UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

x ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2014

 

¨ TRANSITION REPORT UNDER 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		4822		26-0319491
(State or jurisdiction		(Primary Standard		(IRS Employer
of incorporation or		Industrial Classification		Identification No.)
organization)		Code Number)

 

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)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF

THE EXCHANGE ACT:

 

None.

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF

THE EXCHANGE ACT:

 

Common Stock, $0.0001 Par Value Per Share.

 

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

 

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

  

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

 

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   o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

 

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  ¨	(Do not check if a smaller reporting company)	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   o    No   x

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2014: $17,540,082.

 

As of April 13, 2015, the registrant had 68,886,327 shares of common stock, $0.0001 par value per share, issued and outstanding.

 

Documents incorporated by reference: None

 

 

TABLE OF CONTENTS

 

PART I
ITEM 1. BUSINESS	3
ITEM 1A. RISK FACTORS	8
ITEM 2. PROPERTIES	8
ITEM 3. LEGAL PROCEEDINGS	8
ITEM 4. MINE SAFETY DISCLOSURES	8
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	9
ITEM 6. SELECTED FINANCIAL DATA	11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	17
ITEM 9A. CONTROLS AND PROCEDURES	17
ITEM 9B. OTHER INFORMATION	17
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	18
ITEM 11. EXECUTIVE COMPENSATION	21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	23
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE	25
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES	26
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES	27
SIGNATURES	30

 

 

PART I

 

FORWARD-LOOKING STATEMENTS

 

Portions of this Form 10-K, including disclosure under “Management’s Discussion and Analysis or Plan of Operation, ” contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “ Securities Act ”), Section 21E of the Securities and Exchange Act of 1934, as amended (the “ Exchange Act ”), and the Private Securities Litigation Reform Act of 1995, as amended. All statements other than statements of historical fact contained in this Periodic Report on Form 10-K, including statements regarding future events, our future financial performance, business strategy and plans and objectives of management for future operations, are forward-looking statements.  We have attempted to identify forward-looking statements by terminology including “ anticipates, ” “ believes, ” “ can, ” “ continue, ” “ could, ” “ estimates, ” “ expects, ” “ intends, ” “ may, ” “ plans, ” “ potential, ” “ predicts, ” or “ should, ” or the negative of these terms or other comparable terminology.  Although we do not make forward looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy.  These statements are only predictions and involve known and unknown risks, uncertainties and other factors which may cause our or our industry’s actual results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.  Moreover, we operate in a very competitive and rapidly changing environment.  New risks emerge from time to time and it is not possible for us to predict all risk factors, nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual results to differ materially from those contained in any forward-looking statements.  All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements, except as expressly required by law.

 

You should not place undue reliance on any forward-looking statement, each of which applies only as of the date of this Annual Report on Form 10-K.  Before you invest in our securities, you should be aware of the possibility of known and unknown events, some of which are described elsewhere in this Annual Report on Form 10-K could negatively affect our business, operating results, financial condition and stock price.  Except as required by law, we undertake no obligation to update or revise publicly any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform our statements to actual results or changed expectations.  Unless otherwise stated, references in this Form 10-K “ we ”, the “ Company, ” “ us ” or “ Sebring ”, refer to Sebring Software, Inc., formerly Sumotext Incorporated.  References in this Form 10-K, unless another date is stated are to December 31, 2014.

 

ITEM 1. BUSINESS

 

History

 

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 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. On April 25, 2013 the Company and its subsidiary, Sebring Management of Florida, LLC entered into an Agreement and Plan of Merger whereby it acquired a Dental Practice Management company and assumed management of 31 dental practices located in the state of Florida. Also, through its subsidiary Sebring Dental of Arizona, LLC, the Company acquired 3 dental practice locations in the state of Arizona. Due to these acquisitions, the Company has operating revenue and is no longer in the development stage.

 

During December of 2013, the Company obtained financial control of four additional dental practices. Three of the practices are located in Florida and the fourth in Arizona.

 

 

Overview

 

Sebring Software, Inc. (“The Company”) was founded in 2006 as a software development company. One of the main focus areas since inception was the health care industry. Market research presented an opportunity to build value within dental practices, by combining effective management and software integration. As a result in 2013 the Company acquired a Dental Practice Management (“DPM”) company, which currently manages 38 dental and orthodontic practices in Arizona and Florida. In addition, the Company has developed a robust pipeline of opportunities with DPM companies, including individual dental practices primarily located in the Southwestern and Southeastern United States. The Company’s primary business activity is now providing dental management services. The Company has contracts with affiliated professional associations, corporations and partnerships (“the Practices”), which are separate legal entities that provide dental services. Rights to the eCenter-icm2 software license from Engineering Consulting and Solutions, GmbH (“ECS”), which terms are discussed in other parts of this document, will be focused towards the dental industry.

 

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. This trend will increasingly become mainstream within 5 to 10 years according to the American Dental Association (“ADA”). Approximately 170,000 dentists operate in 130,000 dental clinics, with over 82% of dental practices consisting of 1 or 2 dentists according to the ADA.

 

Sebring has the rights to an exclusive license with a German software developer to market its proprietary software solution eCenter in North and South America, if it completes certain terms discussed in other parts of this document. Using the eCenter platform, Sebring has developed numerous proprietary integration adapters since 2007. Over the next year, Sebring intends to roll out a series of these software adapters focused primarily on dental healthcare. eCenter is an ideal solution for its unsurpassed  scope, universal compatibility,  flexible user interface, and the smooth integration and improved mobilization of software assets that it delivers.  eCenter is a Rich Internet Application (RIA) software that offers an inexpensive and a more secure program consolidation solution. The program integrates various widely used applications such as SAP, PeopleSoft, several Oracle products, Siemens PL, and legacy software within an organization to seamlessly connect all existing programs into a single user interface, which substantially improves productivity.

 

The Industries

 

Dental Servics

  

The U.S. dental services industry is a large, stable and growing segment of the health care industry. According to IBIS World Industry Report 62121, total U.S. dental services expenditures in 2014 exceed $124 billion. Nationwide spending on dental services has increased from at a 2.7% CAGR between 2009-2014, and are projected to increase at a 3% CAGR through 2019 to $145 billion. Profitability has increased from 15.2% in 2009 to an estimated 16.6% in 2014, due largely to the trend of practices joining DPM companies. The dental services industry has traditionally been non-cyclical or less susceptible to broader market declines, largely because dental visits and expenditures are often driven by medical problems, which are too painful to ignore, regardless of the economic environment. In addition, the industry is also benefiting from favorable demographic trends, improvements in technology and a growing awareness of the importance of oral hygiene. Critical drivers in the growth and stability of dental care spending include: an aging population that requires increased dental care, an increased understanding of the health benefits afforded by dental care, and a focus on cosmetic dental procedures as a means to improve appearance.

 

Software Solutions

  

In North America there are approximately 47,300 corporations with more than 500 employees each (Bureau of Labor Statistics, 2006) just within the manufacturing sector alone. According to the Gartner Group (a leading manufacturing industry watch group), up to 80% of all " Internet enabled " applications will use RIA technology within the next few years (“ Management Update: Rich Internet Applications Are the Next Evolution of the Web ” ; Published May 11, 2005 by the Gartner Group, ID Number G00127774).

 

Additionally, there are 9,100 main offices in banking with more than 72,000 branches. In the insurance industry, there are 1,023 underwriting companies and 975 major carriers. These businesses combined with state and local government agencies are viable customers for the Company’s software solutions (US Dept. of Commerce).

 

According to two 2009 reports by Forrester Research, Inc. ("The State of Enterprise Software: 2009" and "The State of SMB Software: 2009 "), of more than 2,200 IT executives and technology decision-makers in North America and Europe, “ Modernizing key legacy applications is the top software initiative for businesses this year. ”  Costs of operating large legacy applications makes businesses unsustainable, results from the survey show that firms are seeking efficient ways to modernize.

 

 

Patients and Customers

 

Dental Services Patients

  

The Company’s affiliated dental practices are seeking to deliver the best clinical care possible and consequently retain patients for the long term. The Company’s goal is to manage a critical mass of affiliated practices in its geographical areas to be able to care for all patient needs. The Company believes that by encouraging the best practices available by dentists and staff, will result in long term retention of patients. The Company is actively engaged in assisting all affiliated practices with services that makes it possible for the dentist and staff to focus on the patient needs and their experience with the practice.

 

Software Solutions Customers

  

Our target software customers are all companies and organizations with the need to easily distribute their company’s data to mobilize their employees, potential clients and suppliers. These companies are running core applications on mainframe and midrange systems with external relationships (customers, suppliers or other business partners). The potential client industries include: automotive, aerospace and defense, health care, manufacturing, financial institutions, insurance companies, the public sector, retail and service providers.  Typical customers of the eCenter products will be medium and large companies that are in need of process integration, while the company’s focus is currently on the dental space.

 

All are similar in the fact that they are running multiple business applications in order to perform day-to-day business tasks.  The large number of diverse applications used by customers creates a highly complex and interactive environment.  Customer’s plans to connect with their customers, suppliers and employees are necessary using internet strategies (e.g., business-to-business (B2B) and business-to-consumer (B2C)).  Also included are those companies looking for additional Client/Server infrastructure.

 

Our customer’s goal is to improve processes and make available the appropriate information in the corporation.  The Company believes that its software helps unlock the potential in a customer’s current systems and data and lets it flow into a creation of value in their current process of operation and life cycle. This is Sebring’s area of expertise and where we concentrate our efforts; technical as well as organizational know how.

 

Our Products and Services

 

Dental Services 

  

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. This trend will increasingly become mainstream within 5 to 10 years according to the American Dental Association (“ADA”). Approximately 170,000 dentists operate in 130,000 dental clinics, with over 82% of dental practices consisting of 1 or 2 dentists according to the ADA.

 

The U.S. dental services industry is a large, stable and growing segment of the health care industry. According to IBIS World Industry Report 62121, total U.S. dental services expenditures in 2014 exceed $124 billion. Nationwide spending on dental services has increased at a 2.7% CAGR between 2009-2014, and is projected to increase at a 3% CAGR through 2019 to $145 billion. Profitability has increase from 15.2% in 2009 to an estimated 16.6% in 2014, due largely to the trend of practices joining DPM companies. The dental services industry has traditionally been non-cyclical or less susceptible to broader market declines, largely because dental visits and expenditures are often driven by medical problems, which are too painful to ignore, regardless of the economic environment. In addition, the industry is also benefiting from favorable demographic trends, improvements in technology and a growing awareness of the importance of oral hygiene. Critical drivers in the growth and stability of dental care spending include: an aging population that requires increased dental care, an increased understanding of the health benefits afforded by dental care, and a focus on cosmetic dental procedures as a means to improve appearance.

 

Software Solutions Products

  

The Company plans to offer one desktop solution for complex connections to multiple software’s and software applications such as various departments, vendors and customers.  This approach simplifies a user’s day to day routine by offering a single format work station.  The user will access any company software via one window much like Microsoft Outlook links e-mail, contacts, tasks and so forth.  We believe that this software may eliminate the need to train employees in a variety of applications.

 

 

Competition

 

Dental Services

  

The dental services industry is highly fragmented, consisting primarily of solo and smaller group practices. There are a number of DPMs in the markets served by the Company which have in some cases significantly larger numbers of affiliated practices as well as considerable capital for expansion. These companies include American Dental Partners, Inc., Aspen Dental Services, Bright Now, Inc., Dental Care Alliance, Heartland Dental Care, Western Dental Services and more. The Company intends to continue looking for practices that it feels it can benefit, through an affiliation. This model will certainly not allow the Company to enter into management agreements with every practice available, but make sure that the model is built in a fashion that will enhance the dentists and staff’s ability to perform their services. The Company believes that the market will continue to grow according to the forecasts mentioned above by third parties, and therefore be able to pursue a prudent growth plan.

 

The Company believes it delivers a desired branding plan for its affiliated practices by allowing the individual dentist to continue practicing under the current practice name. The Company does not see a benefit to the dentist or the patients in creating a single branded product in all markets, unless such an affiliation brings existing branding to the relationship. The Company’s affiliated practices compete with other providers of dental and specialty services on the basis of factors such as brand name recognition, convenience, cost and the quality and range of services provided. Competition may include practitioners who have more established practices and reputations. The Company also competes against established practices in the retention and recruitment of general dentists, specialists, dental hygienists and other personnel. If the availability of such individuals begins to decline in the Company’s markets, it may become more difficult to attract and retain qualified personnel to sufficiently staff the existing offices or to meet the staffing needs of the Company’s planned expansion.

 

Strategy

 

Dental Services

  

The Company believes that by offering existing practices an opportunity to affiliate with a group that attempts to hold the highest standards as well as offering the practice to retain its identity, it will attract the type of dentists and staff that deliver consistent quality care.

 

The Company plans to grow through a combination of acquisitions, office consolidations and organic growth to establish itself as the dental healthcare provider of choice in its initial target markets of Arizona and Florida. At year-end 2014, the Sebring network included 39 practice locations that employ over 160 highly-trained dentists, hygienists and employees that provide comprehensive, convenient and high quality general dentistry and specialty services such as periodontics, endodontics, pedodontics, prosthodontics, orthodontics and oral surgery. Sebring supports affiliated dental practices in all non-clinical aspects of dental practice, including staffing, patient scheduling, billing and collections, financial reporting and analysis, group purchasing, payroll, marketing, education, training and management information systems, enabling affiliated dentists to focus exclusively on delivering high quality patient care. The Company has invested extensively into centralized back-office operations and will be able to utilize its scale to obtain favorable payer reimbursement and pricing from third-party vendors for dental office expenditures, such as dental equipment, drugs, supplies and lab fees. In addition to favorable payer pricing and direct cost savings, Sebring achieves operating efficiencies by sharing best practices across its dental practice locations. The Company’s operating and growth strategy is built around offering solo practitioners and small practices an opportunity to maximize operational and financial opportunities as part of an affiliated group.

 

Sebring is led by an experienced management team of both dental and business professionals that has been responsible for developing and implementing the Company’s successful business strategy. This will result in significant growth in revenue and profitability. Sebring has successfully identified and concluded transactions, which expanded the Company’s presence by 38 locations. Sebring has identified metropolitan areas across the United States Sun Belt including Georgia, Nevada and Texas, to acquire additional dental group practices. The focus will be on combining best in class clinical practices that will in turn provide shareholder value. Our goal is to reach a critical mass in each of the identified markets and develop platforms that create economies of scale, increasing the affiliated practices profitability.

 

Software Solutions

  

The Sebring Software platform is a collaborative integration software offering on premises and CLOUD solutions through eCenter-icm2. Customers in the healthcare, automotive, education, hospitality, manufacturing, retail and other industries require enhanced integration for their end users. Sebring’s software platform offers multiple gateways to the customer and doesn’t limit Sebring to just one product offering.

 

 

Suppliers

 

Dental Services

  

The Company works with a number of suppliers in the dental supply market to achieve economies of scale for the affiliated practices. No particular commitments have been made to any supplier. The company intends to procure the best purchasing terms for quality products available so that dentists and staff can deliver the highest quality of both service and product.

 

Software Solutions

  

The Company is not dependent on any significant product or service from any particular third party. We are currently basing our planned rollout of the software which we have the right to license, on future planned alliances with strategic partners such as ECS (which has existing relationships in the European market).

 

Research and Development

 

Since the Company has focused on the dental industry, research and development commitments have been to enhance the use of software in the affiliated practices. Additionally, the company is focusing on technology that will allow the management company to better serve the affiliated practices as well as monitor trends, developments in the market and internal efficiency. The Company will not make any materially significant investment to accomplish this goal as much of the core technology has been developed.

 

Intellectual Property

 

Licenses

 

The Company has entered into a License Agreement with ECS to be a non-exclusive reseller of ECS’s eCenter software, as described in greater detail above, which License is not effective until and unless we pay ECS $150,000.

 

Copyrights

 

Although the Company does not hold registered copyrights, the Company does claim copyright protection on all text and graphics used in conjunction with its published digital media (e.g., its website) and published printed promotional materials as stated generally in Title 17 of the United States Code, Circular 92, Chapter 1, Section 102. The Company also claims a common law copyright in the software adaptors developed by the Company for use with the eCenter software.

 

We plan to apply for additional patents, copyrights and trademarks as applicable necessary or desirable in the evolution of our business.

 

Regulatory Matters

 

Dental Services

  

Sebring must comply with the rules and regulations of HIPAA and OSHA to ensure proper handling of medical and bio-hazard material. Sebring will provide term malpractice insurance to each of its dentists. The Company also maintains general liability, property damage, workers compensation and other insurance that it believes to be customary and generally consistent with industry practice. Sebring believes that such insurance is adequate to cover potential claims relating to its existing business activities. We do not require regulatory approvals to offer our products or services. Our business is subject to federal, state and international laws regarding privacy and protection of user data. Since we are a fully reporting public company, we report our Company’s status on a regular basis and as required with the Securities and Exchange Commission in our public filings.

 

Our operations are not currently subject to any governmental regulations specific to the software integration industry.

 

Employees

 

We currently have a total of 163 employees. Our employees are not party to any collective bargaining agreement.

 

 

ITEM 1A. RISK FACTORS.

 

As a smaller reporting company, we are not required to provide the information required by this item

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not Applicable

  

ITEM 2. PROPERTIES

 

We maintain our corporate office under a month to month lease encompassing approximately 540 square feet of space at 1400 Cattlemen Rd., Suite A, Sarasota, Florida 34232 at a rate of $856 per month. In addition, we lease approximately 5,460 square feet at 13535 Feather Sound Drive, Suites 100 and 110, Clearwater, Florida 33762 for our accounting and general operations. This lease, which runs through 2019, had a cost of approximately $9,300 per month in 2014.

 

As of the date of this report, we managed a total of 39 dental practice locations with 35 in Florida and 4 in Arizona.  The offices typically are located either in shopping centers, professional office buildings or stand-alone buildings. The offices typically range in size from 1,200 square feet to 5,000 square feet and have lease expiration dates with various times through 2023.

 

ITEM 3. LEGAL PROCEEDINGS

 

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations, except as discussed below; however, we may become involved in material legal proceedings in the future.

 

In January 2015 a lawsuit was initiated against the Company in the Supreme Court of the State of New York, County of New York whereby an investor relations consultant claims he is owed stock compensation under a May 7, 2010 consulting agreement. The agreement describes 800,000 shares of common stock to be issued as compensation to the consultant along with $40,000 cash due upon signing of the agreement, an additional cash payment of $34,500 was due on May 21, 2011. Management asserts that no services were performed and no shares or other compensation is due to the consultant. In March 2015 the Company filed a pre-answer motion to dismiss the action for lack of personal jurisdiction. 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 December 31, 2014.

 

In 2013 a subsidiary of the Company, Sebring Dental of Arizona (SDA) entered into an agreement to manage the dental practice of a third party. In August 2014, under the provisions of the agreement, SDA terminated its relationship with the practice. The owner of the practice demanded an arbitration to recover damages alleged to have resulted from the termination. The Company considers this damage claim to be without merit, and has initiated a counterclaim to recover amounts due to SDA for services performed under the terms of the agreement. The matter is currently in the initial stages of arbitration. 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 December 31, 2014.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable

 

 

PART II

 

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

 

On April 29, 2009, we obtained quotation for our common stock on the Over-The-Counter Bulletin Board (“ OTCBB ”) under the symbol SMXI.OB; however, a limited number of shares of our common stock have traded to date and there is currently a limited public market for our common stock.  The quotations provided are for the over the counter market, which reflect interdealer prices without retail mark-up, mark-down or commissions, and may not represent actual transactions.  The values listed below retroactively reflect our Forward Splits as described above.  There was no trading in the Company’s common stock prior to October 4, 2010.

 

Quarter Ended		High				Low
December 31, 2014		$	.15			$	.07
September 30, 2014		$	.25			$	.09
June 30, 2014		$	.45			$	.25
March 31, 2014		$	.44			$	.25
December 31, 2013		$	.50			$	.41
September 30, 2013		$	.59			$	.40
June 30, 2013		$	.59			$	.15
March 31, 2013		$	.20			$	.10

 

The Company's common stock is considered a "penny stock" as defined in the Commission's rules promulgated under the Exchange Act. The Commission's rules regarding penny stocks impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally persons with net worth in excess of $1,000,000 or an annual income exceeding $200,000 or $300,000 jointly with their spouse). For transactions covered by the rules, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Thus the Rules affect the ability of broker-dealers to sell the Company's shares should they wish to do so because of the adverse effect that the Rules have upon liquidity of penny stocks. Unless the transaction is exempt under the Rules, under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, broker-dealers effecting customer transactions in penny stocks are required to provide their customers with (i) a risk disclosure document; (ii) disclosure of current bid and ask quotations if any; (iii) disclosure of the compensation of the broker-dealer and its sales personnel in the transaction; and (iv) monthly account statements showing the market value of each penny stock held in the customer's account. As a result of the penny stock rules, the market liquidity for the Company's securities may be severely adversely affected by limiting the ability of broker-dealers to sell the Company's securities and the ability of purchasers of the securities to resell them.

 

DESCRIPTION OF CAPITAL STOCK

 

We have authorized capital stock consisting of 1,100,000,000 shares of common stock, $0.0001 par value per share (“Common Stock”) and 10,000,000 shares of preferred stock, $0.0001 par value per share (“ Preferred Stock ”).

 

Common Stock

 

Holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of shareholders.  There is no cumulative voting of the election of Directors then standing for election.  The Common Stock is not entitled to pre-emptive rights and is not subject to conversion or redemption.  Upon liquidation, dissolution or winding up of our Company, the assets legally available for distribution to stockholders are distributable ratably among the holders of the Common Stock after payment of liquidation preferences, if any, on any outstanding payment of other claims of creditors.  Each outstanding share of Common Stock is duly and validly issued, fully paid and non-assessable. The holders of outstanding shares of Common Stock are entitled to receive dividends out of assets or funds legally available for the payment of dividends of such times and in such amounts as the Board of Directors (Board) from time to time may determine.

 

As of December 31, 2014, we had 68,876,327 shares of common stock outstanding held by approximately 72 active shareholders of record.

 

 

Preferred Stock

 

Shares of Preferred Stock may be issued from time to time in one or more series, each of which shall have such distinctive designation or title as shall be determined by our Board of Directors (“ Board of Directors ”) prior to the issuance of any shares thereof.  Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issue of such class or series of Preferred Stock as may be adopted from time to time by the Board of Directors prior to the issuance of any shares thereof.  The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all the then outstanding shares of our capital stock entitled to vote generally in the election of the Directors, voting together as a single class, without a separate vote of the holders of the Preferred Stock, or any series thereof, unless a vote of any such holders is required pursuant to any Preferred Stock Designation.

 

As of December 31, 2014, we had no shares of preferred stock issued or outstanding.

 

Options and Warrants

 

As of December 31, 2014 the Company had issued 725,416 warrants to holders of our convertible notes according to the terms of the outstanding notes.

 

Additionally in 2013, as part of our loan agreement which provided funds used to acquire our dental practices, we were required to issue warrants to the lenders. At the acquisition and loan closing dates, we issued a total of 5,987,340 warrants to the lenders in satisfaction of this provision of the agreement. Under a separate agreement with a placement agent, we also were required to issue warrants to the agent for their assistance in helping us to secure the loan. Under the terms of this agreement, we issued a total of 4,680,581 to these agents.

 

RECENT SALES OF UNREGISTERED SECURITIES

 

During the year ended December 31, 2014 the Company issued a total of 638,750 shares of restricted common stock to 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 $184,000 in 2014 as non-cash compensation expense.

 

In January 2014 the Company issued 387,597 shares to a related party for $100,000 or $0.258 per share.

 

In April 2014 the Company issued 1,162,791 shares to related parties for $300,000 or $0.258 per share.

 

We claim an exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended, since the foregoing issuances did not involve a public offering, the recipients took the securities for investment and not resale and we took appropriate measures to restrict transfer.  No underwriters or agents were involved in the foregoing issuances and we paid no underwriting discounts or commissions.

 

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not required pursuant to Item 301 of Regulation S-K.

   

ITEM 7. 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 39 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 year ended December 31, 2014 compared to the year ended December 31, 2013

 

Dental practice revenue for the year ended December 31, 2014 was $20,003,000, an increase of $10,796,000 over $9,207,000 of dental practice revenue for 2013. The increase is attributable to the Company being a development stage enterprise prior upon its entry into the area of dental practice management in April of 2013. Prior to that the Company did not generate any revenue or incur any such expenses. 2014 includes the operatons of 38 practices for a full year plus an additional practice location opened during the year, whereas 2013 includes the operations for each practice from its acquisition date, which occurred at various times throughout 2013, including 5 that were acquired at or near the end of the year.

 

Direct dental costs for the year ended December 31, 2014 were $10,464,000, or 52.2 % of dental practice revenue, compared to direct dental costs of $4,603,000 or 50.0% of dental practice revenue for 2013. Direct dental costs consist primarily of doctor and employee compensation and benefits in the dental practices. The increase in 2014 is attributable to 2014 representing a full years’ operations for the dental practices compared to a partial year in 2013.

 

 

Other direct dental costs for the year ended December 31, 2014 were $5,605,000, or 27.9 % of dental practice revenue compared to $2,529,000 or 27.5% of dental practice revenue for 2013. These costs consist of items such as lab expense, dental implants, clinical supplies and facility costs. The increase is attributable to a 2014 representing a full years’ operations for the dental practices compared to a partial year in 2013.

 

Indirect dental expenses for the year ended December 31, 2014 were $4,566,000, or 22.8 % of dental practice revenue compared to $2,174,000 or 23.6% of dental practice revenue for 2013 in 2013. These are costs incurred at the dental practices for other expenses such as computer expense, telecommunications costs, and other general office expenses. The increase is attributable to a 2014 representing a full years’ operations for the dental practices compared to a partial year in 2013.

 

Corporate compensation and benefits decreased $289,000 from $1,087,593 or 11.8% of revenue for the year ended December 31, 2013 to $799,000 or 4.0% of revenue for the year ended December 31, 2014. The decrease is primarily due to the decrese in non-cash compensation expense recorded with the issuance of restricted common shares issued to management in accordance with employment agreements.

  

General and administrative expenses increased $598,000 from $2,707,000 or 29.4% of revenue for the year ended December 31, 2013 to $3,305,000 or 16.5% of revenue for the year ended December 31, 2014. This increase was primarily due to the amortization costs of our Customer Relationships for a full year compared to a partial years in 2013. The increased general and administrative expenses resulting from a full years’ operations of the dental practices were offset by a decrease in costs for consulting, accounting and other professional fees necessary to facilitate and consummate the dental practice acquisitions in 2013.

 

Loss from operations was $7.8 million, or 39.0% of revenue compared to $3.9 million or 42.3% of revenue in 2013. Included in loss from operations for 2014 is a non-recurring charge of $3.1 million for impairment of goodwill and other intangible assets. Also contributing to the loss from operations is the expense of amortizing acquired customer relationships of $2.2 million and $1.0 million for 2014 and 2013, respectively.

 

Interest expense increased from $2,314,000 for the year ended December 31, 2013 to $3,535,000 for the year ended December 31, 2014. The increase was primarily due to the interest on a Term Loan of $15 million incurred in April 2013 to fund the acquisitions as well as additional interest expense from the amortization of debt issuance costs incurred with the consummation of the term loan, for 12 months in 2014 compared to 8 months in 2013. Interest expense also includes amortization of the debt discount associated with certain notes and warrants, as well as compound interest and penalty warrants due under certain past due Notes Payable.

 

The gain of $3,319,000 and on warrant liability relates to the change in fair value of the warrant liability for the year ended December 31, 2014. A loss of $1,873,000 on warrant liability was recorded in 2013 representing the change in fair value from the issue date of April 25, 2013 to December 31, 2013. The warrants issued with the Term Loan were classified as 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

 

This report has been prepared in conformity with the contemplation the Company’s ability to meet its ongoing obligations. The Company had a net loss of approximately $8.0 million of which $2.6 million was due to a write down of goodwill, net cash used in operations of approximately $438,000 for the year ended December 31, 2014, a working capital deficit of $20.1 million, stockholders’ deficit of $14.3 million and an accumulated deficit of $25.4 million at December 31, 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 $17.0 million in principal and $3.3 million in accrued interest as of December 31, 2014.

 

These conditions were considered when evaluating the Company’s liquidity and its ability to meet its ongoing obligations and raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying 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. The Company is working with its creditors and potential investors to restructure its debt and provide financing to fund expansion through acquisition of additional dental practices, however as of the date of the report there are no such agreements in place.

 

 

Debt and contractual obligations

 

As of December 31, 2014 we have commitments to pay investors and creditors $20.8 million of principal and $3.5 million of accrued interest on various convertible notes, non-convertible notes and loans payable. We also owe $1.7 million in accounts payable, $1.1 million in accrued liabilities, $323,000 of payroll related liabilities and capital lease obligations of $114,000 as of December 31, 2014. In addition, as part of the initial acquisition of the thirty one dental practices in Florida., as of December 31, 2014, we have commitments to pay $2.8 million to the sellers, recorded as consultant liability.

 

On April 25, 2013, the Company and its subsidiaries, Sebring Dental of Arizona, LLC, AAR Acquisition, LLC, and Sebring Management FL, LLC (the “Guarantors”) entered into a Loan and Security Agreement (the “Loan Agreement”) with Great American Life Insurance Company, Great American Insurance Company, United Teachers Associates Insurance Company, Continental General Insurance Company (the “Lenders”) and MidMarket Capital Partners, as agent for the Lenders, in order to facilitate the funding of the acquisition of dental practices according to our business plan. Under the terms of the Loan Agreement, the Lenders agreed to loan us up to Sixteen Million Dollars ($16,000,000) in two separate tranches (the “Term Loan”) for this purpose. The first tranche of the Term Loan of Eleven Million Dollars ($11,000,000) was funded on the closing date of April 26, 2013. Of this total, $6,304,984 was used for acquisitions, debt refinancing and costs associated with the transactions. The remaining $4,695,016 was for working capital requirements. We continued to pursue other acquisition opportunities in accordance with the terms of the loan agreement, although the obligation to advance the second tranche of Five Million Dollars ($5,000,000) expired on May 25, 2013.

 

On December 27, 2013, the Company entered into the First Amendment, Consent and Waiver (the "Amendment") to the Loan Agreement. Under the terms of the Amendment, the Lenders agreed to (i) consent to the December 2013 acquisitions, (ii) waive the identified Events of Default, (iii) extend the second tranche to (a) pay the related transaction costs of the December 2013 acquisitions and (b) fund a portion of the purchase price of said acquisitions in the amounts of $4 million, (iv) certain modifications to terms and provisions of the Loan Agreement.

 

Pursuant to the Loan and Security Agreement above, interest accrues 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 percent per annum. Interest payments on all outstanding principal shall be payable quarterly in arrears on the last day of each quarter. In accordance with the terms of the notes, quarterly principal payments of $112,500, 281,250 and $281,250 along with accrued interest have been made through March 31, 2014. Beginning on June 30, 2014, the quarterly principal payments increased to $375,000 per quarter. Beginning on June 30, 2015, the quarterly principal payments increase to $750,000 per quarter. Beginning on June 30, 2017, the quarterly principal payment increases 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 had not made the principal or interest payments due on June 30, 2014, September 30, 2014, December 31,2014 or March 31, 2015. Accordingly, the note is considered in default for the unpaid principal balance of $14,025,000 and accrued interest of $1,375,425..

 

Management Agreement - The Company has management contracts with four 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 $852,000 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 to be distributed to the employees in equal installments over periods ranging from two to five years. As of December 31, 2014 1.030,000 share have been issued or are issuable to current members of management under the terms of the agreements.

 

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.

 

Office leases Our 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 as of December 31, 2014 are as follows:

 

2015			1,971,000
2016			1,541,000
2017			1,272,000
2018			1,159,000
2019			774,000
Thereafter			1,265,000
Total		$	7,982,000

 

 

Critical Accounting Estimates and 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. The Company has exclusive responsibility for the provision of all non-dental services required for the day-to-day operation and management of the Practices and establishes the guidelines for the employment and compensation of the physicians. In addition, the agreements provide that the Company has the right, but not the obligation, to purchase, or to designate a person(s) to purchase, the stock of the Practices for a nominal amount. Separately, in its sole discretion, the Company has the right to assign its interest in the agreements. Based upon the provisions of these agreements, the Company has determined that the Practices are variable interest entities and that the Company is the primary beneficiary as defined in the accounting guidance for consolidation. All significant intercompany and inter affiliate accounts and transactions have been eliminated.

 

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 retrospectively in the consolidated financial statements of the subsequent period.

 

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 7 years for orthodontic practices and fifteen years for general dental practices.

 

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.

 

During the year ended December 2014, the Company determined its Goodwill to be impaired and recorded an impairement charge of approximately $2.6 million in the second quarter.

 

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 2014 results of operatons led the Company to believe that impairment of long-lived intangible assets may exist. Accordingly, the Company measured its customer relationships for impairment as of December 31, 2014. Upon determination that impairment existed a charge of approximately $483,000 was recorded in the fourth quarter.

 

Revenue Recognition. Revenues are earned from dental, primarily orthodontic, services provided to patients in approximately 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 at a value net of refunds and other adjustments. Amounts collected in excess of amounts earned are deferred.  Revenue earned from general and cosmetic dental practices are recorded on a fee for service basis at the time the services are performed.

 

 

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.

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

See index to Consolidated Financial Statements of Sebring Software, Inc. beginning on Page F1 for information required under this Item 8.

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None

 

ITEM 9A. CONTROLS AND PROCEDURES.

 

Disclosure Controls

 

We carried out an evaluation required by Rule 13a-15 of the Securities Exchange Act of 1934, or the Exchange Act, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a–15(e). Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in an issuer's reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

 

The evaluation of our disclosure controls and procedures included a review of our objectives and processes and effect on the information generated for use in this report. This type of evaluation is done quarterly so that the conclusions concerning the effectiveness of these controls can be reported in our periodic reports filed with the SEC. We intend to maintain these controls as processes that may be appropriately modified as circumstances warrant.

 

Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information which is required to be included in our periodic reports filed with the SEC as of the end of the period covering this report.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014 based on the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2014.

 

However, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Management necessarily applied its judgment in assessing the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected.

 

ITEM 9B. OTHER INFORMATION.

 

None.

 

  

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The following table sets forth the name, age and position of our Directors and Chief Executive Officer as of the date of this filing. There are no other persons who can be classified as a promoter or controlling person of us.

 

Name		Age		Position
Leif Andersen		59		President, Chief Executive Officer and Director
Scott A. Reynolds		54		Chief Financial Officer
Jeffery L. Carrier		63		Director
W. David Tompkins		51		Director
Joel Fedder		82		Director
Dennis Buchman		62		Director

 

Mr. Leif Andersen was appointed as a Director of the Company effective September 23, 2010 and as the President and Chief Executive Officer of the Company on October 25, 2010. On August 1, 2013 Mr. Andersen was appointed Chairman of the Board.  Mr. Andersen has been the managing member of Sebring Software, LLC, a Florida limited liability since its inception in November of 2006.   From 1987 to August 2006, Mr. Andersen was the President of Vermax, Inc., a Utah corporation that manufactured bathroom fixtures.  Mr. Andersen was born in Norway, was raised in Brazil and has worked in a number of western countries. Mr. Andersen studied Chemical Engineering at the Norwegian Institute of Technology from 1975-1979.  Subsequently, he has led companies in the hospitality industry, building materials, management consulting, high technology and energy markets.  Mr. Andersen began his business career with the Donovan Companies, St. Paul, Minnesota, USA.  While at Donovan he was involved with the distribution of propane, natural gas, coal mining and other ventures. In addition Mr. Andersen was engaged in cogeneration projects and introducing new technology into natural gas air conditioning systems manufactured by Yazaki in Japan.  Mr. Andersen has been the CEO of 4 start ups and led companies with as many as 460 employees. Mr. Andersen served as liaison for the Norwegian Olympic Committee, was appointed and served as the Salt Lake City, Utah Consul for the Kingdom of Norway from 1995 to 2004 and was made a Knight of the First Order by His Majesty King Harald V in 2002.

 

On February 28, 2014 Allan Barberio resigned as Chief Financial Officer and Larry C. Colton was appointed to the position. Mr. Colton previously served as Vice President of Finance for Sebring since September 16, 2013. Mr. Colton resigned as Chief Financial Officer as of January 2, 2015. Mr. Scott Reynolds was appointed as Controller and Chief Financial Officer on an interim basis. Mr. Reynolds has a B. S. degree in accounting from Florida State University and is a Certified Public Accountant. He has over 30 years experience in public and private accounting and finance.

 

On August 1, 2013 Jeffery L. Carrier was appointed to the Board of Directors. Mr. Carrier is a Florida CPA and received a B.S. degree in accounting from Florida State University in 1973. Since that time, Mr. Carrier worked for a “Big 4” accounting firm from 1973-1978, served as CFO of publicly traded companies listed on the NYSE and NASDAQ stock markets from 1978-1984, acted as a financial sector expert providing expert witness testimony in US Courts from 1984 to the present, founded and managed a large financial institution outsourcing and consulting firm from 1984-2003, worked as a subject matter technical expert for the International Monetary Fund since 2003, and served as a Bank Board member and Audit Committee Chairman of a publicly traded financial institution since 2003. Mr. Carrier will serve as chair of the Company’s Audit Committee and will serve on the Company’s Acquisition, Compensation and Corporate Governance Committees.

 

On August 1, 2013 W.David Tompkins, Jr. was appointed to the Board of Directors. Mr. Tompkins received a B.S. degree in mechanical engineering from the United States Military Academy at Westpoint in 1985 and an MBA from the Stanford Graduate School of Business in 1992. Since that time, he has held various executive positions in San Francisco including Accenture; Vice President of Sales and Marketing at i2 Technologies; and Chief Operating Officer at WorldChain, Inc. He then moved to Louisville, Kentucky to serve as Chief Marketing Officer for Churchill Downs, Inc. and currently serves as a Founding Partner of an Atlanta-based startup, LiveTech, LLC. Mr. Tompkins will serve as Chair of the Company’s Compensation Committee and will serve on the Company’s Acquisition, Audit and Corporate Governance Committees

 

  

On August 1, 2013 Joel D. Fedder was appointed to the Board of Directors. Mr. Fedder received a B.A. degree in economics from Goddard College, An AA Degree in accounting from Johns Hopkins University and a JD degree from the University of Maryland School of Law. Mr. Fedder is currently “Of Counsel” to the law firm of Fedder & Garten, P.A., where he practiced Tax and Corporate law for over 20 years, and is Chairman of the Board of The Fedder Company and Fedder Management Corporation, real estate development and management companies, respectively. Mr. Fedder previously served on the Board of Directors of DMW, Inc. and on the Advisory Board of the Columbia Bank of Maryland, The Sheppard and Enoch Pratt Health Systems, Inc., North Arundel Hospital, The United Way of Central Maryland, the American Heart Association, Maryland affiliate, and The Marie Selby Botanical Gardens, where he was Treasurer and Chair of the Investment and Science Committees. Mr. Fedder currently serves on the Board of Directors of The Sarasota/Manatee Jewish Federation, Inc. serves on the Board of Trustees of the Sarasota Opera Company, serves on the National Summit Council of The Sierra Club, serves on the Board of Visitors of the University of Maryland School of Law, and is a member of the National Association of Corporate Directors. Mr. Fedder will serve as Chair of the Company’s Corporate Governance Committee and will serve on the Company’s Acquisition, Compensation, and Audit Committees.

 

On August 1, 2013 Dr. Dennis Buchman was appointed to the Board of Directors. Dr. Buchman received his M.S. Degree from West Virginia University in 1979. Since that time, Dr. Buchman has worked in private orthodontic practice. Dr. Buchman was one of the founding doctors of ACA, Inc., a public company, where he served as an Executive Vice President and board member until 2006. Since that time he has served as a partner at A&D Orthodontic Management Corporation and Orthodontic Specialists Management. Dr. Buchman will serve as Chair of the Company’s Acquisition Committee and will serve on the Company’s Compensation, Audit and Corporate Governance Committees.

 

Our Directors and any additional Directors we may appoint in the future are elected annually and will hold office until our next annual meeting of the shareholders and until their successors are elected and qualified. Officers will hold their positions at the pleasure of the Board of Directors, absent any employment agreement. Our officers and Directors may receive compensation as determined by us from time to time by vote of the Board of Directors. Such compensation might be in the form of stock options. Directors may be reimbursed by the Company for expenses incurred in attending meetings of the Board of Directors. Vacancies in the Board are filled by majority vote of the remaining Directors.

 

Involvement in Certain Legal Proceedings

 

Our Directors and executive officers have not been involved in any legal proceedings as indicated below during the past ten years.

 

1.

any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

 

2.

any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences);

 

3.

being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or

 

4.

being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

 

Board of Directors Meetings and Independence

 

The Company’s Board of Directors is comprised of 5 members. Three of the Company’s five members of the Board of Directors are considered to be independent. During 2014, the Board held 6 meetings Four of the Directors attended all 6 meetings, while the fifth Director attended 5.

 

Committees of the Board

 

During 2014 the Board’s Audit Committee held 7 meetings, its Compensation Committee held 2 meetings, its Corporate Governance Committee held 1 meeting and itsAcquisition Committee held 4 meetings.. All committee members attended all of the meetings. The Company does not currently have a Nominating Committee. The entire board of directors acts as the Nominating Committee.

 

 

Shareholder Proposals

 

Our Company does not have any defined policy or procedural requirements for shareholders to submit recommendations or nominations for Directors. The Board of Directors believes that, given the stage of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. Our Company does not currently have any specific or minimum criteria for the election of nominees to the Board of Directors and we do not have any specific process or procedure for evaluating such nominees. Board of Directors, will assess all candidates, whether submitted by management or shareholders, and make recommendations for election or appointment.

 

A shareholder who wishes to communicate with our Board of Directors may do so by directing a written request addressed to our President and Director, at the address appearing on the first page of this report.

 

Code of Ethics

 

We have not adopted a formal Code of Ethics. The Board of Directors evaluated the business of the Company and the number of employees and determined that since the business is operated by only a limited number of employees, general rules of fiduciary duty and federal and state criminal, business conduct and securities laws are adequate ethical guidelines.   In the event our operations, employees and/or Directors expand in the future, we may take actions to adopt a formal Code of Ethics.

  

Compliance with Section 16(a) of the Exchange Act

 

Section 16(a) of the Exchange Act of 1934, as amended (the “Exchange Act”) requires our Directors and officers, and the persons who beneficially own more than ten percent of our common stock, to file reports of ownership and changes in ownership with the SEC. Copies of all filed reports are required to be furnished to us pursuant to Rule 16a-3 promulgated under the Exchange Act.  Based solely on the reports received by us and on the representations of the reporting persons, we believe that Thor Nor, LLC (which is controlled by our President and Chief Executive Officer, Leif Andersen), Leif Andersen, Sebring Software, LLC (our current wholly-owned subsidiary and our prior majority shareholder) and Lester Petracca, have not complied with applicable filing requirements under the Exchange Act.  We anticipate such persons making their required Exchange Act filings shortly after the filing of this report.

 

Corporate Governance

 

The Company promotes accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with the Securities and Exchange Commission (the “ SEC ”) and in other public communications made by the Company; and strives to be compliant with applicable governmental laws, rules and regulations. The Company has not formally adopted a written code of business conduct and ethics that governs the Company’s employees, officers and Directors as the Company is not required to do so.

 

The Audit Committee is responsible for reviewing and making recommendations concerning the selection of outside auditors, reviewing the scope, results and effectiveness of the annual audit of the Company's financial statements and other services provided by the Company’s independent public accountants. The Audit Committee and the Board of Directors reviews the Company's internal accounting controls, practices and policies.

 

 

ITEM 11. EXECUTIVE COMPENSATION.

 

Summary Compensation Table:

 

The table below sets forth, for our last two fiscal years, the compensation earned by our officers and directors.

 

Name and										Deferred								Stock				Option				All Other
Principal Position						Salary				Compensation				Bonus				Awards(3)				Awards				Compensation
Leif Andersen			2014			$	361,111			$	-			$	-			$	-			$	-			$	-
CEO and Director			2013			$	361,111			$	-			$	-			$	-			$	-			$	708,706	(1)
Allan Barberio			2014			$	4,000			$	-			$	-			$	39,188			$	-			$	-
CFO			2013			$	146,333			$	-			$	-			$	194,750			$	-			$	-
Larry Colton			2014			$	146,982			$	-			$	-			$	9,600			$	-			$	-
CFO			2013			$	-			$	-			$	-			$	-			$	-			$	-
L Michael Andersen			2014			$	180,555			$	-			$	-			$	138,750			$	-			$	-
VP-Operations			2013			$	180,555			$	-			$	-			$	155,000			$	-			$	207,872	(2)
Alan Shoopak			2014			$	200,000			$	-			$	-			$	-			$	-			$	-
VP-Bus. Development			2013			$	115,380			$	-			$	-			$	-			$	-			$	-

 

Notes:

	(1)	This represents an amount paid to Mr. Andersen for cumulative compensation owed to him and accrued for the aggregate differential from his employment contract amounts versus the compensation he has actually received
	(2)	This represents an amount paid to Mr. Andersen for compensation owed to him for the aggregate differential from his employment contract amounts versus the compensation he has actually received
	(3)	This represents the value of stock issued to Mr. Barberio, Mr. Colton and Mr. Andersen according to the terms of their employment agreements.

 

Employment Agreements

 

Mr. Leif Andersen and Sebring entered into a Management Employment Agreement (the “Employment Agreement ”) effective January 1, 2013.  Pursuant to the Employment Agreement, Mr. Andersen agreed to serve as the Chief Executive Officer and President of Sebring for a term of 36 months, provided that the Employment Agreement is automatically renewed if not terminated with thirty days prior notice.  Pursuant to the Employment Agreement, Mr. Andersen is to receive a salary of $361,111 per year, a Company provided automobile or an $800 per month auto allowance at Mr. Andersen’s discretion as well as bonuses as determined by the Board of Directors.

 

Mr. Andersen’s Employment Agreement can be terminated by Mr. Andersen at any time with thirty days written notice; by Sebring with five days written notice; or at any time by Sebring for “ Cause ” as defined in the agreement or by Mr. Andersen for “ Good Reason ” as defined in the agreement.  In the event the Employment Agreement is terminated by the Company without Cause or by Mr. Andersen for Good Reason, Mr. Andersen is due severance pay in an amount equal to 100% of his then annual salary, plus payments equal to 12 months of COBRA health insurance payments, which is required to be made in four equal quarterly payments without interest, following Mr. Andersen’s entry into a release satisfactory to Sebring.

 

Mr. Andersen’s Employment Agreement includes a non-compete clause, whereby Mr. Andersen agreed not to compete with Sebring for a period of two years following the termination of the Employment Agreement.

 

 

The Company entered into a Management Employment Agreement (the “Employment Agreement”) with Mr. L. Michael Andersen effective January 1, 2013.  Pursuant to the Employment Agreement, Mr. Andersen agreed to serve as the Vice President of Operations of Sebring for a term of 36 months, provided that the Employment Agreement is automatically renewed if not terminated with thirty days prior notice.  Pursuant to the Employment Agreement, Mr. Andersen is to receive a salary of $180,555 per year, a Company provided automobile or an $800 per month auto allowance at Mr. Andersen’s discretion as well as bonuses as determined by the Board of Directors. Mr. Andersen also has an equity participation clause whereby he will receive stock awards over the first two years of his agreement.

 

Mr. Andersen’s Employment Agreement can be terminated by Mr. Andersen at any time with thirty days written notice; by Sebring with five days written notice; or at any time by Sebring for “ Cause ” as defined in the agreement or by Mr. Andersen for “ Good Reason ” as defined in the agreement.  In the event the Employment Agreement is terminated by the Company without Cause or by Mr. Andersen for Good Reason, Mr. Andersen is due severance pay in an amount equal to 100% of his then annual salary, plus payments equal to 12 months of COBRA health insurance payments, which is required to be made in four equal quarterly payments without interest, following Mr. Andersen’s entry into a release satisfactory to Sebring.

 

Mr. Andersen’s Employment Agreement includes a non-compete clause, whereby Mr. Andersen agreed not to compete with Sebring for a period of two years following the termination of the Employment Agreement.

 

The Company entered into an Employment Agreement with Dr. Alan D. Shoopak to serve in the position of Clinical Director and to render dentistry services from time to time. In addition, Dr. Shoopak will serve in the capacity of Vice President of Business Development. The agreement has an initial term of three years. Dr. Shoopak will receive an annual salary under this agreement of $200,000 per year. The agreement will automatically renew for successive two year periods unless terminated by the parties. Either party may terminate the agreement at any time with ninety days written notice. The obligations of the Company cease on the last day of employment. Dr. Shoopak’s Employment Agreement includes a non-compete clause for a period of two years following termination.

 

 

Indemnification of our Officers and Directors

 

The Nevada Revised Statutes and our Articles of Incorporation, as amended, allow us to indemnify our officers and Directors from certain liabilities and our Bylaws state that we shall indemnify every (i) present or former Director, advisory Director or officer of us, (ii) any person who while serving in any of the capacities referred to in clause (i) served at our request as a Director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, and (iii) any person nominated or designated by (or pursuant to authority granted by) the Board of Directors or any committee thereof to serve in any of the capacities referred to in clauses (i) or (ii) (each an “Indemnitee”).

 

Our Bylaws provide that we shall indemnify an Indemnitee against all judgments, penalties (including excise and similar taxes), fines, amounts paid in settlement and reasonable expenses actually incurred by the Indemnitee in connection with any proceeding in which he was, is or is threatened to be named as a defendant or respondent, or in which he was or is a witness without being named a defendant or respondent, by reason, in whole or in part, of his serving or having served, or having been nominated or designated to serve, if it is determined that the Indemnitee (a) conducted himself in good faith, (b) reasonably believed, in the case of conduct in his Official Capacity, that his conduct was in our best interests and, in all other cases, that his conduct was at least not opposed to our best interests, and (c) in the case of any criminal proceeding, had no reasonable cause to believe that his conduct was unlawful; provided, however, that in the event that an Indemnitee is found liable to us or is found liable on the basis that personal benefit was improperly received by the Indemnitee, the indemnification (i) is limited to reasonable expenses actually incurred by the Indemnitee in connection with the Proceeding and (ii) shall not be made in respect of any Proceeding in which the Indemnitee shall have been found liable for willful or intentional misconduct in the performance of his duty to us.

 

Except as provided above, the Bylaws provide that no indemnification shall be made in respect to any proceeding in which such Indemnitee has been (a) found liable on the basis that personal benefit was improperly received by him, whether or not the benefit resulted from an action taken in the Indemnitee's official capacity, or (b) found liable to us.  The termination of any proceeding by judgment, order, settlement or conviction, or on a plea of nolo contendere or its equivalent, is not of itself determinative that the Indemnitee did not meet the requirements set forth in clauses (a) or (b) above.  An Indemnitee shall be deemed to have been found liable in respect of any claim, issue or matter only after the Indemnitee shall have been so adjudged by a court of competent jurisdiction after exhaustion of all appeals there from.  Reasonable expenses shall, include, without limitation, all court costs and all fees and disbursements of attorneys’ fees for the Indemnitee.  The indemnification provided shall be applicable whether or not negligence or gross negligence of the Indemnitee is alleged or proven.

 

Neither our Bylaws nor our Articles of Incorporation include any specific indemnification provisions for our officer or Director against liability under the Securities Act of 1933, as amended. Additionally, insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act") may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The following table presents certain information regarding the beneficial ownership of all shares of Common Stock as of December 31, 2014, by (i) each person who owns beneficially more than five percent (5%) of the outstanding shares of Common Stock based on 68,876,367 shares of common stock, $0.0001 par value per share, outstanding (which number includes 390,000 shares which have not been physically issued to date), but have been included in the number of issued and outstanding shares disclosed throughout this report, (ii) each of our Directors, (iii) each named executive officer and (iv) all Directors and officers as a group.

 

Beneficial ownership of the common stock is determined in accordance with the rules of the Securities and Exchange Commission and includes any shares of common stock over which a person exercises sole or shared voting or investment powers, or of which a person has a right to acquire ownership at any time within 60 days of December 31, 2013.  Except as otherwise indicated, and subject to applicable community property laws, the persons named in this table have sole voting and investment power with respect to all shares of common stock held by them.

 

  

Name and Address of Beneficial Owner		Shares Beneficially Owned				Percentage Beneficially Owned
Leif Andersen (1) Chief Executive Officer and Director Sebring Software 1400 Cattlemen Rd, Suite D Sarasota,  Florida 34232			14,575,326				21.2	%
Dennis Buchman(2) 241 Royal Tern Road N   Ponte Vedra Beach, FL 32082			10,188,175				14.7	%
Joel Fedder (3) 3590 Mistletoe Lane Long Boat Key, FL 34228			8,947,471				13.0	%
CEDE & Company PO Box 20, Bowling Green Station New York, NY 10004			7,970,690				11.5	%
San Rafael Consulting Group 8560 Heron Lagoon Circle Sarasota, FL 34242			6,007,590				8.7	%
Always Partners, LLP(4)   14564 Eagle Point Dr   Clearwater, FL 33762			4,924,610				7.1	%
Lester Petracca c/o Triangle Equities 30-56 Whitestone Expressway Whitestone, NY 11354			4,447,991				6.4	%
Galileo Asset Mgmt Avenue De Gratta-Paille 2 Geneve Switzerland			3,700,343				5.3	%
Jeffery Carrier (5) 2614 Tamiami Trail N-Ste 712 Long Boat Key, FL 34228			1,250,000				1.8	%
L. Michael Andersen (6) 12704 Stone Ridge Place Lakewood Ranch, FL 34202			1,000,000				1.4	%
W. David Tompkins (5)  1330 Main Street Sarasota, FL 34236			387,597				.6	%
All Officers and Directors as a Group (7 persons)			41,273,179				59.9	%

 

(1)

Mr. Andersen holds 14,575,326 shares of the Company’s common stock through Thor Nor, LLC, an entity which he controls.  Includes 341,212 shares issuable in connection with the conversion of an outstanding convertible promissory note and accrued interest held by Thor Nor, LLC, in the amount of $275,638, which has a conversion rate of $1.72 per share.  Does not include any warrants due to Thor Nor, LLC in connection with the $275,638 of Convertible Notes held by it, as such warrants have not been granted to date.

(2)

Consists of 4,924,610 acquired as a result of the merger and 5,263,565 acquired through stock purchases.

(3)

Includes 322,549 shares issuable in connection with the conversion of an outstanding convertible promissory notes and accrued interest in the aggregate amount of $340,000, which has a conversion rate of $1.72 per share.  Does not include any warrants due to Fedder in connection with the $340,000 of Convertible Notes , as such warrants have not been granted to date.

(4)

Consists of 4,924,610 acquired as a result of the merger.

(5)

Acquired through stock purchases.

(6)

Issued pursuant to terms of his employment agreement.

 

 

ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

Mr. Leif Andersen and Sebring entered into a Management Employment Agreement (the “Employment Agreement ”) effective January 1, 2013.  Pursuant to the Employment Agreement, Mr. Andersen agreed to serve as the Chief Executive Officer and President of Sebring for a term of 36 months, provided that the Employment Agreement is automatically renewed if not terminated with thirty days prior notice.  Pursuant to the Employment Agreement, Mr. Andersen is to receive a salary of $361,111 per year; a Company provided automobile or an $800 per month auto allowance at Mr. Andersen’s discretion as well as bonuses as determined by the Board of Directors.

 

Mr. Andersen’s Employment Agreement can be terminated by Mr. Andersen at any time with thirty days written notice; by Sebring with five days written notice; or at any time by Sebring for “ Cause ” as defined in the agreement or by Mr. Andersen for “ Good Reason ” as defined in the agreement.  In the event the Employment Agreement is terminated by the Company without Cause or by Mr. Andersen for Good Reason, Mr. Andersen is due severance pay in an amount equal to 100% of his then annual salary, plus payments equal to 12 months of COBRA health insurance payments, which is required to be made in four equal quarterly payments without interest, following Mr. Andersen’s entry into a release satisfactory to Sebring. Mr. Andersen’s Employment Agreement includes a non-compete clause, whereby Mr. Andersen agreed not to compete with Sebring for a period of two years following the termination of the Employment Agreement.

 

The Company entered into a Management Employment Agreement (the “Employment Agreement”) with Mr. L. Michael Andersen effective January 1, 2013.  Pursuant to the Employment Agreement, Mr. Andersen agreed to serve as the Vice President of Operations of Sebring for a term of 36 months, provided that the Employment Agreement is automatically renewed if not terminated with thirty days prior notice.  Pursuant to the Employment Agreement, Mr. Andersen is to receive a salary of $180,555 per year,, a Company provided automobile or an $800 per month auto allowance at Mr. Andersen’s discretion as well as bonuses as determined by the Board of Directors. Mr. Andersen also has an equity participation clause whereby he will receive stock awards over the first two years of his agreement.

 

Mr. Andersen’s Employment Agreement can be terminated by Mr. Andersen at any time with thirty days written notice; by Sebring with five days written notice; or at any time by Sebring for “ Cause ” as defined in the agreement or by Mr. Andersen for “ Good Reason ” as defined in the agreement.  In the event the Employment Agreement is terminated by the Company without Cause or by Mr. Andersen for Good Reason, Mr. Andersen is due severance pay in an amount equal to 100% of his then annual salary, plus payments equal to 12 months of COBRA health insurance payments, which is required to be made in four equal quarterly payments without interest, following Mr. Andersen’s entry into a release satisfactory to Sebring.

 

Mr. Andersen’s Employment Agreement includes a non-compete clause, whereby Mr. Andersen agreed not to compete with Sebring for a period of two years following the termination of the Employment Agreement.

 

Review, Approval and Ratification of Related Party Transactions

 

Given our small size and limited financial resources, we have not adopted formal policies and procedures for the review, approval or ratification of transactions, such as those described above, with our executive officers, Directors and significant stockholders.  However, all of the transactions described above were approved and ratified by Directors.  In connection with the approval of the transactions described above, our Directors, took into account several factors, including their fiduciary duties to the Company; the relationships of the related parties described above to the Company; the material facts underlying each transaction; the anticipated benefits to the Company and related costs associated with such benefits; whether comparable products or services were available; and the terms the Company could receive from an unrelated third party.

 

We intend to establish formal policies and procedures in the future, once we have sufficient resources and have appointed additional Directors, so that such transactions will be subject to the review, approval or ratification of our Board of Directors, or an appropriate committee thereof.   On a moving forward basis, our Directors will continue to approve any related party transaction based on the criteria set forth above.

 

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

AUDIT FEES

 

The following table sets forth the fees billed by our independent registered public accounting firm, Salberg & Company, P.A. for each of our last two fiscal years for the categories of services indicated.

 

		Years Ended December 31,
Category		2014				2013
Audit Fees		$	134,000			$	198,000
Audit Related Fees		$	3,700			$	48,000
Tax Fees		$	0			$	0
All Other Fees		$	0			$	0

 

Audit fees:.    Consist of fees billed for the audit of our annual financial statements and review of our interim financial information and services that are normally provided by the accountant in connection with year-end and quarter-end statutory and regulatory filings or engagements.

 

Audit-related fees:    Consist of fees billed for services relating to review of other regulatory filings including registration statements, periodic reports and audit related consulting.

 

Tax fees: Consist of professional services rendered by our principal accountant for tax compliance, tax advice and tax planning.

 

Other fees:     Other services provided by our independent registered public accounting firm.

 

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

Exhibit Number	Description of Exhibit
2.1(5)	Exchange and Reorganization Agreement dated as of October 25, 2010
2.2(5)	Spin-Off Agreement by and among Sumotext Incorporated, Tim Miller and Jim Stevenson effective as of October 25, 2010
3.1(1)	Articles of Incorporation
3.2(3)	Certificate of Change Pursuant to NRS 78.209
3.3(7)	Amendment to Articles of Incorporation
3.4(1)	Bylaws
10.1(4)	Securities Purchase Agreement
10.2(4)	Spin-Off Agreement
10.3(5)	Settlement Agreement by and between Lester Petracca and Sebring Software, LLC dated as of October 1, 2010
10.4(5)	Secured Promissory Note issued by Sebring Software, LLC to Lester Petracca dated as of October 1, 2010
10.5(5)	Security Agreement by and between Lester Petracca and Sebring dated as of October 1, 2010
10.6(5)	License Agreement by and between Sebring Software, LLC and Engineering Consulting and Solutions, GMBH dated as of October 22, 2010
10.7(5)	Form of Convertible Promissory Note
10.8(5)	Redemption and Security Agreement by and between Die CON AG and Sebring Software, LLC dated as of October 22, 2010
10.9(5)	Redemption Note issued by Sebring Software, LLC to Die CON AG dated as of October 22, 2010
10.10(5)	Employment Agreement by and between Leif Andersen and Sebring Software, LLC dated as of June 3, 2008
10.11(5)	Resignation letter to Sumotext Incorporated from Tim Miller
10.12(6)	Employment Agreement by and between John J. Sauickie and Sebring Software, LLC dated as of June 3, 2008
10.13(6)	Employment Agreement by and between L. Michael Andersen and Sebring Software, LLC dated as of June 3, 2008

 

 

10.14(6)	Letter Agreement by and between Sebring Software, LLC and New World Merchant Partners dated as of August 2, 2010
10.15(6)	Letter Agreement by and between Sebring Software, LLC and Abraxis Financial dated as of August 1, 2010
10.16(6)	Investment Advisory Agreement by and between Sebring Software, LLC and Galileo Asset Management, SA dated as of April 5, 2007
10.19(6)	Description of oral agreement between Sebring Software, LLC and Howard and Company regarding real property lease of Company’s headquarters
10.20 (8)	Investment Advisory Agreement by and between Sebring Software, LLC and Wellington Shields for private placement dated January 27, 2012
10.21(8)	Agreement with respect to a public offering by and between Sebring Software, LLC and Wellington Shields dated January 27, 2012
10.22(9)	Agreement of Plan of Merger with OSM dated April 25, 2013
10.23(9)	Asset Purchase Agreement of AAR dated April 25, 2013
10.24(9)	Loan and Security Agreement dated April 25, 2013
10.25(9)	Consulting Agreement with Alan D. Shoopak dated April 25, 2013
10.26(9)	Consulting Agreement with Dennis J.L. Buchman dated April 25, 2013
10.27(9)	Asset Purchase Agreement of AAR dated April 25, 2013
10.28(11)	Employment Agreement with Mr. Leif Andersen dated January 1, 2013
10.29(11)	Employment Agreement with Mr. L. Michael Andersen dated January 1, 2013
10.30(10)	Employment Agreement with Larry C. Colton dated January 1, 2014
16.1(2)	Letter from M & K CPAS, PLLC

 

31.1*	Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certificate of the Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certificate of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certificate of the Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	INS XBRL Instance Document
101.SCH*	SCH XBRL Schema Document
101.CAL*	CAL XBRL Calculation Linkbase Document
101.DEF*	DEF XBRL Definition Linkbase Document
101.LAB*	LAB XBRL Label Linkbase Document
101.PRE*	PRE XBRL Presentation Linkbase Document

 

* Filed herewith.

 

(1) Filed as an Exhibit to the Company’s Registration Statement on Form S-1, filed with the Commission on January 23, 2009, and incorporated by reference herein.

 

(2) Filed as an Exhibit to the Company’s Report on Form 8-K, filed with the Commission on April 14, 2011, and incorporated herein by reference.

 

(3) Filed as an Exhibit to the Company’s Report on Form 8-K, filed with the Commission on September 21, 2010 and incorporated herein by reference.

 

(4) Filed as Exhibits to the Company’s Report on Form 8-K, filed with the Commission on September 24, 2010 and incorporated herein by reference.

 

(5) Filed as Exhibits to the Company’s Report on Form 8-K, filed with the Commission on October 29, 2010 and incorporated herein by reference.

 

(6) Filed as Exhibits to the Company’s Report on Form 8-K/A, filed with the Commission on October 29, 2010 and incorporated herein by reference.

 

(7) Filed as Exhibit to the Company’s Report on Form 10-K, filed with the Commission on December 14, 2010.

 

(8) Filed as Exhibit to the Company’s Report on Form 10-K, filed with the Commission on March 30, 2012.

 

(9) Filed as Exhibit to the Company’s Report on Form 8-K, filed with the Commission on May 16, 2013 and incorporated herein by reference.

 

(10) Filed as Exhibit to the Company’s Report on Form 8-K, filed with the Commission on March 31, 2014 and incorporated herein by reference.

 

(11) Filed as Exhibit to the Company’s Report on Form 10-K, filed with the Commission on March 31, 2014.

 

 

SIGNATURES

 

In accordance with the requirements of Section 13 or 15(d) 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:	April 15, 2015		By:	/s/ Leif Andersen
				Leif Andersen
				Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Name		Title		Date
/s/ Leif Andersen		President, Chief Executive Officer and		April 15, 2015
Leif Andersen		Director
/s/ Jeffery L. Carrier		Director		April 15, 2015
Jeffery L.  Carrier
/s/ W. David Tompkins		Director		April 15, 2015
W. David Tompkins
/s/ Joel Fedder		Director		April 15, 2015
Joel Fedder
/s/ Dennis Buchman		Director		April 15, 2015
Dennis Buchman

 

 

Sebring Software, Inc. and Subsidiaries

 

Consolidated Financial Statements

 

December 31, 2014 and 2013

 

 

Sebring Software, Inc. and Subsidiaries

 

Index to Consolidated Financial Statements

 

	Page(s)
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets	F-2
Consolidated Statements of Operations	F-3
Consolidated Statements of Changes in Equity (Deficit)	F-4
Consolidated Statements of Cash Flows	F-5
Notes to Consolidated Financial Statements	F-6 - F-26

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of:

Sebring Software, Inc.

 

We have audited the accompanying consolidated balance sheets of Sebring Software, Inc. and Subsidiaries as of December 31, 2014 and 2013 and the related consolidated statements of operations, changes in stockholder's deficit, and cash flows for each of the two years in the period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sebring Software, Inc. and Subsidiaries as of December 31, 2014 and 2013 and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company had a net loss and cash used in operations of $8,039,005 and $437,728 in 2014, and has a working capital deficit, accumulated deficit and a total deficit of $20,144,154, $25,431,353 and $14,298,698, respectively, at December 31, 2014. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans as to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Salberg & Company, P.A.

 

SALBERG & COMPANY, P.A.

Boca Raton, Florida

April 15, 2015

 

2295 NW Corporate Blvd., Suite 240 • Boca Raton, FL 33431-7328

Phone: (561) 995-8270 • Toll Free: (866) CPA-8500 • Fax: (561) 995-1920

www.salbergco.com • info@salbergco.com

Member National Association of Certified Valuation Analysts • Registered with the PCAOB

Member CPAConnect with Affiliated Offices Worldwide • Member AICPA Center for Audit Quality

 

 

Sebring Software, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2014 and 2013

 

(in thousands except share data)

 

		2014				2013
ASSETS
Current assets:
Cash		$	-			$	1,826
Patient Receivables, net of allowance for doubtful accounts of $315 and $268			477				230
Prepaid expense			61				157
Total current assets			538				2,213
Fixed Assets
Furniture, equipment and vehicles, net			3,250				3,704
Total Fixed Assets			3,250				3,704
Other Assets
Due from related parties, net of allowance of $447 and $147			54				139
Customer relationship value, net of accumulated amortization of $3,286 and $1,048			13,336				16,057
Loan costs, net of accumulated amortization of $1,290 and $426			2,952				3,816
Goodwill			-				4,821
Deposits			89				21
Total Other Assets			16,431				24,854
Total assets		$	20,219			$	30,771
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Bank overdraft		$	100			$	-
Accounts payable			1,515				867
Due to related party			49				-
Accrued liabilities			1,113				1,467
Accrued payroll related liabilities			323				550
Accrued interest payable			3,457				1,657
Warrant liability			1,133				4,452
Deferred revenue			3,532				2,737
Current portion notes payable and convertible notes payable, net of debt discount			6,606				4,012
Current portion  notes payable and convertible notes payable-related parties			2,015				1,025
Current portion of lease obligations			85				89
Current portion of consultant liability			754				655
Total current liabilities			20,682				17,511
Lease obligation, net of current portion			29				107
Consultant liability, net of current portion			2,085				2,866
Deferred tax liability			-				2,147
Notes payable and convertible notes payable, net of current portion and debt discount			9,020				11,761
Notes payable and convertible notes payable, net of current portion-related parties			2,176				2,555
Other non-current liabilities			525				879
Total liabilities			34,517				37,826
Commitments and contingencies (Note 8)
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, 68,876,327  and 66,687,189 shares issued and outstanding at 2014 and 2013, respectively			7				7
Additional paid in capital			9,053				8,435
Accumulated deficit			(25,431	)			(17,392	)
Total Sebring Software, Inc. stockholders' equity (deficit)			(16,371	)			(8,950	)
Non-controlling interest			2,073				1,895
Total equity (deficit)			(14,298	)			(7,055	)
Total liabilities and equity (deficit)		$	20,219			$	30,771

 

 

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

 

 

Sebring Software, Inc. and Subsidiaries

Consolidated Statements of Operations

Year Ended December 31, 2014 and 2013

 

(in thousands except share data) 

		2014				2013
Net dental practice revenue		$	20,003			$	9,207
Operating expenses:
Direct dental expenses - compensation			10,464				4,603
Direct dental expenses - other			5,605				2,529
Indirect dental expenses			4,566				2,174
Corporate compensation and benefits			799				1,088
Impairment of goodwill and long-lived assets			3,079				-
General & administrative expenses			3,305				2,707
Total operating expense			27,818				13,101
Loss from operations			(7,815	)			(3,894	)
Other income (expense):
Gain on debt settlement			-				15
Gain (loss) on warrant liability			3,319				(1,873	)
Gain (loss) on foreign currency transactions			21				(7	)
Other income			128				44
Interest expense			(3,535	)			(2,314	)
Total other income (expense), net			(67	)			(4,135	)
Net loss			(7,882	)			(8,029	)
Less: Net income attributable to the non-controlling interest			157				609
Net loss attributable to Sebring Software, Inc.'s common stock		$	(8,039	)		$	(8,638	)
Net loss per share attributable to Sebring Software Inc.'s common stock - basic and diluted		$	(0.12	)		$	(0.15	)
Weighted average shares outstanding-Basic and Diluted			68,306,391				58,148,914

 

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

 

 

Sebring Software, Inc.

Statement of Changes in Equity (Deficit)

For the Years Ended December 31, 2014 and 2013

 

(in thousands except share data)

 

		Common Stock issued or to be issued								Additional Paid-in				Accumulated				Total Stockholders’				Non-Controlling				Total Equity
		Shares				Amount				Capital				Deficit				Deficit				Interest				(Deficit)
Balance, December 31, 2012			48,822,146			$	5			$	2,161			$	(8,754	)		$	(6,588	)		$	-			$	(6,588	)
Sale of common stock			1,888,889				1				342				-				343				-				343
Common stock issued for interest			63,145				-				7				-				7				-				7
Common stock to be issued for compensation			1,055,000				-				364				-				364				-				364
Issuance of original issue discount notes			147,970				-				246				-				246				-				246
Common stock issued for services			860,000				-				377				-				377				-				377
Common stock issued for loan costs			124,851				-				69				-				69				-				69
Stock issued for acquisition of dental practices			9,849,220				1				3,840				-				3,841				2,068				5,909
Sale of common stock to related party			3,875,968				-				1,000				-				1,000				-				1,000
Payment received, note receivable, non-controlling interest			-				-				-				-				-				103				103
Payments to non-controlling interest equity holders			-				-				-				-				-				(609	)			(609	)
Acquisition of non-controlling interest			-				-				(7	)			-				(7	)			(276	)			(283	)
Issuance of penalty warrants			-				-				36				-				36				-				36
Net loss for 2013			-				-				-				(8,638	)			(8,638	)			609				(8,029	)
Balance, December 31, 2013			66,687,189				7				8,435				(17,392	)			(8,950	)			1,895				(7,055	)
Common stock issued for compensation			638,750				-				184				-				184				-				184
Sale of common stock to related party			1,550,388				-				400				-				400				-				400
Payment received, note receivable, non-controlling interest			-				-				-				-				-				55				55
Payments to non-controlling interest equity holders			-				-				-				-				-				(34	)			(34	)
Issuance of penalty warrants on notes payable			-				-				34				-				34				-				34
Net loss for 2014			-				-				-				(8,039	)			(8,039	)			157				(7,882	)
Balance, December 31, 2014			68,876,327			$	7				9,053				(25,431	)			(16,371	)			2,073				(14,298	)

 

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

 

 

Sebring Software, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Year Ended December 31, 2014 and 2013

 

(in thousands except share data)

 

		2014				2013
Cash flows from operating activities:
Net loss attributable to Sebring Software, Inc.		$	(8,039	)		$	(8,638	)
Adjustments to reconcile net loss to net cash used in operating activities:
Net loss attributable to non-controlling interest			157				609
Loss on disposal of fixed assets			-				7
Depreciation			799				445
Provision for bad debts			347				232
Common stock issued for services			-				377
Common stock issued for compensation			184				364
(Gain) loss on warrant liability			(3,319	)			1,872
Gain on debt settlements			-				(7	)
Amortization of loan costs			864				426
Amortization of customer relationships			2,238				1,047
Amortization of debt discount			276				398
Issuance of penalty warrants in conjunction with notes			34				37
Impairment of goodwill and long-lived assets			3,079				-
Changes in assets and liabilities:
Prepaid expenses			95				(92	)
Patient Receivables			(216	)			(114	)
Deposits			(68	)			(5	)
Accounts payable and accrued liabilities			883				377
Accrued interest payable			1,801				835
Deferred revenue			795				416
Other non-current liabilities			(348	)			-
Net cash used in operating actives			(438	)			(1,414	)
Cash flows from investing activities:
Payments for business acquisition			(675	)			(3,282	)
Proceeds from business acquisition			-				392
Due from related parties			(215	)			(204	)
Purchase of furniture and equipment			(345	)			(520	)
Net cash used in investing activities			(1,235	)			(3,614	)
Cash flows from financing activities:
Loan closing costs			-				(2,837	)
Payment of consultant liability			(683	)			(411	)
Proceeds from issuance of common of stock			400				1,342
Proceeds from issuance of term note payable			900				15,000
Proceeds from equipment loans			307				200
Contributions of non-controlling interest			55				103
Payment of lease obligation			(90	)			(141	)
Distributions to non-controlling interest			(33	)			(609	)
Repayment of notes payable			(1,009	)			(5,877	)
Proceeds provided by financing activities			(153	)			6,770
Net increase in cash			(1,826	)			1,742
Cash, beginning of period			1,826				84
Cash, end of period		$	-			$	1,826
Supplemental Cash Flow Information:
Interest paid		$	1,180			$	1,082
Taxes paid		$	-			$	-
Supplemental Non-Cash Investing and Financing Activities:
Exchange of accrued interest for debt		$	-			$	578
Common stock issued for accrued interest		$	-			$	7
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		$	-			$	1,086
Warrants issued as debt discount		$	-			$	1,494
Payments made to acquire dental practices		$	-			$	3,282
Common stock issued in acquisition			-				3,841
Note payable issued to the seller			-				3,306
Consultant liability			-				3,392
Purchase Price		$	-			$	14,361
Less: assets acquired			-				(25,884	)
Plus: liabilities and non-controlling interest			-				11,914
Proceeds received in dental practices acquisition		$	-			$	392

 

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

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

1. NATURE OF BUSINESS AND ORGANIZATION

 

Nature of Business - Sebring Software, Inc. and Subsidiaries ("the Company", "us", "we", "our") 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. The Company currently operates thirty-seven Practice locations in the states of Florida and Arizona. The Practices were obtained through a combination of acquisition and organic growth in order to boost revenues while instilling best practice management infrastructure to increase profitability of the Practices. 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.

 

The Company had been in the development stage through March 31, 2013. However, through the acquisition of operations as described in Note 3 "Business Acquisitions" the Company has operating revenue and is no longer in the development stage.

 

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 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 as fully described in Note 3.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GOING CONCERN

 

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. The Company has exclusive responsibility for the provision of all non-dental services required for the day-to-day operation and management of the Practices and establishes the guidelines for the employment and compensation of the physicians. In addition, the agreements provide that the Company has the right, but not the obligation, to purchase, or to designate a person(s) to purchase, the stock of the Practices for a nominal amount. Separately, in its sole discretion, the Company has the right to assign its interest in the agreements. Based upon the provisions of these agreements, the Company has determined that the Practices are variable interest entities and that the Company is the primary beneficiary as defined in the accounting guidance for consolidation. All significant intercompany and interaffiliate 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 valuation of business combination purchase price, fair value valuation of assets acquired and liabilities assumed in business combinations, valuation of patient receivables, amortization period 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.

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

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.

 

Cash Equivalents - Cash equivalents are defined as all highly liquid financial instruments with maturities of 90 days or less from the date of purchase.

 

Patient Receivable - Patient receivables result primarily from the Company's general and cosmetic dental practices and are reported at the customers’ outstanding balances, less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable. The allowance for doubtful accounts is determined primarily on the age and payment history of past due accounts.

 

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. Estimated useful lives are generally three to seven years for medical equipment, computer equipment, software and furniture; and the lesser of the useful life or the remaining lease term for leasehold improvements and capital leases. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is included in earnings.

 

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 retrospectively in the consolidated financial statements of the subsequent period.

 

Goodwill and Other Intangible Assets - The Company records acquired assets and assumed 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 is a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If this step indicates potential impairment, the Company continues on to step two. The Company has the unconditional option to bypass step one and start their analysis at step two. The second 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.

 

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.

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

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.

 

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.

 

Fair Value of Financial Instruments - 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.

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

Revenue Recognition - Revenues are earned from dental, primarily orthodontic, services provided to patients in approximately thirty-seven 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 at a value net of refunds and other adjustments. Amounts collected in excess of amounts earned are recorded as deferred revenue liability.

 

Revenue earned form general and cosmetic dental practices are recorded on a fee for service basis at the time the services are performed.

 

Advertising - The Company’s advertising efforts consist primarily of direct response programs that are web based or through local publications. Advertising costs are expensed as incurred.

 

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 $8.0 million of which $3.1 million was due to a write down of goodwill and intangible assets, net cash used in operations of approximately $438,000 for the year ended December 31, 2014, a working capital deficit of $20.1 million, a total deficit of $14.3 million and an accumulated deficit of $25.4 million at December 31, 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 $17.0 million in principal and $3.3 million in accrued interest as of December 31, 2014. The Company is working with its creditors and potential investors to restructure its debt and provide financing to fund expansion through acquisition of additional dental practices, however as of the date of the report there are no such agreements in place.

 

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.

 

Reclassifications - Certain 2013 other direct dental expenses and indirect dental expenses have been reclassified to conform to the 2014 presentation. These reclassifications had no net effect on Net Loss for 2013.

 

Foreign Currency Transactions - Gains and losses resulting from foreign currency transactions are included in the statement of operations as other income (expense).

 

3. BUSINESS ACQUISITIONS

 

The Company executed several business acquisitions during the year ended December 31, 2013.

 

On April 25, 2013, the Company and its subsidiary, Sebring Management FL, LLC (the “SM FL”), entered into an Agreement and Plan of Merger (the “OSM Agreement”) with Orthodontic Specialists Management, LLC (“OSM”) and Alan D. Shoopak D.M.D. (“Shoopak”) and Dennis J.L. Buchman D.M.D. (“Buchman”). Under the terms of the OSM Agreement, OSM merged with and into the SM FL and the separate existence of OSM ceased (the “Merger”). In consideration of the Merger, the Company issued 9,849,220 shares of its restricted common stock, of which 4,924,610 were issued to Shoopak and 4,924,610 were issued to Buchman. The OSM acquisition includes thirty-one orthodontic practices located in Florida - and Alan D. Shoopak, D.M.D. Orthodontic Group, P.A. (OG PA).

 

Additionally, in conjunction with the OSM Agreement, the Company entered into consulting agreements with Alan D. Shoopak, DMD, P.L., a Florida limited liability company (“Shoopak’s LLC”) and with Dennis J. L. Buchman, DMD, P.L., a Florida limited liability company (“Buchman’s LLC”) (together, the “Consulting Agreements”). The Consulting Agreements are for a term of three (3) years, and automatically renew for an additional two (2) years unless otherwise terminated under the terms of the Consulting Agreements.

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

Under the terms of the consulting agreements, Shoopak’s LLC and Buchman’s LLC shall provide advice to the Company regarding clinical issues and dental practice related matters. Further, Shoopak’s LLC and Buchman’s LLC shall attempt to identify new dental practice business management relationships and shall identify dental practices that may have an interest in entering into arrangements whereby the Company will manage the non-professional business aspects of such dental practices. In consideration for the services performed under the Consulting Agreements, Shoopak’s LLC shall receive an annual fee of approximately $550,000 for five years paid in equal monthly installments, and Buchman’s LLC shall receive an annual fee of $450,000, paid in equal monthly installments for five years. 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 $3,932,010 at the acquisition date. As of December 31, 2014, the remaining consultant liability totals approximately $2.8 million. Of this amount, approximately $754,000 is reflected as a current liability at December 31, 2014.

 

The merger described above with SM FL was accounted for as a business combination. The value of the 9,849,220 shares issued as merger consideration was based on the closing price of the stock as of the date of the closing, April 26, 2013, of $0.39 per share which yielded an approximate value of $3.8 million combined with the present value of the amounts payable under the consulting arrangements of approximately $3.9 million results in a fair value of the total consideration transferred of approximately $7.7 million.

 

In connection with the acquisition of OSM, the Company recognized the following amounts of identifiable assets acquired and liabilities assumed (in thousands):

 

Financial assets		$	372
Fixed assets			2,790
Identifiable intangible assets (Customer relationships)			11,000
Other assets			20
Financial liabilities			(5,311	)
Deferred revenue			(1,705	)
Deferred tax liability			(2,147	)
Total identifiable net assets			5,019
Non-controlling interest			(2,067	)
Goodwill			4,821
Total purchase price		$	7,773

 

The non-controlling interest (“NCI”) obtained in the OSM acquisition relates to certain Practice entities. The fair value of the non-controlling interest was estimated based on underlying contractual arrangements and non-contractual understandings (as indicated by the Practice’s managing member) of the amount that would be required to acquire such interest and was determined based primarily on historical cash basis revenues. The fair value of deferred revenue was estimated based on the estimated costs of the related performance obligation taking into consideration a normal profit margin that would be expected by a market participant.

 

Subsequent to the acquisition and during the measurement period, the Company revised its estimated cost of this performance obligation downward by approximately $480,000 and identified additional financial liabilities assumed in the amount of approximately $160,000. This resulted in a net reduction of approximately $320,000 in the amount of goodwill initially recorded.

 

Also on April 25, 2013, the Company’s subsidiary, AAR Acquisition, LLC (“AAR”) entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Byron J. Larsen, Jennifer Iacobelli, Mitchell W. Ellingson, Kathryn Ellingson, MEBL Dental Management, P.C., Byron J. Larsen, DDS, PLLC, Image Dentistry of Glendale, P.C., Image Dentistry of Peoria, P.C., and Dentelli Corp. (the “Image”). Under the terms of the Asset Purchase Agreement, AAR acquired for $400,000 in cash all of the property and assets of Image used in the dental practice. Image shall retain and be responsible for all liabilities, debts, obligations and expenses of the Practice incurred prior to the date of Closing. AAR shall be responsible for liabilities, debts, obligation and expenses of the Practice accruing on or after the Closing Date. This acquisition was accounted for as a business combination.

 

The AAR purchase price was allocated to record identifiable assets and liabilities at fair value as follows (in thousands):

 

Fixed assets		$	213
Other assets			256
Accounts payable and accrued liabilities			(69	)
Total purchase price		$	400

 

During December of 2013, the Company obtained financial control of four additional dental practices. Three of the practices are located in Florida and the fourth in Arizona. These acquisitions have been accounted for as business combinations.

 

On December 27, 2013, the Company’s subsidiary, Sebring Management FL, LLC (SMFL), and Alan D. Shoopak, D.M.D. Orthodontic Group, P.A. (OG PA) (collectively the “Buyers”) entered into Asset Purchase Agreements (“Asset Purchase Agreements”) with Jan A. Simon, D.D.S. and Simon Orthodontic Centers, P.A. (collectively "Simon") and with Hani "Sam" Tadros, D.D.S. and Implant, General & Cosmetic Dentistry of Tampa Bay, P.A. ("Tadros"). Under the terms of the Asset Purchase Agreements, Simon & Tadros agree to sell and the Buyers agree to purchase all of the undertaking, property, and assets of the Seller used in the Seller's dental practice as a going concern, of every kind and description. Simon & Tadros retain and are responsible for all liabilities, debts, obligations and expenses of their respective Practices incurred prior to the Closing Date. Buyer shall be responsible for liabilities, debts, obligation and expenses of the Practice accruing on or after the Closing Date. The aggregate purchase price for the Assets is approximately $4.2 million, including cash of approximately $2.9 million and Notes Payable totaling approximately $1.3 million.

 

The purchase price was allocated to record identifiable assets and liabilities acquired from Simon & Tadros at fair value as follows (in thousands):

 

		Simon				Tadros
Financial assets		$	-			$	3
Fixed assets			328				75
Identifiable intangible assets (Customer relationships)			3,834				539
Deferred revenue			(612	)			-
Total purchase price		$	3,550			$	617

 

On December 31, 2013, the Company’s subsidiary, Sebring Dental of Arizona, LLC ("SDA”), entered into an Asset Purchase Agreement with North Scottsdale Family Dentistry, PLLC, Dr. Steven H. Poulos, and Dr. Sid S. Stevens (collectively “Scottsdale”). Under the terms of the Asset Purchase Agreement, Scottsdale agreed to sell and SDA agreed to purchase all of the assets of Scottsdale's dental practice. The aggregate purchase price for the assets is approximately $2 million, including cash of approximately $675 thousand and a Note Payable of approximately $1.4 million.

 

The purchase price was allocated to record identifiable assets and liabilities acquired from Scottsdale at fair value as follows (in thousands):

 

Financial assets		$	93
Fixed assets			200
Identifiable intangible assets (Customer relationships)			1,732
Total purchase price		$	2,025

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

The acquisitions were made in order to enter the business of dental practice and dental practice management. The acquisitions include 34 orthodontic offices located in Florida and four general dental offices located in Arizona and Florida. The goodwill of $4.8 million arising from the acquisitions consists largely of the synergies and expected costs savings from economies of scale expected from combining the operations of the Company and the Practices. None of the goodwill is expected to be deductible for tax purposes. Identifiable intangible assets consist primarily of Customer Relationships and are being amortized over their estimated lives of seven years for orthodontic practices and fifteen years for dental practices. Total amortization expense recognized for the year ended December 31, 2014 and 2013 was approximately $2.24 million and $1.05 million, respectively.

 

Acquisition costs of approximately $1.1 million were incurred and expensed and are included as a component of general and administrative expenses in the consolidated statements of operations for the period ended December 31, 2013.

 

 

The amounts of actual revenues and net losses from the acquired entities included in the Company’s consolidated statement of operations as of December 31, 2013, and the unaudited supplemental pro forma revenues and net income (loss) of the combined entity that give effect to the acquisitions had they occurred January 1, 2013 are as follows (in thousands):

 

		(Unaudited)
		Revenues				Net Income (Loss)
Acquired Entities actual for the year ended December 31, 2013		$	9,206			$	(425	)
Supplemental unaudited consolidated pro forma information for the year ended December 31, 2013		$	21,227			$	(5,802	)

 

In preparing the unaudited pro forma information, various assumptions were made, and the Company does not purport this information to be indicative of what would have occurred had the acquisitions been made as of January 1, 2013, nor is it indicative of the results of future combined operations.

 

4. FURNITURE, EQUIPMENT AND VEHICLES

 

Furniture, equipment and vehicles consisted of the following at December 31 (in thousands):

 

		2014				2013
Furniture and Fixtures		$	457			$	452
Vehicles			96				96
Dental Equipment			2,700				2,469
Computers and phone systems			788				749
Leasehold Improvements			463				134
Construction in progress			11				269
Furniture , Equipment and Vehicles			4,515				4,169
Accumulated Depreciation			(1,265	)			(465	)
Furniture, equipment and vehicles, net		$	3,250			$	3,704

 

Depreciation expense for the year ended December 31, 2014 was approximately $799,000 and approximately $445,000 for the year ended December 31, 2013. Included above are phone systems under capital leases with a net book value at December 31, 2014 of approximately $199,000.

 

5. DUE FROM RELATED PARTIES

 

The Company has paid amounts totaling approximately $137,000 at December 31, 2014 that are obligations of sellers in the AAR Acquisition and approximately $14,000 to other related parties.

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

Additionally, the Company has advanced amounts totaling approximately $351,000 to an entity to which it provided dental practice management services. 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. The matter is in arbitration. (See Note 8)

 

The Company has established an allowance in the amount of approximately $447,000 at December 31, 2014 related to these amounts due from related parties.

 

6. GOODWILL AND CUSTOMER RELATIONSHIPS

 

Goodwill

 

The company recorded approximately $4,800,000 in Goodwill in conjunction with the OSM acquisition in April 2013. Goodwill was reduced by approximately $2,200,000 in the second quarter of 2014 primarily due to the Company’s determination that it is unlikely that the deferred tax liability assumed with the OSM acquisition would be realized, and recorded an increase in its valuation allowance to reduce the net book value of the deferred tax liability to $0.

 

The remaining Goodwill was measured and upon determining that impairment existed the Company recorded an impairment write-down of approximately $2.6 million in the second quarter of 2014.

 

Customer relationships

 

The Company recorded approximately $17.1 million of customer relationships of the acquired dental practices as an intangible asset during the year ended December 31, 2013. They are amortized over their estimated useful lives of 7 years for orthodontic practices and 15 years for dental practices. Amortization expense for the customer relationships was approximately $2.2 million and $1.0 million for the years ended December 31, 2014 and 2013, respectively.

 

In 2014 the operating results of the acquired practices indicated that impairment of certain customer relationships may exist. Accordingly, the Company measured its customer relationships for impairment as of December 31, 2014. Upon determination that impairment existed a write-down of approximately $483,000 was recorded in the fourth quarter.

 

 

 

7. NOTES PAYABLE AND LONG-TERM DEBT

 

Note payable and long-term debt consist of the following at December 31 (in thousands):

 

		2014				2013
Term Loan		$	14,025			$	14,588
Convertible notes payable			5,165				5,185
Equipment & vehicle notes payable			443				283
Other notes payable			1,199				588
Total borrowings			20,832				20,644
Less: Debt discount, net of interest amortization			(1,015	)			(1,291	)
Total borrowings, net of debt discount			19,817				19,353
Less: Related party notes payable			4,191				3,580
Total borrowings, net of related party notes			15,626				15,773
Less: Current portion of long term debt			6,606				4,012
Notes payable, net of current portion		$	9,020			$	11,761
Total related party notes		$	4,191			$	3,580
Less: Current portion of related party notes			2,015				1,025
Related party notes, net of current portion		$	2,176			$	2,555

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

Term Loan

 

On April 25, 2013, the Company and its subsidiaries, Sebring Dental of Arizona, LLC, AAR Acquisition, LLC, and Sebring Management FL, LLC (the “Guarantors”) entered into a Loan and Security Agreement (the “Loan Agreement”) with Great American Life Insurance Company, United Teachers Associates Insurance Company, Continental General Insurance Company (the “Lenders”) and MidMarket Capital Partners, as agent for the Lenders. Under the terms of the Loan Agreement, the Lenders agreed to loan the Company Sixteen Million Dollars ($16,000,000) in two separate tranches (the “Term Loan”). The first tranche of the Term Loan of Eleven Million Dollars ($11,000,000) was funded on the closing date of the Loan Agreement and the second tranche of Five Million Dollars ($5,000,000) shall be funded upon the Company’s written request in accordance with section 3.2(A) of the Loan Agreement. The obligation of Lenders to fund the second tranche of the Term Loan expired on May 25, 2013.

 

On December 27, 2013, the Company entered into the First Amendment, Consent and Waiver (the "Amendment") to the Loan Agreement. Under the terms of the Amendment, the Lenders agreed to (i) consent to the December 2013 acquisitions, (ii) waive the identified Events of Default, (iii) extend the second tranche to (a) pay the related transaction costs of the December 2013 acquisitions and (b) fund a portion of the purchase price of said acquisitions in the amounts of $4 million, (iv) certain modifications to terms and provisions of the Loan Agreement.

 

Interest accrues 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 percent per annum. Interest payments on all outstanding principal shall be payable quarterly in arrears on the last day of each quarter. In accordance with the terms of the notes, quarterly principal payments of $112,500, 281,250 and $281,250 along with accrued interest have been made through March 31, 2014. Beginning on June 30, 2014, the quarterly principal payments increased to $375,000 per quarter. Beginning on June 30, 2015, the quarterly principal payments will increase to $750,000 per quarter. Beginning on June 30, 2017, the quarterly principal payment will 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 had not made the principal or interest payments due on June 30, 2014, September 30, 2014, December 31, 2014 or March 31, 2015. Accordingly, at December 31, 2014 the note is considered in default for the unpaid principal balance of $14,025,000 and accrued interest of $1,375,425. The Company is actively working with the lender and other parties to restructure its debt and equity however no specific actions have yet been determined.

 

Under a “Collateral Assignment of Rights Under Purchase” agreement, Sebring Software, Inc. (assignor) assigned to the lender as security, all its rights, power and privileges under the Purchase Agreements relating to the subsidiaries. Under a “Guaranty and Suretyship Agreement” the subsidiaries, Sebring Management of FL, LLC, AAR Acquisition, LLC and Sebring Dental of Arizona, LLC guarantee payment under the Loan and Security Agreement. Under pledge agreements made by Sebring Software, Inc., they pledge all the equity interest in the subsidiaries to the lenders and under another pledge agreement, Sebring Dental of Arizona, LLC pledges its equity interest in AAR Acquisition, LLC to the lender. Additionally, the Lenders received an aggregate of 5,987,340 warrants exercisable at $0.01 per share (the “Warrants”). The Warrants, which expire on April 25, 2023, have a put right where the Holder shall have the right, but not the obligation, to put some or all of the Warrants or the Warrant Shares to the Company upon the earliest to occur of (a) the second anniversary of the Original Issue Date, (b) an event constituting an Event of Default, (c) a Change of Control, or (d) the sale, liquidation or other disposition of the whole or a significant portion of the assets of, or equity in, the Company. The put price per Warrant Share shall be the greater of (i) the Minimum Put Price or (ii) the Fair Market Value of the Warrant Shares issuable upon exercise of this Warrant less the Exercise Price payable upon the exercise of the unexercised portion of this Warrant being put and if the Put Option is being exercised following a Change of Control, the highest price paid per share of Common Stock transferred in the Change of Control transaction less the Exercise Price payable upon the exercise of the unexercised portion of this Warrant being put. In the event of a reorganization, the Put Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Put Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Put Price then in effect. As a result of this put feature, the warrant is classified as a liability that must be re-measured at each reporting period with the change in fair value reflected in the statement of operations.

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

The fair value of the warrants issued to the Lender was calculated using the Black Scholes pricing model. The total value of the warrants on the original issuance date was calculated at approximately $1.5 million and is initially recorded as a debt discount and warrant liability with the debt discount to be amortized over the debt term. Approximately $276,000 and $200,000 of this debt discount was amortized as interest expense in the years ended December 31, 2014 and 2013.

 

The First Amendment to the Loan Agreement waived certain identified covenant violations that had occurred prior to December 27, 2013 and established new financial covenants including Minimum Liquidity, a limit on Capital Expenditures, Fixed Charge Coverage Ratio, Total Debt Leverage Ratio, Senior Debt Leverage Ratio and Interest Coverage Ratio. At December 31, 2014, the Company was not in compliance with all such financial covenants.

 

The Company incurred approximately $4.3 million in loan costs consisting of cash in the amount of approximately $3,213,000 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 years ended December 31, 2014 and 2013, approximately $864,000 and $434,000 was recorded as amortization expense, respectively.

 

Convertible Notes Payable

Convertible notes payable includes several past due notes totaling approximately $2,634,000 and approximately $1,807,000 in accrued but unpaid interest which are currently in default subject to notification by the lenders..

 

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.

 

Approximately $3.2 million of the Convertible Notes Payable are with related parties.

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

The following summarizes the Convertible Notes Payable as of December 31:

 

		2014				2013
Convertible notes payable to related and unrelated parties bearing interest at a rate of 12%, principal is payable on March 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.  Since the Company failed to register the warrant shares on or before June 1, 2011, the lender is 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, capped at 10%.  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. The Public Event occurred on October 25, 2010 and on May 1, 2011 the notes became convertible at a price of $1.72 or a lesser price based on any equity financing. See Public Event below. During the year ended December 31, 2012 the Company repaid $21,920 of principal on these loans. During 2013, the $21,920 was re-invested and the Company repaid another $20,000 of principal on these loans.  As of December 31, 2014, the Company had not received any Notification of Default from any holders of these notes and therefore was not technically in default.		$	1,255,638			$	1,275,638

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

Convertible notes payable issued to related and unrelated parties in January and February 2011 for $200,000 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.  Since the Company failed to register the warrant shares on or before June 1, 2011, the lender is 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, capped at 10%.  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. The Public Event occurred on October 25, 2010 and on May 1, 2011 the notes became convertible at a price of $1.72 or a lesser price based on any equity financing. Although the Company has not made any principal payments as of December 31, 2014, the Company had not received any Notification of Default from any holders of these notes and therefore was not technically in default.			200,000				200,000
Convertible notes payable bearing interest at a rate of 12%. Principal payable on June 30, 2009.  Interest payable every six months.  The note and accrued interest are convertible at 75% of the price per share paid by investors in the next equity financing and such conversion rights will expire 60 days after such equity financing.  The holder also has the right to 100% warrant coverage with an exercise price of 110% of the next $4 million equity round. Although the Company has not made any principal payments as of December 31, 2014, the Company had not received any Notification of Default from any holders of these notes and therefore was not technically in default.			40,000				40,000
Convertible notes payable bearing interest at a rate of 12%.  Principal payable in September 2010.  Interest payable every six months.  Note is convertible at 75% of the price per equity interest paid by investors in the next equity financing and such conversion rights will expire 60 days after such equity financing.  The holder also has the right to 100% warrant coverage with an exercise price of 110% of the next $4 million equity round.  Although the Company has not made any principal payments as of December 31, 2014, the Company had not received any Notification of Default from any holders of these notes and therefore was not technically in default.			100,000				100,000

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

On April 25, 2013 the Company restructured the past due convertible 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, effective one year after the maturity date 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 date such shares became due and payable.			998,666				998,666
Convertible notes payable to a related party bearing interest at a rate of 12%. Principal payable on March 1, 2013.  Interest payable quarterly.  The note and any accrued and unpaid interest are convertible at 75% of the price per share paid by investors in the next equity financing. The holder also has the right to 100% warrant coverage with an exercise price of 110% of the next $4 million equity round. The Company had not received any Notification of Default from any holders of these notes and therefore was not technically in default.			40,000				40,000
In connection with the Scottsdale acquisition on December 31, 2013, the Company issued a convertible promissory note in the amount of $1,350,000 to the sellers. The note bears interest at 6.25% and the entire unpaid principal and accrued but unpaid interest shall be due and payable on December 31, 2016 unless earlier converted by the holder into shares of common stock of Sebring. Upon a "Public Offering", the holder may elect to convert any or all of the unpaid principal and accrued but unpaid interest into shares of Sebring's common stock at a 25% discount to the "Offering Price". Public Offering means the first public offering of Sebring's common stock under the Securities Act of 1933 following the issue date. Offering Price is the price per share of common stock paid by the underwriter to Maker for the shares sold to the underwriter in the Public Offering.			1,350,000				1,350,000
In connection with the Simon acquisition on December 27, 2013, the Company issued a convertible promissory note in the amount of $925,000 to the sellers. The note bears interest at 7.0% and unless prior to the first anniversary of this note a Public Offering has occurred, then on the first anniversary and quarterly thereafter until the earlier of the Maturity Date or the date that a Public Offering occurs, principal payments of $70,083 are due and the entire unpaid principal and accrued but unpaid interest shall be due and payable on December 27, 2016 (the "Maturity Date"), unless earlier converted by the holder into shares of common stock of Sebring. To the extent that a "Public Offering" closes on or before December 27, 2014, all of the unpaid principal and accrued but unpaid interest shall automatically convert into shares of Sebring's common stock at the "Offering Price". To the extent that a Public Offering does not close on or before December 27, 2013 but a Public Offering closes before December 27, 2016, the Holder may elect to convert all of the unpaid principal and accrued but unpaid interest into Sebring's common stock at the Offering Price.			925,000				925,000
In connection with the Tadros acquisition on December 27, 2013, the Company issued a convertible promissory note in the amount of $255,594 to the sellers. The note bears interest at 6.0% and unless prior to the first anniversary of this note a Public Offering has occurred, then on the first anniversary and quarterly thereafter until the earlier of the Maturity Date or the date that a Public Offering occurs, principal and interest payments of $32,406 are due and the entire unpaid principal and accrued but unpaid interest shall be due and payable on December 27, 2016 (the "Maturity Date"), unless earlier converted by the holder into shares of common stock of Sebring. To the extent that a "Public Offering" closes on or before December 27, 2014, all of the unpaid principal and accrued but unpaid interest shall automatically convert into shares of Sebring's common stock at the "Offering Price". To the extent that a Public Offering does not close on or before December 27, 2013 but a Public Offering closes before December 27, 2016, the Holder may elect to convert all of the unpaid principal and accrued but unpaid interest into Sebring's common stock at the Offering Price.			255,594				255,594
		$	5,164,898			$	5,184,898

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

Equipment and vehicle notes payable

 

In connection with the OSM 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 of 2015 and has a balance at December 31, 2014 of approximately $21,000. At December 31, 2014, the Company has installment notes payable in the aggregate amount of approximately $422,000. These notes bear interest at rates ranging from 3.5% to 10.4%, are secured by the equipment, leasehold improvements and vehicles, and require monthly payments of varying amounts through 2018.

 

Other notes payable

 

Other notes payable includes several unsecured past due notes totaling $165,000 in principal at December 31, 2014 and 2013 with interest payable at rates ranging from 10% to 12%. Although the Company has not made any principal payments as of December 31, 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 December 31, 2014.

 

Other notes payable at December 31, 2014 includes notes issued to related parties as follows:

 

In connection with the OSM merger, the Company assumed a 6.5% note payable in the amount of $120,288 to a holder of a non-controlling interest. The note requires monthly payments of approximately $4,600 through July of 2015. The balance of the note at December 31, 2014 was $21,522.

 

In the third quarter of 2013, the Company issued a 5.25% note payable in the amount of $254,784 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 $11,206 through July of 2015. The balance of the note at December 31, 2014 was $77,089.

 

In connection with the Tadros acquisition, the Company issued a 6.25% note payable in the amount of $100,000 to the seller. The note requires monthly payments of $8,618 through December of 2014. The note was paid in full in 2014.

 

In December 2012 the Company issued notes which resulted in the recording of a debt discount and an original issue discount totaling $195,333 that was to be amortized through the notes maturity date of May 31, 2013. During the year ended December 31, 2013 the notes were repaid and the entire $195,333 was amortized to interest expense.

 

During the year ended December 31, 2013 the Company repaid a total of $2,163,031 of principal on outstanding notes and $144,926 of accrued interest to holders of the Company’s notes in accordance with various settlement agreements. In instance where settlement agreements resulted in payments that differed from the previously recorded amounts, the Company accounted for the difference as a gain or loss on settlement of debt. Accordingly, the Company recorded a Gain on Settlement of Debt of $14,515. In addition, on January 2, 2013 the Company issued 63,145 shares of the Company’s common stock to an investor in lieu of payment of $7,265 of interest on a note that had accrued to that date. The shares were valued at $0.115 per share which was the fair value based on the quoted trading price on the date of issuance.

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

As of December 31, 2014, the required principal payments of long-term debt for each of the following five years are as follows

(in thousands):

 

2015		$	8,903
2016			3,925
2017			6,976
2018			981
2019			47
Total		$	20,832

 

8. 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 introduced by the financial advisor that is closed by the Company during the term and for a period of one year following cancellation or expiration of the agreement. This agreement has 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 the date of this report.

 

Lender Contingency - Under a note issued on April 25, 2013 for $998,666 a lender is granted a 1% equity interest on issued and outstanding equity interests for each 120 days (maximum of 4 issuances) that any amount of the note remains outstanding. This penalty provision is effective one year after the maturity date of April 25, 2014.

 

Management Agreements - The Company has management contracts with four 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 $852,000 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 to be distributed to the employees in equal installments over periods ranging from two to five years. As of December 31, 2014 1,030,000 shares have been issued or are issuable under these agreements.

 

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 December 31, 2014, the remaining consultant liability totals approximately $2.8 million. Of this amount, approximately $754,000 is reflected as a current liability at December 31, 2014.

 

Service Agreement – As part of the Simon acquisition the Company assumed an existing service agreement with a third party to provide certain software, payroll and other management services for the Simon practices. The agreement is through June 2018 and has a monthly fee of $25,000.

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

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 shareholders if such warrants are exercised.

 

Legal Matters – In January 2015 a lawsuit was initiated against the Company in the Supreme Court of the State of New York, County of New York whereby an investor relations consultant claims he is owed stock compensation under a May 7, 2010 consulting agreement. The agreement describes 800,000 shares of common stock to be issued as compensation to the consultant along with $40,000 cash due upon signing of the agreement, An additional cash payment of $34,500 was due on May 21, 2011. Management asserts that no services were performed and no shares or other compensation is due to the consultant. In March 2015 the Company filed a pre-answer motion to dismiss the action for lack of personal jurisdiction. 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 December 31, 2014.

 

In 2013 a subsidiary of the Company, Sebring Dental of Arizona (SDA) entered into an agreement to manage the dental practice of a third party. In August 2014, under the provisions of the agreement, SDA terminated its relationship with the practice. The owner of the practice demanded an arbitration to recover damages alleged to have resulted from the termination. The Company considers this damage claim to be without merit, and has initiated a counterclaim to recover amounts due to SDA for services performed under the terms of the agreement. The matter is currently in the initial stages of arbitration. 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 December 31, 2014.

 

Leases

 

Office leases

Our subsidiary in Florida leases office space for their headquarters (Clearwater, FL) and for the Practices. 5 of the Practices are in facilities leased from related parties. The leases expire at various times through 2023.

 

Rent expense was approximately $2,559,000 and $1,360,000 for 2014 and 2013, respectively, of which $337,000 and $57,000, respectively, was for the related party leases.

 

Future minimum lease payments as of December 31, 2014 are as follows (in thousands):

 

		Amount
2015		$	1,971
2016			1,541
2017			1,272
2018			1,159
2019			774
Thereafter			1,265
Total		$	7,982

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

Equipment Leases

The Company also has several leases for its telephone systems related to the Practices that are classified as capital leases. Future payments required under the lease are as follows (in thousands):

 

2015		$	93
2016			16
2017			14
2018			3
Total			126
Less amounts representing interest			12
Capital lease obligation			114
Less current portion			85
Long term capital lease obligation		$	29

 

9. EQUITY TRANSACTIONS

 

Common Stock Rights ("Rights") - In December 2012 the Company issued Rights in connection with the issuance of new and modified convertible promissory notes (see Note 5). Based on the terms of the Rights, the shares must be issued by the related convertible promissory notes maturity date of May 31, 2013. Management evaluated whether these Rights qualified as a liability under ASC 480 "Distinguishing Liabilities from Equity" but determined it did not since the fair value of the Rights varied based on various terms of the Rights. Management then evaluated whether these Rights should be treated as a derivative but determined it did not since due to the thinly trading stock and the restrictions of the underlying common stock, it did not meet the "readily convertible into cash" criteria under ASC 815 "Derivatives and Hedging". Accordingly, the Rights were presented as temporary equity at their redemption value of $246,500 in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin Topic 3C "Redeemable Preferred Stock". In May 2013, the Company repaid the original issue discount notes totaling $328,666 and issued the note holders 147,970 common shares under the Common Stock Rights provision of their note subscription agreement. All remaining discounts were expensed and the Common Stock Rights amount of $246,500 was reclassified to additional paid in capital.

 

Common Stock - During the years ended December 31, 2014 and 2013 the Company issued a total of 638,750 and 1,055,000 shares, respectively of restricted common stock to 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 $183,000 and $364,000, respectively as non-cash compensation expense for these shares.

 

In January 2014 the Company issued 387,597 shares to a related party for $100,000 or $0.258 per share.

 

In April 2014 the Company issued 1,162,791 shares to related parties for $300,000 or $0.258 per share.

 

On January 2, 2013 the Company issued 63,145 shares of the Company’s common stock to an investor in payment of $7,265 of interest on a note that had accrued to that date. The shares were valued at $0.115 per share which was the fair value based on the quoted trading price on the date of issuance.

 

In January 2013 the Company received $30,000 for issuing 300,000 shares of the Company’s common stock to an investor for $0.10 per share.

 

On February 13, 2013 the Company issued 277,778 shares of the Company’s common stock to an investor for $50,000 or $0.18 per share.

 

In March 2013 the Company issued 25,000 shares and 11,111 shares to an investor for $5,000 and $2,000 respectively. These shares were sold at $0.20 and $0.18 per share.

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

In April 2013 the Company raised $105,000 by issuing a total of 525,000 shares of the Company’s common stock to two investors at a price of $0.20 per share.

 

In May 2013 the Company issued an investor 750,000 share shares of the Company’s commons stock for $150,000. The shares were valued at $0.20 per share.

 

In December 2013 the Company issued 3,875,968 shares to a related party for $1,000,000 or $0.26 per share.

 

During 2013 the Company issued shares as follows for services:

 

Number of Shares				$ per share				Value of shares				Service Received
	50,000			$	0.39			$	19,500			Accounting services
	200,000			$	0.20			$	40,000			Investor related consulting
	360,000			$	0.50			$	180,000			Strategic Consulting
	250,000			$	0.55			$	137,500			Legal services

 

These transactions were recorded at the quoted trading price on the day of grant of the shares.

 

The Company issued a total of 9,849,220 shares as consideration for the OSM acquisition. These shares were valued at $0.39 per share on the closing date for a total of $3,841,196. The Company also issued 124,851 shares at $0.55 per share in payment of loan costs to a third party for work done in conjunction with the acquisition, for a total of $68,668. These transactions were valued at the quoted trading price on the day of issuance.

 

Non-controlling Interest

In connection with the OSM Agreement and through certain agreements that provide for a nominee shareholder, the Company obtained financial control of certain Practices consisting of eleven entities and thirty one locations. Five of these entities (thirteen locations) 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 in the accompanying consolidated financial statements.

 

The Company recorded the non-controlling interest at its estimated fair value of approximately $2,067,000. The amount of the Company's net income (loss) allocable to the NCI equity holders is based on the specific performance of their respective operating entity and is distributed to them on a quarterly basis. Additionally, during 2013 the Company acquired the non-controlling interest of one of the entities. This was accomplished through the issuance of a note payable and cash to the holder of the no controlling interest in the amount of approximately $283,000. This resulted in a loss of approximately $7,000 which was charged to additional paid in capital. Net income of approximately $157,000 in 2014 and $608,000 in 2013 was allocated and is distributable to the NCI equity holders.

 

10. 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 year ended December 31, 2014, during which the Company reported a net loss, 11,410,031 warrants and 1,695,728 shares issuable under conversion features of non-contingent convertible notes were excluded from the diluted loss per share computation as their effect would be anti-dilutive. For the year ended December 31, 2013, during which the Company reported a net loss, 11,366,417 warrants and 1,521,274 shares issuable under conversion features of non-contingent convertible notes were excluded from the diluted loss per share computation as their effect would be anti-dilutive. These common stock equivalents may dilute future earnings per share.

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

11. WARRANTS FOR COMMON STOCK AND WARRANT LIABILITY

 

At December 31, 2014 and 2013, the Company’s warrant liabilities had a fair value of approximately $1.1 million and $4.5 million, respectively.

 

The fair value for warrants issued were estimated at the date of issuance and the reevaluation dates according to the following range of assumptions:

 

Estimated fair value of underlying common stock			$0.20 - $0.53
Exercise price			$0.22 - $1.01
Expected life (years)			4.8 - 10
Risk-free interest rate			2.52	%
Expected volatility			295	%
Dividend yield			0	%

 

The activity in the warrant liability (a Level 3 classification in the fair value hierarchy) for the years ended December 31, 2014 and 2013 is as follows (in thousands):

 

Warrant liability-December 31, 2012		$	-
Additional liability due to new grants			2,579
Loss on change in fair market value			1,873
Warrant liability – December 31,2013			4,452
Additional liability due to new grants			-
Gain on change in fair market value			(3,319	)
Warrant liability-December 31, 2014		$	1,133

 

Changes in the fair market value of these warrant liabilities resulted in a gain of approximately $3,319,000 for the year ended December 31, 2014 and a loss of approximately $1,873,000 for the year ended December 31, 2013.

 

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.

 

Warrants without ratchet provisions:

 

As a result of requirements under the terms of previously issued convertible notes, the Company agreed to issue 43,614 warrants and 46,326 warrants, respectively to the note holders during the years ended December 31, 2014 and 2013. These five year warrants have an exercise price of $1.89 and were valued at $0.75 and $0.79 per warrant, respectively under calculations performed using the Black-Scholes pricing model and resulted in a charge to Additional Paid in Capital of $34,455 for 2014 and $36,598 for 2013.

 

In connection with the term loans during 2013, 5,987,340 five-year warrants were issued to the lenders with an exercise price of $.01. This was below the Company’s common stock market price and had a fair value at issuance of approximately $1,494,000, which was recorded as a debt discount to be amortized over the five-year loan term. 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, 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.

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

A summary of the Company’s warrant activity for warrants without ratchet provisions for the years ended December 31, 2014 and 2013 is presented below:

 

						Weighted				Weighted
						Average				Average
						Exercise				Remaining
		Warrants				Price				Life
Balance at December 31, 2012			652,170			$	1.89				3.83
Issued or Issuable			6,033,666			$	.02
Cancelled or Expired			-				-
Exercised			-				-
Outstanding at December 31, 2013			6,685,836			$	.14				9.10
Issued or issuable			43,614			$	1.89
Cancelled or expired			-				-
Exercised			-				-
Outstanding at December 31, 2014			6,729,450			$	.15				8.22
Exercisable at end of period			6,729,450			$	.15				8.22

 

At December 31, 2014 the intrinsic value of the outstanding warrants was approximately $718,000.

 

Warrants with ratchet provisions:

 

The Company issued five-year warrants during 2013 to purchase 4,680,581 shares of common stock, exercisable at a weighted average of $0.26 per share, to a loan placement agent. 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.

 

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.

 

Since these warrants were issued in connection with the term loan described in Note 7, they were recorded as loan issuance costs of approximately $1,086,000 to be amortized over the five year loan term on the interest method.

 

A summary of the Company’s warrant activity for warrants with ratchet provisions for the years ended December 31, 2014 and 2013 is presented below:

 

						Weighted				Weighted
						Average				Average
						Exercise				Remaining
		Warrants				Price				Life
Balance at December 31, 2012			-			$	-
Issued or Issuable			4,680,581				.26				4.43
Exercised			-				-
Cancelled or expired			-				-
Additions due to ratchet trigger			-				-
Outstanding at December 31, 2013			4,680,581			$	.26				4.43
Issued or issuable			-				-
Exercised			-				-
Cancelled or expired			-				-
Additions due to ratchet trigger			-				-
Outstanding at December 31, 2014			4,680,581			$	.26				3.43
Exercisable at end of period			4,680,581			$	.26				3.43

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

At December 31, 2014 the intrinsic value of the outstanding ratchet warrants was $0.

 

12. INCOME TAXES

 

From September 18, 2006 (inception) to the recapitalization date of October 25, 2010, the Company was treated as a partnership for federal Income tax purposes. The corporate tax benefits of its losses were passed through to its owners and the Company did not have any income tax expense or benefit. Starting October 25, 2010 the Company became subject to paying income tax. There was no income tax expense for the years ended December 31, 2014 and 2013 due to the Company's net losses.

 

The blended Federal and State tax rate of 37.63% applies to loss before taxes. The Company's tax expense differs from the “expected” tax expense for federal income tax purposes for the years ended December 31, 2014 and 2013 (computed by applying the United States Federal Corporate tax rate of 34% to net loss before taxes), as follows (in thousands):

 

		2014				2013
Computed “expected” tax benefit		$	(2,733	)		$	(2,937	)
State income tax			(286	)			(315	)
Non-deductible expenses			13				15
Warrant revaluation			(1,249	)			705
Income (loss) of non-taxable entities			53				(10	)
Impairment of goodwill			977				-
Change in deferred tax asset valuation allowance			3,225				2,542
		$	-			$	-

 

The effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities are follows at December 31, 2014 and 2013 (in thousands):

 

		2014				2013
Net operating loss carryforward		$	5,794			$	3,373
Gain on foreign currency exchange rates			(7	)			1
Other accrued liabilities			1,407				1.,653
Intangible assets			(2,981	)			(3,745	)
Bad debt allowance			231				88
Start-up costs			768				768
Fixed assets			176				25
Less valuation allowance			(5,388	)			(4,310	)
Net deferred tax liability		$	-			$	(2,147	)

 

The valuation allowance at December 31, 2014 was $5.4 million. The net increase in 2014 of $1.1 million results from a decrease of the beginning of the year valuation allowance as a purchase price allocation adjustment against goodwill and a current year increase of $3.2 million.

 

 

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 

The Company has a net operating loss carry forward of approximately $15.4 million available to offset future U.S. net income over 20 years through 2033. The utilization of the net operating loss carry forwards is dependent upon the ability of the Company to generate sufficient taxable income during the carry forward period.

 

The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. As of December 31, 2014, tax years 2013, 2012 and 2011 remain open for IRS audit. The Company has received no notice of audit from the Internal Revenue Service for any of the open tax years

 

13. RELATED PARTY TRANSACTIONS

 

Related party transactions and balances include Due from Related Parties (See Note 5), Notes Payable (See Note 7), Consultant Liability (See Note 3), Leases (See Note 8) and certain equity transactions (See Note 9). In addition current liabilities includes approximately $49,000 due to a related party for professional fees paid on behalf of the Company.

 

14. CONCENTRATIONS

 

Credit Risk - The Company’s cash equivalents typically consist of 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.

 

15. SUBSEQUENT EVENTS

 

In 2015 10,000 shares of restricted common stock have been issued to a member of management in accordance with the terms of their employment agreement.