SEBRING SOFTWARE, INC. – 10-Q – 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 financial condition of Sebring Software, Inc. and Subsidiary (Company) and to also describe the plans for future growth and expansion.

Forward-Looking Statements This Management's Discussion and Analysis and other parts of this report contain forward-looking statements that involve risks and uncertainties, as well as current expectations and assumptions. From time to time, 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 of our software product and therefore had not earned any revenue until the second quarter. Our designed purpose is to be in the software business and is focused on 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. Most DPMs and dental practices use different software packages. Sebring plans to use software solutions to substantially reduce the cost of DPMs data entry. With the above stated presence in the DPM market our company decided to acquire a DPM in the state of Florida as well as two dental practices in the state of Arizona during the second quarter. The company intends to continue its acquisitions in the DPM market for the foreseeable future.

Results of Operations

Results of Operations for the three and six months ending June 30, 2013 compared to the three and six months ending June 30, 2012

During the three and six month period ended June 30, 2013, the Company recorded revenues of $239,233. These revenues were for management fees and general dental practice revenue and were a result of the acquisition of dental practices and a dental practice managemet Company according to the Company's strategic plan. The Company also incurred direct costs of $56,027. The Company did not produce any revenue in the three and six month period ending June 30, 2012 as the Company was still in development stage.

Employee compensation and benefits increased $357,147 from $96,526 in the three months ended June 30, 2012 to $453,673 for the three months ended June 30, 2013. During the six months ended June 30, 2013 these costs increased to $617,437 from $188,547 for the same period in 2012. 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 from $213,230 for the three months ended June 30, 2012 to $439,221 for the three months ended June 30, 2013. These costs increased from $353,927 for the six months ended June 30, 2012 to $539,565 for the six months ended June 30, 2013. These increases were due to the Company incurring higher costs for consulting, accounting and other professional fees necessary to consummate the dental practice acquisition as well as additional costs for travel, telephone and filing fees.

Interest expense increased from $171,185 for the three months ended June 30, 2012 to $471,370 for the three months ended June 30,, 2013. These costs increased from $322,349 for the six months ended June 30, 2012 to $744,643 for the six months ended June 30, 2013. The increase was primarily due to the interest on the $11 million note 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.

Loss on warrant liability relates to the charge in fair value of the warrant liability from April 25, 2013 to June 30, 2013. The warrant issued with the $11 million debt more classified and liability due to certain provisions in such warrants and must be marked up or down to fair value at each reporting date.

                                         18  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 six months ended June 30, 2013 we received $342,000 from the sale of our stock. These cash investments have been used primarily for general and administrative expenses including management compensation.

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 will be used as working capital. , We continue to pursue other acquisition opportunities in accordance with the terms of the loan agreement at which point 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. There is no guaranty that we will be successful in consummating acquisitions that will meet the terms of the Loan Agreement that will allow the $5 million to be released. We believe that our current cash on hand will be sufficient to meet our operating requirements for the next twelve months.

Debt and contractual obligations

We have commitments to pay investors $14,663,119 of principal and accrued interest on various convertible notes, non-convertible notes and loans payable through June 30, 2013. We also owe $353,927 in accounts payable and accrued liabilities and $279,443 of payroll related liabilities as of June 30, 2013.

Because the Company was unable to make the required principal and interest payments under a number of notes payable, it was in potential default (subject to lender notifying the Company of default) on $1,825,638 of debt plus $1,061,310 of accrued interest as of June 30, 2013. On April 25, 2013 the Company restructured the note for which the Company had previously been notified as being in default. Under the terms of the agreement, the Company repaid $750,000 of principal to the Noteholder. The remaining principal of $420,718 and accrued interest of $577,948 were restructured into a new note for $998,666. The principal is due in full on the maturity date of April 25, 2014. Interest is to be paid quarterly at a rate of 12%. In the event of default, the interest rate will increase to 20%, compounded annually. In addition, at any time beginning on the date on which the Company may make a secondary public offering but prior to payment in full of the outstanding principal balance of the note, the Noteholder shall have the right on the first day of each calendar month to convert the principal amount into conversion stock at the Note Conversion price, which is defined as the greater of 25% discount to the secondary offering price or the market price on the date of conversion. In addition, for every 120 days that the note remains unpaid the noteholder will be entitled to receive shares of common stock equal to 1% of the issued and outstanding shares on the due date. This provision will only apply through the maturity date.

In July 2013 the Company concluded a Forbearance Agreement with a holder of two of the Company's notes. Under terms of the agreement the Company acknowledged that the two notes, totaling $180,000, are in default, along with $76,750 in accrued interest and agreed to make a principal payment of $25,000. In return, the noteholder agreed that the Company would not be required to make any payments on principal or interest until March 15, 2014 at which time the notes would be paid in full. The noteholder further agreed that if the principal amounts were paid in full by March 14, 2014, the noteholder would waive all accrued but unpaid interest. The agreement stipulates that the notes would accrue interest at a rate of 12%. The agreement further stipulates that if, at any time that the notes are outstanding, the Company makes a secondary stock offering, the Noteholder has the right to accept stock in the Company as full or partial payment for amounts owed under the notes. In that event, the amount to be credited against indebtedness will be 90% of the offering price of the stock received by the noteholder. The Company made the $25,000 principal payment in July2013.

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Pursuant to the Loan and Security Agreement above (under Liquidity and capital resources), interest shall accrue on the outstanding balance of the Term Loan at a rate of 11 ½ percent per annum. Upon the occurrence and continuation of an Event of Default as described in the Loan Agreement, the unpaid principal balance of the Term Loan shall bear interest at a rate of 13 ½ per annum. Interest payments on all outstanding principal shall be payable quarterly in arrears on the last day of each quarter. Beginning on June 30, 2013, principal payments of $300,000 shall be due each quarter. Beginning on June 30, 2014, the quarterly principal payments shall increase to $400,000 per quarter. Beginning on June 30, 2015 the quarterly principal payments shall increase to $800,000 per quarter. Beginning on June 30, 2017, the quarterly principal payments shall increase to $1,700,000 per quarter. On April 25, 2018 all remaining unpaid principal of the Term Loan shall be due. We made the initial principal and interest payment on June 28, 2013.

Management Agreement - The Company has two three-year and one two-year management agreements for each of three key members of management that are in effect until June 2013, December 2015, and April 2015 respectively. These agreements will renew automatically at the expiration dates unless specifically terminated. The agreements commit the Company to pay a combined total of $525,000 per year in base salary and stock compensation as determined by the Board of Directors. In addition two members have Equity Participation clauses in their agreements, whereby each employee shall be awarded 1,000,000 restricted shares of common stock to be awarded in equal increments over the next two years until the abovementioned 1,000,000 shares have been issued to each. We have also committed to pay various stock compensation and finder fees to entities that are raising funds on the Company's behalf. Those funds are payable in the event that they are successful in raising capital described above and as more fully described in the Sebring consolidated financial statements.

Critical Accounting Estimates and Policies

Software Development Costs. We account for our software development costs in accordance with Accounting Standards Codification ("ASC") ASC 350 "Computer Software Developed or Obtained for Internal Use".

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

Intangible Assets. Intangible assets arise in connection with acquisitions, including the acquisition of management contracts. Intangible assets with finite lives are amortized over their respective useful lives. In accordance with Accounting Standards Codifications ("ASC"), we review all intangible assets for impairment annually, or upon the occurrence of a trigger event. ASC Topic 350 permits us to assess qualitative factors to determine whether it is more likely than not that the fair value of the intangible assets is less than its carrying amount as a basis to determine whether the impairment test is necessary. We also have the option to bypass the qualitative assessment in any period and proceed directly to performing the impairment test. Impairment charges, if any, are recognized in operating results. Intangible assets consist of 40 year management contracts recorded at fair value upon acquisition. Amortization is recorded using the straight-line method over the estimated useful lives of the asset at 15 years.

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

Revenue Recognition. Our revenues are primarily derived from charging a fixed monthly management fee to Dental Practices in Florida to operate the business process of the practice and from patient revenues from the Dental Practices in Arizona which we own. Generally, revenues are recognized when the services have been rendered.

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.