InsPro Technologies Corp - FORM 10-Q

Attached files

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EX-31.1 - EXHIBIT 31.1 - InsPro Technologies Corp	ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - InsPro Technologies Corp	ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - InsPro Technologies Corp	ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - InsPro Technologies Corp	ex32-1.htm
EXCEL - IDEA: XBRL DOCUMENT - InsPro Technologies Corp	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

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

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 333-123081

INSPRO TECHNOLOGIES CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware		98-0438502
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

150 North Radnor-Chester Rd.

Radnor Financial Center, Suite B101

Radnor, Pennsylvania 19087

(Address of Principal Executive Offices) (Zip Code)

(484) 654-2200

(Registrant’s Telephone Number, Including Area Code)

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

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

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 definitions of “ large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

	Large Accelerated Filer o	Accelerated Filer o
	Non-Accelerated Filer o	Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x

As of November 14, 2014, there were 41,543,655 outstanding shares of common stock, par value $0.001 per share, of the registrant.

INSPRO TECHNOLOGIES CORPORATION

	Form 10-Q Quarterly Report
	INDEX

	PART I
	FINANCIAL INFORMATION

Item 1	Financial Statements

	Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013	3
	Consolidated Statements of Operations (UNAUDITED) for the three and nine months ended September 30, 2014 and 2013	4
	Consolidated Statements of Cash Flows (UNAUDITED) for the nine months ended September 30, 2014 and 2013	5

	Notes to UNAUDITED Consolidated Financial Statements	6

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 4	Controls and Procedures	43

	PART II
	OTHER INFORMATION

Item 1	Legal Proceedings	43

Item 6	Exhibits	43

	Signatures	44

Page 2

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	September 30, 2014			December 31, 2013
	(Unaudited)				(1)
ASSETS

CURRENT ASSETS:
Cash	$	2,590,502		$	2,569,536
Accounts receivable, net		4,869,936			1,660,564
Prepaid expenses		298,045			200,985
Other current assets		-			2,564
Assets of discontinued operations		20,076			31,540

Total current assets		7,778,559			4,465,189

Property and equipment, net		1,291,766			959,902
Other assets		60,000			60,000

Total assets	$	9,130,325		$	5,485,091

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Notes payable	$	577,604		$	550,761
Accounts payable		3,615,668			1,169,251
Accrued expenses		497,626			456,753
Current portion of capital lease obligations		190,529			57,932
Due to related parties		4,755			10,000
Deferred revenue		3,261,045			1,006,875

Total current liabilities		8,147,227			3,251,572

LONG TERM LIABILITIES:
Warrant liability		556,599			607,199
Capital lease obligations		273,407			23,184

Total long term liabilities		830,006			630,383

Total liabilities		8,977,233			3,881,955

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, 3,809,378 shares issued and outstanding (liquidation value $11,428,134)		7,709,919			7,709,919
Common stock ($.001 par value; 400,000,000 and 300,000,000 shares authorized, 41,543,655 shares issued and outstanding)		41,543			41,543
Additional paid-in capital		45,163,722			43,411,172
Accumulated deficit		(55,626,196	)		(52,423,602	)

Total shareholders’ equity		153,092			1,603,136

Total liabilities and shareholders’ equity	$	9,130,325		$	5,485,091

(1) Derived from audited financial statements.

See accompanying notes to unaudited consolidated financial statements.

Page 3

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Revenues	$	5,973,754		$	2,856,841		$	13,818,009		$	11,746,419

Cost of revenues		4,880,477			2,578,498			11,447,677			9,005,632

Gross profit		1,093,277			278,343			2,370,332			2,740,787

Selling, general and administrative expenses:
Salaries, employee benefits and related taxes		750,226			690,616			3,793,371			2,013,972
Advertising and other marketing		95,872			129,182			239,120			279,252
Depreciation		44,471			42,082			123,325			119,557
Rent, utilities, telephone and communications		91,951			95,748			286,040			288,138
Professional fees		205,147			160,900			742,246			602,724
Other general and administrative		203,412			180,181			596,391			549,140

Total selling, general and administrative expenses		1,391,079			1,298,709			5,780,493			3,852,783

Operating loss from continuing operations		(297,802	)		(1,020,366	)		(3,410,161	)		(1,111,996	)

Other income (expense):
Gain (loss) on the change of the fair value of warrant liability		40,480			306,000			50,600			(76,199	)
Interest expense		(12,850	)		(9,395	)		(31,528	)		(26,256	)

Total other income (expense)		27,630			296,605			19,072			(102,455	)

Loss from continuing operations		(270,172	)		(723,761	)		(3,391,089	)		(1,214,451	)

Income from discontinued operations		56,478			90,498			188,495			305,257

Net loss	$	(213,694	)	$	(633,263	)	$	(3,202,594	)	$	(909,194	)

Net income (loss) per common share - basic and diluted:
Loss from continuing operations	$	(0.01	)	$	(0.02	)	$	(0.08	)	$	(0.03	)
Income from discontinued operations		-			-			-			0.01
Net loss per common share	$	(0.01	)	$	(0.02	)	$	(0.08	)	$	(0.02	)


Weighted average common shares outstanding - basic and diluted		41,543,655			41,543,655			41,543,655			41,543,655

See accompanying notes to unaudited consolidated financial statements.

Page 4

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS CASH FLOWS

	For the Nine Months Ended September 30,
	2014			2013
	(Unaudited)			(Unaudited)
Cash Flows From Operating Activities:
Net loss	$	(3,202,594	)	$	(909,194	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		611,442			522,056
Stock-based compensation		1,752,550			58,165
(Gain) loss on change of fair value of warrant liability		(50,600	)		76,199
Changes in assets and liabilities:
Accounts receivable		(3,209,372	)		(482,782	)
Prepaid expenses		10,020			36,520
Other current assets		2,564			(151	)
Accounts payable		2,446,417			(635,396	)
Accrued expenses		40,873			(44,441	)
Due to related parties		(5,245	)		-
Deferred revenue		2,254,170			(354,937	)
Assets of discontinued operations		11,464			32,444

Net cash provided by (used in) operating activities		661,689			(1,701,517	)

Cash Flows From Investing Activities:
Purchase of property and equipment		(534,300	)		(190,261	)

Net cash used in investing activities		(534,300	)		(190,261	)

Cash Flows From Financing Activities:
Gross proceeds from sale of preferred stock and warrants		-			1,536,000
Fees paid in connection with sale of preferred stock and warrants		-			(36,693	)
Payments on notes payable		(80,237	)		(76,717	)
Payments on capital leases		(26,186	)		(47,429	)

Net cash provided by (used in) financing activities		(106,423	)		1,375,161

Net increase (decrease) in cash		20,966			(516,617	)

Cash - beginning of the period		2,569,536			3,347,689

Cash - end of the period	$	2,590,502		$	2,831,072
Supplemental Disclosures of Cash Flow Information
Cash payments for interest	$	29,669		$	24,335

Non cash financing activities:
Accrued interest on loan payable	$	1,859		$	1,921

See accompanying notes to unaudited consolidated financial statements.

Page 5

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

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

Organization

InsPro Technologies Corporation (the “Company”, “ITCC”, “we”, “us” or “our”) is a technology company that provides software applications for use by insurance administrators in the insurance industry. Our business focuses primarily on our InsPro EnterpriseTM software application.

InsPro Technologies, 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 system that supports group and individual business lines; life, health and long term care products; 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 license fees, application service provider fees, software maintenance fees and consulting and implementation services.

Basis of presentation and principles of consolidation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2013 and notes thereto and other pertinent information contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the “Commission”).

The consolidated financial statements of the Company include the Company and its subsidiaries. All material inter-company balances and transactions have been eliminated.

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 2014 and 2013 include the warrant liability, allowance for doubtful accounts, stock-based compensation, the useful lives and valuation of property and equipment, and deferred revenue.

Cash and cash equivalents

The Company had no cash equilavents during the nine months ended September 30, 2014. The Company considers all liquid debt instruments with original maturities of three months or less to be cash equivalents.

Page 6

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

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

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 September 30, 2014 and December 31, 2013, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $0 and $0, respectively.

Fair value of financial instruments

The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and capital leases approximated fair value as of September 30, 2014 and December 31, 2013, because of the relatively short-term maturity of these instruments or 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. See Note 9 - Fair Value Measurements.

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.

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.

Page 7

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

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

Income taxes

The Company accounts for income taxes pursuant to the provisions of ASC 740-10 “Accounting for Income Taxes,” which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.

The Company follows the provisions of the ASC 740-10 related to, Accounting for Uncertain Income Tax Positions. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits.

The Company has adopted ASC 740-10-25 Definition of Settlement, which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. As of September 30, 2014, the tax years ended December 31, 2013, 2011 and 2010 are still subject to audit.

Page 8

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

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

Income (loss) per common share

Basic earnings per share is computed by dividing income (loss) from continuing operations, net income from discontinued operations and net loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing the adjusted net income (loss) from operations for diluted earnings per share by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. The effects of common stock equivalents and potentially dilutive securities outstanding during 2014 and 2013 are excluded from the calculation of diluted income (loss) per common share because it is anti-dilutive.

The Company’s common stock equivalents include the following:

	September 30,		December 31,
	2014		2013

Series A convertible preferred stock issued and outstanding		25,535,000		25,535,000
Series B convertible preferred stock issued and outstanding		76,187,560		76,187,560
Options to purchase common stock issued and outstanding		4,925,000		5,900,000
Warrants to purchase common stock issued and outstanding		45,473,780		72,140,447
Warrants to purchase series A convertible preferred stock, issued and outstanding		6,000,000		6,000,000
Warrants to purchase series B convertible preferred stock, issued and outstanding		23,400,000		-
		181,521,340		185,763,007

Revenue recognition

InsPro LLC offers InsPro EnterpriseTM on both a licensed and an ASP basis. An InsPro Enterprise software license entitles the purchaser a perpetual license to a copy of the InsPro Enterprise software installed at a single client location. Alternatively, ASP hosting service enables a client to lease the InsPro Enterprise software, paying only for that capacity required to support their business. ASP clients access InsPro Enterprise installed on InsPro LLC owned servers located at a third party’s site.

InsPro LLC’s software maintenance fees apply to both licensed and ASP clients. Maintenance fees cover periodic updates to the application and the InsPro Enterprise help desk.

Page 9

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

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

InsPro LLC’s professional services revenue consists of consulting and implementation services generally associated with the implementation of InsPro Enterprise for either an ASP or licensed client, and includes such activities as InsPro EnterpriseTM installation, configuration, modification of InsPro Enterprise functionality, client insurance plan set-up, client insurance document design and system documentation. Professional services revenue also consists of post implementation activities for clients pertaining to their InsPro Enterprise installation.

InsPro LLC’s revenue is generally recognized under ASC 985-605. For software arrangements involving multiple elements, which are license fees, professional services, ASP services and maintenance services, the Company allocates 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. 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.

Maintenance revenue is recognized ratably over the duration of the maintenance agreement term. ASP revenue is billed and earned on a monthly basis and is earned in the month that the ASP service is provided.

The Company recognizes revenue from software license agreements when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. The Company considers fees relating to arrangements with payment terms extending beyond one year to not be fixed or determinable and revenue for these arrangements is recognized as payments become due from the customer. In software arrangements that include more than one InsPro Enterprise module, the Company allocates 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 InsPro LLC’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.

Page 10

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

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

Cost of revenues

Cost of revenues includes direct labor and associated costs for employees and independent contractors performing InsPro EnterpriseTM design, development, implementation and testing together with customer management, training and technical support, as well as a portion of facilities costs and depreciation. For the nine months ended September 30, 2014 and 2013, cost of revenues consisted of the following:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2014		2013		2014		2013

Compensation, employee benefits and related taxes	$	1,841,432	$	1,791,087	$	5,490,307	$	5,624,602
Professional fees		2,579,136		461,660		4,699,308		2,378,873
Depreciation		183,285		133,160		488,117		402,499
Rent, utilities, telephone and communications		105,466		105,895		347,064		320,508
Other cost of revenues		171,158		86,696		422,881		279,150
	$	4,880,477	$	2,578,498	$	11,447,677	$	9,005,632

Advertising and other marketing

Advertising and other marketing costs are expensed as incurred. For the three months ended September 30, 2014 and 2013, advertising and other marketing costs were $95,872 and $129,182, respectively. For the nine months ended September 30, 2014 and 2013, advertising and other marketing costs were $239,120 and $279,252, respectively.

Concentrations of credit risk

The Company maintains its cash in bank deposit accounts, which exceed the federally insured limits as provided through the Federal Deposit Insurance Corporation (“FDIC”). At September 30, 2014, the Company had $2,590,502 of cash in United States bank deposits, of which $500,158 was federally insured and $2,090,344 was not federally insured. In 2010 the FDIC insurance coverage limit was increased to $250,000 per depositor, per institution as a result of the Dodd-Frank Wall Street and Consumer Protection Act.

The following table lists the percentage of the Company’s accounts receivable balance from the Company’s InsPro EnterpriseTM clients representing 10% or more of the accounts receivable balances as of the periods listed below.

	September 30, 2014			December 31, 2013
	2014			2013

Client #1		19	%		27	%
Client #2		16	%		18	%
Client #3		13	%		13	%
Client #4		10	%		10	%

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INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

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

The following table lists the percentage of the Company’s revenue earned from the Company’s InsPro EnterpriseTM clients representing 10% or more of the revenue earned in each of the periods listed below.

	For the Nine Months Ended September 30,
	2014			2013

Client #1		21	%		30	%
Client #2		14	%		11	%
Client #3		13	%		10	%

Stock-based compensation

The Company accounts for stock based compensation transactions using a fair-value-based method and recognizes compensation cost for share-based payments to employees based on their fair value at their determined measurement date.

Non-employee stock based compensation

The cost of stock based compensation awards issued to non-employees for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, based on their fair value at their determined measurement date.

Registration rights agreements

At September 30, 2014, the Company does not believe that it will incur a penalty in connection with the Company’s registration rights agreements. Accordingly, no liability was recorded as of September 30, 2014. See Note 5 - Stockholders Equity – Registration and Participation Rights.

Recent accounting pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), which are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.

Page 12

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

NOTE 2 – DISCONTINUED OPERATIONS

The Company has classified its former telesales call center and external agent produced agency business as discontinued operations. During the second quarter of 2009, the Company ceased the direct marketing and sale of health and life insurance and related products to individuals and families in its telesales call center. The Company also determined to discontinue selling health and life insurance and related products to individuals and families through its non employee ISG agents. On February 20, 2009, the Company entered into and completed the sale of its agency business to an unaffiliated third party, pursuant to the terms of a client transition agreement.

The financial position of discontinued operations was as follows:

	September 30, 2014		December 31, 2013

Accounts receivable	$	20,076	$	31,540
Net current assets of discontinued operations	$	20,076	$	31,540

The results of discontinued operations do not include any allocated or common overhead expenses. The results of operations of discontinued operations were as follows:

	For the Three Months Ended September 30,				For the Nine Months ended September 30,
	2014		2013		2014		2013
Revenues:
Commission and other revenue from carriers	$	5,861	$	16,060	$	23,099	$	51,342
Transition policy commission pursuant to the Agreement		56,884		80,513		186,451		271,810

		62,745		96,573		209,550		323,152

Operating expenses:
Other general and administrative		6,267		6,075		21,055		17,895

		6,267		6,075		21,055		17,895

Income from discontinued operations	$	56,478	$	90,498	$	188,495	$	305,257

Page 13

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:


	Useful
	Life
	(Years)		September 30, 2014			December 31, 2013
Computer equipment and software		3	$	3,896,174		$	2,952,868
Office equipment		4.6		137,723			237,629
Office furniture and fixtures		6.7		189,857			89,951
Leasehold improvements		5.4		94,620			94,620
				4,318,374			3,375,068

Less accumulated depreciation				(3,026,608	)		(2,415,166	)

			$	1,291,766		$	959,902

The following table discloses depreciation expense as reported in the statement of operations.

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2014		2013		2014		2013

Depreciation included in cost of revenues	$	183,285	$	133,160	$	488,117	$	402,499
Depreciation included in selling, general and administrative		44,471		42,082		123,325		119,557
Total depreciation	$	227,756	$	175,242	$	611,442	$	522,056

NOTE 4 – NOTES PAYABLE

Notes payable consisted of the following:

	September 30, 2014		At December 31, 2013

Notes payable for insurance premium financing	$	52,604	$	25,761
Loan from Silicon Valley Bank		525,000		525,000

	$	577,604	$	550,761

On October 3, 2012, the Company together with InsPro LLC (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”), which expires on December 2, 2014. The Revolving Facility 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.

Page 14

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

NOTE 4 – NOTES PAYABLE (continued)

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 balance held at SVB (the “Borrowing Base”). The Borrowers must maintain a minimum “adjusted quick ratio,” tested as of the last day of each month, of at least 1.50:1.00 commencing November 13, 2012. The adjusted quick ratio (the “AQR”) is the ratio of (x) the Borrowers’ consolidated, unrestricted cash maintained with SVB 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 one year (excluding subordinated debt), minus deferred revenue.

As of September 30, 2014, the Company was in compliance with the Loan Agreement, the balance of the Revolving Facility was $525,000, which is included in notes payable in our balance sheet, and the Borrowing Base and AQR under the Revolving Facility were $2,000,000 and 1.50:1.00, respectively.

The Company is currently in negotiation with SVB to obtain a new revolving facility to be effective on or before December 2, 2014, which would replace the Revolving Facility. There can be no assurance that the Company will be successful in obtaining a new revolving facility from SVB on or before the expiration of the existing Revolving Facility.

NOTE 5 – STOCKHOLDERS’ EQUITY

Common Stock

As of September 30, 2014 and December 31, 2013, the Company was authorized to issue 400,000,000 and 300,000,000 shares of common stock with a par value of $0.001 per share (“Common Stock”), respectively. As of September 30, 2014 and December 31, 2013, the Company had 41,543,655 shares of its Common Stock issued and outstanding. The Company has reserved shares of Common Stock, on an as-if-converted basis, as follows:

	September 30, 2014		December 31, 2013

Exercise of options issued and outstanding to purchase common stock		4,925,000		5,900,000
Issuance of common shares available under the 2010 Equity Compensation Plan		24,071,980		23,096,980
Exercise of warrants issued and outstanding to purchase common stock		45,473,780		72,140,447
Conversion of series A convertible preferred stock issued and outstanding into common stock		25,535,000		25,535,000
Exercise of warrants to purchase series A convertible preferred stock issued and outstanding and converted into common stock		6,000,000		6,000,000
Conversion of series B convertible preferred stock issued and outstanding into common stock		76,187,560		76,187,560
Exercise of warrants to purchase series B convertible preferred stock issued and outstanding and converted into common stock		23,400,000		0

Total common stock reserved for issuance		205,593,320		208,859,987

The above table includes Common Stock reserved for issued and outstanding stock options that will be exercisable in the future and for the issuance of stock options in the future under the Company’s 2010 Equity Compensation Plan.

Page 15

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

NOTE 5 – STOCKHOLDERS’ EQUITY (Continued)

Series A Convertible Preferred Stock

As of September 30, 2014 and December 31, 2013, the Company was authorized to issue 3,437,500 shares of Series A Convertible Preferred Stock with a par value of $0.001 per share (“Series A Preferred Stock”). As of September 30, 2014 and December 31, 2013, the Company had 1,276,750 shares of its Series A Preferred Stock issued and outstanding. As of September 30, 2014 and December 31, 2013, the Company has reserved 300,000 shares of Series A Preferred Stock for the exercise of warrants issued and outstanding to purchase its Series A Preferred Stock. The Series A Preferred Stock is entitled to vote as a single class with the holders of the Company’s Common Stock and preferred stock, with each share of Series A Preferred Stock having the right to 20 votes. Upon the liquidation, sale or merger of the Company, each share of Series A 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 Preferred Stock original issue price or $12,767,500, subject to certain customary adjustments, or (B) the amount such share of Series A Preferred Stock would receive if it participated pari passu with the holders of common stock on an as-converted basis. Each share of Series A Preferred Stock becomes convertible into 20 shares of Common Stock, subject to adjustment and at the option of the holder of the Series A Preferred Stock. For so long as any shares of Series A Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the Series A Preferred Stock is required to approve (Y) any amendment to the Company’s certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special rights of the Series A Preferred Stock or (Z) any amendment to the Company’s certificate of incorporation to create any shares of capital stock that rank senior to the Series A Preferred Stock. In addition to the voting rights described above, for so long as 1,000,000 shares of Series A Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the shares of Series A Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of the Company or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series A Preferred Stock with an amount per share equal to two and a half (2.5) times the Series A Preferred Stock original issue price or $12,767,500 in aggregate for all issued and outstanding Series A Preferred Stock.

Series B Convertible Preferred Stock

As of September 30, 2014 and December 31, 2013, the Company was authorized to issue 5,000,000 shares of Series B Convertible Preferred Stock with a par value of $0.001 per share (“Series B Preferred Stock”). As of September 30, 2014 and December 31, 2013, the Company had 3,809,378 of its Series B Preferred Stock issued and outstanding. As of September 30, 2014, the Company has reserved 1,170,000 shares of Series B Preferred Stock for the exercise of warrants issued and outstanding to purchase its Series B Preferred Stock.

Page 16

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

NOTE 5 – STOCKHOLDERS’ EQUITY (Continued)

The Series B Preferred Stock is entitled to vote as a single class with the holders of the Company’s Common Stock and preferred stock, with each share of Series B Preferred Stock having the right to 20 votes. Upon the liquidation, sale or merger of the Company, each share of Series B Preferred Stock is entitled to receive an amount equal to the greater of (A) a liquidation preference equal to the Series B Preferred Stock original issue price or $11,428,134 as of September 30, 2014 and December 31, 2013, subject to certain customary adjustments, or (B) the amount such share of Series B Preferred Stock would receive if it participated pari passu with the holders of Common Stock and preferred stock on an as-converted basis. Each share of Series B Preferred Stock becomes convertible into 20 shares of Common Stock, subject to adjustment and at the option of the holder of the Series B Preferred Stock. For so long as any shares of Series B Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the Series B Preferred Stock is required to approve (Y) any amendment to the Company’s certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special rights of the Series B Preferred Stock or (Z) any amendment to the Company’s certificate of incorporation to create any shares of capital stock that rank senior to the Series B Preferred Stock. In addition to the aforementioned voting rights, for so long as 1,000,000 shares of Series B Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the shares of Series B Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of the Company or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series B Preferred Stock with an amount per share equal the Series B Preferred Stock original issue price or $11,428,134 in aggregate for all issued and outstanding Series B Preferred Stock.

On February 8, 2013, the Company filed a registration statement for a rights offering on Form S-1, which the Commission declared effective on February 12, 2013, to distribute to stockholders at no charge, one non-transferable subscription right for each 12,756 shares of our Common Stock and 638 shares of our preferred stock owned as of 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 stockholders’ behalf, as a beneficial owner of such shares. If the rights offering was fully subscribed the gross proceeds from the rights offering would have been $2.5 million. This rights offering was designed to give all of the holders of the Company’s capital stock the opportunity to participate in an equity investment in the Company on the same economic terms as the Company’s 2012 private placement.

The basic subscription right entitled the holder to purchase one unit (“Subscription Unit”) at a subscription price of $240 per unit. A Subscription Unit consisted of 80 shares of the Company’s Series B Preferred Stock and a five-year warrant to purchase 800 shares of the Company’s Common Stock at an exercise price of $0.15 per share. In the event that a holder of a Subscription Unit purchased all of the basic Subscription Units available to the holder then pursuant to their basic subscription right, the holder had the option to choose to subscribe for a portion of any Subscription Units that were not purchased by all other holders of Subscription Units through the exercise of their basic subscription rights.

Effective with the expiration of the subscription rights, which occurred on March 14, 2013, holders of subscription rights exercised in aggregate 100 basic subscription rights and 50 over subscription rights for a total 150 Subscription Units. The Company received $36,000 in gross proceeds as a result of the exercise of Subscription Units. As a result of the exercise of 150 Subscription Units the Company issued effective on March 14, 2013 an aggregate of 12,000 shares of Series B Preferred Stock and five-year warrants to purchase in aggregate 120,000 shares of Common Stock at an exercise price of $0.15 per share. Effective with the expiration of the subscription rights all unexercised subscription rights expired.

Page 17

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

NOTE 5 – STOCKHOLDERS’ EQUITY (Continued)

The warrants issued on March 14, 2013 include full ratchet anti-dilution adjustment provisions for issuances of securities below $0.15 per share of Common Stock during the first two years following the date of issuance of these warrants, subject to customary exceptions. As a result the Company determined that these warrants did not qualify for a scope exception under ASC 815 as they were determined to not be indexed to the Company’s stock.

The Company allocated $7,200 of the $36,000 gross proceeds received as a result of the rights offering to the warrant liability using a Black-Scholes option pricing model with the following assumptions: expected volatility of 711%, a risk-free interest rate of 0.10%, an expected term of 5 years and 0% dividend yield. See “Common Stock Warrants” below and Note 9 – Fair Value Measurements - Warrant Liability. The legal costs incurred as a result of the rights offering exceeded the gross proceeds. During the nine months ended September 30, 2013 the Company incurred $61,258 in legal costs in connection with the rights offering of which $32,458 was recorded as professional services expense and $28,800 was recorded to Series B Preferred Stock.

On September 12, 2013, the Company entered into and completed a private placement (the “Private Placement”) with Independence Blue Cross, a Pennsylvania hospital plan corporation (the “Investor”), for an aggregate of 500,000 shares of Series B Preferred Stock, and warrants to purchase 5,000,000 shares of Common Stock, pursuant to the terms of a securities purchase agreement (the “Purchase Agreement”).

Pursuant to the Purchase Agreement, the Company agreed to sell to the Investor 500,000 investment units (each, a “Private Placement Unit”) in the Private Placement at a per Private Placement Unit purchase price equal to $3.00. Each Private Placement Unit sold in the Private Placement consisted of one share of Series B Preferred Stock and a warrant to purchase ten shares of Common Stock at an initial exercise price of $0.15 per share, subject to adjustment.

The closing of the Private Placement was subject to customary closing conditions. The gross proceeds from the closing of the Private Placement were $1,500,000. The Company incurred $7,893 in legal costs in connection with the Private Placement, which was recorded to Series B Preferred Stock.

In connection with the signing of the Purchase Agreement, the Company and the Investor also entered into a registration rights agreement (the “Registration Rights Agreement”). Under the terms of the Registration Rights Agreement, the Company agreed to prepare and file with the Commission, within 30 days following the receipt of a demand notice of a holder of Registrable Securities, a registration statement on Form S-1 (the “Registration Statement”) covering the resale of the Shares and the Warrant Shares (collectively, the “Registrable Securities”). Subject to limited exceptions, the Company also agreed to use its reasonable best efforts to cause the Registration Statement to be declared effective under the Securities Act of 1933, as amended (the “Securities Act”), as soon as practicable but, in any event, no later than 60 days following the date of the filing of the Registration Statement (or 120 days following the date of the filing of the Registration Statement in the event the Registration Statement is subject to review by the Commission), and agreed to use its reasonable best efforts to keep the Registration Statement effective under the Securities Act until the date that all of the Registrable Securities covered by the Registration Statement have been sold or may be sold without volume restrictions pursuant to Rule 144(b)(i) promulgated under the Securities Act. In addition, if the Company proposes to register any of its securities under the Securities Act in connection with the offering of such securities for cash, the Company shall, at such time, promptly give each holder of Registrable Securities notice of such intent, and such holders shall have the option to register their Registrable Securities on such additional registration statement.

Page 18

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

NOTE 5 – STOCKHOLDERS’ EQUITY (Continued)

The Registration Rights Agreement also provides for payment of partial damages to the Investor under certain circumstances relating to failure to file or obtain or maintain effectiveness of the Registration Statement, subject to adjustment.

The Purchase Agreement also provides for a customary participation right for the Investor, subject to certain exceptions and limitations, which grants the Investor the right to participate in any future capital raising financings of the Company occurring prior to November 20, 2014. The Investor may participate in such financings at a level based on the Investor’s ownership percentage of the Company on a fully-diluted basis prior to such financing.

The Company allocated $400,000 of the $1,500,000 gross proceeds received as a result of the Private Placement to the warrant liability using a Black-Scholes option pricing model with the following assumptions: expected volatility of 703%, a risk-free interest rate of 0.10%, an expected term of 5 years and 0% dividend yield. See “Common Stock Warrants” below and Note 9 – Fair Value Measurements - Warrant Liability.

Stock Options

During the nine months ended September 30, 2014, 2,775,000 options, which were previously granted to current and former employees of the Company, expired in accordance with the terms of the stock options.

On August 19, 2014, the Company granted to an executive of the Company an option to purchase a total of 1,800,000 shares of the Company’s Common Stock, which vests as follows: 300,000 shares of Common Stock on August 19, 2014, 300,000 shares of Common Stock on August 19, 2015, 600,000 shares of Common Stock on August 19, 2016, and 600,000 shares of Common Stock on August 19, 2017. This option has a five year term and an exercise price of $0.10 per share, which exceeded the closing price of one share of the Company’s Common Stock as quoted on the OTCBB on August 19, 2014. The fair value of the option granted was estimated on the date of the grant to be $75,600 using the Black-Scholes option-pricing model based on the following assumptions: expected volatility: 753%, risk-free interest rate: 0.05%, expected life in years: 5 based on the contract life of the option grant, and assumed dividend yield: 0%. The Company recorded compensation expense pertaining to this option in salaries, commission and related taxes of $13,650 in the nine months ended September 30, 2014.

As of September 30, 2014, there were 30,000,000 shares of our Common Stock authorized to be issued under the Company’s 2010 Equity Compensation Plan, of which 24,071,980 shares of our Common Stock remain available for future stock option grants.

The Company recorded compensation expense pertaining to employee stock options in compensation, commission and related taxes of $58,150 and $58,165 for the nine months ended September 30, 2014 and 2013, respectively. See Series B Preferred Stock warrants for a description of compensation expense recorded pertaining to warrants.

The value of equity compensation expense not yet expensed pertaining to unvested equity compensation was $70,755 as of September 30, 2014, which will be recognized over a weighted average 3 years in the future.

Page 19

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

NOTE 5 – STOCKHOLDERS’ EQUITY (Continued)

A summary of the Company’s outstanding stock options as of and for the nine months ended September 30, 2014 are as follows:


	Number			Weighted				Weighted
	Of Shares			Average		Weighted		Average		Aggregate
	Underlying			Exercise		Average		Remaining		Intrinsic
	Options			Price		Fair Value		Contractual Life		Value (1)
								(in years)
Outstanding at December 31, 2013		5,900,000		$	0.51	$	0.36		2.33	$	-

For the period ended September 30, 2014
Granted		1,800,000			0.10		0.04
Exercised		-			-		-
Expired		(2,775,000	)		0.10		0.10

Outstanding at September 30, 2014		4,925,000		$	0.59	$	0.39		2.52

Outstanding and exercisable at September 30, 2014		3,312,500		$	0.81	$	0.55		1.42	$	-

(1) The aggregate intrinsic value is based on the $0.055 closing price as of September 30, 2014 for the Company’s Common Stock.

The following information applies to options outstanding at September 30, 2014.


	Options Outstanding							Options Exercisable
	Exercise Price	Number of Shares Underlying Options		Weighted Average Remaining Contractual Life		Exercise Price		Number Exercisable		Exercise Price

$	0.065		250,000		0.8	$	0.065		250,000	$	0.065
	0.100		1,950,000		4.8		0.100		337,500		0.100
	0.111		1,500,000		0.9		0.111		1,500,000		0.111
	1.000		750,000		1.1		1.000		750,000		1.000
	3.500		75,000		1.5		3.500		75,000		3.500
$	3.600		400,000		1.6	$	3.600		400,000	$	3.600
			4,925,000						3,312,500

Page 20

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

NOTE 5 – STOCKHOLDERS’ EQUITY (Continued)

Common Stock Warrants

Outstanding warrants at September 30, 2014 have an average weighted average remaining contractual life of 1.4 years. A summary of the status of the Company’s outstanding stock warrants as of and for the nine months ended September 30, 2014 are as follows:


				Weighted
	Common			Average
	Stock			Exercise
	Warrants			Price

Outstanding and exercisable at December 31, 2013		72,140,447		$	0.15

For the period ended September 30, 2014
Granted		-			-
Exercised		-			-
Expired		(26,666,667	)		0.15
Outstanding and exercisable at September 30, 2014		45,473,780		$	0.15

The following information applies to warrants outstanding at September 30, 2014:


Warrant Issue Date	Warrant Exercise Price		Warrant Expiration Date	Weighted Average Remaining Life		Anti-dilution Provision Expiration Date	Outstanding Common Stock Warrants

3/26/2010	$	0.15	3/26/2015		0.5	expired		7,380,000
9/30/2010		0.15	9/30/2015		1.0	expired		18,000,010
11/29/2010		0.15	11/29/2015		1.2	expired		2,000,000
12/22/2010		0.15	12/22/2015		1.2	expired		7,973,780
11/20/2012		0.15	11/20/2017		3.1	11/20/2014		4,999,990
3/14/2013		0.15	3/14/2018		3.5	3/14/2015		120,000
9/12/2013	$	0.15	11/20/2017		3.1	11/20/2014		5,000,000

								45,473,780

Page 21

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

NOTE 5 – STOCKHOLDERS’ EQUITY (Continued)

Series A Preferred Stock Warrants

Outstanding preferred stock warrants to purchase the Company’s Series A Preferred Stock at September 30, 2014 have a remaining contractual life of 1.4 years. A summary of the status of the Company’s outstanding Series A Preferred Stock warrants as of and for the nine months ended September 30, 2014 are as follows:


			Weighted
	Preferred		Average
	Stock		Exercise
	Warrants		Price

Outstanding and exercisable at December 31, 2013		300,000	$	4.00

For the period ended September 30, 2014
Granted		-		-
Exercised		-		-
Expired		-		-
Outstanding and exercisable at September 30, 2014		300,000	$	4.00

Series B Preferred Stock Warrants

On May 22, 2014, the board of directors of the Company granted warrants to purchase 1,140,000 shares of Series B Preferred Stock at an exercise price equal to $3.00 per share (the “Series B Warrants”) to the directors of the Company. Messrs. Adamsky and Caldwell assigned their warrants to The Co-Investment Fund II, L.P. The Series B Warrants are immediately exercisable, non transferrable and expire on May 22, 2019.

The Company estimated the fair value of the Series B Warrants to be $1,664,400 as of the date of grant using the Black-Scholes option-pricing model based on the following assumptions: expected volatility: 769%, risk-free interest rate: 0.05%, expected life in years: 5, and assumed dividend yield: 0%. As of September 30, 2014, the Company recorded $1,664,400 as compensation, employee benefits and related taxes.

On May 22, 2014, the board of the Company authorized the grant of a warrant to purchase 30,000 shares of the Company’s Series B Convertible Preferred Stock with a par value of $0.001 per share at an exercise price equal to $3.00 per share (the “IBC Warrant”) to either Mr. Alan Krigstein or to Independence Blue Cross (“IBC”) or its affiliate as designated by Mr. Krigstein subject to and effective on the date of Mr. Krigstein’s designation to the Company of the recipient of the Warrant. Mr. Alan Krigstein, the executive vice president and chief financial officer of Independence Hospital Indemnity Plan, Inc. (formerly named Independence Blue Cross) and Independence Blue Cross, LLC (“IBC, LLC”), was subsequently elected as a director of the Company effective June 3, 2014. On August 14, 2014, the Company received Mr. Krigstein’s written notice designating the IBC Warrant to be issued to IBC, LLC. The Company granted the Warrant to IBC, LLC effective August 14, 2014. The IBC Warrant is immediately exercisable, non transferrable and will expire on May 22, 2019.

Page 22

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

NOTE 5 – STOCKHOLDERS’ EQUITY (Continued)

The Company estimated the fair value of the IBC Warrant to be $30,000 as of the date of grant using the Black-Scholes option-pricing model based on the following assumptions: expected volatility: 768%, risk-free interest rate: 0.06%, expected life in years: 4.8, and assumed dividend yield: 0%. As of September 30, 2014, the Company recorded $30,000 as compensation, employee benefits and related taxes.

Outstanding Series B Warrants at September 30, 2014, have a remaining contractual life of 4.6 years. A summary of the status of the Company’s outstanding Series B Warrants as of and for the period ended September 30, 2014 are as follows:


			Weighted
	Preferred		Average
	Stock		Exercise
	Warrants		Price

Outstanding and exercisable at December 31, 2013		-	$	-

For the period ended September 30, 2014
Granted		1,170,000		3.00
Exercised		-		-
Expired		-		-
Outstanding and exercisable at September 30, 2014		1,170,000	$	3.00

Registration and Participation Rights

As of September 30, 2014, the Company has not received a demand notice in connection with any of the Company’s various registration rights agreements.

NOTE 6 – CAPITAL LEASE OBLIGATIONS

The Company’s InsPro LLC subsidiary has entered into several capital lease obligations to acquire equipment used for operations. The Company has the option to purchase the equipment at the end of the lease agreement for one dollar. The underlying assets and related depreciation were included in the appropriate fixed asset category, and related depreciation account.

Page 23

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

NOTE 6 – CAPITAL LEASE OBLIGATIONS (continued)

Property and equipment includes the following amounts for leases that have been capitalized:


			September 30, 2014			December 31, 2013
	Useful Life (Years)
Computer equipment and software		3	$	1,179,211		$	672,027
Phone System		3		15,011			15,011
				1,194,222			687,038
Less accumulated depreciation				(756,377	)		(659,443	)
			$	437,845		$	27,595

Future minimum payments required under capital leases at September 30, 2014 are as follows:


2014	$	62,267
2015		196,996
2016		179,672
2017		51,873

Total future payments		490,808
Less amount representing interest		26,872

Present value of future minimum payments		463,936
Less current portion		190,529

Long-term portion	$	273,407

NOTE 7 – DEFINED CONTRIBUTION 401(k) PLAN

The Company implemented a 401(k) plan on January 1, 2007. Eligible employees contribute to the 401(k) plan. Employees become eligible after attaining age 19 and after 6 months of employment with the Company. The employee may become a participant of the 401(k) plan on the first day of the month following the completion of the eligibility requirements. Effective January 1, 2007 the Company implemented an elective contribution to the plan of 25% of the employee’s contribution up to 4% of the employee’s compensation. Employer contributions are subject to a vesting schedule and become fully vested after one year of service, retirement, death or disability or the employee attaining age 65, whichever occurs first. The Company made contributions of $59,068 and $57,628 for the nine months ended September 30, 2014 and 2013, respectively.

Page 24

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

NOTE 8 – OPERATING LEASES

On July 7, 2006, the Company entered into a lease agreement with Radnor Properties-SDC, L.P. (the “Landlord”) for the lease of 7,414 square feet of office space located in Radnor Financial Center, Building B, 150 Radnor-Chester Road, Radnor, Pennsylvania. The term of the lease commenced on November 1, 2006, which was the date the Company, with the Landlord’s prior consent, assumed possession of the premises and the date the Landlord tendered possession of the premises to the Company following the substantial completion of the improvements required to be made by the Landlord under the lease agreement, and will expire on the last day of the 125th month following the commencement of the lease term. The annual rent increases every 12 months, starting at approximately $161,592 plus a proportionate share of Landlord’s building expenses after the second month and ending at approximately $258,378 plus a proportionate share of Landlord’s building expenses. Under the terms of the lease agreement, rent was waived for the first five months of the lease term with respect to 5,238 square feet and for the first twelve months for the remaining 2,176 square feet. The Company recorded a liability for deferred rent in accrued liabilities in the amount of $68,228 as of September 30, 2014.

The Company leases certain real and personal property under non-cancelable operating leases. Rent expense was $427,606 and $463,900 for the nine months ended September 30, 2014 and 2013, respectively.

NOTE 9 – FAIR VALUE MEASUREMENTS

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.

Page 25

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

NOTE 9 – FAIR VALUE MEASUREMENTS (Continued)

The following tables provide a summary of the fair values of the Company’s assets and liabilities.


	As of September 30, 2014
	Fair Value Measurements Using						Liabilities at
	Level 1		Level 2		Level 3		Fair Value

LIABILITIES:
Warrant liability	$	-	$	-	$	556,599	$	556,599

Total liabilities	$	-	$	-	$	556,599	$	556,599

	As of December 31, 2013
	Fair Value Measurements Using						Liabilities at
	Level 1		Level 2		Level 3		Fair Value

LIABILITIES:
Warrant liability	$	-	$	-	$	607,199	$	607,199

Total liabilities	$	-	$	-	$	607,199	$	607,199

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 5 – Equity - Common Stock Warrants. The Company has classified the warrant liability as non-current based an evaluation of the contractual obligations of the warrants and management’s expectation as to the settlement date of the warrant liability. The Company measured its warrant liability using Level 3 inputs as defined by ASC 820.

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.

Page 26

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

NOTE 9 – FAIR VALUE MEASUREMENTS (Continued)

The Company determined the fair value of the warrant liability at September 30, 2014 was $556,599. The fair value was determined using the Black Scholes Option Pricing Model based on the following assumptions: common stock closing price of $0.055 per share as of September 30, 2014, dividend yield: 0%, risk free rate: 0.07% and the following:


Warrant Issue Date	Warrant Exercise Price		Aggregate Number of Warrants		Expected Term (Years) of Warrants	Volatility		Fair Value

11/20/2012	$	0.15		4,999,990	3.4	622	%	$	274,999
3/14/2013	$	0.15		120,000	3.7	668	%		6,600
9/11/2013	$	0.15		5,000,000	3.4	668	%		275,000

								$	556,599

The following table presents a reconciliation of the warrant liability measured at fair value on a recurring basis using significant unobservable input (Level 3) for the nine months ended September 30, 2014:


Warrant liability balance as of December 31, 2013	$	607,199
Change in the fair value of warrant liability		(50,600	)
Warrant liability balance as of September 30, 2014	$	556,599

Page 27

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain of the statements contained in this Quarterly Report on Form 10-Q, including in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) 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, regulatory changes, customer defaults or insolvencies, adverse resolution of any contract or other disputes with customers, or the loss of one or more key client relationships, 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 Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q 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.

We qualify all the forward-looking statements contained in this Quarterly Report on Form 10-Q by the foregoing cautionary statements.

Page 28

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

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 LLC”).

InsPro EnterpriseTM is a comprehensive, web-based insurance administration software application. InsPro Enterprise was introduced by Atiam Technologies, L.P. (now our InsPro 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 license fees, 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 2014 and 2013 include the allowance for doubtful accounts, stock-based compensation, the useful lives and valuation of property and equipment and intangible assets, warrant liability and revenue recognition. Actual results may differ from these estimates under different assumptions or conditions.

InsPro LLC 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 LLC’s servers located at InsPro LLC’s 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.

Page 29

InsPro LLC 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.

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 EnterpriseTM module, we allocate the total arrangement fee among the modules based on the relative fair value of each of the modules.

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.

Page 30

RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2014 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2013

Revenues

For the three months ended September 30, 2014 (“Third Quarter 2014”), we earned revenues of $5,973,754 compared to $2,856,841 for the three months ended September 30, 2013 (“Third Quarter 2013”), an increase of $3,116,913 or 109%. Revenues include the following:


	For the Three Months Ended September 30,
	2014		2013

Professional services	$	2,948,158	$	1,487,699
ASP revenue		1,285,927		968,749
Sales of software licenses		1,300,000		-
Maintenance revenue		432,475		398,393
Other revenue		7,194		2,000

Total	$	5,973,754	$	2,856,841

●

In Third Quarter 2014 our professional services revenue increased $1,460,459 or 98% as a result of higher implementation services. Implementation services included assisting clients in setting up their insurance products in InsPro EnterpriseTM, 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 Third Quarter 2014 our ASP revenue increased $317,178 or 33% as a result of increased fees from ongoing and recent implementations of InsPro Enterprise 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 a third party’s site.

●

In Third Quarter 2014 we earned $1,300,000 of license fee revenue, which was a license fee recognized upon the completion of the implementation of additional insurance products for an existing client.

●

In Third Quarter 2014 our maintenance revenue increased $34,082 or 9% as a result of increased fees from several clients.

●

Other revenue consists of reimbursements of office and administrative expenses pertaining to various agreements with related and unrelated parties.

Page 31

Cost of Revenues

Our cost of revenues for Third Quarter 2014 was $4,880,477 as compared to $2,578,498 for Third Quarter 2013 for an increase of $2,301,979 or 89% as compared to Third Quarter 2013. Cost of revenues consisted of the following:


	For the Three Months Ended September 30,
	2014		2013


Compensation, employee benefits and related taxes	$	1,841,432	$	1,791,087
Professional fees		2,579,136		461,660
Depreciation		183,285		133,160
Rent, utilities, telephone and communications		105,466		105,895
Other cost of revenues		171,158		86,696
	$	4,880,477	$	2,578,498

●

In Third Quarter 2014 our employee compensation, benefits and related taxes increased $50,345 or 3% as compared to Third Quarter 2013. Compensation, employee benefits and related taxes increased primarily as a result of increased employee staffing.

●

In Third Quarter 2014 our professional fees increased $2,117,476 or 459% as compared to Third Quarter 2013. Professional fees increased as a result of increased utilization of several outside consulting firms, which were assisting us with modifications to InsPro Enterprise’s functionality and new clients’ implementation of InsPro EnterpriseTM. In Third Quarter 2014 the Company engaged a third party consulting firm to be a preferred system integrator for the Company for InsPro Enterprise, which contributed to the increase in cost in Third Quarter 2014 as compared to Third Quarter 2013 .

●

In Third Quarter 2014 our depreciation increased $50,125 or 38% as compared to Third Quarter 2013. Depreciation expense increased as a result of increased computer equipment and software purchases, which were primarily related to recent clients’ implementations of InsPro Enterprise.

●

In Third Quarter 2014 our other cost of revenues increased $84,462 or 97% as compared to Third Quarter 2013. The increase was the result of increased travel and lodging costs associated with the increase in the number of outside consulting firms and InsPro Enterprise clients. 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 $1,093,277 in Third Quarter 2014 as compared to a gross profit of $278,343 in Third Quarter 2013.

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Selling, General and Administrative Expenses

Our selling, general and administrative expenses for Third Quarter 2014 was $1,391,079 as compared to $1,298,709 for Third Quarter 2013 for an increase of $92,370 or 7% as compared to Third Quarter 2013. Selling, marketing and administrative expenses consisted of the following:


	For the Three Months Ended September 30,
	2014		2013

Compensation, employee benefits and related taxes	$	750,226	$	690,617
Advertising and other marketing		95,872		129,182
Depreciation		44,471		42,082
Rent, utilities, telephone and communications		91,951		95,747
Professional fees		205,147		160,900
Other general and administrative		203,412		180,181
	$	1,391,079	$	1,298,709

●

In Third Quarter 2014 our compensation, employee benefits and related taxes increased by $59,609 or 9% as compared to Third Quarter 2013 primarily as a result of increased staffing and compensation to sales staff and increased equity compensation expense to directors and employees.

●

In Third Quarter 2014 our advertising and other marketing decreased as compared to Third Quarter 2013 primarily as a result of decreased insurance industry conference fees.

●

In Third Quarter 2014 our professional fees increased as compared to Third Quarter 2013 primarily as a result of increased utilization of several outside consulting firms, which were assisting us with the Company’s ASP and hosting services as a result of the growth in the number InsPro Enterprise clients.

●

In Third Quarter 2014 our other expense increased as compared to Third Quarter 2013 primarily as a result of increased maintenance expense on computer hardware and software.

Operating loss from continuing operations

As a result of the aforementioned factors, we reported an operating loss from continuing operations of $297,802, in Third Quarter 2014 as compared to $1,020,366 in Third Quarter 2013.

Other income (expenses)

The gain on the change of the fair value of the warrant liability in Third Quarter 2014 and Third Quarter 2013 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 a price lower than the exercise price of these warrants. The gain or loss on the change of the fair value of the warrant liability is primarily attributable to the increase in the per share price of the Company’s common stock.

Page 33

Interest expense is attributable to interest on the Company’s loan with Silicon Valley Bank, capital leases and notes payable for premium financing on portions of the Company’s insurance coverages.

Income on discontinued operations

Results from discontinued operations were as follows:


	For the Three Months Ended September 30,
	2014		2013
Revenues:
Commission and other revenue from carriers	$	5,861	$	16,060
eHealth Agreement		56,884		80,513

		62,745		96,573

Operating expenses:
Other general and administrative		6,267		6,075

		6,267		6,075

Income from discontinued operations	$	56,478	$	90,498

For Third Quarter 2014 we earned revenues from discontinued operations of $62,745 as compared to $96,573 in the Third Quarter 2013, a decrease of $33,828 or 35%. Revenues include the following:

●

In Third Quarter 2014 our commission and other revenue from carriers decreased due to the declines in our telesales call center produced agency business.

●

On February 20, 2009, the Company entered into and completed the sale of its agency business to eHealth Insurance Services, Inc., an unaffiliated third party, pursuant to the terms of a client transition agreement. In Third Quarter 2014 our transition policy commission pursuant to the agreement decreased due to the declines in our telesales call center produced agency business.

As a result of the aforementioned factors, we reported income from discontinued operations of $56,478 or $0.00 gain from discontinued operations per share in Third Quarter 2014 as compared to $90,498 or $0.00 income from discontinued operations per share in Third Quarter 2013.

Page 34

Net loss

As a result of these factors discussed above, we reported a net loss of $213,694 or $0.01 net loss per share in Third Quarter 2014 as compared to a net loss of $633,263 or $0.02 net loss per share in Third Quarter 2013.

RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2014 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2013

Revenues

For the nine months ended September 30, 2014 (“2014 To Date”), we earned revenues of $13,818,009 compared to $11,746,419 for the nine months ended September 30, 2013 (“2013 To Date”), an increase of $2,071,590 or 18%. Revenues include the following:


	For the Nine Months Ended September 30,
	2014		2013

Professional services	$	7,831,030	$	5,334,305
ASP revenue		3,477,023		2,897,950
Sales of software licenses		1,300,000		2,475,000
Maintenance revenue		1,202,762		1,036,164
Other revenue		7,194		3,000

Total	$	13,818,009	$	11,746,419

●

In 2014 To Date our professional services revenue increased $2,496,725 or 47% as a result of higher implementation services. Implementation services included assisting clients in setting up their insurance products in InsPro EnterpriseTM, 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 2014 To Date our ASP revenue increased $579,073 or 20% as a result of increased fees from ongoing and recent implementations of InsPro Enterprise 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 2014 To Date we earned $1,300,000 of license fee revenue, which was a license fee recognized upon the completion of the implementation of additional insurance products for an existing client. In 2013 To Date we earned $2,475,000 of license fee revenue, which was a license fee recognized upon the completion of the implementation of InsPro Enterprise for three clients.

Page 35

●

In 2014 To Date our maintenance revenue increased $166,598 or 16% as a result of increased fees from several clients’ recent implementations of InsPro Enterprise.

●

Other revenue consists of reimbursements of office and administrative expenses pertaining to various agreements with related and unrelated parties.

Cost of Revenues

Our cost of revenues for 2014 To Date was $11,447,677 as compared to $9,005,632 for 2013 To Date for an increase of $2,442,045 or 27% as compared to 2013 To Date. Cost of revenues consisted of the following:


	For the Nine Months Ended September 30,
	2014		2013

Compensation, employee benefits and related taxes	$	5,490,307		5,624,602
Professional fees		4,699,308		2,378,873
Depreciation		488,117		402,499
Rent, utilities, telephone and communications		347,064		320,508
Other cost of revenues		422,881		279,150
	$	11,447,677	$	9,005,632

●

In 2014 To Date our compensation, employee benefits and related taxes component of cost of revenues decreased $134,295 or 2% as compared to 2013 To Date. Compensation, employee benefits and related taxes decreased primarily as a result of decreased executive employee staffing and lower employee benefit costs.

●

In 2014 To Date our professional fees component of cost of revenues increased $2,320,435 or 98% as compared to 2013 To Date. Professional fees increased as a result of increased utilization of several outside consulting firms, which were assisting us with modifications to InsPro Enterprise’s functionality and new clients’ implementation of InsPro EnterpriseTM. In Third Quarter 2014 the Company engaged a third party consulting firm to be a preferred system integrator for the Company for InsPro Enterprise, which contributed to the increase in cost in Third Quarter 2014 as compared to Third Quarter 2013 .

●

In 2014 To Date our depreciation component of cost of revenues increased $85,618 or 21% as compared to 2013 To Date. Depreciation expense increased as a result of recent computer equipment and software purchases, which were primarily related to recent clients’ implementations of InsPro Enterprise.

●

In 2014 To Date our rent, utilities and communications component of cost of revenues increased $26,556 or 8% as compared to 2013 To Date. The increase as a result of an increased allocation of a portion of facilities costs to cost of revenues, which was the result of increased utilization of several outside consulting firms. As a result of allocating an increased portion of cost to cost of revenues the rent, utilities and communications component of general selling and administrative costs decreased as compared to 2013 To Date.

Page 36

●

In 2014 To Date our other cost of revenues component of cost of revenues increased $143,731 or 51% as compared to 2013 To Date. The increase was primarily the result of increased travel and lodging costs and to a lesser extent computer processing costs associated with increase in the number of InsPro LLC’s clients and prospective clients. 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 $2,370,332 in 2014 To Date as compared to a gross profit of $2,740,787 in 2013 To Date.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses for 2014 To Date was $5,780,493 as compared to $3,852,783 for 2013 To Date for an increase of $1,927,711 or 50% as compared to 2013 To Date. Selling, marketing and administrative expenses consisted of the following:


	For the Nine Months Ended September 30,
	2014		2013

Compensation, employee benefits and related taxes	$	3,793,371	$	2,013,972
Advertising and other marketing		239,120		279,252
Depreciation		123,325		119,557
Rent, utilities, telephone and communications		286,040		288,138
Professional fees		742,246		602,724
Other general and administrative		596,391		549,140
	$	5,780,493	$	3,852,783

●

In 2014 To Date we incurred compensation, employee benefits and related taxes of $3,793,371 as compared to $2,013,972 in 2013To Date, an increase of $1,779,399 or 88%. The increase is primarily the result of $1,694,400 of equity compensation expense to directors and increased staffing in the Company’s computer systems infrastructure area.

On May 22, 2014, the board of directors of the Company granted warrants to purchase 1,140,000 shares of Series B Convertible Preferred Stock at an exercise price equal to $3.00 per share to the directors of the Company. The warrants are immediately exercisable, non transferrable and expire on May 22, 2019. The Company estimated the fair value of the warrants to be $1,664,400 as of the date of grant using the Black-Scholes option-pricing model based on the following assumptions: expected volatility: 769%, risk-free interest rate: 0.05%, expected life in years: 5, and assumed dividend yield: 0%.

On May 22, 2014, the board of the Company authorized the grant of a warrant to purchase 30,000 shares of Series B Convertible Preferred Stock at an exercise price equal to $3.00 per share to either Mr. Alan Krigstein or to Independence Blue Cross (“IBC”) or its affiliate as designated by Mr. Krigstein subject to and effective on the date of Mr. Krigstein’s designation to the Company of the recipient of the warrant. On August 14, 2014, the Company received Mr. Krigstein’s written notice designating the warrant to be issued to Independence Blue Cross, LLC. The Company granted the Warrant to Independence Blue Cross effective August 14, 2014. The IBC Warrant is immediately exercisable, non transferrable and will expire on May 22, 2019. The Company estimated the fair value of the IBC Warrant to be $30,000 as of the date of grant using the Black-Scholes option-pricing model based on the following assumptions: expected volatility: 768%, risk-free interest rate: 0.06%, expected life in years: 4.8, and assumed dividend yield: 0%. As of September 30, 2014, the Company recorded $30,000 as compensation, employee benefits and related taxes.

Page 37

●

In 2014 To Date our professional fees increased as compared to 2013 To Date primarily as a result of $218,780 royalty expense to an outside consulting firm partially offset by lower recruiting and sales consulting expenses. The Company and a consulting firm agreed that the consulting firm would reduce the fees that it charged the Company in 2013 for consideration of a royalty payment, which will be due if and when the Company executes up to three new InsPro Enterprise license agreements with new clients to process annuity or universal life policies as part of their license agreement. The Company executed such a license agreement in the second quarter of 2014. The Company will incur royalty expense of $102,500 in the future upon the execution of each of the next two new InsPro Enterprise license agreements with clients processing annuity or universal life policies as part of their license agreements.

●

In Third Quarter 2014 our other expense increased as compared to Third Quarter 2013 primarily as a result of increased maintenance expense on computer hardware and software.

Operating loss from continuing operations

As a result of the aforementioned factors, we reported an operating loss from continuing operations of $3,410,161, in 2014 To Date as compared to $1,111,996 in 2013 To Date.

Other income (expenses)

The gain on the change of the fair value of the warrant liability in 2014 To Date and the loss in 2013 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 a price lower than the exercise price of these warrants. The gain or loss on the change of the fair value of the warrant liability is primarily attributable to the increase in the per share price of the Company’s common stock.

Interest expense is attributable to interest on the Company’s loan with Silicon Valley Bank, capital leases and note payable for premium financing on a portion of the Company’s insurance coverages.

Page 38

Income on discontinued operations

Results from discontinued operations were as follows:


	For the Nine Months ended September 30,
	2014		2013
Revenues:
Commission and other revenue from carriers	$	23,099	$	51,342
Transition policy commission pursuant to the Agreement		186,451		271,810

		209,550		323,152

Operating expenses:
Other general and administrative		21,055		17,895

		21,055		17,895

Income from discontinued operations	$	188,495	$	305,257

For 2014 To Date we earned revenues from discontinued operations of $209,550 as compared to $323,152 in the 2013 To Date, a decrease of $113,602 or 35%. Revenues include the following:

●

In 2014 To Date our commission and other revenue from carriers decreased due to the declines in our telesales call center produced agency business.

●

On February 20, 2009, the Company entered into and completed the sale of its agency business to eHealth Insurance Services, Inc., an unaffiliated third party, pursuant to the terms of a client transition agreement. In 2014 To Date our transition policy commission pursuant to the agreement decreased due to the declines in our telesales call center produced agency business.

As a result of the aforementioned factors, we reported income from discontinued operations of $188,495 or $0.00 gain from discontinued operations per share in 2014 To Date as compared to $305,257 or $0.01 income from discontinued operations per share in 2013 To Date.

Net loss

As a result of these factors discussed above, we reported a net loss of $3,202,594 or $0.08 net loss per share in 2014 To Date as compared to a net loss of $909,194 or $0.02 net loss per share in 2013 To Date.

Page 39

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2014, we had a cash balance of $2,590,502 and a working capital deficit of $368,668.

Net cash provided by operations was $661,689 in 2014 To Date as compared to cash used in operations of $1,701,517 in 2013 To Date. Impacting our cash flow from operations was our net loss of $3,202,594 in 2014 To Date as compared to our net loss of $909,194 in 2013 To Date and:

●

Increases in accounts receivable of $3,209,372 in 2014 To Date, which are primarily the result of increased billed professional services from clients in 2014 To Date.

●

Increases in accounts payable of $2,446,417 in 2014 To Date, which are primarily the result of increased utilization of several outside IT consulting firms.

●

Increases in deferred revenue of $2,254,170 in 2014 To Date, which are primarily the result of license fees, which were collected in 2014 To Date that are not yet earned.

In addition to cash used in operating activities we incurred the following non-cash gain and expenses, which were included in our net loss:

●

Recorded depreciation expense of $611,442 and $522,056 in 2014 To Date and 2013 To Date, respectively.

●

Recorded stock-based compensation expense of $1,752,550 and $58,165 in 2014 To Date and 2013 To Date, respectively. Stock-based compensation and consulting expense in 2014 To Date consisted of $1,694,400 pertaining to warrants granted to directors and $58,150 pertaining to employee stock options.

●

Recognized a gain on the change in fair value of warrants liabilities of $50,600 in 2014 To Date and a loss on the change in fair value of warrants liabilities of $76,199 in 2013 To Date.

Page 40

Net cash used by investing activities in 2014 To Date was $534,300 as compared to $190,261 in 2013 To Date. The aforementioned amounts exclude capital leased computer hardware and software.

Net cash used by financing activities in 2014 To Date was $106,423 as compared to cash provided of $1,375,161 in 2013 To Date.

●

Effective with the March 14, 2013 expiration of the subscription rights pertaining to the Company’s rights offering holders of subscription rights exercised an aggregate of 100 basic subscription rights and 50 over subscription rights for a total 150 subscription units. The Company received $36,000 in gross proceeds as a result of the exercise of subscription units. As a result of the exercise of 150 subscription units the Company issued effective on March 14, 2013 an aggregate of 12,000 shares of the Company’s Series B Convertible Preferred Stock and five-year warrants to purchase an aggregate of 120,000 shares of the Company’s common stock at an exercise price of $0.15 per share.

●

On September 12, 2013 the Company entered into and completed a private placement (the “Private Placement”) with Independence Blue Cross, a Pennsylvania hospital plan corporation (the “Investor”), for an aggregate of 500,000 shares of Series B Preferred Stock, and warrants (“September 2013 Warrants”) to purchase 5,000,000 shares of common stock, pursuant to the terms of a securities purchase agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement, the Company agreed to sell to the Investor 500,000 investment units (each, a “Private Placement Unit”) in the Private Placement at a per Unit purchase price equal to $3.00. Each Private Placement Unit sold in the Private Placement consisted of one share of Preferred Stock and a September 2013 Warrant to purchase ten shares of common stock at an initial exercise price of $0.15 per share, subject to adjustment. The gross proceeds from the closing of the Private Placement were $1,500,000.

●

Payments on notes payable pertain to notes payable, which we entered into in order to finance two of the Company’s corporate insurance premiums.

●

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

On October 3, 2012, the Company together with InsPro LLC (the “Borrowers”) entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). No advances were made at closing; however an advance of $525,000 was made on October 15, 2012. The Loan Agreement established a revolving credit facility for the Borrowers in the principal amount of up to $2,000,000 (the “Revolving Facility”), which expires on December 2, 2014. The Revolving Facility 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.

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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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Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

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.

(b) Change in Internal Control over Financial Reporting.

There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.

OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we are involved in various investigations, claims and lawsuits arising in the normal conduct of our business, none of which, in our opinion, are material to our business. We cannot assume 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.

Item 6. Exhibits

Exhibit No.		Description
31.1		Chief Executive Officer’s Rule 13a-14(a)/15d-14(a) Certification *
31.2		Chief Financial Officer’s Rule 13a-14(a)/15d-14(a) Certification *
32.1		Chief Executive Officer’s Section 1350 Certification †
32.2		Chief Financial Officer’s Section 1350 Certification †

* Filed herewith.

† Furnished herewith.

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SIGNATURES

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

Date: November 14, 2014	INSPRO TECHNOLOGIES CORPORATION

	By:	/s/ ANTHONY R. VERDI
		Anthony R. Verdi
		Chief Executive Officer, Chief Financial Officer and Chief Operating Officer
		(Principal Executive and Financial Officer)

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EXHIBIT INDEX

Exhibit No.		Description
31.1		Principal Executive Officer’s Rule 13a-14(a)/15d-14(a) Certification *
31.2		Chief Financial Officer’s Rule 13a-14(a)/15d-14(a) Certification *
32.1		Principal Executive Officer’s Section 1350 Certification †
32.2		Chief Financial Officer’s Section 1350 Certification †

* Filed herewith.

† Furnished herewith.

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