Sebring Software, Inc. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - Sebring Software, Inc.	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - Sebring Software, Inc.	v241281_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - Sebring Software, Inc.	v241281_ex31-1.htm

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, 2011

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

EXCHANGE ACT OF 1934

For the transition period from _________________ to ________________

COMMISSION FILE NUMBER: 333-156934

SEBRING SOFTWARE, INC.

(Name of registrant in its charter)

SUMOTEXT INCORPORATED

(Former name of registrant in its charter)

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

1400 Cattlemen Rd, Suite D

Sarasota, Florida 34232

(Address of principal executive offices)

N/A

(Address of former principal executive offices)

(941) 377-0715

(Registrant's telephone number)

Indicate by check mark whether the registrant: (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes ¨ No

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

¨ Yes x No

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

Large accelerated filer ¨ Accelerated filer ¨

Non-accelerated filer ¨ Smaller reporting company x

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

As of November 12, 2011, the registrant had 37,086,106 shares of common stock, $0.0001 par value per share outstanding (which number includes 2,080,592 shares to be issued under various agreements which have not been physically issued to date).

TABLE OF CONTENTS

		Page #

PART 1	FINANCIAL INFORMATION:
ITEM 1	FINANCIAL STATEMENTS:	1
	Sebring Software, Inc. and Subsidiary Consolidated Financial Statements Three and Nine Months Ended September 30, 2011 and 2010 and for the Period from September 18, 2006 (inception) to September 30, 2011.	1

ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	18

ITEM 4.	CONTROLS AND PROCEDURES	18

PART II	OTHER INFORMATION:
ITEM 1	LEGAL PROCEEDINGS	18

ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	19

ITEM 3	DEFAULTS UPON SENIOR SECURITIES	19

ITEM 4	REMOVED AND RESERVED	19

ITEM 5	OTHER INFORMATION	19

ITEM 6	EXHIBITS	19

	Signatures	19

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Sebring Software, Inc. and Subsidiary

(a development stage company)

Consolidated Financial Statements

Three and Nine Months Ended September 30, 2011 and 2010

and for the Period from September 18, 2006

(Inception) to September 30, 2011

Sebring Software, Inc. and Subsidiary

(a development stage company)

Index to Consolidated Financial Statements

	Page

Consolidated Balance Sheets	4

Consolidated Statements of Operations - Unaudited	5

Consolidated Statement of Changes in Stockholders’ Deficit - Unaudited	7

Consolidated Statements of Cash Flows - Unaudited	7

Notes to Consolidated Financial Statements - Unaudited	8

Sebring Software, Inc. and Subsidiary

(a development stage company)

Consolidated Balance Sheets

	September 30, 2011			December 31, 2010
	(Unaudited)
ASSETS
Current assets:
Cash	$	37,192		$	6,359
Prepaid expenses		27,732			7,588
Total current assets		64,924			13,947

Furniture, equipment and vehicles, net		66,340			1,428
Deposits		101,000			1,000
Total assets	$	232,264		$	16,375

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities	$	282,592		$	306,357
Accrued payroll related liabilities		441,956			327,581
Accrued interest payable		774,633			417,034
Current portion of notes payable, net of debt discount		3,332,185			2,614,390
Loans payable		189,080			189,080
Notes payable, related parties		275,639			275,638
Total current liabilities		5,296,085			4,130,080

Notes payable, net of current portion		160,553			346,879
Total liabilities		5,456,638			4,476,959

Commitments and contingencies (Note 4)

Common stock issued or to be issued- $0.0001 par value, 1,100,000,000 shares authorized, 37,086,106 and 34,980,515 shares issued or to be issued and outstanding, at September 30, 2011 and December 31, 2010, respectively.		3,709			3,498
Additional paid-in-capital		1,119,927			(331,092	)
Deficit accumulated during the development stage		(6,348,010	)		(4,132,990	)
Total stockholders' deficit		(5,224,374	)		(4,460,584	)

Total liabilities and stockholders' deficit	$	232,264		$	16,375

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

Sebring Software, Inc. and Subsidiary

(a development stage company)

Consolidated Statements of Operations - Unaudited

	Three Months Ended						Nine Months Ended						September 18, 2006
	September 30,						September 30,						(inception) to
	2011			2010			2011			2010			September 30, 2011
Operating expenses:
Employee compensation and benefits	$	96,088		$	125,076		$	299,821		$	264,622		$	1,701,009
Impairment expense		-			-			-			-			452,288
General & administrative expenses		141,773			169,914			349,686			299,402			1,851,985
Total operating expenses		237,861			294,990			649,507			564,024			4,005,282
Loss from operations		(237,861	)		(294,990	)		(649,507	)		(564,024	)		(4,005,282	)

Other income (expense):
Gain on debt settlement		-			-			-			-			39,068
Loan penalty		(165,235	)		-			(889,059	)		-			(889,059	)
Gain (loss) on foreign currency transactions		9,780			(26,250	)		(2,899	)		-			17,978
Interest expense		(231,010	)		(95,673	)		(673,555	)		(251,229	)		(1,510,716	)
Total other income (expense), net		(386,465	)		(121,923	)		(1,565,513	)		(251,229	)		(2,342,729	)

Net loss	$	(624,326	)	$	(416,913	)	$	(2,215,020	)	$	(815,253	)	$	(6,348,011	)

Net loss per share - basic and diluted	$	(0.02	)	$	(0.01	)	$	(0.06	)	$	(0.03	)	$	(0.20	)

Weighted average shares outstanding - basic and diluted		36,703,903			29,966,557			35,867,437			29,966,557			31,041,689

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

Sebring Software, Inc. and Subsidiary

(a development stage company)

Consolidated Statement of Changes in Stockholders’ Deficit - Unaudited

Nine Months Ended September 30, 2011

								Deficit
								Accumulated
	Common Stock issued				Additional			During			Total
	or to be issued				Paid-in			Development			Stockholders'
	Shares		Amount		Capital			Stage			Deficit

Balance - December 31, 2010		34,980,515	$	3,498	$	(331,092	)	$	(4,132,990	)	$	(4,460,584	)

Shares to be issued for loan penalty		1,074,709		107		888,952			-			889,059

Shares to be issued for cash		955,882		96		324,904						325,000

Warrants to be issued on notes payable						199,671						199,671

Shares issued for services		75,000		8		37,492						37,500

Net loss for nine months ended September 30, 2011		-		-		-			(2,215,020	)		(2,215,020	)

Balance -September 30, 2011		37,086,106	$	3,709	$	1,119,927		$	(6,348,010	)	$	(5,224,374	)

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

Sebring Software, Inc. and Subsidiary

(a development stage company)

Consolidated Statements of Cash Flows - Unaudited

	Nine Months Ended						September 18, 2006
	September 30,						(inception) to
	2011			2010			September 30, 2011
Cash flows from operating activities:
Net loss	$	(2,215,020	)	$	(815,253	)	$	(6,348,010	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		20,340			484			21,638
Common stock issued for services		37,500			-			75,000
Common shares to be issued for loan penalty		889,059			-			889,059
Gain on debt settlements		-			(38,531	)		(39,068	)
Impairment expense		-			-			452,287
Amortization of debt issuance costs		-			-			140,000
Amortization of debt discount		72,609			-			95,766
Warrant expense of notes payable		199,671						199,671
Changes in assets and liabilities:
Other current assets					(6,000	)		-
Prepaid expenses		(20,144	)		-			(27,732	)
Deposits		-			-			(1,000	)
Accounts payable and accrued liabilities		(23,765	)		147,335			461,123
Accrued payroll related liabilities		114,375			211,827			441,956
Accrued interest payable		357,600			251,229			1,087,336
Net cash used in operating activities		(567,775	)		(248,909	)		(2,551,974	)

Cash flows from investing activities:
Loans to officers and shareholders					(87,193	)		-
Investment pursuant to recapitalization		-			(350,000	)		(286,147	)
Software development costs		-			-			(452,287	)
Stock Purchase Agreement Deposit		(100,000	)					(100,000	)
Purchase of furniture and equipment		-			(854	)		(2,726	)
Net cash used in investing activities		(100,000	)		(438,047	)		(841,160	)

Cash flows from financing activities:
Payment of debt issuance costs		-			-			(140,000	)
Proceeds from issuance of stock		325,000						325,000
Proceeds from issuance of notes payable		390,000			657,000			3,412,638
Repayment of notes payable		(16,392	)		-			(67,312	)
Repayment of notes issued for redemption of equity interest		-			-			(100,000	)
Net cash provided by financing activities		698,608			657,000			3,430,326
Net increase in cash		30,833			(29,956	)		37,192
Cash, beginning of period		6,359			35,505			-
Cash, end of period	$	37,192		$	5,549		$	37,192
Supplemental Cash Flow Information:
Interest paid				$	-
Taxes paid	$	-		$	-		$	-

Supplemental Non-Cash Investing and Financing Activities:
Accounts payable settled with note payable	$	-		$	178,531		$	178,531
Note payable principal and interest refinanced	$	-		$	-		$	1,062,165
Stock based lender fees recorded as debt discount from settlement	$	-		$	-		$	21,053
Lender fee recorded as discount pursuant to settlement	$	-		$	-		$	108,553
Note issued for redemption of equity	$	-		$	-		$	100,000
Deemed issuance of common stock pursuant to recapitalization	$	-		$	-		$	1,620
Purchase vehicles with notes payable	$	85,252		$	-		$	85,252

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

Sebring Software, Inc. and Subsidiary

(a development stage company)

Notes to Consolidated Financial Statements - Unaudited

Three and Nine Months ended September 30, 2011 and 2010 and from September 18, 2006 (Inception) to

September 30, 2011

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

Basis of Presentation – The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of consolidated financial position and results of operations. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair consolidated financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year. For further information, refer to the audited consolidated financial statements and footnotes of the company for the years ending December 31, 2010 and 2009.

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

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

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

The Company has been in the development stage through September 30, 2011. Activities during the development stage have been principally devoted to organizational activities, raising capital, software development and evaluating operational opportunities. Since its formation, the LLC has not realized any revenues from its planned operations.

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

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

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

Sebring Software, Inc. and Subsidiary

(a development stage company)

Notes to Consolidated Financial Statements - Unaudited

Three and Nine Months ended September 30, 2011 and 2010 and from September 18, 2006 (Inception) to

September 30, 2011

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

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

Going Concern - The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company and its ability to meet its ongoing obligations. The Company has a net loss of $2,215,020 and net cash used in operations of $567,775 for the nine months ended September 30, 2011 and a working capital deficit, stockholders' deficit and deficit accumulated during the development stage of $5,231,161, $5,224,374 and $6,348,010, respectively, at September 30, 2011. In addition, the Company has not generated any revenues through September 30, 2011. Furthermore, because the Company was unable to make the required principal and interest payments under a number of notes payable, it was in potential default (subject to lender notifying the Company of default) on $2,971,356 of debt plus $735,304 of accrued interest as of September 30, 2011. Under terms of the convertible notes, the Company is required to issue warrants upon conversion or, in the event that conversion has not taken place, issue warrants equal to 25% of the shares the subscriber would have received if conversion had taken place. As of September 30, 2011 the Company has agreed to issue 252,749 warrants as a result of this requirement. As of the date of this report the Company has been notified of default on one note with $1,170,718 of principal and $203,094 of accrued interest.

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

The company has signed a term sheet with Socius Capital Group for a funding of up to $5 million under terms discussed in Note 4 below. As of the date of this report, the Company has not received any funds under this agreement. In addition, the Company continues to explore additional sources of funding although there is no guaranty that such funds will be available or at favorable terms.

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

Recently Issued Accounting Standards - The following is a summary of recent authoritative pronouncements that were adopted in the attached consolidated financial statements by the Company.

Sebring Software, Inc. and Subsidiary

(a development stage company)

Notes to Consolidated Financial Statements - Unaudited

Three and Nine Months ended September 30, 2011 and 2010 and from September 18, 2006 (Inception) to

September 30, 2011

In July 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This Update improves the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables (including trade and notes receivable) and related allowance for credit losses. This disclosure was initially effective for the Company’s financial statements ending December 31, 2010, but the effective date was deferred to financial statements ended on or after September 30, 2011. Management doesn’t believe that this ASU will have a material impact on its financial statements.

2. FURNITURE, EQUIPMENTAND VEHICLE, NET

The Company acquired two vehicles for its executives for a total of $85,252 during the nine months ended September 30, 2011. Those vehicles are being depreciated on a straight line basis over a three year life.

3. NOTES AND CONVERTIBLE NOTES PAYABLE

During the nine months ended September 30, 2011, the Company has financed its operation mainly through the issuance of notes payable as follows:

In January and February 2011 the Company issued $200,000 of convertible promissory notes for cash. These convertible notes payable bear interest at a rate of 12%, and principal is payable on September 1, 2011 and interest is payable quarterly in cash or common stock at Company option using conversion terms below. If the Company is merged with or acquired by a public company (public event) during the term of the note, then on the first day of each month, starting with the 7th full month following the public event, the lender shall have the right to (a) receive payment equal to one-sixth of the principal outstanding or (b) convert the monthly principal amount as follows: Note is convertible at the lesser of (1) 75% of the price per share paid by investors in the next equity financing after the note was issued, or (2) either (a) if the Company has forty-five million or more shares issued and outstanding then $0.75 per share or (b) if the Company has less than forty-five million shares issued and outstanding then a price per share determined by dividing 45,000,000 by the product of the number of shares issued and outstanding after the closing of a Public Event multiplied by $0.75. Upon conversion of any portion of principal or accrued interest the lender will receive an equal number of warrants to purchase common stock. For any portion of the note not converted, the lender will receive warrants equal to 25% of the quantity the lender would have received had they converted. In event of default with respect to principal payment, as liquidated damages, the lender will receive an additional warrant to purchase such number of shares as equals the number of shares issuable upon exercise of a warrant issued under the 25% provision above. The warrants contain piggy-back registration rights, however, if the warrant shares have not been registered on or before June 1, 2011 and a public event, as defined, has occurred, the Company will use its best efforts to file a registration statement as soon as practicable thereafter and use commercially reasonable efforts to cause the registration statement to become effective on or before September 1, 2011. In the event the Company fails to register the warrant shares on or before June 1, 2011, the lender will be entitled, as liquidated damages, to an additional warrant to purchase such number of shares as equals 2% of the number of warrant shares that may be purchased under all of the lenders warrants multiplied by the number of full months that the registration statement is delayed. All warrants shall have an exercise price that is 110% of the conversion price and shall be exercisable for 5 years from the warrant issuance date.

On May 1, 2011 the 7th month benchmark after a defined public event (October 25, 2010 Reverse Recapitalization) was reached. As a result of reaching this benchmark, as of September 30, 2011 the Company was required to issue a total of 247,793 warrants to holders of twenty-nine convertible notes that specified the terms listed above. Since none of notes had been converted, this represents 25% of the shares the holders would have received if the first five months of the principal and total accrued interest were converted as specified under the terms of the notes. The five year warrants have an exercise price of $1.89. The warrants were valued at $.79 per warrant under calculations performed using the Black-Sholes model and resulted in a charge of $195,756 being recorded in the nine months ended September 30, 2011. Although the Company has not made any principal payments as of September 30, 2011, the Company had not received any Notification of Default from any holders of these notes and therefore was not technically in default. In addition, since the Company did not file a Registration Statement by June 1, 2011 as stipulated in the Agreement, it was required to issue additional warrants as liquidated damages equal to 2% of the number of warrant shares that may be purchased under all of the lenders warrants multiplied by the number of full months that the registration statement was delayed, capped at 10%. In accordance with these terms, the four month delay resulted in the Company agreeing to issue the noteholders 4,955 warrants as of September 30, 2011. These five year warrants, with an exercise price of $1.89, were valued at $.79 per warrant under calculations performed using the Black-Sholes model and resulted in a charge of $3,915 being recorded in the nine months ended September 30, 2011.

Sebring Software, Inc. and Subsidiary

(a development stage company)

Notes to Consolidated Financial Statements - Unaudited

Three and Nine Months ended September 30, 2011 and 2010 and from September 18, 2006 (Inception) to

September 30, 2011

In April 2011 the Company issued two non-convertible promissory notes in the amounts of $10,000 and $70,000 for cash. The $10,000 note bears interest at 10% and is due in full with all accumulated interest on December 31, 2012. The $70,000 note bears interest at 8% and is due in full with all accumulated interest in April, 2012. In addition, in August and September 2011 the company issued three non-convertible notes in the amounts of $50,000, $35,000 and $25,000. All three notes bear interest at 10% and are due in full with all accumulated interest on December 31, 2012.

Vehicle loans – The Company financed the purchase of two vehicles for two executives for a total of $85,252. These financing agreements require the Company to pay principal and interest payments of $2,402 per month through February 2014. The loan has an interest rate of approximately 1%.

Past Due Notes - Because the Company was unable to make the required principal and interest payments under a number of notes payable, they were in potential default (subject to lender notifying the Company of default) on $2,971,356 of debt plus $735,304 of accrued interest as of September 30. As of the date of this report the Company has been notified of default on one note with $1,170,718 of principal and $203,094 of accrued interest.

4. COMMITMENTS AND CONTINGENCIES

Legal Matters - Management has been notified of a legal claim against the Company whereby an investor relations consultant claims he is owed stock compensation under a March 9, 2010 consulting agreement. The agreement describes common stock payments of 400,000 shares to be issued on October 25, 2010 and 100,000 shares each month for the following 11 months for a total of 1,500,000 shares. Management asserts that no services were performed and no share or other compensation is due to the consultant except for $25,000 the consultant loaned to the Company which is recorded as a loan payable in the accompanying consolidated balance sheets. Management believes that they will prevail in this matter and that any potential negative outcome will not have a material adverse impact on the Company’s financial position. No liability has been accrued for this claim as of September 30, 2011.

Advisor agreement - The Company entered into an agreement with a Swiss Corporation, (the advisor) to assist the Company in raising capital. At the completion of an equity financing, the agreement calls for compensation to the advisor of ten percent (10%) of total gross cash proceeds of funds raised, non-accountable expense allowance of 3%, and the issuance of five year warrants equal to 10% of the shares of the common stock issued with an exercise price of 110% of the market value. If there is a debt financing, the advisor is to be paid (i) 6% of consideration received by the company and non-accountable expense allowance of 1%, (ii) 3% of any revolving credit line, (iii) 2% of any credit enhancement instrument, and (iv) 10% of any revenue-producing contract, fee-sharing arrangement, licensing, royalty or similar agreement.

Immediately following receipt by the Company of bridge financing, the advisor is to receive 9% of the Company. In the event the advisor fails to secure a minimum of $20 million on a firm underwriting basis during the term of this agreement, the advisor shall return any of those advisor shares received for cancellation. No shares were earned or issued as of the date of this report.

Financial Advisory Services - In April 2011 the Company executed a contract for financial advisory services to be provided over a six month period in exchange for 845,000 shares of the Company’s common stock which will be paid by a stockholder of the Company. These shares are being paid by another shareholder and will be valued for accounting purposes at the date of issuance and such value will be recognized over the contract term and the payment of shares by the stockholder will be recorded as contributed capital. No shares have been issued under the terms of this agreement as of September 30, 2011.

Sebring Software, Inc. and Subsidiary

(a development stage company)

Notes to Consolidated Financial Statements - Unaudited

Three and Nine Months ended September 30, 2011 and 2010 and from September 18, 2006 (Inception) to

September 30, 2011

Equity Funding – In May 2011 the Company entered into an agreement with Socius Capital Group to provide funding up to $5 million. Under the terms of the agreement, the investor agreed to purchase $500,000 of the Company’s restricted common stock at a price equal to 40% of the volume weighted average price in the five days preceding the execution date. The investor also agreed to purchase up $4.5 million of redeemable cumulative preferred stock. The investor will receive cumulative preferred dividends accruing annually at a rate of 10% from each investment date. Dividends shall accrue in shares of Preferred Stock and are payable upon the redemption date which shall be at the Company’s election. Investor shall also receive five-year warrants allowing it to purchase shares of the Company’s common stock on the investment date equal in dollar amount to the liquidation value of the Preferred on the 7 year anniversary of the investment date. Such warrants shall be immediately exercisable at a price equal to 200% of the closing bid price of the Company’s common stock. So long as such warrants shall remain outstanding, the warrant will have limited full ratchet anti-dilution protection for any issuances of common stock or common stock equivalents at a price less than the then current exercise price as of the date of such common issuance. The agreement further provides that the Company pay the investor a non-refundable investment fee equal to 5% of the investment amount payable in restricted common stock valued at 40% of the volume weighted average price for the 5 trading days immediately preceding the issuance date. It also provides that the Company pay the investor’s reasonable attorney’s fees as well as a $20,000 retainer to the Company’s counsel. The agreement also provides that the Company shall not incur any indebtedness nor, without express written consent of the investor, issue any common stock or common stock equivalents for a period of 240 days from the later of (i) the last sale to investor of Preferred Stock or (ii) the effectiveness of a registration statement. The Company has paid the retainer to counsel but as of the date of this report, no funds have been received under the terms of this agreement.

Lender Contingency - Under an October 1, 2010 secured promissory note, a lender is granted a 1% equity interest on issued and outstanding equity interests for each 120 days that any amount is outstanding. The first three sets of shares to be issued under this agreement were recorded as of January 29, 2011, May 28, 2011 and September 26, 2011 as described in Note 5.

Management agreement – On June 3, 2010, the Company entered into three-year management agreements with two key members of management. The agreements commit the Company to pay a combined total of $339,000 per year in base salary and stock compensation as determined by the Board of Directors.

A third agreement was also executed; however, the management member has not begun to provide services so the Company has not become liable for the compensation described in the agreement, which includes the Company issuing 1 million shares of restricted common stock. The Company will recognize the expense of those shares based on their fair market value and the terms under which the shares vest.

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

Sebring Software, Inc. and Subsidiary

(a development stage company)

Notes to Consolidated Financial Statements - Unaudited

Three and Nine Months ended September 30, 2011 and 2010 and from September 18, 2006 (Inception) to

September 30, 2011

5. EQUITY TRANSACTIONS

Common Stock

At January 29, 2011 (the Penalty date) a 1% common stock interest or 349,805 common shares became due to a lender pursuant to a settlement agreement and promissory note. Those shares of common stock are considered to be issued and were recorded as loan penalty expense based on the common stock quoted market value of $1.20 per share on the Penalty date which is considered the measurement date for a total of $419,766. At May 28, 2011 (the Penalty date) an additional 1% common stock interest or 357,715 common shares became due to the same lender under the terms of the same agreement. Those shares of common stock are considered to be issued and were recorded as loan penalty expense based on the common stock quoted market value of $.85 per share on the Penalty date which is considered the measurement date for a total of $304,058. At September 26, 2011 (the Penalty date) an additional 1% common stock interest or 367,189 common shares became due to the same lender under the terms of the same agreement. Those shares of common stock are considered to be issued and were recorded as loan penalty expense based on the common stock quoted market value of $.45 per share on the Penalty date which is considered the measurement date for a total of $165,235.

As a result of requirements under the terms of the convertible notes, the Company agreed to issue a total of 252,749 warrants to the noteholders during the nine months ended September 30, 2011. These five year warrants, with an exercise price of $1.89, were valued at $.79 per warrant under calculations performed using the Black-Sholes model and resulted in a charge of $199,671 being recorded in the nine months ended September 30, 2011. See Notes 3 and 4.

In May and June 2011 the Company raised $325,000 by agreeing to issue a total of 955,882 shares of common stock to two investors at $.34 per share. In August 2011 the Company issued 75,000 shares for services valued at their fair value on the agreement date of $37,500.

6. EARNINGS PER SHARE CALCULATION

Basic earnings per share is computed as earnings available to common stockholders divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock-based compensation including stock options, restricted stock awards, warrants and convertible securities. For the three and nine month periods ending September 30, 2011 during which the Company reported a loss, 252,749 warrants were excluded from the diluted loss per share computation as their effect would be anti-dilutive. Should all the note holders convert the five-sixth value of the notes available for conversion they would be issued 724,631 shares in exchange for the conversion and the holders would be due an additional 58,263 warrants.

7. WARRANTS FOR COMMON STOCK

The Company estimates the fair value of issued warrants by utilizing the Black-Scholes pricing model, which is dependent upon several variables. The fair value for warrants issued during the three months ended September 30, 2011 was estimated at the date of issuance according to the following assumptions. The risk-free rate of 1.81% was the five year nominal fed rate at the date of issuance. The volatility factor was determined based on an independent study and the assumed market volatility was calculated to be 174%. The assumed dividend yield was 0% and the expected life of the warrant was assumed to be five years, which is the stated life of the warrant.

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

A Summary of the Company’s warrant activity during the nine months end September 30, 2011 is presented below:

Sebring Software, Inc. and Subsidiary

(a development stage company)

Notes to Consolidated Financial Statements - Unaudited

Three and Nine Months ended September 30, 2011 and 2010 and from September 18, 2006 (Inception) to

September 30, 2011

			Weighted		Weighted
			Average		Average
			Exercise		Remaining
	Warrants		Price		Life

Balance at beginning of year		0	$	0.00
Issued or Issuable		252,749	$	1.89
Cancelled or Expired		0	$	0.00
Exercised		0	$	0.00

Outstanding at end of period		252,749	$	1.89	4.66

At September 30, 2011 the warrant exercise price of $1.89 exceeded the market value of the Company’s stock price, therefore the intrinsic value of the outstanding warrants was $0.

8. PURCHASE AGREEMENT

In July 2011 the Company entered into a Stock Purchase Agreement whereby the Company agreed to purchase 49% of Scalix, Inc, a Delaware corporation, from Xandros, Inc. a Delaware corporation, for a Purchase Price of $5,750,000. Under the terms of the agreement, upon execution of the agreement, the Company will pay $150,000 in cash. In addition, the Company will pay an additional $200,000 in cash upon closing of the transaction with Socius (as discussed under Note 4 above) plus $150,000 upon closing of a secondary funding transaction of $1,750,000 with a third investor. This total of $500,000 is defined as an “Execution Deposit Amount”. If the Company receives $10 million (“Target Raise”) in aggregate gross investment, within five days of receiving such investment, the Company will pay the purchase price less any amounts previously paid. If the Company receives an investment of an amount less than the “Target Raise”, which shall be defined as the “Tranche Raise”, then the Company will pay an amount equal to 20% of the Tranche Raise if the raise is less than $3,750,000 or an amount equal to 40% of the Tranche Raise if the cumulative amount is equal to or greater than $3,750,000. If by October 15, 2011,(the “Minimum Payment Date”) the Company has not paid Xandros the full purchase price, the Company shall have the option of paying Xandros $500,000 (not inclusive of amounts previously paid hereunder) (the “Minimum Amount Payable”) in exchange for a two-month extension to pay the Purchase Price in full. The Minimum Amount Payable shall be applied against the purchase price. In the event the Company a) does not pay Xandros the Purchase Price or the Minimum Amount Payable on or before the Minimum Payment Date or b) in the event the Company has paid the Minimum Amount Payable on or before the Minimum Payment Date and has not paid the full Purchase Price by January 1, 2012, then Xandros shall have the option to terminate the agreement. If the agreement is terminated the Company shall own a number of shares of Scalix which is calculated pro rata based on the amounts the Company paid to Xandros against the $5,750,000 to be paid for the full 49 shares in Scalix. Xandrox has not exercised its option to terminate. The Company is presently negotiating to extend the dates. The Company paid $100,000 of the “Execution Deposit Amount” on July 5, 2011.

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

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

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

Forward-Looking Statements

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

Overview

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

Results of Operations

Results of Operations for the three and nine months ending September 30, 2011 compared to the three and nine months ending September 30, 2010

Employee compensation and benefits decreased $28,988 from $125,076 in the three months ended September 30, 2010 to $96,088 for the three months ended September 30, 2011. For the nine months ended September 30, 2011, employee compensation and benefits increased $35,199 to $299,821 compared to $264,622 over the comparable period in 2010. This increase over the nine period is mainly the result of a base salary increase received under new employment agreements with two Company executives for a combined total of $45,000.

General and administrative expenses decreased by $28,141, from $169,914 in the three months ended September 30, 2010 to $141,773 in the three months ended September 30, 2011. For the nine months ended September 30, 2011, general and administrative expenses increased $50,284 to $349,686 compared to $299,402 over the comparable period in 2010. This nine month increase was mainly due to an increase of approximately $100,000 in the accounting and auditing fees incurred to comply with the SEC filing requirements, and $30,000 in increased travel costs incurred in efforts to execute the Company’s business plan. This expense was partially offset by approximately $80,000 in reduced cost for legal expenses recognized during the nine months ending September 30, 2011 as compared to the same period in 2010.

In the three and nine months ended September 30, 2011 the Company recorded a loan penalty of $165,235 and $889,059 respectively, because of a provision in a loan document that stated the Company would issue the holder of the note 1% of the Company’s outstanding common stock if the loan was not paid back as of January 29, 2011, May 28, 2011 and September 26, 2011. Since the loan was not repaid, a charge for the shares to be issued was recorded.

Interest expense increased from $95,673 and $251,229 for the three and nine months ended September 30, 2010 to $231,010 and $673,555 for the three and nine months ended September 30, 2011. This increase was primarily due to incurring a charge of $199,671 which reflects the value of warrants required to be issued to holders of convertible notes, approximately $63,000 for payments to an advisor for their role in helping the Company to secure financing as well as the interest on the additional debt incurred during 2010 and 2011 to support the operations of the Company.

Inflation and seasonality

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

Liquidity and capital resources

Sebring’s cash and liquidity resources have been provided by investors through convertible and non-convertible notes and loans payable. Investors have loaned the company $3,412,638 from September 18, 2006 (inception) through September 30, 2011. In addition, the Company received $325,000 in the second quarter of 2011from the sale of its securities. These cash investments have generally been used for software development and for general and administrative expenses including management compensation. However, we don’t believe our current funds will be sufficient to sustain operations and for implementation of our business plan.

In May 2011 the Company entered into an agreement with an investor to provide up to $5 million of additional funding through the issuance of preferred stock. However, no funding has been received under this agreement and the Company cannot guarantee that this funding will be completed or that it will receive the necessary funding to sustain operations.

Debt and contractual obligations

Sebring has commitments to pay investors $4,765,930 of principal and accrued interest in various convertible notes, non-convertible notes and loans payable as of September 30, 2011. It is also owes $282,592 in accounts payable and accrued liabilities and $441,956 of payroll related liabilities as of September 30, 2011. Because the Company was unable to make the required principal and interest payments required by numerous notes payable, the Company was in potential default (subject to lender notifying the Company of default) on $2,971,356 of debt plus $735,304 of accrued interest as of September 30, 2011. In addition, holders of the convertible notes are due, in the event of a default with respect to the principal payment as defined in the note, to receive as liquidated damages, an additional warrant to purchase such shares as equals the number of shares issuable upon exercise of the warrants issued under the 25% calculation for each full calendar month that the event of default with respect to such principal payment has not been cured. The liquidated damages payable under this requirement shall be capped at warrants to purchase an aggregate of 3 times the number of shares purchasable under the warrants issued under the 25% calculation. As of this date, the Company has not been notified of an event of default by any noteholder, therefore no warrants have been required to be issued under this provision of the convertible notes. As of the date of this report the Company has been notified of default on one note with $1,170,718 of principal and $203,094 of accrued interest.

Additionally, for each 120 days that the one of the notes, which is in default, is issued and outstanding, the Company agreed to pay the holder 1% of the issued and outstanding common stock of the Company (approximately 1,074,709 shares based on the number of shares outstanding on the date the penalty became effective). This note is secured by a security interest in substantially all of Sebring’s assets. Pursuant to the Security Agreement, we agreed to pay the holder 25% of the first $750,000 in net proceeds received by us in connection with any debt or equity financing and 30% of the net proceeds of any amount of debt or equity financing received by us in excess of $750,000, which amount if paid will decrease the amount of the Note.

On June 3, 2010, the Company entered into three-year management agreements with two key members of management. The agreements commit the Company to pay a combined total of $339,000 per year in base salary and stock compensation as determined by the Board of Directors.

A third agreement was also executed; however, the management member has not begun to provide services so the Company has not become liable for the compensation described in the agreement.

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

Critical Accounting Estimates and Policies

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

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

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

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

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

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

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Recent Accounting Pronouncements

The following is a summary of recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by the Company.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.

CONTROLS AND PROCEDURES

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

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

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Not Applicable

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the nine months ended September 30, 2011 the Company agreed to issue 955,882 shares of its common stock to two investors for $325,000. The funds were used primarily for general and administrative expenses including management compensation.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

ITEM 4.

REMOVED AND RESERVED

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 21, 2011	/s/ Leif Andersen
		Leif Andersen, CEO,
		Principal Executive Officer and
		Principal Financial Officer

Sebring Software, Inc. - FORM 10-Q - November 21, 2011

Attached files

Sebring Software, Inc. Reports