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SEBRING SOFTWARE, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 14, 2014

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



We were in the development stage of the Company until 2013 and therefore 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 ("DPM") 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. Sebring plans to use software solutions to substantially reduce the cost of DPMs data entry. With the above stated presence in the DPM market our 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 months ending March 31, 2014 compared to the three months ending March 31, 2013

During the three months ended March 31, 2014, the Company recorded revenues of $5,115,415. This revenue was earned from general dental practice and is the result of the acquisition of dental practices and a dental practice management company according to the Company's strategic plan. The Company also incurred direct dental costs of $2,498,806 which were primarily for employee compensation and benefits in the dental practices. In addition, other direct dental costs of $1,444,683 for the three months ended March 31, 2014 were incurred for expenses in the dental practices which included items such as lab expense, dental implants and other supplies and certain rents. Indirect dental expenses of $958,050 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. The Company did not produce any revenue or incur any such expenses in the three months ended March 31, 2013 as the Company was still in the development stage.

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Corporate compensation and benefits increased $89,816 from $163,764 in the three months ended March 31, 2013 to $253,580 for the three months ended March 31, 2014. This increase is due to the additional personnel associated with the dental practice acquisition and the hiring of additional administrative management.

General and administrative expenses increased $851,409 from $100,344 for the three months ended March 31, 2013 to $951,753 for the three months ended March 31, 2014. This increase was 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 acquisition as well as additional costs for travel, communication and filing fees.

Interest expense increased from $273,272 for the three months ended March 31, 2013 to $853,202 for the three months ended March 31, 2014. 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 $1,158,020 gain on warrant liability relates to the change in fair value of the warrant liability from December 31, 2013 to March 31, 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.

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 three months ended March 31, 2014 we received $100,000 from the sale of our stock. 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 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 $6.5 million of the current liabilities at March 31, 2014 are warrant liabilities and deferred revenue which we believe are unlikely to result in a cash outlay over the next twelve months. However, in order to meet our obligations when they come due, a capital infusion of approximately $2.9 million will be necessary. Management has obtained a commitment from an investor to provide up to $5 million in cash as necessary to fund the Company's obligations as they come due in 2014.

Debt and contractual obligations

We have commitments to pay investors $20,258,069 of principal and $1,920,991 of accrued interest on various convertible notes, non-convertible notes and loans payable through March 31, 2014. We also owe $1,053,477 in accounts payable, $1,463,942 in accrued liabilities, $592,993 of payroll related liabilities and a capital lease obligation of $183,517 as of March 31, 2014. In addition, as of March 31, 2014, we have commitments to pay $3,343,967 to the sellers, recorded as consultant liability, as part of the initial acquisition of the 31 dental practices in Florida.

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 $1,820,638 of debt plus $1,308,301 of accrued interest as of March 31, 2014. On April 25, 2013 the Company restructured the one note for which the Company had previously been notified as being in default. Under the terms of the agreement, the Company repaid $750,000 of principal to the noteholder. The remaining principal of $420,718 and accrued interest of $577,948 were restructured into a new note for $998,666. The principal is due in full on the maturity date of April 25, 2014. Interest is to be paid quarterly at a rate of 12%. In the event of default, the interest rate will increase to 20%, compounded annually. In addition, at any time beginning on the date on which the Company may make a secondary public offering but prior to payment in full of the outstanding principal balance of the note, the noteholder shall have the right on the first day of each calendar month to convert the principal amount into conversion stock at the Note Conversion price, which is defined as the greater of 25% discount to the secondary offering price or the market price on the date of conversion. In addition, for every 120 days that the note remains unpaid the noteholder will be entitled to receive shares of common stock equal to 1% of the issued and outstanding shares on the due date. This penalty provision will not be in effect until 120 days after April 25, 2014.

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In July 2013 the Company concluded a Forbearance Agreement with a holder of two of the Company's notes. Under terms of the agreement the Company acknowledged that the two notes, totaling $180,000, are in default, along with $76,750 in accrued interest and agreed to make a principal payment of $25,000. In return, the noteholder agreed that the Company would not be required to make any payments on principal or interest until March 15, 2014 at which time the notes would be paid in full. The noteholder further agreed that if the principal amounts were paid in full by March 14, 2014, the noteholder would waive all accrued but unpaid interest. The agreement stipulates that the notes would accrue interest at a rate of 12%. The agreement further stipulates that if, at any time that the notes are outstanding, the Company makes a secondary stock offering, the noteholder has the right to accept stock in the Company as full or partial payment for amounts owed under the notes. In that event, the amount to be credited against indebtedness will be 90% of the offering price of the stock received by the noteholder. The Company made the $25,000 principal payment in July 2013. The Company has not made any additional payments on this note as of the date of this report.

Pursuant to the Term Loan, interest shall accrue on the outstanding balance of the Term Loan at a rate of 11 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 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 $1,593,750 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 was current on the Term Loan.

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 $1,361,666 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 described above and as more fully described in the Sebring consolidated financial statements.

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.

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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. The Company does not believe there are any indicators that would require an adjustment to such assets or their estimated periods of recovery at March 31, 2014 pursuant to current accounting standards.

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 eighteen to twenty-four 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 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.

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