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Sebring Software, Inc. – ‘10-K’ for 12/31/13

On:  Monday, 3/31/14, at 4:21pm ET   ·   For:  12/31/13   ·   Accession #:  1144204-14-19441   ·   File #:  0-53785

Previous ‘10-K’:  ‘10-K’ on 4/15/13 for 12/31/12   ·   Next & Latest:  ‘10-K’ on 4/15/15 for 12/31/14   ·   3 References:   By:  SEC – ‘UPLOAD’ on 11/5/14 By:  SEC – ‘UPLOAD’ on 9/26/14 By:  SEC – ‘UPLOAD’ on 8/21/14 

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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, 2013

¨ 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)

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   S    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.

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, 2013: $12,343,789.

As of March 31, 2014, the registrant had 67,137,638 shares of common stock, $0.0001 par value per share, issued and outstanding.

Documents incorporated by reference: None

TABLE OF CONTENTS

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, 2013.

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 2012 will exceed $109 billion. Nationwide spending on dental services has increased from $62 billion in 2000 at a 5.0% CAGR through 2012, significantly in excess of the GDP growth. 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. Growth in the dental services sector is expected to continue, reaching an estimated $168.0 billion by 2020, representing a CAGR of 5.3%. 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 2012 will exceed $109 billion. Nationwide spending on dental services has increased from $62 billion in 2000 at a 5.0% CAGR through 2012, significantly in excess of the GDP growth. 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. Growth in the dental services sector is expected to continue, reaching an estimated $168.0 billion by 2020, representing a CAGR of 5.3%. 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 2013, the Sebring network included 38 practice locations that employ over 140 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 143 employees. Our employees are not party to any collective bargaining agreement.

ITEM 1A. RISK FACTORS.

Smaller reporting companies are not required to provide the information required by this item

ITEM 2. PROPERTIES

We maintain our corporate office under a month to month lease encompassing approximately 1,500 square feet of space at 1400 Cattlemen Rd., Suite D, Sarasota, Florida 34232 at a rate of $2,140 per month for the year ended December 31, 2013. In addition, we lease approximately 3150 square feet at 13535 Feather Sound Drive, Suite 220, Clearwater, Florida 33762 for our accounting and general operations. This lease, which runs through 2019, had a cost of approximately $4,794 per month in 2013.

As of the date of this report, we managed a total of 38 dental practice locations with 34 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.

Management was notified of a legal claim against the Company whereby an investor relations consultant claims he is owed stock compensation under a March 9, 2010 consulting agreement. The agreement describes common stock payments of 400,000 shares that were to be issued on October 25, 2010 and 100,000 shares thereafter for the following 11 months for a total of 1,500,000 shares. Management asserts that no services were performed and no share or other compensation is due to the consultant except for $25,000 the consultant loaned to the Company which is recorded as a loan payable in the accompanying December 31, 2013 and 2012 consolidated balance sheets. Management believes that they will prevail in this matter and that any potential negative outcome will not have a material adverse impact on the Company’s financial position. No additional liability has been accrued for this claim as of December 31, 2013.

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.

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, 2013, we had 66,687,189 shares of common stock outstanding held by approximately 68 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, 2013, we had no shares of preferred stock issued or outstanding.

Options and Warrants

As of December 31, 2013 the Company had issued 698,496 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, 2013 the Company issued a total of 1,055,000 shares of restricted common stock to four 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 $364,000 as non-cash compensation expense.

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.

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:

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

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

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.

The Company issued a total of 9,849,220 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.

The Company issued 147,970 share at $1.66 per share, or $246,500, to note holders under the Common Stock Rights provision of their note subscription agreement. See Note 8, Common Stock Rights.

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

We have been in the development stage and therefore had not earned any revenue until the second quarter of 2013 at which time the Company entered into the Dental Practice Management industry (“DPM”). 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. With the above stated presence in the DPM market the Company decided to acquire a DPM and control of 31 dental practices in the state of Florida as well as 2 dental practices in the state of Arizona during the second quarter. Five (5) more dental practices were acquired in the third and fourth quarter of 2013. As a result of these acquisitions, the Company currently manages thirty-eight Practices and plans to boost revenues and substantially reduce costs through increased efficiencies through the use of software solutions and best practice management techniques.

Results of Operations

Results of Operations for the year ended December 31, 2013 compared to the year ended December 31, 2012

During the year ended December 31, 2013, the Company recorded revenues of $9,206,874. This revenue was earned from general dental practice and is the result of the acquisition of dental practices and a dental practice management company according to the Company’s strategic plan. The Company also incurred direct dental costs of $4,602,970 which were primarily for employee compensation and benefits in the dental practices. In addition, other direct dental costs of $2,619,573 for the year ended December 31, 2013 were incurred for expenses in the dental practices which included items such as lab expense, dental implants and other supplies and certain rents. Indirect dental expenses of $2,083,188 were incurred at the dental practices for other expenses such as computer expense, telecommunications costs, cleaning expenses, repairs and maintenance, utilities and other general office expenses. The Company did not produce any revenue or incur any such expenses in the year ending December 31, 2012 as the Company was still in the development stage.

Corporate compensation and benefits increased $675,976 from $411,617 in the year ended December 31, 2012 to $1,087,593 for the year ended December 31, 2013. This increase is due to the additional personnel associated with the dental practice acquisition and the hiring of additional administrative management. 

General and administrative expenses increased $2,167,009 from $540,360 for the year ended December 31, 2012 to $2,707,369 for the year ended December 31, 2013. This increase was primarily due to the amortization costs of our Customer Relationships as well as due to the Company incurring higher costs for consulting, accounting and other professional fees necessary to facilitate and consummate the dental practice acquisition as well as additional costs for travel, communication and filing fees. 

Interest expense increased from $693,376 for the year ended December 31, 2012 to $2,313,987 for the year ended December 31, 2013. The increase was primarily due to the interest on a Term Loan to fund the acquisitions as well as additional interest expense incurred from amortizing a portion of the debt discount associated with certain notes and warrants and the amortization of debt issuance costs incurred with the consummation of the term loan. 

The $1,872,548 loss on warrant liability relates to the change in fair value of the warrant liability from 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

Our cash and liquidity resources have been provided by investors through convertible and non-convertible notes, loans payable and the sale of our common stock. During the year ended December 31, 2013 we received $1,342,000 from the sale of our stock as well as proceeds from the consummation of our Term Loan which is further discussed below. These cash investments have been used primarily for general and administrative expenses including management compensation and to fund our acquisitions as discussed below.

The Company recognized a net loss of approximately $8.7 million, net cash used in operations of approximately $1.4 million for year ended December 31, 2013and negative working capital ($16.2 million), stockholders’ deficit ($9.0 million) and an accumulated deficit of $17.4 million at December 31, 2013.

During 2013, the Company acquired or gained financial control of a management company and thirty-eight dental practices in the states of Florida and Arizona. Financial control of these dental practices is expected to provide material positive cash flow to the Company. Furthermore, approximately $7.2 million of the current liabilities at December 31, 2013 are warrant liabilities and deferred revenue which we believe are unlikely to result in a cash outlay over the next twelve months. However, in order to meet our obligations when they come due, a capital infusion of approximately $3.2 million will be necessary. Management has received a commitment from an investor to provide the necessary funding to cover this potential shortfall.

Debt and contractual obligations

As of December 31, 2013 we have commitments to pay investors and creditors $20,642,674 of principal and $1,656,700 of accrued interest on various convertible notes, non-convertible notes and loans payable as of December 31, 2013. We also owe $868,797 in accounts payable, $2,345,888 in accrued liabilities, $549,557 of payroll related liabilities and a capital lease obligation of $195,638 as of December 31, 2013. In addition, as of December 31, 2013, we have commitments to pay $3,521,111 to the sellers, recorded as consultant liability, as part of the initial acquisition of the thirty one dental practices in Florida.

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 is 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 shall accrue on the outstanding balance of the Term Loan at a rate of 11 ½ percent per annum. Upon the occurrence and continuation of an Event of Default as described in the Loan Agreement, the unpaid principal balance of the Term Loan shall bear interest at a rate of 13 ½ per annum. Interest payments on all outstanding principal shall be payable quarterly in arrears on the last day of each quarter. A quarterly payment of $281,250 is due on March 31, 2014. Beginning on June 30, 2014, the quarterly principal payments increase 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. In accordance with the terms of the notes, the Company repaid $412,500 of the principal as of December 31, 2013. The $281,250 principle payment that was due on December 31, 2012 was paid on January 2, 2014.

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 $892,000 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 2,000,000 shares of restricted stock that will be distributed to the employees in equal installments over periods ranging from two to five years.

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

Office leases Our new subsidiary in Florida leases office space for their headquarters (Clearwater, FL) and for the Practices. The leases expire at various times through 2023. Future minimum lease payments as of December 31, 2013 are as follows:

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.

Long-Lived Assets - The Company is required to evaluate long-lived assets, including intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable. The recoverability of such assets is measured by a comparison of the carrying value of the assets to the future undiscounted cash flows before interest charges to be generated by the assets. If long-lived assets are impaired, the impairment to be recognized is measured as the excess of the carrying value over the fair value. Long-lived assets held for disposal are reported at the lower of the carrying value or fair value less disposal costs. The Company does not believe there are any indicators that would require an adjustment to such assets or their estimated periods of recovery at December 31, 2013 pursuant to current accounting standards.

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 as the services are provided at a value net of refunds and other adjustments. Amounts collected in excess of amounts earned are deferred. 

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

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

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

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Recent Accounting Pronouncements

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

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.

Sebring Software, Inc. and Subsidiaries

Consolidated Financial Statements

December 31, 2013 And 2012

Sebring Software, Inc. and Subsidiaries

Index to Consolidated Financial Statements

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 at December 31, 2013 and 2012, and the related consolidated statements of operations, changes in equity (deficit), and cash flows for each of the two years in the period ended December 31, 2013. 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 at December 31, 2013 and 2012 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

/s/ Salberg & Company, P.A.

SALBERG & COMPANY, P.A.

Boca Raton, Florida

March 31, 2014 

Sebring Software, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2013 and 2012

The accompanying notes are an integral part of the accompanying financial statements.

Sebring Software, Inc. and Subsidiaries

Consolidated Statements of Operations

Year Ended December 31, 2013 and 2012

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, 2013 and 2012

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, 2013 and 2012

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

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

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, 2013 and 2012

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 dental practices in Arizona and are reported at the customers’ outstanding balances, less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable

Furniture, Equipment and Vehicles - Fixed assets are recorded at historical cost. Depreciation and amortization are recognized on a straight-line basis over an asset’s estimated useful life. Estimated useful lives are generally three to ten 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. Future annual amortization of customer lists is approximately $2.3 million through 2019, $1.2 million in 2020 and $132,000 annually through 2028.

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. The Company does not believe there are any indicators that would require an adjustment to such assets or their estimated periods of recovery at December 31, 2013 and 2012 pursuant to current accounting standards.

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

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.

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 as the services are provided at a value net of refunds and other adjustments. Amounts collected in excess of amounts earned are recorded as deferred revenue liability.

Liquidity - The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company and its ability to meet its ongoing obligations. The Company has a net loss of approximately $8.7 million, net cash used in operations of $1.5 million for year ended December 31, 2013, negative working capital ($16.2 million) and a deficit of $7.0 million and an accumulated deficit of $17.4 million at December 31, 2013.

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

During 2013, the Company acquired or gained financial control of a management company and thirty-eight dental office locations in the states of Florida and Arizona. Financial control of these dental practices is expected to provide material positive cash flow to the Company. Furthermore, approximately $7.2 million of the current liabilities at December 31, 2013 are warrant liabilities and deferred revenue which we believe are unlikely to result in a cash outlay over the next twelve months. However, in order to meet our obligations when they come due, a capital infusion of approximately $3.2 million will be necessary. Management has obtained a commitment from an investor to provide up to $5 million in cash as necessary to fund the Company’s obligations as they come due in 2014.

Reclassifications - Certain 2012 Note and Loan payable amounts have been reclassified to conform to the 2013 consolidated balance sheet presentation.

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

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.

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, 2013, the remaining consultant liability totals approximately $3.5 million. Of this amount, approximately $655,000 is reflected as a current liability at December 31, 2013.

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:

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

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:

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:

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

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:

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, 2013 was approximately $1.05 million.

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 estimated fair values and allocation of purchase price is provisional pending the final valuation of the assets acquired and liabilities assumed.

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, 2012 are as follows:

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, 2012, nor is it indicative of the results of future combined operations.

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

4. Furniture, EQUIPMENT and VEHICLES, net

Furniture, equipment and vehicles consisted of the following at December 31:

Depreciation expense for the year ended December 31, 2013 was approximately $445,000 and approximately $29,000 for the year ended December 31, 2012. Included above are phone systems under capital leases with a net book value at December 31, 2013 of approximately $248,000.

5. BORROWINGS

Borrowings consist of the following at December 31:

Term Loan

During the year ended December 31, 2013, the Company received financing of $15 million for notes with the proceeds to be used for acquisitions and general working capital. In accordance with the terms of the notes, the Company repaid $412,500 of the principal as of December 31, 2013. The $281,250 principle payment that was due on December 31, 2013 was paid on January 2, 2014.

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.

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

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. A quarterly payment of $281,250 is due on March 31, 2014. Beginning on June 30, 2014, the quarterly principal payments increase 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.

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.

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 $200,000 of this debt discount was amortized in 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, 2013, the Company was 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 (including $250,000 payable no later than May 30, 2014) and approximately 4.7 million five-year warrants issued to a loan placement agent, exercisable at $0.22 per share, which were valued at their fair value of $1,085,000 in conjunction with the Loan Agreement. The loan costs are recorded as debt issue costs to be amortized over the term of the debt. During the year ended December 31, 2013, a total of approximately $434,000 was recorded as amortization expense.

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

Convertible Notes Payable

Convertible notes payable includes several past due notes totaling approximately $1,355,000 in principle and approximately $905,000 in accrued but unpaid interest which are currently in default subject to notification by the lenders.. Also included in convertible notes payable at December 31, 2013 is a restructured note in the amount of $998,666 which the Company had been notified by the lender of default.

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.

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

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

Sebring Software, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

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, 2013 of approximately $103,000. During the year ended December 31, 2013, the Company made several notes payable to a bank to acquire orthodontic equipment in the aggregate amount of approximately $161,000. These notes bear interest at rates ranging from 3.5% to 7%, are secured by the equipment, and require aggregate monthly payments of approximately $3,300 through 2018. The balance of these notes at December 31, 2013 was approximately $143,000. The remaining notes in this category are loans for vehicles purchased in 2013 that mature in 2016 with interest of 3.9%. The notes have monthly principal and interest payments of $1,147. Balance owed at December 31, 2013 was approximately $37,000.

Other notes payable

Other notes payable includes several unsecured past due notes totaling $165,000 in principal at December 31, 2013 and 2012 with interest payable at rates ranging from 10% to 12%. Although the Company has not made any principal payments as of December 31, 2013, the Company had not received any Notification of Default from any holders of these notes and therefore was not technically in default. Other notes payable with an aggregate balance of $828,080 at December 31, 2012 were paid off on April 27, 2013 with proceeds from the term loan as follows:

During 2012, Other notes payable in the amount of $85,000 were converted to equity. Also included in Other notes payable is a non-interest bearing loan in the amount of $35,000 at December 31, 2013 ($70,000 at December 31, 2012).

Other notes payable at December 31, 2013 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, 2013 was $83,552.

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, 2013 was $203,883.

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 balance of the note at December 31, 2013 was $100,000.

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