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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q
Commission file number: 1-09228 COVER-ALL TECHNOLOGIES INC. (Exact Name of Registrant as Specified in Its Charter)
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.
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 12 Item 3. Quantitative and Qualitative Disclosures 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
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
3 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
4 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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)
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:
7 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[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)
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:
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)
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:
13 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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 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 14 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY 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.
15 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY 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
16 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY 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.
17 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.
18 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.
19 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.
20 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.
21 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 Date: May 15, 2012 By: /s/ Ann F. Massey Ann F. Massey, Chief Financial Officer
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