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EX-5.1 - EXHIBIT 5.1 - InsPro Technologies Corpv332805_ex5-1.htm
EX-8.1 - EXHIBIT 8.1 - InsPro Technologies Corpv332805_ex8-1.htm
EX-4.33 - EXHIBIT 4.33 - InsPro Technologies Corpv332805_ex4-33.htm
EX-4.32 - EXHIBIT 4.32 - InsPro Technologies Corpv332805_ex4-32.htm
EX-99.2 - EXHIBIT 99.2 - InsPro Technologies Corpv332805_ex99-2.htm
EX-99.4 - EXHIBIT 99.4 - InsPro Technologies Corpv332805_ex99-4.htm
EX-99.1 - EXHIBIT 99.1 - InsPro Technologies Corpv332805_ex99-1.htm
EX-99.6 - EXHIBIT 99.6 - InsPro Technologies Corpv332805_ex99-6.htm
EX-99.5 - EXHIBIT 99.5 - InsPro Technologies Corpv332805_ex99-5.htm
EX-23.1 - EXHIBIT 23.1 - InsPro Technologies Corpv332805_ex23-1.htm
EX-99.7 - EXHIBIT 99.7 - InsPro Technologies Corpv332805_ex99-7.htm
EX-99.3 - EXHIBIT 99.3 - InsPro Technologies Corpv332805_ex99-3.htm

 

As filed with the Securities and Exchange Commission on February 1, 2013

 

Registration No. 333-185752

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

 

 

AMENDMENT NO. 1

To

FORM S-1

 

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

________________

 

InsPro Technologies Corporation

(Exact name of registrant as specified in charter)

 

Delaware 6411 98-0438502
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)

 

150 N. Radnor-Chester Road

Suite B-101

Radnor, Pennsylvania 19087

(484) 654-2200

(Address, including zip code, and Telephone Number, including area code of Registrant’s Principal Executive Offices)

________________

 

Anthony R. Verdi

Chief Executive Officer, Chief Financial Officer and Chief Operating Officer

InsPro Technologies Corporation

150 N. Radnor-Chester Road

Suite B-101

Radnor, Pennsylvania 19087

(484) 654-2200

(Name, Address, including zip code and Telephone Number, including area code of Agent for Service)

 

Copy to:

James W. McKenzie, Jr., Esq.

Morgan, Lewis & Bockius LLP

1701 Market Street

Philadelphia, Pennsylvania 19103

(215) 963-5000

________________

 

Approximate Date of Proposed Sale to the Public: As soon as practicable after the effective date of this registration statement.

 

If any Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: £

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. £

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. £

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. £

 

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 R

 

1
 

 

CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities To Be Registered Proposed Maximum Aggregate Offering Price ($)

Amount of Registration Fee ($)

(1)

Series B Convertible Preferred Stock, par value $0.001 per share —(2)
Warrants to Purchase Shares of Common Stock —(3)
Units Consisting of 80 Shares of Series B Convertible Preferred Stock and a Five-Year Warrant to Purchase 800 Shares of Common Stock
Common Stock issuable upon exercise of the Warrants —(4)
Common Stock issuable upon the conversion of the Series B Convertible Preferred Stock —(5)
Total Registration Fee: $2,500,000 $341.00  

(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

 

(2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(i) under the Securities Act of 1933, as amended.

 

(3) Pursuant to Rule 457(g), no separate registration fee is required for the warrants offered hereby because they are being registered on the same registration statement as the common stock underlying the warrants.

 

(4) Pursuant to Rule 416, the securities being registered hereunder include such indeterminate number of additional shares of common stock as may be issuable upon exercise of warrants registered hereunder as a result of stock splits, stock dividends, or similar transactions.

 

(5) Pursuant to Rule 457(i), no separate registration fee is required for the common stock underlying the convertible preferred stock because the common stock is being registered on the same registration statement as the convertible preferred stock.

 

Pursuant to Rule 429 under the Securities Act of 1933, the prospectus included in this Registration Statement is a combined prospectus and also relates to (i) 33,550,000 shares of common stock previously registered under the Registrant’s Registration Statement on Form SB-2 (File No. 333-133182); (ii) 6,050,000 shares of common stock previously registered under the Registrant’s Registration Statement on Form SB-2 (File No. 333-142556), (iii) 1,089,913 shares of common stock previously registered under the Registrant’s Registration Statement on Form SB-2 on Form S-1 (File No. 333-149015), and (iv) 5,000 units, 1,250,000 shares of Series A Convertible Preferred Stock and warrants to purchase 25,000,000 shares of common stock previously registered under the Registrant’s Registration Statement on Form S-1 (File No. 333-162712). Accordingly, this Registration Statement, which is a new registration statement, also constitutes Post-Effective Amendment No. 2 to Registration Statement No. 333-133182, Post-Effective Amendment No. 2 to Registration Statement No. 333-142556, Post-Effective Amendment No. 2 to Registration Statement No. 333-149015 and Post-Effective Amendment No. 1 to Registration Statement No. 333-162712, which post-effective amendments shall hereafter become effective concurrently with the effectiveness of this Registration Statement and in accordance with Section 8(c) of the Securities Act of 1933. If securities previously registered under Registration Statement No. 333-133182, Registration Statement No. 333-142556, Registration Statement No. 333-149015 and Registration Statement No. 333-162712 are offered and sold before the effective date of this Registration Statement, the amount of previously registered securities so sold will not be included in the prospectus hereunder.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

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Explanatory Note

 

InsPro Technologies Corporation (the “Company”) previously filed a Registration Statement on Form SB-2 (File No. 333-133 182) with the U.S. Securities and Exchange Commission (the “Commission”) on April 10, 2006, which was declared effective on July 7, 2006 (the “2006 Prior Registration Statement”). The 2006 Prior Registration Statement registered up to 33,550,000 shares of our common stock for resale by the selling stockholders named therein, including 8,650,000 shares of our common stock issuable upon the exercise of warrants held by such selling stockholders.

 

The Company previously filed a Registration Statement on Form SB-2 (File No. 333-142556) with the Commission on May 2, 2007, which was declared effective on June 1, 2007 (the “2007 Prior Registration Statement”). The 2007 Prior Registration Statement registered up to 6,050,000 shares of our common stock for resale by the selling stockholders named therein, including 2,000,000 shares of our common stock issuable upon the exercise of warrants held by such selling stockholders.

 

The Company previously filed a Registration Statement on Form SB-2 on Form S-l (File No. 333-149015) with the Commission on February 1, 2008, which was declared effective on April 22, 2008 (the “2008 Prior Registration Statement”). The 2008 Prior Registration Statement registered up to 739,913 shares of our common stock for resale by the selling stockholders named therein, including 350,000 shares of our common stock issuable upon the exercise of warrants held by such selling stockholders.

 

The Company previously filed a Registration Statement on Form S-l (File No. 333-162712) with the Commission on January 14, 2010, which was declared effective on January 22, 2010 (the “2010 Prior Registration Statement”, and together with the 2006 Prior Registration Statement, 2007 Prior Registration Statement and 2008 Prior Registration Statement, the “Prior Registration Statements”). The 2010 Prior Registration Statement registered up to 5,000 units, 1,250,000 shares of Series A Convertible Preferred Stock and warrants to purchase 25,000,000 shares of common stock. Pursuant to Rule 429 under the Securities Act of 1933, the prospectus included in the 2010 Prior Registration Statement was a combined prospectus and also related to relates to 33,550,000 shares of common stock registered under the 2006 Prior Registration Statement, 6,050,000 shares of common stock registered under the 2007 Prior Registration Statement and 1,089,913 shares of common stock registered under the 2008 Prior Registration Statement. Accordingly, the 2010 Prior Registration Statement also constituted Post-Effective Amendment No. 1 to the 2006 Prior Registration Statement, Post-Effective Amendment No. 1 to the 2007 Prior Registration Statement and Post-Effective Amendment No. 1 to the 2008 Prior Registration Statement.

 

Pursuant to Rule 429 under the Securities Act of 1933, the prospectus included in this Registration Statement is also a combined prospectus and also relates to 33,550,000 shares of common stock registered under the 2006 Prior Registration Statement, 6,050,000 shares of common stock registered under the 2007 Prior Registration Statement, 1,089,913 shares of common stock registered under the 2008 Prior Registration Statement, and the 5,000 units, 1,250,000 shares of Series A Convertible Preferred Stock and warrants to purchase 25,000,000 shares of common stock registered under the 2010 Prior Registration Statement. Accordingly, this Registration Statement, which is a new registration statement, also constitutes Post-Effective Amendment No. 2 to the 2006 Prior Registration Statement, Post-Effective Amendment No. 2 to the 2007 Prior Registration Statement, Post-Effective Amendment No. 2 to the 2008 Prior Registration Statement and Post-Effective Amendment No. 2 to the 2010 Prior Registration Statement and is being filed to, among other things: (i) include audited financial statements for our fiscal year ended December 31, 2011 and to reflect additional information disclosed in our Annual Report on Form 10-K (the “Annual Report”) for our fiscal year ended December 31, 2011, filed with the Commission on March 31, 2012; (ii) include unaudited interim financial statements for our three and nine months ended September 30, 2012 and to reflect additional information disclosed in our Quarterly Reports on Form l0-Q and our Current Reports on Form 8-K filed with the Commission subsequent to our Annual Report.

 

Accordingly, this Registration Statement on Form S-l (i) carries forward from the Prior Registration Statements an aggregate of (A) 40,689,913 shares of our common stock, which includes 11,000,000 shares of our common stock issuable upon the exercise of warrants, held by certain of the named selling stockholders, and (B) 5,000 units, 1,250,000 shares of our Series A Convertible Preferred Stock and 25,000,000 warrants to purchase shares of our common stock, and (ii) registers an additional 10,416 Units, 833,280 shares of our Series B Convertible Preferred Stock and warrants to purchase 8,332,800 shares of our common stock which have not previously been registered. All filing fees payable in connection with the initial filing of the Prior Registration Statements were previously paid at the time of the initial filing of the Prior Registration Statements. A registration fee of $341.00 in respect of the 833,280 shares of our Series B Convertible Preferred Stock and warrants to purchase 8,332,800 shares of our common stock being registered in this Registration Statement on Form S-l was paid concurrently with the filing of this Registration Statement on Form S-l on December 31, 2012.

 

3
 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS

Subject to Completion February 1, 2013

 


INSPRO TECHNOLOGIES CORPORATION

 

Up to 10,416 Units, 833,280 Shares of Preferred Stock and
Warrants to Purchase 8,332,800 Shares of Common Stock
Issuable Upon Exercise of Rights to Subscribe for such Shares and Warrants

 

We are distributing, at no charge to the holders of our capital stock, non-transferable subscription rights to subscribe for units, which we refer to throughout this prospectus as Units, consisting of 80 shares of our Series B Convertible Preferred Stock and a five-year warrant to purchase 800 additional shares of our common stock at an exercise price of $0.15 per share. Our stockholders will receive one subscription right for every 12,756 shares of our common stock, 638 shares of our Series A Convertible Preferred Stock held and 638 shares of our Series B Convertible Preferred Stock held of record as of 5:00 p.m., New York City time, on January 31, 2013, the record date. Pursuant to the terms of this offering, the rights may only be exercised for a maximum of 10,416 Units, or $2.5 million of gross subscription proceeds.

 

Each subscription right entitles the holder to subscribe for one Unit at the subscription price of $240.00 per Unit, which we refer to as the basic subscription right. In addition, rights holders who fully exercise their basic subscription rights will be entitled, subject to limitations, to subscribe for additional Units that remain unsubscribed as a result of any unexercised basic subscription rights, which we refer to as the over-subscription right, at the subscription price of $240.00 per Unit.

 

There is no minimum number of Units you must purchase, but you may not purchase fractional Units. When determining the number of subscription rights you will receive, divide the number of shares of our common stock you own by 12,756, the number of shares of our Series A Convertible Preferred Stock you own by 638 and the number of shares of our Series B Convertible Preferred Stock you own by 638 and round down the sum of those amounts to the next whole number. For example, if you own 100,000 shares of our common stock, 10,000 shares of our Series A Convertible Preferred Stock and 10,000 shares of our Series B Convertible Preferred Stock, you will receive 39 subscription rights (100,000 shares of common stock divided by 12,756 = 7.84, 10,000 shares of Series A Convertible Preferred Stock divided by 638 = 15.68, 10,000 shares of Series B Convertible Preferred Stock divided by 638 = 15.68, which sum = 39.20, rounded down to 39 subscription rights, the next whole number), which will entitle you to subscribe for up to 39 Units under your basic subscription privilege.

 

This rights offering was designed to give all of the holders of our capital stock the opportunity to participate in an equity investment in InsPro Technologies Corporation on substantially the same economic terms as our last private placement in November 2012.

 

The subscription rights will expire if they are not exercised by 5:00 p.m., New York City time, on March 14, 2013, unless we extend the rights offering period. Our board of directors may cancel the rights offering at any time prior to the expiration of the rights offering for any reason and may extend or amend the rights offering for any reason. In the event we cancel the rights offering, all subscription payments received by us will be returned, without interest or penalty, as soon as practicable.

 

4
 

 

The subscription rights may not be sold, transferred or assigned, and will not be listed for trading on any stock exchange or on the Over-the-Counter Bulletin Board, the OTCBB.

 

You should carefully consider whether to exercise your subscription rights before the expiration date. All exercises of subscription rights are irrevocable. This is not an underwritten offering. The Units are being offered directly by us without the services of an underwriter or selling agent. Our board of directors is making no recommendation regarding your exercise of the subscription rights.

 

Our common stock is quoted on the OTCBB under the symbol “ITCC.OB.”

 

The average of the bid and asked prices of our common stock on the OTCBB on January 31, 2013 was $0.07 per share.

 

INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE SECTION ENTITLED “RISK FACTORS” BEGINNING ON PAGE 18.

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

The date of this prospectus is           , 2013

 

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Table of Contents

 

Page

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 7
   
QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING 8
   
PROSPECTUS SUMMARY 15
   
RISK FACTORS 18
   
THE RIGHTS OFFERING 28
   
USE OF PROCEEDS 36
   
DILUTION 36
   
CAPITALIZATION   37
   
DESCRIPTION OF SECURITIES 37
   
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS 39
   
BUSINESS   40
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 44
   
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 55
   
EXECUTIVE COMPENSATION 58
   
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 63
   
TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS 66
   
PLAN OF DISTRIBUTION 67
   
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS 67
   
EXPERTS   73
   
TRANSFER AGENT AND REGISTRAR 73
   
LEGAL MATTERS 73
   
WHERE YOU CAN FIND MORE INFORMATION 73
   
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES 73
   
FINANCIAL STATEMENTS F-1

 

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from the information contained in this prospectus. We will not make an offer to sell these securities in any jurisdiction where offers and sales are not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of when this prospectus is delivered or when any sale of our common stock occurs. All dollar amounts in this prospectus are in U.S. dollars unless otherwise stated.

 

In this prospectus, unless the context specifically indicates otherwise, all references to “the Company,” “we,” “us,” and “our” refer to InsPro Technologies Corporation and its subsidiaries.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain of the statements contained in this prospectus, including in the sections entitled “Questions and Answers About the Rights Offering,” “Prospectus Summary,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained in the forward-looking statements. The forward-looking statements herein include, among others, statements addressing management’s views with respect to future financial and operating results and costs associated with the Company’s operations and other similar statements. Various factors, including competitive pressures, market interest rates, regulatory changes, customer defaults or insolvencies, litigation, acquisition of businesses that do not perform as we expect or that are difficult for us to integrate or control, adverse resolution of any contract or other disputes with customers, could cause actual outcomes and results to differ materially from those described in forward-looking statements.

 

The words “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. While we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and projections of the future about which we cannot be certain. Many factors, including general business and economic conditions, affect our ability to achieve our objectives. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. In addition, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, if at all. We may not update these forward-looking statements, even though our situation may change in the future.

 

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QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING

 

The following are examples of what we anticipate will be common questions about the rights offering. The answers are based on selected information included elsewhere in this prospectus. The following questions and answers do not contain all of the information that may be important to you and may not address all of the questions that you may have about the rights offering. This prospectus contains more detailed descriptions of the terms and conditions of the rights offering and provides additional information about us and our business, including potential risks related to the rights offering, the Units, and our business.

 

What is the rights offering?

 

We are distributing, at no charge, to holders of our shares of capital stock, non-transferable subscription rights to subscribe for Units consisting of 80 shares of our Series B Convertible Preferred Stock and a five-year warrant to purchase 800 additional shares of our common stock at an exercise price of $0.15 per share. You will receive one subscription right for every 12,756 shares of our common stock, 638 shares of Series A Convertible Preferred Stock and 638 shares of Series B Convertible Preferred Stock held of record by you as of 5:00 p.m., New York City time, on January 31, 2013, the record date. Each subscription right entitles the holder to a basic subscription right and an over-subscription privilege, which are described below. The shares of preferred stock and the warrant to be issued as components of the Units in the rights offering do not currently trade on the OTCBB or on any other exchange, and are only transferable to the extent permitted in the instruments governing such securities.

 

What is the basic subscription right?

 

The basic subscription right gives our stockholders the opportunity to purchase Units at a subscription price of $240.00 per Unit for each 12,756 shares of common stock, 638 shares of Series A Convertible Preferred Stock and 638 shares of Series B Convertible Preferred Stock you own. We have granted to you, as a stockholder of record on the record date, one subscription right for each 12,756 shares of our common stock, 638 shares of Series A Convertible Preferred Stock and 638 shares of Series B Convertible Preferred Stock you owned at that time.

 

There is no minimum number of Units you must purchase, but you may not purchase fractional Units. When determining the number of subscription rights you will receive, divide the number of shares of our common stock you own by 12,756, the number of shares of Series A Convertible Preferred Stock you own by 638 and the number of shares of Series B Convertible Preferred Stock you own by 638, and round down the sum of those amounts to the next whole number. For example, if you own 100,000 shares of our common stock, 10,000 shares of our Series A Convertible Preferred Stock and 10,000 shares of our Series B Convertible Preferred Stock, you will receive 39 subscription rights (100,000 shares of common stock divided by 12,756 = 7.84, 10,000 shares of Series A Convertible Preferred Stock divided by 638 = 15.68, 10,000 shares of Series B Convertible Preferred Stock divided by 638 = 15.68, which sum = 39.20, rounded down to 39 subscription rights, the next whole number), which will entitle you to subscribe for up to 39 Units under your basic subscription privilege.

 

You may exercise all or a portion of your basic subscription right, or you may choose not to exercise any subscription rights at all. However, if you exercise less than your full basic subscription right, you will not be entitled to purchase shares under your over-subscription privilege.

 

If you hold an InsPro Technologies Corporation stock certificate, the number of Units you may purchase pursuant to your basic subscription right is indicated on the enclosed rights certificate. If you hold your shares in the name of a broker, dealer, custodian bank or other nominee who uses the services of the Depository Trust Company (DTC), you will not receive a rights certificate. Instead, DTC will issue one subscription right to your nominee record holder for each 12,756 shares of our common stock, 638 shares of Series A Convertible Preferred Stock and 638 shares of Series B Convertible Preferred Stock that you own at the record date. If you are not contacted by your nominee, you should contact your nominee as soon as possible.

 

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What is the over-subscription privilege?

 

In the event that you purchase all of the Units available to you pursuant to your basic subscription right, you may also choose to purchase any Units that are not purchased by our other stockholders through the exercise of their basic subscription rights. You should indicate on your rights certificate, or the form provided by your nominee if your shares are held in the name of a nominee, how many additional Units you would like to purchase pursuant to your over-subscription privilege.

 

If sufficient Units are available, we will seek to honor your over-subscription request in full. If, however, over-subscription requests exceed the number of Units available, we will allocate the available Units pro rata among the stockholders exercising the over-subscription privilege in proportion to the number of shares of capital stock owned by such stockholder on the record date, relative to the number of shares owned on the record date by all stockholders exercising the over-subscription privilege. If this pro rata allocation results in any stockholder receiving a greater number of Units than the stockholder subscribed for pursuant to the exercise of the over-subscription privilege, then such stockholder will be allocated only that number of Units for which the stockholder oversubscribed, and the remaining Units will be allocated among all other stockholders exercising the over-subscription privilege on the same pro rata basis described above. The proration process will be repeated until all Units have been allocated.

 

In order to properly exercise your over-subscription privilege, you must deliver the subscription payment related to your over-subscription privilege prior to the expiration of the rights offering. Because we will not know the total number of unsubscribed Units prior to the expiration of the rights offering, if you wish to maximize the number of Units you purchase pursuant to your over-subscription privilege, you will need to deliver payment in an amount equal to the aggregate subscription price for the maximum number of Units that may be available to you (i.e., for the maximum number of Units available to you, assuming you exercise all of your basic subscription rights and are allotted the full amount of your over-subscription). See “The Rights Offering — The Subscription Rights — Over-Subscription Privilege.”

 

Any excess subscription payments received by us will be returned, without interest or penalty, as soon as practicable.

 

Why are we conducting the rights offering?

 

We are conducting the rights offering for the primary purpose of providing all of the holders of our capital stock the opportunity to participate in an equity investment in InsPro Technologies Corporation on substantially the same economic terms as our last private placement in November 2012 and secondarily of raising equity capital to improve our capital position, to inject additional capital into InsPro Technologies Corporation and to retain the remainder of any proceeds at InsPro Technologies Corporation for general corporate purposes. See “Use of Proceeds.”

 

This rights offering, including the composition and price of the Units, was designed to give all of the holders of our capital stock the opportunity to participate in an equity investment in InsPro Technologies Corporation on substantially the same economic terms as our last private placement in November 2012.

 

How was the $240.00 per Unit subscription price determined?

 

The $240.00 per Unit subscription price was determined by our board of directors based on the per share value of the Series B Convertible Preferred Stock and warrants (considered in the aggregate) purchased by investors in our last private placement in November 2012. In November 2012, we sold units, consisting of one share of our Series B Convertible Preferred Stock (each share of which is convertible, at the sole option of the holder, into 20 shares of our common stock) and one five-year warrant to purchase 10 shares of our common stock, at a per unit price of $3.00. We sold a total of 499,999 units in that offering for an aggregate purchase price of $1.5 million.

 

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In determining the subscription price, our board of directors considered the overall economic value offered to investors in InsPro Technologies Corporation in the last private placement. If an investor had invested in the last private placement, for every $240.00 invested, such investor would have received 80 shares of Series B Convertible Preferred Stock and warrants to purchase 800 additional shares of our common stock at an exercise price of $0.15 per share. As a result, the Units offered in this rights offering consist of 80 shares of our Series B Convertible Preferred Stock and a warrant to purchase 800 shares of our common stock at a price per Unit of $240.00.

 

We did not seek or obtain an opinion of financial advisors in establishing the subscription price. The subscription price will not necessarily be related to our book value, tangible book value, net worth or any other established criteria of fair value.

 

What are the material terms of the Series B Convertible Preferred Stock offered in this rights offering?

 

Each share of Series B Convertible Preferred Stock offered in this rights offering is convertible, at the sole discretion of each holder of preferred stock, into 20 shares of common stock, subject to certain adjustments. The holders of shares of our Series B Convertible Preferred Stock are entitled to vote, with respect to any question upon which holders of our common stock are entitled to vote, together with the holders of common stock as one class on an as-converted basis. At such time, if any, as our board of directors declares a dividend or distribution on the common stock, the holders of preferred stock shall be entitled to receive, for each share of Series B Convertible Preferred Stock held by them, a dividend or distribution in an amount equal to what such holder of preferred stock would receive if their shares were converted into shares of common stock. We do not currently intend to pay any cash dividends to the holders of shares of our common stock.

 

In addition, upon the liquidation, sale or merger of InsPro Technologies Corporation, each share of our Series B Convertible Preferred Stock is entitled to receive an amount equal to the greater of (A) a liquidation preference equal to the preferred stock original issue price, subject to certain customary adjustments, or (ii) the amount such preferred stock would receive if it participated pari passu with the holders of our common stock on an as-converted basis. For so long as any shares of Series B Convertible Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the shares of preferred stock is required to approve (Y) any amendment to our certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special rights of the Series B Convertible Preferred Stock or (Z) any amendment to our certificate of incorporation to create any shares of capital stock that rank senior to the Series B Convertible Preferred Stock. In addition to the voting rights described above, for so long as 1,000,000 shares of Series B Convertible Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the preferred stock is required to effect or validate any merger, sale of substantially all of the assets of InsPro Technologies Corporation or other fundamental transaction, unless such transaction, when consummated, will provide the holders of preferred stock with an amount per share equal to the preferred stock original issue price plus any declared but unpaid dividends.

 

What are the material terms of the warrants offered in this rights offering?

 

The warrants that we are offering in this rights offering are in substantially similar form to those warrants purchased by investors in the last private placement in November 2012. Each warrant issued as a component of the Units will be a five-year warrant to purchase 800 shares of our common stock at an exercise price of $0.15 per share, subject to our right to call the warrant under certain conditions. The warrants include full ratchet anti-dilution adjustment provisions for issuances of securities below $0.15 per share during the first two years following the date of issuance of the warrants, subject to customary exceptions.

 

Am I required to exercise all of the subscription rights I receive in the rights offering?

 

No. You may exercise any number of your subscription rights, or you may choose not to exercise any subscription rights. If you do not exercise any subscription rights, the number of shares of our common stock you own will not change. However, if you choose not to exercise your subscription rights, your ownership interest in InsPro Technologies Corporation may be diluted by other stockholder purchases (to the extent we receive any subscriptions in this rights offering). In addition, if you do not exercise your basic subscription right in full, you will not be entitled to participate in the over-subscription privilege. See “Risk Factors — If you do not exercise your subscription rights, your percentage ownership in InsPro Technologies Corporation will be diluted.”

 

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How soon must I act to exercise my subscription rights?

 

If you received a rights certificate and elect to exercise any or all of your subscription rights, we must receive your completed and signed rights certificate and payments prior to the expiration of the rights offering, which is March 14, 2013, at 5:00 p.m., Eastern Time. If you hold your shares in the name of a broker, dealer, custodian bank or other nominee, your nominee may establish a deadline prior to 5:00 p.m. Eastern Time, on March 14, 2013 by which you must provide it with your instructions to exercise your subscription rights. Although our board of directors may, in its discretion, extend the expiration of the rights offering, we currently do not intend to do so. Our board of directors may cancel or amend the rights offering at any time. In the event that the rights offering is cancelled, all subscription payments received will be returned, without interest or penalty, as soon as practicable.

 

Although we will make reasonable attempts to provide this prospectus to our stockholders, the rights offering and all subscription rights will expire at 5:00 p.m., Eastern Time on March 14, 2013, whether or not we have been able to locate each person entitled to subscription rights.

 

May I transfer my subscription rights?

 

No. You may not sell, transfer or assign your subscription rights to anyone. Subscription rights will not be listed for trading on the OTCBB or any other stock exchange or market. Rights certificates may only be completed by the stockholder who receives the certificate.

 

Are we requiring a minimum subscription to complete the rights offering?

 

No. There is no individual minimum purchase requirement in the rights offering and we are not requiring a minimum subscription to complete the rights offering. However, because we are not issuing fractional Units, you must own at least 12,756 shares of our common stock, 638 shares of our Series A Convertible Preferred Stock or 638 shares of our Series B Convertible Preferred Stock as of the record date in order to subscribe for one Unit in the rights offering.

 

In addition, our board of directors reserves the right to cancel the rights offering for any reason.

 

Can the board of directors cancel, amend or extend the rights offering?

 

Yes. Our board of directors may decide to cancel, amend or terminate the rights offering at any time before the expiration of the rights offering and for any reason. If our board of directors cancels or terminates the rights offering, any money received from subscribing stockholders will be returned, without interest or penalty, as soon as practicable. We also reserve the right to amend or modify the terms of the rights offering. We further have the right to extend the rights offering and the time for exercising your subscription rights, although we do not presently intend to do so.

 

Has our board of directors made a recommendation to our stockholders regarding the rights offering?

 

No. Our board of directors is making no recommendation regarding your exercise of the subscription rights. Stockholders who exercise subscription rights risk investment loss on new money invested. There is currently no public market for our shares of Series B Convertible Preferred Stock. You are urged to make your decision based on your own assessment of our business and financial condition, our prospects for the future, the terms of the rights offering and the information contained in, or incorporated by reference into, this prospectus. See “Risk Factors” for a discussion of some of the risks involved in investing in our common stock.

 

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How do I exercise my subscription rights if I own shares in certificate form?

 

If you hold an InsPro Technologies Corporation stock certificate and you wish to participate in the rights offering, you must take the following steps:

 

· deliver payment to us before 5:00 p.m., Eastern Time, on March 14, 2013; and

 

· deliver a properly completed and signed rights certificate to us before 5:00 p.m., Eastern Time, on March 14, 2013.

 

In certain cases, you may be required to provide additional documentation or signature guarantees.

 

Please follow the delivery instructions on the rights certificate. You are solely responsible for completing delivery to us of your subscription documents, rights certificate and payment. We urge you to allow sufficient time for delivery of your subscription materials to us so that they are received by us by 5:00 p.m., Eastern Time, on March 14, 2013. WE WILL NOT ACCEPT ANY SUBSCRIPTIONS THAT WE RECEIVE AFTER THIS TIME.

 

If you send a payment that is insufficient to purchase the number of Units you request, or if the number of Units you request is not specified in the forms, the payment received will be applied to exercise your subscription rights to the fullest extent possible based on the amount of the payment received, subject to the availability of Units under the over-subscription privilege and the elimination of fractional Units.

 

What should I do if I want to participate in the rights offering, but my shares are held in the name of a broker, dealer, custodian bank or other nominee?

 

If you hold your shares of common stock through a broker, dealer, custodian bank or other nominee, then your nominee is the record holder of the shares you own. The record holder must exercise the subscription rights on your behalf. If you wish to purchase Units through the rights offering, you should contact your broker, dealer, custodian bank or nominee as soon as possible. Please follow the instructions of your nominee. Your nominee may establish a deadline that may be before the expiration date that we have established for the rights offering.

 

When will I receive my new shares and warrants?

 

If you purchase Units in the rights offering you will receive your new shares and warrants as soon as practicable after the closing of the rights offering.

 

After I send in my payment and rights certificate, may I cancel my exercise of subscription rights?

 

No. All exercises of subscription rights are irrevocable unless the rights offering is terminated, even if you later learn information that you consider to be unfavorable to the exercise of your subscription rights. You should not exercise your subscription rights unless you are certain that you wish to purchase Units in the rights offering.

 

Are there any conditions to completing the rights offering?

 

No, there are no conditions to completion of the rights offering.

 

What effects will the rights offering have on our outstanding Series B Convertible Preferred Stock and warrants?

 

As of January 31, 2013, we had 3,297,378 shares of Series B Convertible Preferred Stock and 92,020,447 warrants to purchase shares of common stock issued and outstanding. The number of shares of our Series B Convertible Preferred Stock and warrants that we will issue in this rights offering through the exercise of subscription rights will depend on the number of Units that are subscribed for in the rights offering. We could, depending on the number of Units that are subscribed for in the offering, have a maximum of 4,130,658 shares of Series B Convertible Preferred Stock and warrants to purchase 100,353,247 shares of our common stock outstanding after completion of the rights offering.

 

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The issuance of Units in the rights offering will dilute, and thereby reduce, your proportionate ownership in InsPro Technologies Corporation. If you fully exercise your basic subscription right and a certain level of your over-subscription privilege, your ownership interest will be diluted to a lesser extent.

 

How much will InsPro Technologies Corporation receive from the rights offering?

 

If all of the subscription rights (including all over-subscription privileges) are exercised in full by our stockholders, we expect the gross proceeds from the rights offering to be approximately $2.5 million. If no subscription rights are exercised by our stockholders, we would receive no proceeds from the rights offering. We are offering shares in the rights offering to stockholders with no individual minimum purchase requirement.

 

Are there risks in exercising my subscription rights?

 

Yes. The exercise of your subscription rights involves risks. Exercising your subscription rights involves the purchase of additional shares of our Series B Convertible Preferred Stock and warrants to purchase our common stock and should be considered as carefully as you would consider any other equity investment. Among other things, you should carefully consider the risks described under the heading “Risk Factors” in this prospectus and in the documents incorporated by reference in this prospectus.

 

If the rights offering is not completed, will my subscription payment be refunded to me?

 

Yes. We will hold all funds we receive in a segregated bank account until completion of the rights offering. If the rights offering is not completed, all subscription payments received by us will be returned, without interest or penalty, as soon as practicable. If you own shares in “street name,” it may take longer for you to receive your subscription payment because we will return payments through the record holder of your shares.

 

What fees or charges apply if I purchase Units in the rights offering?

 

We are not charging any fee or sales commission to issue subscription rights to you or to issue shares or warrants to you if you exercise your subscription rights. If you exercise your subscription rights through a broker, dealer, custodian bank or other nominee, you are responsible for paying any fees your record holder may charge you.

 

What are the material U.S. federal income tax consequences of exercising my subscription rights?

 

It is the opinion of our counsel, Morgan, Lewis & Bockius LLP, that you should not recognize income or loss for U.S. federal income tax purposes in connection with the receipt or exercise of subscription rights in the rights offering. You should consult your tax advisor as to your particular tax consequences resulting from the rights offering. For a detailed discussion, see “Material U.S. Federal Income Tax Considerations.”

 

To whom should I send my forms and payment?

 

If your shares are held in the name of a broker, dealer or other nominee, then you should send your subscription documents, rights certificate and subscription payment to that record holder. If you are the record holder, then you should send your subscription documents, rights certificate and subscription payment by hand delivery, first class mail or courier service to:

 

InsPro Technologies Corporation

150 N. Radnor-Chester Road

Suite B-101

Radnor, Pennsylvania 19087

Attn: Francis L. Gillan III

 

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You are solely responsible for completing delivery to us of your subscription documents, rights certificate and payment. We urge you to allow sufficient time for delivery of your subscription materials to us.

 

Whom should I contact if I have other questions?

 

If you have any questions regarding InsPro Technologies Corporation or the rights offering, please contact Francis L. Gillan III at (484) 654-2200. You may also contact us with questions by electronic mail at rightsoffering@inspro.com.

 

If you have any questions regarding completing a rights certificate or submitting payment in the rights offering, please contact Francis L. Gillan III at (484) 654-2200 or by electronic mail at rightsoffering@inspro.com.

 

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PROSPECTUS SUMMARY

 

This summary highlights selected information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our securities. You should read the entire prospectus carefully, including the “Risk Factors” section, before making a decision to invest in our securities.

 

Our Business

 

We are a technology company that provides software applications for use by insurance administrators in the insurance industry. Our business focuses primarily on our InsPro Enterprise software application.

 

We acquired Atiam Technologies, L.P. on October 1, 2007. This entity, which changed its name to InsPro Technologies, LLC on May 14, 2009, developed, sells and supports our InsPro Enterprise software application. InsPro Enterprise is a comprehensive, web-based insurance administration software application, which was introduced by Atiam Technologies, L.P. (now our InsPro Technologies, LLC subsidiary) in 2004. InsPro Enterprise clients include insurance carriers and third party administrators. We market InsPro Enterprise as a licensed software application, and we realize revenue from the sale of the software licenses, application service provider fees, software maintenance fees and consulting and implementation services.

 

During 2005 through October 1, 2007 our operations were primarily that of our former Telesales and Insurint businesses. We effectively sold our former Telesales business in 2009 and our former Insurint business in 2010. Our former Telesales and Insurint businesses are now classified as part of our discontinued operations.

 

Our common stock has been quoted on the OTCBB since December 6, 2010 under the symbol ITCC.OB and from December 13, 2005 until December 3, 2010 under the symbol HBDT.OB.

 

Summary of this Rights Offering

 

 

 

Securities Offered   We are distributing to you, at no charge, one non-transferable subscription right for each 12,756 shares of our common stock, 638 shares of Series A Convertible Preferred Stock and 638 shares of Series B Convertible Preferred Stock that you owned as of 5:00 p.m., Eastern Time, on January 31, 2013, the record date, either as a holder of record or, in the case of shares held of record by brokers, dealers, custodian banks or other nominees on your behalf, as a beneficial owner of such shares. If the rights offering is fully subscribed, we expect the gross proceeds from the rights offering to be approximately $2.5 million. This rights offering was designed to give all of the holders of our capital stock the opportunity to participate in an equity investment in InsPro Technologies Corporation on the same economic terms as the investment made by investors in our last private placement in November 2012.
     
Basic Subscription Right   The basic subscription right will entitle you to purchase one unit at a subscription price of $240.00.  A unit consists of 80 shares of our Series B Convertible Preferred Stock and a five-year warrant to purchase an additional 800 shares of our common stock at an exercise price of $0.15 per share.  We refer to these units throughout this prospectus as “Units.”
     
    There is no minimum number of Units you must purchase, but you may not purchase fractional Units.  When determining the number of subscription rights you will receive, divide the number of shares of our common stock you own by 12,756, the number of shares of Series A Convertible Preferred Stock you own by 638 and the number of shares of Series B Convertible Preferred Stock you own by 638, and round down the sum of those amounts to the next whole number.  For example, if you own 100,000 shares of our common stock, 10,000 shares of our Series A Convertible Preferred Stock and 10,000 shares of our Series B Convertible Preferred Stock, you will receive 39 subscription rights (100,000 shares of common stock divided by 12,756 = 7.84, 10,000 shares of Series A Convertible Preferred Stock divided by 638 = 15.68, and 10,000 shares of Series B Convertible Preferred Stock divided by 638 = 15.68, which sum = 39.20, rounded down to 39 subscription rights, the next whole number), which will entitle you to subscribe for up to 39 Units under your basic subscription privilege.

 

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Over-Subscription Privilege   In the event that you purchase all of the Units available to you pursuant to your basic subscription right, you may also choose to subscribe for a portion of any Units that are not purchased by our stockholders through the exercise of their basic subscription rights. You may subscribe for these Units pursuant to your over-subscription privilege, subject to the limitations described below.
     
Subscription Price   $240.00 per Unit, payable in cash. To be effective, any payment related to the exercise of a subscription right must clear prior to the expiration of the rights offering.
     
Record Date   5:00 p.m., Eastern Time, on January 31, 2013.
     
Expiration of the Rights Offering   5:00 p.m., Eastern Time, on March 14, 2013.
     
Use of Proceeds   We intend to use the proceeds of the rights offering to improve our capital position and for general corporate purposes.
     
Non-Transferability of Rights   The subscription rights may not be sold, transferred or assigned and will not be listed for trading on the OTCBB or on any other stock exchange or market.
     
No Revocation   All exercises of subscription rights are irrevocable, even if you later learn of information that you consider to be unfavorable to the exercise of your subscription rights. You should not exercise your subscription rights unless you are certain that you wish to purchase additional Units at a subscription price of $240.00 per full Unit.
     

Material U.S. Federal

Income Tax Consequences

  It is the opinion of our counsel, Morgan, Lewis & Bockius LLP, that you should not recognize income or loss for U.S. federal income tax purposes in connection with the receipt or exercise of subscription rights in the rights offering.  You should consult your own tax advisor as to the tax consequences to you of the receipt, exercise or lapse of the subscription rights in light of your particular circumstances.
     
Extension, Cancellation and Amendment   Although we do not presently intend to do so, we have the option to extend the rights offering and the period for exercising your subscription rights. Our board of directors may cancel the rights offering at any time prior to the expiration date of the rights offering for any reason. In the event that the rights offering is cancelled, all subscription payments received by us will be returned, without interest or penalty, as soon as practicable. We also reserve the right to amend or modify the terms of the rights offering at any time.
     
Procedures for Exercising Rights   To exercise your subscription rights, you must take the following steps:
     

 

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    · If you are a registered holder of our capital stock, you must deliver payment and a properly completed rights certificate to us so that we receive these items before 5:00 p.m., Eastern Time, on March 14, 2013. You may deliver the documents and payments by hand delivery, first class mail or courier service. If first class mail is used for this purpose, we recommend using registered mail, properly insured, with return receipt requested.
     
    · If you are a beneficial owner of shares that are registered in the name of a broker, dealer, custodian bank or other nominee, or if you would rather an institution conduct the transaction on your behalf, you should instruct your broker, dealer, custodian bank or other nominee to exercise your subscription rights on your behalf. Please follow the instructions of your nominee, who may require that you meet a deadline earlier than 5:00 p.m., Eastern Time, on March 14, 2013.
     

Shares Outstanding

Before the Rights Offering

  3,297,378 shares of our Series B Convertible Preferred Stock and warrants to purchase 92,020,447 shares of our common stock were outstanding as of January 31, 2013.
     
Shares Outstanding After Completion of the Rights Offering   Assuming all Units are sold in the rights offering, we expect approximately 4,130,658 shares of our Series B Convertible Preferred Stock and warrants to purchase 100,353,247 shares of our common stock will be outstanding immediately after completion of the rights offering.
     
Fees and Expenses   We will pay the expenses related to the rights offering.
     
The Over-the-Counter Bulletin Board   Our shares of common stock are currently listed for trading on the OTCBB under the ticker symbol “ITCC.OB .”
     
Risk Factors   Before you exercise your subscription rights to purchase shares of our common stock, you should carefully consider risks described in the section entitled “Risk Factors,” beginning on page 18 of this prospectus.
     

 

Our Corporate Information

 

Our principal executive offices are located at 150 N. Radnor-Chester Road, Suite B-101, Radnor, Pennsylvania 19087. Our telephone number is (484) 654-2200. Our website address is www.inspro.com. The information contained on our website is not incorporated by reference into, and does not form any part of, this prospectus.

 

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RISK FACTORS

 

Investing in our securities involves significant risks. In addition to all of the other information contained in this prospectus, you should carefully consider the risks and uncertainties described below before deciding to invest in our common stock and preferred stock. If any of the following risks actually occur, they may materially harm our business, our financial condition or our results of operations. In this event, the market price of our securities could decline and you could lose all or part of your investment.

 

Risks Related to the Rights Offering

 

If you do not exercise your subscription rights, your percentage ownership in InsPro Technologies Corporation will be diluted.

 

Stockholders who do not fully exercise their subscription rights should expect that they will, at the completion of this offering, own a smaller proportional interest in our company than would otherwise be the case had they fully exercised their basic subscription and over-subscription rights. In addition, the shares issuable upon the exercise of the warrants to be issued pursuant to this rights offering will dilute the ownership interest of stockholders not participating in this offering or holders of warrants issued pursuant to this offering who have not exercised them.

 

The subscription rights are not transferable, and there is no market for the subscription rights.

 

You may not sell, give away or otherwise transfer your subscription rights. The subscription rights are only transferable by operation of law. Because the subscription rights are non-transferable, there is no market or other means for you to directly realize any value associated with the subscription rights.

 

If we terminate this offering for any reason, we will have no obligation other than to return subscription monies as soon as practicable.

 

We may decide, in our sole discretion and for any reason, to cancel or terminate the rights offering at any time prior to the expiration date. If this offering is cancelled or terminated, we will have no obligation with respect to subscription rights that have been exercised except to return as soon as practicable, without interest, the subscription payments deposited with us. If we terminate this offering and you have not exercised any subscription rights, such subscription rights will expire worthless.

 

The subscription price determined for this offering is not an indication of the fair value of our common stock.

 

In determining the subscription price, our board of directors considered the overall economic value offered to investors in InsPro Technologies Corporation in our last private placement in November 2012. If an investor had invested in these last private placement, for every $240.00 invested, such investor would have received 80 shares of Series B Convertible Preferred Stock and warrants to purchase 800 additional shares of our common stock at an exercise price of $0.15 per share. As a result, the Units offered in this rights offering consist of 80 shares of our Series B Convertible Preferred Stock and a warrant to purchase 800 shares of our common stock at a price per Unit of $240.00.

 

We did not seek or obtain an opinion of financial advisors in establishing the subscription price. The subscription price will not necessarily be related to our book value, tangible book value, net worth or any other established criteria of fair value and may or may not be considered the fair value of our common stock to be offered in the rights offering. You should not assume or expect that, after the rights offering, our shares of common stock will trade at or above the equivalent component of the subscription price in any given time period.

 

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We will have broad discretion in the use of the net proceeds from this offering and may not use the proceeds effectively.

 

Although we plan to use the proceeds of this offering for general corporate purposes, including working capital, we will not be restricted to such use and will have broad discretion in determining how the proceeds of this offering will be used. Our discretion is not substantially limited by the uses set forth in this prospectus in the section entitled “Use of Proceeds.” While our board of directors believes the flexibility in application of the net proceeds is prudent, the broad discretion it affords entails increased risks to the investors in this offering. Investors in this offering have no current basis to evaluate the possible merits or risks of any application of the net proceeds of this offering. Our stockholders may not agree with the manner in which we choose to allocate and spend the net proceeds.

 

If you do not act on a timely basis and follow subscription instructions, your exercise of subscription rights may be rejected.

 

Holders of subscription rights who desire to purchase Units in this offering must act on a timely basis to ensure that all required forms and payments are actually received by us prior to 5:00 p.m., New York City time, on the expiration date, unless extended, unless delivery of the subscription rights certificate is effected pursuant to the guaranteed delivery procedures as described below. If you are a beneficial owner of shares of capital stock and you wish to exercise your subscription rights, you must act promptly to ensure that your broker, dealer, custodian bank or other nominee acts for you and that all required forms and payments are actually received by your broker, dealer, custodian bank or other nominee in sufficient time to deliver such forms and payments to us to exercise the subscription rights granted in this offering that you beneficially own prior to 5:00 p.m., New York City time on the expiration date, as may be extended, unless delivery of the subscription rights certificate is effected pursuant to the guaranteed delivery procedures as described below. We will not be responsible if your broker, dealer, custodian bank or other nominee fails to ensure that all required forms and payments are actually received by us prior to 5:00 p.m., New York City time, on the expiration date.

 

If you fail to complete and sign the required subscription forms, send an incorrect payment amount, or otherwise fail to follow the subscription procedures that apply to your exercise in this rights offering, we may, depending on the circumstances, reject your subscription or accept it only to the extent of the payment received. We do not undertake to contact you concerning an incomplete or incorrect subscription form or payment, nor are we under any obligation to correct such forms or payment. We have the sole discretion to determine whether a subscription exercise properly follows the subscription procedures.

 

You may not receive all of the Units for which you subscribe pursuant to the over-subscription privilege.

 

Holders who fully exercise their basic subscription rights will be entitled to subscribe for an additional amount of Units that are not purchased by our other holders through the exercise of their basic subscription rights. Over-subscription rights will be allocated pro-rata among subscription rights holders who over-subscribed, based on the number of shares of capital stock owned by such holders on the record date, relative to the number of shares owned on the record date by all stockholders exercising the over-subscription privilege. You may not receive any or all of the amount of Units for which you over-subscribed. If the prorated amount of Units allocated to you in connection with your over-subscription right is less than your over-subscription request, then the excess funds held by us on your behalf will be returned to you, without interest, as soon as practicable after the rights offering has expired and all prorating calculations and reductions contemplated by the terms of the rights offering have been effected, and we will have no further obligations to you.

 

If you make payment of the subscription price by uncertified check, your check may not clear in sufficient time to enable you to purchase Units in this rights offering.

 

Any uncertified check used to pay for Units to be issued in this rights offering must clear prior to the expiration date of this rights offering, and the clearing process may require five or more business days. If you choose to exercise your subscription rights, in whole or in part, and to pay for Units by uncertified check and your check has not cleared prior to the expiration date of this rights offering, you will not have satisfied the conditions to exercise your subscription rights and will not receive the Units you wish to purchase.

 

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The receipt of subscription rights may be treated as a taxable distribution to you.

 

It is the opinion of our counsel, Morgan, Lewis & Bockius LLP, that the distribution of the subscription rights in this rights offering should be a non-taxable distribution under Section 305(a) of the Internal Revenue Code of 1986, as amended, or the Code. Please see the discussion on the “Material U.S. Federal Income Tax Considerations” below. This position is not binding on the Internal Revenue Service, or the IRS, or the courts, however. If this rights offering is deemed to be part of a “disproportionate distribution” under Section 305(b)(2) of the Code (or otherwise to be within one of the exceptions to Section 305(a) of the Code set forth in Section 305(b) of the Code), your receipt of subscription rights in this offering may be treated as the receipt of a taxable distribution to you equal to the fair market value of the subscription rights. Any such distribution would be treated as dividend income to the extent of our current and accumulated earnings and profits, if any, with any excess being treated as a return of capital to the extent thereof and then as capital gain. Each holder of capital stock is urged to consult his, her or its own tax advisor with respect to the particular tax consequences of this rights offering.

 

Absence of a public trading market for the warrants and shares of Series B Convertible Preferred Stock may limit the ability of a purchaser to resell the warrants and/or the shares of Series B Convertible Preferred Stock.

 

There is no established trading market for the warrants or the shares of our Series B Convertible Preferred Stock to be issued pursuant to this offering, and such securities may not be widely distributed. There can be no assurance that a market will develop for the warrants or the shares of Series B Convertible Preferred Stock. Even if a market for these securities does develop, the price of the warrants and the Series B Convertible Preferred Stock may fluctuate and liquidity may be limited. If a market for these securities does not develop, then purchasers of the warrants and the shares of Series B Convertible Preferred Stock may be unable to resell the securities or sell them only at an unfavorable price for an extended period of time, if at all. Future trading prices of the warrants and shares of Series B Convertible Preferred Stock will depend on many factors, including:

 

·our operating performance and financial condition;

 

·our ability to continue the effectiveness of the registration statement, of which this prospectus is a part, covering the warrants and shares of Series B Convertible Preferred Stock and the common stock issuable upon exercise or conversion of these securities;

 

·the interest of securities dealers in making a market; and

 

·the market for similar securities.

 

The market price of our common stock may never exceed the exercise price of the warrants issued in connection with this offering.

 

The warrants being issued in connection with this offering become exercisable on their date of issuance and will expire five years thereafter. We cannot provide you any assurance that the market price of our common stock will ever exceed the exercise price of these warrants prior to their date of expiration. Any warrants not exercised by their date of expiration will expire worthless and we will be under no further obligation to the warrant holder.

 

Since the warrants are executory contracts, they may have no value in a bankruptcy or reorganization proceeding.

 

In the event a bankruptcy or reorganization proceeding is commenced by or against us, a bankruptcy court may hold that any unexercised warrants are executory contracts that are subject to rejection by us with the approval of the bankruptcy court. As a result, holders of the warrants may, even if we have sufficient funds, not be entitled to receive any consideration for their warrants or may receive an amount less than they would be entitled to if they had exercised their warrants prior to the commencement of any such bankruptcy or reorganization proceeding.

 

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Your ability to resell the securities you acquire in the rights offering may be limited by state securities laws.

 

If you purchase securities in the rights offering, you may not be able to resell the securities to other persons unless the securities are registered under the securities laws of the states in which the potential purchasers reside or exemptions from registration requirements are available in such states. We do not intend to register any of the securities for resale in any states or jurisdictions. Consequently, you may only be able to sell the securities in those states where exemptions are available, such as an exemption for sales to institutional investors. In addition, in the event that the warrants to be issued in this rights offering are sold to another person, the purchaser may not be able to exercise the warrants unless an exemption is available in the purchaser’s state of residence for the issuance of common stock upon the exercise of warrants.

 

Risks Relating to our Company and Industry

 

We have incurred significant operating losses since our inception, which we anticipate will continue for the foreseeable future.

 

Since our inception, we have incurred significant operating losses. As of September 30, 2012, we had an accumulated deficit of approximately $49.7 million. We incurred operating losses of approximately $6.9 million for the nine months ended September 30, 2012, $2.5 million net loss for the year ended December 31, 2010, $6.3 million for the year ended December 31, 2009, $9.0 million for the year ended December 31, 2008, $14.3 million for the year ended December 31, 2007, $14 million for the year ended December 31, 2006, $3.2 million for the year ended December 31, 2005 and approximately $1.1 million for the period from our inception on January 27, 2004 through December 31, 2004. We reported $0.5 million net income for the year ended December 31, 2011. We expect to incur significant and increasing operating expenses and capital expenditures relating to the development of our software-related business, particularly as we pursue growth internally, expanding our marketing efforts, and further the development of our technologies. In addition, we will continue to incur significant legal, accounting and other expenses associated with our status as a reporting company under the Securities Exchange Act of 1934, as amended, or the Exchange Act. As a result, we will need to generate significant revenues to achieve profitability. Even if we achieve profitability, we may be unable to maintain or increase profitability on a quarterly or annual basis. If we are unable to achieve and then maintain profitability, the market value of our stock will decline.

 

If we fail to increase our brand recognition, we may face difficulty in attracting new customers.

 

We believe that establishing, maintaining and enhancing our brand in a cost-effective manner is critical to achieving widespread acceptance of our current and future products and services and is an important element in our efforts to maintain and expand our relationships with customers and to grow our customer base, particularly in light of the competitive nature of our business. We believe that the importance of brand recognition will increase as competition in our market develops. Some of our competitors already have well-established brands in the individual health and life insurance market. Successful promotion of our brand will depend largely on our ability to maintain a sizeable and active customer base, the success of our marketing efforts and our ability to provide high quality products and reliable and useful service to our customers. There can be no assurance that brand promotion activities will yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in building our brand. If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, in which case our business, financial condition and results of operations could be materially harmed.

 

We may be unable to obtain additional capital when necessary or on terms that are acceptable to us, if at all.

 

Since our inception, we have used significant amounts of cash in our operations and in investing activities. As of September 30, 2012, we had a cash balance of approximately $2.1 million. We used cash in operations of approximately $0.6 million for the nine months ended September 30, 2012, $1.5 million for the year ended December 31, 2011, $4.8 million for the year ended December 31, 2010, $5.3 million for the year ended December 31, 2009, $8.4 million for the year ended December 31, 2008, $5.5 million for the year ended December 31, 2007, approximately $6.5 million for the year ended December 31, 2006, $1.2 million for the year ended December 31, 2005 and approximately $0.5 million for the period from our inception on January 27, 2004 through December 31, 2004. We used cash in investing of approximately $0.3 million for the nine months ended September 30, 2009, $0.8 million for the year ended December 31, 2008, $1.9 million for the year ended December 31, 2007, approximately $3.2 million for the year ended December 31, 2006, $0.3 million for the year ended December 31, 2005 and approximately $0.2 million for the period from our inception on January 27, 2004 through December 31, 2004.

 

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We expect that we will need significant additional cash resources to operate and expand our business in the future. Our future capital requirements will depend on many factors, including our ability to maintain our existing cost structure and return on sales, fund obligations for repayment of our credit facility with Silicon Valley Bank, additional capital and execute our business and strategic plans as currently conceived. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities would result in additional dilution to our stockholders. Additional indebtedness would result in debt service obligations and could result in operating and financing covenants that would restrict our operations. In addition, financing might be unavailable in amounts or on terms acceptable to us, if at all.

 

We are substantially dependent on our InsPro software application.

 

We derive a significant portion of our revenue from software license and maintenance revenue attributable to our InsPro software application. Accordingly, our future results depend on continued market acceptance of InsPro, and any factor adversely affecting the market for InsPro could have a material adverse effect on our business, financial condition and operating results.

 

We may be unsuccessful in attracting or retaining key sales, marketing and other personnel or in retaining the members of our senior management team.

 

The success of our business is dependent on our ability to attract and retain highly skilled managers and sales and marketing personnel and to retain the members of our senior management team. Our inability to retain key personnel and attract additional qualified personnel could harm our development and results of operations.

 

We may be unable to sufficiently protect our intellectual property.

 

Our business and competitive positions are dependent on our ability to use and protect our proprietary technologies. Our patent applications may not protect our technologies because, among other things:

 

·there is no guarantee that any pending patent applications will result in issued patents;

 

·we may develop additional proprietary technologies that are not patentable;

 

·there is no guarantee that any patent issued to us will provide us with any competitive advantage;

 

·there is no guarantee that any patents issued to us will not be challenged, circumvented or invalidated by third parties; and

 

·there is no guarantee that any patents previously issued to others or issued in the future will not have an adverse effect on our ability to do business.

 

In addition, if we are unable to protect and control unpatented trade secrets, know-how and other technological innovation, we may suffer competitive harm. We also rely on trade secrets, know-how and technologies that are not protected by patents to maintain our competitive position. Trade secrets are difficult to protect. To maintain the confidentiality of trade secrets and proprietary information, we generally seek to enter into confidentiality agreements with our employees, consultants and collaborators upon the commencement of a relationship with us. However, we at times do not obtain these agreements, nor can we guarantee that these agreements will provide meaningful protection, that these agreements will not be breached or that we will have an adequate remedy for any such breach. In addition, adequate remedies may not exist in the event of unauthorized use or disclosure of this information. Others may have developed, or may develop in the future, substantially similar or superior know-how and technologies. The loss or exposure of our trade secrets, know-how and other proprietary information, or independent development of similar or superior know-how, could harm our business, financial condition and results of operations.

 

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We may become subject to intellectual property rights claims in the future, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use the affected technologies.

 

Our commercial success will depend in part on not infringing the patents or proprietary rights of third parties. Third parties could bring legal actions against us claiming damages and seeking to enjoin us from using any technology found to be in violation of a third party’s rights. If we become involved in any litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. If any of these actions are successful, in addition to any potential liability for damages, we could be required to obtain a license to continue to use the affected technology, in which case we may be required to pay substantial fees. There can be no assurance that any such license will be available on acceptable terms or at all.

 

If we are unable to satisfy regulatory requirements relating to internal controls, or if our internal controls over financial reporting are not effective, our stock price could decline.

 

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission, or the Commission, adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports required by Section 13(a) of the Exchange Act. In addition, the public accounting firm auditing the company’s financial statements must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting. Ensuring that we have adequate internal financial and accounting controls and procedures in place to help ensure that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Any failure to maintain the adequacy of our internal controls, or the resulting inability to produce accurate financial statements on a timely basis, could increase our operating costs and harm our ability to operate our business. In addition, investor perception that our internal controls are inadequate or that we are unable to produce accurate financial statements on a consistent basis may adversely affect our stock price.

 

We may be unable to manage our growth effectively.

 

Our ability to compete effectively and to manage our future growth, if any, requires us to:

 

·continue to improve our financial and management controls and reporting systems and procedures to support the proposed expansion of our business operations; and

 

·locate or hire, at reasonable compensation rates, qualified personnel and other employees necessary to expand our capacity in order to accommodate the proposed expansion of our business operations.

 

We may be unable to find or complete strategic acquisitions of complementary businesses or technologies or to integrate acquired businesses or technologies.

 

Our business strategy includes, among other things, achieving growth through the acquisition and integration into our business of complementary businesses or technologies. We may be unable to find additional complementary businesses or technologies to acquire. Future acquisitions may result in substantial per share financial dilution of our common stock from the issuance of equity securities. Completion of future acquisitions also would expose us to potential risks, including risks associated with:

 

·the assimilation of new operations, technologies and personnel;

 

·unforeseen or hidden liabilities or other unanticipated events or circumstances;

 

·the diversion of resources from our existing business;

 

·the inability to generate sufficient revenue to offset the costs and expenses of acquisitions, which may result in the impairment of assets acquired through acquisitions; and

 

·the potential loss of, or harm to, relationships with our employees and customers as a result of the integration of new businesses.

 

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Our operating results may fluctuate as a result of factors beyond our control.

 

Our operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are beyond our control. These factors include, but are not limited to:

 

·capital expenditures for the development of our technologies;

 

·marketing and promotional activities and other costs;

 

·changes in operating expenses;

 

·increased competition in our market; and

 

·other general economic and seasonal factors.

 

Our business may be materially adversely impacted by U.S. and global market and economic conditions, particularly adverse conditions in the insurance industry.

 

For the foreseeable future, we expect to continue to derive most of our revenue from products and services we provide to the insurance industry. Given the concentration of our business activities in the insurance industry, we may be particularly exposed to economic downturns in this industry. U.S. and global market and economic conditions have been, and continue to be, disrupted and volatile. A poor economic environment could result in significant decreases in demand for our products or could present difficulties in collecting accounts receivables from our customers due to their deteriorating financial condition. Our existing customers may be acquired by or merged into other institutions that use our competitors or decide to terminate their relationships with us for other reasons. As a result, our sales could decline if an existing customer is merged with or acquired by another company or closed. All of these conditions could adversely affect our operating results and financial position.

 

We may not be able to secure additional financing to support capital requirements when needed.

 

We may need to raise additional funds in the future in order to fund more aggressive promotion or more rapid market penetration, to develop new or enhanced products, to respond to competitive pressures, to make acquisitions or for other purposes. Any required additional financing may not be available on terms favorable to us, or at all, particularly in light of current conditions in the credit markets. If adequate funds are not available on acceptable terms, we may be unable to meet our strategic business objectives or compete effectively, and the future growth of our business could be adversely impacted. If additional funds are raised by our issuing equity securities, stockholders may experience dilution of their ownership and economic interests, and the newly issued securities may have rights superior to those of our common stock. If additional funds are raised by our issuing debt, we may be subject to significant market risks related to interest rates, and operating risks regarding limitations on our activities.

 

The markets for our products are highly competitive and are likely to become more competitive, and our competitors may be able to respond more quickly to new or emerging technology and changes in customer requirements.

 

Our insurance software business experiences competition from certain large hardware suppliers that sell systems and system components to independent agencies and from small independent developers and suppliers of software, who sometimes work in concert with hardware vendors to supply systems to independent agencies. Pricing strategies and new product introductions and other pressures from existing or emerging competitors could result in a loss of customers or a rate of increase or decrease in prices for our services different than past experience.

 

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Some of our current competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial and marketing resources than we do.

 

If we infringe on the proprietary rights of others, our business operations may be disrupted, and any related litigation could be time consuming and costly.

 

Third parties may claim that we have violated their intellectual property rights. Any of these claims, with or without merit, could subject us to costly litigation and divert the attention of key personnel. To the extent that we violate a patent or other intellectual property right of a third party, we may be prevented from operating our business as planned, and we may be required to pay damages, to obtain a license, if available, to use the right or to use a non-infringing method, if possible, to accomplish our objectives. The cost of such activity could have a material adverse effect on our business.

 

If a third party infringes on our proprietary rights, our business operations may be disrupted, and any related litigation could be time consuming and costly.

 

We rely on a combination of trademark, copyright and trade secret laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand.

 

We may be unable to compete successfully against new and existing competitors.

 

We operate in a highly competitive market with few barriers to entry. We expect that competition will continue to intensify. Some of our competitors are more established than we are, and have significantly greater financial, technical, marketing and other resources than we do. In addition, many of our current and potential competitors can devote substantially greater resources than we can to promotion, website development and systems development. Many of our competitors have greater name recognition and a larger customer base than we do. These competitors may be able to respond more quickly to new or changing opportunities and customer requirements.

 

Technology and customer requirements evolve rapidly in our industry, and if we do not continue to develop new products and enhance our existing products in response to these changes, our business could be harmed.

 

Ongoing enhancements to our products will be required to enable us to maintain our competitive position. We may not be successful in developing and marketing enhancements to our products on a timely basis, and any enhancements we develop may not adequately address the changing needs of the marketplace. Overlaying the risks associated with our existing products and enhancements are ongoing technological developments and rapid changes in customer requirements. Our future success will depend upon our ability to develop and introduce in a timely manner new products or upgrades to our existing products that take advantage of technological advances and respond to new customer requirements. The development of new products is increasingly complex and uncertain, which increases the risk of delays. We may not be successful in developing new or updated products incorporating new technology on a timely basis, and any new products may not adequately address the changing needs of the marketplace. Failure to develop new products and product enhancements that meet market needs in a timely manner could have a material adverse effect on our business, financial condition and operating results.

 

Risks Relating to our Common Stock

 

Sales of substantial amounts of our common stock in the public market could depress the market price of our common stock.

 

Our common stock currently is quoted on the OTCBB, which is a limited and illiquid market. If our stockholders sell substantial amounts of our common stock in the public market, including the shares being registered under this registration statement and shares issuable upon the exercise of outstanding warrants and options, or the market perceives that such sales may occur, the market price of our common stock could fall and we may be unable to sell our common stock in the future.

 

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Our common stock may experience extreme price and volume fluctuations, which could lead to costly litigation for us and make an investment in us less appealing.

 

The market price of our common stock may fluctuate substantially due to a variety of factors, including:

 

·our business strategy and plans;

 

·changing factors related to doing business in various jurisdictions within the United States;

 

·new regulatory pronouncements and changes in regulatory guidelines and timing of regulatory approvals;

 

·general and industry-specific economic conditions;

 

·additions to or departures of our key personnel;

 

·variations in our quarterly financial and operating results;

 

·changes in market valuations of other companies that operate in our business segments or in our industry;

 

·lack of adequate trading liquidity;

 

·announcements about our business partners;

 

·changes in accounting principles; and

 

·general market conditions.

 

The market prices of the securities of early-stage companies, particularly companies like ours without consistent product revenues and earnings, have been highly volatile and are likely to remain highly volatile in the future. This volatility has often been unrelated to the operating performance of particular companies. In the past, companies that experience volatility in the market price of their securities have often faced securities class action litigation. Whether or not meritorious, litigation brought against us could result in substantial costs, divert our management’s attention and resources and harm our financial condition and results of operations.

 

Our directors, executive officers and entities affiliated with them beneficially own a substantial number of shares of our common stock, which gives them significant control over certain major decisions.

 

As of January 31, 2013, our executive officers and directors and entities affiliated with them beneficially owned, in the aggregate, approximately 81.3% of our outstanding shares of common stock, 98.6% of our outstanding shares of Series A Convertible Preferred Stock and 42.9% of our outstanding shares of Series B Convertible Preferred Stock, based on a total of 41,543,655 shares of common stock, 1,276,750 shares of Series A Convertible Preferred Stock and 3,297,378 shares of Series B Convertible Preferred Stock outstanding. These executive officers, directors and their affiliates may have different interests than you. For example, they could act to delay or prevent a change of control of us, even if such a change of control would benefit our other stockholders, could prevent or frustrate attempts to replace or remove current management or could pursue strategies that are different from the wishes of other investors. This significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

 

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Transactions in which a privately-held company merges into a largely inactive company with publicly traded stock are generally closely scrutinized by the Commission and we may encounter difficulties or delays in obtaining future regulatory approvals.

 

Historically, the Commission and Nasdaq and securities exchanges have disfavored transactions in which a privately-held company merges into a largely inactive company with publicly traded stock, and there is a significant risk that we may encounter difficulties in obtaining the regulatory approvals necessary to conduct future financing or acquisition transactions, or to eventually achieve our common stock being quoted on Nasdaq or listed on a securities exchange. Effective August 22, 2005, the Commission adopted rules dealing with private company mergers into dormant or inactive public companies. As a result, it is likely that we will be scrutinized carefully by the Commission and possibly by the National Association of Securities Dealers or Nasdaq or a national securities exchange, which could result in difficulties or delays in achieving Commission clearance of any future registration statements or other Commission filings that we may pursue, in attracting NASD-member broker-dealers to serve as market-makers in our stock, or in achieving admission to Nasdaq or a national securities exchange. As a result, our financial condition and the value and liquidity of our shares may be negatively impacted.

 

As a stock quoted on the OTCBB, our common stock, which is deemed to be “penny stock,” currently has limited liquidity.

 

Holders of shares of our common stock, which are quoted on the OTCBB, may find that the liquidity of our common stock is impaired as compared with the liquidity of securities listed on Nasdaq or one of the national or regional exchanges in the United States. This impairment of liquidity may result from reduced coverage of us by security analysts and news media and lower prices for our common stock than may otherwise be attained. In addition, our common stock is deemed to be “penny stock,” as that term is defined in rules under the Exchange Act. Penny stocks generally are equity securities that are not registered on certain national securities exchanges or quoted by Nasdaq and have a price per share of less than $5.00. Penny stock may be difficult for investors to resell. Federal rules and regulations impose additional sales practice requirements on broker-dealers who sell the stock to persons other than established customers and accredited investors. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of these securities and obtain the purchaser’s written consent to the transaction prior to the sale. Prior to the sale, broker-dealers must also deliver to the potential purchaser a disclosure schedule prescribed by the Commission, describing the penny stock market and disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, broker-dealers must deliver to penny stock investors monthly statements disclosing recent price information for penny stocks held in the account and information on the limited market in penny stocks. These additional requirements restrict the ability of broker-dealers to sell our common stock and make it more difficult for investors to dispose of our common stock in the secondary market and may also adversely affect the price of our common stock.

 

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THE RIGHTS OFFERING

 

The Subscription Rights

 

We are distributing, at no charge to the holders of our capital stock non-transferable subscription rights to subscribe for units, which we refer to throughout this prospectus as Units, consisting of 80 shares of our Series B Convertible Preferred Stock and a five-year warrant to purchase 800 additional shares of our common stock at an exercise price of $0.15 per share. Our stockholders will receive one subscription right for every 12,756 shares of our common stock, 638 shares of Series A Convertible Preferred Stock and 638 shares of Series B Convertible Preferred Stock held of record as of 5:00 p.m., New York City time, on January 31, 2013, the record date. Pursuant to the terms of this offering, the rights may only be exercised for a maximum of 10,416 Units, or $2.5 million of gross subscription proceeds.

 

Each subscription right entitles the holder to a basic subscription right and an over-subscription privilege.

 

Basic Subscription Right . With your basic subscription right, you may purchase one Unit, consisting of 80 shares of our Series B Convertible Preferred Stock and a five-year warrant to purchase 800 additional shares of our common stock and exercise price of $0.15 per share, subject to delivery of the required documents and payment of the subscription price of $240.00 per Unit, prior to the expiration of the rights offering. You may exercise all or a portion of your basic subscription right, or you may choose not to exercise any of your subscription rights. If you do not exercise your basic subscription rights in full, you will not be entitled to purchase any shares under your over-subscription privilege. There is no minimum number of Units you must purchase, but you may not purchase fractional Units. When determining the number of subscription rights you will receive, divide the number of shares of our common stock you own by 12,756, the number of shares of Series A Convertible Preferred Stock you own by 638 and the number of shares of Series B Convertible Preferred Stock you own by 638, and round down the sum of those amounts to the next whole number. For example, if you own 100,000 shares of our common stock, 10,000 shares of our Series A Convertible Preferred Stock and 10,000 shares of our Series B Convertible Preferred Stock, you will receive 39 subscription rights (100,000 shares of common stock divided by 12,756 = 7.84, 10,000 shares of Series A Convertible Preferred Stock divided by 638 = 15.68, 10,000 shares of Series B Convertible Preferred Stock divided by 638 = 15.68, which sum = 39.20, rounded down to 39 subscription rights, the next whole number), which will entitle you to subscribe for up to 39 Units under your basic subscription privilege.

 

Any excess subscription payments received by us will be returned, without interest, as soon as practicable following the expiration of the rights offering.

 

We will deliver certificates representing shares of our Series B Convertible Preferred Stock and warrants or credit your account at your record holder with shares of our Series B Convertible Preferred Stock and warrants that you purchased with the basic subscription rights as soon as practicable after the rights offering has expired.

 

Over-Subscription Privilege. If you purchase all of the Units available to you pursuant to your basic subscription right, you may also choose to purchase a portion of any Units that are not purchased by other stockholders through the exercise of their basic subscription rights. If sufficient Units are available, we will seek to honor the over-subscription requests in full. If, however, over-subscription requests exceed the number of Units available, we will allocate the available Units pro rata among the stockholders exercising the over-subscription privilege in proportion to the number of shares of capital stock owned by such stockholder on the record date, relative to the number of shares owned on the record date by all stockholders exercising the over-subscription privilege. If this pro rata allocation results in any stockholder receiving a greater number of Units than the stockholder subscribed for pursuant to the exercise of the over-subscription privilege, then such stockholder will be allocated only that number of Units for which the stockholder oversubscribed, and the remaining Units will be allocated among all other stockholders exercising the over-subscription privilege on the same pro rata basis described above. The proration process will be repeated until all Units have been allocated.

 

In order to properly exercise your over-subscription privilege, you must deliver the subscription payment related to your over-subscription privilege prior to the expiration of the rights offering. Because we will not know the total number of unsubscribed Units prior to the expiration of the rights offering, if you wish to maximize the number of Units you purchase pursuant to your over-subscription privilege, you will need to deliver payment in an amount equal to the aggregate subscription price for the maximum number of Units that may be available to you (i.e., for the maximum number of Units available to you, assuming you exercise all of your basic subscription right and are allotted the full amount of your over-subscription without reduction).

 

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We can provide no assurances that you will actually be entitled to purchase the number of Units issuable upon the exercise of your over-subscription right in full at the expiration of the rights offering. We will not be able to satisfy any orders for Units pursuant to the over-subscription privilege if all of our stockholders exercise their basic subscription rights in full, and we will only honor an over-subscription privilege to the extent sufficient Units are available following the exercise of subscription rights pursuant to the basic subscription rights.

 

To the extent the aggregate subscription price of the actual number of unsubscribed Units available to you pursuant to the over-subscription privilege is less than the amount you actually paid in connection with the exercise of the over-subscription privilege, you will be allocated only the number of unsubscribed Units available to you, and any excess subscription payments will be returned to you, without interest or penalty, as soon as practicable.

 

To the extent the amount you actually paid in connection with the exercise of the over-subscription privilege is less than the aggregate subscription price of the maximum number of unsubscribed Units available to you pursuant to the over-subscription privilege, you will be allocated the number of unsubscribed Units for which you actually paid in connection with the over-subscription privilege and subject to the elimination of any fractional Units.

 

Any excess subscription payments received by us will be returned, without interest or penalty, as soon as practicable.

 

We will deliver certificates representing shares of our of Series B Convertible Preferred Stock and warrants or credit the account of your record holder with shares of our of Series B Convertible Preferred Stock and warrants that you purchased with the over-subscription privilege as soon as practicable after the expiration of the rights offering.

 

Reasons for the Rights Offering

 

We are engaging in the rights offering to give all of the holders of our capital stock the opportunity to participate in an equity investment in InsPro Technologies Corporation on substantially the same economic terms as our last private placement in November 2012 and to raise capital to improve our overall capital position. Our board of directors has chosen to raise capital through a rights offering to give our stockholders the best opportunity to limit ownership dilution by participating in the rights offering on a pro-rata basis. In addition, this rights offering, including the composition and price of the Unit, was designed to give all of the holders of our capital stock the opportunity to participate in an equity investment in InsPro Technologies Corporation on substantially the same economic terms as our last private placement in November 2012.

 

Effect of Rights Offering on Existing Stockholders

 

The ownership interests and voting interests of the existing stockholders that do not exercise their basic subscription privileges will be diluted. See “Questions and Answers Related to the Rights Offering.”

 

Method of Exercising Subscription Rights

 

The exercise of subscription rights is irrevocable and may not be cancelled or modified. You may exercise your subscription rights as follows:

 

Subscription by Registered Holders . If you hold an InsPro Technologies Corporation stock certificate, the number of Units you may purchase pursuant to your basic subscription right is indicated on the enclosed rights certificate. You may exercise your subscription rights by properly completing and executing the rights certificate and forwarding it, together with your full payment, to us at the address set forth below under “— Delivery of Subscription Payments,” to be received prior to 5:00 p.m., Eastern Time, on March 14, 2013.

 

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Subscription by Beneficial Owners . If you are a beneficial owner of shares of our capital stock that are registered in the name of a broker, custodian bank or other nominee, you will not receive a rights certificate. Instead, the DTC will issue one subscription right to the nominee record holder for each 12,756 shares of our common stock, 638 shares of Series A Convertible Preferred Stock and 638 shares of Series B Convertible Preferred Stock that you own at the record date. If you are not contacted by your nominee, you should promptly contact your nominee in order to subscribe for Units in the rights offering.

 

Payment Method

 

Payments must be made in full in U.S. currency by:

 

·check or bank draft payable to InsPro Technologies Corporation, drawn upon a U.S. bank; or

 

·wire transfer of immediately available funds to an account maintained by InsPro Technologies Corporation for purposes of this rights offering.

 

Payment received after the expiration of the rights offering will not be honored, and we will return your payment to you, without interest, as soon as practicable. We will be deemed to receive payment upon:

 

·clearance of any uncertified check deposited by us into our account designated for the rights offering;

 

·receipt by us of any certified check or bank draft, drawn upon a U.S. bank; or

 

·receipt of collected funds in our account designated for the rights offering.

 

If you elect to exercise your subscription rights, we urge you to consider using a certified or cashier’s check, money order or wire transfer of funds to ensure that we receive your funds prior to the expiration of the rights offering. If you send an uncertified check, payment will not be deemed to have been received by us until the check has cleared. If you send a certified check or bank draft, drawn upon a U.S. bank, or wire or transfer funds directly to our account, payment will be deemed to have been received by us immediately upon receipt of such instruments or wire transfer.

 

Any personal check used to pay for Units must clear the appropriate financial institutions prior to 5:00 p.m., Eastern Time, on March 14, 2013, which is the expiration of the rights offering. The clearinghouse may require five or more business days. Accordingly, holders that wish to pay the subscription price by means of an uncertified personal check are urged to make payment sufficiently in advance of the expiration of the rights offering to ensure such payment is received and clears by such date.

 

You should read the instruction letter accompanying the rights certificate carefully and strictly follow it. We will not consider your subscription received until we have received delivery of a properly completed and duly executed rights certificate and payment of the full subscription amount. The risk of delivery of all documents and payments is borne by you or your nominee, not by InsPro Technologies Corporation.

 

The method of delivery of rights certificates and payment of the subscription amount to us will be at the risk of the holders of subscription rights. If sent by mail, we recommend that you send those certificates and payments by overnight courier or by registered mail, properly insured, with return receipt requested, and that a sufficient number of days be allowed to ensure delivery to us and clearance of payment prior to the expiration of the rights offering.

 

Unless a rights certificate provides that the shares of preferred stock and the warrants are to be delivered to the record holder of such rights or such certificate is submitted for the account of a bank or a broker, signatures on such rights certificate must be guaranteed by an “eligible guarantor institution,” as such term is defined in Rule 17Ad-15 of the Exchange Act.

 

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Medallion Guarantee May Be Required

 

Your signature on your rights certificate must be guaranteed by an eligible institution, such as a member firm of a registered national securities exchange or a member of the Financial Industry Regulatory Authority, Inc., or a commercial bank or trust company having an office or correspondent in the United States, unless:

 

·you provide on the rights certificate that shares and warrants are to be delivered to you as record holder of those subscription rights; or

 

·you are an eligible institution.

 

Missing or Incomplete Subscription Information

 

If you hold your shares of capital stock in the name of a custodian bank, broker, dealer or other nominee, the nominee will exercise the subscription rights on your behalf in accordance with your instructions. Your nominee may establish a deadline that may be before the 5:00 p.m., Eastern Time March 14, 2013 expiration date that we have established for the rights offering. If you send a payment that is insufficient to purchase the number of Units you requested, or if the number of Units you requested is not specified in the forms, the payment received will be applied to exercise your subscription rights to the fullest extent possible based on the amount of the payment received, subject to the availability of Units under the over-subscription privilege and the elimination of fractional Units. Any excess subscription payments received by us will be returned, without interest, as soon as practicable following the expiration of the rights offering.

 

Expiration Date and Cancellation Rights

 

The subscription period, during which you may exercise your subscription rights, expires at 5:00 p.m., Eastern Time, on March 14, 2013, which is the expiration of the rights offering. If you do not exercise your subscription rights prior to that time, your subscription rights will expire and will no longer be exercisable. We will not be required to issue shares of our Series B Convertible Preferred Stock or warrants to you if we receive your rights certificate or your subscription payment after that time. We have the option to extend the rights offering without notice to you, although we do not presently intend to do so. We may extend the expiration of the rights offering at any time prior to the scheduled expiration of the rights offering. If we elect to extend the expiration of the rights offering, we will issue a press release announcing such extension no later than 9:00 a.m., Eastern Time, on the next business day after the most recently announced expiration of the rights offering. We reserve the right to amend or modify the terms of the rights offering.

 

If you hold your shares of capital stock in the name of a broker, dealer, custodian bank or other nominee, the nominee will exercise the subscription rights on your behalf in accordance with your instructions. Please note that the nominee may establish a deadline that may be before the 5:00 p.m., Eastern Time, March 14, 2013, expiration date that we have established for the rights offering.

 

We may cancel the rights offering at any time for any reason prior to the time the rights offering expires. If we cancel the rights offering, we will issue a press release notifying stockholders of the cancellation and all subscription payments received by us will be returned, without interest or penalty, as soon as practicable.

 

Determination of Subscription Price

 

The $240.00 per Unit subscription price was determined by our board of directors based on the per share value of the Series B Convertible Preferred Stock and warrants (considered in the aggregate) purchased by investors in our last private placement in November 2012. In November 2012, we sold units, consisting of one share of our Series B Convertible Preferred Stock (each share of which is convertible, at the sole option of the holder, into 20 shares of our common stock) and one five-year warrant to purchase 10 shares of our common stock, at a per unit price of $3.00. We sold a total of 499,999 units in that offering for an aggregate purchase price of $1.5 million.

 

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In determining the subscription price, our board of directors considered the overall economic value offered to investors in InsPro Technologies Corporation in the last private placement. If an investor had invested in the last private placement, for every $240.00 invested, such investor would have received 80 shares of Series B Convertible Preferred Stock and warrants to purchase 800 additional shares of our common stock at an exercise price of $0.15 per share. As a result, the Units offered in this rights offering consist of 80 shares of our Series B Convertible Preferred Stock and a warrant to purchase 800 of our common stock at a price per Unit of $240.00.

 

We did not seek or obtain an opinion of financial advisors in establishing the subscription price. The subscription price will not necessarily be related to our book value, tangible book value, net worth or any other established criteria of fair value.

 

There is currently no market for our shares of Series B Convertible Preferred Stock and, unless you choose to convert any shares of preferred stock you purchase in this offering into shares of common stock, you will not be able to re-sell such shares. We urge you to obtain a current quote for our common stock and perform an independent assessment of our Series B Convertible Preferred Stock and warrants before exercising your subscription rights and to make your own assessment of our business and financial condition, our prospects for the future, and the terms of this rights offering.

 

Terms of Series B Convertible Preferred Stock

 

Each share of Series B Convertible Preferred Stock offered in this rights offering is convertible, at the sole discretion of each holder of preferred stock, into 20 shares of common stock, subject to certain adjustments. The holders of shares of our Series B Convertible Preferred Stock are entitled to vote, with respect to any question upon which holders of our common stock are entitled to vote, together with the holders of common stock as one class on an as-converted basis. At such time, if any, as our board of directors declares a dividend or distribution on the common stock, the holders of preferred stock shall be entitled to receive, for each share of Series B Convertible Preferred Stock held by them, a dividend or distribution in an amount equal to what such holder of preferred stock would receive if their shares were converted into shares of common stock. We do not currently intend to pay any cash dividends to the holders of shares of our common stock.

 

In addition, upon the liquidation, sale or merger of InsPro Technologies Corporation, each share of our Series B Convertible Preferred Stock is entitled to receive an amount equal to the greater of (A) a liquidation preference equal to the preferred stock original issue price, subject to certain customary adjustments, or (B) the amount such preferred stock would receive if it participated pari passu with the holders of our common stock on an as-converted basis. For so long as any shares of Series B Convertible Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the shares of preferred stock is required to approve (Y) any amendment to our certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special rights of the Series B Convertible Preferred Stock or (Z) any amendment to our certificate of incorporation to create any shares of capital stock that rank senior to the Series B Convertible Preferred Stock. In addition to the voting rights described above, for so long as 1,000,000 shares of Series B Convertible Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the preferred stock is required to effect or validate any merger, sale of substantially all of the assets of InsPro Technologies Corporation or other fundamental transaction, unless such transaction, when consummated, will provide the holders of preferred stock with an amount per share equal to the preferred stock original issue price plus any declared but unpaid dividends.

 

Terms of Warrants

 

The warrants that we are offering in this rights offering are in substantially similar form to those warrants purchased by our investors in the last private placement in November 2012. Each warrant issued as a component of the Units will be a five-year warrant to purchase 800 of our common stock at an exercise price of $0.15 per share, subject to our right to call the warrant under certain conditions. The warrants include full ratchet anti-dilution adjustment provisions for issuances of securities below $0.15 per share during the first two years following the date of issuance of the warrants, subject to customary exceptions.

 

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Withdrawal, Amendment and Termination

 

We reserve the right to withdraw the rights offering at any time for any reason. We also may amend or terminate the rights offering at any time before its completion if our board of directors decides to do so in its sole discretion. If we terminate the rights offering, all affected subscription rights will expire without value, and all excess subscription payments received by us will be returned, without interest, as soon as practicable.

 

Delivery of Subscription Payments

 

The address to which rights certificates and payments, other than wire transfers, should be mailed or delivered is provided below. If sent by mail, we recommend that you send documents and payments by overnight courier or by registered mail, properly insured, with return receipt requested, and that a sufficient number of days be allowed to ensure delivery.

 

InsPro Technologies Corporation

150 N. Radnor-Chester Rd.

Suite B-101

Radnor, PA 19087

Attn: Francis L. Gillan III

 

If you deliver subscription documents or rights certificates in a manner different than that described in this prospectus, we may not honor the exercise of your subscription rights.

 

If you have any questions regarding completing a rights certificate, submitting payment in the rights offering, or questions or requests regarding InsPro Technologies Corporation or the rights offering in general, please call Francis L. Gillan III, at (484) 654-2200. You may also contact us with questions by electronic mail at rightsoffering@inspro.com.

 

Fees and Expenses

 

We will pay the fees and expenses of collecting the subscription payments and distributing the share certificates and warrants associated with the Units. You are responsible for paying any other commissions, fees, taxes or other expenses that you may incur in connection with the exercise of your subscription rights.

 

No Fractional Shares

 

All Units will be sold at a purchase price of $240.00 per Unit. We will not issue fractional Units. Fractional Units resulting from the exercise of the basic subscription rights and the over-subscription privileges will be eliminated by rounding down to the nearest whole Unit. Any excess subscription payments received by us will be returned, without interest, as soon as practicable.

 

Notice to Nominees

 

If you are a broker, custodian bank or other nominee holder that holds shares of our capital stock for the account of others on the record date, you should notify the beneficial owners of the shares for whom you are the nominee of the rights offering as soon as possible to learn their intentions with respect to exercising their subscription rights. You should obtain instructions from the beneficial owners of our capital stock. If a registered holder of our capital stock so instructs, you should complete the rights certificate and submit it to us with the proper subscription payment by the expiration date. You may exercise the number of subscription rights to which all beneficial owners in the aggregate otherwise would have been entitled had they been direct holders of our capital stock on the record date, provided that you, as a nominee record holder, make a proper showing to us by submitting the form entitled “Nominee Holder Certification,” which is provided with your rights offering materials. If you did not receive this form, you should contact us to request a copy.

 

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Beneficial Owners

 

If you are a beneficial owner of shares of our capital stock and will receive your subscription rights through a broker, custodian bank or other nominee, we will ask your nominee to notify you of the rights offering. If you wish to exercise your subscription rights, you will need to have your nominee act for you, as described above. To indicate your decision with respect to your subscription rights, you should follow the instructions of your nominee. If you wish instead to obtain a separate rights certificate, you should contact your nominee as soon as possible and request that a rights certificate be issued to you. You should contact your nominee if you do not receive notice of the rights offering, but you believe you are entitled to participate in the rights offering. We are not responsible if you do not receive the notice by mail or otherwise from your nominee or if you receive notice without sufficient time to respond to your nominee by the deadline established by your nominee, which may be before the 5:00 p.m., Eastern Time, March 14, 2013, expiration date.

 

Non-Transferability of Subscription Rights

 

The subscription rights granted to you are non-transferable and, therefore, you may not sell, transfer or assign your subscription rights to anyone. We will not be listing shares of our Series B Convertible Preferred Stock, the warrants or the subscription rights for trading on OTCBB or any other stock exchange or market.

 

Validity of Subscriptions

 

We will resolve all questions regarding the validity and form of the exercise of your subscription rights, including time of receipt and eligibility to participate in the rights offering. Our determination will be final and binding. Once made, subscriptions and directions are irrevocable, and we will not accept any alternative, conditional or contingent subscriptions or directions. We reserve the absolute right to reject any subscriptions or directions not properly submitted or the acceptance of which would be unlawful. You must resolve any irregularities in connection with your subscriptions before the subscription period expires, unless waived by us in our sole discretion. We shall not be under any duty to notify you or your representative of defects in your subscriptions. A subscription will be considered accepted, subject to our right to withdraw or terminate the rights offering, only when a properly completed and duly executed rights certificate and any other required documents and the full subscription payment have been received by us. Our interpretations of the terms and conditions of the rights offering will be final and binding.

 

Escrow Arrangements; Return of Funds

 

We will hold funds received in payment for Units in a segregated account pending completion of the rights offering. We will hold this money in escrow until the rights offering is completed or is withdrawn and cancelled. If the rights offering is cancelled for any reason, all subscription payments received by us will be returned, without interest or penalty, as soon as practicable.

 

Stockholder Rights

 

You will have no rights as a holder of the shares of our Series B Convertible Preferred Stock you purchase in the rights offering until certificates representing the shares of our Series B Convertible Preferred Stock are issued to you.

 

No Revocation or Change

 

Once you submit the rights certificate or have instructed your nominee of your subscription request, you are not allowed to revoke or change the exercise or request a refund of monies paid. All exercises of subscription rights are irrevocable, even if you learn information about us that you consider to be unfavorable. You should not exercise your subscription rights unless you are certain that you wish to purchase Units at the subscription price.

 

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 Material U.S. Federal Income Tax Treatment of Rights Distribution

 

It is the opinion of our counsel, Morgan, Lewis & Bockius LLP, that you should not recognize income or loss upon receipt or exercise of these subscription rights to purchase shares of our Series B Convertible Preferred Stock and warrants for the reasons described below in “Material U.S. Federal Income Tax Considerations.”

 

No Recommendation to Rights Holders

 

Our board of directors is making no recommendation regarding your exercise of the subscription rights. Stockholders who exercise subscription rights risk investment loss on new money invested. You are urged to make your decision based on your own assessment of our business and financial condition, our prospects for the future and the terms of this rights offering. Please see “Risk Factors” for a discussion of some of the risks involved in investing in our common and preferred stock.

 

Shares of Our Series B Convertible Preferred Stock and Warrants Outstanding After the Rights Offering

 

As of January 31, 2013, 3,297,378 shares of our Series B Convertible Preferred Stock and warrants to purchase 92,020,447 shares of our common stock were issued and outstanding. Assuming no other transactions by us involving our Series B Convertible Preferred Stock or warrants, if the rights offering is fully subscribed through the exercise of the subscription rights, then an additional 833,280 shares of our Series B Convertible Preferred Stock and warrants to purchase 8,332,800 shares of our common stock will be issued and outstanding after the closing of the rights offering, for a total of 4,130,658 shares of Series B Convertible Preferred Stock and warrants to purchase 100,353,247 shares of common stock outstanding.

 

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USE OF PROCEEDS

 

Although the actual amount will depend on participation in the rights offering, we expect that the net proceeds from the rights offering will be approximately $2.5 million. We intend to use the proceeds of the rights offering for general corporate and working capital purposes, including for the purpose of funding current operations, discontinued operations and future commitments. Obtaining funding through the rights offering will allow us additional timing flexibility before we need to raise funds through additional financings or other methods.

 

To the extent that we raise less than $2.5 million in net proceeds in the rights offering, we anticipate reducing the amounts of proceeds to be allocated to the foregoing uses on a pro rata basis.

 

DILUTION

 

Purchasers of Units in the rights offering (and upon exercise of the warrants issued pursuant to this rights offering) will experience an immediate dilution of the net tangible book value per share of our common stock. Our net tangible book value as of September 30, 2012 was approximately $1,964,279, or $0.0160 per share of our common stock (based upon 41,354,645 shares of our common stock outstanding, as adjusted for 25,535,000 shares of common stock underlying the 1,276,750 shares of our Series A Convertible Preferred Stock and the 55,947,580 shares of common stock underlying the 2,797,379 shares of our Series B Convertible Preferred Stock outstanding). Net tangible book value per share is equal to our total net tangible book value, which is our total tangible assets less our total liabilities, divided by the number of shares of our outstanding common stock. Dilution per share equals the difference between the amount per share of common stock paid by purchasers of Units in the rights offering and the net tangible book value per share of our common stock immediately after the rights offering.

 

Based on the aggregate offering of a maximum of 10,416 Units and after deducting estimated offering expenses payable by us of approximately $81,841, and the application of the estimated $2,417,999 of net proceeds from the rights offering, our pro forma net tangible book value as of September 30, 2012 would have been approximately $3,882,310 or $0.0278 per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $0.0118 per share and an immediate dilution to purchasers in the rights offering of $0.1382 per share.

 

The following table illustrates this per-share dilution (assuming a fully subscribed for rights offering of 10,416 Units at the subscription price of $240.00 per Unit but excluding any issuance of shares of common stock to holders of warrants):

 

Price per Unit   $ 240.00  
Net tangible book value per common share prior to the rights offering   $ 0.0160  
Increase per common share attributable to the rights offering   $ 0.0118  
Pro forma net tangible book value per common share after the rights offering   $ 0.0278  
Dilution in net tangible book value per common share to purchasers   $ 0.1382  

 

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CAPITALIZATION

 

The following table sets forth our capitalization, cash and cash equivalents:

 

·on an actual basis as of September 30, 2012; and

 

· on a pro forma as adjusted basis to give effect to the sale of maximum of 10,416 Units in this rights offering (but excluding any issuance of shares of common stock to holders of warrants), assuming a subscription price of $240.00 per Unit, and our receipt of the net proceeds of $2,417,999 million from that sale after deducting estimated offering expenses payable by us.

 

This table should be read in conjunction with our “Management’s Discussion and Analysis or Plan of Operation” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    September 30, 2012
(Unaudited)
 
    Actual     Pro Forma
As Adjusted (1)
 
Cash   $ 2,091,032     $ 4,509,031  
Total assets   $ 6,491,972     $ 8,909,971  
Total liabilities   $ 4,527,693     $ 5,027,661  
Net tangible book value   $ 1,964,279     $ 3,882,310  
Total shareholders’ equity   $ 1,964,279     $ 3,882,310  
Total liabilities and shareholders’ equity   $ 6,491,972     $ 8,909,971  

 

(1) Assumes the rights offering is fully subscribed for, of which no assurances can be given.

 

DESCRIPTION OF SECURITIES

 

Our authorized capital stock consists of 300,000,000 shares of common stock, par value $0.001 per share, and 20,000,000 shares of preferred stock, par value $0.001 per share, 3,437,500 of which are designated as Series A Convertible Preferred Stock and 5,000,000 of which are designated as Series B Convertible Preferred Stock. As of January 31, 2013, we had 1,276,750 shares of Series A Convertible Preferred Stock currently issued and outstanding and 300,000 shares of Series A Convertible Preferred Stock reserved for issuance underlying currently issued and outstanding warrants. As of January 31, 2013, we had 3,297,378 shares of Series B Convertible Preferred Stock currently issued and outstanding. As of January 31, 2013, we had 41,543,655 shares of common stock issued and outstanding, 92,020,447 shares of common stock reserved for issuance underlying currently issued and outstanding warrants, 6,210,000 shares of common stock reserved for issuance underlying currently issued and outstanding options, and 22,786,980 shares of common stock reserved for issuance under certain of our existing equity compensation plans.

 

Common Stock

 

Holders of shares of our common shares are entitled to one vote per share on all matters to be voted upon by the stockholders and are not entitled to cumulative voting for the election of directors. Holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by our board of directors out of funds legally available therefore, subject to the rights of the preferred stockholders. We do not currently intend to pay any cash dividends to the holders of common stock. In the event that we liquidate, dissolve or wind up the Company, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the preferences of preferred stockholders. Our common stock has no preemptive, conversion or other subscription rights. There are no redemption or sinking fund provisions applicable to common shares.

 

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Series A Convertible Preferred Stock

 

Each share of Series A Convertible Preferred Stock is convertible, at the sole discretion of each holder of Series A Convertible Preferred Stock, into 20 shares of common stock, subject to certain adjustments. The holders of shares of our Series A Convertible Preferred Stock are entitled to vote, with respect to any question upon which holders of our common stock are entitled to vote, together with the holders of common stock as one class on an as-converted basis. At such time, if any, as our board of directors declares a dividend or distribution on the common stock, the holders of Series A Convertible Preferred Stock shall be entitled to receive, for each share of Series A Convertible Preferred Stock held by them, a dividend or distribution in an amount equal to what such holder of Series A Convertible Preferred Stock would receive if their shares were converted into shares of common stock. We do not currently intend to pay any cash dividends to the holders of shares of our common stock.

 

In addition, upon the liquidation, sale or merger of InsPro Technologies Corporation, each share of our Series A Convertible Preferred Stock is entitled to receive an amount equal to the greater of (A) a liquidation preference equal to two and a half (2.5) times the Series A Convertible Preferred Stock original issue price, subject to certain customary adjustments, or (B) the amount such preferred stock would receive if it participated pari passu with the holders of our common stock on an as-converted basis. For so long as any shares of Series A Convertible Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the shares of Series A Convertible Preferred Stock is required to approve (Y) any amendment to our certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special rights of the Series A Convertible Preferred Stock or (Z) any amendment to our certificate of incorporation to create any shares of capital stock that rank senior to the Series A Convertible Preferred Stock. In addition to the voting rights described above, for so long as 1,000,000 shares of Series A Convertible Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the Series A Convertible Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of InsPro Technologies Corporation or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series A Convertible Preferred Stock with an amount per share equal to two and a half (2.5) times the Series A Convertible Preferred Stock original issue price.

 

In the event of (a) the sale of all or substantially all of the assets of InsPro Technologies Corporation, (b) any tender offer or exchange pursuant to which the holders of a majority of common stock exchange such shares for other securities, cash or property or (c) any reclassification of the common stock pursuant to which the shares of common stock are effectively converted or exchanges for other securities, cash or property, if we do not effect a dissolution within 90 days after such event, the holder of a majority of the shares of Series A Convertible Preferred Stock may require, within 120 days of such event, to redeem all outstanding shares of Series A Convertible Preferred Stock at a price per share equal to two and a half (2.5) times the Series A Convertible Preferred Stock original issue price, subject to certain customary adjustments.

 

Except as noted above our shares of Series A Convertible Preferred Stock have no other conversion, preemptive or other subscription rights. There are no sinking fund provisions applicable to preferred stock.

 

Series B Convertible Preferred Stock

 

Each share of Series B Convertible Preferred Stock is convertible, at the sole discretion of each holder of Series B Convertible Preferred Stock, into 20 shares of common stock, subject to certain adjustments. The holders of shares of our Series B Convertible Preferred Stock are entitled to vote, with respect to any question upon which holders of our common stock are entitled to vote, together with the holders of common stock as one class on an as-converted basis. At such time, if any, as our board of directors declares a dividend or distribution on the common stock, the holders of Series B Convertible Preferred Stock shall be entitled to receive, for each share of Series B Convertible Preferred Stock held by them, a dividend or distribution in an amount equal to what such holder of Series B Convertible Preferred Stock would receive if their shares were converted into shares of common stock. We do not currently intend to pay any cash dividends to the holders of shares of our common stock.

 

In addition, upon the liquidation, sale or merger of InsPro Technologies Corporation, each share of our Series B Convertible Preferred Stock is entitled to receive an amount equal to the greater of (A) a liquidation preference equal to the Series B Convertible Preferred Stock original issue price, subject to certain customary adjustments, or (B) the amount such Series B Convertible Preferred Stock would receive if it participated pari passu with the holders of our common stock on an as-converted basis. For so long as any shares of Series B Convertible Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the shares of Series B Convertible Preferred Stock is required to approve (Y) any amendment to our certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special rights of the Series B Convertible Preferred Stock or (Z) any amendment to our certificate of incorporation to create any shares of capital stock that rank senior to the Series B Convertible Preferred Stock. In addition to the voting rights described above, for so long as 1,000,000 shares of Series B Convertible Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the Series B Convertible Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of InsPro Technologies Corporation or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series B Convertible Preferred Stock with an amount per share equal to the Series B Convertible Preferred Stock original issue price, plus any declared but unpaid dividends.

 

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Except as noted above our shares of Series B Convertible Preferred Stock have no other conversion, preemptive or other subscription rights. There are no sinking fund provisions applicable to Series B Convertible Preferred Stock.

 

Warrants

 

As of January 31, 2013, there were outstanding (i) warrants to purchase up to 67,020,447 shares of our common stock at an exercise price per share of $0.15 and (ii) warrants to purchase up to 25,000,000 shares of our common stock at an exercise price per share of $0.20.

 

In connection with our private placement in March 2008, we issued to investors five-year warrants to purchase up to 6,250,000 shares of our common stock at $0.80 per share, which warrants were subsequently adjusted following the closing of our private placement in January 2009 to provide for the purchase of up to 18,750,000 shares of our common stock at an exercise price of $0.20 per share, per the anti-dilution provisions contained in such warrants.

 

The warrants to be issued as part of the Units upon exercise of the subscription rights will contain substantially the same terms as the warrants issued to the investors in our November 2012 private placement. Each warrant issued as a component of the Units will be a five-year warrant to purchase 800 of our common stock at an exercise price of $0.15 per share, subject to our right to call the warrant under certain conditions. The warrants include full ratchet anti-dilution adjustment provisions for issuances of securities below $0.15 per share during the first two years following the date of issuance of the warrants, subject to customary exceptions.

 

As of January 31, 2013, there were outstanding warrants to purchase up to 300,000 shares of our Series A Convertible Preferred Stock at an exercise price per share of $4. 00.

 

Prior to exercise, the warrants do not confer upon holders any voting or any other rights as a stockholder.

 

MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

Our common stock has been quoted on the OTCBB since December 6, 2010 under the symbol ITCC.OB and from December 13, 2005 until December 3, 2010 under the symbol HBDT.OB. Prior to December 13, 2005, there was no active market for our common stock.

 

The following table sets forth the high and low bid prices for our common stock for the periods indicated, as reported by the OTCBB. The prices state inter-dealer quotations, which do not include retail mark-ups, mark-downs or commissions. Such prices do not necessarily represent actual transactions.

 

    High     Low  
2011:                
First quarter, ended March 31, 2011   $ 0.10     $ 0.05  
Second quarter, ended June 30, 2011   $ 0.10     $ 0.02  
Third quarter, ended September 30, 2011   $ 0.09     $ 0.02  
Fourth quarter, ended December 31, 2011   $ 0.045     $ 0.0095  
                 
2012:                
First quarter, ended March 31, 2012   $ 0.034     $ 0.010  
Second quarter, ended June 30, 2012   $ 0.100     $ 0.010  
Third quarter, ended September 30, 2012   $ 0.100     $ 0.025  
Fourth quarter, ended December 31, 2012   $ 0.090     $ 0.040  
                 
2013:                

First quarter, through January 31, 2013

  $ 0.090     $ 0.040  

 

Holders of Record

 

Based on information furnished by our transfer agent, as of January 31, 2013, we had approximately 108 holders of record of our common stock.

 

Dividends

 

We have not declared any cash dividends on our common stock during the last two fiscal years.

 

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BUSINESS

 

Overview

 

Overview

 

We are a technology company that provides software applications for use by insurance administrators in the insurance industry. Our business focuses primarily on our InsPro Enterprise software application.

 

We acquired Atiam Technologies, L.P. on October 1, 2007. This entity, which changed its name to InsPro Technologies, LLC on May 14, 2009, developed, sells and supports our InsPro Enterprise software application. InsPro Enterprise is a comprehensive, web-based insurance administration software application, which was introduced by Atiam Technologies, L.P. (now our InsPro Technologies, LLC subsidiary) in 2004. InsPro Enterprise clients include insurance carriers and third party administrators. We market InsPro Enterprise as a licensed software application, and we realize revenue from the sale of the software licenses, application service provider fees, software maintenance fees and consulting and implementation services.

 

During 2005 through October 1, 2007 our operations were primarily that of our former Telesales and Insurint businesses. We effectively sold our former Telesales business in 2009 and our former Insurint business in 2010. Our former Telesales and Insurint businesses are now classified as part of our discontinued operations.

 

InsPro Enterprise

 

Product Evolution and Development

 

InsPro Technologies, LLC, or InsPro Technologies, and its predecessor, Systems Consulting Associates, Inc., or SCA, was founded in 1986 by Robert J. Oakes as a programming and consulting services company. In 1988, SCA entered into a long-term contract with Provident Mutual Insurance Company to develop, maintain, install, support and enhance IMACS, which was an insurance direct marketing and administration software system. IMACS was the precursor of InsPro Enterprise. InsPro Technologies dedicated four years, from 2001 to 2005, to developing its principal product, InsPro Enterprise, which is a comprehensive, scalable and modular web-based insurance marketing, claims administration and policy servicing platform.

 

Product and Services

 

We offer InsPro Enterprise on both a licensed and an ASP (Application Service Provider) basis. InsPro is an insurance administration and marketing system that supports group and individual business lines, and efficiently processes agent, direct market, worksite and web site generated business.

 

During the nine months ended September 30, 2012, we earned $8,835,150 in revenue. We earned 36% and 12% of our revenue from our two largest InsPro clients. During 2011, we earned $9,057,816 in revenue. We earned 29% and 20% of our revenue from our two largest InsPro clients.

 

InsPro Enterprise incorporates a modular design, which enables the customer to purchase only the functionality needed, thus minimizing the customer’s implementation cost and time necessary to implement InsPro Enterprise. InsPro Enterprise can be rapidly tailored to the requirements of a wide range of customers from the largest insurance companies and marketing organizations to the smallest third party administrators, operating in environments ranging from a single server environment to the mainframe installations. InsPro Enterprise currently supports a wide range of insurance distribution channels, including the Internet, traditional direct marketing, agent-generated, individual and group plans, worksite and association-booked business, and supports underwritten as well as guaranteed issue insurance products including long term care, Medicare supplement, critical illness, long and short term disability, whole and term life, comprehensive major, hospital indemnity and accidental death and dismemberment.

 

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An InsPro Enterprise software license entitles the purchaser to a perpetual license to a copy of the InsPro Enterprise software installed at a single client location, which may be used to drive a production and model office instance of the application. The ASP Hosting Service enables a client to lease InsPro Enterprise, paying only for that capacity required to support their business. ASP hosting clients access an instance of InsPro Enterprise installed on our servers located at InsPro Technologies’ offices or at a third party’s site. The ASP Hosting Service can also enable a client to outsource its application management of its perpetually licensed InsPro Enterprise software to InsPro Technologies.

 

Software maintenance fees apply to both licensed and ASP clients. Maintenance fees cover periodic updates to the application and the InsPro Enterprise Help Desk.

 

Consulting and implementation services are generally associated with the implementation of an InsPro Enterprise instance for either an ASP or licensed client, and cover such activity as InsPro Enterprise installation, configuration, modification of InsPro Enterprise functionality, client insurance plan set-up, client insurance document design and system documentation.

 

InsPro Enterprise software agreements with our clients often involve multiple elements. We allocate revenue to each element based on the relative fair value or the residual method, as applicable using vendor specific objective evidence to determine fair value, which is based on prices charged when the element is sold separately. Software revenue is recognized when persuasive evidence of an arrangement exists, the software is delivered in accordance with all terms and conditions of the customer contracts, the fee is fixed or determinable and collectability is probable. Maintenance revenue, which pertains to post-contract customer support including technical support and unspecified when-and-if available software upgrades, is recognized ratably over the maintenance agreement term. If fair value does not exist for any undelivered element, revenue is not recognized until the earlier of (i) delivery of such element or (ii) when fair value of the undelivered element is established, unless the undelivered element is a service, in which case revenue is recognized as the service is performed once the service is the only undelivered element.

 

Sales, Marketing and Operations

 

InsPro Technologies markets its products and services directly to prospective insurance carriers and third party administrators via trade shows, advertising in industry publications and direct mail.

 

InsPro Technologies also provides professional services to its clients, which include InsPro Enterprise system implementation, legacy system migration to InsPro Enterprise, InsPro Enterprise application management, web development, InsPro Enterprise help desk and 24x7 hosting service support.

 

Competition

 

The market for insurance policy administration systems and services is very competitive, rapidly evolving, highly fragmented and subject to technological change. Many of our competitors are more established than we are and have greater name recognition, a larger customer base and greater financial, technical and marketing resources than InsPro Technologies.

 

InsPro Technologies is focused on the senior health, disability, affinity and association segments. InsPro Technologies competes with such concerns as International Business Machines Corporation (Genelco Software), Computer Sciences Corporation (FutureFirst), LifePro and Fiserv Inc. (ID3), as well as with such smaller enterprises as Management Data, Inc. To compete we use best practice technologies and methods incorporated into InsPro Enterprise, which provides customers with a user-friendly, flexible, modular and cost-effective insurance administrative software system. We also compete on price with a typical InsPro software license fee ranging from $500,000 to $1,700,000. InsPro Enterprise’s modular design, scalability and ASP Hosting Service option makes InsPro Enterprise a compelling insurance administrative system from small third party administrators to the largest insurance carriers.

 

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Employees

 

As of January 31, 2013 we had 80 full time employees. None of our employees are members of any labor union and we are not a party to any collective bargaining agreement. We believe that the relationship between our management and our employees is good.

 

Intellectual Property and Proprietary Rights

 

We rely on a combination of trademark, copyright and trade secret laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand.

 

Corporate Information

 

We were incorporated under the laws of the state of Nevada on October 21, 2004 as Darwin Resources Corp., or Darwin-NV, an exploration stage company engaged in mineral exploration. On November 22, 2005, Darwin-NV merged with and into its newly-formed wholly-owned subsidiary, Darwin Resources Corp., a Delaware corporation, or Darwin-DE, solely for the purpose of changing the company’s state of incorporation from Nevada to Delaware. On November 23, 2005, HBDC II, Inc., a newly-formed wholly-owned subsidiary of Darwin-DE, was merged with and into Health Benefits Direct Corporation, a privately-held Delaware corporation engaged in direct marketing and distribution of health and life insurance and related products primarily over the Internet, and the name of the resulting entity was changed from Health Benefits Direct Corporation to HBDC II, Inc. Following this merger, Darwin-DE changed its name to Health Benefits Direct Corporation and, as a result, HBDC II, Inc. became our wholly-owned subsidiary. On November 29, 2010, Health Benefits Direct Corporation changed its name to InsPro Technologies Corporation.

 

Our principal executive offices are located at 150 N. Radnor-Chester Road, Suite B-101, Radnor, Pennsylvania 19087. Our telephone number is (484) 654-2200. The principal offices of our wholly-owned subsidiary, InsPro Technologies, LLC, are located at 130 Baldwin Tower, Eddystone, PA 19022 and its web site is www.inspro.com.

 

Investor Information

 

All periodic and current reports, registration statements and other material that we are required to file with the Securities and Exchange Commission, or the Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, may be obtained free of charge by writing to us at InsPro Technologies Corporation, 150 N. Radnor-Chester Road, Suite B-101, Radnor, Pennsylvania 19087 or e-mailing us at finance@inspro.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the Commission. Our Internet websites and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

 

The public may also read and copy any materials we have filed with the Commission at the Commission’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an Internet site, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission.

 

Properties

 

We do not own any real estate.

 

We lease 7,414 square feet of office space in Radnor, Pennsylvania. We lease this office space under a lease agreement with Radnor Properties-SDC, L.P. The term of the lease commenced on November 1, 2006, and will expire on March 31, 2017. The monthly base rent increases every 12 months, starting at approximately $13,466 and ending at approximately $21,531.

 

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We also lease approximately 17,567 square feet of space in Eddystone, Pennsylvania. We lease this office space under a lease agreement with BPG Officer VI Baldwin Tower L.P. The term of this lease commenced on August 1, 2007, and will expire on January 31, 2017. The monthly rent increases every 12 months, starting at approximately $8,500 and ending at approximately $27,814.

 

Legal Proceedings

 

We are involved in various investigations, claims and lawsuits arising in the normal conduct of our business, none of which, in our opinion, will harm our business. We cannot assure that we will prevail in any litigation. Regardless of the outcome, any litigation may require us to incur significant litigation expense and may result in significant diversion of our attention.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

Overview

 

The current operations of InsPro Technologies Corporation (the “Company”, “we”, “us” or “our”) consist of the operations of our wholly owned InsPro Technologies, LLC subsidiary (“InsPro Technologies”).

 

InsPro Enterprise is a comprehensive, web-based insurance administration software application. InsPro Enterprise was introduced by Atiam Technologies, L.P. (now our InsPro Technologies, LLC subsidiary) in 2004. InsPro Enterprise clients include health insurance carriers and third party administrators. We market InsPro Enterprise as a licensed software application, and we realize revenue from the sale of the software licenses, application service provider fees, software maintenance fees and professional services.

 

Critical Accounting Policies

 

Financial Reporting Release No. 60, which was released by the Securities and Exchange Commission (the “Commission”), encourages all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Our consolidated financial statements include a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements. Management believes the following critical accounting policies affect the significant judgments and estimates used in the preparation of the consolidated financial statements.

 

Use of Estimates - Management's Discussion and Analysis is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates these estimates, including those related to allowances for doubtful accounts receivable and long-lived assets such as intangible assets. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Significant estimates in 2012 and 2011 include the allowance for doubtful accounts, stock-based compensation, the useful lives of property and equipment and intangible assets, accrued expenses pertaining to abandoned facilities, warrant liability and revenue recognition. Actual results may differ from these estimates under different assumptions or conditions.

 

InsPro Technologies offers InsPro Enterprise on a licensed and an application service provider (“ASP”) basis. An InsPro Enterprise software license entitles the purchaser a perpetual license to a copy of the InsPro Enterprise installed at a single client location, which may be used to drive a production and model office instance of the application. The ASP Hosting Service enables a client to lease the InsPro Enterprise, paying only for that capacity required to support their business. ASP clients access an instance of InsPro Enterprise installed on InsPro Technologies’ servers located at InsPro Technologies’ office or at a third party’s site.

 

Software maintenance fees apply to both licensed and ASP clients. Maintenance fees cover periodic updates to the application and the InsPro Enterprise Help Desk.

 

Professional services are generally associated with the implementation of InsPro Enterprise instance for either an ASP or licensed client, and cover such activity as InsPro Enterprise installation, configuration, modification of InsPro Enterprise functionality, client insurance plan set-up, client insurance document design and system documentation.

 

InsPro Technologies revenue is generally recognized under ASC 985-605. For software arrangements involving multiple elements, we allocate revenue to each element based on the relative fair value or the residual method, as applicable using vendor specific objective evidence to determine fair value, which is based on prices charged when the element is sold separately. Software revenue accounted for under ASC 985-605 is recognized when persuasive evidence of an arrangement exists, the software is delivered in accordance with all terms and conditions of the customer contracts, the fee is fixed or determinable and collectability is probable. Revenue related to post-contract customer support (“PCS”), including technical support and unspecified when-and-if available software upgrades, is recognized ratably over the PCS term. Under ASC 985-605, if fair value does not exist for any undelivered element, revenue is not recognized until the earlier of (i) delivery of such element or (ii) when fair value of the undelivered element is established, unless the undelivered element is a service, in which case revenue is recognized as the service is performed once the service is the only undelivered element.

 

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We recognize revenues from software license agreements when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. We consider fees relating to arrangements with payment terms extending beyond one year to not be fixed or determinable and revenue for these arrangements is recognized as payments become due from the customer. In software arrangements that include more than one InsPro Enterprise module, we allocate the total arrangement fee among the modules based on the relative fair value of each of the modules.

 

License revenue allocated to software products generally is recognized upon delivery of the products or deferred and recognized in future periods to the extent that an arrangement includes one or more elements to be delivered at a future date and for which fair values have not been established. Revenue allocated to maintenance agreements is recognized ratably over the maintenance term and revenue allocated to training and other service elements is recognized as the services are performed.

 

The unearned portion of the Company’s revenue, which is revenue collected or billed but not yet recognized as earned, has been included in the consolidated balance sheet as a liability for deferred revenue.

 

We review the carrying value of property and equipment and intangible assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.

 

RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2011

 

Revenues

 

For the three months ended September 30, 2012 (“Third Quarter 2012”), we earned revenues of $3,372,990 compared to $1,699,802 for the three months ended September 30, 2011 (“Third Quarter 2011”), an increase of $1,673,188 or 98%. Revenues include the following:

 

   For the Three Months Ended September 30, 
   2012   2011 
         
Professional services  $2,361,674   $933,017 
ASP revenue   752,525    562,374 
Maintenance revenue   258,791    197,290 
Sub-leasing and other revenue   -    7,121 
           
Total  $3,372,990   $1,699,802 
           
·In Third Quarter 2012 our professional services revenue increased $1,428,657 or 153% as a result of higher implementation services for four new clients in 2012 partially offset by lower post implementation services for existing clients. Implementation services included assisting clients in setting up their insurance products in InsPro Enterprise, providing modifications to InsPro Enterprise’s functionality to support the client’s business, interfacing InsPro Enterprise with the client’s other systems, automation of client correspondence to their customers and data conversion from the client’s existing systems to InsPro Enterprise. Post implementation services include these same services to existing clients supporting their ongoing utilization of InsPro Enterprise.

 

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·In Third Quarter 2012 our ASP revenue increased $190,151 or 34% as a result of increased fees from ongoing and recent implementations of InsPro Enterprise and increased fees from several existing clients. ASP hosting service enables a client to either lease InsPro Enterprise software, paying only for that capacity required to support their business, or for a client to outsource the operation of their licensed InsPro Enterprise installation to the Company. ASP hosting clients access InsPro Enterprise installed on the Company’s owned servers located at the Company’s office or at a third party’s site.

 

· In Third Quarter 2012 our maintenance revenue increased $61,501 or 31% as a result of increased fees from a client’s recently implemented InsPro Enterprise software partially offset by decreased fees from an existing client.

 

· We earned sub-leasing revenue from the sub leasing of space in our Radnor office to a third party, which is on a month to month basis. The Company’s sublease revenue varies month to month based on the amount of space the Company’s sub-tenant utilized.

 

Cost of Revenues

 

Our cost of revenues for Third Quarter 2012 was $3,237,929 as compared to $1,587,656 for Third Quarter 2011 for an increase of $1,650,273 or 104% as compared to Third Quarter 2011. Cost of revenues consisted of the following:

 

   For the Three Months Ended September 30, 
   2012   2011 
         
Salaries, employee benefits and related taxes  $1,677,420   $1,131,251 
Professional fees   1,382,394    405,495 
Rent, utilities, telephone and communications   115,119    85,357 
Other cost of revenues   62,996    (34,447)
   $3,237,929   $1,587,656 
           
·In Third Quarter 2012 our salaries, employee benefits and related taxes component of cost of revenues increased $546,169 or 48% as compared to Third Quarter 2011. Salaries, employee benefits and related taxes increased primarily a result of increased employee staffing related to the increase in the number of InsPro Technologies’ clients and to a lesser extent as a result of $220,691 of post employment expense pertaining to a Separation of Employment Agreement and General Release between the Company and InsPro Technologies’ and a former vice president of InsPro Technologies.

 

·In Third Quarter 2012 our professional fees component of cost of revenues increased $976,899 or 241% as compared to Third Quarter 2011. Professional fees increased as a result of increased utilization of several outside consulting firms, which are assisting us with modifications to InsPro Enterprise’s functionality and new clients’ implementation of InsPro Enterprise.

 

·In Third Quarter 2012 our rent, utilities, telephone and communications component of cost of revenues increased $29,762 or 35% as compared to Third Quarter 2011. The increase was the result of higher telephone and communications costs and higher utilities and building expenses pertaining to InsPro Technologies office.

 

·In Third Quarter 2012 our other cost of revenues component of cost of revenues increased $97,443 or 283% as compared to Third Quarter 2011. The increase was the result of a non recurring $160,029 expense credit in Third Quarter 2011 pertaining to the settlement of amounts owed to a vendor partially offset by cost reduction initiatives pertaining to computer processing. Other cost of revenues consisted of computer processing incurred primarily to provide ASP hosting services, hardware and software, travel and entertainment, and office expenses.

 

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Gross Profit (Loss)

 

As a result of the aforementioned factors, we reported a gross profit of $135,061 in Third Quarter 2012 as compared to a gross profit of $112,146 in Third Quarter 2011.

 

Selling, General and Administrative Expenses

 

Our selling, general and administrative expenses for Third Quarter 2012 was $1,375,576 as compared to $1,293,373 for Third Quarter 2011 for an increase of $82,202 or 6% as compared to Third Quarter 2011. Selling, marketing and administrative expenses consisted of the following:

 

   For the Three Months Ended September 30, 
   2012   2011 
         
Salaries, employee benefits and related taxes  $580,579   $765,496 
Advertising and other marketing   84,802    27,199 
Depreciation and amortization   255,316    166,521 
Rent, utilities, telephone and communications   99,652    93,526 
Professional fees   176,905    99,199 
Other general and administrative   178,323    141,432 
   $1,375,577   $1,293,373 
           

In Third Quarter 2012 we incurred salaries, employee benefits and related taxes of $580,579 as compared to $765,496 for Third Quarter 2011, a decrease of $184,917 or 24%. The decrease is primarily the result of lower corporate staffing.

 

Depreciation and amortization expense consisted of the following:

 

   For the Three Months Ended September 30, 
   2012   2011 
         
Amortization of intangibles acquired as a result of the InsPro acquisition  $86,683   $86,684 
Depreciation expense   168,633    79,837 
           
Total  $255,316   $166,521 
           
·We incurred amortization expense pertaining to the intangible assets acquired from InsPro Technologies (formerly Atiam Technologies, L.P.) on October 1, 2007.

 

·In Third Quarter 2012 we incurred depreciation expense of $168,632 as compared to $79,837 in Third Quarter 2011. The increase was primarily due to assets acquired on April 30, 2012, whereby InsPro Technologies entered into an Application Provider Hosting Agreement (“Micro Focus Agreement”) with Micro Focus (US) Inc. (“Micro Focus”). As part of the Micro Focus Agreement InsPro Technologies expanded its perpetual license rights to a Micro Focus software product used by InsPro Technologies in conjunction with hosting its InsPro Enterprise software.

 

In Third Quarter 2012 our professional fees increased as a result of higher legal fees associated with our Loan and Security Agreement with Silicon Valley Bank, technology consulting expenses, human resource management consulting and accounting fees for tax preparation services.

 

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In Third Quarter 2012 our other expense increased primarily as a result of increased maintenance expense on computer hardware and software especially costs associated with assets acquired in connection with the Micro Focus Agreement.

 

Loss from operations

 

As a result of the aforementioned factors, we reported a loss from operations of $1,240,516 in Third Quarter 2012 as compared to a loss from operations of $1,181,227 in Third Quarter 2011.

 

Gain on discontinued operations

 

Results from discontinued operations were as follows:

 

   For the Three Months Ended September 30, 
   2012   2011 
Revenues:          
Commission and other revenue from carriers  $14,135   $34,310 
Transition policy commission pursuant to the Agreement   131,579    176,028 
           
    145,714    210,338 
           
Operating expenses:          
Other general and administrative   6,896    11,809 
           
    6,896    11,809 
           
Gain from discontinued operations  $138,818   $198,529 

 

For Third Quarter 2012 we earned revenues from discontinued operations of $145,714 as compared to $210,338 in the Third Quarter 2011, a decrease of $64,624 or 31%. Revenues include the following:

 

·In Third Quarter 2012 our commission and other revenue from carriers decreased due to the declines in our telesales call center produced agency business. We continue to receive commissions from carriers other than certain carriers and commissions on policies other than transferred policies, which were transferred to the acquirer.

 

·On February 20, 2009, the Company entered into and completed the sale of the agency business to eHealth Insurance Services, Inc., an unaffiliated third party, pursuant to the terms of a Client Transition Agreement. In Third Quarter 2012 our transition policy commission pursuant to the agreement decreased due to the declines in our telesales call center produced agency business.

 

Total operating expenses of discontinued operations for Third Quarter 2012 was $6,896 as compared to $11,809 for Third Quarter 2011. The primary reason for the decrease is the expiration of the lease for our former Florida office and the elimination of rent and other associated costs.

 

Gain from discontinued operations

 

As a result of the aforementioned factors, we reported a gain from discontinued operations of $138,818 or $0.00 gain from discontinued operations per share in Third Quarter 2012 as compared to a gain from discontinued operations of $198,529 or $0.01 gain from discontinued operations per share in Third Quarter 2011.

 

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Other income (expenses)

 

Effective September 30, 2012, the full ratchet anti-dilution provisions pertaining to warrants issued during 2009 and 2010 expired. Consequently, the Company has determined that effective September 30, 2012, all of the Company’s issued and outstanding warrants qualify for a scope exception under ASC 815-40-15 as they are indexed to the Company’s stock. Effective September 30, 2012, the Company recorded the elimination of the warrant liability by recording a debit to warrant liability in the amount of $6,182,309 and a credit to additional paid in capital in the amount of $6,182,309. The gain in the Third Quarter 2011 represents the mark to market adjustments for the change in fair value of warrants, which contain provisions that adjust the exercise price of these warrants in the event we issue our common stock or other securities convertible into our common stock at price lower than the exercise price of these warrants.

 

Interest income is attributable to interest-bearing cash deposits. The decrease in interest income is the result of a decline in interest rates and a decline in cash balances.

 

Interest expense is attributable to interest on accounts payable, capital leases and note payable for premium financing on a portion of the Company’s insurance coverages. The increase in interest expense is the result of an increase in notes payable for premium financing.

 

RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2011

 

Revenues

 

For the nine months ended September 30, 2012 (“2012 To Date”), we earned revenues of $8,835,150 as compared to $5,636,023 for the nine months ended September 30, 2011 (“2011 To Date”), an increase of $3,199,127 or 57%. Revenues include the following:

 

   For the Nine Months Ended September 30, 
   2012   2011 
         
Professional services  $5,824,189   $3,231,819 
ASP revenue   2,299,290    1,458,578 
Sales of software licenses   -    335,000 
Maintenance revenue   704,021    592,365 
Sub-leasing and other revenue   7,650    18,261 
           
Total  $8,835,150   $5,636,023 
           
·In 2012 To Date our professional services revenue increased $2,592,370 or 80% as a result of higher implementation services from four new clients in 2012 partially offset by lower post implementation services for existing clients. Implementation services included assisting clients in setting up their insurance products in InsPro Enterprise, providing modifications to InsPro Enterprise’s functionality to support the client’s business, interfacing InsPro Enterprise with the client’s other systems, automation of client correspondence to their customers and data conversion from the client’s existing systems to InsPro Enterprise. Post implementation services include these same services to existing clients supporting their ongoing utilization of InsPro Enterprise.

 

·In 2012 To Date our ASP revenue increased $840,712 or 57% as a result of increased fees from recent implementations of InsPro Enterprise to several clients and increased fees from several existing clients. ASP hosting service enables a client to either lease InsPro Enterprise software, paying only for that capacity required to support their business, or for a client to outsource the operation of their licensed InsPro Enterprise installation to the Company. ASP hosting clients access InsPro Enterprise installed on the Company’s owned servers located at the Company’s office or at a third party’s site.

 

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·In 2011 To Date we earned $335,000 of license fee revenue, which represented a license fee recognized upon the completion of the implementation of InsPro Enterprise for a client.

 

·In 2012 To Date our maintenance revenue increased $111,656 or 19% as a result of increased fees from a client’s recently implemented InsPro Enterprise software partially offset by decreased fees from an existing client.

 

·We earned sub-leasing revenue from the sub leasing of space in our Radnor office to third parties, which are on a month to month basis. The Company’s sublease revenue varies month to month based on the amount of space the Company’s sub-tenants utilizes. The Company’s sub-tenant ceased sub-leasing our Radnor office during the second quarter of 2012.

 

Cost of Revenues

 

Our cost of revenues for 2012 To Date was $7,844,648 as compared to $5,035,330 for 2011 To Date for an increase of $2,809,318 or 56% as compared to 2011 To Date. Cost of revenues consisted of the following:

 

   For the Nine Months Ended September 30, 
   2012   2011 
         
Salaries, employee benefits and related taxes  $4,327,799   $3,364,826 
Professional fees   3,011,577    1,191,263 
Rent, utilities, telephone and communications   288,331    255,750 
Other cost of revenues   216,941    223,491 
   $7,844,648   $5,035,330 
           
·In 2012 To Date our salaries, employee benefits and related taxes component of cost of revenues increased $962,973 or 29% as compared to 2011 To Date. Salaries, employee benefits and related taxes increased primarily a result of increased employee staffing related to the increase in the number of InsPro Technologies’ clients and to a lesser extent as a result of $220,691 of post employment expense pertaining to a Separation of Employment Agreement and General Release between the Company and InsPro Technologies’ and a former vice president of InsPro Technologies recorded in Third Quarter 2012.

 

·In 2012 To Date our professional fees component of cost of revenues increased $1,820,314 or 153% as compared to 2011 To Date. Professional fees increased as a result of increased utilization of several outside consulting firms, which are assisting us with modifications to InsPro Enterprise’s functionality and new clients’ implementation of InsPro Enterprise.

 

·In 2012 To Date our rent, utilities, telephone and communications component of cost of revenues increased $32,581 or 13% as compared to 2011 To Date. The increase was the result of higher telephone and communications costs and higher utilities and building expenses pertaining to InsPro Technologies office.

 

·In 2012 To Date our other cost of revenues component of cost of revenues decreased $6,550 or 3% as compared to 2011 To Date. The decrease was the result of lower travel expenses. Other cost of revenues consisted of computer processing incurred primarily to provide ASP hosting services, hardware and software, travel and entertainment, and office expenses.

 

Gross Profit

 

As a result of the aforementioned factors, we reported a gross profit of $990,502 in 2012 To Date as compared to a gross profit of $600,693 in 2011 To Date.

 

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Selling, General and Administrative Expenses

 

Our selling, general and administrative expenses for 2012 To Date was $3,689,997 as compared to $3,665,627 for 2011 To Date for an increase of $24,370 or 1% as compared to 2011 To Date. Selling, marketing and administrative expenses consisted of the following:

 

   For the Nine Months Ended September 30, 
   2012   2011 
         
Salaries, employee benefits and related taxes  $1,735,783   $2,053,283 
Advertising and other marketing   145,119    81,243 
Depreciation and amortization   717,072    521,309 
Rent, utilities, telephone and communications   281,353    282,363 
Professional fees   385,407    307,856 
Other general and administrative   425,264    419,573 
   $3,689,998   $3,665,627 
           

In 2012 To Date we incurred salaries, employee benefits and related taxes of $1,735,783 as compared to $2,053,283 for 2011 To Date, a decrease of $317,500 or 16%. The decrease is primarily the result of lower corporate staffing.

 

Depreciation and amortization expense consisted of the following:

 

   For the Nine Months Ended September 30, 
   2012   2011 
         
Amortization of intangibles acquired as a result of the InsPro acquisition  $260,050   $260,052 
Depreciation expense   457,022    261,257 
           
Total  $717,072   $521,309 
           
·We incurred amortization expense pertaining to the intangible assets acquired from InsPro Technologies (formerly Atiam Technologies, L.P.) on October 1, 2007.

 

·In 2012 To Date we incurred depreciation expense of $457,021 as compared to $261,257 in 2011 To Date. The increase was primarily due to assets acquired pursuant to the Micro Focus Agreement as described above. In addition, 2012 To Date included $41,896 of additional, accelerated depreciation expense as a result of InsPro Technologies’ abandonment of certain furniture and equipment in the second quarter of 2012 when InsPro Technologies moved into newly furnished office space in a different section of Baldwin Towers.

 

In 2012 To Date our professional fees increased as a result of higher legal fees associated with our Loan and Security Agreement with Silicon Valley Bank, technology consulting expenses and human resource management consulting services.

 

In 2012 To Date our other expense decreased primarily as a result of cost reductions in our corporate areas including lower insurance costs due to the elimination of the Company’s former Florida office.

 

Loss from operations

 

As a result of the aforementioned factors, we reported a loss from operations of $2,699,495 in 2012 To Date as compared to a loss from operations of $3,064,934 in 2011 To Date.

 

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Gain on discontinued operations

 

Results from discontinued operations were as follows:

 

   For the Nine Months Ended September 30, 
   2012   2011 
Revenues:          
Commission and other revenue from carriers  $64,001   $145,278 
Transition policy commission pursuant to the Agreement   374,790    564,697 
Sub-lease revenue   -    150,100 
           
    438,791    860,075 
           
Operating expenses:          
Salaries, employee benefits and related taxes   -    11,118 
Rent, utilities, telephone and communications   -    171,510 
Professional fees   -    (1,961)
Other general and administrative   29,697    41,374 
           
    29,697    222,041 
           
Gain (loss) from discontinued operations  $409,094   $638,034 
           

For 2012 To Date we earned revenues from discontinued operations of $438,791 as compared to $860,075 in the 2011 To Date, a decrease of $421,284 or 49%. Revenues include the following:

 

·In 2012 To Date our commission and other revenue from carriers decreased due to the declines in our telesales call center produced agency business. We continue to receive commissions from carriers other than certain carriers and commissions on policies other than transferred policies, which were transferred to the acquirer.

 

·On February 20, 2009, the Company entered into and completed the sale of the agency business to eHealth Insurance Services, Inc., an unaffiliated third party, pursuant to the terms of a Client Transition Agreement. In 2012 To Date our transition policy commission pursuant to the agreement decreased due to the declines in our telesales call center produced agency business.

 

Total operating expenses of discontinued operations for 2012 To Date was $29,697 as compared to $222,041 for 2011 To Date. The primary reason for the decrease is the expiration of the lease for our former Florida office and the elimination of rent and other associated costs.

 

Gain from discontinued operations

 

As a result of the aforementioned factors, we reported a gain from discontinued operations of $409,094 or $0.01 gain from discontinued operations per share in 2012 To Date as compared to a gain from discontinued operations of $638,034 or $0.02 gain from discontinued operations per share in 2011 To Date.

 

Other income (expenses)

 

Effective September 30, 2012, the full ratchet anti-dilution provisions pertaining to warrants issued during 2009 and 2010 expired. Consequently, the Company has determined that effective September 30, 2012, all of the Company’s issued and outstanding warrants qualify for a scope exception under ASC 815-40-15 as they are indexed to the Company’s stock. Effective September 30, 2012, the Company recorded the elimination of the warrant liability by recording a debit to warrant liability in the amount of $6,182,309 and a credit to additional paid in capital in the amount of $6,182,309. The loss in 2012 To Date and the gain in the 2011 To Date represents the mark to market adjustments for the change in fair value of warrants, which contain provisions that adjust the exercise price of these warrants in the event we issue our common stock or other securities convertible into our common stock at price lower than the exercise price of these warrants.

 

52
 

 

Interest income is attributable to interest-bearing cash deposits. The decrease in interest income is the result of a decline in interest rates and a decline in cash balances.

 

Interest expense is attributable to interest on account payable, capital leases and note payable for premium financing on a portion of the Company’s insurance coverages. The increase in interest expense is the result of an increase in the note payable for premium financing.

 

Net loss

 

As a result of these factors discussed above, we reported a net loss of $6,864,779 or $0.17 net loss per share in 2012 To Date as compared to a net loss of $1,496,548 or $0.04 loss per share in 2011 To Date.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At September 30, 2012, we had a cash balance of $2,091,032 and working capital of $477,612.

 

Net cash used by operations was $676,379 in 2012 To Date as compared to $1,704,182 cash used in 2011 To Date. The improvement in cash flow from operations was primarily the result of increased collections of earned and unearned revenue in 2012 as compared to 2011. Impacting our cash flow from operations was our net loss of $6,864,779 in 2012 To Date as compared to our net loss of $1,496,548 in 2011 To Date and:

 

·Increases in accounts receivable of $938,141 in 2012 To Date, which are primarily the result of increased billings in 2012 To Date to clients primarily for professional services.

 

·Increases in prepaid expenses in 2012 To Date of $168,494, which are primarily the result of premium obligations for various insurance policies and expenditures for software maintenance agreements.

 

·Increases in accounts payable of $738,392 in 2012 To Date, which are primarily the result of increased utilization of outside IT consulting firms and the associated increase in the amounts owed to these vendors.

 

·Increases in deferred revenue of $1,049,539 in 2012 To Date, which are primarily the result of unearned license fees and to a lesser extent annual maintenance fees to various clients 2012 To Date.

 

·Decreases in net assets of discontinued operations of $16,185 in 2012 To Date, which are primarily the result of the collection of commission amounts owed pertaining to our former agency business and amounts owed from the buyer of our Insurint business.

 

In addition to cash used in operating activities we incurred the following non cash gain and expenses in 2012 To Date, which were included in our net income (loss), including:

 

·Recorded depreciation and amortization expense of $717,072 and $521,309 in 2012 To Date and 2011 To Date, respectively.

 

·Recorded stock-based compensation and consulting expense of $72,632 and $250,354 in 2012 To Date and 2011 To Date, respectively.

 

·Recognized a loss on change in fair value of warrants liabilities of $4,508,078 and a gain of $929,671 in 2012 To Date and 2011 To Date, respectively.

 

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Net cash used by investing activities in 2012 To Date was $939,022 as compared to $98,235 in 2011 To Date. The increase is primarily the result of the partial payments for computer software acquired from Micro Focus in connection with existing and new clients utilizing the Company’s hosting service for InsPro Enterprise.

 

Net cash provided by financing activities in 2012 To Date was $4,380 as compared to cash provided in 2011 of $1,030,558.

 

·We entered into two notes payable to finance insurance premiums for two of the Company’s various corporate insurance coverages during 2012.

 

·InsPro Technologies has entered into various capital lease obligations to purchase equipment used for operations.

 

·During the first quarter of 2011 the letters of credit pertaining to the former leases for our Florida and New York offices, which were collateralized with assets in the form of a money market account and certificate of deposit and classified as restricted cash as of December 31, 2010, were terminated as a result of the expiration of these leases. As a result of the termination of these letters of credit the restrictions on the money market account and certificate of deposit were lifted, and $1,152,573 was reclassified from restricted cash to cash during the first quarter of 2011.

 

On October 3, 2012, the Company together with InsPro Technologies (the “Borrowers”) entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”).

 

The Loan Agreement established a revolving credit facility for the Borrowers in the principal amount of up to $2,000,000 (the “Revolving Facility”). Availability under the Revolving Facility is tied to a borrowing base formula that is based on 80% of the Borrowers’ eligible accounts receivable, plus 20% of the aggregate unrestricted cash balanced held at SVB (the “Borrowing Base”). Advances under the Revolving Facility may be repaid and reborrowed in accordance with the Loan Agreement. No advances were made at closing; however, an advance of $525,000 was made on October 15, 2012. Pursuant to the Loan Agreement, the Borrowers agreed to pay to SVB the outstanding principal amount of all advances (the “Advances”), the unpaid interest thereon, and all other obligations incurred with respect to the Loan Agreement on October 3, 2014. Interest will accrue on the unpaid principal balance of the Advances at a floating per annum rate equal to 1% above the prime rate. During an event of default the rate of interest will increase 5% above the otherwise applicable rate, until such event of default is cured or waived. All accrued and unpaid interest is payable monthly on the first day of each month.

 

Subject to certain exceptions, the Loan Agreement contains covenants prohibiting the Borrowers from, among other things: (a) conveying, selling, leasing, transferring or otherwise disposing of their properties or assets; (b) liquidating or dissolving; (c) engaging in any business other than the business currently engaged in or reasonably related thereto; (d) entering into any merger or consolidation, or acquiring all or substantially all of the capital stock or property of another entity; (e) becoming liable for any indebtedness; (f) allowing any lien or encumbrance on any of their property; (g) paying any dividends; and (h) making payment on subordinated debt. Further, the Borrowers must maintain a minimum “adjusted quick ratio,” tested as of the last day of each month, of at least 1.75:1.00 commencing August 31, 2012. The adjusted quick ratio (the “AQR”) is the ratio of (x) the Borrowers’ consolidated, unrestricted cash maintained with SVB (and, for 90 days after the closing date, maintained with PNC Bank) plus net unbilled accounts receivable to (y) the Borrowers’ liabilities to SVB plus, without duplication, the aggregate amount of the Borrowers’ liabilities that mature within 1 year (excluding subordinated debt), minus the current portion of deferred revenue.

 

The Loan is secured by a first priority perfected security interest in substantially all of the assets of the Borrowers, excluding the intellectual property of the Borrowers. The Loan Agreement contains a negative covenant prohibiting the Borrowers from granting a security interest in their intellectual property to any party.

 

Under the terms of the Loan Agreement, the Borrowing Base under the Revolving Facility was $1,563,414 and the AQR was 1.64 as of September 30, 2012, which is below the required 1.75:1.00 AQR. The Company has notified SVB that the AQR as of September 30, 2012, is lower than the required amount, which represented a default on the Loan Agreement by the Company. On November 13, 2012 SVB agreed to waive the default and the Company and SVB agreed to amend the Loan Agreement to lower the Company’s requirement to maintain an AQR of 1.75 to 1.0 to 1.50 to 1.0 commencing with the month ending November 30, 2012 and as of the last day of each month thereafter.

 

Off-Balance Sheet Arrangements

 

We do not currently have any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet or other contractually narrow or limited purposes.

 

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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

 

The following table sets forth the name, age, and position of each of our executive officers and directors.

 

Directors serve until the next annual meeting of stockholders, until their successors are elected or appointed or qualified, or until their prior resignation or removal. Our executive officers are appointed by, and serve at the discretion of, our board of directors.

 

Name

Age

Position

Donald R. Caldwell 66 Chairman
Brian Adamsky 51 Director
John Harrison 69 Director
Michael Azeez 55 Director
Robert Oakes 54 Director
Sanford Rich 54 Director
L.J. Rowell 80 Director
Paul Soltoff 58 Director
Anthony R. Verdi 63 Chief Executive Officer, Chief Financial Officer and Chief Operating Officer and Director
Edmond J. Walters 51 Director
     

Brian K. Adamsky, 51. Mr. Adamsky has worked at Cross Atlantic Capital Partners, Inc. since its inception in 1999, and presently serves as its Secretary/Treasurer and Chief Financial Officer. During his years at Cross Atlantic, he has served as a director at numerous of its portfolio companies including Profectus BioSciences, Inc. and Rubicon Technology, Inc. From 1996 to 1999, Mr. Adamsky was Chief Financial Officer at Megasystems, Inc., a portfolio company of Safeguard Scientifics, Inc. Prior to Megasystems, Mr. Adamsky worked in a variety of financial and operational roles at companies in the Philadelphia region. Mr. Adamsky worked in public accounting at Touche Ross & Company (now Deloitte & Touche) and is a Certified Public Accountant in the Commonwealth of Pennsylvania. Mr. Adamsky’s experience serving as a director and officer of numerous companies qualifies him to be a member of our board of directors.

 

Michael Azeez, age 55, has served as one of our directors since December 2011. Mr. Azeez is a managing member of Azeez Investors, LLC. Mr. Azeez co-founded Unitel in 1988 and served as its President from 1988 until 2002. Mr. Azeez served in various executive positions at American Cellular Network Corporation from 1982 until 1988 and his positions included Vice President, General Manager of various divisions and assistant to the President. Mr. Azeez is a member of the board of directors of Acrometis Strategic Software Services, which provides software solutions to insurance companies for workers compensation claims management. Mr. Azeez is a member of the board of directors of the Friends of Yemin Orde. Mr. Azeez is the Chairman and founder of the Sam Azeez Museum of Woodbine Heritage. Mr. Azeez’s significant executive and business development experience in the telecommunications industry and his civic service for various non-profit organizations qualifies him to be a member of our board of directors.

 

Donald R. Caldwell , 66, has served as one of our directors and as one of the Co-Chairman of our board of directors from April 2008 through November 24, 2009 and as our Chairman since November 24, 2009. Mr. Caldwell founded Cross Atlantic Capital Partners, Inc. in 1999, and presently serves as its Chairman and Chief Executive Officer. He has served as a Director at Rubicon Technology, Inc. since 2001 where he chairs the Compensation Committee; and at Diamond Management & Technology Consultants, Inc. (NASDAQ) from 1994 until its sale to PriceWaterhouse in 2010, and where he served as a member of their Compensation Committee, Audit Committee and as the lead director since 2006. Mr. Caldwell is a director and a member of the Compensation and Audit Committees and Chairman of the Executive Committee of Quaker Chemical Corporation (NYSE), and a member of the Compensation Committee and the board of Voxware, Inc. (NASDAQ), a supplier of voice driven solutions. Mr. Caldwell is a director, Chairman of the Audit Committee and member of the Compensation Committee of Lighting Gaming, Inc. since 2005. Mr. Caldwell was a director of Kanbay International, Inc. from 1999 through 2007 when it was purchased by CapGemini. From 1996 to 1999, Mr. Caldwell was President and Chief Operating Officer and a director of Safeguard Scientifics, Inc. Mr. Caldwell is a Certified Public Accountant in the State of New York. Mr. Caldwell’s experience serving as a director and officer of numerous public companies qualifies him to be a member of our board of directors.

 

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John Harrison, 69, has served as one of our directors since November 2005. He is a founding Partner and Executive Director of The Keystone Equities Group, Inc., a full service investment banking group and a registered NASD broker-dealer founded in 2003. Mr. Harrison also is a Managing Director of Covenant Partners, a hedge fund that invests in direct marketing services companies. In 1999, Mr. Harrison became a founding Partner of Emerging Growth Equities, Ltd., a full service investment banking and brokerage firm focused on raising capital for emerging technology companies addressing high-growth industry sectors. From 1985 to 2000, Mr. Harrison served as President of DiMark, a direct marketing agency that was acquired by Harte-Hanks in 1996. He also has held senior management positions with CUNA Mutual, RLI Insurance and CNA Insurance where he directed their direct marketing practice. Mr. Harrison was Chairman of Professional Insurance Marketing Association (PIMA) and Chairman of the DMA's Financial Services Council. Mr. Harrison’s extensive experience in the financial and insurance sectors qualifies him to be a member of our board of directors.

 

Robert J. Oakes , 54, has served as one of our directors since August 2008. He has served as the President and CEO of our InsPro Technologies, LLC subsidiary since our acquisition of the subsidiary on October 1, 2007. From 1986 until 2007 Mr. Oakes was President and Chief Executive Officer of the general partner of Atiam Technologies L.P. (now known as InsPro Technologies, LLC), a software development and servicing company that developed, expanded and serviced products to serve the insurance and financial services markets. Mr. Oakes founded InsPro Technologies under the name “Atiam” in 1986 and led the company’s effort to design and develop its flagship product, InsPro Enterprise. InsPro Enterprise is a state-of-the-art Insurance, Marketing, Administration and Claim System that provides end-to-end insurance processing, technology and support, for a broad range of life, health and disability products. Mr. Oakes’ experience in the development of our flagship product and the management of InsPro Technologies, LLC qualifies him to be a member of our board of directors.

 

Sanford Rich , 54, has served as one of our directors since April 2006. Mr. Rich has served as a director and Chief Executive Officer at In the Car, LLC since October 2011. He is a director and the Audit Committee Chairman at Aspen Group Inc., an online University. Mr. Rich also has served as a FINRA Registered Managing Director with Whitemarsh Capital Advisors LLC, a broker-dealer, since February 2009. Mr. Rich served as a director, Audit Committee Chairman and SEC qualified audit committee financial expert of Interclick, Inc. from 2007 to 2010. From 1995 to May 2008 Mr. Rich was director, Senior Vice President and Portfolio Manager at GEM Capital Management Inc. From 1993 to 1995, Mr. Rich was a Managing Director of High Yield Finance, Capital Markets & North American Loan Syndicate, Sales and Trading at Citicorp Securities. From 1985 to 1993, he served as Managing Director of Debt Capital Markets at Merrill Lynch. From 1978 to 1985, Mr. Rich held various analyst positions in numerous companies, including Cypress Capital Management, Inc. (Vice President and Analyst from 1983 to 1985), FIAMCO (Distressed/High Yield Bond Analyst from 1981 to 1983), Progressive Corporation (Financial Analyst from 1980 to 1981) and Prescott, Ball and Turben (Distressed/High Yield Bond Analyst from 1978 to 1980). Mr. Rich’s 30+ years of experience in the financial sector qualifies him to be a member of our board of directors.

 

L.J. Rowell, 80, has served as one of our directors since April 2006. He is a past President (1984-1996), Chief Executive Officer (1991-1996) and Chairman of the Board (1993-1996) of Provident Mutual Life Insurance Company, where he also held various other executive and committee positions from 1980 until his retirement in 1996. Mr. Rowell served on the board of directors of the PMA Group from 1992 until 2009. Mr. Rowell served on the board of directors of the Southeast Pennsylvania Chapter of the American Red Cross, the American College, The Foundation at Paoli and The Milton S. Hershey Medical Center. Mr. Rowell also has served on the Board of Trustees of The Pennsylvania State University as a business and industry trustee since 1992. In 1991, he served as the Chairman of the Major Business Division for the United Way of Southeastern Pennsylvania. Mr. Rowell also has served as chairman of The American Red Cross Ad Blood Campaign and has previously served on its Major Contributions Donor Campaign. Mr. Rowell’s extensive experience in the insurance industry and his civic service for various health care organizations qualifies him to be a member of our board of directors.

 

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Paul Soltoff, 58, has served as one of our directors since November 2005. He also has served as Chairman and Chief Executive Officer of Acquirgy, Inc. since 2009. He served as Chairman and Chief Executive Officer of SendTec, Inc. since its inception in February 2000 through 2009. From 1997 until February 2000, Mr. Soltoff served as Chief Executive Officer of Soltoff Direct Corporation, a specialized direct marketing consulting company. From September 2004 until October 2005, Mr. Soltoff served as a director of theglobe.com. Mr. Soltoff’s experience as an officer and director in the Internet marketing sector qualifies him to be a member of our board of directors.

 

Anthony R. Verdi, 63, has served as one of our directors since June 2008, as our Chief Financial Officer and Assistant Secretary since November 2005, as our Chief Operating Officer since April 2008, Acting Chief Executive Officer from June 20, 2008 through May 18, 2011, and Chief Executive Officer since May 18, 2011. From 2001 until November 2005, Mr. Verdi provided consulting services to life, health and property and casualty insurance company agency and venture capital clients. Mr. Verdi served as Chief Operating Officer of Provident American Corporation and Chief Financial Officer of HealthAxis, Inc. From January 1990 until December 1998 Mr. Verdi served as Chief Financial Officer of Provident American Corporation. From July 1986 until January 1990, he was the Vice President and Controller of InterCounty Hospitalization and Health Plans, a nonprofit group medical insurer. From April 1971 until July 1986, he served in various finance and accounting capacities for the Academy Insurance Group, ultimately serving as the Assistant Controller. Mr. Verdi’s extensive experience in the insurance industry and his financial and accounting background qualifies him to be a member of our board of directors.

 

Edmond J. Walters, 51, has served as one of our directors since April 2008. Mr. Walters is Founder and Chief Executive Officer of eMoney Advisor, a wealth planning and management solutions provider for financial advisors that Mr. Walters founded in 2000 and is now a wholly-owned subsidiary of Commerce Bancorp. Prior to forming eMoney Advisor in 2000, Mr. Walters spent more than 20 years in the financial services industry, advising high net worth clients. From 1983 to 1992 he was associated with Kistler, Tiffany & Company in Wayne, PA. In 1992, Walters helped found the Wharton Business Group, a financial advising firm, in Malvern, PA. Mr. Walters’ 20+ years of experience in the financial sector qualify him to be a member of our board of directors.

 

Board Independence

 

The Board has determined that Messrs. Azeez, Caldwell, Harrison, Rich, Rowell, Soltoff and Walters are “independent” directors as defined by Rule 4200(a)(15) of the Nasdaq listing standards and as defined by Rule 10A-3(b)(1)(ii) promulgated by the Commission.

 

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EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table summarizes the compensation paid to, awarded to or earned during the fiscal years ended December 31, 2012 and 2011 by our Principal Executive Officer and each of our two other most highly compensated executive officers whose total salary and bonus exceeded $100,000 for services rendered to us in all capacities during 2012. The executive officers listed in the table below are referred to in this report as our “named executive officers”. There were no non-equity incentive plan compensation or non-qualified deferred compensation earnings for any of the named executive officers for the fiscal years ended December 31, 2012 and December 31, 2011.

 

Name and Principal Position   Fiscal Year   Salary ($)     Bonus ($)
(6)
    Stock
Awards
($)
    Option
Awards ($)
(4)
    All Other
Compensation
($) (5)
    Total ($)  
                                         
Anthony R. Verdi (1)   2012     250,000       -       -       -       16,491       266,491  
Chief Executive Officer,   2011     239,583       -       -       180,000       16,490       436,073  
Chief Financial Officer & Chief                                                    
Operating Officer                                                    
                                                     
Robert J. Oakes (2)   2012     300,000       -       -       -       23,598       323,598  
President & Chief Executive Officer of InsPro Technologies, LLC   2011     300,000       -       -       -       22,132       322,132  
                                                     
James Rourke (3)   2012     172,143       120,220       -       -       17,637       309,999  
Senior Vice President   2011     180,000       136,019       -       -       16,156       332,175  

 

(1)        Mr. Verdi was appointed as our Chief Financial Officer on November 10, 2005, Chief Operating Officer on April 1, 2008, interim Principal Executive Officer on June 20, 2008 and Principal Executive Officer on May 18, 2011.

 

(2)        Mr. Oakes was appointed as President of our subsidiary InsPro Technologies, LLC on October 1, 2007 concurrently with the closing of our acquisition of InsPro.

 

(3)        Mr. Rourke was appointed our Senior Vice President on February 1, 2010. Mr. Rourke resigned effective December 14, 2012.

 

(4)        Represents the aggregate grant date fair value of the stock option as of the date of grant using the Black-Scholes option-pricing model. Fair value is estimated based on an expected life of five years, an assumed dividend yield of 0% and the assumptions below.

 

Name   Fiscal Year   Fair Value
at Date of
Grant ($)
    Number of
Options
Granted (#)
    Option
Exercise
Price ($)
    Closing
Stock Price
on the Date
of Grant ($)
    Date of
Grant
    Expected
Volatility
    Risk Free
Interest
Rate
    Expected
Life in
Years
    Assumed
Dividend
Yield
 
                                                           
Anthony R. Verdi   2012     -       -       -       -       -       -       -       -       -  
    2011     180,000       150,000       4       4       9/14/2011       566 %     0.03 %     5       -  
                                                                             
Robert J. Oakes   2012     -       -       -       -       -       -       -       -       -  
    2011     -       -       -       -       -       -       -       -       -  
                                                                             
James Rourke   2012     -       -       -       -       -       -       -       -       -  
    2011     -       -       -       -       -       -       -       -       -  

  

(5)        All other compensation paid to our named executive officers in the fiscal year ended December 31, 2012 consisted of the following:

 

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Name   Payments for
Auto and
Equipment ($)
(a)
    Company Paid
Health, Life and
Disabilitly
Insurance ($)
(b)
    Company
Matching of
Employee
401(k)
Contributions
(c)
    Total ($)  
Anthony R. Verdi     13,200       956       2,335       16,491  
                                 
Robert J. Oakes     1,200       19,898       2,500       23,598  
                                 
James Rourke     1,148       13,989       2,500       17,637  

 

(a) Payments for auto and equipment represent monthly allowances for auto, cell phones and other equipment.

 

(b) Company-paid health, life and disability insurance represents the cost of company-paid insurance premiums covering the named executive officers and, in the case of health insurance premiums, their dependents. Through November 30, 2012, we paid 100% and thereafter the Company paid 75% of these insurance premiums for the named executive officers. Health insurance premiums vary based on several factors, including the age of the named executive officer and the number of their covered dependents.

 

(c) Company matching of employee 401(k) contributions represents 25% of the employee’s contribution up to 4% of the employee’s compensation, which were fully vested for the above named Executive Officers.

 

(6)        Mr. Rourke received variable compensation based on revenue from new clients.

  

Outstanding Equity Awards at Fiscal Year-End

 

The following table sets forth information for the outstanding equity awards held by our named executive officers for the year ended December 31, 2012. The information below pertains to stock options, which were granted under the 2010 Equity Compensation Plan (which includes prior grants under our 2005 Incentive Stock Plan, 2006 Omnibus Equity Compensation Plan and 2008 Equity Compensation Plan), restricted stock grants, which were granted in accordance with the terms of our 2006 Omnibus Equity Compensation Plan, a warrant to purchase 150,000 shares of the Company’s Series A Convertible Preferred Stock, which was issued to Mr. Oakes on August 18, 2010, and a warrant to purchase 150,000 shares of the Company’s Series A Convertible Preferred Stock, which was issued to Mr. Verdi on September 14, 2011.

 

    Option Awards  
Name   Number of
Securities
Underlying
Unexercised
Options
(#)
    Number of
Securities
Underlying
Unexercised
Options
(#)
    Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
    Option
Exercise
Price
($)
    Option
Expiration
Date
 
    Exercisable     Unexercisable                    
                                         
Anthony R. Verdi     150,000       -       -       4.00       9/14/2016  
      650,000       -       -       0.10       2/4/2014  
      350,000       -       -       1.00       11/09/2015  
                                         
Robert J. Oakes     750,000       750,000       -       0.11       8/18/2015  
      150,000       -       -       4.00       8/18/2015  
      1,000,000               -       0.10       2/4/2014  
                                         
James Rourke     150,000       -       -       0.07       7/9/2015  
      120,000       -       -       0.06       3/25/2015  

 

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Employment, Severance and Other Agreements

 

Anthony R. Verdi

 

Pursuant to an amended and restated employment agreement, Mr. Verdi serves as our Principal Executive Officer, Chief Financial Officer and Chief Operating Officer. His amended and restated employment agreement automatically renewed for a one year term on March 31, 2012, and, if not terminated, will automatically renew for one year periods. His annual base salary was $225,000 per year from March 31, 2008 through May 30, 2011 and was then increased by the board of directors to $250,000 effective June 1, 2011. He is entitled to receive such bonus compensation as a majority of our board of directors may determine from time to time.

 

In the event of Mr. Verdi’s termination without cause or for good reason, he or his estate would receive his then current base annual salary, plus unpaid accrued employee benefits, which is primarily accrued vacation, plus the continuation of his employee benefits for a period of 18 months, less all applicable taxes. In the event of his voluntary termination, death or disability, he or his estate would receive unpaid accrued employee benefits, plus the continuation of his employee benefits for a period of one month, less all applicable taxes.

 

Robert J. Oakes

 

Pursuant to an amended and restated written employment agreement with InsPro Technologies, LLC, Mr. Oakes serves as InsPro Technologies, LLC’s President and Chief Executive Officer. Pursuant to his employment agreement, his annual base salary was $250,000 per year through September 30, 2011. On April 7, 2011, Mr. Oakes received an increase in his base compensation pursuant to his employment agreement to $300,000 retroactive to July 1, 2010, upon InsPro Technologies, LLC achievement of one calendar quarter of positive operating cash flow, which occurred during the calendar quarter ended March 31, 2011. Mr. Oakes was entitled to bonus compensation equal to 100% of the InsPro Technologies, LLC’s net income up to a maximum of $100,000 in 2010 and $100,000 in 2011. Mr. Oakes is entitled to such fringe benefits as are available to other executives of InsPro Technologies Corporation. Mr.

Oakes employment agreement was automatically extended for an additional one year term on March 25, 2011 and will be annually automatically extended thereafter unless either party provides written notification to the other party of non-renewal no later than 60 days prior to the termination date of the agreement.

 

In the event of Mr. Oakes’s termination without cause or for good reason, he or his estate would receive his then current base annual salary, plus unpaid accrued employee benefits, which is primarily accrued vacation, plus the continuation of his employee benefits for a period of 12 months, less all applicable taxes. In the event of his voluntary termination, death or disability, he or his estate would receive unpaid accrued employee benefits, plus the continuation of his employee benefits for a period of one month, less all applicable taxes.

 

Pursuant to Mr. Oakes employment agreement, he is subject to a non competition and non-solicitation provision during the term of his employment agreement and for a period of one year following his termination.

 

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James Rourke

  

Mr. Rourke served as InsPro Technologies, LLC’s Senior Vice President of Sales and Marketing from February 1, 2010 through December 14, 2012. and was employed as an employee-at-will. Mr. Rourke was entitled to variable incentive compensation based on a percentage of new sales and bonus compensation as defined in the InsPro Technologies Management Incentive Compensation Plan. The InsPro Technologies Management Incentive Compensation Plan defines a maximum compensation payment payable to certain executives including Mr. Rourke but excluding Messrs. Oakes and Verdi, or the Bonus Pool, based on the net income of InsPro Technologies, LLC, adjusted up or down based on the revenue of InsPro Technologies, LLC. The Bonus Pool amount (if any) is then divided among the certain executives, which includes Mr. Rourke. Mr. Rourke was entitled to such fringe benefits as are available to other executives of InsPro Technologies Corporation.

 

Compensation of Directors

 

The following table sets forth information concerning the compensation of all individuals who served on our board of directors during the fiscal year ended December 31, 2012. There were no non-equity incentive plan compensation or nonqualified deferred compensation earnings to any of our directors for the year ended December 31, 2012. Directors who are employees receive no additional or special compensation for serving as directors. All compensation for Messrs. Oakes and Verdi are included in the Summary Compensation Table. Messrs. Adamsky, Caldwell and Tecce have assigned all of their board compensation to The Co-Investment Fund II, L.P. Messrs. Adamsky, Caldwell and Tecce are stockholders, directors and officers of Co-Invest II Capital Partners, Inc., which is the general partner of Co-Invest Management II, L.P.

 

Name   Fees Earned or
Paid in Cash
($) (1)
    Stock A
wards
($)
    Option A
wards
($)
    Total
($)
 
                         
Brian Adamsky     3,000                          
                                 
Michael Azeez     4,500       -       -       4,500  
                                 
Donald Caldwell     8,000       -       -       8,000  
                                 
John Harrison     6,000       -       -       6,000  
                                 
Sanford Rich     8,000       -       -       8,000  
                                 
L.J. Rowell     8,000       -       -       8,000  
                                 
Paul Soltoff     6,000       -       -       6,000  
                                 
Frederick Tecce (2)     3,000       -       -       3,000  
                                 
Edmond Walters     4,500       -       -       4,500  
                                 
total     51,000       -       -       48,000  

 

(1)        Represents board and committee meeting fees paid to our directors under our Non-Employee Director Compensation Plan.

 

(2)        Mr. Tecce is a former member of the board who chose not to be a nominee for director at the company annual meeting of stockholders, which was held on August 15, 2012.

  

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The following table sets forth information concerning the aggregate number of options available, which are options issued, outstanding and exercisable, for non-employee directors as of December 31, 2012.

 

    Aggregate Number of
Options Available as of
December 31, 2012
 
       
Brian Adamsky     -  
         
Michael Azeez     -  
         
Donald Caldwell     -  
         
John Harrison     250,000  
         
Sanford Rich     200,000  
         
L.J. Rowell     200,000  
         
Paul Soltoff     150,000  
         
Edmond Walters     -  

 

Director Compensation Plan

 

Directors who are employees receive no additional or special compensation for serving as directors. Non employee directors receive the following compensation under the terms of our Non Employee Director Compensation Plan, which was amended on December 13, 2011, to remove all equity compensation and annual cash retainer components from the plan and to increase the per Board meeting cash fee effective January 2, 2012:

 

The compensation of the Company’s non-employee directors is as follows:

 

· $1,500 meeting fee for each director for each meeting of the Board attended in person or via conference telephone.
· $500 meeting fee for each committee member for each meeting of a committee of the Board, attended in person or via conference telephone.

 

The Company shall reimburse non-employee directors for reasonable out-of-pocket expenses incurred in connection with their attendance at Board and committee meetings, in accordance with the Company’s expense reimbursement policies in effect from time to time. We also reimburse our directors for their reasonable out-of-pocket expenses incurred in attending meetings of our board of directors or its committees.

 

We also purchase directors and officers’ liability insurance for the benefit of our directors and officers as a group. No fees are payable to directors for attendance at specially called meetings of the board.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table shows information known by us with respect to the beneficial ownership of our common stock, Series A Convertible Preferred Stock and Series B Convertible Preferred Stock as of January 31, 2013, for each of the following persons:

 

·each of our directors;

 

·our named executive officers;

 

·all of our directors, director nominees and executive officers as a group; and

 

·each person or group of affiliated persons or entities known by us to beneficially own 5% or more of our common stock, Series A Convertible Preferred Stock or Series B Convertible Preferred Stock.

 

The number of shares beneficially owned, beneficial ownership and percentage ownership are determined in accordance with the rules of the Securities and Exchange Commission. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and includes any shares that an individual or entity has the right to acquire beneficial ownership of within 60 days of January 31, 2013 through the exercise of any warrant, stock option or other right. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares underlying options and warrants that are exercisable within 60 days of January 31, 2013 are considered to be outstanding. To our knowledge, except as indicated in the footnotes to the following table and subject to community property laws where applicable, the persons named in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them. The following table is based on 41,543,655 shares of Common Stock, 1,276,750 shares of Series A Convertible Preferred Stock and 3,297,378 shares of Series B Convertible Preferred Stock outstanding as of January 31, 2013. Unless otherwise indicated, the address of all individuals and entities listed below is InsPro Technologies Corporation, 150 N. Radnor-Chester Road, Suite B-101, Radnor, Pennsylvania 19087.

 

Name of Beneficial Owner

Number of Shares
Beneficially Owned

 Title of Class

Percent of Shares Beneficially

Directors and Executive Officers:

 

     
Michael Azeez 8,499,990 (1)(1a) Common Stock 20.5%
  283,333(1) Series B Preferred Stock 8.6%
       
Brian Adamsky 125,894,915  (2) Common Stock 81.3%
  1,250,000 (3) Series A Preferred Stock 97.9%
  1,130,711 (3) Series B Preferred Stock 34.3%
Donald R. Caldwell 126,008,925  (2) Common Stock 81.4%
  1,250,000 (3) Series A Preferred Stock 97.9%
  1,130,711 (3) Series B Preferred Stock 34.3%

 

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Name of Beneficial Owner

Number of Shares
Beneficially Owned

 Title of Class

Percent of Shares Beneficially

Robert J. Oakes 5,207,232 (4)  Common Stock 12.0%
  151,250 (5) Series A Preferred Stock 10.7%
John Harrison 453,333  (6) Common Stock 1.1%
  1,250  Series A Preferred Stock      *
James Rourke 370,000  (7) Common Stock      *
L.J. Rowell 415,600  (8) Common Stock 1.0%
Paul Soltoff 388,333  (9) Common Stock      *
  1,250  Series A Preferred Stock      *
Sanford Rich 348,333  (10) Common Stock      *
  1,250  Series A Preferred Stock      *
Anthony R. Verdi 4,118,333  (11) Common Stock 9.7%
  151,250(5) Series A Preferred Stock 10.7%
Edmond Walters 171,633  Common Stock      *

All directors and executive officers as a group

(11 persons)

145,981,713 (1)(1a)(2)(4)(5) (6) (7)(8)(9)

(10)(11)(12)

 

Common Stock 81.3%
  1,256,250 (3) Series A Preferred Stock 98.6%
  1,414,044 (3) Series B Preferred Stock 42.9%
       
Holders of More than Five Percent of Our Common Stock, Series A Convertible Preferred Stock and Series B Convertible Preferred Stock:      
       
The Co-Investment Fund II, L. P 125,894,915 (12) Common Stock 81.3%
  1,250,000  Series A Preferred Stock 97.9%
  1,130,711  Series B Preferred Stock 34.3%
       
Independence Blue Cross 50,000,010 (13) Common Stock 54.6%
  1,666,667  Series B Preferred Stock 50.5%
       
Azeez Investors, LLC 8,499,990 (1a) Common Stock 20.5%
  283,333  Series B Preferred Stock 8.6%
       
Scarpa Family Trust, 2005 6,500,010 (14) Common Stock 13.5%
  216,667  Series B Preferred Stock 6.6%
       
Alvin H. Clemens 3,922,457 (15) Common Stock 9.2%

______________

* Less than 1%

 

(1)Represents securities owned by Azeez Investors, LLC. Mr. Azeez is a managing member of Azeez Investors, LLC. Mr. Azeez disclaims beneficial ownership of these securities, except to the extent of his pecuniary interest therein.

 

(1a) Includes 2,833,330 shares underlying warrants, which are exercisable within 60 days of January 31, 2013. Includes 5,666,660 shares underlying 283,333 shares of Series B Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series B Convertible Preferred Stock.

 

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(2)Includes 12,646,874 shares, 65,633,821 shares underlying warrants, 25,000,000 shares underlying 1,250,000 shares of Series A Convertible Preferred Stock, which is convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series A Convertible Preferred Stock, and 22,614,220 shares underlying 1,130,711 shares of Series B Convertible Preferred Stock, which is convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series B Convertible Preferred Stock, which are beneficially owned by Co-Investment Fund II, L. P. (the “Fund”), designee of Cross Atlantic Capital Partners, Inc. Mr. Caldwell is a managing partner of Cross Atlantic Capital Partners, Inc. Mr. Caldwell is also a shareholder, director and officer of Co-Invest II Capital Partners, Inc., which is the general partner of Co-Invest Management II, L.P., which is the general partner of the Fund. Mr. Caldwell disclaims beneficial ownership of these securities, except to the extent of his pecuniary interest therein.

 

(3)Represents securities owned by the Fund, the designee of Cross Atlantic Capital Partners, Inc., of which Brian Adamsky is secretary, treasurer and chief financial officer of Cross Atlantic Capital Partners, Inc. and of which Donald R. Caldwell is managing partner. Mr. Caldwell is also a shareholder, director and officer of Co-Invest II Capital Partners, Inc., which is the general partner of Co-Invest Management II, L.P., which is the general partner of the Fund. Mr. Tecce and Mr. Caldwell disclaim beneficial ownership of these securities, except to the extent of their pecuniary interest therein.

 

(4) Includes 1,750,000 shares underlying options and 33,333 shares underlying warrants, which are exercisable within 60 days of January 31, 2013. Includes 3,000,000 shares underlying a warrant to purchase 150,000 shares of Series A Convertible Preferred Stock, which is exercisable within 60 days of January 31, 2013, which is also convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series A Convertible Preferred Stock. Includes 25,000 shares underlying 1,250 shares of Series A Convertible Preferred Stock, which is convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series A Convertible Preferred Stock. Excludes 750,000 shares underlying options, which are not exercisable within 60 days of January 31, 2013.

 

(5) Includes 150,000 shares underlying warrants, which are exercisable within 60 days of January 31, 2013.

 

(6) Includes 250,000 shares underlying options and 58,333 shares underlying warrants, all of which are exercisable within 60 days of January 31, 2013. Includes 25,000 shares underlying 1,250 shares of Series A Convertible Preferred Stock, which is convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series A Convertible Preferred Stock.

 

(7) Includes 370,000 shares underlying options, which are exercisable within 60 days of January 31, 2013.

 

(8) Includes 200,000 shares underlying options that are exercisable within 60 days of January 31, 2013.

 

(9) Includes 150,000 shares underlying options and 33,333 shares underlying warrants, all of which are exercisable within 60 days of January 31, 2013. Includes 25,000 shares underlying 1,250 shares of Series A Convertible Preferred Stock, which is convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series A Convertible Preferred Stock.

 

(10) Includes 200,000 shares underlying options and 33,333 shares underlying warrants that are exercisable within 60 days of January 31, 2013. Includes 25,000 shares underlying 1,250 shares of Series A Convertible Preferred Stock, which is convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series A Convertible Preferred Stock.

 

(11) Includes 1,000,000 shares underlying options and 33,333 shares underlying warrants, all of which are exercisable within 60 days of January 31, 2013. Includes 25,000 shares underlying 1,250 shares of Series A Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series A Convertible Preferred Stock. Includes 3,000,000 shares underlying a warrant to purchase 150,000 shares of Series A Convertible Preferred Stock, which is exercisable within 60 days of January 31, 2013, which is also convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series A Convertible Preferred Stock.

 

(12) Includes 62,300,491 shares underlying warrants that are exercisable within 60 days of January 31, 2013. Includes 25,000,000 shares underlying 1,250,000 shares of Series A Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series A Convertible Preferred Stock. Includes 22,614,220 shares underlying 1,130,711 shares of Series B Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series B Convertible Preferred Stock.

 

(13) Includes 16,666,670 shares underlying warrants, which are exercisable within 60 days of January 31, 2013. Includes 33,333,340 shares underlying 1,666,667 shares of Series B Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series B Convertible Preferred Stock.

 

(14) Includes 1,333,340 shares underlying warrants, which are exercisable within 60 days of January 31, 2013. Includes 4,330,340 shares underlying 216,667 shares of Series B Convertible Preferred Stock, which are convertible, at the sole option of the holder, into 20 shares of our common stock per share of Series B Convertible Preferred Stock.

 

(15) Includes 1,000,000 shares held by The Clemens-Beaver Creek Limited Partnership, of which Alvin H. Clemens is the general partner. Also includes 100,000 shares held by Mr. Clemens’s minor children. Also includes 993,377 shares underlying warrants, all of which are exercisable within 60 days of January 31, 2013.

 

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TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS

 

From the beginning of our last fiscal year until the date of this proxy statement, there has been no transaction, nor is there any transaction currently proposed, to which we were, are, or would be a participant, in which the amount involved exceeded or would exceed the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years and in which any of our directors or executive officers, any holder of more than 5% of our common stock or any member of the immediate family of any of these persons or entities had or will have a direct or indirect material interest, other than the transactions described below.

 

We believe that we have executed all of the transactions described below on terms no less favorable to us than we could have obtained from unaffiliated third parties. It is our intention to ensure that all future transactions between us and our officers, directors and principal stockholders and their affiliates are approved by a majority of our board of directors, including a majority of the independent and disinterested members of our board of directors, and are on terms no less favorable to us than those that we could obtain from unaffiliated third parties.

 

·On November 20, 2012, we completed a private placement with certain accredited investors who hold more than 5% of our common stock, including The Co-Investment Fund II, L.P., The Scarpa Family Trust, 2005 and Azeez Investors, LLC for an aggregate of 499,999 shares of our Series B Convertible Preferred Stock and warrants to purchase 4,999,990 shares of our common stock. We agreed to sell to the investors 499,999 investment units at a per unit price of $3.00, for an approximate aggregate total investment of $1,500,000, and each unit consisted of one share of Series B Convertible Preferred Stock and a warrant to purchase 10 shares of our common stock at an initial exercise price of $0.15 per share, subject to adjustment. The units issued in the private placement are substantially equivalent to the Units being offered pursuant to this rights offering.

 

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PLAN OF DISTRIBUTION

 

On or about February __, 2013, we will distribute the rights, rights certificates and copies of this prospectus to individuals who owned shares of capital stock on January 31, 2013. If you wish to exercise your rights and purchase Units, you should complete the rights certificate and return it with payment for the shares, to us at the following address:

 

InsPro Technologies Corporation

150 N. Radnor-Chester Road

Suite B-101

Radnor, Pennsylvania 19087

Attn: Francis L. Gillan III

 

See further the section of this prospectus entitled “The Rights Offering.” If you have any questions, you should contact Francis L. Gillan III, at (484) 654-2200 or by electronic mail at rightsoffering@inspro.com.

 

We do not know of any existing agreements between any stockholder, broker, dealer, underwriter or agent relating to the sale or distribution of the Series B Convertible Preferred Stock or warrants underlying the rights.

 

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

 

The following is a discussion of the material U. S. federal income tax consequences to U.S. holders, as defined below, of the receipt, ownership and exercise of the subscription rights distributed in the subscription rights offering, the ownership and disposition of Series B Convertible Preferred Stock and warrants to purchase our common stock received upon exercise of the subscription rights, and the ownership and disposition of our common stock received upon the exercise of warrants to purchase our common stock or the conversion of Series B Convertible Preferred Stock. The legal conclusions with respect to matters of U.S. federal income tax law identified in this section, “Material U.S. Federal Income Tax Considerations,” are the opinions of our counsel, Morgan, Lewis & Bockius LLP. In this section, all references to “we” and “our” refer to the Company and not to Morgan, Lewis & Bockius LLP.

 

This discussion is based on the Code, Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as in effect as of the date hereof and all of which are subject to change, possibly with retroactive effect. This discussion is not binding on the Internal Revenue Service or the IRS, or the courts. Accordingly, no assurance can be given that the tax consequences described herein will not be challenged by the IRS or that such a challenge would not be sustained by a court. No ruling has been sought from the IRS as to the U.S. federal income tax consequences set forth in this discussion.

 

This discussion does not address all aspects of U.S. federal income taxation that may be applicable to holders in light of their particular circumstances or to holders subject to special treatment under the U.S. federal income tax laws, including, but not limited to, financial institutions, brokers and dealers in securities or currencies, insurance companies, regulated investment companies, real estate investment trusts, tax-exempt organizations, persons who hold their shares as part of a straddle, hedge, conversion or other risk-reduction transaction, persons liable for the alternative minimum tax, persons who have received their common stock pursuant to which the subscription rights in this rights offering have been granted through the exercise of employee stock options or otherwise as compensation for services, partnerships or other entities treated as partnerships for U.S. federal income tax purposes, U.S. expatriates, and persons whose functional currency is not the U.S. dollar and foreign taxpayers. This discussion does not describe any tax consequences arising out of the tax laws of any state, local or foreign jurisdiction, or any U.S. federal tax considerations other than income taxation (such as alternative minimum, estate or gift). This discussion is limited to U.S. holders which hold our shares as capital assets and does not address U.S. holders which beneficially hold our shares through either a “foreign financial institution” (as such term is defined in Section 1471(d)(4) of the Code) or certain other non-U.S. entities specified in Section 1472 of the Code. For purposes of this discussion, a “U.S. holder” is a holder that is, for U.S. federal income tax purposes:

 

·a citizen or resident of the United States;

 

·a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any political subdivision thereof;

 

·an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

 

· a trust (1) if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more “United States persons” (within the meaning of the Code) have the authority to control all substantial decisions of the trust or (2) that has a valid election in effect under applicable Treasury regulations to be treated as a United States person.

 

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If a partnership (including any entity treated as a partnership for U.S. federal income tax purposes) receives the subscription rights or holds shares of Series B Convertible Preferred Stock or warrants received upon exercise of the subscription rights or the oversubscription privilege, the tax treatment of a partner in a partnership generally will depend upon the status of the partner and the activities of the partnership. Such a partner or partnership should consult its own tax advisor as to the U.S. federal income tax consequences of the receipt and ownership of the subscription rights or the ownership of shares of Series B Convertible Preferred Stock and warrants received upon exercise of the subscription rights or, if applicable, upon exercise of the oversubscription privilege.

 

YOU SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO YOU OF YOUR RECEIPT, OWNERSHIP, AND EXERCISE OF THE SUBSCRIPTION RIGHTS, YOUR OWNERSHIP AND DISPOSITION OF SERIES B CONVERTIBLE PREFERRED STOCK AND WARRANTS TO PURCHASE OUR COMMON STOCK, YOUR OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK RECEIVED UPON THE EXERCISE OF WARRANTS TO PURCHASE OUR COMMON STOCK OR THE CONVERSION OF SERIES B CONVERTIBLE PREFERRED STOCK, INCLUDING THE APPLICABILITY OF ANY FEDERAL ESTATE OR GIFT TAX LAWS OR ANY STATE, LOCAL OR FOREIGN TAX LAWS.

 

Receipt of the Subscription Rights

 

Each subscription right entitles an eligible stockholder the right to purchase for $240.00 one Unit, consisting of 80 shares of our Series B Convertible Preferred Stock and a five-year warrant to purchase 800 additional shares of our common stock at an exercise price of $0.15 per share. Generally, the distribution of stock by a corporation to its stockholders with respect to their stock is not taxable to such stockholders pursuant to Section 305(a) of the Code. For such purpose, a distribution of rights to acquire stock of the distributing corporation constitutes a distribution of stock. However, if a distribution of stock or rights to acquire stock is within one of several exceptions to the general rule of Section 305(a) set forth in Section 305(b) of the Code, the distribution may be taxable to the stockholders of the distributing corporation as described below.

 

Many of the exceptions to the general rule of Section 305(a) set forth in Section 305(b) involve preferred stock, such as the distribution of convertible preferred stock in certain circumstances pursuant to Section 305(b)(5). Treasury regulations define preferred stock not for its preferred rights and privileges, but its inability to participate in corporate growth to any significant extent. It is the opinion of Morgan, Lewis & Bockius LLP that the Series B Convertible Preferred Stock should not be preferred stock for tax purposes based on certain features of the preferred stock, including its right to participate in dividends on an as converted basis and the right to a distribution in a liquidation or other capital event on an as converted basis if such distribution would be greater than the liquidation preference right associated with the Series B Convertible Preferred Stock, as well as based on certain representations relied upon in rendering the opinion, and, accordingly, that none of the Section 305(b) exceptions that apply to preferred stock for tax purposes should apply to the rights offering and that the rights offering should be evaluated for Section 305 purposes as if we have only one outstanding class of stock. This opinion is not binding on the IRS or any court and there can be no assurance that the IRS or a court will agree with this opinion. The remainder of this discussion assumes that the Series B Convertible Preferred Stock is not treated as preferred stock for tax purposes.

 

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Section 305(b)(2) is an exception to the general rule of Section 305(a) that applies to a “disproportionate distribution.” Pursuant to Section 305(b)(2), a distribution (or a series of distributions of which such distribution is one) of stock rights constitutes a “disproportionate distribution,” and is therefore taxable, if the distribution results in (a) the receipt of property by some stockholders, and (b) an increase in the proportionate interest of other stockholders in the assets or earnings and profits of the distributing corporation. For this purpose, the term “property” means money, securities and any other property, except that such term does not include stock in the corporation making the distribution or rights to acquire such stock. A “series of distributions” encompasses all distributions of stock made or deemed made by a corporation which have the result of receipt of cash or property by some stockholders and an increase in the proportionate interests of other stockholders. It is not necessary for a distribution of stock to be considered as one of a series of distributions that such distribution be pursuant to a plan to distribute cash and property to some stockholders and to increase the proportionate interests of the other stockholders, rather it is sufficient if there is a distribution (or a deemed distribution) having such effect. In addition, there is no requirement that both elements of Section 305(b)(2) of the Code occur in the form of a distribution or series of distributions as long as the result is that some stockholders receive cash and property and other stockholders’ proportionate interests increase. Under the applicable Treasury regulations, where the receipt of cash or property occurs more than 36 months following a distribution or series of distributions of stock, or where a distribution is made more than 36 months following the receipt of cash or property, such distribution or distributions will be presumed not to result in the receipt of cash or property by some stockholders and an increase in the proportionate interest of other stockholders, unless the receipt of cash or property by some stockholders and the distribution or series of distributions are made pursuant to a plan.

 

It is the opinion of Morgan, Lewis & Bockius LLP that the distribution of rights in the rights offering should not constitute an increase in the proportionate interest of some stockholders in the assets or earnings and profits of the Company for the purpose of Section 305(b)(2) based on the fact that all of our stockholders will receive rights in the rights offering based upon their respective ownership our common stock, as well as based on certain representations relied upon in rendering the opinion, and, accordingly, that the rights offering should not constitute part of a “disproportionate distribution,” pursuant to Section 305(b)(2) of the Code. This opinion is not binding on the IRS or any court and there can be no assurance that the IRS or a court will agree with this opinion. The remainder of this discussion assumes that Section 305(b)(2) does not apply to the subscription rights offering.

 

Subject to the foregoing, it is the opinion of Morgan, Lewis & Bockius LLP that you should not recognize taxable income for U.S. federal income tax purposes in connection with the receipt of the subscription right in the rights offering and the remainder of this discussion so assumes. However, in the event the IRS successfully asserts or a court determines that your receipt of subscription rights is currently taxable pursuant to Section 305(b)(2) of the Code, the discussion under the heading “Alternative Treatment of Subscription Rights” describes the tax consequences that will result from such a determination.

 

Tax Basis and Holding Period of the Subscription Rights

 

Your tax basis of the subscription rights for U.S. federal income tax purposes will depend on the fair market value of the subscription rights you receive and the fair market value of your existing shares of stock on the date you receive the subscription rights. The tax basis of the subscription rights received by you in the subscription rights offering will be zero unless either (1) the fair market value of the subscription rights on the date such subscription rights are distributed is equal to at least 15% of the fair market value on such date of the shares with respect to which they are received or (2) you elect to allocate part of the tax basis of such shares to the subscription rights. If either (1) or (2) is true, then, if you exercise the subscription rights, your tax basis in your shares will be allocated between the subscription rights and the shares with respect to which the subscription rights were received in proportion to their respective fair market values on the date the subscription rights are distributed.

 

In addition, any tax basis allocated to the subscription rights must be apportioned between the right to receive shares of the Series B Convertible Preferred Stock, or Preferred Stock Rights, and the right to receive warrants, or Warrant Rights, in proportion to their respective fair market values on the date you receive the subscription rights.

 

69
 

 

We have not obtained an independent appraisal of the valuation of the subscription rights and, therefore, you should consult with your tax advisor to determine the proper allocation of basis between the subscription rights and the shares with respect to which the subscription rights are received.

 

Your holding period for the subscription rights will include your holding period for the shares with respect to which the subscription rights were received.

 

Expiration of the Subscription Rights

 

If you allow subscription rights received in the subscription rights offering to expire, you will not recognize any gain or loss. If you have tax basis in the subscription rights, the tax basis of the shares owned by you with respect to which such subscription rights were distributed will be restored to the tax basis of such shares immediately prior to the receipt of the subscription rights in the subscription rights offering.

 

Alternative Treatment of Subscription Rights

 

Receipt . If the IRS were to successfully assert that the distribution of the subscription rights in the rights offering resulted in a “disproportionate distribution” or was otherwise taxable pursuant to Section 305(b)(2), each holder would be considered to have received a distribution with respect to such holder’s stock in an amount equal to the fair market value of the subscription rights received by such holder on the date of the distribution. This distribution generally would be taxed as dividend income to the extent of your ratable share of our current and accumulated earnings and profits. The amount of any distribution in excess of our earnings and profits will be applied to reduce, but not below zero, your tax basis in your stock, and any excess generally will be taxable to you as capital gain (long-term, if your holding period with respect to your stock is more than one year as of the date of distribution, and otherwise short-term). Your tax basis in the subscription rights received pursuant to the rights offering would be equal to their fair market value on the date of distribution and the holding period for the rights would begin upon receipt.

 

Expiration. Assuming the receipt of subscription rights in the rights offering is a taxable event, if your subscription rights lapse without being exercised, you will recognize a capital loss equal to your tax basis in such expired subscription rights. The deductibility of capital losses is subject to limitations.

 

Exercise of the Subscription Rights; Tax Basis and Holding Period of the Shares

 

Generally, you will not recognize any gain or loss upon the exercise of the subscription rights received in the subscription rights offering by purchasing Unit(s) for $240.00 per Unit. The tax basis of the Series B Convertible Preferred Stock acquired will be the sum of (i) that portion of the subscription price allocable to the Series B Convertible Preferred Stock, plus (ii) the portion, if any, of the tax basis of the subscription rights allocable to the Preferred Stock Rights. The tax basis of the warrants acquired will be the sum of (i) that portion of the subscription price allocable to the warrants, plus (ii) the portion, if any, of the tax basis of the subscription rights allocable to the Warrant Rights.

 

The holding period for the Series B Convertible Preferred Stock and warrants acquired through exercise of the subscription rights will begin on the date the subscription rights are exercised.

 

Taxation of Warrants

 

You generally will not recognize gain or loss upon exercise of a warrant to acquire our common stock. Your tax basis of the common stock received upon exercise of a warrant for cash generally will equal the tax basis of the warrant, increased by the amount paid upon exercise of the warrant.

 

Your holding period of common stock received upon exercise of a warrant will begin on the date the warrant is exercised.

 

70
 

 

In the event a warrant lapses unexercised, you will recognize a capital loss in an amount equal to the tax basis of the warrant. Such capital loss will be long-term if your holding period of such warrant was more than one year at the time of lapse. The deductibility of capital losses is subject to limitations.

 

Taxation of Series B Convertible Preferred Stock

 

Distributions. Generally, any distribution with respect to the Series B Convertible Preferred Stock that is paid out of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes, will constitute a dividend and will be includible in gross income by you when paid. Distributions with respect to the Series B Convertible Preferred Stock in excess of our current or accumulated earnings and profits would be treated first as a non-taxable return of capital to the extent of your basis in the Series B Convertible Preferred Stock (thus reducing such tax basis dollar-for-dollar), and thereafter as capital gain, which will be long-term capital gain if the your holding period for such stock at the time of distribution exceeds one year.

 

Sale, Exchange or Other Disposition. Upon a sale, exchange or other disposition of the Series B Convertible Preferred Stock (not including a conversion of the Series B Convertible Preferred Stock into our common stock), you generally will recognize capital gain or loss equal to the difference between the amount realized (not including any amount attributable to declared and unpaid dividends, which generally will be taxable as described above, under “— Taxation of Series B Convertible Preferred Stock — Distributions,” to holders that have not previously included such dividends in income) and your tax basis in the Series B Convertible Preferred Stock so disposed. Such capital gain or loss generally will be long-term capital gain or loss if your holding period for such stock at the time of disposition exceeds one year. The deductibility of capital losses is subject to limitations.

  

Conversion of the Series B Convertible Preferred Stock into Our Common Stock. You generally will not recognize any gain or loss in respect of the receipt of our common stock upon the conversion of the Series B Convertible Preferred Stock. The tax basis of our common stock that you receive on conversion will equal the tax basis of the Series B Convertible Preferred Stock converted (reduced by the portion of tax basis allocated to any fractional common share exchanged for cash, as described below), and the holding period of such common stock received on conversion will generally include the period during which you held the Series B Convertible Preferred Stock prior to conversion.

 

Cash received in lieu of a fractional common share will generally be treated as a payment in a taxable exchange for such fractional common share, and capital gain or loss will be recognized on the receipt of cash in an amount equal to the difference between the amount of cash received and the amount of tax basis allocable to the fractional common share. Any cash received attributable to any declared and unpaid dividends on the Series B Convertible Preferred Stock will be treated as described above under “— Taxation of Series B Convertible Preferred Stock — Distributions.”

 

Taxation of Common Stock

 

Distributions. Distributions received with respect to our common stock will be treated as described above under “— Taxation of Series B Convertible Preferred Stock — Distributions.”

 

71
 

 

Sale, Exchange or Other Disposition. Upon a sale, exchange or other disposition of our common stock, you generally will recognize capital gain or loss in the manner described above under “— Taxation of Series B Convertible Preferred Stock — Sale, Exchange or Other Disposition.”

 

Additional Medicare Tax on Net Investment Income

 

For tax years beginning after December 31, 2012, an additional 3.8% tax will be imposed on the “net investment income” of certain U.S. citizens and resident aliens, and on the undistributed “net investment income” of certain estates and trusts. Among other items, “net investment income” generally includes gross income from dividends and net gain from the disposition of property, such as our Series A Convertible Preferred Stock and common stock, less certain deductions. You should consult your tax advisor with respect to this additional tax.

 

Information Reporting and Backup Withholding

 

In general, payments made to you of proceeds from the sale or other disposition of warrants, Series B Convertible Preferred Stock, or our common stock may be subject to information reporting to the IRS and possible U.S. federal backup withholding at a rate of 28%. Backup withholding will not apply if you furnish a correct taxpayer identification number (certified on the IRS Form W-9 or valid substitute Form W-9) or otherwise establish that you are exempt from backup withholding. Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability. You may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing any required information.

 

You should consult your own tax advisor regarding your qualification for an exemption from backup withholding and the procedures for obtaining such an exemption, if applicable.

 

72
 

 

EXPERTS

 

Our consolidated financial statements as of and for the years ended December 31, 2011 and 2010 included in this prospectus and in the registration statement of which this prospectus is a part have been audited by Sherb & Co., LLP, independent registered public accountants, to the extent and for the periods set forth in their report and are incorporated in this prospectus in reliance upon the report given upon the authority of Sherb & Co., LLP as experts in auditing and accounting.

 

TRANSFER AGENT AND REGISTRAR

 

The transfer agent and registrar for our common stock is Pacific Stock Transfer Company, whose address is 4045 South Spencer Street, Suite 403, Las Vegas, NV 89119, and whose phone number is (702) 361-3033.

 

LEGAL MATTERS

 

The validity of the securities being offered by this prospectus have been passed upon for us by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the Commission a registration statement on Form S-1, including exhibits, schedules and amendments filed with this registration statement, under the Securities Act with respect to offers and resales of shares of our common stock by the selling stockholders identified in this prospectus. This prospectus, which constitutes part of the registration statement, does not include all of the information contained in the registration statement and its exhibits and schedules. You should refer to the registration statement and its exhibits and schedules for additional information. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete and you should refer to the exhibits filed with the registration statement for copies of the actual contract, agreement or other document. Statements contained in this prospectus as to the contents of any contract or other document referred to in this prospectus are not necessarily complete and, where that contract is an exhibit to the registration statement, each statement is qualified in all respects by reference to the exhibit to which the reference relates.

 

You can read the registration statement and our other filings with the Commission, over the Internet at the Commission’s website at http://www.sec.gov. You also may read and copy any document that we file with the Commission at its public reference room at Headquarters Office, 100 F Street, N.E., Washington, D.C. 20549.

 

DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

 

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

73
 

 

FINANCIAL STATEMENTS

 

TABLE OF CONTENTS

 

Page Number

 

Management’s Report on Internal Control Over Financial Reporting F-2
Report of Independent Registered Public Accounting Firm F-3
Consolidated Balance Sheets at December 31, 2011 and December 31, 2010 F-4
Consolidated Statements of Operations for the Years Ended December 31, 2011 and December 31, 2010 F-5
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2011 and December 31, 2010 F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011 and December 31, 2010 F-7
Notes to Consolidated Financial Statements F-8 – F-42
Consolidated Balance Sheets as of September 30, 2012 (UNAUDITED) and December 31, 2011 F-43
Consolidated Statements of Operations (UNAUDITED) for the three and nine months ended September 30, 2012 and 2011 F-44
Consolidated Statements of Cash Flows (UNAUDITED) for the nine months ended September 30, 2012 and 2011 F-45
Notes to Consolidated UNAUDITED Financial Statements F-46 – F-60

 

F-1
 

 

Management Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Under the supervision of our Chief Executive Officer and Chief Financial Officer, our management conducted an assessment of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on the results of such assessment, management has concluded that the our disclosure controls and procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and is accumulated and communicated to management, including our principal executive and principal financial officers, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

F-2
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors
InsPro Technologies Corporation
Radnor, Pennsylvania

 

We have audited the accompanying consolidated balance sheets of InsPro Technologies Corporation and Subsidiaries as of December 31, 2011 and December 31, 2010, the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended December 31, 2011 and December 31, 2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of InsPro Technologies Corporation and Subsidiaries as of December 31, 2011 and December 31, 2010, and the results of their operations and their cash flows for the years ended December 31, 2011 and December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

 

  /s/ Sherb & Co., LLP
  Certified Public Accountants
   

Boca Raton, Florida
March 16, 2012

 

F-3
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 

   December 31, 2011   December 31, 2010 
ASSETS          
           
CURRENT ASSETS:          
Cash  $3,702,053   $4,429,026 
Accounts receivable, net   1,506,234    709,503 
Prepaid expenses   116,649    158,245 
Other current assets   2,905    8,211 
Assets of discontinued operations   104,002    63,301 
           
Total current assets   5,431,843    5,368,286 
           
Restricted cash   -    1,152,573 
Property and equipment, net   496,692    613,618 
Intangibles, net   260,050    606,785 
Other assets   80,608    92,558 
           
Total assets  $6,269,193   $7,833,820 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
           
CURRENT LIABILITIES:          
Note payable  $8,586   $17,311 
Accounts payable   644,563    918,972 
Accrued expenses   521,383    346,808 
Current portion of capital lease obligations   109,872    158,138 
Due to related parties   -    8,370 
Deferred revenue   622,500    377,500 
           
Total current liabilities   1,906,904    1,827,099 
           
LONG TERM LIABILITIES:          
Warrant liability   1,674,226    4,030,340 
Capital lease obligations   113,943    165,612 
           
Total long term liabilities   1,788,169    4,195,952 
           
SHAREHOLDERS' EQUITY:          
Preferred stock ($.001 par value; 20,000,000 shares authorized)          
Series A convertible preferred stock; 3,437,500 shares authorized, 1,276,750 shares issued and outstanding (liquidation value $12,767,500)   2,864,104    2,864,104 
Series B convertible preferred stock; 5,000,000 shares authorized, 2,797,379 shares issued and outstanding (liquidation value $8,392,137)   5,427,604    5,427,604 
Common stock ($.001 par value; 300,000,000 shares authorized, 41,543,655 shares issued and outstanding)   41,543    41,543 
Additional paid-in capital   37,038,318    36,764,016 
Accumulated deficit   (42,797,449)   (43,286,498)
           
Total shareholders' equity   2,574,120    1,810,769 
           
Total liabilities and shareholders' equity  $6,269,193   $7,833,820 

 

See accompanying notes to audited consolidated financial statements.

 

F-4
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

 

   For the Year Ended December 31, 
   2011   2010 
         
Revenues  $9,057,816   $6,077,358 
           
Cost of revenues   6,948,872    6,563,842 
           
Gross profit (loss)   2,108,944    (486,484)
           
Selling, general and administrative expenses:          
Salaries, employee benefits and related taxes   2,615,602    2,765,161 
Advertising and other marketing   125,130    160,903 
Depreciation and amortization   687,042    876,644 
Rent, utilities, telephone and communications   368,336    403,955 
Professional fees   439,006    653,123 
Other general and administrative   544,366    528,022 
           
    4,779,482    5,387,808 
           
Loss from operations   (2,670,538)   (5,874,292)
           
Gain from discontinued operations   803,989    2,463,675 
           
Other income (expense):          
Gain on the change of the fair value of warrant liability   2,356,114    1,136,588 
Interest income   23,044    21,000 
Interest expense   (23,560)   (247,417)
           
Total other income (expense)   2,355,598    910,171 
           
Net income (loss)  $489,049   $(2,500,446)
           
Net income (loss) per common share - basic and fully diluted          
Income (loss) from operations  $(0.01)  $(0.12)
Gain from discontinued operations   0.02    0.06 
Net income (loss) per common share  $0.01   $(0.06)
           
Weighted average common shares outstanding - basic and fully diluted   41,543,655    41,543,655 

 

See accompanying notes to audited consolidated financial statements.

 

F-5
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARs ENDED DECEMBER 31, 2011 and 2010

 

   Series A Preferred Stock,   Series B Preferred Stock,   Common Stock, $.001           Total 
   $.001 Par Value   $.001 Par Value   Par Value   Additional       Shareholders' 
   Number of
Shares
   Amount   Number of
Shares
   Amount   Number of
Shares
   Amount   Paid-in
Capital
   Accumulated
Deficit
   Equity
(Deficit)
 
                                     
Balance - December 31, 2009   1,000,000   $1,983,984              41,543,655   $41,543   $36,380,493   $(40,786,052)  $(2,380,032)
                                              
Preferred stock and warrants issued in rights offering   276,750    880,120                                  880,120 
                                              
Preferred stock and warrants issued in private placement             2,000,001    3,609,525                        3,609,525 
                                              
Warrant issued as compensation                                 332,994         332,994 
                                              
Preferred stock and warrants issued in connection with conversion of secured note from related party             797,378    1,818,079                        1,818,079 
                                              
Amortization of deferred compensation                                 50,529         50,529 
                                              
Net loss for the period                                      (2,500,446)   (2,500,446)
                                              
Balance - December 31, 2010   1,276,750    2,864,104    2,797,379    5,427,604    41,543,655    41,543    36,764,016    (43,286,498)   1,810,769 
                                              
Amortization of deferred compensation                                 94,302         94,302 
                                              
Warrant issued as compensation                                 180,000         180,000 
                                              
Net income for the period                                      489,049    489,049 
                                              
Balance - December 31, 2011   1,276,750   $2,864,104    2,797,379   $5,427,604    41,543,655   $41,543   $37,038,318   $(42,797,449)  $2,574,120 

 

See accompanying notes to audited consolidated financial statements.

 

F-6
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the Year Ended December 31, 
   2011   2010 
Cash Flows From Operating Activities:          
Net income (loss)  $489,049   $(2,500,446)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   687,042    876,644 
Stock-based compensation and consulting   274,302    383,523 
(Gain) on change of fair value of warrant liability   (2,356,114)   (1,136,588)
Loss on the disposal of equipment of discontinued operations   -    6,530 
Changes in assets and liabilities:          
Accounts receivable   (796,731)   305,566 
Prepaid expenses   41,596    (74,411)
Other current assets   5,306    (1,802)
Other assets   11,950    28,412 
Accounts payable   (274,409)   (330,911)
Accrued interest on related secured note from related party   -    199,876 
Accrued expenses   174,576    (469,925)
Due to related parties   -    8,370 
Deferred revenue   245,000    145,000 
Assets of discontinued operations   (40,701)   (2,214,461)
Net cash used in operating activities   (1,539,134)   (4,774,623)
Cash Flows From Investing Activities:          
Purchase of property and equipment   (223,382)   (239,607)
Net cash used in investing activities   (223,382)   (239,607)
Cash Flows From Financing Activities:          
Gross proceeds from note payable   37,540    119,875 
Payments on note payable   (46,265)   (110,168)
Gross proceeds from secured note from related party   -    1,000,000 
Payments on secured note from related party   -    (2)
Fees paid in connection with secured note from related party   (8,370)   (18,389)
Gross proceeds from capital leases   58,791    137,310 
Payments on capital leases   (158,726)   (151,099)
Restricted cash in connection with letters of credit   1,152,573    1,471 
Gross proceeds from sales of preferred stock and warrants   -    7,107,001 
Fees paid in connection with offering   -    (46,396)
           
Net cash provided by financing activities   1,035,543    8,039,603 
           
Net increase (decrease) in cash   (726,973)   3,025,373 
           
Cash - beginning of the period   4,429,026    1,403,653 
           
Cash - end of the period  $3,702,053   $4,429,026 
Supplemental Disclosures of Cash Flow Information Cash payments for interest  $23,560   $47,541 
Non cash financing activities:          
Accrued Interest on related party note  $-   $139,398 
Repayment of secured note upon conversion into equity  $-   $(2,392,134)
Preferred stock and warrants issued upon the conversion of secured note  $-   $2,367,874 

 

See accompanying notes to audited consolidated financial statements. 

 

F-7
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization

 

InsPro Technologies Corporation (the “Company”, “ITCC”, “we”, “us” or “our”) was incorporated under the laws of the state of Nevada on October 21, 2004 as Darwin Resources Corp., (“Darwin-NV”). On November 22, 2005, Darwin-NV merged with and into its newly-formed wholly-owned subsidiary, Darwin Resources Corp., a Delaware corporation (“Darwin-DE”), solely for the purpose of changing the Company’s state of incorporation from Nevada to Delaware. On November 23, 2005, HBDC II, Inc., a newly-formed wholly-owned subsidiary of Darwin-DE, was merged with and into Health Benefits Direct Corporation, a privately-held Delaware corporation (“HBDC”), and the name of the resulting entity was changed from Health Benefits Direct Corporation to HBDC II, Inc. Following the merger, Darwin-DE changed its name to Health Benefits Direct Corporation. On November 29, 2010, Health Benefits Direct Corporation changed its name to InsPro Technologies Corporation.

 

HBDC was formed in January 2004 for the purpose of acquiring, owning and operating businesses engaged in direct marketing and distribution of health and life insurance products, primarily utilizing the Internet. On September 9, 2005, HBDC acquired three affiliated Internet health insurance marketing companies, namely Platinum Partners, LLC, a Florida limited liability company, Health Benefits Direct II, LLC, a Florida limited liability company, and Health Benefits Direct III, LLC, a Florida limited liability company. HBDC issued 7,500,000 shares of its common stock and a warrant to purchase 50,000 shares of its common stock, in the aggregate, in exchange for 100% of the limited liability company interests of these companies.

 

The acquisition of HBDC by the Company was accounted for as a reverse merger because, on a post-merger basis, the former HBDC shareholders held a majority of the outstanding common stock of the Company on a voting and fully diluted basis. As a result, HBDC was deemed to be the acquirer for accounting purposes. Accordingly, the consolidated financial statements presented for the period ended December 31, 2005, are those of HBDC for all periods prior to the acquisition, and the financial statements of the consolidated companies from the acquisition date forward. The historical shareholders' deficit of HBDC prior to the acquisition has been retroactively restated (a recapitalization) for the equivalent number of shares received in the acquisition after giving effect to any differences in the par value of the Company and HBDC's common stock, with an offset to additional paid-in capital. The restated consolidated retained earnings of the accounting acquirer, HBDC, are carried forward after the acquisition.

 

During 2005 through October 1, 2007 our operations were primarily that of our former Telesales and Insurint businesses. We effectively sold our former Telesales business in 2009 and our former Insurint business in 2010. Our former Telesales and Insurint businesses are now classified as part of our discontinued operations. Today w e are a technology company that provides software applications for use by insurance administrators in the insurance industry. Our business focuses primarily on our InsPro software application.

 

We acquired Atiam Technologies, L.P. on October 1, 2007 through our Atiam Technologies, LLC subsidiary. During the second quarter of 2009, Atiam Technologies, LLC was renamed InsPro Technologies, LLC (“InsPro LLC”). InsPro LLC is a provider of comprehensive, web-based insurance administration software applications. InsPro LLC’s flagship software product is InsPro Enterprise, which was introduced in 2004. InsPro LLC offers InsPro Enterprise on both a licensed and an ASP (Application Service Provider) basis. InsPro Enterprise is an insurance administration and marketing system that supports group and individual business lines, and efficiently processes agent, direct market, worksite and web site generated business. InsPro LLC’s clients include insurance carriers and third party administrators. InsPro LLC realizes revenue from the sale of software licenses, application service provider fees, software maintenance fees and consulting and implementation services.

 

F-8
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Basis of presentation

 

The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). The consolidated financial statements of the Company include the Company and its subsidiaries. All material inter-company balances and transactions have been eliminated.

 

For purposes of comparability, certain prior period amounts have been reclassified to conform to the 2011 presentation.

 

Use of estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates in 2011 and 2010 include the warrant liability, allowance for doubtful accounts, stock-based compensation, the useful lives of property and equipment and intangible assets, and revenue recognition.

 

Cash and cash equivalents

 

The Company considers all liquid debt instruments with original maturities of three months or less to be cash equivalents.

 

Restricted cash

 

Restricted cash pertained to all cash and cash equivalents that were held in restricted accounts pertaining to the Company’s letters of credit as restricted cash. See Note 11 – Restricted Cash, Commitments and Contingencies.

 

Accounts receivable

 

The Company has a policy of establishing an allowance for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. At December 31, 2011 and 2010, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amount of $0 and $0, respectively.

 

The following table lists the percentage of the Company’s accounts receivable balance from the Company’s two largest InsPro Enterprise clients.

 

   As of December 31, 
   2011   2010 
         
Largest InsPro client   33%   42%
Second largest InsPro client   27%   15%

 

F-9
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Fair value of financial instruments

 

The carrying amounts of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and capital leases approximated fair value as of December 31, 2011, and December 31, 2010, because of the relatively short-term maturity of these instruments and their market interest rates.

 

Effective January 1, 2008, the Company adopted FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements establishes a framework for measuring fair value and expands disclosure about such fair value measurements. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results, but did expand certain disclosures.

 

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

 

  Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities
     
  Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data
     
  Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
         

The Company measured its warrant liability using Level 3 inputs as defined by ASC 820.

 

Property and equipment

 

Property and equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. In accordance with Statement of Financial Accounting Standards ASC 360, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

 

Intangible assets

 

Intangible assets consist of assets acquired in connection with the acquisition of InsPro LLC and costs incurred in connection with the development of the Company’s software. See Note 3 – InsPro Technologies Acquisition and Note 5 – Intangible Assets.

 

F-10
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The Company’s capitalization of software development costs for software used internally begins upon the establishment of technological feasibility of the software. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross product revenues, estimated economic life and changes in software and hardware technology. Capitalized software development costs are amortized utilizing the straight-line method over the estimated economic life of the software not to exceed three years. We regularly review the carrying value of software development assets and a loss is recognized when the unamortized costs are deemed unrecoverable based on the estimated cash flows to be generated from the applicable software.

 

The Company’s InsPro LLC subsidiary capitalized certain costs valued in connection with developing or obtaining software for external use. These costs, which consist of direct technology labor costs, are capitalized subsequent to the establishment of technological feasibility and until the product is available for general release. Both prior and subsequent costs relating to the establishment of technological feasibility are expensed as incurred. Development 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 has been established. Software development costs are amortized on a straight-line basis over the estimated useful lives of the products not to exceed two years, beginning with the initial release to customers. The Company continually evaluates whether events or circumstances have occurred that indicate the remaining useful life of the capitalized software development costs should be revised or the remaining balance of such assets may not be recoverable. The Company evaluates the recoverability of capitalized software based on the net realizable value of its software products, as defined by the estimated future revenue from the products less the estimated future costs of completing and disposing of the products, compared to the unamortized capitalized costs of the products. Capitalized software development costs were fully amortized as of December 31, 2010.

 

Impairment of long-lived assets

 

The Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset's estimated fair value and its book value.

 

Warrant liability

 

The Company issued warrants, which contain certain anti-dilution provisions that reduce the exercise price of the warrants in certain circumstances.  See Note 8 – Equity - Common Stock Warrants.

 

Upon the Company’s adoption of the Derivative and Hedging Topic of the FASB Accounting Standards Codification (“ASC 815”) on January 1, 2009, the Company determined that the warrants with provisions that reduce the exercise price of the warrants did not qualify for a scope exception under ASC 815 as they were determined to not be indexed to the Company’s stock as prescribed by ASC 815.  On January 1, 2009, the warrants, under ASC 815, were reclassified from equity to warrant liability for the then relative fair market value of $678,891.

 

F-11
 

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The Company determined that the fair value of the warrant liability for warrants issued during 2010 to be $3,145,016 in aggregate. The fair value of the warrant liability for warrants issued during 2010 was determined on the dates of their issuance, which was recorded in warrant liability, using the Black Scholes Option Pricing Model based on an expected term of 5 years, an assumed dividend yield of 0% and the following assumptions:

 

Warrant Issue Date  Warrant
Exercise Price
   Common
Stock Closing
Price
   Aggregate
Number of
Warrants
   Volatility   Risk Free Interest
Rate
   Fair Value 
                         
3/26/2010  $0.20   $0.041    5,535,000    345%   0.14%  $226,880 
9/30/2010   0.15    0.120    18,000,010    392%   0.19%   2,159,973 
11/29/2010   0.15    0.100    2,000,000    404%   0.18%   199,998 
12/22/2010  $0.15   $0.070    7,973,780    476%   0.18%   558,165&nb