PINX:SPBU Spare Backup Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

or

 

o     TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________ to ________

 

Commission File Number: 000-30587

 

SPARE BACKUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   23-3030650
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

990 Ironwood, Minden, NV 98423

(Address of principal executive offices)

 

(775) 392-2180

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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 (ss. 232.405 of this chapter) during the preceding 12 (or for such shorter period that the registrant was required to submit and post such files).Yes o    No o

 

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

 

Large accelerated filer o Accelerated filer o
Non-accelerated filer o Smaller reporting company x

 

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

 Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date, 345,862,703 shares of common stock are issued and outstanding as of August 15, 2012.

 

 

OTHER PERTINENT INFORMATION

 

When used in this report, the terms “Spare Backup,” the Company”, “ we”, “our”, and “us” refers to Spare Backup, Inc., a Delaware corporation formerly known as Newport International Group, Inc., and our subsidiary. The information which appears on our web site is not part of this report.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

Certain statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, our ability to raise sufficient capital to fund our ongoing operations and satisfy our obligations as they become due, our ability to increase our revenues, our ability to compete within our market segment, our ability to implement our strategic initiatives, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, U.S. and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, as well as our annual report on Form 10-K for the year ended December 31, 2011 including the risks described in Part I. Item 1A. Risk Factors of that report. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

                   1                      

 

SPARE BACKUP, INC.

 

INDEX

 

    Page
   
PART I – FINANCIAL INFORMATION: 3
     
Item 1. Financial Statements 3
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 4
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
     
Item 4. Controls and Procedures 13
   
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 13
     
Item 1A. Risk Factors 14
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
     
Item 3. Defaults Upon Senior Securities 14
     
Item 4. [Removed and Reserved] 14
     
Item 5. Other Information 14
     
Item 6. Exhibits 14
   
Signatures 15

 

 

 

2

 

 PART I - FINANCIAL INFORMATION

 

 

Item 1.  Financial Statements  
   
   
INDEX TO UNAUDITED FINANCIAL STATEMENTS PAGE
   
   
Consolidated Balance Sheets at June 30, 2012 and December 31, 2011 F-1
   

Unaudited Consolidated Statements of Operations for the three and six months period

ended June 30, 2012 and 2011

F-2
   

Unaudited Consolidated Statements of Cash Flows for the six months periods ended

June 30, 2012 and 2011

F-3
   
Notes to Consolidated Financial Statements F-4

 

3

 

 

SPARE BACKUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 
     June 30,      December 31,  
ASSETS   2012    2011 
     (Unaudited)     (1)
Current Assets:          
 Cash  $—     $—   
 Accounts receivable, net allowance for bad debt of -0- and $100,000   193,730    120,248 
 Prepaid expenses   6,028    10,599 
   Total current assets   199,758    130,847 
           
 Property and equipment, net of accumulated depreciation of $317,436 and $279,345   61,034    98,070 
           
 Deferred financing costs   4,000    —   
 Other assets   58,250    85,522 
    Total assets  $323,042   $314,439 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
Current Liabilities:          
 Accounts payable and accrued expenses  $3,370,033   $3,615,504 
 Overdraft liability   4,927    70,750 
 Accrued payroll taxes   4,260,805    4,314,670 
 Convertible promissory notes, net of unamortized debt discount of $458,329 and -0-   2,231,551    1,918,735 
 Accrued interest on convertible promissory notes   187,375    215,004 
 Notes payable   508,000    787,600 
 Derivative liabilities   460,431    —   
 Deferred revenue   102,500    102,500 
 Due to stockholder   15,000    15,000 
   Total current liabilities   11,140,622    11,039,763 
           
Stockholders' Deficit:          
 Preferred stock, $0.001 par value, 5,000,000 shares authorized:          
   150,000 issued and outstanding   150    150 
 Common stock; $.001 par value; 450,000,000 shares authorized;          
   354,843,881 and 303,943,573 issued; 351,843,881 and 303,943,573 outstanding   351,844    303,943 
 Additional paid-in capital   107,495,127    105,765,093 
 Accumulated deficit   (118,664,701)   (116,794,510)
           
    Total stockholders’ deficit   (10,817,580)   (10,725,324)
           
    Total liabilities and stockholders’ deficit  $323,042   $314,439 
           
(1) Derived from audited financial statements          

 

See Notes to Unaudited Consolidated Financial Statements. 

 

F-1

 

 

SPARE BACKUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
             
   Three-month periods ended  Six-month periods ended
   June 30,  June 30,
   2012  2011  2012  2011
   (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited)
             
Revenues  $124,351   $155,909   $368,666   $193,503 
                     
Operating expenses:                    
 Research and development   115,059    400,296    379,892    658,555 
 Selling, general and administrative   811,200    1,877,289    2,172,480    3,356,492 
   Total operating expenses   926,259    2,277,585    2,552,372    4,015,047 
                     
 Operating loss   (801,908)   (2,121,676)   (2,183,706)   (3,821,544)
                     
Other income (expense):                    
 Change in fair value of derivative liabilities   (12,870)   368,208    (12,870)   2,129,934 
 Gain from debt settlements   446,387    —      446,387    —   
 Interest expense   (78,045)   (279,950)   (118,842)   (390,771)
 Other loss   (1,112)   —      (1,112)   —   
   Total other income (expense)   354,360    88,258    313,563    1,739,163 
                     
Net loss  $(447,548)  $(2,033,418)  $(1,870,143)  $(2,082,381)
                     
                     
Basic and diluted loss per common share  $(0.00)  $(0.01)  $(0.01)  $(0.02)
                     
Basic and diluted weighted average common shares outstanding   334,017,135    243,236,988    323,490,588    229,801,518 

 

 See Notes to Unaudited Consolidated Financial Statements.

 

F-2

 

 

  

SPARE BACKUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
       
   For the Six Months Ended
   June 30,
   2012  2011
   (Unaudited)  (Unaudited)
Cash flows from operating activities:          
Net loss  $(1,870,143)  $(2,082,381)
Adjustments to reconcile net loss to net cash used in          
 operating activities:          
 Change in fair value of derivative liabilities   12,870    (2,129,934)
 Fair value of options and warrants issued for services   319,634    296,175 
 Fair value of option and warrant modifications   —      121,621 
 Fair value of warrants issued to convertible promissory note holder   —      200,000 
 Fair value of warrants issued for accrued interest   —      198 
 Fair value of common stock issued in connection with service rendered   737,640    456,000 
 Fair value of convertible promissory notes modifications   —      266 
 Fair value of common stock issued in connection with note payable issuance   —      44,000 
 Fair value of common stock issued to satisfy accrued interest   137,510    153,561 
 Gain on extinguishment of debt   (446,387)   —   
 Depreciation and amortization   42,662    110,715 
 Amortization of debt discount   3,745    29,964 
Changes in operating assets and liabilities:          
 Accounts receivable   (73,450)   (72,330)
 Prepaid expense and other current assets   27,272    25,865 
 Deferred financing costs   (4,000)   —   
 Accounts payable, accrued expense and accrued payroll taxes   147,004    1,369,084 
 Accrued interest on convertible promissory notes   (27,629)   2,567 
           
Net cash used in operating activities   (993,272)   (1,474,629)
           
Cash flows used in investing activities:          
 Capital expenditures   (1,055)   (10,265)
           
Net cash used in investing activities   (1,055)   (10,265)
           
Cash flows from financing activities:          
 Proceeds from issuance of convertible promissory notes   454,000    50,000 
 Proceeds from issuance of notes payable   23,000    367,600 
 Repayment of notes payable   —      (163,000)
 Net proceeds from issuance of common stock for cash   457,250    1,166,894 
 Cash overdraft   (65,823)   (127,321)
 Proceeds from exercise of warrants   47,500    112,008 
 Proceeds from exercise of stock options   78,400    90,000 
           
Net cash provided by financing activities   994,327    1,496,181 
           
 Net increase in cash   —      11,287 
           
Cash, beginning of period   —      —   
           
Cash, end of period  $—     $11,287 
           
Supplemental disclosures of cash flow information:          
 Cash paid for interest  $2,316   $—   
 Cash paid for income taxes  $—     $—   
           
Non-cash investing and financing activities:          
 Write off of fully depreciated property and equipment  $—     $183,641 
 Fair value of warrants and embedded conversion features issued in
    connection with the issuance of convertible promissory notes and
    corresponding debt discount
  $447,561   $200,000 
 Reclassification of equity contracts to liability contracts  $—     $2,407,261 
 Reclassification of liability contracts to equity contracts  $—     $656 
 Conversion of convertible promissory notes and accrued interest
    into shares of common stock
  $—     $697,500 
 Conversion of notes payable into shares of common stock  $—     $308,500 
 Fair value of shares of common stock issued for payment of 
    accrued interest
  $137,510   $—   

 

 See Notes to Unaudited Consolidated Financial Statements.

 

F-3

 

  

SPARE BACKUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED JUNE 30, 2012

(Unaudited)

 

NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN

 

Spare Backup, Inc., (the "Company") was incorporated in Delaware in December 1999. The Company sells on-line backup solutions software and services to individuals, business professionals, small office and home office companies, and small to medium sized businesses.

 

The balance sheet presented as of June 30, 2012 has been derived from our audited financial statements. The unaudited financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant to those rules and regulations, but we believe that the disclosures are adequate to make the information presented not misleading. The financial statements and notes included herein should be read in conjunction with the annual financial statements and notes for the year ended December 31, 2011 included in our Annual Report on Form 10-K filed on April 26, 2012.  The results of operations for the six-month period ended June 30, 2012 are not necessarily indicative of the results for the year ending December 31, 2012.

 

The accompanying consolidated unaudited financial statements have been prepared on a going concern basis. The Company has incurred net losses of approximately $1.9 million during the six-month period ended June 30, 2012 and its current liabilities exceed its current assets by $10.9 million. The Company's ability to continue as a going concern is dependent upon its ability to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due, and to generate profitable operations in the future. Management plans to continue to provide for its capital requirements by issuing additional equity securities and debt. The outcome of these matters cannot be predicted at this time and there are no assurances that if achieved, the Company will have sufficient funds to execute its business plan or generate positive operating results.

 

These matters, among others, raise substantial doubt about the ability of the Company to continue as a going concern. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.

 

The accompanying consolidated unaudited financial statements include the accounts of Spare Backup and its wholly-owned subsidiary. All material inter-company balances and transactions have been eliminated in consolidation.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of the consolidated unaudited financial statements in accordance with accounting principles generally accepted in the United States 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 periods. Significant estimates made by management include, but are not limited to share-based payments, derivative liabilities, and useful life of property and equipment. Actual results will differ from these estimates.

 

F-4

 

 

Cash and Cash Equivalents

 

The Company considers all highly liquid temporary cash investments with an original maturity of three months or less when purchased, to be cash equivalents.

 

Reclassification

 

Certain items in the June 30, 2011 financial statements have been reclassified to conform to the presentation in the June 30, 2012 financial statements. Such reclassifications did not have a material impact on the presentation of the overall financial statements.

 

Concentration of Credit Risks

 

The Company is subject to concentrations of credit risk primarily from cash and cash equivalents.

 

The Company’s cash and cash equivalents accounts are held at financial institutions and are insured by the Federal Deposit Insurance Corporation, or the FDIC, up to $250,000. During the six-month period ended June 30, 2012, the Company did not exceed the FDIC insurance limit.

 

The Company's accounts receivable are due from a few customers, which are located in the Unites States and United Kingdom. At June 30, 2012,two of the Company’s customers accounted for 51% and 21% of its accounts receivable. Two of the Company’s customers accounted for 16% and 96%of its accounts receivable at December 31, 2011. 

 

Accounts Receivable

 

The Company has a policy of reserving for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the bad debt expense after all means of collection have been exhausted and the potential for recovery is considered remote. Management determined that an allowance of $0 and $100,000 was necessary at June 30, 2012 and December 31, 2011.

 

Property and Equipment

 

Property and equipment, which primarily consists of office equipment and computer software, are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives of three to five years. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. At the retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in other income (expense) in the accompanying statements of operations.

 

Revenue Recognition

 

The Company follows the guidance of the FASB ASC 605-10-S99 "Revenue Recognition Overall – SEC Materials." The Company records revenue when persuasive evidence of an arrangement exists, on-line back-up services have been rendered, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.

 

The Company has collected annual fees related to online back-up services. Online back-up service fees received in advance or collected up front are reflected as deferred revenue on the accompanying balance sheet. Deferred revenue as of June 30, 2012 and December 31, 2011 amounted to $102,500, and will be recognized as revenue over the respective subscription period.

 

Revenue consists of the gross value of billings to clients. The Company reports this revenue gross in accordance with Generally Accepted Accounting Pronouncements (“GAAP”) because it is responsible for fulfillment of the service, has substantial latitude in setting price and assumes the credit risk for the entire amount of the sale, and it is responsible for the payment of all obligations incurred for sales marketing and commissions.

 

F-5

 

 

 

Customer Concentration

 

Two of the Company’s customers accounted for 52% and 20% of the Company’s revenue during the six-month period ending June 30, 2012. One of the Company’s customers accounted for 13% of the Company’s revenue during the six-month period ending June 30, 2011.

 

Product Concentration

 

The Company offers subscriptions to online and software backup products to assist individuals, small businesses and home business users.

 

Fair Value of Financial Instruments

 

FASB ASC 820 “Fair Value Measurements and Disclosures” establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results, but did expand certain disclosures.

 

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

 

Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities  
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data  
Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.  

 

The Company did not have any Level 2 or Level 3 assets or liabilities as of June 30, 2012 and December 31, 2011, with the exception of its convertible promissory notes and derivative liabilities.  The carrying amount of the convertible promissory notes at June 30, 2012 and December 31, 2011, approximate their respective fair value based on the Company’s incremental borrowing rate. The derivative liabilities are computed using either the Black Scholes Model or the binomial method and are classified as Level 3 liability.

 

Software Development Costs

 

Costs incurred in the research and development of software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional costs are capitalized in accordance with FASB ASC 985-20, “Costs of Software to be Sold, Leased, or Marketed.” The Company believes that the current process for developing software is essentially completed concurrently with the establishment of technological feasibility. Accordingly, no software development costs have been capitalized as of June 30, 2012. Instead, such amounts are included in the statement of operations under the caption "Research and development."

 

Foreign Currency Transactions

 

The Company periodically engages in transactions in countries outside the United States which may result in foreign currency transaction gains or losses. Gains and losses resulting from foreign currency transactions are recognized as foreign currency gain (loss) in the statement of operations of the period incurred.

 

F-6

 

 

 

Income Taxes

 

Income taxes are accounted for in accordance with the provisions of FASB ASC-740 – Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized, but no less than quarterly.

 

Share-based Payments

 

The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation(“ASC 718”). Under the fair value recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.

 

The Company has elected to use the Black-Scholes-Merton (“BSM”) option-pricing model to estimate the fair value of its options, which incorporates various subjective assumptions including volatility, risk-free interest rate, expected life, and dividend yield to calculate the fair value of stock option awards. Compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest and reflects estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

Convertible Instruments

 

The Company evaluates and accounts for conversion options embedded in its convertible instruments and warrants in accordance with professional standards for “Accounting for Derivative Instruments and Hedging Activities.”

 

Professional standards generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.  Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of “Conventional Convertible Debt Instrument.”

 

The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.

 

F-7

 

 

ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control could require net cash settlement, then the contract shall be classified as an asset or a liability.

 

Pursuant to 815-40-25-22, if the number of currently authorized but unissued shares, less the maximum number of shares that could be required to be delivered during the contract period under existing commitments, including outstanding convertible debt or instruments, outstanding stock options and warrants, exceeds the maximum number of shares that could be required to be delivered under share settlement of the contract, then the excess is to be accounted for as a liability.

 

Additionally, the Company determines whether the instruments issued in the transactions are considered indexed to the Company’s own stock.

 

Recent Accounting Pronouncements

 

Management does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying consolidated financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.

 

Basic and Diluted Earnings per Share

 

Basic earnings per share is calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding for each period. Diluted earnings per share is computed using the weighted-average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise of stock options and warrants (calculated using the reverse treasury stock method). The outstanding options, warrants and shares equivalent issuable pursuant to convertible promissory notes amounted to 127,239,013 and 121,791,677 at June 30, 2012 and 2011, respectively. Accordingly, these common share equivalents at June 30, 2012 and 2011 are excluded from the loss per share computation for that period due to their anti-dilutive effect.

 

F-8

 

 

The following sets forth the computation of basic and diluted earnings per share for the six-month periods ended June 30, 2012 and 2011:

 

   Three months ended  Six months ended
   June 30,  June 30,  June 30,  June 30,
   2012  2011  2012  2011
Numerator:                    
   Net loss  $(447,548)  $(2,033,418)  $(1,870,143)  $(2,082,381)
 Increase (decrease) in fair value of derivative liabilities   12,870    (368,208)   12,870    (2,129,934)
Numerator for basic earnings per share- loss                    
   attributable to common stockholders - as adjusted   (434,678)   (2,401,626)   (1,857,273)   (4,212,315)
Numerator for diluted earnings per share-net income (loss)               
   attributable to common stockholders - as adjusted  $(434,678)  $(2,401,626)  $(1,857,273)  $(4,212,315)
                     
Denominator:                    
   Denominator for basic earnings per share--weighted                    
      average shares   334,017,135    243,236,988    323,490,588    229,801,518 
   Effect of dilutive securities:                    
      Assumed conversion of Series A preferred stock   —      —      —      —   
     Assumed conversion of notes payable   —      —      —      —   
      Stock options   —      —      —      —   
      Warrants   —      —      —      —   
   Dilutive potential common shares   —      —      —      —   
Denominator for diluted earnings per share--adjusted                    
   weighted-average shares and assumed conversions   334,017,135    243,236,988    323,490,588    229,801,518 
                     
Loss per share:                    
Net loss available to common stockholders                    
  Basic and diluted  $(0.00)  $(0.01)  $(0.01)  $(0.02)

  

NOTE 3- PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

    June 30,    December 31,
Estimate Life 2012    2011
Computer and office equipment 3 to 5 years$ 378,470 $ 377,415  
    378,470    377,415
Less: Accumulated depreciation   (317,436)   (279,345)
   $61,034   $98,070

 

Depreciation expense amounted to approximately $38,091 and $111,000 during the six-month periods ended June 30, 2012 and 2011, respectively.

 

F-9

 

 

NOTE 4–ACCRUED PAYROLL TAXES

 

At June 30, 2012, the Company recorded a liability of approximately $4.3 million to certain U.S. and state governmental agencies for unpaid payroll taxes, including statutory additions, such as interest and penalties.

 

NOTE 5 - CONVERTIBLE PROMISSORY NOTES

 

Convertible promissory notes

 

Convertible promissory notes consist of the following as of:

 

   June 30,  December 31,
   2012  2011
Convertible promissory notes, bearing interest between 8% and 10% per annum, maturing between August 2008 and October 2011. Interest is within 30 days after the end of the quarter. Interest may be paid in cash or common stock at the option of the Company. Interest paid in common stock will be calculated at a range of 90% of the average closing price for the common stock for the five trading days preceding the interest payment date to 100% of the volume weighted average price for the common stock for the ten trading days preceding the interest payment date. The promissory notes are convertible at any time at the option of the holder, into shares of common stock at an effective conversion rate ranging from $0.05 to $0.25.  $1,918,735   $1,918,735 
Convertible note payable for up to $1.5 million, convertible at 75% of the Company’s 5-day moving average quoted price of the stock for that month, bearing interest at 10% per annum, payable monthly beginning August 2011, maturing in June 2014.   585,000    —   
Convertible note payable, convertible at the lessor of: 1) 70% of the lowest traded price of the Company’s common stock for the 20 trading days prior to the conversion, or 2) $0.035, bearing a one-time interest payment of 10%, payable upon conversion, maturing December 15, 2012.   60,000    —   
Convertible note payable for up to $385,000, convertible at the lessor of: 1) $0.035, or 2) 70% of the lowest trade price in the 25 trading days prior to the conversion, bearing an original issuance discount of 9.1% and no interest for the first 90 days, bearing a one-time interest payment of 5% after 90 days, payable on conversion, maturing one year from the effective date of each payment.   54,545    —   
 Convertible note payable, convertible at 60% of the average of the lowest three trading prices for the Company’s common stock in the ten day trading period ended one trading day prior to the conversion date, bearing interest at 6% per annum, payable upon conversion, maturing on February 18, 2013.   40,000    —   
Convertible note payable, convertible at $0.05, bearing no interest and no maturity date.   29,600    —   
Convertible note payable, convertible at $0.02, bearing no interest and no maturity date.   2,000    —   
 Less: debt discount  458,329    —   
   $2,231,551   $1,918,735 
           

 

F-10

 

 

The following sets forth the Company’s activity of its convertible notes payable during the six-month period ended June 30, 2012 and 2011, respectively:

 

    Six-month period ended June 30, 2012    Six-month period ended June 30, 2011 
Repricing of certain convertible promissory notes from $0.16 to $0.12 per share recorded as interest expense  $—     $266 
Issuance of -0- and 11,760,000 shares of common stock pursuant to conversion of convertible notes payable   —      697,500 
Proceeds from issuance of convertible notes payable   454,000    50,000 
Fair value of warrants issued to certain promissory note holders recorded as interest expense   —      200,000 
Fair value of 2,166,737 and 955,029 shares of common stock to satisfy accrued interest obligations   137,510    81,687 
Fair value of warrants and embedded conversion features recorded as corresponding debt discount   447,561    47,672 
Fair value of warrants issued to satisfy accrued interest obligations   —      198 
Amortization of debt discount   3,745    29,964 
Notes payable changed to convertible notes payable   302,600    —   
Original issuance discount on convertible notes payable   14,545    —   

  

Notes Payable

 

Notes payable do not have any stated interest rate, are payable on demand and are unsecured, with the exception of one note, which amounts to $37,500, which has a premium of $15,000 and was due on November 16, 2011. The amount due under such note at June 30, 2012 and December 31, 2011 amounts to $15,000.

 

 

F-11

 

The following sets forth the Company’s activity of its notes payable during the six-month period ended June 30, 2012 and 2011, respectively:

 

   Six-month period ended June 30, 2012  Six-month period ended June 30, 2011
Principal repayments  $—     $163,000 
Proceeds from issuance of note payable   23,000    367,600 
Fair value of -0- and 955,029 shares of common stock to satisfy accrued interest obligations   —      115,874 
Issuance of -0- and 6,420,000 shares to satisfy obligations under certain notes payable   —      308,500 
Change of note payable to convertible note payable   302,600    —   

 

 

The Company recognized approximately $118,000 and $391,000 during the six-month periods ended June 30, 2012 and 2011, respectively, as interest expense, which consists of the excess of the fair value of shares of common stock over the carrying value of the convertible promissory notes and notes payable satisfied, amortization of debt discount, amortization of deferred financing costs, fair value of the Company’s shares of common stock and warrants issued in lieu of interest.

 

NOTE 6 - DERIVATIVE LIABILITIES

 

A summary of the transactions related to the derivative liability for the six-month period ended June 30, 2011:

 

Derivative liability at January 1, 2011  $470,871 
Reclassification of equity contracts to liability contracts   2,407,261 
Reclassification of liability contracts to equity contracts   (656)
Issuance of warrants   200,000 
Decrease in fair value of derivative liability, recognized as other income   (2,129,934)
Derivative liability at June 30, 2011  $947,542 

  

A summary of the transactions related to the derivative liability for the six-month period ended June 30, 2012:

 

Derivative liability at January 1, 2012  $—   
Issuance of embedded conversion features, recognized as interest expense   447,561 
Increase in fair value of derivative liability, recognized as other expense   12,870 
Derivative liability at June 30, 2012  $460,431 

  

The maximum number of shares required to be delivered during the period under which substantially all of the Company’s outstanding warrants, options, and convertible notes exceeded the amount of authorized shares through June 30, 2012.

 

The Company accounts for the embedded conversion features included in its convertible promissory notes and outstanding warrants.

 

F-12

 

Derivative liabilities amounted to $460,431 and $0 at June 30, 2012 and December 31, 2011, respectively.

 

During the first three quarters of 2011, the warrants and convertible promissory notes issued by the Company were recognized as liability contracts because, at issuance, the Company did not have sufficient amount of authorized of shares of common stock to satisfy its obligations under such contracts.

 

During December 2011, the Company’s shareholders approved an increase in the Company’s authorized number of its shares of common stock to 450,000,000. Accordingly, the Company reclassified its previously-recorded liability contracts to equity contracts in December 2011.

 

At each measurement date, the fair value of the embedded conversion features and warrants were based on the binomial and the Black Scholes method, respectively.

 

During the six-month period ended June 30, 2011, the Company issued warrants in connection with the sale of the Company’s common stock, conversion of convertible promissory notes, and short-term note payable, as well convertible promissory notes. The maximum number of shares required to be delivered during the period under which the warrants issued pursuant to common stock, conversion of promissory notes and short-term note payables, as well as the issuance of convertible promissory note, together with all the outstanding convertible debt, stock options, warrants and common stock, exceeded the amount of authorized common stock shares at June 30, 2011. As a result, the Company recorded a derivative liability aggregating $947,541 and was offset against additional-paid in capital.

 

The fair value of the derivative instruments were based on the following assumptions:

 

Exercise price:   $0.05 - $0.08
Market price at date of grant:   $0.08 - $0.09
Expected volatility:   69%
Term:   >1 year  
Risk-free interest rate:   0.28% - 1.76%

 

During the six-month period ended June 30, 2012, the Company issued warrants in connection with the sale of the Company’s common stock, conversion of convertible promissory notes, and short-term note payable, as well convertible promissory notes. The maximum number of shares required to be delivered during the period under which the warrants issued pursuant to common stock, conversion of promissory notes and short-term note payables, as well as the issuance of convertible promissory note, together with all the outstanding convertible debt, stock options, warrants and common stock, exceeded the amount of authorized common stock shares at June 30, 2011.  As a result, the Company recorded a derivative liability aggregating $460,431 and was offset against debt discount.

 

The fair value of the derivative instruments were based on the following assumptions:

   

Exercise price:     $0.015 - $0.029  
Market price at date of grant:     $0.032 - $0.043  
Expected volatility:     72%  
Term:       >1 year – 3 years  
Risk-free interest rate:     0.72%  

 

F-13

 

 

NOTE 7 - STOCKHOLDERS' DEFICIT

 

Preferred Stock

 

During the year ended December 31, 2011, the Company issued 100,000 shares of its Series B Preferred Stock. The Series B Preferred Stock’s designation provides voting rights amounting to 400-to-1 shares. The Company issued 50,000 of such shares to one of its directors, who also manages and controls a company which is one of the Company’s customers. Additionally, the Company issued 50,000 of such shares to one of its lenders and shareholders, who has granted a $1.5 million convertible note payable and was the owner of 7,416,666 shares of the Company’s common stock at the date of issuance of the $1.5 million convertible note payable.

 

The issuance of the shares of Series B Preferred Stock was recognized at their par value.

 

Common Stock

 

During December 2011, the Company increased its authorized shares of common stock to 450,000,000.

 

The issuance of common stock during the six-month period ended June 30, 2011 is summarized in the table below:

  

   Number of Shares of Common Stock  Fair Value at Issuance  Fair Value at  Issuance
(per share)
Accrued Interest Payment for 8% and 10% convertible promissory notes   955,029   $81,687   $0.09 
Services performed- Investor relations   5,395,000    383,000    0.04-0.10 
Exercised stock options   3,000,000    90,000    0.03 
Exercised warrants   2,240,159    112,008    0.05 
Conversion of convertible promissory notes and notes payable   19,095,966    1,077,874    

 0.05-0.10

 
Private placement, net of finder’s fee of $57,330   27,730,972    1,123,139    .03-.06 
Convertible note repricing   416,666    79,167    0.19 
Interest associated with issuance of notes payable   500,000    44,000    .088 

 

 The issuance of common stock during the six-month period ended June 30, 2012 is summarized in the table below:

 

   Number of Shares of Common Stock  Fair Value at Issuance  Fair Value at Issuance
(per share)
Services performed- Investor relations   4,650,000   $196,050   $0.01-0.072 
Services performed-Consulting   12,725,000    585,340    0.03-0.07 
Accrued interest payment for 8% and 10% convertible promissory notes   2,116,737    137,510    

 0.05-0.12

 
Exercise of stock options   3,640,000    78,400    0.025 
Private placement   20,768,571    457,250    0.018-0.05 
Exercised warrants   4,000,000    47,500    0.01-0.03 
                

 

Additionally, the Company issued 3,000,000 shares of its common stock as collateral in connection with the issuance of a note payable of $60,000 during the six-month period ended June 30, 2012.

 

F-14

 

 

Warrants

 

The issuance of warrants during the six-month period ended June 30, 2011 is summarized in the table below:

 

  Number of    Exercise  Expiration Value at
Association Warrants    Price  Date Issuance
Private Placement        1,090,000  $  0.09 1/5/2014   $      -  
           
Finder's Fees         4,575,000  $   0.05 - 0.012  2/14/14 - 1/5/14                      -  
           
Conversion of 8%          
  Note payable           166,667  $  0.16 1/14/2013                      -  
           
Accrued interest on          
  Conversion of 8%          
  Note payable             19,981  $  0.16 1/14/2013                    198
           
Issuance of convertible          
  Promissory note        5,000,000  $  0.09 6/17/2016                      -  

 

The issuance of warrants during the six-month period ended June 30, 2012 is summarized in the table below:

 

  Number of    Exercise  Expiration Value at
Association Warrants    Price  Date Issuance
Private Placement        7,350,000  $  0.01-0.07 4/1/15 - 6/29/15  $        -  
           
Issuance of          
  Note payable           100,000  $  0.03 5/7/2015                 2,900
           
Services        1,000,000  $  0.018 5/21/2015               23,000

 

The fair value of the warrants granted is based on the Black Scholes Model using the following assumptions:

  

  June 30, 2012   June 30, 2011
Exercise price: $0.018 - $0.03   $.09-.16
Market price at date of grant: $0.035 - $0.048   $0.08-.09
Expected volatility: 76.21%   69-75%
Term: 3 years   3 – 5 years
Risk-free interest rate: 0.72%   0.75% - 2.72%

 

Stock Options

 

In 2002, the Company adopted the 2002 Stock Plan under which stock awards or options to acquire shares of the Company's common stock may be granted to employees and non-employees of the Company. The Company has authorized 12,000,000 shares of the Company's common stock for grant under the 2002 Plan.

In May 2006, the Board increased the authorized amount to 27,000,000. The 2002 Plan is administered by the Board of Directors and permits the issuance of options for the purchase of up to the number of available shares outstanding. Options granted under the 2002 Plan vest in accordance with the terms established by the Company's stock option committee and generally terminates ten years after the date of issuance.

 

The fair value of stock options granted was estimated at the date of grant using the Black-Scholes options pricing model. The Company used the following assumptions for determining the fair value of options granted under the Black-Scholes option pricing model:

  

  June 30, 2012   June  30, 2011
Exercise Price $ 0.02 - $ 0.05   $ 0.03-0.08
Market price at date of grant $ 0.021 - $ 0.07   $ 0.08
Expected volatility 76.15% - 76.21%   50-69%
Risk-free interest rate 0.51% - 0.72%   0.63-1.76%

 

The following activity occurred under our plan:

  

  Six- month period ended June 30, 2011   Six- month period ended June 30, 2012
 Weighted-average grant-date fair value of options granted  $0.04    $0.04
 Fair value of options recognized as expense:  $293,734    $296,175
 Options granted  5,640,000    4,500,000

 

The total compensation cost related to non-vested options not yet recognized amounted to approximately $13,339 at June 30, 2012 and the Company expects that it will be recognized over the following weighted-average period of 9 months.

 

NOTE 8 - COMMITMENTS AND CONTINGENCIES

 

Litigation

 

The Company has appealed to the California Court of Appeals in a matter involving a consultant.  The issue on appeal is the California Superior Court’s failure to disregard a NY state court judgment for approximately $100,000, which the Company asserts was improperly entered and, therefore, should not be recognized as a valid sister state judgment.  The Company’s likelihood of success on this appeal cannot be determined at this time.

 

F-15

 

 

In November 2011, a note holder filed suit against the Company in Nevada State Court in Douglas County, alleging breach of a promissory debenture.  The Company has filed motions to dismiss the action based on the fact that the note holder has been dissolved and the Company has entered into individual agreements with its former partners.  The case has not been set for trial and, as of this date, there is a low likelihood of an unfavorable outcome.

 

In February 2011, a former employee filed suit against the Company alleging various employment related claims.  The matter is set for trial in September 2012. The Company’s likelihood of success on this appeal cannot be determined at this time.

 

In January 2012, a former officer filed suit against the Company alleging various employment related claims. The matter is set for trial in December 2012. The Company’s likelihood of success on this appeal cannot be determined at this time.

 

At June 30, 2012, the Company has recorded liabilities in connection with such legal proceedings.

 

NOTE 9 - GAIN ON WRITE-OFF FROM DEBT SETTLEMENTS 

 

During the six months ended June 30, 2012, the Company recorded a gain from debt settlements of $446,387 on write off of certain payables on which the statute of limitations has expired relating to the collectability of these payables.

 

NOTE 10 - RELATED PARTY TRANSACTIONS

 

The Company made rental payments for property owned by the Chief Executive Officer of the Company during the six-month periods ended June 30, 2012 and 2011 amounting $0 and $2,500, respectively. The rental property was used for temporary employee housing during such periods.

 

NOTE 11 - SEGMENTS

 

During the six-month periods ended June 30, 2012 and 2011, the Company operated in one business segment. The percentages of sales by geographic region for the six-month periods ended June 30, 2012 and 2011 were approximately:

 

  2012   2011
United States 33%   11%
Europe 67%   89%

 

 

 

 

 

F-16

 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

We are a software development company and service provider for the PC and mobile device industry.  Our flagship product is Spare Backup, a fully-automated remote backup solution designed and developed especially for the small office, mobile and home environment which automatically and efficiently backs up all data on selected laptops, tablets or desktop computers, as well as smart phones. As a result, we believe individuals and businesses can ensure file safety. We launched our Spare Back-up service and software product version 1.0 in March 2005 specifically designed for the PC, and we are currently offering version 6.0 of the product which now incorporates not only the PC but tablets and smart phones which are carrier agnostic and handset agonistic .

 

Our Spare Switch software enables users to complete the transfer of personal files from one personal computer (PC) to another via a high speed Internet connection. We focus on individuals and businesses that use diverse technologies and various devices to support their businesses and lifestyles. 

 

Our Spare Mobile product backs up personal content on your “smart phones” such as contacts, emails, calendar events, photos, music and videos.  We offer a complete line of security products to compliment the user’s smart phone, such as:

 

Last Known LocationPRO:  View the approximate location of your registered phone(s) on an integrated map using the phone’s built-in GPS.

 

Lock/Unlock PhonePRO:  Remotely lock your phone to prevent unauthorized use and protect your personal information.

 

Display MessagePRO:  Send a message to your phone that locks your phone and displays a message requesting that the Good Samaritan holding your phone contact you to return it.

 

Set Phone AlarmPRO:  Locks your phone and sends a loud, audible alert directly to your phone to immediately pinpoint its location.

 

Erase PhonePRO:  Remotely lock your phone and erase your contacts, photos, etc. from your phone.   

 

We provide an easy to use, scalable, cloud-based solution for securing business files, media, and personal data. The total Spare Backup offerings represent a suite of complementary products and services which are designed for use by technical and non-technical users. Our software has unique, easy, scalable   characteristics which we believe provides a competitive advantage over other competitors whose products require large investments in hardware, installation, training and support.

 

We have focused our more recent development and marketing efforts on our Spare Mobile product, which backs up personal content on “smart phones” and “tablets,” such as contacts, emails, calendar events, photos, music, videos and data files.  It also offers a complete line of mobile security products and parental controls (developed in 2011) to compliment the users’ mobile devices, as described in our software development section. We have shifted our focus to the mobile industry to take advantage of a number of industry trends which we believe represent a tremendous growth opportunity for our company. In 2011, there were approximately six billion mobile subscribers throughout the world according to The International Telecommunications Union, representing almost 87% of the world’s population.  Industry experts, including IDC and Strategy Analytics, estimate that worldwide shipments of smart phones were approximately 490 million units, up over 60% from 2010, and representing over 31% of all handsets shipped. In June of 2012, Ericsson forecasts that mobile subscriptions will reach 9 billion in 2017, of which 5 billion will be mobile broadband connections. With recent estimates by Juniper Research that less than 1 in 20 smart phones and tablets have third-party security software installed in them, this represents a vast potential market for mobile security. According to Canalys, the U.S. market for mobile security is estimated to grow to over $3 billion annually by 2015.  

 

4

 

We have generated minimal revenue since our inception on September 12, 2002, and have incurred net losses of approximately $119 million from cash and non-cash activity since inception through June 30, 2012. Revenues generated from our business have not been sufficient to fund our current operations and we have relied on funds raised from the sale of our securities to provide sufficient cash to operate our business.  

 

Corporate Relocation

 

We completed the move of our corporate headquarters, including a major portion of our software development team, to Minden, Nevada in the third quarter of 2011.  We believe the move will enable us to draw from a more experienced labor pool for software design, as well as provide us with a significantly more favorable corporate tax environment.  We currently anticipate that we will be subject to minimal corporate taxes for the remainder of 2012.

 

Business Development and Marketing Strategy:

 

We market our software products through distributor’s retailers as well as insurance and warrantee providers.  We are continuing to expand our current distribution base with scheduled launches throughout the remainder of the year. We will focus our distribution efforts in four vertical channels:

 

  · Insurance and warranties: Assurant, Service Net and Lifestyle Group;

 

  · Retail: Car Phone Warehouse, Best Buy Europe and Simplexity;

 

  · Original Equipment Manufacturers: Sony; and

 

  · Carriers

 

Examples of our marketing partners within the four vertical distribution channels include Wirefly/Simplexity, Assurant/Federal Home Warranty, Life Styles Group (a UK warranty provider), Best Buy Europe, and Sony. We will continue to aggressively add additional partnerships. We expect our current partners will commence a number of scheduled launches of our services during 2012 and we are in late stage negotiations for a near term launch with a large international mobile communications company. We are also in various stages of negotiations with potential partners in the U.S., Brazil, India, the Middle East, South America, and   the South Pacific. We are hopeful that these negotiations will result in additional partnerships in the coming quarters.

 

While, we believe the launch of our base offerings will be commercially successful, it is still too early, to determine the extent of its market penetration.

 

We continue to invest in our software development, particularly focusing on the smart phone market. We have added additional features, such as:

 

Last Known LocationPRO:  View the approximate location of your registered phone(s) on an integrated map using the phone’s built-in GPS.

 

Lock/Unlock PhonePRO:  Remotely lock your phone to prevent unauthorized use and protect your personal information.

 

Display MessagePRO:  Send a message to your phone that locks your phone and displays a message requesting that the Good Samaritan holding your phone contact you to return it.

 

Set Phone AlarmPRO:  Locks your phone and sends a loud, audible alert directly to your phone to immediately pinpoint its location.

 

Erase PhonePRO:  Remotely lock your phone and erase your contacts, photos, etc. from your phone.   Since Wirefly Mobile Backup also backs up your contacts, photos, and more, you can easily transfer your stored data to your replacement device in minutes.

 

In the third quarter of 2011 we completed the first phase of development of a new suite of parental controls to enable parents to monitor and manage numerous aspects of their children's use of smart mobile devices. The parental controls are activated through a simple set-up wizard that helps users establish boundaries for monitoring up to 5 children’s locations and times of daily activities like school, sports, and time with friends.  Once specific rules are put into place by the subscriber, if the child's phone is not in the location it should be, the intelligent software automatically notifies the subscriber through email or text. Through the secure website and mobile devices a parent can view the exact movements of a monitored child to see where they have been.  Additional functionalities are being developed which we anticipate will be released in the coming quarters

 

We believe our offerings will adapt to the customer’s day-to-day needs, as our cloud system provides smart phones with the ability to link to our cloud and connect to multiple devices, which include PC’s and tablets.

 

 

5

 

In addition, we are working on providing our partners with real time data analytics which will provide them with behavioral pattern matching and market research.

 

We began an initial small-scale launch with the UK-based Carphone Warehouse in April of 2011 and in the Netherlands in May 2011.  We have now converted our product to support the local language in the Netherlands and Spain, as we anticipate a progressive ramp in their distribution efforts throughout the remainder of 2012. We have also begun translation of our product and documentation into the Turkish language which we anticipate will be completed in the second half of 2012.

 

In September 2010 we reached a distribution agreement with Simplexity, LLC., (“Simplexity”), the parent company of Wirefly.com. Simplexity, a privately held company, is the Internet's leading authorized seller of cell phones and wireless services. Wirefly is Simplexity's shopping and comparison site for consumers, bringing online shoppers an unprecedented selection of cell phones and service plans from every major U.S. carrier with the convenience of automated application processing and cell phone activation. For the last six years Wirefly has been the internet's #1 authorized dealer for AT&T, Verizon Wireless, Sprint, and T-Mobile. Simplexity also operates and maintains similar online websites for a number of major retailers in North America. We believe Simplexity is uniquely positioned in the U.S. market to reach potential mobile customers across a wide variety of carriers through online mobile sales sites they own or manage   within North America.  We anticipate the sales launch of our services through Simplexity’s distribution network to progressively grow in 2011 and beyond. The service will be offered as an add-on or inclusive in the service packages such as “data protection,” currently marketed by Simplexity to its channel partners and customers.

 

We opened a new distribution channel for our mobile platform through mobile insurance and warrantee providers.  In North America we reached an agreement with Assurant (Federal Warranty Service Corporation). Assurant, which develops, underwrites, and markets specialty insurance, extended service contracts, and other risk management solutions with leading financial institutions, retailers, and other entities, has bundled us into their services. The first of their launches is with Sprint, a US-based cellular company.  Our backup solution will be bundled into all warranties associated with tablet sales.  We will be expanding our offerings and are currently doing translations for up to 8 additional languages to support additional launches throughout 2012.

 

We also have a distribution partnership with Lifestyle Services Group (LSG), provider of leading lifestyle solutions and insurance products. LSG specializes in supporting its client products brands, attracting customers, improving the customer journey, and reducing customer attrition rates. LSG’s portfolio includes Mobile Phone Insurance, Card Protection and Tech Protect®, and The HubbTM, which allows clients to seamlessly integrate a complete suite of products and services all accessed via one number.  Their customer base includes Virgin Mobile, Orange, “3”,  Phone, Phones 4 U, Barclay’s and Lloyds bank to name a few in the U.K.   LSG has also amended our December 13, 2010 master services agreement in the third quarter of 2011 to include our parental controls functionality. Under the terms of the amended agreement, Spare Backup will supply the parental controls to LSG for distribution to LSG's affinity distribution channels, which includes most of the major retail banks and mobile networks and targets approximately 10 million customers.  

We expect to be able to work with each LSG partner, including scheduled launches with Lloyds and Royal Bank of Scotland in 2012.  The software is marketed as a way to not only protect data from loss, but to also increase the likelihood of retrieving a lost or stolen phone through the suite of security features.  As mobile devices are becoming more prevalent and more powerful, we believe this channel should become a significant source of revenue to our company in the coming quarters.  We anticipate that these companies will continue to roll out marketing programs progressively in 2012.

 

Through our relationship with LSG’s client companies, Spare Backup will broaden its distribution efforts with current and new partners and initiate new launches into Ireland, Spain, Poland, Turkey, the Middle East, India, Brazil and South America.  In 2012 we anticipate expanding our marketing partnerships across our four vertical marketing channels and across additional geographic areas in order to reach the widest potential subscriber base.

 

6

 

Software Development

 

Our decision to expand the scope of our cloud-based platform into mobile backup and security required us to make substantial changes to our software to enhance the scalability and functionality of our services across a wide array of devices and platforms.  This expansion delayed our ability to launch a number of important programs in 2011. Our development team continued to test and improve the mobile platform throughout the second half of 2011 and now feel that these changes enable us to complete launches with our marketing partners in 2012.

 

In the third quarter we began the full migration to an HTML-based platform for our distribution partners.  We have begun launching with our marketing partners and anticipate a progressive roll out system-wide by the end of 2012.  The sites will enable a full touchscreen interface to support all tablet and mobile device applications including Android, Blackberry, Windows and Apple. HTML will also enable quicker launch schedules for new customers, greater scalability, simplification of server technology, and faster maintenance.

 

We also began the upgrade of our hardware in the third quarter of 2011 to a scalable storage platform capable of supporting millions of users for our software products. Through a unique cloud-like structure, this new platform can be infinitely scaled as usage increases by the combined use of additional network storage and virtual machine arrays (VMWARE). Upon completion all user backup data will be stored on state of the art NetAPP SAN storage.  User account information and transactional information will be stored in a secure SQL-Server redundant distributed database utilizing special high-speed RAID drives.  In addition, our IIS web servers each can support thousands of simultaneous users.  Combining this with our new, scalable virtual machine array allows the system to be used by millions of users.

 

We believe that through our software and hardware improvements we are now better positioned to begin the launches of Assurant, Simplexity, LSG and other potential partners in 2012. The above partnerships represent multiple opportunities, as each of the companies has different distributors and strategic alliances marketing their products. We will continue to enhance our platform nonetheless. We believe the backbone for our service platform has been substantially developed. We have added new features to our existing services that will continue rolling out throughout 2012 that will accelerate revenue from our distribution.

 

7

 

Results of Operations for the three-month and six-month periods ended June 30, 2012 compared to the three-month and six-month periods ended June 30, 2011

 

 

SPARE BACKUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
                         
   Three-month periods ended  Increase/  Increase/  Six-month periods ended  Increase/  Increase/
   June 30,  (Decrease)  (Decrease)  June 30,  (Decrease)  (Decrease)
   2012  2011  in $ 2012  in % 2012  2012  2011  in $ 2012  in % 2012
   (Unaudited)  (Unaudited)  vs 2011  vs 2011  (Unaudited)  (Unaudited)  vs 2011  vs 2011
                         
Revenues:  $124,351   $155,909   $(31,558)   -20.2%  $368,666   $193,503   $175,163    90.5%
                                         
Operating expenses:                                        
 Research and development   115,059    400,296    (285,237)   -71.3%   379,892    658,555    (278,663)   -42.3%
 Selling, general and administrative   811,200    1,877,289    (1,066,089)   -56.8%   2,172,480    3,356,492    (1,184,012)   -35.3%
   Total operating expenses   926,259    2,277,585    (1,351,326)   -59.3%   2,552,372    4,015,047    (1,462,675)   -36.4%
                                         
 Operating loss   (801,908)   (2,121,676)   1,319,768    -62.2%   (2,183,706)   (3,821,544)   1,637,838    -42.9%
                                         
Other income (expense):                                        
 Change in fair value of derivative liabilities   (12,870)   368,208    (381,078)   -103.5%   (12,870)   2,129,934    (2,142,804)   NM 
 Gain from debt settlement   446,387    —      446,387    NM    446,387    —      446,387    NM 
 Interest expense   (78,045)   (279,950)   (201,905)   -72.1%   (118,842)   (390,771)   (271,929)   -69.6%
 Other loss   (1,112)   —      1,112    NM    (1,112)   —      1,112    NM 
   Total other income (expense)   354,360    88,258    266,102    301.5%   313,563    1,739,163    (1,425,600)   -82.0%
                                         
Net loss   (447,548)   (2,033,418)   (1,585,870)   -78.0%   (1,870,143)   (2,082,381)   (212,238)   -10.2%
                                         
NM: Not Meaningful                                        

 

Revenues

 

Our net revenues primarily consist of fees charged for the hosting, development and modification of portals related to the support of our online back-up services, as well as monthly subscriptions. Our net revenues decreased during the three-month periods ended June 30, 2012, when compared to the prior year period, due to a decrease in fees associated with the development of portals during the three-month period ended June 30, 2012, offset by an increase in monthly subscription revenues. Our net revenues increased during the six-month period ended June 30, 2012, when compared to the prior year period, due to an increase in the number of software development projects in the first quarter of 2012, in combination with growing subscription revenues attributable to a larger number of users of our products and several new hosting agreements during the six-month period ended June 30, 2012.

 

We believe that our monthly subscription revenues will continue to grow sequentially during the remainder of 2012. We believe that our portal-related revenues will vary depending on how many new distribution partners begin these marketing programs for the remainder of 2012.

8

 

Research and Development

 

Research and development expenses consist primarily of compensation expenses paid to our software engineers, employees and consultants in conjunction with the development or enhancement of our products. Our research and development expenses for the three-month and six-month periods ended June 30, 2012 include costs associated with continued development of user interfaces and enhancements of existing products.

 

Research and development expenses during the three-month and six-month periods ended June 30, 2012 decreased due to reduced research and development related payroll expenses to provide for the maintenance and upgrades of existing portals during the first half of 2012, while the Company was still developing such portals in the comparable periods of the prior year.

 

Selling, General, and Administrative Expenses

 

Selling, general, and administrative expenses primarily consist of consultant fees related to the marketing of our products, advertising, as well as other general and administrative expenses, such as payroll expenses, necessary to support our existing and anticipated growth in our revenues and legal and professional fees.

 

The decrease in selling, general and administrative expenses during the three-month and six-month periods ended June 30, 2012, when compared with the prior period, is primarily due to a shift of our resources allocated to our marketing efforts from customer acquisition to enhancing our existing distribution channels, which is less costly. In addition, the shift toward developing our current distribution channels has allowed us to significantly decrease our payroll and related expenses due to increased focus and efficiency.

 

Change in Fair Value of Derivative Liabilities

 

Change in fair value of derivative liabilities results from the changes in the fair value of the derivative liability due to the application of ASC 815, resulting in either income or expense, depending on the difference in fair value of the derivative liabilities between their measurement dates. The decrease in fair value of derivative liabilities recognized during the three-month and six-month periods ended June 30, 2012, when compared to the prior year period, is primarily due to a decrease in our share price between measurement dates. Our share price is one of the main assumptions in our computation of derivative liabilities.

 

Interest Expense

 

Interest expense consists primarily of interest on our convertible promissory notes and the amortization of debt discount. The decrease in interest expense during the three-month and six-month periods ended June 30, 2012 is primarily due to the fair value of shares issued in connection with notes payable and the amortization of debt discount during the three-month and six-month periods ended June 30, 2011. We recognized the amortization of debt discount over the terms of their respective promissory notes, which matured during the latter part of the fiscal 2010 and the first half of 2011.

 

9

 

 

Liquidity and Capital Resources

 

 

Sources of liquidity and capital resources            
             
   Ending balance at June 30  Average balance during first half of
   2012  2011  2012  2011
Cash  $—     $11,287   $—     $5,644 
Accounts receivable, net of allowance for bad debt   193,730    100,866    156,989    64,751 
Accounts payable and accrued expenses   3,391,032    3,994,343    3,503,268    3,491,919 
Convertible notes payable excluding debt discount   2,637,280    1,998,735    2,278,008    2,127,981 
Notes payable, excluding debt discount   539,600    399,600    663,600    646,050 

 

 

At June 30, 2012 and 2011, 60% and 28%, respectively, of our total assets consisted of cash and cash equivalents and accounts receivable.

 

We extend unsecured credit in the normal course of business to our customers. The determination of the appropriate amount of the reserve for uncollectible accounts is based upon a review of the amount of credit extended, the length of time each receivable has been outstanding, and the specific customers from whom the receivables are due.

 

The objective of liquidity management is to ensure that we have ready access to sufficient funds to meet commitments while implementing our growth strategy. Our primary sources of liquidity include the sale of our securities and other financing activities, such as the issuance of a convertible promissory notes and notes payable aggregating $456,000 during the six-month period ended June 30, 2012. We cannot ascertain that we have sufficient funds from operations to fund our ongoing operating requirements through December 31, 2012. We may need to raise funds to enhance our working capital and use them for strategic purposes. If such need arises, we intend to generate proceeds from either debt or equity financing.

10

 

 

We do not have any material commitments for capital expenditures. We routinely purchase computer equipment and technology to support our products and their development, and such capital expenditures have ranged between $1,055 and $10,265 during the six-month periods ended June 30, 2012 and 2011.

 

            Six-Month Periods Ended June 30
            2012   2011
Cash flows from operating activities          
                 
Net loss          $        (1,870,143)    $         (2,082,381)
Non-cash adjustments            
  Change in fair value of derivative liabilities                     12,870                (2,129,934)
  Fair value of options and warrants issued for services                 319,634                    296,175
  Fair value of option and warrant modifications                             -                      121,621
  Fair value of warrants issued to convertible promissory note holders                           -                      200,000
  Fair value of stock issued in connection with services rendered                 737,640                    456,000
  Fair value of common stock issued to satisfy accrued interest                 137,510                    153,561
  Gain on extinguishment of debt                    (446,387)                              -  
  Depreciation and amortization                       42,662                    110,715
   Other                             3,745                      74,428
                 
Changes in assets and liabilities          
  Accounts payable, accrued expenses, and accrued payroll taxes                 147,004                 1,369,084
  Other                          (77,807)                     (43,898)
Net cash provided by (used in) operating activities                (993,272)                (1,474,629)
                 
Cash flows from investing activities          
  Purchase of fixed assets and other, net                      (1,055)                     (10,265)
                               (1,055)                     (10,265)
                 
Cash flows from financing activities          
  Proceeds from issuance of convertible promissory notes payable                 452,000                      50,000
  Proceeds from issuance of notes payable                     25,000                    367,600
  Repayment of notes payable                               -                     (163,000)
  Net proceeds from issuance of common stock for cash                 457,250                 1,166,894
  Cash overdraft                        (65,823)                   (127,321)
  Other                         125,900                    202,008
                            994,327                 1,496,181
                 
  Net variation in cash        $                       -      $                11,287

 

11

 

 

Six months ended June 30, 2012

 

The increase in accounts receivable as of June 30, 2012 is primarily due to slower payment processing by our primary clients. The decrease in accounts payable and accrued expenses during the six-month period ended June 30, 2012 is primarily due to a decrease in our operating expenses, in combination with a series of accounts payable adjustments made during the six-month period ended June 30, 2012 for unenforceable debts.

 

Cash used in investing activities during the six-month period ended June 30, 2012 consists of the purchase of computer equipment of approximately $1,000.

 

Cash provided by financing activities of approximately $973,000 during the six-month period ended June 30, 2012 resulted from the proceeds from the issuance of convertible promissory notes and notes payable of $456,000, proceeds from the issuance of common stock for cash of approximately $457,000, and the exercise of warrants and options of approximately $126,000, offset by a cash overdraft of approximately $66,000.

 

Six months ended June 30, 2011

 

The increase in accounts receivable as of June 30, 2011 is primarily due to slower payment processing by our primary clients. The increase in accounts payable and accrued expenses during the six-month period ended June 30, 2012 is primarily due to slower payment processing to vendors relating to a decrease in liquidity following a decrease in our revenues.

 

Cash used in investing activities during the six-month period ended June 30, 2011 consisted of capital expenditures of approximately $10,000.

 

Cash provided by financing activities of approximately $1.5 million consisted of the proceeds from notes payable and convertible notes promissory notes of $418,000, and the net proceeds from the issuance of our common stock of approximately $1.2 million offset by principal repayments of certain notes payable aggregating $164,000 and the funding of our overdraft of approximately $127,000. Additionally, we generated proceeds from exercise of options and warrants aggregating approximately $202,000.

 

 Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Capital Raising Transactions

 

During the six-month period ended June 30, 2012, we issued an aggregate 20,501,904 shares of our common stock pursuant to a private placement which generated gross proceeds of approximately $457,000.

 

Going Concern

 

We have generated minimal revenue since our inception on September 12, 2002, and have incurred net losses of approximately $119 million from cash and non-cash activity since inception through June 30, 2012. Our current operations are not an adequate source of cash to fund our current operations and we have relied on funds raised from the sale of our securities to provide sufficient cash to operate our business. The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2011 contains an explanatory paragraph regarding our ability to continue as a going concern based upon our net losses and cash used in operations. Our ability to continue as a going concern is dependent upon our ability to obtain the necessary financing to meet our obligations and repay our liabilities when they become due and to generate profitable operations in the future. If we are unable to raise capital as needed, it is possible that we would be required to cease operations. The financial statements included in this report do not include any adjustments to reflect future adverse effects on the recoverability and classification of assets or amounts and classification of liabilities that may result if we are not successful. 

 

Critical Accounting Policies

 

A summary of significant accounting policies is included in Note 2 to the audited consolidated financial statements included elsewhere in this annual report. We believe that the application of these policies on a consistent basis enables our company to provide useful and reliable financial information about the company's operating results and financial condition.

 

The preparation of financial statements in conformity with generally accepted accounting principles 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 may differ from those estimates.

 

Effective January 1, 2006, we adopted the provisions of ASC Topic 718 "Compensation-Stock Compensation" under the modified prospective method. ASC 718 eliminates accounting for share-based compensation transactions using the intrinsic value method prescribed under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and requires instead that such transactions be accounted for using a fair-value-based method. Under the modified prospective method, we are required to recognize compensation cost for share-based payments to employees based on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied. For periods prior to adoption, the financial statements are unchanged, and the pro forma disclosures previously required by ASC 718, will continue to be required under ASC 718 to the extent those amounts differ from those in the Consolidated Statement of Operations.

12

 

  The Company follows the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements". The Company records revenue when persuasive evidence of an arrangement exists, on-line back-up services have been rendered, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. Online backup service fees received in advance are reflected as deferred revenue on the accompanying balance sheet. Deferred revenue as of December 31, 2008 amounted to $240,436 and will be recognized as revenue over the respective service period.

 

Revenue consists of the gross value of billings to clients. The Company reports this revenue gross in accordance with EITF 99-19 because it is responsible for fulfillment of the service, has substantial latitude in setting price and assumes the credit risk for the entire amount of the sale, and it is responsible for the payment of all obligations incurred for sales marketing and commissions.

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable for a smaller reporting company.

 

Item 4.   Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We do not maintain proper “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on his evaluation as of the end of the period covered by this report, our President who also serves as our principal financial and accounting officer, has concluded that our disclosure controls and procedures were not effective in providing reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and that such information is not accumulated and communicated to our management, including our President to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

PART II - OTHER INFORMATION

 

Item 1.   Legal Proceedings

 

We have appealed to the California Court of Appeals in the matter of Wolfe Axelrod Weinberger, LLC vs. Spare Backup Inc. The issue on appeal is the California Superior Court’s failure to disregard a NY state court judgment for approximately $100,000, which we assert was improperly entered and, therefore, should not be recognized as a valid sister state judgment.  The Company’s likelihood of success on this appeal cannot be determined at this time.

 

In November 2011, Gimmel Partners, LP filed suit against us in Nevada State Court in Douglas County, alleging breach of a promissory debenture.  We have filed motions to dismiss the action based on the fact that Gimmel Partners has been dissolved and we have entered into individual agreements with its former partners.  The case has not been set for trial and, as of this, date there is a low likelihood of an unfavorable outcome.

 

13

In February 2011, Darryl Adams filed suit against us alleging various employment related claims. The matter is set for trial in September 2012. The Company’s likelihood of success on this appeal cannot be determined at this time.

 

In January 2012, Ivor Newman filed suit against us alleging various employment related claims. The matter is set for trial in December 2012. The Company’s likelihood of success on this appeal cannot be determined at this time.

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

 

During the three-month period ended June 30, 2012, we issued 13,375,000 shares of common stock to five investor relation providers and consultants for service performed at a fair value of $456,840 or $0.03-0.048 per share. These private transactions are exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that Act.

 

During the three-month period ended June 30, 2012, we  issued in aggregate 7,978,571 shares of our common stock to 8 accredited investors pursuant to a private placement which generated gross proceeds of approximately $151,000 or $0.018 per share. These private transactions are exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Regulation D, Rule 506 and Section 4(2) of that act.

 

During the three-month period ended June 30, 2012, we issued 694,488 shares of common stock to 30 accredited investors in connection with the payment of accrued interest of the 8% and 10% convertible promissory notes. The fair value of such shares issued amounted to $34,285 or $0.05 per share. These private transactions are exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that Act.

 

 

Item 3.   Defaults Upon Senior Securities

 

None.

 

Item 4.   [Removed and Reserved]

 

None.

 

Item 5.   Other Information

 

Item 6.    Exhibits

 

31.1 Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer

 

31.2 Rule 13a-14(a)/ 15d-14(a) Certification of principal financial and accounting officer

 

32.1   Section 1350 Certification of Chief Executive Officer and principal financial and accounting officer

 

14

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    SPARE BACK UP, INC.
     
     
Dated: August 20, 2012 By:   /s/ Cery B. Perle
   

Cery B. Perle

President, Chief Executive Officer and Director

and Principal Financial and Accounting Officer

 

15

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