UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

¨ TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the transition period from _________________ to ________________

 

COMMISSION FILE NUMBER: 333-156934

SEBRING SOFTWARE, INC.

(Name of registrant in its charter)

 

SUMOTEXT INCORPORATED

(Former name of registrant in its charter)

 

	Nevada		26-0319491
	(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

1400 Cattlemen Rd, Suite D

Sarasota, Florida 34232

(Address of principal executive offices)

N/A

(Address of former principal executive offices)

(941) 377-0715

(Registrant's telephone number)

 

Indicate by check mark whether the registrant: (1) has filed all reports required 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.   x Yes  ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨   Yes     x   No

 

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

 

	Large accelerated filer   ¨	Accelerated filer   ¨
	Non-accelerated filer   ¨	Smaller reporting company   x

 

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

 

As of May 20, 2012, the registrant had 40,339,203 shares of common stock, $0.0001 par value per share, outstanding which includes 3,620,287 shares to be issued under various agreements which have not been physically issued to date.

 

 

Table of Contents

 

			Page #
Part 1	Financial Information:
Item 1	Financial statements:
	Sebring Software, Inc. and Subsidiary Consolidated Financial Statements Three Months Ended March 31, 2012 and 2011 and for the Period from September 18, 2006 (inception) to March 31, 2012.		1
ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		13
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		16
ITEM 4.	CONTROLS AND PROCEDURES		16
PART II	OTHER INFORMATION:
ITEM 1	LEGAL PROCEEDINGS		16
ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		16
ITEM 3	DEFAULTS UPON SENIOR SECURITIES		16
ITEM 4	MINING SAFETY DISCLOSURES		16
ITEM 5	OTHER INFORMATION		17
ITEM 6	EXHIBITS		17
	Signatures		17

 

  

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Sebring Software, Inc. and Subsidiary

(a development stage company)

 

Consolidated Financial Statements

 

Three Months Ended March 31, 2012 and 2011

and for the Period from September 18, 2006

(Inception) to March 31, 2012

 

 

Sebring Software, Inc. and Subsidiary

(a development stage company)

 

Index to Consolidated Financial Statements

 

	Page
Consolidated Balance Sheets	3
Consolidated Statements of Operations - Unaudited	4
Consolidated Statements of Changes in Stockholders’ Deficit - Unaudited	5
Consolidated Statements of Cash Flows - Unaudited	6
Notes to Consolidated Financial Statements - Unaudited	7

 

 

Sebring Software, Inc. and Subsidiary

(a development stage company)

Consolidated Balance Sheets

 

		March 31, 2012				December 31, 2011
		(Unaudited)
ASSETS
Current assets:
Cash		$	28,088			$	12,222
Prepaid expenses			20,000				20,000
Total current assets			48,088				32,222
Furniture, equipment and vehicles, net			51,952				59,193
Deposits			101,000				101,000
Total assets		$	201,040			$	192,415
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities		$	337,260			$	321,660
Accrued payroll related liabilities			500,956				460,627
Accrued interest payable			1,121,014				988,623
Current portion of notes payable, net of debt discount			3,744,724				3,622,538
Loans payable			79,080				89,080
Notes payable, related parties			275,638				275,638
Total current liabilities			6,058,672				5,758,166
Notes payable, net of current portion			26,301				33,435
Total liabilities			6,084,973				5,791,601
Commitments and contingencies (Note 4)
Common stock issued or to be issued- $0.0001 par value, 1,100,000,000 shares authorized, 39,039,203 and 37,662,577 shares issued or to be issued and outstanding,  at March 31, 2012 and December 31, 2011, respectively.			3,904				3,766
Additional paid-in-capital			1,510,347				1,233,222
Deficit accumulated during the development stage			(7,398,184	)			(6,836,174	)
Total stockholders' deficit			(5,883,933	)			(5,599,186	)
Total liabilities and stockholders' deficit		$	201,040			$	192,415

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

Sebring Software, Inc. and Subsidiary

(a development stage company)

Consolidated Statements of Operations - Unaudited

 

		Three Months Ended								September 18, 2006
		March 31,								(inception) to
		2012				2011				March 31, 2012
Operating expenses:
Employee compensation and benefits		$	92,021			$	102,507			$	1,881,092
Impairment expense			-								452,287
General & administrative expenses			140,697				105,961				2,091,269
Total operating expenses			232,718				208,468				4,424,648
Loss from operations			(232,718	)			(208,468	)			(4,424,648	)
Other income (expense):
Gain on debt settlement			-				-				58,111
Loan penalty			(173,248	)			(419,766	)			(1,062,307	)
Gain (loss) on foreign currency transactions			(4,880	)			(9,081	)			21,099
Interest expense			(151,164	)			(134,256	)			(1,990,439	)
Total other income (expense), net			(329,292	)			(563,103	)			(2,973,536	)
Net loss		$	(562,010	)		$	(771,571	)		$	(7,398,184	)
Net loss per share - basic and diluted		$	(0.01	)		$	(0.02	)		$	(0.23	)
Weighted average shares outstanding - basic and diluted			38,351,961				35,217,605				31,649,686

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

Sebring Software, Inc. and Subsidiary

(a development stage company)

Consolidated Statements of Changes in Stockholders’ Deficit - Unaudited

Three Months Ended March 31, 2012

 

														Deficit
														Accumulated
		Common Stock issued								Additional				During				Total
		or to be issued								Paid-in				Development				Stockholders'
		Shares				Amount				Capital				Stage				Deficit
Balance - December 31, 2011			37,662,577			$	3,766			$	1,233,222			$	(6,836,174	)		$	(5,599,186	)
Shares to be issued for loan penalty			376,626				38				173,210				-				173,248
Issuance of warrants on notes payable			-				-				2,894				-				2,894
Relative fair value of warrants issued with convertible notes			-				-				51,121				-				51,121
Sale of common stock			1,000,000				100				49,900				-				50,000
Net loss for three months ended March 31, 2012			-				-				-				(562,010	)			(562,010	)
Balance -March 31, 2012			39,039,203			$	3,904			$	1,510,347			$	(7,398,184	)		$	(5,883,933	)

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

Sebring Software, Inc. and Subsidiary

(a development stage company)

Consolidated Statements of Cash Flows - Unaudited

 

		Three Months Ended								September 18, 2006
		March 31,								(inception) to
		2012				2011				March 31, 2012
Cash flows from operating activities:
Net loss		$	(562,010	)		$	(771,571	)		$	(7,398,184	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			7,241				5,677				36,026
Common stock issued for services			-				-				75,000
Common stock to be issued for loan penalty			173,248				419,766				1,062,307
Gain on debt settlements			-				-				(58,111	)
Impairment expense			-				-				452,287
Amortization of debt issuance costs			-				-				140,000
Amortization of debt discount			15,742				23,672				136,795
Issuance of warrants in conjunction with notes			2,894				-				264,917
Changes in assets and liabilities:
Prepaid expenses			-				7,500				(20,000	)
Deposits			-				-				(1,000	)
Accounts payable and accrued liabilities			15,600				34,249				534,834
Accrued payroll related liabilities			40,329				46,180				500,956
Accrued interest payable			132,391				110,518				1,433,716
Net cash used in operating activities			(174,565	)			(124,009	)			(2,840,457	)
Cash flows from investing activities:
Investment pursuant to recapitalization			-				-				(286,147	)
Software development costs			-				-				(452,287	)
Stock purchase agreement			-				-				(100,000	)
Purchase of furniture and equipment			-				-				(2,726	)
Net cash used in investing activities			-				-				(841,160	)
Cash flows from financing activities:
Payment of debt issuance costs			-				-				(140,000	)
Proceeds from issuance of stock			50,000				-				426,000
Proceeds from issuance of notes payable			162,500				200,000				3,625,138
Repayment of notes payable			(22,069	)			(2,336	)			(101,434	)
Repayment of notes issued for redemption of equity interest							-				(100,000	)
Proceeds provided by financing activities			190,431				197,664				3,709,704
Net increase (decrease) in cash			15,866				73,655				28,088
Cash, beginning of period			12,222				6,359				-
Cash, end of period		$	28,088			$	80,014			$	28,088
Supplemental Cash Flow Information:
Interest paid		$	-			$	-			$	-
Taxes paid		$	-			$	-			$	-
Supplemental Non-Cash Investing and Financing Activities:
Accounts payable settled with note payable		$	-			$	-			$	178,531
Note payable principal and interest refinanced		$	-			$	-			$	1,062,165
Stock based lender fees recorded as debt discount from settlement		$	-			$	-			$	21,053
Lender fee recorded as discount pursuant to settlement		$	-			$	-			$	108,553
Note issued for redemption of equity		$	-			$	-			$	100,000
Deemed issuance of common stock pursuant to recapitalization		$	-			$	-			$	1,620
Purchase vehicles with notes payable		$	-			$	85,252			$	85,252
Relative fair value of warrants issued with convertible notes		$	51,121			$	-			$	51,121

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

Sebring Software, Inc. and Subsidiary

(a development stage company)

Notes to Consolidated Financial Statements - Unaudited

Three Months ended March 31, 2012 and 2011 and from September 18, 2006 (Inception) to March 31, 2012

 

1. BASIS OF PRESENTATION, NATURE OF BUSINESS, ORGANIZATION, REVERSE RECAPITALIZATION AND GOING CONCERN

 

Basis of Presentation – The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of consolidated financial position and results of operations. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair consolidated financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year. For further information, refer to the audited consolidated financial statements and footnotes of the company for the years ending December 31, 2011 and 2010.

 

Principles of Consolidation - The consolidated financial statements include the accounts of Sebring and its wholly-owned subsidiary, Sebring Software, LLC. All material intercompany balances and transactions have been eliminated in consolidation.

 

Nature of Business – Sebring Software, Inc. and Subsidiary ("the Company", "us", "we", "our") intends to be a subscription based reseller of software to companies in the automotive, manufacturing, aerospace, healthcare and financial services industries. The software is intended to be licensed from a German based company. Sebring has developed “Adaptors” to the original software product developed by the German company which allow the software to be used by companies in North and South America and allows them to navigate multiple enterprise applications used in their numerous operating units in a single user interface so the users can gather and use their intercompany business information more quickly and effectively.

 

Organization – Sebring Software, LLC ("the LLC") was originally organized in the state of Florida on September 18, 2006. On October 25, 2010 the Company consummated a transaction whereby the LLC was acquired by an inactive publicly-held company in a transaction accounted for as a recapitalization of the LLC. The publicly-held company was incorporated in Arkansas on June 8, 2007 and redomiciled in Nevada in September 2008. (see "Reverse Recapitalization" below).

 

The Company has been in the development stage through March 31, 2012. Activities during the development stage have been principally devoted to organizational activities, raising capital, software development and evaluating operational opportunities.  Since its formation, the LLC has not realized any revenues from its planned operations.

 

Reverse Recapitalization - On October 25, 2010, (the "recapitalization date") pursuant to the terms of an Exchange and Reorganization Agreement between Sumotext Incorporated ("Sumotext"), an inactive publicly-held company, the LLC and the members of the LLC, Sumotext acquired all of the membership interests of the LLC in exchange for 18,729,098 shares of Sumotext common stock to be issued to the members of the LLC and the assumption of certain LLC liabilities. Sumotext then changed its name to Sebring Software, Inc.

 

Pursuant to the terms of the Exchange, LLC caused Sumotext to cancel controlling shares of the Sumotext common stock that had been acquired by LLC on September 17, 2010 for $286,147 in contemplation of this reverse recapitalization. The $286,147 investment was then recorded as a reduction to additional paid-in capital at the recapitalization date. Concurrent with the reverse recapitalization, Sumotext had spun-off all its prior assets, liabilities and operations to a company controlled by a shareholder of Sumotext, which spin-off made it inactive. The Company also incurred $101,000 of transaction costs on the September 17, 2010 transaction date which was charged as an expense to operations.

 

This transaction resulted in the LLC becoming a wholly-owned subsidiary of Sebring Software, Inc. and the Company intends to carry on LLC’s business as its sole line of business.

 

 

Sebring Software, Inc. and Subsidiary

(a development stage company)

Notes to Consolidated Financial Statements - Unaudited

Three Months ended March 31, 2012 and 2011 and from September 18, 2006 (Inception) to March 31, 2012

 

Since the spin-off was contemplated as part of the transaction and occurred on the transaction date of October 25, 2010, and since the members of LLC obtained an approximate 53% voting interest and Board and management control in Sumotext, the transaction is deemed to be a reverse recapitalization of the LLC with a public shell. However, since control was obtained of the shell, Sumotext, on September 17, 2010 and the acquisition occurred on October 25, 2010, the transaction will be accounted for as a combination of entities under common control. The historical operations of the Company are those historical operations of the LLC and those of Sumotext from the September 17, 2010 date when the entities became under common control.

 

All share and per share data in the accompanying consolidated financial statements has been retroactively adjusted for the effect of the recapitalization.

 

Going Concern - The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company and its ability to meet its ongoing obligations. The Company has a net loss of $562,010 and net cash used in operations of $174,565 for the three months ended March 31, 2012 and a working capital deficit, stockholders' deficit and deficit accumulated during the development stage of $6,010,585, $5,883,933 and $7,398.184, respectively, at March 31, 2012. In addition, the Company has not generated any revenues through March 31, 2012. Furthermore, because the Company was unable to make the required principal and interest payments under a number of notes payable, it was in potential default (subject to lender notifying the Company of default) on $3,543,356 of debt plus $1,097,481 of accrued interest as of March 31, 2012. As of the date of this report the Company has been notified of default on one note with $1,170,718 of principal and $320,486 of accrued interest.

 

These conditions, as well as the conditions noted below, were considered when evaluating the Company’s liquidity and its ability to meet its ongoing obligations. These consolidated financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of these uncertainties.

 

Use of Estimates in Financial Statements - The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates during the period covered by these financial statements include the valuation of software for impairment analysis purposes, valuation of any derivatives or beneficial conversion features on convertible debt, valuation of stock or other equity-based instruments issued for services or settlements and valuation of deferred tax assets.

 

Recent Accounting Pronouncements – Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

 

2. Furniture, equipmentand Vehicle, net

 

The Company did not make any capital purchases during the three months ended March 31, 2012. The Company depreciates its fixed assets on a straight line basis over a three year life.

 

3. NOTES AND CONVERTIBLE Notes Payable

 

In January 2012, the Company provided an opportunity for potential investors to purchase up to a total of 200 units, each consisting of one $25,000 convertible note and warrants to purchase $25,000 shares of Common Stock. The notes are unsecured and carry an interest rate of 15%, accrued quarterly. The interest and principal will be paid upon the maturity date of the note, which is December 31, 2012. Notes are convertible into common stock at a 25% discount to any public offering that occurs before the maturity date with the common shares being registered in the S-1 registration for and sold at the time of the public offering; if no public offering occurs before the maturity date, the Notes shall be convertible into the common stock of the Company at a 25% discount to the volume weighted average price during December 2012. Warrants will have a term of five years, exercisable during the four years commencing twelve months after the closing date. The exercise price of the Warrants is 120% of any public offering completed by the Company prior to the Maturity Date of the convertible promissory notes (December 31, 2012; or 120% of the volume weighted average price (of the Company's common stock) during December 2012.

 

 

Sebring Software, Inc. and Subsidiary

(a development stage company)

Notes to Consolidated Financial Statements - Unaudited

Three Months ended March 31, 2012 and 2011 and from September 18, 2006 (Inception) to March 31, 2012

 

In February, 2012 the Company received $100,000 from one investor for convertible notes sold according to the specifics of the Term Sheet. The Company paid Wellington Shields a fee of $3,000 for this transaction in satisfaction of the requirements of the Wellington Shields agreement for investors of short term loans not introduced by Wellington Shields. Also in February, the Company received $12,500 for a convertible note from another investor under the same Term Sheet. A fee of $375 is due to be paid to Wellington Shields for this transaction but had not been paid as of the date of this report.

 

The Company determined that based on the conversion terms of the notes, the notes qualify as stock settled debt in accordance with ASC 480 “Distinguishing Liabilities from Equity”. Accordingly, a premium of $37,500 will be accreted to the total $112,500 notes balance from the note dates to the first computable date they become convertible, which is December 31, 2012. In addition, the relative fair value of the warrants, which totals $51,121 will be recorded as additional paid in capital and debt discount to be amortized over the debt term, to December 31, 2012. In the three months ended March 31, 2012, a total of $7,189 was amortized for these warrants leaving a balance of debt discount of $43,932 which is netted against current portion of notes payable on the accompanying consolidated balance sheet.

 

In February, 2012 the Company received $50,000 from one investor for a promissory note. The note, which has an interest rate of 12%, plus accrued interest, is due and payable upon completion of the financial transaction contemplated by Wellington Shields in June, 2012 or no later than February, 2013. The proceeds of the note were used to pay Wellington Shields the contractual retainer as discussed in Note 4.

 

Past Due Notes - Because the Company was unable to make the required principal and interest payments under a number of notes payable, it was in potential default (subject to lender notifying the Company of default) on $3,543,356 of debt plus $1,097,481 of accrued interest as of March 31, 2012. As of the date of this report the Company has been notified of default on one note with $1,170,718 of principal and $320,486 of accrued interest.

 

4. Commitments and contingencies

 

Legal Matters - Management has been notified of a legal claim against the Company whereby an investor relations consultant claims he is owed stock compensation under a March 9, 2010 consulting agreement. The agreement describes common stock payments of 400,000 shares to be issued on October 25, 2010 and 100,000 shares each month for the following 11 months for a total of 1,500,000 shares. Management asserts that no services were performed and no share or other compensation is due to the consultant except for $25,000 the consultant loaned to the Company which is recorded as a loan payable in the accompanying consolidated balance sheets. Management believes that they will prevail in this matter and that any potential negative outcome will not have a material adverse impact on the Company’s financial position. No liability has been accrued for this claim as of March 31, 2012.

 

Advisor Agreement - On January 27, 2012 the Company entered into two agreements with Wellington Shields. Under the first agreement, Wellington Shields has been engaged for a term of 12 months to act as exclusive underwriter/broker with respect to a potential public offering of the Company’s common stock of $50 million. Wellington Shields will be compensated as follows: (a) an underwriting fee of 6% of the amount raised in the public offering; (b) a non-refundable retainer of $50,000 was paid on February 3, 2012 by an investor who loaned the funds to the Company; (c) the sale to Wellington Shields of warrants (“Underwrite Warrants”) equal to 3% of the total number of shares sold pursuant to the public offering. Underwriter warrants will be exercisable between the first and fifth anniversary dates of the Effective Date and shall be exercisable at a price per unit equal to 120% of the public offering price of the common shares; (d) the Company will bear all fees and expenses in connection with the proposed offering; (e) a success-based non-accountable expense allowance equal to 1% of the gross proceeds of the offering plus all incurred expenses In addition, the Company agrees to pay for the legal fees incurred by Wellington Shields, capped at $100,000. The success fee will continue for 18 months after cancellation or expiration of the agreement. Wellington Shields also receives preferential right to provide financing arrangements to the Company for any transaction closed by the Company during the term and, for a period of one year following the cancellation or expiration of the agreement, Wellington Shields shall have preferential right to participate as co-manager with no less than 25% economic interest (fees) in providing any financing arrangements for the Company. If any over-allotments occur during the distribution and sale of the shares, Wellington Shields is granted an option to purchase an amount of shares, not to exceed 15%, of the total number of shares initially offered to the public, for the period of 60 days from the Effective Date.

 

 

Sebring Software, Inc. and Subsidiary

(a development stage company)

Notes to Consolidated Financial Statements - Unaudited

Three Months ended March 31, 2012 and 2011 and from September 18, 2006 (Inception) to March 31, 2012

 

In the second agreement, the Company retained Wellington Shields as the exclusive placement agent and financial advisor to the Company in connection with a Private Placement transaction up to $15 million. Wellington Shields will be compensated as follows: (a) a success fee of 8% of gross proceeds of a successful placement; (b) non-callable warrants equal to 8% of the aggregate number of securities sold in the placement (“Placement Agent Warrants”). These warrants shall have a purchase price equal to 110% of the implied price per share of the Placement and shall be exercisable for a period of five years after the closing of the Placement. Wellington Shields will also be entitled to 8% compensation resulting from any cash generated by the Company upon exercise of warrants by investors introduced to the Company by Wellington Shields; (c) placement fee of 10% for any bridge loan or short term capital during the term of the agreement including 10% warrant coverage for investors introduced to the Company by Wellington Shields or a 3% fee plus 3% warrant coverage for any short term loans obtained by the Company for investors located by someone other than Wellington Shields; (d) expenses incurred by Wellington Shields after prior approval from the Company is obtained. The Agreement shall terminate at the close of business on June 30, 2012, but will continue unless cancelled by 30 days written notice. The Company is obligated to pay the fees indicated herein for a period of 12 months after termination of the agreement for any transactions completed by the Company with parties introduced to the Company by Wellington Shields. In addition, if the Company closes a placement or transaction during the term, or for a period of 24 months commencing the later of (i) the date of the closing of the placement or (ii) the date of the closing of any transaction, Wellington shall have a preferential right whereby the Company will offer Wellington the first opportunity to provide any financing arrangements to the Company.

 

Lender Contingency - Under an October 1, 2010 secured promissory note, a lender is granted a 1% equity interest on issued and outstanding equity interests for each 120 days (maximum of 4 issuances) that any amount is outstanding. The final set of shares to be issued under this agreement was recorded as of January 24, 2012 as described in Note 5.

 

Management agreement – The Company has three-year management agreements with two key members of management that are in effect until June 2013. The agreements commit the Company to pay a combined total of $339,000 per year in base salary and stock compensation as determined by the Board of Directors.

 

Penalty Contingency - Under the terms of the convertible notes, since the Company has failed to register the warrant shares by June 1, 2011, the holders of the notes will be entitled to liquidated damages in the form of an additional warrant to purchase such number of shares as equals 2% of the number of warrant shares that may be purchased under all of the subscriber’s warrants multiplied by the number of full calendar months that the effective registration is delayed. The liquidated damages under this agreement are capped at 10% of the number of warrant shares that may be purchased. The Company has not filed a registration statement as of the date of this report and therefore would be required to issue warrants equal to the full 10%. See Notes 3 and 4.

 

5. equity transactions

 

On January 17, 2012 the Company raised $25,000 by agreeing to issue one investor 500,000 shares of the Company’s common stock at a price of $.05 per share. The Company also raised an additional $25,000 on March 30, 2012 from the same investor by agreeing to issue an additional 500,000 shares of the Company’s common stock at the same price of $.05 per share.

 

 

Sebring Software, Inc. and Subsidiary

(a development stage company)

Notes to Consolidated Financial Statements - Unaudited

Three Months ended March 31, 2012 and 2011 and from September 18, 2006 (Inception) to March 31, 2012

 

At January 24, 2012 (the Penalty date) a 1% common stock interest or 376,626 common shares became due to a lender as the fourth and final installment pursuant to a settlement agreement and promissory note. Those shares of common stock are considered to be issued and were recorded as loan penalty expense based on the common stock quoted market value of $.46 per share on the Penalty date which is considered the measurement date for a total of $173,248.

 

As a result of the terms specified under the convertible notes issued in February 2012, the Company recorded $51,121 as additional paid in capital for the relative fair value of the warrants issued in conjunction with the notes. See Note 3.

 

As a result of requirements under the terms of previously issued convertible notes, the Company agreed to issue a total of 7,058 warrants to the noteholders during the three months ended March 31, 2012. These five year warrants, with an exercise price of $1.89, were valued at $.41 per warrant under calculations performed using the Black-Scholes pricing model and resulted in a charge of $2,894 being recorded in the three months ended March 31, 2012. See Notes 3 and 4.

 

6. EARNINGS PER SHARE CALCULATION

 

Basic earnings per share is computed as earnings available to common stockholders divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock-based compensation including stock options, restricted stock awards, warrants and convertible securities. For the three months ending March 31 2012 during which the Company reported a loss, 338,733 warrants and 1,234,423 shares issuable under conversion features of convertible notes were excluded from the diluted loss per share computation as their effect would be anti-dilutive

 

7. WARRANTS FOR COMMON STOCK

 

The Company estimates the fair value of issued warrants by utilizing the Black-Scholes pricing model, which is dependent upon several variables. The fair value for warrants issued during the three months ended March 31, 2012 was estimated at the date of issuance according to the following assumptions. The risk-free rate of 1.04% was the five year nominal fed rate at the date of issuance. The volatility factor was determined based on an independent study and the assumed market volatility was calculated to be 174%. The assumed dividend yield was 0% and the expected life of the warrant was assumed to be five years, which is the stated life of the warrant.

 

The Black-Scholes pricing model was developed for use in estimating the fair value of options and warrants and is dependent on the input of subjective assumptions. While the Company believes these estimates to be reasonable, the warrant expense recorded would increase if a higher volatility was used, or if the expected dividend yield increased.

 

 

Sebring Software, Inc. and Subsidiary

(a development stage company)

Notes to Consolidated Financial Statements - Unaudited

Three Months ended March 31, 2012 and 2011 and from September 18, 2006 (Inception) to March 31, 2012

 

A Summary of the Company’s warrant activity for the three months ended March 31, 2012 is presented below:

 

						Weighted				Weighted
						Average				Average
						Exercise				Remaining
		Warrants				Price				Life
Balance at beginning of year			331,675			$	1.89
Issued or Issuable			7,058			$	1.89
Cancelled or Expired			0			$	0.00
Exercised			0			$	0.00
Outstanding at end of period			338,733			$	1.89				4.17
Exercisable at end of period			338,733			$	1.89				4.17

 

At March 31, 2012 the warrant exercise price of $1.89 exceeded the market value of the Company’s stock price, therefore the intrinsic value of the outstanding warrants was $0.

 

8. PURCHASE AGREEMENT

 

In July 2011 the Company entered into a Stock Purchase Agreement whereby the Company agreed to purchase 49% of Scalix, Inc, a Delaware corporation, from Xandros, Inc. a Delaware corporation, for a Purchase Price of $5,750,000. Under the terms of the agreement, upon execution of the agreement, the Company will pay $150,000 in cash. In addition, the Company will pay an additional $200,000 in cash upon closing of the transaction with Socius (as discussed under Note 4 above) plus $150,000 upon closing of a secondary funding transaction of $1,750,000 with a third investor. This total of $500,000 is defined as an “Execution Deposit Amount”. If the Company receives $10 million (“Target Raise”) in aggregate gross investment, within five days of receiving such investment, the Company will pay the purchase price less any amounts previously paid. If the Company receives an investment of an amount less than the “Target Raise”, which shall be defined as the “Tranche Raise”, then the Company will pay an amount equal to 20% of the Tranche Raise if the raise is less than $3,750,000 or an amount equal to 40% of the Tranche Raise if the cumulative amount is equal to or greater than $3,750,000. If by October 15, 2011,(the “Minimum Payment Date”) the Company has not paid Xandros the full purchase price, the Company shall have the option of paying Xandros $500,000 (not inclusive of amounts previously paid hereunder) (the “Minimum Amount Payable”) in exchange for a two-month extension to pay the Purchase Price in full. The Minimum Amount Payable shall be applied against the purchase price. In the event the Company a) does not pay Xandros the Purchase Price or the Minimum Amount Payable on or before the Minimum Payment Date or b) in the event the Company has paid the Minimum Amount Payable on or before the Minimum Payment Date and has not paid the full Purchase Price by January 1, 2012, then Xandros shall have the option to terminate the agreement. If the agreement is terminated the Company shall own a number of shares of Scalix which is calculated pro rata based on the amounts the Company paid to Xandros against the $5,750,000 to be paid for the full 49 shares in Scalix. Xandrox has not exercised its option to terminate. The Company is presently negotiating to extend the dates. The Company paid $100,000 of the “Execution Deposit Amount” on July 5, 2011. As of the date of this report the Purchase Agreement has not been consummated. The Company has made no other payments on this Agreement and continues to work with Xandros to restructure this agreement.

 

9. Subsequent events

 

On April 30, 2012 the Company raised $50,000 from two investors by agreeing to issue each investor 500,000 shares of the Company’s common stock at a price of $.05 per share.

 

In April 2012 the Company agreed to issue 300,000 shares of common stock at fair market value of $.40 per share to an individual for providing advisory services for investor relations related matters.

 

   

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our consolidated financial statements.

 

The purpose of this discussion is to provide an understanding of the consolidated financial results and condition of Sebring Software, Inc. and Subsidiary (Company) and to also describe the plans for future growth and expansion.

 

Forward-Looking Statements

 

This Management’s Discussion and Analysis and other parts of this report contain forward-looking statements that involve risks and uncertainties, as well as current expectations and assumptions. From time to time, the Company may publish forward-looking statements, including those that are contained in this report, relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company’s business include, but are not limited to, its ability to maintain sufficient working capital, adverse changes in the economy, the ability to attract and maintain key personnel, its ability to implement its business plan. The Company’s actual results could differ materially from those anticipated in these forward-looking statements, including those set forth elsewhere in this report. The Company assumes no obligation to update any such forward-looking statements.

 

Overview

 

Sebring is in the development stage and therefore has not earned any revenue. Sebring’s designed purpose is to be a subscription based reseller of software to companies in the automotive, manufacturing, aerospace, healthcare and financial services industries. Sebring has developed “Adaptors” which allow the licensed software to be used by companies in North and South America and allows them to navigate multiple enterprise applications used in their numerous operating units in a single user interface so the users can gather and use their intercompany business information more quickly and effectively.

 

Results of Operations

 

Results of Operations for the three months ending March 31, 2012 compared to the three months ending March 31, 2011

 

Employee compensation and benefits decreased $10,486 from $102,507 in the three months ended March 31, 2011 to $92,021 for the three months ended March 31, 2012. This decrease is mainly due to a reduction in the cost of medical insurance.

 

General and administrative expenses increased by $34,736, from $105,961 in the three months ended March 31, 2011 to $140,697 in the three months ended March 31, 2012. This increase was mainly due to a $58,000 cost incurred for fees paid for investor related services. This increase was partially offset by reductions of expenses in the three months ended March 31, 2012 of approximately $10,000 for accounting fees, approximately $6,000 in amounts paid for rent, a reduction of approximately $6,000 in travel costs and a reduction of approximately $2,000 for amounts paid for meals versus amounts paid for these items in the three months ended March 31, 2011..

 

 

In the three months ended March 31, 2011 the Company recorded a $419,766 loan penalty because of a provision in a loan document that stated the Company would issue the holder of the note 1% of the Company’s outstanding common stock if the loan was not paid back as of January 29, 2011 (and again every 120 days thereafter up to a total of 480 days). Since the loan was not repaid, a charge for the shares to be issued was recorded which represents three 120 day periods. The loan was still not repaid as of the three months ended March 31, 2012, which required the Company to record a loan penalty of $173,248. This represents the last loan penalty required to be issued according to the provisions of the loan document.

 

Interest expense increased from $134,256 for the three months ended March 31, 2011 to $151,164 for the three months ended March 31, 2012. This increase was due to the interest required to be paid on the additional debt incurred during 2011 and 2012 to support the operations of the Company.

 

Inflation and seasonality

 

Sebring does not believe that inflation or seasonality will significantly affect it results of operations.

 

Liquidity and capital resources

 

Sebring’s cash and liquidity resources have been provided by investors through convertible and non-convertible notes, loans payable and sale of the Company’s common stock. Investors have loaned us $3,625,138 from September 18, 2006 (inception) through March 31, 2012. Included in this total was $162,500 which we received in the three months ended March 31, 2012. We have also received $50,000 from the sale of our stock in the three months ended March 31, 2012, These cash investments have generally been used for software development and for general and administrative expenses including management compensation. However, we don’t believe our current funds will be sufficient to sustain operations and for implementation of our business plan.

 

The Company anticipates completing a funding in the near future that will be sufficient to fund the execution of its business plan. However, the Company cannot guarantee that this funding will be completed and that it will receive the necessary funding to sustain operations.

 

Debt and contractual obligations

 

Sebring has commitments to pay investors $5,246,757 of principal and accrued interest in various convertible notes, non-convertible notes and loans payable through March 31, 2012. It is also owes $337,260 in accounts payable and accrued liabilities and $500,956 of payroll related liabilities as of March 31, 2012. Because the Company was unable to make the required principal and interest payments required by numerous notes payable, the Company was in potential default (subject to lender notifying the Company of default) on $3,543,356 of debt plus $1,097,481of accrued interest as of March 31, 2012. As of the date of this report the Company has been notified of default on one note with $1,170,718 of principal and $320,486 of accrued interest.

 

Additionally, for each 120 days that the one of the notes, which is in default, is issued and outstanding, the Company agreed to pay the holder 1% of the issued and outstanding common stock of the Company (approximately 1,451,335 shares based on the number of shares outstanding on the date the penalty became effective). This note is secured by a security interest in substantially all of Sebring’s assets. Pursuant to the Security Agreement, we agreed to pay the holder 25% of the first $750,000 in net proceeds received by us in connection with any debt or equity financing and 30% of the net proceeds of any amount of debt or equity financing received by us in excess of $750,000, which amount if paid will decrease the amount of the Note.

 

The Company has three-year management agreements with two key members of management that are in effect until June 2013. The agreements commit the Company to pay a combined total of $339,000 per year in base salary and stock compensation as determined by the Board of Directors.

 

The Company has also committed to pay various stock compensation and finder fees to entities that are raising funds on the Company’s behalf. Those funds are payable in the event that they are successful in raising capital described above and as more fully described in the Sebring consolidated financial statements.

 

Critical Accounting Estimates and Policies

 

Software Development Costs.  The Company accounts for its software development costs in accordance with Accounting Standards Codification (“ASC”) ASC 350 “Computer Software Developed or Obtained for Internal Use”.  

 

 

ASC 350 requires the expensing of all costs of the preliminary project stage and the training and application maintenance stage and the capitalization of all internal or external direct costs incurred during the application development stage.  The Company amortizes the capitalized cost of software developed or obtained for internal use over at the greater of i) the straight-line method over the expected life of three years and ii) the ratio of the current gross revenues for the software to the total of current and estimated future gross revenues for the software.

 

Impairment of Long-Lived Assets.  The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets”.  This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset.  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 assets exceeds the fair value of the assets.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

 

Stock Based Compensation –Certain employees may be granted stock options or restricted stock. The Company adopted the disclosure requirements of ASC 718 (formerly SFAS No. 123R) "Share-Based Payment" ("ASC 718") for stock options and similar equity instruments (collectively, "options") issued to employees. The Company applies the fair value base method of accounting as prescribed by ASC 718. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. For stock options, the fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option. For restricted stock, the fair value is determined based on the quoted market price. Restricted shares or restricted shares units are measured at their fair value as if they were vested and issued on the grant date value determined based on the close trading price of our shares known at the grant date. All restricted shares and restricted shares units to employees and non-employees granted in 2010 and 2011 were granted for no consideration or for a voluntary reduction in cash compensation; therefore their fair value was equal to the share price at the date of grant.

 

We apply ASC 718 and ASC 505 (EITF 96-18), "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services", with respect to options and warrants issued to non-employees. ASC 718 requires the use of option valuation models to measure the fair value of the options and warrants at the measurement date. ASC 718 also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

 

Stock-based compensation is considered critical accounting policy due to the significant expenses of options, restricted stock and restricted stock units which were granted to our employees, directors and consultants.

 

Off Balance Sheet Arrangements

 

We do not have any off balance sheet arrangements.

 

Recent Accounting Pronouncements

 

Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

  

ITEM 4.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures- Our management carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, required by Rule 13a-15 of the Securities Exchange Act of 1934 (Exchange Act) of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under SEC rules and forms and is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

None 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During the three months ended March 31, 2012 the company agreed to issue 1,000,000 shares of its common stock to one investor for $50,000. The funds were used primarily for general and administrative expenses including management compensation.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

Sebring has commitments to pay investors $5,246,757 of principal and accrued interest in various convertible notes, non-convertible notes and loans payable through March 31, 2012. It is also owes $337,260 in accounts payable and accrued liabilities and $500,956 of payroll related liabilities as of March 31, 2012. Because the Company was unable to make the required principal and interest payments required by numerous notes payable, the Company was in potential default (subject to lender notifying the Company of default) on $3,543,356 of debt plus $1,097,481of accrued interest as of March 31, 2012. As of the date of this report the Company has been notified of default on one note with $1,170,718 of principal and $320,486 of accrued interest.

 

Additionally, for each 120 days that the one of the notes, which is in default, is issued and outstanding, the Company agreed to pay the holder 1% of the issued and outstanding common stock of the Company (approximately 1,451,335 shares based on the number of shares outstanding on the date the penalty became effective). This note is secured by a security interest in substantially all of Sebring’s assets. Pursuant to the Security Agreement, we agreed to pay the holder 25% of the first $750,000 in net proceeds received by us in connection with any debt or equity financing and 30% of the net proceeds of any amount of debt or equity financing received by us in excess of $750,000, which amount if paid will decrease the amount of the Note.

 

ITEM 4.

MINING SAFETY DISCLOSURES

 

None

 

 

ITEM 5.

OTHER INFORMATION

 

None

 

ITEM 6.

EXHIBITS

 

None

 

SIGNATURES (*)

 

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

 

Sebring Software, Inc.

 

Date	May 21, 2012		/s/ Leif Andersen
			Leif Andersen, CEO,
			Principal Executive Officer and
			Principal Financial Officer