Item 1. Business
We are a developer and marketer of a line of software products specifically designed for consumers as well as the business and home business users. Our products are designed and developed so that technical skills are not necessary to use or manage the software. Our Spare line of software products includes our Spare Mobile, Spare Backup for PC and tablets, Spare Switch PC data migration software, and our Parental Controls.
Our Products and Services
Our flagship products are Spare Mobile™ and Spare Backup™, a fully-automated remote backup solution designed and developed for mobile devices and small office or home environment users, allowing automatic and efficient back ups of all data on selected mobile devices, laptop and desktop computers. As a result, we believe consumers and small companies can ensure file safety of all files contained on their mobile devices, personal computers (PCs) and laptops for backup and retrieval. We launched our Spare Back-up service and software product version 1.0 in March 2005 and are currently offering version 6.0 of the product. Our software has characteristics of additional coding that enables easy to scale infrastructure and support elements which we believe provides a competitive advantage over other providers whose products require large investments in hardware, as well as professional installation, training and support.
Spare Mobile will provide a user with the ability to backup data and content from their phone to the Spare cloud without the need to connect the mobile device to a PC via a cable.
● Backup is performed securely using the users’ mobile or Wi-Fi network; mobile network usage charges may apply.
● Backup captures data stored both on the Mobile devices onboard memory as well as any add on memory devices such as a memory card.
● Backup captures all pertinent user data and configuration if feasible.
● A user has the ability to configure the frequency that backups occur.
● The Spare Mobile software detects files that should be backed up automatically.
● Users have the ability to customize which files to back up and have the ability to recover a backed up file(s) to their mobile device.
● If a user also has a Spare Backup account, the user has the ability to retrieve mobile files from a variety of devices using our Spare Synchronization service.
● Spare Mobile will support the following Mobile device operating systems:
● Blackberry Platform v4.0 & above, some exceptions based on models and hardware/software features available on the phone, such as GPS chip;
● Android OS v1.5 & 1.6 backup and security functions;
● Android OS v2.1 & v2.3 above backup and security functions;
● WinMobile OS v6.0, v6.1 & v6.5 backup and security functions;
● iPhone OS v3.1.3 supports backup only;
● iPhone OS v4.0 & above backup and security functions; and
● Java phones with MIDP 2.0 and/or MIDP 2.1 backup only.
***NOTE: Due to differences in OS functionality the Spare Mobile application may differ slightly in appearance between each supported OS. The functionality however shall remain static.
Spare Backup offers:
● An automatic program installation that requires absolutely no user interaction to configure backups,
● No complicated file selection - Spare Backup scans the user's computer and has a number of presets which it backs up automatically, such as:
● All contacts, email messages and attachments, address book, contacts, folders and contents, signature files from Outlook,
● Word, Excel, PowerPoint files, templates and settings from MS Office,
● My Documents, My Music, My Pictures, Quicken, QuickBooks, MS Money, Turbo Tax and Tax Cut; and
● All desktop files.
In addition, users can manually include any files that are not in the present group.
● Simple, fast data recovery of individual files or the complete desktop
● Open file backup, giving the user the ability to back up while a particular program is open
● Reports automatically available to users in Spare Backup
● Redundant file support - select a restore from the last five backups
● Online file retrieval from any Internet connection - using Spare Key
● Provides files security via 256 Rijndael AES 256 block cipher with unique user encryption key
● Decryption protected by Spare Key in the user's computer and with broker so complete loss of the computer is not a problem
The VeriSign/Starfield Technology high assurance certificates provide authenticity for web based transactions. The encryption we use for ensuring privacy is the 256 Rijndael AES, a block cypher adopted as an encryption standard by the U.S. Government. The data is protected in transit and communication via Secure Sockets Layer (SSL), a cryptographic protocol which provides secure communications over the public Internet.
An overview of customer benefits includes:
● Ease-of-use - Spare Backup provides fast, easy and fully automated data protection. Users benefit from automated data file selection, which distinguishes user data files from operating system and application files. As a result, users do not have to remember where all of their data files are stored. Spare Backup allows users to retrieve multiple past versions of a file, not just the most recently backed-up version.
● Impenetrable Security and Protection of Corporate Data - Spare Backup ensures that all data is encrypted with advanced 256-bit encryption on the user's machine using a user provided "key" or password. The data is encrypted a second time using SSL, or secure sockets layer, while it is being transmitted and a third time before it is stored on the RAID, or redundant array of independent disc, servers using a strong private key.
● SSL Support - SSL based protocol enhancements to address security parameters during: registration, upgrade, backup and retrieve.
Spare Switch is used by either downloading the software from the Internet or by inserting an installation CD into the old computer. Spare Switch then scans the hard drive and inventories of personal directories, giving the user a detailed report of the documents and other files. From that inventory, the user can then select the exact files that he or she wishes to transfer to the new PC. Spare Switch avoids the need for PC-to-PC transfer cable by compacting, encrypting and then transferring the files via the Internet. Spare Switch 's data center can then hold the encrypted data for as long as a week, giving the user the flexibility to choose when to download the files to the new PC. The files are downloaded from our secure. Spare Switch uses a 256-bit encryption cipher with non-algorithmic key to ensure that the information is impervious to hackers at every step of the process. Spare Switch pricing is done on a case by case basis per partner.
Spare Backup software comes with the monthly service and enables users to also back up to local storage devices with or without using the online service.
Our offers vary depending on partnerships, in some cases we offer new users a free 14-day trial, other could be an allocation of space. Spare Backup services retail between $0.99 and $6.99 per month and certain partners offer annual plans.
We developed new products and integrated new feature functionality into our Spare Backup® software. The new offerings in our Spare line of software products include: Spare Room™ , Spare Mobile™ , Spare Security Suite for Mobile and Tablets, and Parental Controls. The following paragraphs provide certain information regarding our line of products and features:
Spare Room is designed to complement the Spare Backup software. We launched this product in the second quarter of fiscal 2009. This is a first step to digital contract management and cloud computing for Spare Backup users. This feature has been distributed and is available to our active Spare backup users by downloading and installing the software which is obtainable thru our distribution partners. We are currently in production with this product for Car Phone Warehouse Limited, which distributes this under the name “My Hub”.
The Spare Backup software easily and automatically backs up a user's files from the user's desktop to the Spare Backup 's cloud. Once files are stored securely in the cloud, the Spare Room application allows a user to take advantage of a wide range of sharing and social networking tools. The solution allows the user to get the most out of available tools and services on the Internet while providing the security of online backup.
In the first version of the Spare Room, the applications allow our customers to easily access and manage their backed-up photos, videos, music and documents. As well as enabling users to access other services and applications, such as for music, mobile devices and mobile banking for purchases and or convenience. Future versions of Spare Room will include additional features beyond photo sharing to include Video, Contact Management and Calendar management. These features will be displayed on the Spare Room Dashboard allowing a user to easily navigate Spare Room and manage their digital data stored in the Spare cloud from a variety of devices.
Spare Mobile works in conjunction with the users of Spare Backup and Spare Room accounts. Spare Room provides an interface for a user to manage their mobile device and the files contained on their mobile device.
Our Target Customers
We distribute our product line through four vertical channels as a “white label solution,” branding our solutions under our distribution partners’ brands. We are focusing on the insurance and warranty space where we are bundled into a warranty with retailers online, including OEM’s and Telco’s. Our partners will then resell our products to owners and executives of businesses which do not have an IT (information technology) department that use technology to support their businesses as well as small business users and consumers who desire to secure the redundancy of available files and documents vital to the continuity of their operations, business, or personal information. Since our products and services allow non-technical users too quickly, easily and thoroughly secure and backup their files or data archiving and storage, we believe that our business is uniquely relevant to enabling small companies to succeed using technology. Our products and services also support individual business professionals working in companies of all sizes, as well as individuals who use mobile devices. Other unique characteristics are additional coding that enables easy to scale infrastructure and support elements. We believe that this characteristic provides a competitive advantage over other providers whose products require large investments in hardware, as well as professional installation, training and support. Spare Backup now has a SMB product directed toward the small to mid-size business with 500 or less computers. The same ease of use that the consumer product is known for the SMB product has with an ease to use administrative dashboard for set up, grouping of departments and storage controls.
How We Market Our Products and Services
We market our software products through distributor’s retailers as well as a "white label" solution that will be distributed through its vertical channel, such as insurance and warranty 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
· Retailers
· Original Equipment Manufacturers
· Telephone Carriers
We will continue to aggressively add additional partnerships. We expect our current partners will commence scheduled launches of our services during 2013. We are 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.
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 have now converted our product to support the local language in the Netherlands and Spain. We have also begun translation of our product and documentation into the Turkish language which we anticipate will be launched in 2013.
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 2012 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 additional languages to support additional launches throughout 2013.
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 Hubb TM , 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. Bank of Scotland 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.
We expect to be able to work with each LSG partner, including scheduled launches which occurred in Q3 of 2012 with Lloyds and a soft launch with the Bankof Scotland in Q3 of 2012, as these rolling launches continue, we expect to add customers and revenue accordingly as these partners increase their marketing and awareness of the product to their customers. 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 2013.
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, Poland, Turkey, the Middle East, India, Brazil and South America. In 2013, 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.
Customer Support
We provide tier 1 and tier 2 support for our services. Our tier 1 customer support provides initial call resolution and direct linking capabilities to our tier 2 customer support. Tier 2 customer support is managed by an internal group of specialists who are co-located within our Network Operation Center and software development headquarters in Minden, Nevada. Co-location with the software development group allows for the resolution of highly specific technical issues as well as identification of potential application flaws. Our support services were initially available from during evening hours during the week and extended hours on weekends. In March 2007 we began offering 24/7/365 customer support.
Research and Development
Our products were developed primarily by our employees assisted by contractors in certain specialty areas. We have invested approximately $0.8 million and approximately $1.1 million in research and development during fiscal 2012 and fiscal 2011, respectively.
Technology
Our products use a sophisticated combination of hardware, software, and networking to intelligently select files and settings from a customer's computer and reliably transfer these to secure redundant data centers, making the data highly available.
The networking systems used by us were designed to use outbound Internet connections for all communications, thus allowing many users who are behind a firewall access to the backup services. The proprietary software designed by us has been developed to remove the technical knowledge required to use other backup products by selecting files and backup settings for the user.
We own all of our servers and utilize hosting in geographically dispersed TIA-964 Tier-3 rated collocation facilities. Our server architecture employs multiple servers and switching equipment to provide redundancy and high availability to Spare Backup service users. The entire storage area network (SAN) storage system is replicated in near real-time to a secondary SAN to back up the primary one, which will automatically become available in the event of an outage at the primary storage array. Our servers use the latest enterprise level operating system available from Microsoft and use industry standard networking and communication protocols. This provides a highly available network that can scale rapidly using off the shelf hardware. These systems are fully redundant and we anticipate our reliability at 99.9%. We can expand our network capacity quickly and with highly predictable costs.
Our business will suffer if our systems fail or our third-party facilities become unavailable. A reduction in the performance, reliability and availability of our systems and network infrastructure may harm our ability to distribute our products and services to our customers and other users, as well as harm our reputation and ability to attract and retain customers. Our systems and operations are susceptible to, and could be damaged or interrupted by, outages caused by fire, flood, power loss, telecommunications failure, Internet breakdown, earthquake and similar events. If for some reason we should not have redundancy in our facilities, any damage or destruction to our systems would significantly harm our business. Our systems are also subject to human error, security breaches, power losses, computer viruses, break-ins, "denial of service" attacks, sabotage, intentional acts of vandalism and tampering designed to disrupt our computer systems, Web sites and network communications which are beyond our control. This could lead to slower response times or system failures.
Our computer and communications infrastructure is located in a leased facility in Arizona. While our infrastructure is fully redundant and Tier 3 rated, our insurance coverage covers lost profits and accordingly we may not have adequate business interruption insurance to compensate us for losses that may occur from a system outage. Despite our efforts, our network infrastructure and systems could be subject to service interruptions or damage and any resulting interruption of services could harm our business, operating results and reputation.
On April 4, 2013, the Company entered an amended agreement with IO Capital Princess to reduce the monthly hosting fees from approximately $38,000 to $14,000 a month. This represents a 63% decrease in this recurring monthly cash expenditure, which is one of the highest expenses the Company incurs on a monthly basis. The Company entered an initial Master Service Agreement with the vendor on September 11, 2008.
Competition
We face intense and increasing competition in the web-based backup solutions market. If we do not compete effectively or if we experience reduced market share from increased competition, our business will be harmed. In addition, the more successful we are in the emerging market for web-based storage solutions, the more competitors are likely to emerge. We believe that the principal competitive factors in our market include:
● service functionality, quality and performance;
● ease of use, reliability and security of services;
● establishment of a significant base of customers and distribution partners;
● ability to introduce new services to the market in a timely manner by adding additional suite of products to our Backup client;
● customer service and support; and
● pricing.
Our primary competitors are various Internet-based backup providers’ such as Connected.com, Livevault, and backup.com, Carbonite and EMC/Mozy. These companies provide services similar to our PC backup and each have to various degrees a market presence. We also compete with providers of traditional backup technologies, such as Veritas and Symantec (swampdrive) (Norton 360). With mobile technology, we have very few competitors that can compete with our service of synchronization between the PC and mobile devices. Competitors include SugarSync, Inc., Lookout, Inc. and to an extent McAfee, Inc.
Substantially most of our competitors have more capital, longer operating histories, greater brand recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. These competitors may also engage in more extensive development of their technologies, adopt more aggressive pricing policies and establish more comprehensive marketing and advertising campaigns than we can. Our competitors may develop products and service offerings that we do not offer or that are more sophisticated or more cost effective than our own. For these and other reasons, our competitors' products and services may achieve greater acceptance in the marketplace than our own, limiting our ability to gain market share and customer loyalty and to generate sufficient revenues to achieve a profitable level of operations. Our failure to adequately address any of the above factors could harm our business and operating results.
Intellectual Property
Our intellectual property is critical to our business, and we may seek to protect our intellectual property through copyrights, trademarks, patents, trade secrets, confidentiality provisions in our customer, supplier, potential investors, and strategic relationship agreements, nondisclosure agreements with third parties, and invention assignment agreements with our employees and contractors, although we do not execute such agreements in every case. Our protection efforts may prove to be unsuccessful, and unauthorized parties may copy or infringe upon aspects of our technology, services or other intellectual property rights. In addition, these parties may develop similar technology independently. Existing trade secret, copyright and trademark laws offer only limited protection and may not be available in every country in which we will offer our services. In the fourth quarter the company filed for patents involving its Parental Controls.
Government Regulation
Although there are currently relatively few laws and regulations directly applicable to the Internet, it is likely that new laws and regulations will be adopted in the United States and elsewhere covering issues such as limitations on the use of mass-delivered e-mails, broadcast license fees, copyrights, privacy, pricing, sales taxes and the characteristics and quality of Internet services. The adoption of restrictive laws or regulations could slow Internet growth. The application of existing laws and regulations governing Internet issues such as property ownership, libel and personal privacy is also subject to substantial uncertainty. There can be no assurance that current or new government laws and regulations, or the application of existing laws and regulations (including laws and regulations governing issues such as property ownership, taxation, defamation and personal injury), will not expose us to significant liabilities, slow Internet growth or otherwise hurt us financially.
Employees
As of December 31, 2012 we had 5 full-time employees, including all of our executive officers and 19 independent contractors. We believe this operational model reduces our fixed costs and enables us to better manage our cash flow. As of December 31, 2011 we had 22 full-time employees, including all of our executive officers. Consequently, our overall head count of full-time employees has been reduced by 77% during fiscal 2012, or 15 full-time employees. We have also fully outsourced our customer support functions which we anticipate will result in a substantial reduction in our expenses related to that function in 2013.
None of our employees are covered by collective bargaining agreements, and we believe our relationships with our employees to be good.
Our History
We were incorporated in Delaware on December 27, 1999 under the name First Philadelphia Capital Corp. to serve as a vehicle to effect a merger, exchange of common stock, asset acquisition or other business combination with domestic or foreign private business. On October 30, 2000, we completed a business combination with Conservation Anglers Manufacturing, Inc., a real estate holding and development company that was originally organized in Florida on February 7, 2000. The combination was a stock-for-stock merger that was accounted for as a "pooling-of-interests". In connection with the merger, we issued 235,000 shares of our common stock in exchange for all the outstanding stock of Conservation Anglers Manufacturing, Inc. In January 2001 we changed our name to Newport International Group, Inc. to better reflect and describe our then current strategic direction.
On February 6, 2004, we closed an Agreement and Plan of Merger with Grass Roots Communications Inc., a Delaware corporation. Grass Roots was a development stage company incorporated in Delaware in June 2002 initially to create, produce, deliver and track targeted multimedia communications over the Internet. Under the terms of this agreement, Grass Roots became our wholly-owned subsidiary. At the effective time of the merger, the stockholders of Grass Roots exchanged their securities for approximately 12,300,000 shares of our common stock, representing approximately 93% of our common stock. Contemporaneous with this transaction, Grass Roots' President and Chief Executive Officer, Mr. Cery B. Perle, was elected as a member of our Board of Directors and appointed CEO. Mr. Edward L. Hagan, Secretary of Grass Roots, was appointed our secretary. Mr. Perle, the principal stockholder of Grass Roots, and members of his family/household received an aggregate of 46% of our shares of common stock as a result of the exchange upon the merger.
Effective August 16, 2006 we changed our name to Spare Backup, Inc. The corporate name change was brought about by a merger of a wholly-owned subsidiary into Newport International Group, Inc. with Newport International Group, Inc. surviving but renamed Spare Backup, Inc.
Item 1A.
Item 1A. Risk Factors
An investment in our common stock involves a significant degree of risk. You should not invest in our common stock unless you can afford to lose your entire investment. You should consider carefully the following risk factors and other information in this annual report before deciding to invest in our common stock. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected and you could lose your entire investment in our company.
If we are unable to obtain financing necessary to support our operations, we may be unable to continue as a going concern.
Our net losses for the fiscal years ended December 31, 2012 and 2011 were $3,529,813 and $5,850,863, respectively. We have never generated sufficient revenues to fund our ongoing operations. Our operating losses for fiscal 2012 and fiscal 2011 were $3,572,914 and $7,552,495, respectively, and these losses are primarily attributable to our selling, general and administrative expense. The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2012 contains an explanatory paragraph regarding our ability to continue as a going concern based upon our net losses, cash used in operations and working capital deficit. Our ability to continue as a going concern is dependent upon our ability to raise additional capital as described below. The financial statements included in this annual 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 able to continue as a going concern.
Our revenues are not sufficient to fund our operating expenses and we will need to raise additional capital.
Our operating loss has decreased approximately 53% for fiscal 2012 compared to fiscal 2011; we will need to significantly increase our revenues to fund these costs. At December 31, 2012 we had approximately $18,136 cash overdraft and a working capital deficit of approximately $11.3 million. We have raised, during the year ended December 31, 2012, approximately $735,333 from the sale of our common stock. We intend to use the proceeds from the sale of the common stock for working capital purposes. Our current working capital is not sufficient to pay our operating expenses, our obligations as they become due or certain tax liabilities nor is our working capital sufficient to fund any expansion of our company.
While we are constantly evaluating our cash needs and existing burn rate in order to make appropriate adjustments in operating expenses, we need to raise additional debt or equity capital to provide funding for ongoing and future operations and to satisfy our obligations as they become due. While we have historically been able to raise capital, the current capital markets are very challenging and there are no assurances that we will be successful in obtaining additional capital, or that such capital will be available on terms acceptable to us. Our continued existence is dependent upon, among other things, our ability to raise capital and to market and sell our products successfully. If we are unable to raise capital as needed, it is possible that we would be required to cease operations in which event you would lose your entire investment in our Company.
We cannot predict our future revenues or whether our products will be accepted. If the markets for our products and services do not develop, our future results of operations will be adversely affected.
Net revenues from the sales of our Spare Backup line of products have been limited and insufficient to fund our ongoing operations. We reported net revenues of $539,396 and $399,343, respectively, for the fiscal years ended December 31, 2012 and 2011. Our net revenues significantly decreased for fiscal 2012 over fiscal 2011 and we will need to significantly increase if we are to provide cash to fund our operating expenses. We cannot guarantee either that the demand for our Spare Backup line of software products will develop, that such demand will be sustainable or that we will ever effectively compete in our market segment. In addition, we cannot predict what impact, if any, the reduction in discretionary spending will have on future sales of our products. If we are unable to generate any significant net revenues from our products and services, our business, operating results and financial condition in future periods will be materially and adversely affected and we may not be able to continue our business as presently operated, if at all.
We have approximately $2,508,672 of debt which is presently past due and we do not have the funds necessary to pay these obligations.
In addition to funding our operating expenses, we need capital to pay various debt obligations totaling approximately $2,508,672 which are either currently past due or which are due in the current fiscal year. Currently, there are $1,593,772 principal amount of the 8% short-term notes which are past due, $306,563 principal of the 10% short-term notes which are past due, and $508,000 of notes payable which are past due. During 2012, we have been in contact with numerous note holders to work out either a repayment or extension of these notes. The existence of these obligations provides additional challenges to us in our efforts to raise capital to fund our operations. If we are unable to restructure these notes and we are unable to raise the capital necessary to satisfy the obligations, it is possible we will be forced to cease operations.
We will need additional financing which we may not be able to obtain on acceptable terms. If we are unable to raise additional capital as needed, our continued operations will be adversely affected and the future growth of our business and operations will be severely limited.
Historically, our operations have been financed primarily through the issuance of equity and debt. Because we have a history of losses and have never generated sufficient revenue to fund our ongoing operations, we are dependent on our continued ability to raise working capital through the issuance of equity or debt to fund our present operations. Because our operating expenses have continued to grow and we do not know if our net revenues will grow at a pace sufficient to fund our current operations, the continuation of our operations and any future growth will depend upon our ability to raise additional capital, possibly through the issuance of long-term or short-term indebtedness or the issuance of our equity securities in private or public transactions. While the actual amount of our future capital requirements, however, depend on a number of factors, including our ability to grow our net revenues and manage our business, it is likely we will need to raise a significant amount of capital during fiscal 2012 if we are to continue our current operations and satisfy our obligations as they become due. In addition to the challenges facing the capital markets today which make raising equity capital much more difficult for a company such as ours than in prior years, the existence of a number of short term notes which are either currently past due or which will become due in 2012, together with the pending litigation facing our company and the piggy-back registration rights we have granted a number of investors serve to also make it harder to raise the capital we need. There can be no assurance that acceptable financing can be obtained on suitable terms, if at all. If we are unable to raise additional working capital as needed, our ability to continue our current business will be adversely affected and may be forced to curtail some or all of our operations.
We are past due in the payment of payroll taxes.
At December 31, 2012, we had approximately $4,445,882 of accrued but unpaid payroll taxes due to various governmental agencies. We do not have the funds necessary to satisfy this obligation. We have made payments during the current year to pay down our outstanding balance. If we are unable to raise the funds necessary, it is possible that we will be subject to significant additional fines and penalties. The government could file liens against our company and our bank accounts until such time as the amounts have been paid. Customers may be asked to remit payments directly to the government to satisfy our tax obligations. We are also currently working with the IRS on a settlement and corresponding payment plan for our outstanding balance with them. We are current with our obligations with all Federal payroll taxes incurred for the year-ended December 31, 2012.
Our pricing model for our products and services is unproven and may be less than anticipated, which may harm our gross margins.
The pricing model of our products and services may be lower than expected as a result of competitive pricing pressures, promotional programs and customers who negotiate price reductions in exchange for longer term purchase commitments or otherwise. Our pricing model depends on the duration of the agreement, the specific requirements of the order, purchase volumes, the sales and service support and other contractual agreements. We expect to experience pricing pressure and anticipate that the average selling prices and gross margins for our products may decrease over product life cycles. We may not be successful in developing and introducing on a timely basis new products with enhanced features and services that can be sold at higher gross margins.
We are a defendant in a number of lawsuits.
We are currently a defendant in four separate lawsuits. We are also incurring additional legal fees in our efforts to defend these actions. While we believe our defenses are meritorious in each of these cases, should we not prevail in one or more of the actions we could be forced to pay significant amounts which, given our current cash position and need for working capital, could materially adversely affect our ability to continue as a going concern.
The exercise of outstanding warrants and the conversion of outstanding notes will be dilutive to our existing stockholders.
As of March 31, 2013 the following securities which are convertible or exercisable into shares of our common stock were outstanding:
● common stock purchase warrants to purchase a total of 99,791,184 shares of our common stock at prices ranging between $0.01 to $1.30 per share;
● 9,632,107 shares of our common stock issuable upon the possible conversion of the outstanding $2,636,012 principal amount 8% and 10% convertible promissory notes due between August 2008 and June 2011, and
● 29,118,482 shares of our common stock issuable upon exercise of outstanding options with exercise prices ranging from $0.01 to $0.93.
The exercise of these warrants and the conversion of the notes may materially adversely affect the market price of our common stock and will have a dilutive effect on our existing stockholders.
Our quarterly financial results will continue to fluctuate making it difficult to forecast our operating results.
Our quarterly operating results have fluctuated in the past and we expect our net revenues and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are beyond our control, including:
● the announcement or introduction of new services and products by us and our competitors;
● our ability to upgrade and develop our products in a timely and effective manner;
● our ability to retain existing customers and attract new customers at a steady rate, and maintain customer satisfaction;
● the amount and timing of operating costs and capital expenditures relating to expansion of our business and operations;
● government regulation; and
● general economic conditions and economic conditions specific to development and marketing of software products, the market acceptance of new products offered by us, our competitors and potential competitors.
Our limited operating history and unproven business model further contribute to the difficulty of making meaningful quarterly comparisons. Our current and future levels of expenditures are based primarily on our growth plans and estimates of expected future net revenues. Such expenditures are primarily fixed in the short term and our sales cycle can be lengthy. Accordingly, we may not be able to adjust spending or generate new revenue sources timely to compensate for any shortfall in net revenues. If our operating results fall below the expectations of investors, our stock price will likely decline significantly.
Because we expect to continue to incur net losses, we may not be able to implement our business strategy and the price our stock may decline.
We have incurred net losses from inception through December 31, 2012, and at December 31, 2012 we had an accumulated deficit of approximately $120.3 million. We expect to continue to incur net losses for the foreseeable future absent a significant increase in our revenues, of which there are no assurances. Accordingly, our ability to operate our business and implement our business strategy may be hampered by negative cash flows in the future, and the value of our stock may decline as a result. Our capital requirements may vary materially from those currently planned if, for example, we incur unforeseen capital expenditures, unforeseen operating expenses or investments to maintain our competitive position. If this is the case, we may have to delay or abandon some or all of our development plans or otherwise forego market opportunities. We will need to generate significant additional net revenues to be profitable in the future and we may not generate sufficient net revenues to be profitable on either a quarterly or annual basis in the future. To address the risks and uncertainties facing our business strategy, we must, among other things:
● Achieve broad customer adoption and acceptance of our products and services;
● Successfully raise additional capital in the future;
● Successfully integrate, leverage and expand our product distribution;
● Successfully scale our current operations;
● Implement and execute our business and marketing strategies;
● Address intellectual property rights issues that affect our business;
● Develop and maintain strategic relationships to enhance the development and marketing of our existing and new products and services; and
● Respond to competitive developments in the software industry.
We might not be successful in achieving any or all of these business objectives in a cost-effective manner, if at all, and the failure to achieve these could have a serious adverse impact on our business, results of operations and financial position. Each of these objectives may require significant additional expenditures on our part. Even if we ultimately do achieve profitability, we may not be able to sustain or increase profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
We have not voluntarily implemented various corporate governance measures, in the absence of which, stockholders may have more limited protections against interested director transactions, conflicts of interest and similar matters.
Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or The NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address board of directors' independence, audit committee oversight, and the adoption of a code of ethics. Although we have adopted a Code of Ethics, we have not yet adopted any of these other corporate governance measures and, since our securities are not yet listed on a national securities exchange, we are not required to do so. We have not adopted corporate governance measures such as an audit or other independent committees of our board of directors as we presently have only two independent directors. If we expand our board membership in future periods to include additional independent directors, we may seek to establish an audit and other committees of our board of directors. It is possible that if we were to adopt some or all of these corporate governance measures, stockholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.
We cannot be certain that we will be able to protect our intellectual property, and we may be found to infringe on proprietary rights of others, which could harm our business.
Our intellectual property is critical to our business, and we seek to protect our intellectual property through copyrights, trademarks, patents, trade secrets, confidentiality provisions in our customer, supplier, potential investors, and strategic relationship agreements, nondisclosure agreements with third parties, and invention assignment agreements with our employees and contractors. We cannot assure you that measures we take to protect our intellectual property will be successful or that third parties will not develop alternative solutions that do not infringe upon our intellectual property.
In addition, we could be subject to intellectual property infringement claims by others. Claims against us, and any resultant litigation, should it occur in regard to any of our services and applications, could subject us to significant liability for damages including treble damages for willful infringement. In addition, even if we prevail, litigation could be time-consuming and expensive to defend and could result in the diversion of our time and attention. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims. Further, we plan to offer our services and applications to customers worldwide including customers in foreign countries that may offer less protection for our intellectual property than the United States. Our failure to protect against misappropriation of our intellectual property, or claims that we are infringing the intellectual property of third parties could have a negative effect on our business, revenues, financial condition and results of operations.
Competition may decrease our market share, net revenues, and gross margins.
We face intense and increasing competition in the web-base backup solutions market. If we do not compete effectively or if we experience reduced market share from increased competition, our business will be harmed. In addition, the more successful we are in the emerging market for web-based storage solutions, the more competitors are likely to emerge. We believe that the principal competitive factors in our market include:
● Service functionality, quality and performance;
● Ease of use, reliability and security of services;
● Establish a significant base of customers and distribution partners;
● Ability to introduce new services to the market in a timely manner;
● Customer service and support; and
● Pricing.
Our primary competitors are various Internet-based backup providers’ broadcasters, such as Connected.com, Livevault, and backup.com, Carbonite and EMC/Mozy. These companies provide services similar to our PC backup and each have, to various degrees, a market presence. We also compete with providers of traditional backup technologies, such as Veritas and Symantec (swampdrive) (Norton 360). With mobile technology, we have very few competitors that can compete with our service of synchronization between the PC and mobile devices. Competitors include SugarSync, Inc., Lookout, Inc. and, to an extent, McAfee, Inc.
Substantially all of our competitors may have more capital, longer operating histories, greater brand recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. These competitors may also engage in more extensive development of their technologies, adopt more aggressive pricing policies and establish more comprehensive marketing and advertising campaigns than we can. Our competitors may develop products and service offerings that we do not offer or that are more sophisticated or more cost effective than our own. For these and other reasons, our competitors' products and services may achieve greater acceptance in the marketplace than our own, limiting our ability to gain market share and customer loyalty and to generate sufficient net revenues to achieve a profitable level of operations. Our failure to adequately address any of the above factors could harm our business and operating results.
Provisions of our certificate of incorporation and bylaws may delay or prevent a takeover which may not be in the best interests of our stockholders. We recently issued our CEO a series of super voting preferred stock which increased his ability to control the outcome of stockholder votes .
Provisions of our certificate of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our stockholders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions of Delaware law also may be deemed to have certain anti-takeover effects which include that control of shares acquired in excess of certain specified thresholds will not possess any voting rights unless these voting rights are approved by a majority of a corporation's disinterested stockholders.
In addition, our certificate of incorporation authorizes the issuance of up to 5,000,000 shares of preferred stock with such rights and preferences as may be determined by our board of directors. Our board of directors may, without stockholder approval, issue preferred stock with dividends, liquidation, conversion or voting rights that could adversely affect the voting power or other rights of our common stockholders.
Our common stock is currently quoted on the OTCQB, but trading in our stock is limited. Because our stock currently trades below $5.00 per share, and is quoted on the OTC Bulletin Board, our stock is considered a “penny stock” which can adversely affect its liquidity.
The market for our common stock is extremely limited and there are no assurances an active market for our common stock will ever develop. Accordingly, purchasers of our common stock cannot be assured any liquidity in their investment. In addition, the trading price of our common stock is currently below $5.00 per share and we do not anticipate that it will be above $5.00 per share in the foreseeable future. Because the trading price of our common stock is less than $5.00 per share, our common stock is considered a "penny stock," and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. SEC regulations also require additional disclosure in connection with any trades involving a "penny stock," including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of our securities in the secondary market because few broker or dealers are likely to undertake these compliance activities.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable to a smaller reporting company.
Item 2.
Item 2. Properties
In May 2011 we entered into a two year lease agreement, commencing June 1, 2011, with Biofilm Management, Inc., which is affiliated with a board member by means of common ownership and management, which serves as our principal executive office. Under the terms of the lease our initial base rent is approximately $3,000 and we will be responsible for our pro-rata share of common area expenses. The annual rent will escalate annually during the term of the lease to approximately $3,090 in the second year. We believe this facility meets our operational needs for the foreseeable future. This lease will expire May 2013, at which time the Company intends to renew the lease on a month by month basis. We intend to decrease the space used in an effort to increase efficiency.
In October 2011 we entered into a two year lease agreement, commencing November 15, 2011, with an unrelated third party for 3,610 square feet which serves as our secondary office. Under the terms of the lease our initial base rent is approximately $8,664 and we will be responsible for our pro-rata share of common area expenses. This lease was terminated early during April of 2012, which resulted in the deposit being forfeited.
Item 3.
Item 3. Legal Proceedings
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.
In February 2012, a former employee filed suit against the Company alleging various employment related claims. The Company conducted litigation and discovery, the case is in settlement discussions and was set for trial in 2013.
In June 2012, a vendor filed suit against the Company for breach of contract related to call center services they provided. The Company is currently conducting litigation and discovery, the case is not yet set for trial.
At December 31, 2012, the Company has recorded liabilities in connection with such legal proceedings.
Item 4.
Item 4. (Removed and Reserved)
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on the OTCQB under the symbol SPBU. The reported high and low sales prices for the common stock as reported on the OTCQB are shown below for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.
Stockholders
On March 28, 2013, the last sale price of our common stock as reported on the OTCQB was $0.007. As of March 31, 2013, there were approximately 482 record owners of our common stock.
Dividend Policy
We have never paid cash dividends on our common stock. Under Delaware law, we may declare and pay dividends on our capital stock either out of our surplus, as defined in the relevant Delaware statutes, or if there is no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. If, however, the capital of our company, computed in accordance with the relevant Delaware statutes, has been diminished by depreciation in the value of our property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, we are prohibited from declaring and paying out of such net profits any dividends upon any shares of our capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired.
Unregistered Sales of Equity Securities
During the three-month period ended December 31, 2012, we issued in aggregate 19,888,999 shares of our common stock to 5 accredited investors pursuant to a private placement which generated gross proceeds of approximately $140,833 or $0.01 per share. The Company issued 11,666,665 warrants, exercisable at $0.02 per share, as finder’s fees. The warrants expire in December 2015 . This private transaction is 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 December 31, 2012, we issued short-term convertible notes payable of $178,750 . The number of warrants issued with convertible notes s were 28,550,000 shares of our common stock at an exercise price of $0.05 per share. The warrants expire in December 2015. This private transaction is exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that Act.
Item 6.
Item 6. Selected Financial Data
Not applicable to a smaller reporting company.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
The following information should be read in conjunction with our financial statements and accompanying notes included in this Annual Report on Form 10-K.
Overview
We are a software development company and service provider for the PC and mobile device industry. Our flagship products 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. As part of our software we offer Spare Switch which 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.
We began to migrate the product to encompass the mobile environment in 2010 and we are currently offering version 6.0 of the product which now incorporates PC’s, tablets and smart phones . Our mobile software product, which is carrier agnostic and handset agonistic, is marketed under the name “Spare Mobile”.
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 across mobile devices and standard PCs. 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 and 2012) 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 International Data Corporation (IDC) and Strategy Analytics, estimate that worldwide shipments of smart phones in 2012 were approximately 575 million units, up over 10% from 2011, and representing over 45.5% 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. Additionally, according to the IDC Smart Connected Device Tracker, worldwide shipments of smart connected devices grew 29.1% year over year in 2012, crossing 1 billion units shipped with a value of $576.9 billion. The market expansion was largely driven by 78.4% year-over-year growth in tablet shipments, which surpassed 128 million in 2012. IDC expects that tablet shipments will surpass desktop PCs in 2013 and portable PCs in 2014. In 2013, worldwide desktop PC shipments are expected to drop by 4.3% and portable PCs to maintain a flat growth of 0.9%. The tablet market, on the other hand, is expected to reach a new high of 190 million shipment units with year-on-year growth of 48.7% while the smartphone market is expected to grow 27.2% to 918.5 million units. IDC predicts the worldwide smart connected device space will continue to surge with shipments surpassing 2.2 billion units and revenues reaching $814.3 billion in 2017
We have generated minimal revenue since our inception on September 12, 2002, and have incurred net losses of approximately $120.3 million from cash and non-cash activity since inception through December 31, 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.
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, and Lifestyle Group;
· Retail: Car Phone Warehouse, Best Buy Europe and Simplexity;
· Original Equipment Manufacturers: Sony;
· 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 scheduled launches of our services during 2013. We are 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 and our revenue has improved, several launches were delayed in 2012 as a result of upgrading our software to accommodate the breadth of operating systems currently available in the mobile phone market place, and to facilitate new software design applications, making it still too early to determine the extent of the market penetration capabilities of these offerings.
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.
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.
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 began the sales launch of our services through Simplexity’s distribution network in 2011 and have experienced steady sales growth in 2012 on a small scale from this channel throughout 2012. 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 was with Sprint, a US-based cellular company early in 2012, offering our backup solution will be bundled into all warranties associated with tablet sales. We have recorded minimal revenue with small incremental growth in subscribers throughout the course of 2012. We will be expanding our offerings and are currently doing translations for additional languages to support additional launches throughout 2013.
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 Hubb TM , 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 launched the marketing of our services with certain LSG partners in the second half of 2012, including Lloyds in the third quarter of 2012 and a soft launch with the Bank of Scotland in the fourth quarter of 2012. These rolling launches are expected to continue in 2013 and we expect to add new customers and grow revenue accordingly as these partners increase their marketing and awareness campaigns for the products to their customers. Our 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 2013.
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. On August 30, 2012, Spare Backup and LSG executed a client addendum to make Spare Mobile available through LSG Asistans Hizmetleri Anonim Şirketi (“LSG Assistance”) a company registered in Turkey), to the leading mobile communications company in Turkey. The launch of our products in Turkey is now expected to take place in the second quarter of 2013. We believe the Turkish market represents a substantial opportunity for our company as it represents one of the largest smartphone markets in the European/Middle Eastern region. In 2013 we also 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.
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. We completed the majority of that work in 2011.
Over the course of 2012 we completed the full migration to an HTML-based platform for our distribution partners. We developed a number of web hosting sites through our platform with our marketing partners to support current and future marketing roll outs of our software. The sites 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. The hosting of these sites represents an additional revenue source for us as we charge monthly service fees to each distributor for hosting and maintaining the sites.
During 2012 we upgraded our software to accommodate the breadth of operating systems currently available in the mobile phone market place, and to facilitate new software design applications. This upgrade, however, caused delays in launching some of Spare Backup’s marketing partnerships during 2012. While the core development work for our current product offerings is largely complete, we continue to make improvements to increase the capabilities of the product, enhance the user experience and support the inclusion of new operating systems, languages and devices.
Expense Reductions
In an effort to reduce our overall expenses, we have made a number of changes to our corporate structure. 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. The move has enabled the company to significantly reduce its corporate taxes due to a significantly more favorable corporate tax environment as well as less expensive rent and labor costs.
We also have largely completed an outsourcing plan to reduce our employment costs. At December 31, 2012 we had 5 full-time employees, including executive officers. We now utilize approximately 19 independent contractors on a project basis. We believe this operational model reduces our fixed costs and enables us to better manage our cash flow. We have also fully outsourced our customer support functions which we anticipate will result in a substantial reduction in our expenses related to that function in 2013.
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.
Results of Operations
SPARE BACKUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
NM: Not Meaningful
Revenues
Our net revenues primarily consist of subscription fees charged for online back-up services. Our net revenues increased during fiscal 2012, when compared to fiscal 2011, due to an increase in revenues from our new distributors who launched our products and growth with our existing customers. We expect that our revenues during 2013 will continue to increase sequentially from 2012.
During 2012, Spare Backup spent a considerable amount of money and effort to upgrade its software. This upgrade was necessary to accommodate the breadth of operating systems currently available in the mobile phone market place, and to facilitate new software design applications. This upgrade, however, caused delays in launching some of Spare Backup’s marketing partnerships during 2012.
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 fiscal 2012 include costs associated with continued development of user interfaces and enhancements of existing products.
The decrease in our research and development expenses during fiscal 2012, when compared to the prior year periods, is primarily attributable to the completion of our Spare back-Up offering as a cloud solution during the first half of 2010, while our research and development expenses during fiscal 2012 consisted mostly of upgrades necessary to accommodate the breadth of operating systems currently available in the mobile phone market place, and to facilitate new software design applications for enhancements to our existing solutions.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses primarily consist of consultant fees related to the marketing and enhancement 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 in 2012, as compared to 2011 of $3,568,208 or 52% is primarily due to the following:
● a decrease in non-recurring fair value of options, warrants, and our shares of common stock issued to employees and consultants, including the fair value of modification of terms of such options and warrants. Otherwise, selling, general, and administrative expenses during fiscal 2012 are at comparable levels to the prior year period.
·a reduction of our overall head count of full-time employees of 77% during fiscal 2012, or 15 full-time employees.
·reduced rent due to the early termination of the lease in Los Angeles during the fiscal 2012 year.
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 or increase in fair value of derivative liabilities recognized during fiscal 2012 and 2011 is primarily due to a decrease or increase of our common stock quoted price between measurement dates and during such periods, respectively. Our common stock quoted price is one of the primary assumptions used in the computation of our derivative liabilities.
Gain from Debt Settlement
During fiscal 2012 and 2011, we settled numerous court cases and disputes with vendors, which resulted in gains from debt settlements amounting to approximately $446,387 and $172,000, respectively.
Interest Expense
Interest expense consists primarily of interest recognized in connection with the excess of the fair value of the shares issued to satisfy such obligations, over their carrying value, the amortization of debt discount and interest on our convertible promissory notes. The decrease in interest expense during fiscal 2012 is primarily due to lower amortization of debt discount than in fiscal 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.
Liquidity and Capital Resources
At December 31, 2012, our cash overdraft amounted to $18,136 and our working deficit amounted to approximately $11,362,337 as compared with the cash overdraft of $70,750 and a working deficit of approximately $10,909,000 at December 31, 2011.
During the year ended December 31, 2012, we used cash in our operating activities amounting to approximately $1,678,581. Our cash used in operating activities was comprised of our net loss of approximately $3,529,813 adjusted for the following:
● Change in fair value of our derivative liabilities of approximately $600,770;
● Fair value of shares of common stock issued in connection with services rendered of approximately $844,730;
● Fair value of options and warrants issued for services of approximately $350,377;
Additionally, the following variations in operating assets and liabilities impacted our cash used in operating activities:
● Decrease in accounts payable, accrued expenses and accrued payroll taxes of approximately $730 thousand, resulting from delays in payments to satisfy our obligations due to our liquidity issues.
During the year ended December 31, 2012, we generated cash from financing activities of approximately $1.7 million, which consisted of the proceeds from notes payable and convertible promissory notes of $871 thousand, and the net proceeds from the issuance of common stock for cash of $735 thousand offset the funding of our overdraft of approximately $53,000. Additionally, we generated proceeds from exercise of options and warrants aggregating approximately $125,900.
During the year ended December 31, 2011, we used cash in our operating activities amounting to approximately $3,812,000. Our cash used in operating activities was comprised of our net loss of approximately $5,851,000 adjusted for the following:
● Change in fair value of our derivative liabilities of approximately $2,297,000;
● Fair value of stock-based payments issued to employees and consultants of approximately $851,000;
● Fair value of shares of common stock issued in connection with services rendered of approximately $1,018,000;
● Fair value of equity transactions related to financing of approximately $343,000;
Additionally, the following variations in operating assets and liabilities impacted our cash used in operating activities:
● Increase in accounts payable, accrued expenses and accrued payroll taxes of approximately $1.6 million, resulting from delays in payments to satisfy our obligations due to our liquidity issues.
During the year ended December 31, 2011, we generated cash from financing activities of approximately $4 million, which consisted of the proceeds from notes payable and convertible promissory notes of $1.3 million, and the net proceeds from the issuance of common stock for cash of $2.2 million offset principal repayments of certain notes payable aggregating $173,000 and the funding of our overdraft of approximately $57,000. Additionally, we generated proceeds from exercise of options and warrants aggregating approximately $496,000.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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.
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.
Going Concern
We have generated minimal revenue since our inception on September 12, 2002, and have incurred net losses of approximately $120.3 million from cash and non-cash activity since inception through December 31, 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, 2012 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.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable to smaller reporting companies.
Item 8.
Item 8. Financial Statements and Supplementary Data
Our financial statements are contained in pages through, which appear at the end of this annual report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A(T).
Item 9A(T). 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.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The following individuals serve as our executive officers and members of our Board of Directors:
Cery B. Perle. Mr. Perle has served as our President, CEO and Chairman since February 2004. Mr. Perle co-founded Grass Roots in June of 2002. Mr. Perle has experience in numerous start-up ventures. A primary focus of Mr. Perle's experience has been on the sales and marketing of innovative ideas and products. Prior to Grass Roots, from 2001 to 2002, he was director of Crystal Consulting Group, a business-consulting firm. From 2000 to 2001, he was engaged as a consultant to Rxalternative.com, an alternative healthcare web site. From 1994 to 1998, he was President and Chief Executive Officer of Waldron & Co., a California-based registered broker-dealer, where he established four branch offices in addition to the West Coast based corporate office of the investment firm.
We believe that Mr. Perle is qualified to serve on our board of directors due to his experience with numerous start-up ventures and his sales and marketing skills. Mr. Perle is also our founder.
Daniel X. Wray. Mr. Wray was appointed to the Company’s board of directors on January 14, 2012. Mr. Wray is currently the Chairman of Biofilm, Inc. (“Biofilm”), a privately held company based in Vista, California, that manufactures and distributes healthcare products. Prior to becoming Chairman of Biofilm in 2011, Mr. Wray served as CEO of Biofilm, since founding the company in 1991. Prior to founding BioFilm, Mr. Wray has held various positions in the Aerospace industry and holds six patents for technologies he developed during that time. Mr. Wray has a Bachelor’s of Science degree in Chemistry from the University of Arizona.
Mr. Wray was appointed to the board of directors to replace Ivor Newman, whose resignation as a board member and from the position of COO became effective as of January 14, 2012.
Key Employees
Following is biographical information on those persons whom we consider key employees of our company:
Compliance with Section 16(A) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires that our executive officers, directors and persons who own more than ten percent of a registered class of our equity securities file reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the SEC. Such executive officers, directors and ten percent stockholders are also required by the SEC rules to furnish to us copies of all Section 16(a) reports that they file. Based solely on its review of the copies of such forms received by us, or written representations from certain reporting persons that they were not required to file a Form 5, we believe that during the fiscal year ended December 31, 2012, our executive officers, directors and ten percent stockholders complied with all Section 16(a) filing requirements applicable to such persons.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics to provide guiding principles to all of our employees. Our Code of Business Conduct and Ethics does not cover every issue that may arise, but it sets out basic principles to guide our employees and provides that all of our employees must conduct themselves accordingly and seek to avoid even the appearance of improper behavior. Any employee who violates our Code of Business Conduct and Ethics will be subject to disciplinary action, up to an including termination of his or her employment. Generally, our Code of Business Conduct and Ethics provides guidelines regarding:
● compliance with laws, rules and regulations,
● conflicts of interest,
● insider trading,
● corporate opportunities,
● competition and fair dealing,
● discrimination and harassment,
● health and safety,
● record keeping,
● confidentiality,
● protection and proper use of company assets,
● payments to government personnel,
● waivers of the Code of Business Conduct and Ethics,
● reporting any illegal or unethical behavior, and
● compliance procedures.
In addition, we have also adopted a Code of Ethics for our Chief Executive Officer and Senior Financial Officers. In addition to our Code of Business Conduct and Ethics, our CEO and senior financial officers are also subject to specific policies regarding:
● disclosures made in our filings with the SEC,.
● deficiencies in internal controls or fraud involving management or other employees who have a significant role in our financial reporting, disclosure or internal controls,
● conflicts of interests, and
● knowledge of material violations of securities or other laws, rules or regulations to which we are subject.
A copy of our Code of Business Conduct and Ethics has been filed with the Securities and Exchange Commission as an exhibit to this annual report. We will provide a copy, without charge, to any person desiring a copy of the Code of Business Conduct and Ethics, by written request to, 990 Ironwood Drive, Minden, NV 89423, Attention: Corporate Secretary.
Committees of the Board of Directors
Our Board of Directors has not established any committees, including an Audit Committee, a Compensation Committee or a Nominating Committee, any committee performing a similar function. The functions of those committees are being undertaken by the entire board as a whole. Because of the small size of our company and the even number of independent directors, our Board of Directors believes that the establishment of committees of the Board would not provide any benefits to our company and could be considered more form than substance.
We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. Given our relative size, we do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees.
None of our directors is an "audit committee financial expert" within the meaning of Item 401(e) of Regulation S-B. In general, an "audit committee financial expert" is an individual member of the audit committee or Board of Directors who:
● understands generally accepted accounting principles and financial statements,
● is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves,
● has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements,
● understands internal controls over financial reporting, and
● understands audit committee functions.
Since our formation we have relied upon the personal relationships of our CEO to attract individuals to our Board of Directors. While we would prefer that one or more of our directors be an audit committee financial expert, the individuals whom we have been able to attract to our Board do not have the requisite professional backgrounds. As with most small companies until such time our company further develops its business, achieves a stronger revenue base and has sufficient working capital to purchase directors and officers insurance, we do not have any immediate prospects to attract independent directors. When we are able to expand our Board of Directors to include one or more additional independent directors, we intend to establish an Audit Committee of our Board of Directors. It is our intention that one or more of these additional independent directors will also qualify as an audit committee financial expert. Our securities are not quoted on an exchange that has requirements that a majority of our Board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include "independent" directors, nor are we required to establish or maintain an Audit Committee or other committee of our Board of Directors.
Item 11.
Item 11. Executive Compensation
The following table summarizes all compensation recorded by us in the last completed fiscal year for
● our principal executive officer or other individual serving in a similar capacity,
● our one most highly compensated executive officers other than our principal executive officer who was serving as executive officers at December 31, 2012 as that term is defined under Rule 3b-7 of the Securities Exchange Act of 1934. In the case of our company this includes one key employee of our company, and
● up to one additional individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer at December 31, 2011.
For definitional purposes in this annual report these individuals are sometimes referred to as the "named executive officers." The value attributable to any option awards is computed in accordance with ASC 718.
(1) The dollar value recognized for the stock option awards was determined in accordance with ASC 718. For a disclosure of the assumptions made in the valuation please refer to footnote 10 in our consolidated financial statements filed under Item 8 of this Annual Report on Form 10-K.
Employment Agreements and Narrative Regarding Executive Compensation
Employment Agreement with Cery Perle
On January 1, 2012, Cery Perle’s employment agreement automatically renewed for an additional year. Under the terms of this agreement, we currently pay Mr. Perle an annual base salary of $363,000. We initially granted him an option to purchase 1,000,000 shares of our common stock at an exercise price of $0.01 per share as additional compensation, which vest immediately. During 2010, the Board Approved granted him options to purchase a total of 3,100,000 shares of our common stock at an exercise prices ranging from $0.01 to $0.18 per share which were valued at $372,950. In addition, during fiscal 2008, 2009 and 2010 we paid him certain additional compensation set forth in the above table which was approved by our Board of Directors. The agreement also provides for an automobile allowance which is presently $5,000 per month, paid vacation, fringe benefits commensurate with his duties and responsibilities and benefits in the event of disability, as well as containing certain non-disclosure and non-competition provisions. Under the terms of the agreement, we may terminate Mr. Perle's employment either with or without cause. If the agreement is terminated by us without good cause, or by Mr. Perle with cause, we would be obligated to pay him his base salary though the end of the term of the agreement, continue his benefits through the end of the term and all options would continue to vest during the remaining period of the term. To the extent that Mr. Perle is terminated for cause, or he voluntarily resigns, no severance benefits will be paid.
Outstanding Equity Awards at Fiscal Year End
The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of December 31, 2012:
2002 Stock Option and Stock Award Plan
Overview
On August 9, 2002, our board of directors authorized, and holders of a majority of our outstanding common stock approved and adopted, our 2002 Stock Option and Stock Award Plan covering 1,000,000 shares of common stock. On April 20, 2004, the plan was amended to increase the number of shares covered by the plan to 12,000,000 shares to accommodate grants previously provided under the Grass Roots Communications, Inc. compensation program, and on May 31, 2006 the plan was again amended to further increase the number of shares covered by the plan to 27,000,000 shares.
The purpose of the plan is to encourage stock ownership by our officers, directors, key employees and consultants, and to give such persons a greater personal interest in the success of our business and an added incentive to continue to advance and contribute to us. Our board of directors, or a committee of the board, will administer the Plan including, without limitation, the selection of the persons who will be awarded stock grants and granted options, the type of options to be granted, the number of shares subject to each option and the exercise price.
Plan options may either be options qualifying as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified options. In addition, the plan allows for the inclusion of a reload option provision, which permits an eligible person to pay the exercise price of the option with shares of common stock owned by the eligible person and receive a new option to purchase shares of common stock equal in number to the tendered shares. Furthermore, compensatory stock amounts may also be issued. Any incentive option granted under the plan must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of grant, but the exercise price of any incentive option granted to an eligible employee owning more than 10% of our outstanding common stock must not be less than 110% of fair market value on the date of the grant. The term of each plan option and the manner in which it may be exercised is determined by the board of directors or the committee, provided that no option may be exercisable more than 10 years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of the common stock, no more than five years after the date of the grant.
On January 14, 2010, the board approved the repricing of all options granted to our employees and directors. The new exercise price for all options is $0.18.
Eligibility
Our officers, directors, key employees and consultants are eligible to receive stock grants and non-qualified options under the plan. Only our employees are eligible to receive incentive options.
Administration
The plan will be administered by our board of directors or an underlying committee. The board of directors or the committee determines from time to time those of our officers, directors, key employees and consultants to whom stock grants or plan options are to be granted, the terms and provisions of the respective option agreements, the time or times at which such options shall be granted, the type of options to be granted, the dates such plan options become exercisable, the number of shares subject to each option, the purchase price of such shares and the form of payment of such purchase price. All other questions relating to the administration of the plan, and the interpretation of the provisions thereof and of the related option agreements, are resolved by the board of directors or committee.
Shares Subject to Awards
We have currently reserved 27,000,000 of our authorized but unissued shares of common stock for issuance under the plan, and a maximum of 27,000,000 shares may be issued, unless the plan is subsequently amended, subject to adjustment in the event of certain changes in our capitalization, without further action by our board of directors and stockholders, as required. Subject to the limitation on the aggregate number of shares issuable under the plan, there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted to any person. Shares used for stock grants and plan options may be authorized and unissued shares or shares reacquired by us, including shares purchased in the open market. Shares covered by plan options which terminate unexercised will again become available for grant as additional options, without decreasing the maximum number of shares issuable under the plan, although such shares may also be used by us for other purposes.
The plan provides that, if our outstanding shares are increased, decreased, exchanged or otherwise adjusted due to a share dividend, forward or reverse share split, recapitalization, reorganization, merger, consolidation, combination or exchange of shares, an appropriate and proportionate adjustment will be made in the number or kind of shares subject to the plan or subject to unexercised options and in the purchase price per share under such options. Any adjustment, however, does not change the total purchase price payable for the shares subject to outstanding options. In the event of our proposed dissolution or liquidation, a proposed sale of all or substantially all of our assets, a merger or tender offer for our shares of common stock, the board of directors may declare that each option granted under the Plan terminates as of a date to be fixed by the board of directors; provided that not less than 30 days written notice of the date so fixed shall be given to each participant holding an option, and each such participant shall have the right, during the period of 30 days preceding such termination, to exercise the participant's option, in whole or in part, including as to options not otherwise exercisable.
Terms of Exercise
The plan provides that the options granted there under shall be exercisable from time to time in whole or in part, unless otherwise specified by the committee or by the board of directors.
The plan provides that, with respect to incentive stock options, the aggregate fair market value (determined as of the time the option is granted) of the shares of common stock, with respect to which incentive stock options are first exercisable by any option holder during any calendar year shall not exceed $100,000.
Exercise Price
The purchase price for shares subject to incentive stock options must be at least 100% of the fair market value of our common stock on the date the option is granted, except that the purchase price must be at least 110% of the fair market value in the case of an incentive option granted to a person who is a "10% stockholder." A "10% stockholder" is a person who owns, within the meaning of Section 422(b)(6) of the Internal Revenue Code of 1986, at the time the incentive option is granted, shares possessing more than 10% of the total combined voting power of all classes of our outstanding shares. The plan provides that fair market value shall be determined by the board of directors or the committee in accordance with procedures which it may from time to time establish. If the purchase price is paid with consideration other than cash, the Board or the Committee shall determine the fair value of such consideration to us in monetary terms.
The exercise price of non-qualified options shall be determined by the board of directors or the committee, but shall not be less than the par value of our common stock on the date the option is granted.
The per share purchase price of shares issuable upon exercise of a plan option may be adjusted in the event of certain changes in our capitalization, but no such adjustment shall change the total purchase price payable upon the exercise in full of options granted under the plan.
Manner of Exercise
Plan options are exercisable by delivery of written notice to us stating the number of shares with respect to which the option is being exercised, together with full payment of the purchase price therefore. Payment shall be in cash, checks, certified or bank cashier's checks, promissory notes secured by the shares issued through exercise of the related options, shares of common stock or in such other form or combination of forms which shall be acceptable to the board of directors or the committee, provided that any loan or guarantee by us of the purchase price may only be made upon resolution of the board of directors or committee that such loan or guarantee is reasonably expected to benefit us.
Option Period
All incentive stock options shall expire on or before the tenth anniversary of the date the option is granted except as limited above. However, in the case of incentive stock options granted to an eligible employee owning more than 10% of the common stock, these options will expire no later than five years after the date of the grant. Non-qualified options shall expire 10 years and one day from the date of grant unless otherwise provided under the terms of the option grant.
Termination
All plan options are non-assignable and nontransferable, except by will or by the laws of descent and distribution, and during the lifetime of the optionee, may be exercised only by such optionee. If an optionee shall die while our employee or within three months after termination of employment by us because of disability, or retirement or otherwise, such options may be exercised, to the extent that the optionee shall have been entitled to do so on the date of death or termination of employment, by the person or persons to whom the optionee's right under the option pass by will or applicable law, or if no such person has such right, by his executors or administrators.
In the event of termination of employment because of death while an employee or because of disability, the optionee's options may be exercised not later than the expiration date specified in the option or one year after the optionee's death, whichever date is earlier, or in the event of termination of employment because of retirement or otherwise, not later than the expiration date specified in the option or one year after the optionee's death, whichever date is earlier.
If an optionee's employment by us terminates because of disability and such optionee has not died within the following three months, the options may be exercised, to the extent that the optionee shall have been entitled to do so at the date of the termination of employment, at any time, or from time to time, but not later than the expiration date specified in the option or one year after termination of employment, whichever date is earlier.
If an optionee's employment shall terminate for any reason other than death or disability, optionee may exercise the options to the same extent that the options were exercisable on the date of termination, for up to three months following such termination, or on or before the expiration date of the options, whichever occurs first. In the event that the optionee was not entitled to exercise the options at the date of termination or if the optionee does not exercise such options (which were then exercisable) within the time specified herein, the options shall terminate.
If an optionee's employment shall terminate for any reason other than death, disability or retirement, all right to exercise the option shall terminate not later than 90 days following the date of such termination of employment.
If an optionee's employment with us is terminated for any reason whatsoever, and within three months after the date thereof optionee either (i) accepts employment with any competitor of, or otherwise engages in competition with us, or (ii) discloses to anyone outside our company or uses any confidential information or material of our company in violation of our policies or any agreement between the optionee and our company, the committee, in its sole discretion, may terminate any outstanding stock option and may require optionee to return to us the economic value of any award that was realized or obtained by optionee at any time during the period beginning on that date that is six months prior to the date optionee's employment with us is terminated.
The committee may, if an optionee's employment with us is terminated for cause, annul any award granted under this plan to such employee and, in such event, the committee, in its sole discretion, may require optionee to return to us the economic value any award that was realized or obtained by optionee at any time during the period beginning on that date that is six months prior to the date optionee's employment with us is terminated.
Modification and Termination of Plan
The board of directors or committee may amend, suspend or terminate the plan at any time. However, no such action may prejudice the rights of any holder of a stock grant or optionee who has prior thereto been granted options under the plan. Further, no amendment to this plan which has the effect of (a) increasing the aggregate number of shares subject to this plan (except for adjustments due to changes in our capitalization), or (b) changing the definition of "Eligible Person" under the plan, may be effective unless and until approved by our stockholders in the same manner as approval of this plan is required. Any such termination of the plan shall not affect the validity of any stock grants or options previously granted there under. Unless the plan shall theretofore have been suspended or terminated by the board of directors, the plan will terminate on September 30, 2014 pursuant to the extension from a Board resolution.
Director Compensation
Our Board of Directors is comprised of Messrs. Perle and Wray. Mr. Perle, who is also an executive officer of our company, does not receive any compensation specifically for his Board services. The following table provides information concerning the compensation of Mr. Wray for services as members of our Board of Directors for fiscal 2012. The value attributable to any option awards is computed in accordance with FAS 123R.
(1) Represents the value of options to purchase 1,000,000 shares of our common stock with an exercise price of $0.025 per share.
We have not established standard compensation arrangements for our directors and the compensation payable to each individual for their service on our Board is determined from time to time by our Board of Directors based upon the amount of time expended by each of the directors on our behalf.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
At March 31, 2013 we had: 447,887,403 shares of common stock, 50,000 shares of Series A Preferred Stock and 100,000 shares of Series B Preferred Stock issued and outstanding. Each share of common stock entitles the holder to one vote, each share of Series A Preferred Stock entitles the holder to 400 votes, and each share of Series B Preferred Stock entitles the holder to 400 votes at any meeting of our stockholders and the shares of common stock, Series A Preferred Stock and Series B Preferred Stock vote together on all matters submitted to a vote of our stockholders.
The following table sets forth information known to us as of March 31, 2013 relating to the beneficial ownership of shares of our voting securities by:
● each person who is known by us to be the beneficial owner of more than five percent of our outstanding voting stock;
● each director;
● each named executive officer; and
● all named executive officers and directors as a group.
Unless otherwise indicated, the business address of each person listed is in care of 990 Ironwood Drive, Minden, Nevada 89423. The percentages in the table have been calculated on the basis of treating as outstanding for a particular person, all shares of our common stock outstanding on that date and all shares of our common stock issuable to that holder in the event of exercise of outstanding options, warrants, rights or conversion privileges owned by that person at that date which are exercisable within 60 days of that date. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of our common stock owned by them, except to the extent that power may be shared with a spouse.
(1) Unless otherwise indicated, the business address of each person listed is in care of Spare Backup, Inc., 990 Ironwood Drive, Minden, NV 89423
(2) Includes: Includes 17,072,794 shares of our common stock underlying options with exercise prices ranging from $0.005 to $0.18 per share.
In January 2008 we issued Mr. Cery Perle, our CEO and a member of our Board of Directors, 50,000 shares of a newly created Series A Preferred Stock as additional compensation valued at $.001 per share or $50.00. The designations, rights and preferences of the Series A Preferred Stock includes:
● each share has a stated value and a liquidation preference of $0.001 per share which equals the par value of the shares,
● the shares are not convertible or exchange into any other security,
● each share entitles the holder to 400 votes at any meeting of our stockholders and such shares will vote together with our common stockholders, provided, however, that Mr. Perle is not eligible to vote the shares in connection with an amendment to increase the number of our authorized shares of common stock if such amendment is proposed to our stockholders within four months from the date of issuance of the shares,.
● the shares are not subject to redemption, and
● so long as the shares are outstanding we have agreed not to alter or change the rights of the security in a manner which would adversely affect the Series A Preferred Stock, or take any action which would result in the taxation of the holder under Section 305 of the Internal Revenue Code.
Prior to the issuance of the shares of Series A Preferred Stock to Mr. Perle, he controlled the vote of approximately 10% of our outstanding voting securities. As a result of the issuance of these securities, Mr. Perle presently controls the vote of approximately 8.8% of our outstanding voting securities. These actions were approved by our Board of Directors of which Mr. Perle is a member.
Related Party Transactions
None.
Director Independence
Mr. Wray is "independent" within the meaning of Marketplace Rule 5605 of the NASDAQ Stock Market, Inc.
Item 14.
Item 14. Principal Accountant Fees and Services
Sherb & Co., LLP served as our independent registered public accounting firm for Q1-Q3 during the fiscal year ended December 31, 2012. The following table shows the fees that were billed for the audit and other services provided by such firm for fiscal 2012 and fiscal 2011. On April 5, 2013, the Company dismissed Sherb & Co., LLP as its auditor. The decision to change independent registered public accounting firm was approved by the Board of Directors of the Company.
On April 5, 2013, concurrent with the dismissal of Sherb & Co, the Company, upon the Board of Directors’ approval, engaged Li and Company, PC (“LICO”) as its new independent registered public accounting firm to audit and review the Company’s consolidated financial statements effective April 5, 2013.
(1)This fee was paid during the first quarter of 2013, but related to the audit of the financial statements for the year ended December 31, 2012.
We do not have an Audit Committee. Our Board of Directors pre-approves all auditing services and permissible non-audit services provided to us by our independent registered public accounting firm. All fees listed above were pre-approved in accordance with this policy.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
EXHIBIT NO. DESCRIPTION
2.1 Acquisition Agreement and Plan of Merger(3)
2. Agreement and Plan of Merger(4)
3.1 Certificate of Incorporation(1)
3.2 By-Laws (1)
3.3 Certificate of Incorporation, as amended(2)
3.4 Certificate of Amendment to the Certificate of Incorporation(5)
3.5 Certificate of Amendment to the Certificate of Incorporation (8)
3.6 Certificate of Ownership merging Spare Backup, Inc. into Newport International Group, Inc. (19)
3.7 Certificate of designations, rights and preferences of Series A Preferred Stock (23)
4.1 Form of Investor Warrant to Purchase Common Stock issued with 8% promissory note (12)
4.2 Form of Common Stock Purchase Warrant issued with 10% secured note (12)
4.3 Form of Common Stock Purchase Warrant issued to Robinson Reed Inc. and First Capital Holdings International, Inc.(11)
4.4 Form of $0.75 Investor Warrant (11)
4.5 Common stock purchase warrant issued March 31, 2005 to purchase 256,667 shares of common stock issued to Jenelle Fontes (10)
4.6 Common stock purchase warrant issued March 31, 2005 to purchase 280,000 shares of common stock issued to Curtis Lawler (10)
4.7 Form of $1.30 common stock purchase warrant (13)
4.8 Form of common stock purchase warrant issued to Langley Park Investment Trust, PLC (16)
4.9 Form of placement agent warrant issued to Brookstreet Securities Corporation (20)
4.10 Option to Purchase Common Stock issued to Wolfe Axlerod Weinberger (20)
4.11 Option to Purchase Common Stock issued to The Sterling Group (20)
4.12 Form of warrant issued to DSG Plc.(24)
10.1 2002 Stock Option and Stock Award Plan (15)
10.2 Lease for principal executive offices (24)
10.3 Stock Purchase Agreement with Langley Park Investment Trust PLC (9)
10.4 Employment Agreement with Cery B. Perle (11)
10.5 Common Stock and Warrant Purchase Agreement dated as of August 27, 2004 (9)
10.6 Registration Rights Agreement dated as of August 27, 2004 (9)
10.7 Amendment No. 1 to Common Stock and Warrant Purchase Agreement dated as of November 2, 2004 (9)
10.8 Settlement Agreement and Release between Newport International Group, Inc., Robinson Reed, Inc., First Capital Holdings International, Inc., Continental Blue Limited and E-Holdings, Inc. (11)
10.9 Supplier Agreement with CompUSA (12)
10.10 Form of Settlement Agreement between Newport International Group, Inc, Robinson Reed, Inc. and First Capital Holdings International, Inc. (14)
10.11 Amendment No. 1 to the 2002 Stock Option and Stock Award Plan (6)
10.12 Form of Repurchase Agreement with Langley Park Investment Trust PLC (16)
10.13 Form of Amendment to Escrow Agreement with Langley Park Investment Trust PLC (16)
10.14 Amendment No. 2 to the 2002 Stock Option and Stock Award Plan (17)
10.15 Customer Technical Support Services Agreement with Circuit City Stores, Inc. (18)
10.16 Standard Services Agreement and Statement of Work with Hewlett-Packard Company (20)
10.17 Finder's Agreement dated February 5, 2007 between Spare Backup, Inc. and Skyebanc, Inc. (21)
10.18 Agreement Regarding Put Option dated as of May 8, 2007 by and among Spare Backup, Inc., Robinson Reed, Inc. and First Capital Holdings International, Inc. (22)
10.19 Software License and Distribution Agreement with Gateway Companies, Inc. (22) Portions of this agreement have been omitted and separately filed with the Securities and Exchange Commission with a request for confidential treatment.
10.20 Data Storage Services Agreement dated February 2, 2007 between DSG Retail and Spare Backup, Inc. (24) Portions of this agreement have been omitted and separately filed with the Securities and Exchange Commission with a request for confidential treatment.
14.1 Code of Business Conduct and Ethics and Code of Ethics for the Chief Executive Officer and Senior Financial Officers (11)
21.1 Subsidiaries of the registrant (11)
23.1 Consent of Liand Company, PC *
31.1 Section 302 Certificate of Chief Executive Officer *
31.2 Section 302 Certificate of principal accounting and financial officer *
32.1 Section 906 Certificate of Chief Executive Officer and principal financial and accounting officer *
101.1 The following materials from the Company's Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows, and (v) related notes to these financial statements, tagged as blocks of text.
* filed herewith
(1) Incorporated by reference to the Quarterly Report on Form 10-QSB as filed with the SEC on May 10, 2000.
(2) Incorporated by reference to the Current Report on Form 8-K as filed with the SEC on February 5, 2001.
(3) Incorporated by reference to the Current Report on Form 8-K filed with the SEC on November 6, 2000.
(4) Incorporated by reference to the Current Report on Form 8-K filed with the SEC on February 13, 2004.
(5) Incorporated by reference to the definitive Information Statement on Schedule 14C as filed with the SEC on November 14, 2003.
(6) Incorporated by reference to the registration statement on Form S-8 as filed with the SEC on August 8, 2004.
(7) Intentionally omitted.
(8) Incorporated by reference to the quarterly report on Form 10-QSB for the three and six months ended June 30, 2004.
(9) Incorporated by reference to the Quarterly Report on Form 10-QSB for the three and nine months ended September 30, 2004.
(10) Incorporated by reference to the Current Report on Form 8-K as filed with the SEC on May 5, 2005.
(11) Incorporated by reference to the registration statement on Form SB-2, as amended, file number 333-123096, as declared effective on May 19, 2005.
(12) Incorporated by reference to the Quarterly Report on Form 10-QSB for the three and six months ended June 30, 2005. Portions of this agreement have been omitted and separately filed with the Securities and Exchange Commission with a request for confidential treatment.
(13) Incorporated by reference to the registration statement on Form SB-2, SEC file number 333-128980, as amended, as declared effective by the SEC on November 14, 2005.
(14) Incorporated by reference to the Current Report on Form 8-K as filed with the SEC on December 15, 2005.
(15) Incorporated by reference to the registration statement on Form S-8, SEC File No. 333-98229, as filed on August 16, 2002.
(16) Incorporated by reference to the Current Report on Form 8-K as filed on May 31, 2006.
(17) Incorporated by reference to the Current Report on Form 8-K as filed on June 6, 2006.
(18) Incorporated by reference to the Current Report on Form 8-K as filed on August 18, 2006. Portions of this agreement have been omitted and marked with a [_] and separately filed with the Securities and Exchange Commission with a request for confidential treatment.
(19) Incorporated by reference to the Current Report on Form 8-K as filed on August 16, 2006.
(20) Incorporated by reference to the registration statement on Form SB-2, SEC File No. 333-139138, as amended, as declared effective by the SEC on February 13, 2007.
(21) Incorporated by reference to the Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006 as filed on April 2, 2007.
(22) Incorporated by reference to the Quarterly Report on Form 10-QSB for the period ended March 31, 2007 as filed on May 21, 2007.
(23) Incorporated by reference to the Current Report on Form 8-K as filed on January 18, 2008.
(24) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 2007 as filed on April 14, 2008.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SPARE BACKUP, INC.
By: /s/ Cery Perle
Cery Perle
Executive Officer, President and Director
Date: April 22, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title Date
By: /s/ Cery Perle
Chief Executive Officer, President and Chairman of the Board April 22, 2013
Cery Perle
(Principal executive officer and financial officer)
By: /s/ Daniel Wray
Director April 22, 2013
Daniel Wray
SPARE BACKUP, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2012
Index to Consolidated Financial Statements and Financial Statement Schedules
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the
	
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Spare Backup, Inc.
Minden, Nevada
We have audited the accompanying consolidated balance sheet of Spare Backup, Inc. (the "Company") as of December 31, 2012, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
The Company’s consolidated financial statements as of December 31, 2011 and for the year then ended was audited by other auditors whose reports dated April 25, 2012 included an explanatory paragraph as to an uncertainty with respect to the Company’s ability to continue as a going concern. The other auditors’ report has been furnished to us, and our opinion, insofar as it relates to amounts included for such prior period, is based solely on the report of such other auditors.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spare Backup, Inc. at December 31, 2012, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has negative working capital and a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Li and Company, PC
Li and Company, PC
Skillman, New Jersey
April 22, 2013
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Spare Backup, Inc.
We have audited the accompanying consolidated balance sheet of Spare Backup, Inc. and Subsidiary as of December 31, 2011, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the year ended December 31, 2011. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spare Backup, Inc. and Subsidiary at December 31, 2011, and the results of their operations and their cash flows for the year ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has negative working capital and a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Sherb & Company LLP
New York, New York
April 25, 2012
See Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
SPARE BACKUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
From January 1, 2012 to December 31, 2012
See Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
SPARE BACKUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 accompanying consolidated financial statements have been prepared on a going concern basis. The Company has incurred net losses of approximately $3.5 million during the year ended December 31, 2012. 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, including accrued payroll taxes and statutory additions amounts to approximately $4.5 million at December 31, 2012, 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 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 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 and useful life of property and equipment. Actual results will differ from these estimates.
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.
Concentration of Credit Risks
The Company's accounts receivable are due from a few customers, who are located in the Unites States and United Kingdom. At December 31, 2012, two of the Company’s customers accounted for 76% of its accounts receivable. Two of the Company’s customers accounted for 85% of its accounts receivable at December 31, 2011.
One of the Company's customers accounted for approximately 40% of its revenues during the year ending December 31, 2012. One of the Company’s customers accounted for 44% of the Company’s revenue during the year ending 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 $86,714 and $100,000 was necessary at December 31, 2012 and 2011, respectively.
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 December 31, 2012 and 2011 amounted to $102,500 and $102,500, respectively, 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.
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 December 31, 2012 and 2011, with the exception of its convertible promissory notes and derivative liabilities. The carrying amount of the convertible promissory notes at December 31, 2012 and 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.
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 December 31, 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.
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.
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 111,303,079 and 105,097,959 at December 31, 2012 and 2011, respectively. Accordingly, these common share equivalents at December 31, 2012 and 2011 are excluded from the loss per share computation for that period due to their antidilutive effect.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Depreciation expense amounted to $61,910 and $217,537 during the years ended December 31, 2012 and 2011, respectively.
NOTE 4 - ACCRUED PAYROLL TAXES
At December 31, 2012, the Company recorded a liability of approximately $4.5 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 consist of the following as of:
The following sets forth the Company’s activity of its convertible notes payable during the year ended December 31, 2011 and 2010, respectively:
Notes Payable
The following sets forth the Company’s activity of its notes payable during the year ended December 31, 2012 and 2011, respectively:
The Company recognized approximately $536,206 and $763,775 during 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
Summary of the Changes in Fair Value of Level 3 Financial Liabilities
The table below provides a summary of the changes in the fair value of the derivative financial instruments and the changes in the fair value of the derivative financial instruments, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
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.
The fair value of the derivative instruments were based on the following assumptions:
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 executives. 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. He was subsequently appointed a director and is the holder of 28,599,078 shares as of December 31, 2012.
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 year ended December 31, 2011 is summarized in the table below:
The issuance of common stock during the year ended December 31, 2012 is summarized in the table below:
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 year ended December 31, 2012.
Warrants
The issuance of warrants during the year ended December 31, 2011 is summarized in the table below:
The issuance of warrants during the year ended December 31, 2012 is summarized in the table below:
The fair value of the warrants granted is based on the Black Scholes Model using the following assumptions:
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:
Stock option activity for the years ended December 31, 2012 and 2011, respectively is summarized as follows:
The following activity occurred under the Company’s option plan:
The total compensation cost related to non-vested options not yet recognized amounted to approximately $85,000 at December 31, 2012 and the Company expects that it will be recognized over the following weighted-average period of 13 months.
NOTE 8 - INCOME TAXES
A reconciliation of the Company’s effective tax rate to the statutory federal rate is as follows at December 31:
* Permanent differences consist of changes in fair value derivative liability and fair value of shares issued for financing or operating activities.
Management believes it is more likely than not that it will be able to offset its deferred tax liability against its net operating losses.
The components of the deferred tax assets and liabilities are as follows:
NOTE 9 - 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.
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 2012, a former employee filed suit against the Company alleging various employment related claims. The Company conducted litigation and discovery, the case is in settlement discussions and was set for trial in 2013.
In June 2012, a vendor filed suit against the Company for breach of contract related to call center services they provided. The Company is currently conducting litigation and discovery, the case is not yet set for trial.
At December 31, 2012, the Company has recorded liabilities in connection with such legal proceedings.
In addition, one of the Company’s note holders has initiated a dispute that is currently in dispute pertaining to an unreasonable amount of penalties and interest related to a prepayment. We are currently negotiating a settlement offer. This case has not been settled, but it is highly likely that there will be a favorable outcome.
Operating Leases
The Company entered into a 2-year lease for certain office space in Minden, Nevada, effective June 1, 2011 through May 31, 2013. Under the terms of the lease, the Company pays monthly base rent of $3,000. Pursuant to the terms of the lease, it may renewed for one additional two year period.
During October 2011, the Company entered into a 2-year lease for certain office space in Los Angeles, California, effective November 15, 2011. Under the terms of the lease, the Company paid monthly base rent of $8,664. This lease was terminated during the fourth quarter of 2012.
Future annual minimum payments, net of sublease income, required under operating lease obligations at December 31, 2012 are as follows:
NOTE 10 - GAIN ON WRITE-OFF FROM DEBT SETTLEMENTS
During the twelve months ended December 31, 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 11 - RELATED PARTY TRANSACTIONS
The Company did not engage in any related party transactions for the year ended December 31, 2012.
NOTE 12 - SEGMENTS
During the years ended December 31, 2012 and 2011, the Company operated in one business segment. The percentages of sales by geographic region for the years ended December 31, 2012 and 2011 were approximately: