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EX-21 - InsPro Technologies Corpv216185_ex21.htm
EX-3.11 - InsPro Technologies Corpv216185_ex3-11.htm
EX-31.1 - InsPro Technologies Corpv216185_ex31-1.htm
EX-32.1 - InsPro Technologies Corpv216185_ex32-1.htm
EX-3.10 - InsPro Technologies Corpv216185_ex3-10.htm
EX-23.1 - InsPro Technologies Corpv216185_ex23-1.htm
EX-31.2 - InsPro Technologies Corpv216185_ex31-2.htm
EX-10.27 - InsPro Technologies Corpv216185_ex10-27.htm
 


 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

R
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

OR

¨
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 N. Radnor-Chester Road
   
Suite B-101
   
Radnor, Pennsylvania
 
19087
(Address of Principal Executive Offices)
 
(Zip Code)

(484) 654-2200
Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:  None.

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.                        ¨   Yes     x  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.                    ¨   Yes      x  No

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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 Act).
Yes  ¨   No  x      

The aggregate market value of common stock, par value $0.001 per share, held by non-affiliates at June 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter) was $3,738,929.  Such aggregate market value was computed by reference to the closing price of the common stock of the registrant on the Over-the-Counter Bulletin Board on June 30, 2010.

As of March 31, 2011, there were 41,543,655 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
None.

 
 

 
 
TABLE OF CONTENTS
     
 
 
Page
     
PART I
Item 1. Business
 
4
Item 2. Properties
 
7
Item 3. Legal Proceedings
 
7
     
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
8
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
8
Item 8. Financial Statements and Supplementary Data
 
F-1
Item 9. Changes in and Disagreements With  Accountants on Accounting and Financial Disclosure
 
22
Item 9A(T). Controls and Procedures
 
22
Item 9B. Other Information
 
22
     
PART III
Item 10. Directors, Executive Officers and Corporate Governance
 
23
Item 11. Executive Compensation
 
27
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
35
Item 13. Certain Relationships and Related Transactions, and Director Independence
 
38
Item 14. Principal Accountant Fees and Services
 
41
Item 15. Exhibits and Financial Statement Schedules
 
43

 
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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

Certain of the statements contained in this Annual Report on Form 10-K, including in the Business description, the “Management’s Discussion and Analysis of Financial Condition and Results” and elsewhere in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained in the forward-looking statements. The forward-looking statements herein include, among others, statements addressing management’s views with respect to future financial and operating results and costs associated with the Company’s operations and other similar statements. Various factors, including competitive pressures, market interest rates, changes in insurance carrier mix, regulatory changes, customer defaults or insolvencies, litigation, acquisition of businesses that do not perform as we expect or that are difficult for us to integrate or control, adverse resolution of any contract or other disputes with customers could cause actual outcomes and results to differ materially from those described in forward-looking statements.

The words “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. While we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report on Form 10-K, 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 Annual Report on Form 10-K will prove to be accurate. In addition, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, if at all. We may not update these forward-looking statements, even though our situation may change in the future.

 
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PART I

ITEM 1.
BUSINESS.

Overview

We were originally incorporated under the laws of the state of Nevada on October 21, 2004 as Darwin Resources Corp., an exploration stage company formed to engage in mineral exploration. On November 22, 2005, Darwin Resources Corp. merged with and into its newly-formed wholly-owned subsidiary, Darwin Resources Corp., a Delaware corporation, solely for the purpose of changing its state of incorporation from Nevada to Delaware. On November 23, 2005, HBDC II, Inc., a newly-formed wholly-owned subsidiary of Darwin Resources Corp., was merged with and into Health Benefits Direct Corporation, a privately-held Delaware corporation, and the name of the resulting entity was changed from Health Benefits Direct Corporation to HBDC II, Inc. Following the merger, Darwin Resources Corp. changed its name to Health Benefits Direct Corporation.  On November 29, 2010, Health Benefits Direct Corporation changed its name to InsPro Technologies Corporation.  We believe that InsPro Technologies Corporation better reflects the Company’s current business strategy and operations.

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

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

InsPro

Product Evolution and Development

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

Product and Services

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

During 2010, we earned $6,077,358 in revenue.  We earned 33% and 16% of the Company’s revenue from InsPro Technologies’ two largest InsPro clients.
 
 
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InsPro incorporates a modular design, which enables the customer to purchase only the functionality needed, thus minimizing the customer’s implementation cost and time necessary to implement InsPro. InsPro can be rapidly tailored to the requirements of a wide range of customers from the largest insurance companies and marketing organizations to the smallest third party administrators, operating in environments ranging from a single server environment to the mainframe installations. InsPro currently supports a wide range of distribution channels, including the Internet, traditional direct marketing, agent-generated, individual and group plans, worksite and association-booked business, and supports underwritten as well as guaranteed products including long term care, Medicare supplement, critical illness, long and short term disability, whole and term life, comprehensive major, hospital indemnity and accidental death and dismemberment.

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

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

Consulting and implementation services are generally associated with the implementation of an InsPro instance for either an ASP or licensed client, and cover such activity as InsPro installation, configuration, modification of InsPro functionality, client insurance plan set-up, client insurance document design and system documentation.
 
InsPro Technologies software arrangements often involve multiple elements. We allocate revenue to each element based on the relative fair value or the residual method, as applicable using vendor specific objective evidence to determine fair value, which is based on prices charged when the element is sold separately. Software revenue is recognized when persuasive evidence of an arrangement exists, the software is delivered in accordance with all terms and conditions of the customer contracts, the fee is fixed or determinable and collectibility is probable.  Revenue related to post-contract customer support, or PCS,, including technical support and unspecified when-and-if available software upgrades, is recognized ratably over the PCS term.   If fair value does not exist for any undelivered element, revenue is not recognized until the earlier of (i) delivery of such element or (ii) when fair value of the undelivered element is established, unless the undelivered element is a service, in which case revenue is recognized as the service is performed once the service is the only undelivered element.

Sales, Marketing and Operations

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

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

           The market for insurance policy administration systems and services is very competitive, rapidly evolving, highly fragmented and subject to rapid technological change. Many of our competitors are more established than we are and have greater name recognition, a larger customer base and greater financial, technical and marketing resources than InsPro.
 
 
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InsPro is focused on the senior health, disability, affinity and association segments. InsPro competes with such concerns as International Business Machines Corporation (Genelco Software), Computer Sciences Corporation (FutureFirst), LifePro and Fiserv Inc. (ID3), as well as with such smaller enterprises as Management Data, Inc. To compete we use best practice technologies and methods incorporated into InsPro, which provides customers with a user-friendly, flexible, modular and cost-effective insurance administrative software system. We also compete on price with a typical InsPro software license fee ranging from $500,000 to $1,700,000. InsPro’s modular design, scalability and ASP hosting service option makes it a compelling insurance administrative system from small third party administrators to the largest insurance carriers.

Employees

As of December 31, 2010 we had 48 employees, which included 46 full-time and 2 part-time employees. None of our employees are members of any labor union and we are not a party to any collective bargaining agreement. We believe that the relationship between our management and our employees is good.

Intellectual Property and Proprietary Rights

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

Corporate Information

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

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

Investor Information

All periodic and current reports, registration statements and other material that we are required to file with the Securities and Exchange Commission, or the Commission,, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, may be obtained free of charge by writing to us at InsPro Technologies Corporation, 150 N. Radnor-Chester Road, Suite B-101, Radnor, Pennsylvania 19087 or e-mailing us at Finance@inspro.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the Commission. Our Internet websites and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
 
 
6

 

The public may also read and copy any materials filed by the Company with the Commission at the Commission’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an Internet site, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission.
 
ITEM 2.
PROPERTIES.

We do not own any real property.

We lease 7,414 square feet of office space in Radnor, Pennsylvania. We lease this office space under a lease agreement with Radnor Properties-SDC, L.P. The term of the lease commenced on November 1, 2006, and will expire on March 31, 2017. The monthly base rent increases every 12 months, starting at approximately $13,466 and ending at approximately $21,531. Under the terms of the lease agreement, rent is waived for the first five months of the lease term with respect to 5,238 square feet and for the first 12 months for the remaining 2,176 square feet.

We also lease approximately 13,600 square feet of space in Eddystone, Pennsylvania. We lease this office space under a lease agreement with BPG Officer VI Baldwin Tower L.P.  The term of this lease commenced on August 1, 2007, and will expire on December 31, 2012. The monthly rent increases every 12 months, starting at approximately $8,500 and ending at approximately $23,900.

We also lease approximately 50,000 square feet of office space in Deerfield Beach, Florida under a lease agreement with 2200 Deerfield Florida LLC. The lease expires on February 28, 2011.  The monthly rent increases every 12 months, starting at $62,500 and ending at approximately $70,344.

ITEM 3.
LEGAL PROCEEDINGS.
 
We are involved in various investigations, claims and lawsuits arising in the normal conduct of our business, none of which, in our opinion, will harm our business. We cannot assure that we will prevail in any litigation. Regardless of the outcome, any litigation may require us to incur significant litigation expense and may result in significant diversion of our attention.
 
 
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PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

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

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

2009:
 
High
   
Low
 
First quarter, ended March 31, 2009
  $ 0.16     $ 0.05  
Second quarter, ended June 30, 2009
  $ 0.16     $ 0.04  
Third quarter, ended September 30, 2009
  $ 0.16     $ 0.05  
Fourth quarter, ended December 31, 2009
  $ 0.13     $ 0.04  
                 
2010:
               
First quarter, ended March 31, 2010
  $ 0.12     $ 0.04  
Second quarter, ended June 30, 2010
  $ 0.11     $ 0.04  
Third quarter, ended September 30, 2010
  $ 0.18     $ 0.04  
Fourth quarter, ended December 31, 2010
  $ 0.51     $ 0.05  
                 
2011:
               
First quarter, ended March 31, 2011
  $ 0.10     $ 0.05  

Holders of Record

Based on information furnished by our transfer agent, as of March 31, 2011, we had approximately 111 holders of record of our common stock.

Dividends

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

ITEM 7.
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 our InsPro Technologies, LLC subsidiary (“InsPro Technologies”).

          InsPro is a comprehensive, web-based insurance administration software application. InsPro was introduced by Atiam Technologies, L.P. (now our InsPro Technologies, LLC subsidiary) in 2004. InsPro clients include health insurance carriers and third party administrators. We market InsPro as a licensed software application, and we realize revenue from the sale of the software licenses, application service provider fees, software maintenance fees and professional services.
 
 
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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 or Plan of Operation is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates these estimates, including those related to allowances for doubtful accounts receivable and long-lived assets such as intangible assets. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Significant estimates in 2010 and 2009 include the allowance for doubtful accounts, stock-based compensation, the useful lives of property and equipment and intangible assets, accrued expenses pertaining to abandoned facilities, warrant liability and revenue recognition.  Actual results may differ from these estimates under different assumptions or conditions.

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

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

Professional services are generally associated with the implementation of an InsPro instance for either an ASP or licensed client, and cover such activity as InsPro installation, configuration, modification of InsPro functionality, client insurance plan set-up, client insurance document design and system documentation.
 
InsPro Technologies revenue is generally recognized under ASC 985-605.   For software arrangements involving multiple elements, we allocate revenue to each element based on the relative fair value or the residual method, as applicable using vendor specific objective evidence to determine fair value, which is based on prices charged when the element is sold separately. Software revenue accounted for under ASC 985-605 is recognized when persuasive evidence of an arrangement exists, the software is delivered in accordance with all terms and conditions of the customer contracts, the fee is fixed or determinable and collectibility is probable.  Revenue related to post-contract customer support (“PCS”), including technical support and unspecified when-and-if available software upgrades, is recognized ratably over the PCS term.   Under ASC 985-605, if fair value does not exist for any undelivered element, revenue is not recognized until the earlier of (i) delivery of such element or (ii) when fair value of the undelivered element is established, unless the undelivered element is a service, in which case revenue is recognized as the service is performed once the service is the only undelivered element.
 
 
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We recognize revenues from software license agreements when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectibility 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 module, we allocate the total arrangement fee among the modules based on the relative fair value of each of the modules.

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

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

We review the carrying value of property and equipment and intangible assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.
 
Results of Operations for the Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

For the year ended December 31, 2010, or 2010, we earned revenues of $6,077,358 compared to $6,847,767 for the year ended December 31, 2009, or 2009, a decrease of $770,409 or 11%.  Revenues include the following:
 
   
For the Year Ended December 31,
 
   
2010
   
2009
 
             
Professional services
  $ 3,694,125     $ 3,596,895  
ASP revenue
    1,487,880       1,480,322  
Sales of software licenses
    125,000       1,162,500  
Maintenance revenue
    761,250       578,000  
Sub-leasing revenue
    9,103       30,050  
                 
Total
  $ 6,077,358     $ 6,847,767  

 
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·
Professional services revenue increased as a result of higher post implementation services, which were provided to several of our largest clients.  Implementation services included assisting clients in setting up their insurance products in InsPro, providing modifications to InsPro’s functionality to support the client’s business, interfacing InsPro with the client’s other systems, automation of client correspondence to their customers and data conversion from the client’s existing systems to InsPro.
 
 
·
ASP revenue marginally increased as a result of the commencement of hosting services to a recently implemented client partially offset by lower ASP revenue from three other clients.  In 2010 we earned ASP revenue from seven InsPro clients. ASP hosting service enables a client to lease the InsPro software, paying only for that capacity required to support their business.  In addition InsPro Technologies provides hosting service to client’s licensed InsPro software.  InsPro’s ASP clients access InsPro installed on InsPro Technologies’ owned servers located at InsPro Technologies’ offices or at a third party’s site.
 
 
·
In 2010 and 2009 we earned sales of software licenses from one InsPro client in 2010 and three clients in 2009.
 
 
·
Maintenance revenue increased as a result of the addition of three maintenance contracts in 2010  compared to 2009.  In 2010 we earned maintenance revenues from seven clients.
 
 
·
We earned sub-leasing revenue from the sub-leasing of space in our Radnor office.  The subleasing commenced in March 2009 and ended in March 2010.

Cost of Revenues

Our cost of revenues for 2010 was $6,563,842 as compared to $6,265,536 for 2009 for an increase of $298,306 or 5%. Cost of revenues consisted of the following:

   
For the Year Ended December 31,
 
   
2010
   
2009
 
             
Salaries, employee benefits and related taxes
  $ 3,953,596     $ 3,547,783  
Professional fees
    1,622,039       1,812,229  
Rent, utilities, telephone and communications
    295,173       262,456  
Other cost of revenues
    693,034       643,068  
    $ 6,563,842     $ 6,265,536  

 
·
Our salaries, employee benefits and related taxes component of cost of revenues in 2010 was $3,953,596 as compared to $3,547,783 for 2009 for an increase of $405,813 or 11%.  Salaries, employee benefits and related taxes increased as a result of increased employee staffing.  InsPro Technologies strengthened its management by hiring a COO in the fourth quarter of 2009 and hiring staff in quality assurance, customer implementation and business development areas.
 
 
·
Our professional fees component of cost of revenues in 2010 was $1,622,039 as compared to $1,812,229 for 2009 for a decrease of $190,190 or 11%. Professional fees decreased as a result of the hiring of two key former consultants as employees and reduced utilization of certain domestic based independent contractors partially offset by $167,571 of training and set up expense incurred pertaining to a new vendor, who will provide InsPro Technologies with offshore outsourcing capabilities, which we believe will provide us with cost effective and scalable technology resources in the future.
 
 
11

 
 
 
·
Our rent, utilities, telephone and communications component of cost of revenues in 2010 was $295,173 as compared to $262,456 for 2009 for an increase of $32,727 or 13%.  Rent, utilities, telephone and communications increased as a result of an increase in the amount of leased space at InsPro’s Eddystone office during 2009 and to a lesser extent an increase in ASP data connection costs and corporate telephone and communications expense.
 
 
·
Our other cost of revenues component of cost of revenues in 2010 was $693,034 as compared to $643,068 in 2009, an increase of $49,966 or 8%.  Other cost of revenues consisted of the following:
 
   
For the Year Ended December 31,
 
   
2010
   
2009
 
             
Office expenses
  $ 5,606     $ 8,823  
Travel and entertainment
    107,325       91,897  
Computer processing, hardware and software
    571,609       537,364  
Other
    8,494       4,984  
                 
Total
  $ 693,034     $ 643,068  
 
 
o
Our travel and entertainment component of cost of revenues increased as a result of post implementation support, which was provided to a client whose InsPro licensed application was implemented in 2010. We incurred travel and entertainment expense in connection with customer relationship management and implementation of InsPro at client locations.
 
 
o
Our computer processing, hardware and software component of cost of revenues in 2010 was $571,609 as compared to $537,364 in 2009, an increase of $34,245 or 6%.  The increase was the result of costs incurred to reorganize and move certain equipment in order to improve performance and ultimately reduce cost in the future and certain vendor discounts pertaining to computer processing provided to the Company in 2009 in connection with a new ASP client, which expired in 2009.  We incur computer processing, hardware and software fees associated with ASP hosting services and these services increased due to incremental services and expense associated with a new InsPro client.  InsPro has a hosting services contract with a third party, which can be terminated with notice and payment of a termination fee.  This third party provides InsPro Technologies with hosting services for our client’s ASP environments.
 
Gross Profit (Loss)

As a result of the aforementioned factors, we reported a gross loss of $486,484 in 2010, which is $1,068,715 less than the reported gross profit of $582,231 in 2009 and primarily the result of lower revenue from sales of software licenses and to a lesser extent higher salaries, employee benefits and related taxes in cost of revenue.

 
12

 

Selling, Marketing and Administrative Expenses

Our selling, marketing and administrative expenses for 2010 were $5,387,808 as compared to $6,952,835 for 2009 for a decrease of $1,565,027 or 23%.  Selling, marketing and administrative expenses consisted of the following:

   
For the Year Ended December 31,
 
   
2010
   
2009
 
             
Salaries, employee benefits and related taxes
  $ 2,765,161     $ 3,489,204  
Advertising and other marketing
    160,903       279,450  
Depreciation and amortization
    876,644       885,681  
Rent, utilities, telephone and communications
    403,955       545,677  
Professional fees
    653,123       1,286,064  
Other general and administrative
    528,022       466,759  
    $ 5,387,808     $ 6,952,835  
 
In 2010 we incurred salaries, employee benefits and related taxes of $2,765,161 as compared to $3,489,204 for 2009, a decrease of $724,043 or 21%. Salaries, commission and related taxes consisted of the following:
 
   
For the Year Ended December 31,
 
   
2010
   
2009
 
             
Salaries, wages and bonuses
  $ 2,031,443     $ 2,187,342  
Share based employee and director compensation
    383,523       555,161  
Commissions to employees
    40,319       25,454  
Employee benefits
    131,001       107,451  
Payroll taxes
    119,881       139,129  
Severance and other compensation
    16,967       356,305  
Directors’ compensation
    42,027       118,362  
                 
Total
  $ 2,765,161     $ 3,489,204  

 
·
Salaries, wages and bonuses were $2,031,443 in 2010 as compared to $2,187,342 in 2009, a decrease of $155,899 or 7%.  The decrease is the result the elimination of two senior executive positions, four human resource positions and an accounting position.  These reductions in corporate expenses were partially offset by increased staffing in InsPro’s sales and IT infrastructure areas.

 
·
Share based employee and director compensation expense was $383,523 in 2010 as compared to $555,161 in 2009.

 
o
In the third quarter of 2010 the Company granted to Mr. Oakes an immediately exercisable warrant to purchase 150,000 shares of Series A Preferred Stock at an exercise price equal to $4.00 per share.  The Company recorded an expense of $332,994, which is the estimated fair value of warrant.
 
 
o
On October 29, 2009 all outstanding unvested options became vested and the associated unamortized deferred compensation expense was expensed as a result of a change of control as defined in the 2008 Equity Compensation Plan on that date. Consequently the only expense incurred in 2010 pertains to options granted after October 29, 2009.
 
 
13

 
 
 
o
Share based employee and director compensation consist of stock option and restricted stock grants, which are valued at fair-value at the date of the grant and expensed over the stock option’s vesting period or the duration of employment, whichever is shorter.

 
·
Commissions to employees were $40,319 in 2010 as compared to $25,454 in 2009, an increase of $14,865 or 58%.  Commissions to employees increased as a result of increased commissionable revenue activity, which was paid to InsPro Technologies’ sales personnel.
 
 
·
Employee benefits expense was $131,001 in 2010 as compared to $107,451 in 2009, an increase of $23,550 or 22%. The increase is primarily the result of increased employee group health insurance cost as a result of a change in the Company’s employee benefits program in 2010 to provide all employees with comparable employee benefits at comparable cost.
 
 
·
Severance and other compensation was $16,967 in 2010 as compared to $356,505 in 2009. The decrease was the result of the accrual of severance expense as of March 31, 2009 as a result of the Separation of Employment and General Release Agreement with Mr. Eissa.
 
Advertising and other marketing in 2010 was $160,903 as compared to $279,450 in 2009 InsPro Technologies’ marketing strategy, included creating the corporate brand and message and redesign of all sales and marketing material, company web site, brochures and sales presentation.  Costs in 2009 included the use of outside agencies for services rendered in connection with the development of InsPro Technologies’ marketing strategy.

Depreciation and amortization expense consisted of the following:
   
For the Year Ended December 31,
 
   
2010
   
2009
 
             
Amortization of intangibles acquired as a result of the InsPro acquisition
  $ 437,706     $ 468,079  
Amortization of software and website development for external marketing
    43,574       87,148  
Depreciation expense
    395,364       330,454  
                 
Total
  $ 876,644     $ 885,681  

 
·
In 2010 we incurred amortization expense of $437,706 for the intangible assets acquired from InsPro Technologies as compared to $468,079 in 2009.   The decrease in 2010 as compared to 2009 is the result of employment and non-compete agreements acquired, which were amortized straight line over three years starting on October 1, 2007, that became fully amortized effective September 30, 2010.
 
 
·
In 2010 we incurred amortization expense of $43,574 for software development cost for external marketing pertaining to InsPro Technologies’ InsPro system as compared to $87,148 in 2009. The decrease was the result of the completion of the amortization in the second quarter of 2010.
 
 
·
In 2010 we incurred depreciation expense of $395,364 as compared to $330,454 in 2009. The increase was due to assets recently acquired by InsPro Technologies.
 
In 2010 we incurred rent, utilities, telephone and communications expense of $403,955 as compared to $545,677 in 2009, a decrease of $141,722 or 26%.  The decrease is primarily due to corporate staffing reductions and cost containment actions.
 
 
14

 
In 2010 we incurred professional fees of $653,123 as compared to $1,286,064 in 2009, a decrease of $632,941 or 49%.  The decrease is primarily the result of lower legal fees as compared to 2009, which was primarily due to legal costs incurred in connection with litigation with certain shareholders, and to a lesser extent lower costs in executive recruiting and investor relations costs.  The decrease is primarily the result of a reduced legal costs related to certain former employees and shareholder litigation, which was resolved in 2010.
 
Loss from operations

As a result of the aforementioned factors, we reported a loss from operations of $5,874,292 in 2010 as compared to a loss from operations of $6,370,604 in 2009.

Gain (loss) on discontinued operations

Results from discontinued operations were as follows:
   
For the Year Ended December 31,
 
   
2010
   
2009
 
Revenues:
           
Commission and other revenue from carriers
  $ 452,360     $ 2,157,217  
Gain recognized upon the execution of the Agreement
    -       2,664,794  
Transition policy commission pursuant to the Agreement
    1,114,477       1,786,480  
Gain on the sale of Insurint
    578,569       -  
Gain on disposal of property and equipment
    6,530       230,170  
Lead sale revenue
    156       228  
Insurint revenue
    53,340       163,947  
Sub-lease revenue
    1,219,723       1,447,738  
                 
      3,425,155       8,450,574  
                 
Operating expenses:
               
Salaries, employee benefits and related taxes
    238,698       1,838,247  
Lead, advertising and other marketing
    -       101,356  
Depreciation and amortization
    -       363,787  
Rent, utilities, telephone and communications
    312,068       3,632,962  
Professional fees
    182,424       596,765  
Loss on impairment of property and equipment
    -       416,764  
Loss on impairment of intangible assets
    -       1,222,817  
Other general and administrative
    228,290       707,813  
                 
      961,480       8,880,511  
                 
Gain (loss) from discontinued operations
  $ 2,463,675     $ (429,937 )
 
We earned revenues in discontinued operations of $3,425,155 in 2010 compared to $8,450,574 in 2009, a decrease of $5,025,419 or 59%.  Revenues include the following:
 
 
·
Commission and other revenue from carriers of $452,360 in 2010 as compared to $2,157,217 in 2009.  The decrease is primarily the result of the execution of the Client Transition Agreement, or the Agreement, with eHealth Insurance Services, Inc., or eHealth, whereby we no longer receive commission revenue on certain policies transferred to eHealth effective on or about February 1, 2009. We continue to receive commissions from carriers other than certain specified carriers and commissions on policies other than the transferred policies.
 
 
15

 
 
 
·
Gain recognized upon the execution of the Agreement of $2,664,794 in the first quarter of 2009, which is the sum of the aggregate initial amount of consideration paid by eHealth and eHealth’s assumption of certain liabilities relating to historical commission advances on the transferred policies.
 
 
·
Transition policy commission pursuant to the Agreement of $1,114,478 in 2010 as compared to $1,786,480 in 2009.  The decrease is due to the declines in our Telesales call center produced agency business.
 
 
·
During the first quarter of 2010 we recognized a $578,569 gain on the sale of Insurint effective upon the March 31, 2010 execution of an asset purchase agreement, or the Insurint Sale Agreement, with an unaffiliated third party.
 
 
o
Pursuant to the terms of the Insurint Sale Agreement we sold substantially all of Insurint’s assets used in Insurint’s business including the Insurint software, the www.insurint.com web site, other intellectual property specific to Insurint including but not limited to the customer base and all future revenue pertaining to Insurint.  The buyer agreed to assume future Insurint commitments and expenses subsequent to March 31, 2010.
 
 
o
Pursuant to the Insurint Sale Agreement we will receive in aggregate $625,000 in cash from the buyer of Insurint, of which $312,500 was received on April 1, 2010 and the $312,500 balance will be received over twenty-three equal monthly installments in the amount of $13,020.83, with the first monthly payment due on May 1, 2010, and the last monthly payment in the amount of $13,020.91 due on April 1, 2012.
 
 
o
We incurred $21,829 of legal costs pertaining to the Insurint Sale Agreement.
 
 
·
Insurint revenue was $53,340 in 2010 and $163,947 in 2009.  Insurint revenue ceased effective March 31, 2010 as a result of the Insurint Sale Agreement.
 
 
·
In 2010 we earned sub-lease revenue of $1,219,723 as compared to $1,447,738 in 2009 relating to the sub-lease of a portion of our former Agency and Insurint operations office in Florida and our former New York Agency sales office. The decline in sub-lease revenue is the result of lower sub-lease revenue from both our former New York sales office and Deerfield Beach office.  Sub-lease revenue includes base rent, additional rent pertaining to utilities and occupancy costs and certain telephony, technology and facility services provided by us to certain of our sub-tenants.  Sub-lease revenue from our former New York sales office terminated effective December 31, 2010 along with our sub-lease expense and obligation for this office.  Sub-lease revenue from our Florida office will terminate effective February 28, 2011 along with our lease expense and obligation for this office.
 
Total operating expenses of discontinued operations for 2010 was $961,480 as compared to $8,880,511 for 2009 for a decrease of $7,919,031 or 89% as compared to 2009.  The primary reason for the decrease is attributable to lower expenses associated with our accrual for abandoned leases, which are recorded in rent, utilities and communications expenses, recording of impairment expense in 2009, and the elimination of expenses associated with our former Agency and Insurint businesses.  Insurint’s expenses ceased effective March 31, 2010 as a result of the Insurint Sale Agreement.  Our Agency business expenses were significantly reduced as a result of the cessation of direct marketing and selling activities in the first quarter of 2009.
 
 
16

 
 
Gain from discontinued operations

As a result of the aforementioned factors, we reported a gain from discontinued operations of $2,463,675 or $0.06 per share in 2010 as compared to a loss from discontinued operations of $429,937 or $0.01 per share in 2009.
 
Other income (expenses)

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

Interest expense of $247,417 in 2010 includes $142,136 of accrued interest and $42,087 amortization of deferred loan costs on the Note (as defined below) together with imputed interest on certain employee obligations.

In 2010 we recognized a gain on the change in fair value of warrants liabilities of $1,136,588 as compared to a gain of $534,391 in 2009.  The gain in 2010 and 2009 represents the mark to market adjustments for the change in fair value of warrants, which contain provisions that adjust the exercise price of these warrants in the event we issue our common stock or other securities convertible into our common stock at price lower than the exercise price of these warrants.

Net loss

As a result of these factors discussed above, we reported a net loss of $2,500,446 or $0.06 per share in 2010 as compared to a net loss of $6,331,310 or $0.15 per share in 2009.

Inflation

We do not believe inflation had a material effect on our financial position or results of operations during the past two years, however, we cannot predict future effects of inflation.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2010, we had a cash balance of $4,429,026 and working capital of $3,541,187.

At December 31, 2010, we had a restricted cash balance of $1,152,373, which represents a money market account and certificate of deposit with restricted balances pertaining to two letters of credit for the benefit of the landlords of our Florida and our former New York offices.  The money market account and certificate of deposit are on deposit with the issuer of the letters of credit.  We receive the interest on the money market account and certificate of deposit.  Subsequent to December 31, 2010, the letters of credit expired, the restrictions on our restricted cash were lifted, and these balances were reclassified as cash.

 
Net cash used by operations was $4,774,623 in 2010 as compared to net cash used by operations of $5,327,683 in 2009.  In 2010 we used cash to fund our net loss of $2,500,446 and:

 
·
Decreases in accounts receivable of $305,566, which is primarily the result of the collection of amounts pertaining to the sale of software licenses in the fourth quarter of 2009.
 
 
·
Decreases in accounts payable of $330,911, which is primarily the result of the Company’s reduction in its backlog of past due payables during 2010.
 
 
·
Decreases in accrued expenses of $469,925, which is primarily the result of the payment of severance to Mr. Eissa in 2010, which was accrued as of December 31, 2009, and the payment of accrued legal fees during 2010, which were accrued as of December 31, 2009.
 
 
17

 
 
 
·
Decreases in net liabilities of discontinued operations of $2,214,461, which is primarily the result of our payment of abandoned lease costs, that were accrued as of December 31, 2010, pertaining to our Deerfield Beach and New York offices.
 
 
o
As of December 31, 2010, we had $63,301 of net assets of discontinued operations as compared to $2,144,630 of net liabilities of discontinued operations as of December 31, 2009.
 
 
o
We do not anticipate our discontinued operations will continue to utilize cash from operations subsequent to December 31, 2010.
 
 
§
The sub-lease of our former New York office expired on December 31, 2010 and any remaining liabilities we have pertaining to this office will be funded out of our security deposit.
 
 
§
We anticipate future cash receipts from our former Agency and Insurint businesses combined with sublease revenue will exceed our remaining $117,935 liability, which we recorded pertaining to our abandoned lease for our Deerfield Beach office.
 
In addition to cash used in operating activities we incurred the following non-cash gain and expenses in 2010, which were included in our net loss, including:
 
 
·
Recorded depreciation and amortization expense of $876,644 and $885,681 in 2010 and 2009, respectively.
 
 
·
Recorded stock-based compensation and consulting expense of $383,523 and $619,721 in 2010 and 2009, respectively.
 
 
·
Recognized a gain on change in fair value of warrants liabilities of $1,136,588 in 2010 and $534,391 in 2009.
 
 
·
In the first quarter of 2009 we recorded $1,639,581 pertaining to the impairment of certain long lived assets of our discontinued operations.
 
 
·
We recorded a loss of $6,530 and a gain of $233,228 on the disposal of property and equipment of discontinued operations in 2010 and 2009, respectively.
 
Net cash used by investing activities in 2010 was $239,607 as compared to $304,478 in 2009.  Investing activities pertain to the purchase of property and equipment supporting current and future operations.
 
 
18

 
 
Net cash provided by financing activities in 2010 was $8,039,603 as compared to $5,193,395 in 2009.
 
 
·
During the first quarter of 2010 we received $1,107,000 in gross proceeds as a result of the issuance of preferred stock and warrants as a result of the exercise of subscription units by certain shareholders pertaining to our rights offering, which was completed on March 26, 2010.
 
 
o
On January 14, 2010 we filed a prospectus for a rights offering on Form S-1/A, which the Commission declared effective on January 22, 2010, to distribute to shareholders at no charge, one non-transferable subscription right for each 12,256 shares of our common stock and 613 shares of our Series A Preferred Stock owned as of January 1, 2010, 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 shareholders’ behalf, as a beneficial owner of such shares.  This rights offering was designed to give all of the holders of the Company’s common stock the opportunity to participate in an equity investment in the Company on the same economic terms as the Company’s 2009 private placement.

 
o
The basic subscription right entitled the holder to purchase one unit, or a Subscription Unit, at a subscription price of $1,000. A Subscription Unit consisted of 250 shares of Series A Preferred Stock and a five-year warrant to purchase 5,000 shares of common stock at an exercise price of $0.20 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.

 
o
Effective with the expiration of the subscription rights, which occurred on March 26, 2010, holders of subscription rights exercised in aggregate 1,061 basic subscription rights and 46 over subscription rights for a total 1,107 Subscription Units.  As a result of the exercise of 1,107 Subscription Units we issued effective on March 26, 2010 in aggregate 276,750 shares of Series A Preferred Stock and five-year warrants to purchase in aggregate 5,535,000 shares of common stock at an exercise price of $0.20 per share. The Series A Preferred Stock issued in 2010 has the same terms as the Series A Preferred Stock issued in 2009.

 
o
Of the 1,107 subscription rights exercised, The Co-Investment Fund II, L.P., a Delaware limited partnership, or Co-Investment, exercised 1,000 basic subscription rights for $1,000,000 and on March 26, 2010, the Company issued to Co-Investment 250,000 shares of Series A Preferred Stock and five-year warrants to purchase in aggregate 5,000,000 shares of common stock at an exercise price of $0.20 per share.

 
o
Effective with the expiration of the subscription rights all unexercised subscription rights expired.

 
·
During the second quarter of 2010 we received $1,000,000 in gross proceeds as a result of the modification of the terms of the Loan Agreement and Note (each as defined below).
 
 
o
On June 15, 2010, the Company and Co-Investment agreed to modify the terms of the loan agreement, or the Loan Agreement, and the Secured Promissory Note, or the Note, between the parties to: (i) increase the loan from $1,250,000 to $2,250,000 on June 15, 2010 and (ii) allow Co-Investment to demand the Company to repay to Co-Investment an amount not to exceed the loan balance plus accrued interest in the form of the Company’s equity securities at the conversion price and terms identical to the price and terms of the Company’s next issuance of common or preferred stock issued for cash consideration occurring after June 15, 2010 (“Equity Issuance”).  An Equity Issuance occurred on September 30, 2010.
 
 
19

 
 
 
o
The Company and Co-Investment agreed in the event that the Company did not have a sufficient number of authorized shares of its equity securities to issue to Co-Investment the Company and Co-Investment will jointly cooperate with one another in obtaining the necessary shareholder approval to increase the number of authorized shares of the Company’s equity securities and the effective date of the issuance and repayment will be the date of the Company’s shareholder approval.
 
 
o
The Company incurred $18,389 of costs associated with the Loan Agreement and Note in the second quarter of 2010.
 
 
·
During the third quarter of 2010 we received $5.4 million in gross proceeds as a result of the issuance of units of preferred stock and warrants in a private offering.
 
 
o
On September 30, 2010, the Company entered into and completed a private placement, or the 2010 Private Placement, with certain accredited investors, including Independence Blue Cross, a Pennsylvania hospital plan corporation, for an aggregate of 1,800,001 shares of Series B Preferred Stock, and warrants to purchase 18,000,010 shares of our common stock, pursuant to the terms of a securities purchase agreement, or the 2010 Purchase Agreement.
 
 
o
Under the terms of the 2010 Purchase Agreement, and subject to the approval of the Company’s shareholders of an amendment to the Certificate of Incorporation of the Company to increase the number of shares of authorized Common Stock of the Company, the Company has agreed to sell an additional 200,000 Units to the investors after September 30, 2010, on the same terms and conditions as described in the 2010 Purchase Agreement.
 
 
·
During the fourth quarter of 2010 we received $0.6 million in gross proceeds as a result of the issuance of preferred stock and warrants in the sale of 200,000 Units to Independence Blue Cross as part of the 2010 Private Placement.
 
 
·
In the first quarter of 2009 we completed a private placement (the “2009 Private Placement”) with Co-Investment and issued 1,000,000 shares of our Series A Preferred Stock and warrants to purchase 1,000,000 shares of our Series A Preferred Stock.  Our gross proceeds were $4,000,000 and we paid $15,617 of legal and other expenses in connection with the 2009 Private Placement.
 
 
·
During the fourth quarter of 2009 the Company received $1,250,000 from Co-Investment upon entering into the Loan Agreement.
 
 
·
InsPro Technologies has entered into various capital lease obligations to purchase equipment used for operations.
 
As of December 31, 2010, we have funded our operating and investment activities from the proceeds of the sale of shares of our equity securities and from the proceeds from the Note.  Our liquidity needs for the next twelve months and beyond are principally for the funding of our operations and the purchase of fixed assets.  Barring unforeseen circumstances, we anticipate being able to fund these liquidity needs for the next twelve months with cash and cash equivalents balances as of December 31, 2010, and restricted cash, which became available to fund operations subsequent to December 31, 2010.  We believe that offerings of equity or debt securities are possible for expenditures beyond the next twelve months, if the need arises, although such offerings may not be available to us on acceptable terms and are dependent on market conditions at such time.
 
 
20

 

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.

The letters of credit pertaining to the lease for our Deerfield Beach, Florida office and our New York office were collateralized with assets in the form of a money market account and certificate of deposit, which as of December 31, 2010, in aggregate had a balance of $1,152,373.  These accounts were on deposit with the issuer of the letters of credit and are classified as restricted cash on our balance sheet.  Subsequent to December 31, 2010, these letters of credit were terminated as a result of the expiration of our Deerfield Beach and New York leases.  As a result of the termination of these letters of credit, subsequent to December 31, 2010, the restrictions on our restricted cash were lifted, and these balances were reclassified as cash.
 
 
21

 
 
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

FINANCIAL STATEMENTS
 
TABLE OF CONTENTS
 
   
Page
Number
     
INSPRO TECHNOLOGIES CORPORATION
   
     
Report of Independent Registered Public Accounting Firm
 
F-2
Consolidated Balance Sheets at December 31, 2010 and December 31, 2009
 
F-3
Consolidated Statements of Operations for the Years Ended December 31, 2010 and December 31, 2009
 
F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the Years Ended December 31, 2010 and December 31, 2009
 
F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and December 31, 2009
 
F-6
Notes to Consolidated Financial Statements
 
F-7 to
F48
 
 
F-1

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors
InsPro Technologies Corporation
Radnor, Pennsylvania
 
We have audited the accompanying consolidated balance sheets of InsPro Technologies Corporation and Subsidiaries as of December 31, 2010 and December 31, 2009, the related consolidated statements of operations, changes in shareholders' equity (deficit) and cash flows for the years ended December 31, 2010 and December 31, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of InsPro Technologies Corporation and Subsidiaries as of December 31, 2010 and December 31, 2009, and the results of their operations and their cash flows for the years ended December 31, 2010 and December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Sherb & Co., LLP
Certified Public Accountants
Boca Raton, Florida
March 25, 2011
 
 
F-2

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
December 31, 2010
   
December 31, 2009
 
             
ASSETS
           
CURRENT ASSETS:
           
Cash
  $ 4,429,026     $ 1,403,653  
Accounts receivable, net
    709,503       1,015,069  
Tax receivable
    6,455       16,817  
Prepaid expenses
    158,245       83,834  
Other current assets
    1,756       43,227  
Assets of discontinued operations
    63,301       -  
                 
Total current assets
    5,368,286       2,562,600  
                 
Restricted cash
    1,152,573       1,154,044  
Property and equipment, net
    613,618       768,184  
Intangibles, net
    606,785       1,088,065  
Other assets
    92,558       110,608  
                 
Total assets
  $ 7,833,820     $ 5,683,501  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
               
                 
CURRENT LIABILITIES:
               
Note payable
  $ 17,311     $ 7,595  
Secured note from related party
    -       1,252,740  
Accounts payable
    918,972       1,249,883  
Accrued expenses
    346,808       816,733  
Current portion of capital lease obligations
    158,138       135,913  
Due to related parties
    8,370       -  
Deferred revenue
    377,500       232,500  
Liabilities of discontinued operations
    -       2,144,630  
                 
Total current liabilities
    1,827,099       5,839,994  
                 
LONG TERM LIABILITIES:
               
Warrant liability
    4,030,340       2,021,912  
Capital lease obligations
    165,612       201,627  
                 
Total long term liabilities
    4,195,952       2,223,539  
                 
SHAREHOLDERS' EQUITY (DEFICIT):
               
Preferred stock ($.001 par value; 20,000,000 shares authorized)
               
Series A convertible preferred stock; 3,437,500 shares authorized, 1,276,750 and 1,000,000, shares issued and outstanding, respectively (liquidation value $12,767,500 and $10,000,000, respectively)
    2,864,104       1,983,984  
Series B convertible preferred stock; 5,000,000 and 2,250,000 shares authorized, respectively, 2,797,379 and 0 shares issued and outstanding, respectively (liquidation value $8,392,137 and $0, respectively)
    5,427,604       -  
Common stock ($.001 par value; 300,000,000 and 200,000,000 shares authorized, respectively;  41,543,655 shares issued and outstanding)
    41,543       41,543  
Additional paid-in capital
    36,764,016       36,380,493  
Accumulated deficit
    (43,286,498 )     (40,786,052 )
                 
Total shareholders' equity (deficit)
    1,810,769       (2,380,032 )
                 
Total liabilities and shareholders' equity (deficit)
  $ 7,833,820     $ 5,683,501  

See accompanying notes to audited consolidated financial statements.

 
F-3

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

   
For the Year Ended December 31,
 
   
2010
   
2009
 
             
Revenues
  $ 6,077,358     $ 6,847,767  
                 
Cost of revenues
    6,563,842       6,265,536  
                 
Gross profit (loss)
    (486,484 )     582,231  
                 
Selling, general and administrative expenses:
               
Salaries, employee benefits and related taxes
    2,765,161       3,489,204  
Advertising and other marketing
    160,903       279,450  
Depreciation and amortization
    876,644       885,681  
Rent, utilities, telephone and communications
    403,955       545,677  
Professional fees
    653,123       1,286,064  
Other general and administrative
    528,022       466,759  
                 
      5,387,808       6,952,835  
                 
Loss from operations
    (5,874,292 )     (6,370,604 )
                 
Gain (loss) from discontinued operations
    2,463,675       (429,937 )
                 
Other income (expense):
               
Gain on the change of the fair value of warrant liability
    1,136,588       534,391  
Interest income
    21,000       29,579  
Interest expense
    (247,417 )     (94,739 )
                 
Total other income (expense)
    910,171       469,231  
                 
Net loss
  $ (2,500,446 )   $ (6,331,310 )
                 
Net loss per common share - basic and diluted:
               
Loss from operations
  $ (0.12 )   $ (0.14 )
Gain (loss) from discontinued operations
    0.06       (0.01 )
Net loss per common share - basic and diluted
  $ (0.06 )   $ (0.15 )
                 
Weighted average common shares outstanding - basic and diluted
    41,543,655       41,286,898  

See accompanying notes to audited consolidated financial statements.

 
F-4

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

    
Series A Preferred Stock,
   
Series B Preferred Stock,
   
Common Stock, $.001
                   
   
$.001 Par Value
   
$.001 Par Value
   
Par Value
                   
   
Number of
Shares
   
Amount
   
Number of
Shares
   
Amount
   
Number of
Shares
   
Amount
   
Additional Paid-
in Capital
   
Accumulated
Deficit
   
Total
Shareholders'
Equity (Deficit)
 
                                                       
Balance - December 31, 2008
                            41,279,645     $ 41,279     $ 43,281,139     $ (41,378,941 )   $ 1,943,477  
                                                                 
Cumulative effect of a change in accounting principle-adoption of EITF 07-05 effective January 1, 2009
                                            (7,603,090 )     6,924,199       (678,891 )
                                                                 
Preferred stock and warrants issued in private placement
    1,000,000       1,983,984                                   1,960,399               3,944,383  
                                                                     
Record fair value of warrant liability pertaining to warrants issued in private placement during 2009
                                                (1,877,412 )             (1,877,412 )
                                                                     
Common stock issued to directors as compensation
                                264,010       264       12,936               13,200  
                                                                     
Amortization of deferred compensation
                                                606,521               606,521  
                                                                     
Net loss for the period
                                                        (6,331,310 )     (6,331,310 )
                                                                     
Balance - December 31, 2009
    1,000,000       1,983,984                   41,543,655       41,543       36,380,493       (40,786,052 )     (2,380,032 )
                                                                     
Preferred stock and warrants issued in rights offering
    276,750       880,120                                                   880,120  
                                                                     
Preferred stock and warrants issued in private placement
                    2,000,001       3,609,525                                       3,609,525  
                                                                         
Warrant issued to Robert Oakes as compensation
                                                    332,994               332,994  
                                                                         
Preferred stock and warrants issued in connection with conversion of secured note from related party
                    797,378       1,818,079                                       1,818,079  
                                                                         
Amortization of deferred compensation
                                                    50,529               50,529  
                                                                         
Net loss for the period
                                                            (2,500,446 )     (2,500,446 )
                                                                         
Balance - December 31, 2010
    1,276,750     $ 2,864,104       2,797,379     $ 5,427,604       41,543,655     $ 41,543     $ 36,764,016     $ (43,286,498 )   $ 1,810,769  

See accompanying notes to audited consolidated financial statements.
 
 
F-5

 

INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
   
For the Year Ended December 31,
 
   
2010
   
2009
 
             
Cash Flows From Operating Activities:
           
Net loss
  $ (2,500,446 )   $ (6,331,310 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    876,644       885,681  
Stock-based compensation and consulting
    383,523       619,721  
Gain on change of fair value of warrant liability
    (1,136,588 )     (534,391 )
Loss on impairment of property and equipment of discontinued operations
    -       416,764  
Loss on impairment of intangible assets of discontinued operations
    -       1,222,817  
Gain (loss) on the disposal of equipment of discontinued operations
    6,530       (233,228 )
Provision for bad debt
    -       7,211  
Changes in assets and liabilities:
               
Accounts receivable
    305,566       (557,385 )
Tax receivable
    10,362       14,473  
Prepaid expenses
    (74,411 )     43,775  
Other current assets
    (1,802 )     8,506  
Other assets
    18,050       -  
Accounts payable
    (330,911 )     519,922  
Accrued interest on related secured note from related party
    199,876       -  
Accrued expenses
    (469,925 )     119,478  
Due to related parties
    8,370       (4,315 )
Deferred revenue
    145,000       (225,000 )
Assets and liabilities of discontinued operations
    (2,214,461 )     (1,300,402 )
                 
Net cash used in operating activities
    (4,774,623 )     (5,327,683 )
                 
Cash Flows From Investing Activities:
               
Purchase of property and equipment
    (239,607 )     (315,973 )
Proceeds from the sale of property and equipment of discontinued operations
    -       11,495  
                 
Net cash used in investing activities
    (239,607 )     (304,478 )
                 
Cash Flows From Financing Activities:
               
Gross proceeds from note payable
    119,875       32,831  
Payments on note payable
    (110,168 )     (25,236 )
Gross proceeds from secured note from related party
    1,000,000       1,319,265  
Payments on secured note from related party
    (2 )     (60,404 )
Fees paid in connection with secured note from related party
    (18,389 )     (43,273 )
Gross proceeds from capital leases
    137,310       85,790  
Payments on capital leases
    (151,099 )     (55,917 )
Restricted cash in connection with letters of credit
    1,471       (4,044 )
Gross proceeds from sales of preferred stock and warrants
    7,107,001       4,000,000  
Fees paid in connection with offering
    (46,396 )     (55,617 )
                 
Net cash provided by financing activities
    8,039,603       5,193,395  
                 
Net increase (decrease) in cash
    3,025,373       (438,766 )
                 
Cash - beginning of the year
    1,403,653       1,842,419  
                 
Cash - end of the year
  $ 4,429,026     $ 1,403,653  
                 
Supplemental Disclosures of Cash Flow Information
               
Cash payments for interest
  $ 47,541     $ 94,739  
                 
Non cash financing activities:
               
Accrued Interest on related party note
  $ 139,398     $ 2,740  
Repayment of secured note upon conversion into equity
  $ (2,392,134 )   $ -  
Preferred stock and warrants issued upon the conversion of secured note
  $ 2,367,874     $ -  
See accompanying notes to audited consolidated financial statements.
 
 
F-6

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
 
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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

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

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

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

We acquired Atiam Technologies, L.P. on October 1, 2007 through our Atiam Technologies, LLC subsidiary.  During the second quarter of 2009, Atiam Technologies, LLC was renamed InsPro Technologies, LLC (“InsPro LLC”).  InsPro LLC is a provider of comprehensive, web-based insurance administration software applications.  InsPro LLC’s flagship software product is InsPro, which was introduced in 2004.  InsPro Technologies offers InsPro on both a licensed and an ASP (Application Service Provider) basis.  InsPro is an insurance administration and marketing system that supports group and individual business lines, and efficiently processes agent, direct market, worksite and web site generated business.  InsPro Technologies’ clients include insurance carriers and third party administrators.  InsPro LLC realizes revenue from the sale of software licenses, application service provider fees, software maintenance fees and consulting and implementation services.
 
 
F-7

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
 
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Basis of presentation

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

These financial statements have been restated to reflect discontinued operations.  On March 31, 2010 we sold substantially all of Insurint’s assets and ceased our Insurint operations on that date.  These financial statements reflect Insurint’s activity as discontinued operations.  For purposes of comparability, certain prior period amounts have been reclassified to conform to the 2010 presentation.   See Note 2 – Discontinued Operations.

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 2010 and 2009 include the warrant liability, allowance for doubtful accounts, stock-based compensation, the useful lives of property and equipment and intangible assets, and revenue recognition.

Cash and cash equivalents

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

Restricted cash

The Company considers all cash and cash equivalents held in restricted accounts pertaining to the Company’s letters of credit as restricted cash.  See Note 13 – Subsequent Events.

Accounts receivable

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

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

   
As of December 31,
 
   
2010
   
2009
 
             
Largest InsPro client
    42 %     56 %
Second largest InsPro client
    15 %     23 %
 
 
F-8

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
 
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fair value of financial instruments

The carrying amounts of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and capital leases approximated fair value as of December 31, 2010, and December 31, 2009, because of the relatively short-term maturity of these instruments and their market interest rates.

Property and equipment

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

Intangible assets

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

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

The Company’s InsPro LLC subsidiary capitalized certain costs valued in connection with developing or obtaining software for external use.  These costs, which consist of direct technology labor costs, are capitalized subsequent to the establishment of technological feasibility and until the product is available for general release.  Both prior and subsequent costs relating to the establishment of technological feasibility are expensed as incurred.  Development costs associated with product enhancements that extend the original product’s life or significantly improve the original product’s marketability are also capitalized once technological feasibility has been established.  Software development costs are amortized on a straight-line basis over the estimated useful lives of the products not to exceed two years, beginning with the initial release to customers.  The Company continually evaluates whether events or circumstances have occurred that indicate the remaining useful life of the capitalized software development costs should be revised or the remaining balance of such assets may not be recoverable.  The Company evaluates the recoverability of capitalized software based on the net realizable value of its software products, as defined by the estimated future revenue from the products less the estimated future costs of completing and disposing of the products, compared to the unamortized capitalized costs of the products.  Capitalized software development costs were fully amortized as of December 31, 2010,
 
 
F-9

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
 
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Impairment of long-lived assets

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

Warrant liability

The Company issued warrants, which were issued in connection with the issuance of the Company’s common and preferred stock, to purchase the Company’s common stock, which contain certain anti-dilution provisions that reduce the exercise price of the warrants in certain circumstances.  See Note 8 – Equity - Common Stock Warrants.

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

The Company determined that the fair value of the warrant liability at January 1, 2009 to be $678,891 as the initial fair value at the adoption date of EITF No. 07-05.  The fair value was determined using the Black Scholes Option Pricing Model based on the following assumptions:  dividend yield: 0%, volatility: 231%, risk free rate: 0.2% and the following assumptions:

Warrant Issue
Date
 
Warrant Exercise
Price
   
Aggregate
Number of
Warrants
   
Expected Term
(Years) of
Warrants
   
Fair Value
 
                         
3/30/2007
  $ 2.48       3,024,186       3.2       $ 203,376  
3/31/2008
  $ 0.80       6,250,000       4.2         475,515  
                            $ 678,891  

The Company determined that the fair value of the warrants issued on January 15, 2009 to be $1,877,412 and recorded that amount in warrant liability.  The fair value of the warrant liability for warrants issued on January 15, 2009 was determined using the Black Scholes Option Pricing Model on the date of issuance based on the following assumptions: warrant exercise price of $0.20 per share, the Company’s common stock closing price per share on January 15, 2009 of $0.095, expected volatility of 236%, risk free interest rate of 0.12%, an expected term of 5 years and an assumed dividend yield of 0%.  See Note 8 – Equity – Preferred Stock - 2009.

For the year ended December 31, 2009, the Company recorded a gain on the change in fair value of derivative liability of $534,391 to mark to market for the increase in fair value of the warrants during the year ended December 31, 2009.   Under ASC 815, the warrants will be carried at fair value and adjusted at each reporting period.

The Company determined that the fair value of the warrant liability at December 31, 2009 to be $2,021,912. The fair value was determined using the Black Scholes Option Pricing Model based on the following assumptions: dividend yield: 0%, volatility: 331%, risk free rate: 0.2% and the following: 
 
 
F-10

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
 
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Warrant Issue
Date
 
Warrant Exercise
Price
   
Aggregate
Number of
Warrants
   
Expected Term
(Years) of
Warrants
   
Fair Value
 
                         
3/31/2008
  $ 0.20       25,000,000       3.2       $ 1,123,520  
1/15/2009
  $ 0.20       20,000,000       4.0         898,392  
                            $ 2,021,912  

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

Warrant Issue Date
 
Warrant
Exercise Price
   
Common
Stock Closing
Price
   
Aggregate
Number of
Warrants
   
Volatility
   
Risk Free
Interest Rate
   
Fair Value
 
                                     
3/26/2010
  $ 0.20     $ 0.041       5,535,000       345 %     0.14 %   $ 226,880  
9/30/2010
    0.15       0.120       18,000,010       392 %     0.19 %     2,159,973  
11/29/2010
    0.15       0.100       2,000,000       404 %     0.18 %     199,998  
12/22/2010
  $ 0.15     $ 0.070       7,973,780       476 %     0.18 %     558,165  
                                            $ 3,145,016  

For the year ended December 31, 2010, the Company recorded a gain on the change in fair value of derivative liability of $1,136,588 to mark to market for the decrease in fair value of the warrants during the year ended December 31, 2010.

The Company determined that the fair value of the warrant liability at December 31, 2010 to be $4,030,340. The fair value was determined using the Black Scholes Option Pricing Model based on the following assumptions: dividend yield: 0%, risk free rate: 0.2% and the following:

Warrant Issue
Date
 
Warrant
Exercise Price
   
Aggregate
Number of
Warrants
   
Expected Term
(Years) of
Warrants
   
Volatility
   
Fair Value
 
                               
1/15/2009
  $ 0.15       26,666,667       3.0         408 %   $ 1,732,347  
3/26/2010
    0.15       7,380,000       4.2         446 %     479,697  
9/30/2010
    0.15       18,000,010       4.8         472 %     1,170,000  
11/29/2010
    0.15       2,000,000       4.9         480 %     130,000  
12/22/2010
  $ 0.15       7,973,780       5.0         484 %     518,296  
                                    $ 4,030,340  

 
F-11

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
 
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
A summary of the Company's warrant liability activity and balances as of and for year ended December 31, 2010 are as follows:

Warrant liability balance as of December 31, 2009
  $ 2,021,912  
Fair value of warrants issued during the year ended December 31, 2010
    3,145,017  
Fair value of warrants whose anti-dultion provisions expired during the year ended December 31, 2010
    (1,123,710 )
Decrease in the fair value of warrants liability during the year ended December 31, 2010
    (12,879 )
Warrant liability balance as of December 31, 2010
  $ 4,030,340  
 
Income taxes

The Company accounts for income taxes under the liability method.  Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Loss per common share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Diluted loss per common share is not presented because it is anti-dilutive. The Company's common stock equivalents include the following:

 
   
December 31,
2010
   
December 31,
2009
 
Series A convertible preferred stock issued and outstanding
    25,535,000       20,000,000  
Series B convertible preferred stock issued and outstanding
    55,947,580       -  
Options, issued, outstanding and exercisable
    4,240,000       5,426,648  
Warrants to purchase common stock, issued, outstanding and exercisable
    93,162,344       51,566,887  
Warrants to purchase series A convertible preferred stock, issued, outstanding and exercisable
    3,000,000       -  
      181,884,924       76,993,535  

 
Revenue recognition

InsPro LLC offers InsPro on both a licensed and an ASP basis.  An InsPro software license entitles the purchaser a perpetual license to a copy of the InsPro software installed at a single client location.  Alternatively, ASP hosting service enables a client to lease the InsPro software, paying only for that capacity required to support their business.  ASP clients access InsPro installed on InsPro Technologies owned servers located at InsPro Technologies’ offices or 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 help desk.
 
 
F-12

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
 
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
InsPro LLC’s consulting and implementation services are generally associated with the implementation of an InsPro instance for either an ASP or licensed client, and cover such activity as InsPro installation, configuration, modification of InsPro functionality, client insurance plan set-up, client insurance document design and system documentation.
 
InsPro LLC’s revenue is generally recognized under ASC 985-605.   For software arrangements involving multiple elements, 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. 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 collectibility 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.

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

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.

See Note 2 - Discontinued Operations for revenue recognition for discontinued operations.

Cost of Revenues

Cost of revenues includes direct labor and associated costs for employees and independent contractors performing InsPro design, development, implementation and testing together with customer management, training and technical support, as well as a portion of facilities, equipment and software costs.
 
 
F-13

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
 
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Advertising and other marketing

Advertising and other marketing costs are expensed as incurred.

Concentrations of credit risk
 
The Company maintains its cash and restricted cash in bank deposit accounts, which exceed the federally insured limits as provided through the Federal Deposit Insurance Corporation (“FDIC”).  In 2010 the FDIC insurance coverage limit has been permanently increased to $250,000 per depositor, per institution as a result of the Dodd-Frank Wall Street and Consumer Protection Act.  Beginning December 31, 2010, the FDIC has implemented a new temporary insurance category to provide unlimited FDIC insurance coverage for funds held in noninterest-bearing transaction accounts at insured banks. This temporary category will remain in effect through December 31, 2012.
 
At December 31, 2010, the Company had $4,429,026 of cash and $1,152,573 of restricted cash for a total of $5,581,599 in United States bank deposits, of which $986,447 was federally insured and $4,595,152 exceeded federally insured limits.

The following table lists the percentage of the Company’s revenue was earned from the Company’s two largest InsPro clients.

   
For the Years ended December 31,
 
   
2010
   
2009
 
             
Largest InsPro client
    33 %     37 %
Second largest InsPro client
    16 %     28 %

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 grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied.

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 grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied.
 
 
F-14

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
 
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Registration rights agreements

The Company classifies as liability instruments the fair value of registration rights agreements when such agreements (i) require it to file, and cause to be declared effective under the Securities Act of 1933 as amended (the “Securities Act”), a registration statement with the Commission within contractually fixed time periods, and (ii) provide for the payment of liquidating damages in the event of its failure to comply with such agreements. Registration rights with these characteristics are accounted for as (i) derivative financial instruments at fair value and (ii) contracts that are (a) indexed to and potentially settled in an issuer's own stock and (b) permit gross physical or net share settlement with no net cash settlement alternative are classified as equity instruments.

At December 31, 2010, the Company does not believe that it is probable that the Company will incur a penalty in connection with the Company’s registration rights agreements.  Accordingly no liability was recorded as of December 31, 2010.  See Note 8- Shareholders Equity – Registration and Participation Rights.

Recent accounting pronouncements

In April 2009, the FASB issued guidance in the Fair Value Measurements and Disclosures Topic of the Codification on determining fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly.  The guidance emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants.  The guidance provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity.  In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value.  The guidance is effective for interim or annual reporting periods ending after June 15, 2009, and shall be applied prospectively.  We adopted this guidance effective for the quarter ending June 30, 2009.  There is no impact of the adoption on our financial statements as of December 31, 2010.

In April 2009, FASB issued guidance in the Financial Instruments Topic of the Codification on interim disclosures about fair value of financial instruments.  The guidance requires disclosures about the fair value of financial instruments for both interim reporting periods, as well as annual reporting periods.  The guidance is effective for all interim and annual reporting periods ending after June 15, 2009 and shall be applied prospectively.  The adoption of this guidance had no impact on our financial statements as of December 31, 2010.

In May 2009, FASB issued guidance in the Subsequent Events Topic of the Codification.  The guidance is intended to establish general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The guidance is effective for interim or annual financial periods ending after June 15, 2009 and is required to be adopted prospectively.  We adopted this guidance effective for the quarter ending June 30, 2009.  The adoption of this guidance had no impact on our financial statements as of December 31, 2010, other than the additional disclosure.

In June 2009, the FASB issued guidance which will amend the Consolidation Topic of the Codification.  The guidance addresses the effects of eliminating the qualifying special-purpose entity (QSPE) concept and responds to concerns over the transparency of enterprises’ involvement with variable interest entities (VIEs).  The guidance is effective beginning on January 1, 2010.  We do not expect the adoption of this guidance to have an impact on our financial statements.
 
 
F-15

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
 
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
In August 2009, the FASB issued Accounting Standards Update No. 2009-05, “Measuring Liabilities at Fair Value” (ASU 2009-05).  ASU 2009-05 amends the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification by providing additional guidance clarifying the measurement of liabilities at fair value.  ASU 2009-05 is effective for us for the reporting period ending December 31, 2010.  We do not expect the adoption of ASU 2009-05 to have an impact on our financial statements.

In October 2009, the FASB issued Accounting Standards Update 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. This Accounting Standards Update amends the FASB Accounting Standard Codification for EITF 09-1. (See EITF 09-1 effective date below).

In October 2009, the FASB issued Accounting Standards Update 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements. This update changed the accounting model for revenue arrangements that include both tangible products and software elements. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company does not expect the provisions of ASU 2009-14 to have a material effect on the financial position, results of operations or cash flows of the Company.
 
In October 2009, the FASB issued Accounting Standards Update 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update addressed the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than a combined unit and will be separated in more circumstances that under existing US GAAP. This amendment has eliminated that residual method of allocation. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company does not expect the provisions of ASU 2009-13 to have a material effect on the financial position, results of operations or cash flows of the Company.

In December 2009, the FASB issued Accounting Standards Update 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for Statement 167. (See FAS 167 effective date below).
 
In December 2009, the FASB issued Accounting Standards Update 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for Statement 166. (See FAS 166 effective date below).

In January 2010, the FASB issued Accounting Standards Update 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This amendment to Topic 810 clarifies, but does not change, the scope of current US GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between guidance in that Subtopic and asset derecognition and gain or loss recognition guidance that may exist in other US GAAP. An entity will be required to follow the amended guidance beginning in the period that it first adopts FAS 160 (now included in Subtopic 810-10). For those entities that have already adopted FAS 160, the amendments are effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009. The amendments should be applied retrospectively to the first period that an entity adopted FAS 160. The Company does not expect the provisions of ASU 2010-02 to have a material effect on the financial position, results of operations or cash flows of the Company.
 
 
F-16

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
 
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
In January 2010, the FASB issued Accounting Standards Update 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash (A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a limit on the amount of cash that will be distributed is not a stock dividend for purposes of applying Topics 505 and 260. Effective for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. The Company does not expect the provisions of ASU 2010-01 to have a material effect on the financial position, results of operations or cash flows of the Company.

In February 2010, the FASB issued ASU 2010-09, which addresses certain implementation issues related to an entity’s requirement to perform and disclose subsequent events procedures. The ASU (1) exempts entities that file their financial statements with, or furnish them to, the Commission from disclosing the date through which subsequent events procedures have been performed and (2) clarifies the circumstances in which an entity’s financial statements would be considered restated and in which the entity would therefore be required to update its subsequent events evaluation since the originally issued or available to be issued financial statements. ASU 2010-09 became effective immediately upon issuance, and the Company adopted its disclosure requirements within the Form 10-K for the year ended December 31, 2010.

In April 2010, the FASB issued ASU 2010-17, Revenue Recognition – Milestone Method (Topic 605): Milestone Method of Revenue Recognition  (“ASU 2010-17”).  ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions.   Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the  milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive.  Milestones should be considered substantive in their entirety and may not be bifurcated.  An arrangement may contain both substantive and nonsubstantive milestones, and each milestone should be evaluated individually to determine if it is substantive.  ASU 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010, with early adoption permitted.  We adopted this guidance effective for the quarter ending June 30, 2010 and it did not have a material impact on our consolidated financial statements.
 
NOTE 2 – DISCONTINUED OPERATIONS

The Company has classified its former telesales call center and external (ISG) agent produced agency business (the “Agency Business”), its former Insurint business, and its leased offices located in New York and Florida as discontinued operations.

During the first quarter of 2009, the Company ceased the direct marketing and sale of health and life insurance and related products to individuals and families in its Telesales call center.  The Company also determined to discontinue selling health and life insurance and related products to individuals and families through its non employee ISG agents.  On February 20, 2009 (the “Closing Date”), the Company entered into and completed the sale of the Agency Business to eHealth Insurance Services, Inc. (“eHealth”), an unaffiliated third party, pursuant to the terms of a Client Transition Agreement (the “Agreement”).
 
 
F-17

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
 
NOTE 2 – DISCONTINUED OPERATIONS (continued)
 
Pursuant to the Agreement the Company transferred to eHealth the broker of record status and the right to receive commissions on certain of the in-force individual and family major medial health insurance policies and ancillary dental, life and vision insurance policies issued by Aetna, Inc., Golden Rule, Humana, PacifiCare, Inc., Assurant and United Healthcare Insurance Co. (collectively, the “Specified Carriers”) on which the Company was designated as broker of record as of the Closing Date (collectively, the “Transferred Policies” and each, a “Transferred Policy”).  Certain policies and products were excluded from the transaction, including the Company’s agency business generated through its ISG agents, all short term medical products and all business produced through carriers other than the Specified Carriers.  In addition, the Agreement also provides for the transfer to eHealth of certain lead information relating to health insurance prospects (the “Lead Database”).

The aggregate initial amount of consideration paid by eHealth to the Company pursuant to the Agreement during the first quarter of 2009 was approximately $1,280,000.  In addition, on the Closing Date, eHealth agreed to assume from the Company certain liabilities relating to historical commission advances on the Transferred Policies made by the Specified Carriers in an aggregate amount of approximately $1,385,000.  In addition, eHealth has agreed to pay to HBDC II, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company (“HBDC II”), a portion of each commission payment received by eHealth and reported by the Specified Carrier relating to a Transferred Policy for the duration of the policy, provided that eHealth remains broker of record on such Transferred Policy.  During the first quarter of 2009, the Company recognized a gain upon the execution of the Agreement of $2,664,794, which is the sum of the aggregate initial amount of consideration paid by eHealth to the Company and eHealth’s assumption of certain liabilities relating to historical commission advances on the Transferred Policies.

Simultaneous with the execution of the Agreement, the Company and eHealth also entered into a Marketing and Referral Agreement, dated as of February 20, 2009 (the “Referral Agreement”).  Pursuant to the terms of the Referral Agreement, eHealth agreed to construct one or more websites for the purpose of selling health insurance products (the “Referral Sites”) and to pay to HBDC II a portion of all first year and renewal commissions received by eHealth from policies sold through the Referral Sites that result from marketing to prospects using the Lead Database or other leads delivered by the Company to eHealth.  The Referral Agreement is scheduled to terminate 18 months following the Closing Date and is terminable by the Company or eHealth upon material breach by the other party.

On March 31, 2010, the Company entered into and completed an asset purchase agreement for the sale of Insurint (the “Insurint Sale Agreement”) with an unaffiliated third party.  Pursuant to the terms of the Insurint Sale Agreement, the Company sold substantially all of the assets used in the Company’s former Insurint business, including the Insurint software, the www.insurint.com web site, other intellectual property specific to Insurint, including but not limited to the customer base, and all future revenue pertaining to Insurint.  The buyer agreed to assume future Insurint commitments and expenses subsequent to March 31, 2010.  Pursuant to the Insurint Sale Agreement, the Company will receive in aggregate $625,000 in cash from the buyer of Insurint, of which $312,500 was received on April 1, 2010 and the $312,500 balance will be received over 23 equal monthly installments in the amount of $13,020.83, with the first monthly payment due on May 1, 2010, and the last monthly payment in the amount of $13,020.91 and due on April 1, 2012.   The Company recorded a gain on the sale of Insurint of $578,569 on March 31, 2010.

Revenue Recognition for Discontinued Operations

Our discontinued operations generates revenue primarily from transition policy commissions pursuant to the Agreement, renewal commissions paid to the Company by insurance companies based upon the insurance policies sold to consumers by the Company’s Agency Business prior to the Closing Date, and sub-leasing revenue.
 
 
F-18

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
 
NOTE 2 – DISCONTINUED OPERATIONS (continued)
 
We recognize commissions and other revenue from carriers after we receive notice that the insurance carrier has received payment of the related premium. The unearned portion of premium commissions has been included in the consolidated balance sheet in net liabilities of discontinued operations.

The Company recognizes as revenue commission payments received from eHealth in connection with the Agreement upon the Company’s notification by eHealth of such amounts.

The Company also generated revenue from the sub-lease of our leased New York City office, which was sub-leased on a month to month basis, and also from the sub-lease of a portion of our leased Deerfield Beach Florida office, which was leased under operating leases through February 28, 2011.  We recognize sub-lease revenue when lease rent payments are due in accordance with the sub-lease agreements.  Recognition of sub-lease revenue commences when control of the facility has been given to the tenant. We record a provision for losses on accounts receivable equal to the estimated uncollectible amounts. This estimate is based on our historical experience and a review of the current status of the Company's receivables.

Impairment of Long Lived Assets

During the first quarter of 2009 we determined certain long term assets were impaired as a result of the cessation of direct marketing and sales in the Telesales call center.  The Company recorded expense in 2009 to write-off the value of these long term assets in the results from discontinued operations, which included property and equipment net of depreciation of $416,764, intangible assets net of accumulated amortization acquired from ISG of $1,200,428 and the value of internet domain name www.healthbenefitsdirect.com net of accumulated amortization of $22,389.

On July 1, 2009 the Company entered into a sub-lease agreement with a third party, effective July 15, 2009 which terminated an existing sub-lease agreement for approximately 8,000 square feet of the Company’s Deerfield Beach office and replaced it with a sub-lease agreement for approximately 29,952 square feet.  This new sub-lease terminated on February 28, 2011.  As part of the sub-lease agreement, the Company also agreed to lease certain personal property to the sub-lessee for the term of the lease.   The sub-lessee agreed to pay the Company 20 monthly payments of $10,890 for such personal property and the Company has agreed to deliver to the sub-lessee a bill of sale for the leased personal property at the end of the term.  The Company has accounted for this personal property sub-lease arrangement as a sale and recorded a gain of $217,601.

Effective December 31, 2010, the Company has accrued $117,935 related to the non-cancelable lease for the abandoned portion of the Deerfield Beach office, which is the net present value of the Company’s future lease payments, plus management’s estimate of contractually required expenses pertaining to the Deerfield Beach office, which are estimated to be $269,896, less future sub-lease revenue, which is estimated to be $151,961.
 
 
F-19

 
 
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
 
NOTE 2 – DISCONTINUED OPERATIONS (continued)

The financial position of discontinued operations was as follows:
 
   
December 31, 2010
   
December 31, 2009
 
             
Accounts receivable, less allowance for doubtful accounts $0 and $4,735
  $ 149,913     $ 322,619  
Deferred compensation advances
    200       -  
Prepaid expenses
    4,332       -  
Other current assets
    174,103       22,907  
Other assets
    51,227       91,809  
Accounts payable
    (82,431 )     (183,722 )
Accrued expenses
    (134,203 )     (2,273,024 )
Sub-tenant security deposit
    (99,840 )     (121,007 )
Unearned commission advances
    -       (3,461 )
Deferred revenue
    -       (751 )
Net current assets (liabilities) of discontinued operations
  $ 63,301     $ (2,144,630 )

 The results of discontinued operations do not include any allocated or common overhead expenses except for a portion of expenses pertaining to our Florida office.  The results of operations of discontinued operations were as follows:

   
For the Year Ended December 31,
 
   
2010
   
2009
 
Revenues:
           
Commission and other revenue from carriers
  $ 452,360     $ 2,157,217  
Gain recognized upon the execution of the Agreement
    -       2,664,794  
Transition policy commission pursuant to the Agreement
    1,114,477       1,786,480  
Gain on the sale of Insurint
    578,569       -  
Gain on disposal of property and equipment
    6,530       230,170  
Lead sale revenue