of 2.1 years.  

A summary of the changes in outstanding common stock options for all outstanding plans is as follows:

             
   Shares  Exercise Price
Per Share
  Weighted-Average Remaining Contractual Life  Weighted-Average Exercise Price
Balance, January 1, 2012   1,524,963    $ 0.85 – 1.55    2.0 years   $1.21 
Granted   1,055,000    1.63        1.63 
Balance, March 31, 2012   2,579,963    $ 0.85 – 1.63    1.7  years   $1.38 


Of the stock options outstanding, an aggregate of  948,610 are currently exercisable.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

Time-Based Restricted Stock Units


A summary of our time-based restricted stock units, or RSUs, for the three months ended March 31, 2012 is as follows:



9





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




       
   Shares  Weighted-Average Grant Date Fair Value Per Share
Balance, January 1, 2012   252,500   $1.42 
Granted   278,376    1.63 
Vested   (75,000)   1.12 
Balance, March 31, 2012   455,876   $1.60 


The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

We follow Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, Accounting for Stock Options and Other Stock-Based Compensation.  Among other items, ASC 718 requires companies to record compensation expense for shared-based awards issued to employees and directors in exchange for services provided.  The amount of the compensation expense is based on the estimated fair value of the awards on their grant dates and is recognized over the required service periods.  Our share-based awards include stock options and restricted stock awards.  For restricted stock awards, the calculation of compensation expense under ASC 718 is based on the intrinsic value of the grant.

[4]  Income Taxes

At December 31, 2011, the Company had a net operating tax loss carryforward of approximately $9,000,000 expiring at various dates through 2026. Management believes it is more likely than not that they will be able to utilize the net operating loss carry forward before they expire.

[5]  Recently Issued Accounting Standards

In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles – Goodwill and Other (Topic 350):  Testing Goodwill for Impairment.  The amendment permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in FASB ASC Topic 350.  The more-likely-than-not threshold is defined as having a likelihood of more than 50%.  The guidance also includes examples of the types of events and circumstances to consider in conducting the qualitative assessment.  It is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income.  The updated guidance requires companies to disclose the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The updated guidance does not affect how earnings per share is calculated or presented.  The updated guidance is effective for fiscal years, and interim periods within those years, beginning



10





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



after December 15, 2011.  The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  ASU No. 2011-04 amends FASB ASC Topic 820, Fair Value Measurements and Disclosures, to establish common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with Generally Accepted Accounting Principles and International Financial Reporting Standards.  ASU No. 2011-04 is effective for fiscal years beginning after December 15, 2011 and for interim periods within those fiscal years.  The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.

We believe there is no additional new accounting guidance adopted, but not yet effective, that is relevant to the readers of our financial statements.  However, there are numerous new proposals under development which may have a significance impact on the Company’s financial reporting, if and when enacted.





11




COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY



Item 2:    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Certain of the matters discussed in this report, including, without limitation, matters discussed under this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act) and are subject to the occurrence of certain contingencies which may not occur in the time frames anticipated or otherwise, and, as a result, could cause actual results to differ materially from such statements.  In addition to other factors and matters discussed elsewhere in this report on Form 10-Q and in our other filings filed with the Securities and Exchange Commission (“SEC”) over the last 12 months, including our Form 10-K filed with the SEC on April 2, 2012, these risks, uncertainties and contingency include, but are not limited to, risks associated with increased competition, customer decisions, the successful completion of continuing development of new products, the successful negotiation, execution and implementation of anticipated new software contracts, the successful addition of personnel in the marketing and technical areas and our ability to complete development and sell and license our products at prices which result in sufficient revenues to realize profits, and other business factors beyond our control.

Overview

We are a supplier of software products for the property and casualty insurance industry, supplying a wide range of professional services that support product customization, conversion from existing systems and data integration with other software or reporting agencies.  We also offer on-going support services including incorporating recent insurance rate and rule changes in our solutions.  These support services also include analyzing the changes, developments, quality assurance, documentation and distribution of insurance rate and rule changes.

We earn revenue from software contract licenses, fees for servicing the product, which we call support services, and professional services.  Total revenue for the three months ended March 31, 2012 decreased to $3,552,000 from $5,197,000 for the three months ended March 31, 2011, mainly due to a decrease in license revenue.  

The following is an overview of the key components of our revenue and other important financial data for the three months ended March 31, 2012:

Software Licenses.  Our license revenue in the three months ended March 31, 2012 of $130,000 was from existing customers who chose to renew, add onto or extend their use of our software.  For the three months ended March 31, 2011, we generated $1,961,000 in license revenue.  Our new software license revenue is affected by the strength of general economic and business conditions and the competitive position of our software products.  New software license sales are characterized by long sales cycles and intense competition.  Timing of new software license sales can substantially affect our quarterly results.

Support Services.  Support services revenue was $2,140,000 in the three months ended March 31, 2012 compared to $2,114,000 in the same period in 2011.  The increase in the first three months of 2012 was mainly due to the annual renewal of existing customers’ support services and support services from new customer contracts signed in 2011.  Support services revenue is influenced primarily by the following factors: the renewal rate from our existing customer base, the amount of new support services associated with new license sales and annual price increases.

Professional Services.  The increase in professional services revenue, to $1,282,000 in the three months ended March 31, 2012 from $1,122,000 in the same period of 2011 was a result of increased demand for new software capabilities and customizations from our current customer base.

(Loss) Income before Provision for Income Taxes.  (Loss) income before provision for income taxes was $(1,461,000) in the three months ended March 31, 2012 compared to $1,243,000 in the same period of 2011 as a result of a decrease in license revenue.



12




COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY



Net (Loss) Income.  Net (loss) income for the three months ended March 31, 2012 decreased to $(1,461,000) from $1,205,000 in the same period of 2011 as a result of decreases in license revenue.

EBITDA.  Earnings before interest, taxes, depreciation and amortization (“EBITDA”), a non-GAAP metric, was $(628,000) for the three months ended March 31, 2012 compared to $1,618,000 for the three months ended March 31, 2011.

Cash Flow.  We ended the first three months of 2012 with $1,191,000 in cash and cash equivalents and $2,000,000 in accounts receivable.

We continue to face competition for growth in 2012 mainly in the marketing and selling of our products and services to new customers, caused by a number of factors, including long sales cycles and general economic and business conditions.  In addition, there are risks related to customers’ acceptance and implementation delays which could affect the timing and amount of license revenue we are able to recognize.  We are expanding our sales and marketing efforts to both new and existing customers to get the word out regarding out software and continued development.  Consequently, we are incurring additional sales and marketing expense in advance of generating the corresponding revenue.

As we shift over time from software development to deployment, from a financial perspective, the non-cash charges for amortization of developed software will increasingly impact our bottom line. Therefore, in order to provide more visibility to investors, we have decided to also report EBITDA to show what we believe is the Company’s earnings power without the impact of, among other items, amortization.  In the first three months of 2012, the non-cash charge for amortization of capitalized software increased more than 150% from 2011 to $738,000, and we expect this amount could exceed $3 million, or $0.12 per share, in 2012, depending on our sales success.  Therefore, we believe that EBITDA will be a useful measure of the true earnings power of the Company while we complete the development and deployment cycle. As such, we expect to increasingly focus on EBITDA to evaluate our progress.

USE OF NON-GAAP FINANCIAL MEASURES

In evaluating our business, we consider and use EBITDA as a supplemental measure of our operating performance. The Company defines EBITDA as earnings before interest, taxes, depreciation and amortization. The Company presents EBITDA because it believes it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance.

The term EBITDA is not defined under U.S. generally accepted accounting principles, or U.S. GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. EBITDA has limitations as an analytical tool, and when assessing the Company’s operating performance, investors should not consider EBITDA in isolation, or as a substitute for net income (loss) or other consolidated income statement data prepared in accordance with U.S. GAAP. Among other things, EBITDA does not reflect the Company’s actual cash expenditures. Other companies may calculate similar measures differently than Cover-All limiting their usefulness as comparative tools. We compensate for these limitations by relying on our U.S. GAAP results and using EBITDA only supplementally.

The following is an unaudited reconciliation of U.S. GAAP net income to EBITDA for the three months ended March 31, 2012 and 2011:

       
   Three Months Ended March 31,
   2012  2011
       
Net (Loss) Income  $(1,461,395)  $1,205,349 
           
Interest Income (Expense), Net   32    (3,667
Income Tax Expense   —      37,385 



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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY




           
Depreciation   39,860    42,686 
Amortization   793,103    329,190 
           
EBITDA  $(628,464)  $1,618,277 
           
EBITDA per common share:          
Basic  $(0.02)  $0.06 
Diluted  $(0.02)  $0.06 
           


Results of Operations

The following table sets forth, for the periods indicated, certain items from the consolidated statements of operations expressed as a percentage of total revenues:

       
   Three Months Ended March 31,
   2012  2011
Revenues:          
License   3.7%   37.7%
Support Services   60.3    40.7 
Professional Services   36.0    21.6 
Total Revenues   100.0    100.0 
Cost of Revenues:          
License   27.8    10.0 
Support Services   42.2    21.9 
Professional Services   36.0    25.1 
Total Cost of Revenues   106.0    57.0 
Direct Margin   (6.0)   43.0 
Operating Expenses:          
Sales and Marketing   15.1    7.5 
General and Administrative   11.8    8.7 
Acquisition Expenses   3.9    —   
Research and Development   4.3    3.0 
Total Operating Expenses   35.1    19.2 
Operating (Expense) Income   (41.1)   23.8 
Other Expense (Income):          
Interest Expense   —      0.1 
Interest Income   —      —   
Other Income   —      (0.2)
Total Other Expense (Income)   —      (0.1)
Income Before Income Taxes   (41.1)   23.9 
Income Taxes   —      0.7 
Net (Loss) Income   (41.1)%   23.2%


Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

Total revenues for the three months ended March 31, 2012 were $3,552,000 as compared to $5,197,000 for the same period in 2011.  License fees were $130,000 for the three months ended March 31, 2012 as compared $1,961,000 in the same period in 2011, as a result of fewer sales to new and existing customers.  For the three months ended March 31, 2012, support services revenues were $2,140,000 as compared to $2,114,000 in the same period of the prior year primarily due to the annual renewals from our existing customers and the new customer contracts signed in 2011.  Professional services revenue contributed $1,282,000 in the three months ended March



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31, 2012 as compared to $1,122,000 in the first quarter of 2011 as a result of increased demand for new software capabilities and customizations from our current customer base.  

Cost of sales increased to $3,765,000 for the three months ended March 31, 2012 as compared to $2,964,000 for the same period in 2011 due to increased costs in line with our anticipated revenue growth for 2012.  We are expanding our delivery bandwidth through improved productivity and new technology in order to meet our continually increasing demand.  Non-cash capitalized software amortization was $738,000 for the three months ended March 31, 2012 as compared to $295,000 for the same period in 2011.  The Company capitalized $1,425,000 of software development costs in the first three months of 2012 as compared to $1,225,000 in the same period in 2011.

Research and development expenses were $154,000 for the three months ended March 31, 2012 as compared to $154,000 for the same period in 2011, primarily as a result of our efforts to develop new capability to better service our customers.  We are continuing our ongoing efforts to enhance the functionality of our products and solutions and believe that investments in research and development are critical to our remaining competitive in the marketplace.  

Sales and marketing expenses were $536,000 for the three months ended March 31, 2012 as compared to $390,000 in the same period of 2011.  This increase in 2012 was primarily due to an increase in our marketing and sales personnel-related costs.

Acquisition expenses were approximately $137,000 for the three months ended March 31, 2012 as compared to $0 in the same period of 2011.  These expenses were in connection with the acquisition of substantially all of the assets (excluding working capital) of BlueWave in December 2011.

General and administrative expenses were $421,000 in the three months ended March 31, 2012 as compared to $452,000 in the same period in 2011.  This decrease in 2012 was mainly due to personnel-related costs.

Liquidity and Capital Resources

Sources of Liquidity

We have funded our operations primarily from cash flow from operations.  Cash from operations results primarily from net income from the income statement plus non-cash expenses (depreciation and amortization) and changes in working capital from the balance sheet.

Our largest source of operating cash flows is cash collections from our customers following the purchase or renewal of software licenses, product support agreements and other related services.  Payments from customers for software licenses are generally received at the beginning of the contract term.  Payments from customers for support services are generally received in advance on a quarterly basis.  Payments for professional services are generally received 30 days after the services are performed.  

At March 31, 2012, we had cash and cash equivalents of $1,190,000 compared to cash and cash equivalents of $4,365,000 at March 31, 2011.  The decrease in cash and cash equivalents is primarily attributable to fewer new customer contracts signed at the end of 2011 and the first quarter of 2012 and increased costs attributable to the BlueWave acquisition as well as increased investment in build out of new product capabilities.

Cash Flows

Our ability to generate cash has depended on a number of different factors, primarily our ability to continue to secure and retain existing customers and generate new license sales and related product support agreements.  In order to attract new customers and maintain or grow existing revenue streams, we utilize our existing sources of capital to invest in sales and marketing, technology infrastructure and research and development.



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Our ability to continue to control expenses, maintain existing revenue streams and anticipate new revenue will impact the amounts and certainty of cash flows.  We work to maintain our expenses in line with existing revenue streams from support services and professional services and to invest in our products consistent with our sales efforts.

Balance sheet items that should be considered in assessing our liquidity include cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued liabilities.  Statement of operations items that should be considered in assessing our liquidity include revenues, cost of revenues (net of depreciation and amortization), operating expenses (net of depreciation and amortization) and other expenses.  Statement of cash flows items that should be considered in assessing our liquidity include net cash flows from operating activities, net cash flows from investing activities and net cash flows from financing activities.

At March 31, 2012, we had working capital of approximately $1,215,000 compared to working capital of approximately $5,497,000 at March 31, 2011.  This decrease in our working capital resulted primarily from a decrease in cash due to fewer new customer sales in 2012.  For the three months ended March 31, 2012, net cash provided from (used for) operating activities totaled approximately $(570,000) compared to approximately $(238,000) for the three months ended March 31, 2011.  In 2012, cash flow from operating activities represented the Company’s principal source of cash and results primarily from net income, plus non-cash expense and changes in working capital.  

For the three months ended March 31, 2012, net cash used for investing activities was approximately $1,521,000 as compared to approximately $1,225,000 for the three months ended March 31, 2011.  The Company expects capital expenditures and capital software expenditures to continue to be funded by cash generated from operations.  For the three months ended March 31, 2012, net cash provided from (used for) financing activities was approximately $0 compared to approximately $(65,000) for the three months ended March 31, 2011.  The cash provided from financing activities in 2011 consisted of proceeds from the exercise of warrants and the payment of debt.

Funding Requirements

Our primary uses of cash are for personnel-related expenditures, facilities and technology costs.

We may need additional funding for any large capital expenditures and for continued product development.  We lease computer equipment for terms of three years in order to have the latest available technology to serve our customers and develop new products.

On April 12, 2010, the Company announced the acquisition of MSBS, a provider of business intelligence and advanced analytical solutions to the insurance industry based in New York, New York. The Company acquired substantially all of MSBS’ assets (excluding working capital) for an aggregate purchase price of $2,450,000, with no assumed indebtedness, payable as follows: (i) a cash payment in the amount of $1,760,000; (ii) the execution and delivery by the Company to MSBS of a non-negotiable, subordinated promissory note in the aggregate principal amount of $600,000; and (iii) the delivery to MSBS of 76,014 shares of our common stock, which number of shares had a fair market value of $90,000 calculated as provided for in the purchase agreement.

On December 16, 2011, we announced that our board of directors authorized a share buyback plan of up to 1,000,000 shares of the Company’s common stock, in accordance with Rule 10b-18 of the Exchange Act.

On December 30, 2011, the Company completed the acquisition of the PipelineClaims assets (excluding working capital) of BlueWave, a provider of enterprise claims management software to the property and casualty insurance industry based in Honolulu, Hawaii. The aggregate purchase price for the acquisition, in addition to the assumption by the Company of certain assumed liabilities, consisted of the following: (i) $1,100,000 in cash on the closing date, (x) $635,821 of which (net of adjustments for certain prepayments to BlueWave and other prorations) was paid in cash to BlueWave, and (y) $400,000 of which was deposited into an escrow account to be held and distributed by an escrow agent pursuant to the terms of an escrow agreement to secure possible future



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indemnification claims and certain other post-closing matters in favor of the Company; and (ii) up to an aggregate of $750,000 in an earnout, which earnout will be based upon the performance of the acquired business in the five years following the closing. More particularly, for each of the five years following the closing, BlueWave will be entitled to receive an amount equal to ten percent (10%) of the PipelineClaims Free Cash Flow (as such term is defined in the purchase agreement) but in no event will the Company be required to pay to BlueWave in excess of $750,000 in the aggregate for the 5-year period.

We prepare monthly cash flow projections on a rolling twelve-month basis based on a detailed review of anticipated receipts and revenue from licenses, support services and professional services.  We also perform a detailed review of our disbursements, including fixed costs, variable costs, legal costs, payroll costs and other specific payments, on a rolling twelve-month basis.  

We believe that our current cash balances and anticipated cash flows from operations may be sufficient to meet our normal operating needs for at least the next twelve months.  These projections include anticipated sales of new licenses, the exact timing of which cannot be predicted with absolute certainty and can be influenced by factors outside the Company’s control.  Our ability to fund our working capital needs, address planned capital expenditures will depend on our ability to generate cash in the future.  We anticipate generating future working capital through sales to new customers and continued sales and services to our existing customers.

Our future liquidity and capital resource requirements will depend on many factors, including but not limited to the following trends and uncertainties we face:

·

Our ability to generate cash is subject to general economic, financial, competitive and other factors beyond our control.

·

Our need to invest resources in product development in order to continue to enhance our current product, develop new products, attract and retain customers and keep pace with competitive product introductions and technological developments.

·

We experience competition in our industry and continuing technological changes.

·

Insurance companies typically are slow in making decisions and have numerous bureaucratic and institutional obstacles, which can make our efforts to attain new customers difficult.

·

We compete with a number of larger companies who have greater resources than those of ours.  We compete on the basis of insurance knowledge, products, services, price, technological advances and system functionality and performance.

·

Our operations continue to depend upon the continuing business of our existing customers and our ability to attract new customers.

·

A decline in software spending in the insurance industry could result in a decrease in our revenue.


Material risks to cash flow from operations include delayed or reduced cash payments accompanying sales of new licenses or a decline in our services business.  There can be no assurance that changes in our plans or other events affecting our operations will not result in materially accelerated or unexpected expenditures.

There may be a need for a change in the mix or relative cost of our sources of capital if the timing of anticipated new licenses were to change.

Net Operating Loss Carryforwards

At December 31, 2011, we had approximately $9,000,000 of federal net operating tax loss carryforwards expiring at various dates through 2026.  The Tax Reform Act of 1986 enacted a complex set of rules which limits a company’s ability to utilize net operating loss carryforwards and tax credit carryforwards in periods following an ownership change.  These rules define ownership change as a greater than 50 percent point change in stock ownership within a defined testing period which is generally a three-year period.  As a result of stock which may be issued by us from time to time, including the stock which may be issued relating to a potential merger or acquisition or the result of other changes in ownership of our outstanding stock, we may experience an ownership change and consequently our utilization of net operating loss carryforwards could be significantly limited.



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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY



Off-Balance Sheet Transactions

We do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Estimates

The SEC has issued cautionary advice to elicit more precise disclosure in this Item 2, MD&A, about accounting policies that management believes are most critical in portraying our financial results and in requiring management’s most difficult subjective or complex judgments.

The preparation of financial documents in conformity with accounting principles generally accepted in the United States of America requires management to make judgments and estimates.  On an ongoing basis, we evaluate our estimates, the most significant of which include establishing allowances for doubtful accounts, a valuation allowance for our deferred tax assets and determining the recoverability of our long-lived assets.  The basis for our estimates are historical experience and various assumptions that are believed to be reasonable under the circumstances, given the available information at the time of the estimate, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources.  Actual results may differ from the amounts estimated and recorded in our financial statements.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

·

Revenue Recognition

·

Valuation of Capitalized Software

·

Valuation of Allowance for Doubtful Accounts Receivable

·

Business Combinations and Goodwill


Revenue Recognition

Revenue recognition rules are very complex, and certain judgments affect the application of our revenue policy.  The amount and timing of our revenues is difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter.  In addition to determining our results of operations for a given period, our revenue recognition determines the timing of certain expenses, such as commissions, royalties and other variable expenses.

Our revenues are recognized in accordance with FASB ASC 986-605, “Software Revenue Recognition,” as amended.   Revenue from the sale of software licenses is predominately related to the sale of standardized software and is recognized when these software modules are delivered and accepted by the customer, the license term has begun, the fee is fixed or determinable and collectibility is probable.  Revenue from support services is recognized ratably over the life of the contract.  Revenue from professional consulting services is recognized when the service is provided.

Amounts invoiced to our customers in excess of recognizable revenues are recorded as deferred revenues.  The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenues in any given period.

Our revenues are derived from the licensing of our software products, professional services and support services.  We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable.


License Revenue.  We recognize our license revenue upon delivery, provided that collection is determined to be probable and no significant obligations remain.



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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY



Services and Support Revenue.  Our services and support revenue is composed of professional services (such as consulting services and training) and support services (maintenance, support and ASP services).  Our professional services revenue is recognized when the services are performed.  Our support services are recognized ratably over the term of the arrangement.


Multiple Element Arrangement.  We enter into revenue arrangements in which a customer may purchase a combination of software, support and professional services (multiple-element arrangements). When vendor-specific objective evidence (“VSOE”) of fair value exists for all elements, we allocate revenue to each element based on the relative fair value of each of the elements.  VSOE of fair value is established by the price charged when that element is sold separately.  For support services, VSOE of fair value is established by renewal rates when they are sold separately.  For arrangements where VSOE of fair value exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met.


Valuation of Capitalized Software


Costs for the conceptual formulation and design of new software products are expensed as incurred until technological feasibility has been established.  Once technological feasibility is established, we capitalize costs to produce the finished software products.  Capitalization ceases when the product is available for general release to customers. Costs associated with product enhancements that extend the original product’s life or significantly improve the original product’s marketability are also capitalized once technological feasibility for that particular enhancement has been established. Amortization is calculated on a product-by-product basis as the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining economic life of the product. At each balance sheet date, the unamortized capitalized costs of each computer software product is compared to the net realizable value of that product. If an amount of unamortized capitalized costs of a computer software product is found to exceed the net realizable value of that asset, such amount will be written off. The net realizable value is the estimated future gross revenues from that product reduced by the estimated future costs of completing and deploying of that product, including the costs of performing maintenance and customer support required to satisfy our responsibility set forth at the time of sale.


Valuation of Allowance for Doubtful Accounts Receivable

Management’s estimate of the allowance for doubtful accounts is based on historical information, historical loss levels, and an analysis of the collectibility of individual accounts.  We routinely assess the financial strength of our customers and based upon factors concerning credit risk, establish an allowance for uncollectible accounts.  Management believes that accounts receivable credit risk exposure beyond such allowance is limited.

Business Combination, Goodwill and Other Intangible Assets

ASC 805, Business Combinations, requires that the purchase method of accounting be used for all business combinations.  It further specifies criteria as to intangible assets acquired in a business combination that must be recognized and reported separately from goodwill.  The intangible assets, other than goodwill, acquired in the MSBS transaction will be amortized using the straight-line method over their estimated useful lives.

Goodwill represents the cost of the MSBS assets in excess of the fair value of identifiable tangible and intangible net assets purchased.  Goodwill is not amortized but is tested for impairment.  We review our goodwill for impairment annually in the fourth quarter.  We also analyze whether any indicators of impairment exist each quarter.  A significant amount of judgment is involved in determining if an indicator of impairment has occurred.  Such indicators may include a sustained, significant decline in our share price and market capitalization, a decline in our expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, the testing for recoverability of our assets, and/or slower growth rates, among others.



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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY



We estimate the fair value of MSBS using discounted expected future cash flows, supported by the results of various market approach valuation models.  If the fair value of MSBS exceeds net book value, goodwill is not impaired, and no further testing is necessary.  If the net book value exceeds fair value, we perform a second test to measure the amount of impairment loss.  To measure the amount of any impairment charge, we determine the implied fair value of goodwill in the same manner as in a business combination.

Specifically, we allocate fair value to all assets and liabilities, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill.  If the implied fair value of goodwill is less than the goodwill recorded on our consolidated balance sheet, we record an impairment charge for the difference.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company and this Item is not applicable to us.

Item 4.

Controls and Procedures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).  Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and (2) accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


* * * * * * * * *

Statements in this Form 10-Q, other than statements of historical information are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements involve known and unknown risks which may cause the Company’s actual results in future periods to differ materially from expected results.  Those risks include, among others, risks associated with increased competition, customer decisions, the successful completion of continuing development of new products, the successful negotiation, execution and implementation of anticipated new software contracts, the successful addition of personnel in the marketing and technical areas and our ability to complete development and sell and license our products at prices which result in sufficient revenues to realize profits, and other business factors beyond our control.  Those and other risks are described in the Company’s filings with the SEC over the last 12 months, including our Form 10-K filed with the SEC on April 2, 2012, copies of which are available from the SEC or may be obtained upon request from the Company.



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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY




PART II:

OTHER INFORMATION

Item 1A.

Risk Factors.

The risk factors included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC on April 2, 2012, have not materially changed.

Item 6.

Exhibits.

Exhibit

 

 

No.

 

Description

 

 

 

10.1

 

Lease, dated April 12, 2012, by and between the Company and Kemble Plaza II Realty L.L.C.

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.1*

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 formatted in eXtensible Business Reporting Language (XBRL):  

(i) Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011; (ii) Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011 (Unaudited); (iii) Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (Unaudited); and (iv) Notes to Consolidated Financial Statements (Unaudited).




 
Furnished herewith.  Pursuant to with Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101.1 hereto are not to be deemed “filed” or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, and are not to be deemed “filed” for purposes of Section 18 of the Exchange Act, and otherwise are not subject to liability under those sections, except as shall be expressly set forth by specific reference in such filing 




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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COVER-ALL TECHNOLOGIES INC.

Date:  May 15, 2012

By:

/s/ John W. Roblin

John W. Roblin, Chairman of the Board of Directors
and Chief Executive Officer




Date:  May 15, 2012

By: /s/ Ann F. Massey

Ann F. Massey, Chief Financial Officer





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XASE:COVR Cover-All Technologies Inc Quarterly Report 10-Q Filling

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