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 September 30, 2014

 

o 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)

 

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

 

1400 Cattlemen Rd, Suite D

Sarasota, Florida 34232

(Address of principal executive offices)

 

(941) 377-0715

(Registrant's telephone number)

 

N/A

(Former name, Former address,

if changed since the last report)

 

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).

x Yes ¨ 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). o Yes x No

 

As of November 13, 2014 the registrant had 68,746,327 shares of common stock, $0.0001 par value per share, issued and outstanding.

 

 

Table of Contents

 

			Page #
Part 1	Financial Information:
Item 1	Financial statements:
	Sebring Software, Inc. and Subsidiaries Consolidated Financial Statements Three and Nine Months Ended September 30, 2014 and 2013.		3
ITEM  2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		17
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		21
ITEM 4.	CONTROLS AND PROCEDURES		21
PART II	OTHER INFORMATION:
ITEM 1	LEGAL PROCEEDINGS		21
ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		22
ITEM 3	DEFAULTS UPON SENIOR SECURITIES		22
ITEM 4	MINE SAFETY DISCLOSURES		23
ITEM 5	OTHER INFORMATION		23
ITEM 6	EXHIBITS		23
	Signatures		23

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Sebring Software, Inc. and Subsidiaries

Consolidated Balance Sheets

(Amounts in thousands, except share data)

 

		September 30, 2014				December 31, 2013
		(unaudited)
ASSETS
Current assets:
Cash		$	23			$	1,826
Patient Receivables, net of $267 allowance for doubtful accounts at both September 30, 2014 and December 31, 2013			496				230
Prepaid expense			32				157
Total current assets			551				2,213
Fixed Assets
Furniture, equipment and vehicles, net			3,195				3,704
Total Fixed Assets			3,195				3,704
Other Assets
Loans receivable - related parties, net of allowance of $447 and $147 at September 30, 2014 and December 31, 2013, respectively			57				139
Customer relationship value, net of $2,725 and $1,048 accumulated amortization at September 30, 2014 and December 31, 2013, respectively			14,380				16,057
Loan costs, net of $1,072 and $426 accumulated amortization at September 30, 2014 and December 31, 2013, respectively.			3,170				3,816
Goodwill			-				4,821
Deposits			58				21
Total Other Assets			17,665				24,854
Total assets		$	21,411			$	30,771
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	1,351			$	867
Accrued liabilities			1,502				2,346
Accrued payroll related liabilities			435				550
Accrued interest payable			2,759				1,657
Warrant liability			1,310				4,452
Deferred revenue			3,877				2,737
Current portion notes payable and convertible notes payable, net of debt discount			5,296				4,012
Current portion  notes payable and convertible notes payable-related parties			1,707				1,025
Current portion of lease obligations			98				89
Current portion of consultant liability			737				655
Total current liabilities			19,072				18,390
Lease obligation, net of current portion			40				107
Consultant liability, net of current portion			2,265				2,866
Deferred tax liability			-				2,147
Notes payable and convertible notes payable, net of current portion and debt discount			10,110				11,761
Notes payable and convertible notes payable, net of current portion-related parties			2,165				2,555
Total liabilities			33,652				37,826
Commitments and contingencies (Note 6)			-				-
EQUITY (DEFICIT)
Sebring Software, Inc. stockholders' equity (deficit)
Preferred stock, $0.0001 par value, 10,000 authorized, none issued and outstanding
Common stock issued and to be issued, $0.0001 par value, 1,100,000,000 shares
authorized, 68,746,327 and 66,687,189 shares issued and outstanding at
September 30, 2014 and December 31, 2013, respectively			7				7
Additional paid in capital			9,023				8,435
Accumulated deficit			(23,222	)			(17,392	)
Total Sebring Software, Inc. stockholders' equity (deficit)			(14,192	)			(8,950	)
Noncontrolling interest			1,951				1,895
Total equity (deficit)			(12,241	)			(7,055	)
Total liabilities and equity (deficit)		$	21,411			$	30,771

 

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

 

 

Sebring Software, Inc. and Subsidiaries

Consolidated Statements of Operations

(unaudited)

(Amounts in thousands, except share data)

 

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2014				2013				2014				2013
Net dental practice revenue		$	4,906			$	3,301			$	14,943			$	5,957
Operating expenses:
Direct dental expenses - compensation			2,618				2,022				7,725				3,185
Direct dental expenses - other			1,476				1,066				4,404				1,678
Indirect dental expenses			1,352				777				3,343				1,269
Corporate compensation and benefits			180				375				640				823
Impairment of goodwill			-				-				2,596				-
General & administrative expenses			775				1,017				2,570				1,654
Total operating expense			6,401				5,257				21,278				8,609
Loss from operations			(1,495	)			(1,956	)			(6,335	)			(2,652	)
Other income (expense):
Gain (loss) on debt settlement			-				8				-				15
Gain/(loss) on warrant liability			1,205				1,061				3,142				(1,701	)
Gain (loss) on foreign currency transactions			12				(9	)			13				(4	)
Other income			31				13				89				13
Interest expense			(911	)			(646	)			(2,585	)			(1,518	)
Total other income (expense), net			337				427				659				(3,195	)
Net loss			(1,158	)			(1,529	)			(5,676	)			(5,847	)
Less: Net income (loss) attributable to the noncontrolling interest			54				89				154				236
Net loss attributable to Sebring Software, Inc.'s common stock		$	(1,212	)		$	(1,618	)		$	(5,830	)		$	(6,083	)
Net loss per share attributable to Sebring Software Inc.'s common stock - basic and diluted		$	(0.02	)		$	(0.02	)		$	(0.09	)		$	(0.10	)
Weighted average shares outstanding-Basic and Diluted			68,744,914				62,055,148				68,114,801				56,614,163

 

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

 

 

Sebring Software, Inc.

Statement of Changes in Equity (Deficit)

For the Nine Months Ended September 30, 2014

(unaudited)

 

 (Amounts in thousands, except share data)

 

																		Total				Non-				Total
		Common Stock issued or to be issued								Additional				Accumulated				Stockholders'				Controlling				Equity
		Shares				Amount				Paid-in-capital				Deficit				Deficit				Interest				(Deficit)
Balance - December 31, 2013			66,687,189			$	7			$	8,435			$	(17,392	)		$	(8,950	)		$	1,895			$	(7,055	)
Common stock issued for compensation			508,750				-				167				-				167				-				167
Issuance of penalty warrants on notes payable			-				-				21				-				21				-				21
Sale of common stock			1,550,388				-				400				-				400				-				400
Payment received-Note receivable-non controlling interest			-				-				-				-				-				57				57
Net loss attributable to non-controlling interest			-				-				-				-				-				(154	)			(154	)
Net loss for the period			-				-				-				(5,830	)			(5,830	)			153				(5,677	)
Balance - September 30, 2014			68,746,327			$	7			$	9,023			$	(23,222	)		$	(14,192	)		$	1,951			$	(12,241	)

 

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

  

 

Sebring Software, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

 

(Amounts in thousands)

 

		Nine Months Ended
		September 30
		2014				2013
Cash flows from operating activities:
Net loss attributable to Sebring Software, Inc.		$	(5,830	)		$	(6,082	)
Adjustments to reconcile net loss to net cash used in operating activities:
Net loss attributable to noncontrolling interest			153				236
Depreciation			559				229
Impairment of goodwill			2,596				-
Common stock issued for services			-				240
Common stock issued for interest			-				7
Common stock issued for compensation			167				254
Buyout noncontrolling interest member with note			-				(282	)
Warrant liability			(3,142	)			1,701
Gain on debt settlement			-				(7	)
Amortization of loan costs			646				268
Amortization of contract value			-				-
Amortization of customer relationships			1,677				655
Amortization of debt discount			206				237
Issuance of penalty warrants in conjunction with notes			21				18
Changes in assets and liabilities:			-				-
Non-controlling interest			-				-
Prepaid expenses			124				(149	)
Deposits			(38	)			(5	)
Patient Receivables			(188	)			(167	)
Accounts payable and accrued liabilities			(361	)			(451	)
Accrued payroll related liabilities			(115	)			(273	)
Accrued interest payable			1,102				652
Deferred revenue			1,140				320
Consultant liability			-				-
Net cash used in operating actives			(1,283	)			(2,599	)
Cash flows from investing activities:
Cash paid for business acquisition net of bank overdraft acquired			-				(400	)
Proceeds from business acquisition			-				372
Loan receivable			83				(140	)
Advances to managed dental practices			-				-
Due from orthodontic practices			-				-
Proceeds from sale of fixed assets			385				-
Purchase of furniture and equipment			(435	)			(148	)
Net cash used in investing activities			33				(316	)
Cash flows from financing activities:
Payment of consultant liability			(519	)			(263	)
Bank overdraft			-				-
Loan costs			-				(2,178	)
Proceeds from issuance of common of stock			400				342
Proceeds from issuance of notes payable			-				11,000
Proceeds from equipment loans			-				142
Repayment of notes assumed in OSM acquisition			-				(3,291	)
Repayment of loans and advances			-				-
Distributions to non-controlling interest			(154	)			-
Proceeds from note payable			593				-
Contributions of NCI equity holders			57				-
Proceeds from non-controlling interest			-				64
Payment of lease obligation			(57	)			(25	)
Repayment of notes payable			(873	)			(1,453	)
Proceeds (used in) provided by financing activities			(553	)			4,338
Net (decrease) increase in cash			(1,803	)			1,423
Cash, beginning of period			1,826				84
Cash, end of period		$	23			$	1,507
Supplemental Cash Flow Information:
Interest paid		$	1,483			$	793
Taxes paid		$	-			$	-
Supplemental Non-Cash Investing and Financing Activities:
Reduction in deferred tax liability, accounts receivable and goodwill		$	2,225			$	-
Common stock issued for compensation		$	167
Common stock issued for acquisition		$	-			$	3,841
Common stock issued for payment of loan costs		$	-			$	69
Common stock issued for original issue discount on notes		$	-			$	247
Warrants issued as debt issuance costs		$	-			$	800
Warrants issued as debt discount		$	-			$	901

 

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

 

 

Sebring Software, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

Three and Nine Months Ended September 30, 2014

(Unaudited)

 

1. BASIS OF PRESENTATION, NATURE OF BUSINESS AND ORGANIZATION

 

Basis of Presentation - The accompanying unaudited consolidated financial statements of Sebring Software, Inc. and Subsidiaries ("the Company", "us", "we", "our") 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, 2013 and 2012.

 

Nature of Business - The Company’s primary business activity is providing dental (primarily orthodontic) management services. The Company has contracts with affiliated professional associations, corporations and partnerships (“the Practices”), which are separate legal entities that provide dental services primarily in Florida and Arizona. Capital and cost efficiency have driven the dental services industry to join Dental Practice Management (“DPM”) companies rather than remain as sole practitioners. Most DPMs and dental practices operate on different software platforms. The Company plans to use software solutions to substantially reduce costs.

 

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 re-domiciled in Nevada in September 2008.

  

Sebring Management FL, LLC, a subsidiary of the Company, was organized in the state of Florida on April 12, 2013 to manage dental practices in the state of Florida.

 

Sebring Dental of Arizona, LLC, a subsidiary of the Company, was organized in the state of Arizona on March 22, 2013 to manage dental practices and owns 100% of AAR Acquisition, LLC.

 

AAR Acquisition, LLC, a subsidiary of the Company, was organized on March 18, 2013 in the state of Arizona and was organized to own the assets purchased in Arizona.

  

The Company had been in the development stage through March 31, 2013. However, through the acquisition of dental related operations on April 25, 2013 the Company has operating revenue and is no longer in the development stage.

 

 

Sebring Software, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

Three and Nine Months Ended September 30, 2014

(Unaudited)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries combined with the accounts of the affiliated Practices with which the Company has specific management arrangements. The Company’s agreements with the Practices provide that the term of the arrangements are for forty years, subject only to termination by the Company, except in the case of gross negligence, fraud or bankruptcy of the Company. The Company has the right to receive income, both as ongoing fees and as proceeds from the sale of its interest in the Practices. All intercompany and inter-affiliate accounts and transactions have been eliminated.

 

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 fair value valuation of assets acquired and liabilities assumed in business combinations, valuation of patient receivables, amortization of intangibles value, impairment analysis of long-lived assets and goodwill, 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 and liabilities.

 

Recent Accounting Pronouncements – In August 2014 the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update requires management of the Company to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern. This update is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company does not expect this standard to have an impact on the Company’s consolidated financial statements upon adoption.

 

Other 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.

 

Reclassification of Prior Period Amounts – Certain amounts in the comparative periods have been reclassified in the Company’s financial statements and related footnotes to conform to the current presentation.

 

Cash Equivalents - Cash equivalents are defined as all highly liquid financial instruments with maturities of 90 days or less from the date of purchase. The Company’s cash equivalents typically consist of demand deposits. Cash equivalent balances may, at certain times, exceed federally insured limits.

 

Patient Receivable - Patient receivables result from the Company's dental practices and are reported at the customers’ outstanding balances, less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable.

 

Furniture, Equipment and Vehicles - Fixed assets are recorded at historical cost. Depreciation and amortization are recognized on a straight-line basis over an asset’s estimated useful life. 

 

Business Acquisitions - In accordance with the acquisition method of accounting, any identifiable assets acquired and any liabilities assumed are recognized and measured at their fair values on the acquisition date. If information about facts and circumstances existing as of the acquisition date is incomplete at the end of the reporting period in which a business acquisition occurs, the Company will report provisional amounts for the items for which the accounting is incomplete. The measurement period ends once the Company receives sufficient information to finalize the fair values; however, the period will not exceed one year from the acquisition date. Any material adjustments recognized during the measurement period will be reflected prospectively in the consolidated financial statements.

 

Management has re-evaluated the purchase price allocation relating to deferred taxes and accounts receivable within the one year measurement period following the acquisition of dental related operations on April 25, 2013. Based on the results of this evaluation management determined to reduce the allocation of $2,147,000 to the deferred tax liability with a related reduction of goodwill. It was also determined that accounts receivable of $78,000 should be recorded which was also offset against goodwill.

 

 

Sebring Software, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

Three and Nine Months Ended September 30, 2014

(Unaudited)

 

Intangible Assets – Intangible assets arise in connection with acquisitions, including goodwill and the acquisition of management contracts. Intangible assets with finite lives are amortized over their respective useful lives. The Company reviews all intangible assets annually for impairment, or upon occurrence of a triggering event. Due to the sustained decrease in the Company’s stock price, the Company re-measured goodwill and determined that it was impaired. Consequently an impairment charge of $2,596,000 was recorded at June 30, 2014.

 

Long-Lived Assets - The Company evaluates long-lived assets, including intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable. The Company does not believe there are any indicators that would require an adjustment to such assets or their estimated periods of recovery at September 30, 2014 pursuant to current accounting standards.

 

Fair Value Measurements - The Company measures fair value based on a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The Company carries its warrant liabilities that meet certain criteria at fair value. In accordance with the three-tier fair value hierarchy, the Company classifies the warrant liability as a Level 3 and determines the fair value of its warrant liabilities using the Black Scholes pricing model and records a warrant liability for the value. The Company then assesses the fair value of the warrants quarterly based on the Black Scholes Model and increases or decreases the warrant liability to the new value, and records a corresponding gain or loss. The Company uses expected volatility based primarily on historical volatility using weekly pricing observations for recent periods that correspond to the expected life of the warrants. The risk-free interest rate is based on U.S. Treasury securities rates.

 

At September 30, 2014 and December 31, 2013, the Company’s warrant liabilities had a fair value of approximately $1,310,000 and $4,452,000, respectively. See Note 9 for more information regarding the Company’s warrant liability during the nine months ended September 30, 2014.

 

The carrying amounts of cash equivalents, accounts receivable and accounts payable and accrued expenses approximate fair value due to the short maturities of the respective instruments. The carrying values of deferred revenue and other long-term obligations also approximate fair value.

 

Revenue Recognition - Revenues are earned from dental, primarily orthodontic, services provided to patients in thirty-eight dental facilities in the states of Florida and Arizona. Orthodontic patients agree to a fee structure in advance by signing a written agreement that details the services to be provided and the terms of the payment(s) for services. The services are typically rendered over 18 to 24 months. Revenue is generally recognized over the service period on a straight line basis as the services are provided at a value net of refunds and other adjustments. Amounts collected in excess of amounts earned are deferred.

 

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 had a net loss of approximately $5.8 million of which $2.6 million was due to a write down of goodwill, net cash used in operations of $1.3 million for the nine months ended September 30, 2014, a working capital deficit of $18.5 million, stockholders’ deficit of $12.2 million and an accumulated deficit of $23.2 million at September 30, 2014. Furthermore, because the Company was unable to make the required principal and interest payments under its term loan and a number of notes payable, it was in potential default (subject to lender notifying the Company of default) on approximately $17 million in principal and $2.6 million in accrued interest as of September 30, 2014. Management is currently working to obtain the necessary financing and are exploring opportunities in both the debt and equity sectors.

 

 

Sebring Software, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

Three and Nine Months Ended September 30, 2014

(Unaudited)

 

These conditions were considered when evaluating the Company’s liquidity and its ability to meet its ongoing obligations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The 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 this uncertainty.

 

Foreign Currency Transactions – Gains and losses resulting from foreign currency transactions, which are not material, are included in the statement of operations as other income (expense).

 

3. Furniture, EQUIPMENT and VEHICLES, net

 

Furniture, equipment and vehicles consisted of the following:

 

		September 30, 2014				December 31, 2013
		(000 omitted)				(000 omitted)
Furniture and fixtures		$	457			$	452
Vehicles			96				96
Dental equipment			2,604				2,469
Computers and phone systems			779				749
Leasehold improvements			284				134
Construction in progress			0				269
Furniture , equipment and vehicles			4,220				4,169
Accumulated depreciation			(1,025	)			(465	)
Furniture, equipment and vehicles, net		$	3,195			$	3,704

 

Depreciation expense for the nine months ended September 30, 2014 was approximately $559,000. Included above are phone systems under capital leases with a net book value at September 30, 2014 of approximately $138,000.

 

4. BORROWINGS

 

The Company has financed its operations mainly through the issuance of notes and convertible notes payable. Borrowings consist of the following at September 30, 2014 and December 31, 2013:

 

		September 30, 2014				December 31, 2013
		(000 omitted)				(000 omitted)
Term Loan		$	14,025			$	14,589
Convertible notes payable			5,185				5,185
Equipment & vehicle notes payable			272				283
Other notes payable			880				587
Total borrowings			20,362				20,644
Less: Debt discount, net of interest amortization			(1,084	)			(1,291	)
Total borrowings, net of debt discount			19,278				19,353
Less: Related party notes payable			(3,872	)			(3,580	)
Total borrowings, net of related party notes			15,406				15,773
Less: Current portion of long term debt			(5,296	)			(4,012	)
Notes payable, net of current portion		$	10,110			$	11,761
Total related party notes		$	3,872			$	3,580
Less: Current portion of related party notes			(1,707	)			(1,025	)
Related party notes, net of current portion		$	2,165			$	2,555

 

 

Sebring Software, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

Three and Nine Months Ended September 30, 2014

(Unaudited)

 

Term Loan

 

In 2013, the Company received financing of $15,000,000 for a note with the proceeds used for acquisitions and general working capital. As of the date of this report the Company had not made the principal or interest payment due at June 30 or September 30, 2014. Accordingly, the note is considered in default for the unpaid principal balance of $14,025,000 and accrued interest of approximately $892,000. Upon the occurrence of any event of default, the lender may, declare all obligations to be immediately due and payable, without presentment, demand, protest or other requirements of any kind. The Company is working with the lender to resolve the issue, however, although efforts continue, no specific actions have yet been determined. 

 

The Company incurred approximately $4.2 million in loan costs consisting of cash payments due to the lender in the amount of approximately $3,156,000 (including $250,000 that was to be paid by May 30, 2014) and approximately 4.7 million five-year warrants issued to a loan placement agent, exercisable at $0.22 per share, which were valued at their fair value of $1,085,000 in conjunction with the Loan Agreement. The loan costs are recorded as debt issue costs to be amortized over the term of the debt. During the nine months ended September 30, 2014, a total of approximately $494,000 was recorded as amortization expense. As of November 13, 2014 the Company had not made the May 30, 2014 $250,000 payment.

 

Convertible Notes Payable

 

The Company has a total of $5,185,000 of convertible notes payable outstanding. This total includes several past due notes totaling approximately $1,655,000 in principal and approximately $1,370,000 in accrued but unpaid interest which are currently in default subject to notification by the lenders. Also included in convertible notes payable at September 30, 2014 is a restructured note, in the amount of approximately $999,000 which the Company had been notified by the lender of default. This note also has approximately $281,000 of accrued but unpaid interest in default. This restructured note was accounted for as a debt extinguishment in 2013, resulting in no gain or loss.

 

Three convertible notes were issued in conjunction with the December 2013 acquisitions. These notes, which total $2,531,000, were issued with interest rates from 6% to 7% and mature in 2016.

 

No amounts have been recorded relating to stock settled debt, derivatives or beneficial conversion values since all such convertible notes are convertible contingent upon the occurrence of future events under control of the Company.

 

Of the total convertible notes payable, approximately $3.4 million are with related parties.

 

Equipment and Vehicle Notes Payable

 

In connection with the April 25, 2013 merger, the Company assumed a note payable in the amount of approximately $160,000. The note bears interest at 5%, requires monthly payments of approximately $7,000 through March 2015. During the year ended December 31, 2013, the Company executed several notes payable to a bank to acquire orthodontic equipment in the aggregate amount of approximately $161,000. These notes bear interest at rates ranging from 3.5% to 7%, are secured by the equipment, and require aggregate monthly payments of approximately $3,300 through 2018. During the nine months ended September 30, 2014 the Company executed notes for additional orthodontic equipment of approximately $93,000. These notes bear interest at approximately 4.5%. The remaining notes in this category are loans for vehicles purchased in 2013 that mature in 2016 with interest of 3.9%. The notes have monthly principal and interest payments of approximately $1,000. Total amounts owed under these equipment and vehicle notes payable at September 30, 2014 and December 31, 2013 was approximately $272,000 and $283,000 respectively.

 

Other Notes Payable

 

Other notes payable includes several unsecured past due notes totaling $165,000 in principal at September 30, 2014 and December 31, 2013 with interest payable at rates ranging from 10% to 12%. Although the Company has not made any principal payments as of September 30, 2014, the Company had not received any Notification of Default from any holders of these notes and therefore was not technically in default.

 

Also included in other notes payable is a non-interest bearing loan in the amount of $35,000 at September 30, 2014 and December 31, 2013.

 

Other notes payable at September 30, 2014 includes notes issued to related parties as follows:

 

 

Sebring Software, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

Three and Nine Months Ended September 30, 2014

(Unaudited)

 

In connection with the April 25, 2013 merger, the Company assumed a 6.5% note payable for approximately $120,000 to a holder of a non-controlling interest. The note requires monthly payments of approximately $4,600 through July 2015. The balance of the note at September 30, 2014 and December 31, 2013 was approximately $45,000 and $84,000, respectively.

 

In the third quarter of 2013, the Company issued a 5.25% note payable in the amount of approximately $255,000 to a holder of a non-controlling interest as part of a transaction to re-acquire the non-controlling interest. The note requires monthly payments of approximately $11,000 through July of 2015. The balance of the Note at September 30, 2014 and December 31, 2013 was approximately $109,000 and $205,000, respectively.

 

In connection with a December 2013 acquisition, the Company issued a 6.25% note payable in the amount of $100,000 to the seller. The note requires monthly payments of approximately $9,000 through December 2014. The balance of the note at September 30, 2014 and December 31, 2013 was approximately $26,000 and $100,000, respectively.

 

In April 2014, the Company received $200,000 on a note from a board member. The note matures on June 30, 2014 and has a simple interest rate of 8%. As of November 13, 2014 the Company had not made any principal payments on this note.

 

In July 2014, the Company received $300,000 on two notes from two board members. The notes mature in July 2015 and have a simple interest rate of 8%. As of November 13, 2014 the Company had not made any payments on these notes.

 

5. LOANS RECEIVABLE

 

The Company has paid amounts totaling approximately $137,000 at September 30, 2014 that are obligations of sellers in the AAR Acquisition. Additionally, the Company has advanced amounts totaling approximately $351,000 to an entity that it provides dental practice management services and approximately $14,000 to other related parties. In August 2014 the Company terminated its relationship with the entity to which it was providing dental management services and is currently attempting to recover the previously advanced amounts owed by this entity. Although the Company is pursuing all options available to recover the amounts owed, an allowance in the amount of approximately $447,000 has been recorded at September 30, 2014 related to all of these loans receivable.

 

6. COMMITMENTS AND CONTINGENCIES

 

Advisor Agreements - The Company has entered into two agreements with a financial advisor. Under the first agreement, the Advisor has been engaged to act as exclusive underwriter with respect to a potential secondary public offering of the Company’s common stock. The agreement provides for compensation to be earned by the Advisor in the form of a success fee and issuance of warrants based on a percentage of the number of shares sold pursuant to the public offering. The success fee will continue for 18 months after cancellation or expiration of the agreement. The Advisor also receives preferential rights 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 cancellation or expiration of the agreement. This agreement was renewed at substantially the same terms with an expiration date of May 12, 2015.

 

Under the second agreement, the Advisor has been retained in connection with a Private Placement transaction. The agreement provides for compensation to be earned by the Advisor in the form of a success fee and issuance of warrants based on a percentage of the aggregate securities sold in the placement. The Company is obligated to pay the fees for any transaction completed during the term of the agreement or for a period of 12 months after termination of the agreement for any transactions completed by the Company with parties introduced by the Advisor. The Advisor has preferential rights to provide financing for any transaction closed during the term of the agreement, or for a period of 24 months after expiration of the agreement. This agreement is still in effect as of November 13, 2014.

 

Management Agreement - The Company has management contracts with five key members of management with lengths ranging from one to three years. These agreements will renew automatically at the expiration dates unless specifically terminated. The agreements commit the Company to pay a combined total of approximately $1,362,000 per year in base salary and stock compensation as determined by the Board of Directors. In addition, the contracts have Equity Participation clauses whereby the employees have been awarded a total of 1,100,000 shares of restricted stock that will be distributed to the employees in equal installments over periods ranging from two to five years.

 

 

Sebring Software, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

Three and Nine Months Ended September 30, 2014

(Unaudited)

 

Consultant Liability - As a result of the April 25, 2013 merger the Company entered into consulting agreements with two individuals for an initial period of three years which automatically renew for an additional two years unless otherwise terminated under the terms of the agreements. The amounts payable under the consulting arrangements were deemed to be additional consideration for the merger. These payments were recorded as “consultant liability” at its net present value of approximately $3,932,000 at the acquisition date. As of September 30, 2014, the remaining consultant liability totals approximately $3.0 million. Of this amount, approximately $737,000 is reflected as a current liability at September 30, 2014.

 

Penalty Contingency - Certain penalty and other ongoing warrant issuances are due under various note agreements. These continuing warrant grants will continue to be expensed at fair value in future periods and may cause dilution to current stockholders if such warrants are exercised.

 

Leases

 

Office Leases

Our new subsidiary in Florida leases office space for their headquarters (Clearwater, FL) and for the Practices. The leases expire at various times through 2023.

 

Future minimum lease payments for the 12 months ending September 30:

 

		(000 omitted)
2015		$	1,860
2016			1,539
2017			1,108
2018			824
2019			627
Thereafter			1,245
Total		$	7,203

 

Equipment Leases

The Company also has leases for software and telephone systems related to the Practices. The software lease is classified as an operating lease and requires monthly payment of approximately $7,000 through February of 2015. The telephone systems lease is classified as a capital lease. Future payments required under the lease are as follows:

 

		(000 omitted)
Through September 31, 2014		$	24
September 30, 2015			93
September 30, 2016			17
September 30, 2017			14
September 30, 2018			3
Total			151
Less amounts representing interest			(13	)
Capital lease obligation			138
Less current portion			(98	)
Long term capital lease obligation		$	40

 

7. EQUITY TRANSACTIONS

 

During the nine months ended September 30, 2014 the Company issued a total of 508,750 shares of common stock to three members of management according to the terms of their employment agreements. The shares, which were issued at various intervals as required in the agreements, were valued at the applicable price per share based on the trading price of the stock at the dates of issuance specified in each contract. Accordingly, the Company recorded a total of approximately $167,000 as non-cash compensation expense.

 

 

Sebring Software, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

Three and Nine Months Ended September 30, 2014

(Unaudited)

 

In January 2014 the Company received $100,000 for issuing 387,597 shares of the Company’s common stock to an investor and board member for $0.258 per share. In April 2014, the Company received a total of $300,000 from two investors and board members for 1,162,791 shares of the Company’s common stock, or $0.258 per share.

 

As a result of requirements under the terms of previously issued convertible notes, the Company agreed to issue a total of 26,920 warrants to the noteholders during the nine months ended September 30, 2014. These five year warrants, with an exercise price of $1.89 were valued at $.79 per warrant under calculations performed using the Black-Scholes pricing model and resulted in a charge to Additional Paid in Capital of approximately $21,000 during the nine months ended September 30, 2014.

 

Non-controlling Interest

 

In connection with the 2013 OSM Agreement and through certain agreements that provide for a nominee shareholder, the Company obtained financial control of certain Practices consisting of 11 entities and 31 locations. Four of these entities have equity owners that have not pledged their equity interests to the Company through the nominee shareholder. These non-controlling interests range from 40% to 50%. These interests have been classified as non-controlling interests (NCI) in the accompanying consolidated financial statements.

 

The Company recorded the noncontrolling interest at the April 2013 acquisition date in the amount of approximately $2,067,000 as the estimated fair value. The amount of the Company's net income (loss) allocable to the non-controlling interest equity holders is based on the specific performance of their respective operating entity and is distributed to them on a quarterly basis. During the nine months ended September 30, 2014 capital contributions in the amount of approximately $57,000 were received from the NCI equity holders and approximately $154,000 of net income was allocated and is distributable to the NCI equity holders.

 

Additionally in 2013 the Company acquired the non-controlling interest of one of the entities. This was accomplished through the issuance of a note payable to the holder of the non-controlling interest in the amount of approximately $282,000 which was substantially equivalent to the value placed on this non-controlling interest in connection with the original acquisition plus any earnings thereon.

  

8. 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 nine months ending September 30, 2014 during which the Company reported a net loss, 11,393,607 warrants and 1,628,953 shares issuable under conversion features of convertible notes were excluded from the diluted loss per share computation as their effect would be anti-dilutive.

 

9. WARRANTS FOR COMMON STOCK AND WARRANT LIABILITY

 

Warrants issued during the nine months ended September 30, 2014 were issued under a continuation agreement calculated according to the following assumptions: 

 

Estimated fair value of underlying common stock			$0.13-$0.33
Exercise price			$1.89
Expected life (years)			5.0
Risk-free interest rate			1.04	%
Expected volatility			174	%
Dividend yield			-

 

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 Subsidiaries

Condensed Notes to Consolidated Financial Statements

Three and Nine Months Ended September 30, 2014

(Unaudited)

 

Warrants Without Ratchet Provisions:

 

During the nine months ended September 30, 2014 a total of 26,920 warrants were issued under a continuation agreement according to the factors calculated at the time of inception. The expense and credit to additional paid-in capital for the nine months ended September 30, 2014 was approximately $21,000. 

 

In connection with the financing agreement on April 25, 2013, 5,987,340 ten-year warrants were issued to the lenders with an exercise price of $.01. These warrants have a put option that allows the holder to receive a cash payment of the value of the warrants (a minimum of $.011 or the market price) less the exercise price of $.01, upon the two year anniversary of the original issue date, event of default or the change in control date. As a result of this provision the warrants are treated as a liability and are re-measured at each reporting period.

 

A Summary of the Company’s warrant activity for warrants without ratchet provisions for the nine months ended September 30, 2014 is presented below:

 

						Weighted				Weighted
						Average				Average
						Exercise				Remaining
		Warrants				Price				Life
Balance at beginning of year			6,685,836			$	1.89
Issued or Issuable			26,920			$	1.89
Cancelled or Expired			-				-
Exercised			-				-
Outstanding at end of period			6,712,756			$	.15				8.39
Exercisable at end of period			6,712,756			$	.15				8.39

 

At September 30, 2014 the intrinsic value of the outstanding warrants was approximately $718,000.

 

Warrants With Ratchet Provisions:

 

The Company issued five-year warrants on April 25, 2013 to purchase 4,000,000 shares of common stock, exercisable at $0.22 per share, to a loan placement agent. In addition, on December 27, 2013 the Company issued five-year warrants to the same loan placement agent to purchase 680,851 shares of common stock at an exercise price of $0.47 per share. The warrants stipulate that if the Company issues any additional shares of common stock at a price per share less than the warrant exercise price, then the exercise price will be adjusted to equal the average price per share received by the Company for the additional shares issued. In January the Company issued shares to an investor at $0.258 per share, which resulted in the exercise price on the warrants issued in December to be adjusted to the same $0.258 per share. 

 

Due to these ratchet provisions, the Company treats the warrants as a derivative liability in accordance with the provisions of ASC 815 “Derivatives and Hedging”. ASC 815 applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative and to any freestanding financial instruments that potentially settle in an entity’s own common stock.

 

A Summary of the Company’s warrant activity for warrants with ratchet provisions for the nine months ended Septmber 30, 2014 is presented below:

 

						Weighted				Weighted
						Average				Average
						Exercise				Remaining
		Warrants				Price				Life
Balance at beginning of year			4,680,851			$	.26
Issued or Issuable			-				-
Exercised			-				-
Canceled or expired			-				-
Addition due to ratchet trigger
Outstanding at end of period			4,680,851			$	.23				3.69
Exercisable at end of period			4,680,851			$	.23				3.69

 

 

Sebring Software, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

Three and Nine Months Ended September 30, 2014

(Unaudited)

 

At September 30, 2014 the intrinsic value of the outstanding ratchet warrants was $0.

 

The activity in the warrant liability (a Level 3 classification in the fair value hierarchy) for the nine months ended September 30, 2014 is as follows:

 

		(000 Omitted)
Warrant liability-December 31, 2013		$	4,452
Additional liability due to new grants			-
Gain on changes in fair market value			(3,142	)
Warrant liability-September 30, 2014		$	1,310

 

Changes in the fair market value of these warrant liabilities resulted in a gain totaling approximately $3,142,000 for the nine months ended September 30, 2014.

 

10. RELATED PARTIES

 

Related party transactions and balances include Borrowings (See Note 4), Loans Receivable (See Note 5), Commitments and Contingencies (See Note 6), and certain equity transactions (See Note 7).

 

11. CONCENTRATIONS

 

Credit Risk - The Company’s cash equivalents typically consist of Bank demand deposits. Cash equivalent balances may, at certain times, exceed federally insured limits.

 

Geographic Concentration - The Company's dental practice locations are concentrated in Florida and Arizona.

 

12. Subsequent Events

 

In October 2014 the Company received a total of $300,000 from an investor and board member in exchange for a promissory note.

 

  

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 Subsidiaries (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, we may publish forward-looking statements, including those that are contained in this report, relating to such matters as anticipated financial performance, business prospects, acquisition strategies, 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, we note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of our business include, but are not limited to, our ability to maintain sufficient working capital, adverse changes in the economy, the ability to attract and maintain key personnel, our ability to implement our business plan. Our actual results could differ materially from those anticipated in these forward-looking statements, including those set forth elsewhere in this report. We assume no obligation to update any such forward-looking statements.

 

Overview

 

Prior to the Company entering the Dental Practice Management (“DPM”) industry on April 26, 2013 we were a development stage software solutions enterprise through 2013 and up to April 26, 2013 and accordingly had not earned any revenue until the second quarter of 2013. The Company reported its audited financial statements for the operating period of April 26, 2013 until December 31, 2013 in its 10K annual report filed with the Securities Exchange Commission on March 31, 2014.

 

Our designed purpose is to continue growing in the Dental Practice Management industry and utilize our software connectivity product to reduce the costs associated with different software packages used by dental practices. DPM companies combine acquisition and organic growth to boost revenues while instilling best practice management infrastructure to increase the dental practices’ profitability. Capital and cost efficiency have driven the dental services industry to join DPM companies rather than remain as sole practitioners. Most DPMs and dental practices use different software packages. The Company plans to use software solutions to substantially reduce the cost of DPMs data entry.

 

With the presence in the DPM market the Company presently has 38 affiliated practices in the states of Florida and Arizona. The Company plans to boost revenues and substantially reduce costs through increased efficiencies through the use of software solutions and best practice management techniques as well as additional affiliated practices.

 

Results of Operations

 

Results of Operations for the three and nine months ending September 30, 2014 compared to the three and nine months ending September 30, 2013

 

 

 

During the three and nine months ended September 30, 2014, the Company recorded revenues of $4,906,000 and $14,943,000, respectively. This is compared to $3,301,000 and $5,957,000 of revenues recorded respectively in the three and nine months ended September 30, 2013. This revenue was earned from general dental practice and is the result of the acquisitions in April and December 2013 of dental practices and a dental practice management company according to the Company’s strategic plan.

 

The Company incurred direct dental costs in the three and nine months ended September 30, 2014 of $2,618,000 and $7,725,000, respectively, which were primarily for employee compensation and benefits in the dental practices. Direct dental costs for compensation were $2,022,000 and $3,185,000 respectively during the three and nine months ended September 30, 2013. Expenses began to be incurred in April 2013 as a result of the acquisition of the dental practices and the dental management company. In addition, other direct dental costs of $1,476,000 for the three months ended September 30, 2014 and $4,404,000 for the nine months ended September 30, 2014 were incurred for expenses in the dental practices which included items such as lab expense, dental implants and other supplies and certain rents. Costs for these items in the three and nine months ended September 30, 2013 were $1,066,000 and $1,678,000 respectively. Increases in these costs in 2014 were primarily related to the increased revenue recorded in 2014 as well as additional revenue associated with the December 2013 acquisitions. Indirect dental expenses of $1,352,000 and $3,343,000 for the three and nine months ended September 30, 2014 respectively were incurred at the dental practices for other expenses such as computer expense, telecommunications costs, cleaning expenses, repairs and maintenance, utilities and other general office expenses. Expenses for these items for the three and nine months ended September 30, 2013 were $777,000 and $1,269,000 respectively. These costs were higher in 2014 due primarily to the additional costs associated with the December 2013 acquisitions. The Company did not produce any revenue or incur any such expenses until the April, 2013 acquisition of the dental practices and dental management company. Prior to the dental practices and dental management company acquisitions the Company was a development stage enterprise.

 

Corporate compensation and benefits decreased from $823,000 in the nine months ended September 30, 2013 to $640,000 for the nine months ended September 30, 2014. These costs decreased from $375,000 in the three months ended September 30, 2013 to $180,000 for the three months ended September 30, 2014. The decreases are primarily the result of the reduction of corporate staff.

  

General and administrative expenses decreased $242,000 from $1,017,000 for the three months ended September 30, 2013 to $775,000 for the three months ended September 30, 2014. For the nine months ended September 30, 2014 general and administrative expense was $2,570,000 compared to $1,654,000 for the nine months ended September 30, 2013.These increases were primarily due to the amortization costs of our Customer Relationships as well as due to the Company incurring higher costs for consulting, accounting and other professional fees necessary to facilitate and consummate the dental practice acquisitions as well as additional costs for travel, communication and filing fees. The decrease in the third quarter of 2014 compared to the same period in 2013 was primarily the result of less professional and accounting fees incurred in 2014.

 

Interest expense increased from $646,000 for the three months ended September 30, 2013 to $911,000 for the three months ended September 30, 2014. For the nine months ended September 30, 2014 interest expense was $2,585,000 compared to $1,518,000 for the nine months ended September 30, 2013. The increase was primarily due to the interest on a Term Loan to fund the acquisitions as well as additional interest expense incurred from amortizing a portion of the debt discount associated with certain notes and warrants and the amortization of debt issuance costs incurred with the consummation of the term loan. 

 

The $3,142,000 gain on warrant liability relates to the change in fair value of the warrant liability from December 31, 2013 to September 30, 2014. The warrants issued with the Term Loan were classified as a liability due to certain provisions in such warrants and must be marked up or down to fair value at each reporting date. The Company also recorded a charge for goodwill impairment of $2,596,000 as a result of a re-measurement at June 30, 2014 due to the reduction in the Company’s stock price.

 

 Inflation and seasonality

 

We do not believe that inflation or seasonality will significantly affect our results of operations.

 

Liquidity and capital resources

 

Our cash and liquidity resources have been provided by investors through convertible and non-convertible notes, loans payable and the sale of our common stock as well as cash provided from our dental practice management operations. During the nine months ended September 30, 2014 we received $400,000 from the sale of our stock and $500,000 from the issuance of notes. These cash investments have been used primarily for general and administrative expenses including management compensation.

 

In 2013, management acquired or gained financial control of a dental practice management company and 38 dental practices in the states of Florida and Arizona. Financial control of these practices is expected to provide material positive cash flow to the Company. Furthermore, approximately $5.2 million of the current liabilities at September 30, 2014 are warrant liabilities and deferred revenue which we believe are unlikely to result in a cash outlay over the next twelve months. In order to meet our obligations when they come due, however, a capital infusion of approximately $2.9 million will be necessary. We are currently working to obtain the necessary financing and are exploring opportunities in both the debt and equity sectors. However, there is no guaranty that we will be successful in obtaining additional funding or that funding received will be sufficient to meet our current obligations.

 

 

 

Debt and contractual obligations

 

We have commitments to pay investors $20,362,000 of principal and $2,759,000 of accrued interest on various convertible notes, non-convertible notes and loans payable through September 30, 2014. Of the $20,362,000 in principal amount outstanding as of September 30, 2014, $3,380,000 of that amount consists of convertible and non-convertible notes which debt was incurred by the Company when it was a development stage enterprise and is referred to by Management as legacy debt. A majority of the debt was incurred prior to 2012. The note holders are largely individuals including current directors of the Company. Because the Company was unable to make the required principal and interest payments under a number of these notes payable, it was in potential default (subject to lender notifying the Company of default) on approximately $3,019,000 of debt plus $1,739,000 of accrued interest as of September 30, 2014. Certain of the notes have been restructured or the Company has entered into a Forbearance Agreement with selected note holders.

 

The other debt component consists of a Term Loan from an institutional investor in the principal amount of $14,025,000. Pursuant to the Term Loan, interest shall accrue on the outstanding balance of the Term Loan at a rate of 11 ½ percent per annum. Upon the occurrence and continuation of an Event of Default as described in the Loan Agreement, the unpaid principal balance of the Term Loan shall bear interest at a rate of 13 ½ per annum. Interest payments on all outstanding principal shall be payable quarterly in arrears on the last day of each quarter. Beginning on June 30, 2014, principal payments of $375,000 shall be due each quarter. Beginning on June 30, 2015 the quarterly principal payments shall increase to $750,000 per quarter. Beginning on June 30, 2017, the quarterly principal payments shall increase to $1,594,000 per quarter. On April 25, 2018 all remaining unpaid principal of the Term Loan shall be due. As of the date of this report the Company had not made the principal or interest payments due on June 30 or September 30, 2014. Accordingly, the note is considered in default for the unpaid principal balance of $14,025,000 and accrued interest of $892,000. The Company is working with the lender to resolve the issue however no specific actions have yet been determined.

 

The Company also has a total of $2,957,000 of notes for equipment financing and acquisitions that are current and not in default.

 

In addition to the foregoing, we also owe $1,351,000 in accounts payable, $1,502,000 in accrued liabilities, $435,000 of payroll related liabilities and a capital lease obligation of $138,000 as of September 30, 2014. In addition, as of September 30, 2014, we have commitments to pay $3,002,000 to the sellers, recorded as consultant liability, as part of the initial acquisition of the 31 dental practices in Florida.

 

Management Agreement - The Company has management contracts with five key members of management with lengths ranging from one to three years. These agreements will renew automatically at the expiration dates unless specifically terminated. The agreements commit the Company to pay a combined total of $1,362,000 per year in base salary and stock compensation as determined by the Board of Directors. In addition, the contracts have Equity Participation clauses whereby the employees have been awarded a total of 1,100,000 shares of restricted stock that will be distributed to the employees in in equal installments over periods ranging from two to five years.

 

 

We have 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.

 

Critical Accounting Estimates and Policies

 

Goodwill and Other Intangible Assets - The Company records acquired assets and liabilities at their respective fair values under the acquisition method of accounting. Goodwill represents the excess of cost over the fair value of the net assets acquired. Intangible assets with finite lives, principally customer relationships, are recognized apart from goodwill at the time of acquisition based on the contractual-legal and separability criteria established in the accounting guidance for business combinations. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives. Customer relationships are amortized over seven years for orthodontic practices and fifteen years for general dental practices with no residual value.

 

Goodwill is tested for impairment at a reporting unit level on at least an annual basis in accordance with the subsequent measurement provisions of the accounting guidance for goodwill. The Company defines a reporting unit based upon its management structure for services provided in specific regions of the United States. The testing for impairment is completed using a three-step test. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, a second step is performed to determine the amount of any impairment loss. The Company uses income and market-based valuation approaches to determine the fair value of its reporting units. These approaches focus on discounted cash flows and market multiples based on the Company’s market capitalization to derive the fair value of a reporting unit. The Company also considers the economic outlook for the dental services industry and various other factors during the testing process, including local market developments and other publicly available information. Due to the decrease in the Company’s stock price, at June 30, 2014 the Company re-measured goodwill and determined that an impairment existed and accordingly took an impairment charge of $2,596,000 reducing the amount of goodwill to zero.

 

Long-Lived Assets - The Company is required to evaluate long-lived assets, including intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable. The recoverability of such assets is measured by a comparison of the carrying value of the assets to the future undiscounted cash flows before interest charges to be generated by the assets. If long-lived assets are impaired, the impairment to be recognized is measured as the excess of the carrying value over the fair value. Long-lived assets held for disposal are reported at the lower of the carrying value or fair value less disposal costs.

 

Revenue Recognition - Revenues are earned from dental, primarily orthodontic, services provided to patients in 38 dental facilities in the states of Florida and Arizona. Orthodontic patients agree to a fee structure in advance by signing a written agreement that details the services to be provided and the terms of the payment(s) for services. The services are typically rendered over 18 to 24 months. Revenue is generally recognized over the service period on a straight line basis as the services are provided at a value net of refunds and other adjustments. Amounts collected in excess of amounts earned are deferred. 

 

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. We apply 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.

 

 

 

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 a critical accounting policy due to the amount of expenses associated with the issuance of stock options, restricted stock and restricted stock units which are 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 Chief Executive Officer and our Chief Financial Officer, with other members of Management, evaluated the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the "Evaluation Date"). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2014.

 

Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect of financial statement preparation and may not prevent or detect misstatements. In addition, effective internal control at a point in time may become ineffective in future periods because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures.

 

Changes in internal control over financial reporting. Our Chief Executive Officer and our Chief Financial Officer evaluated the changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2014. We concluded that there were no changes in our internal control over financial reporting during the quarter ended September 30, 2014 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 September 30, 2014 the Company issued a total of 130,000 shares of common stock to two members of Management according to the terms of their employment agreements. The shares, which were issued at various intervals as required in the agreements, were valued at the applicable price per share based on the trading price of the stock at the dates of issuance specified in each contract. Accordingly, the Company recorded a total of $33,000 as non-cash compensation expense.

 

As a result of requirements under the terms of previously issued convertible notes (referred to as legacy debt), the Company agreed to issue a total of 7,360 warrants to the noteholders during the three months ended September 30, 2014. These five year warrants, with an exercise price of $1.89 were valued at $.79 per warrant under calculations performed using the Black-Scholes pricing model and resulted in a charge to Additional Paid in Capital of $6,000 during the three months ended September 30, 2014.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

We have commitments to pay investors $20,362,000 of principal and $2,759,000 of accrued interest on various convertible notes, non-convertible notes and loans payable through September 30, 2014. Of the $20,362,000 in principal amount outstanding as of September 30, 2014, $3,380,000 of that amount consists of convertible and non-convertible notes which debt was incurred by the Company when it was a development stage enterprise and is referred to by Management as legacy debt. A majority of the debt was incurred prior to 2012. The note holders are largely individuals including current directors of the Company. Because the Company was unable to make the required principal and interest payments under a number of these notes payable, it was in potential default (subject to lender notifying the Company of default) on approximately $3,019,000 of debt plus $1,739,000 of accrued interest as of September 30, 2014. Certain of the notes have been restructured or the Company has entered into a Forbearance Agreement with selected note holders.

 

The other debt component consists of a Term Loan to an institutional investor in the principal amount of $14,025,000. Pursuant to the Term Loan, interest shall accrue on the outstanding balance of the Term Loan at a rate of 11 ½ percent per annum. Upon the occurrence and continuation of an Event of Default as described in the Loan Agreement, the unpaid principal balance of the Term Loan shall bear interest at a rate of 13 ½ per annum. Interest payments on all outstanding principal shall be payable quarterly in arrears on the last day of each quarter. Beginning on June 30, 2014, principal payments of $375,000 shall be due each quarter. Beginning on June 30, 2015 the quarterly principal payments shall increase to $750,000 per quarter. Beginning on June 30, 2017, the quarterly principal payments shall increase to $1,594,000 per quarter. On April 25, 2018 all remaining unpaid principal of the Term Loan shall be due. As of the date of this report the Company had not made the principal or interest payments due on June 30 or September 30, 2014. Accordingly, the note is considered in default for the unpaid principal balance of $14,025,000 and accrued interest of $892,000. The Company is working with the lender to resolve the issue however no specific actions have yet been determined.

 

The Company also has a total of $2,957,000 of notes for equipment financing and acquisitions that are current and not in default.

 

In addition to the foregoing, we also owe $1,351,000 in accounts payable, $1,502,000in accrued liabilities, $435,000 of payroll related liabilities and a capital lease obligation of $138,000 as of September 30, 2014. In addition, as of September 30, 2014, we have commitments to pay $3,002,000 to the sellers, recorded as consultant liability, as part of the initial acquisition of the 31 dental practices in Florida.

 

 

 

ITEM 4. MINE 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 November 13, 2014	/s/ Leif Andersen
	Leif Andersen, CEO,
	Principal Executive Officer
Date November 13, 2014	/s/ Larry Colton
	Larry Colton, CFO
	Principal Accounting Officer

 

 

 

EXHIBIT INDEX

 

Exhibit		Item
31.1		Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002