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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended July 31, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-22636

SPOT MOBILE INTERNATIONAL LTD.

(Exact name of registrant as specified in its charter)

Delaware

75-2461665

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

4950 Yonge Street, Suite 904

North York, Ontario M2N 6K1

(Address of principal executive offices, including zip code)

(416) 229-9333

(Registrant’s telephone number, including area code)

N/A

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

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

Indicate by check mark whether the registrant has filed all documents and reports to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨

As of September 19, 2011, the registrant had 29,253,594 shares of common stock, $0.001 par value per share, outstanding.

SPOT MOBILE INTERNATIONAL LTD. AND SUBSIDIARIES

INDEX TO FORM 10-Q


	Page

PART I—FINANCIAL INFORMATION		3

ITEM 1. FINANCIAL STATEMENTS		3

CONSOLIDATED BALANCE SHEETS AT JULY 31, 2011 (UNAUDITED) AND OCTOBER 31, 2010		3

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2011 AND 2010 (UNAUDITED)		4

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT FOR THE NINE MONTHS ENDED JULY 31, 2011 (UNAUDITED)		5

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JULY 31, 2011 AND 2010 (UNAUDITED)		6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		7

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		18

ITEM 4. CONTROLS AND PROCEDURES		24

PART II—OTHER INFORMATION		24

ITEM 1. LEGAL PROCEEDINGS		24

ITEM 1A. RISK FACTORS		25

ITEM 6. EXHIBITS		25

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SPOT MOBILE INTERNATIONAL LTD.

CONSOLIDATED BALANCE SHEETS


	July 31, 2011			October 31, 2010
	(unaudited)

ASSETS

Current assets:
Cash	$	13,801		$	156,465
Accounts receivable, net		11,635			35,738
Inventory		426,592			138,116
Prepaid expenses		10,091			—

Total current assets		462,119			330,319


Deposits		234,000			30,000
Equipment, net		1,068,142			1,204,196
Customer lists, net		100,000			212,500
Intellectual property, net		66,667			141,667
Goodwill		100,000			400,000

		1,568,809			1,988,363

Total assets	$	2,030,928		$	2,318,682


LIABILITIES AND SHAREHOLDERS’ DEFICIT

Current liabilities:
Accounts payable and accrued liabilities	$	1,590,560		$	1,123,090
Secured notes payable		1,175,000			1,175,000
Deferred revenue		288,765			2,027
Due to related parties		1,657,282			871,845
Note payable		100,000			100,000
Convertible promissory note		500,000			—
Senior secured note payable		1,323,366			—

Total current liabilities		6,634,974			3,271,962


Convertible promissory note		—			500,000
Senior secured note payable		—			1,250,000

Total liabilities		6,634,974			5,021,962


Shareholders’ deficit:
Preferred stock		—			—
Common stock		29,254			24,154
Additional paid in capital		5,896,756			3,835,856
Accumulated deficit		(10,530,056	)		(6,563,290	)

Total shareholders’ deficit		(4,604,046	)		(2,703,280	)

Total liabilities and shareholders’ deficit	$	2,030,928		$	2,318,682

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

SPOT MOBILE INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three months ended July 31,						Nine months ended July 31
	2011			2010			2011			2010
Revenue	$	2,948,932		$	3,835,984		$	8,825,215		$	12,940,800
Cost of revenue		3,434,983			3,786,632			9,661,378			12,714,960


Gross (loss) profit		(486,051	)		49,352			(836,163	)		225,840


Operating expenses:
Selling, general and administrative expenses		757,570			389,572			2,350,532			1,022,135
Costs related to Rapid Link transaction		—			—			—			168,765
Amortization		115,629			70.091			346,769			223,530
Inventory write down		149,349			—			149,349			—
Impairment charges		200,000			—			300,000			—
Loss on legal settlements		—			525,000			—			825,000

		(1,222,548	)		984,663			3,146,651			2,239,430

Loss from operations		(1,708,599	)		(935,311	)		(3,982,814	)		(2,013,590	)


Other income/expense:
Gain (loss) on disposal of fixed assets		—			415			—			(5,490	)
Management fee income		62,241			—			221,435			—
Interest expense		(100,585	)		(38,056	)		(205,387	)		(116,389	)


Net loss	$	(1,746,943	)	$	(972,952	)	$	(3,966,766	)	$	(2,135,469	)


Net loss per share - basic and diluted	$	(.06	)	$	(.06	)	$	(.14	)	$	(.34	)


Weighted average number of shares common shares outstanding		28,874,473			15,453,080			27,363,118			6,239,377

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

SPOT MOBILE INTERNATIONAL LTD.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT

(UNAUDITED)


	Common stock				Additional		Accumulated
	Shares		Amount		Paid in Capital		Deficit			Total

Balance, November 1, 2010		24,153,594	$	24,154	$	3,835,856	$	(6,563,290	)	$	(2,703,280	)

Shares sold in a private placement		4,600,000		4,600		1,986,400					1,991,000

Shares issued for services		500,000		500		74,500		—			75,000

Net loss						—		(3,966,766	)		(3,966,766	)


Balance, July 31, 2011		29,253,594	$	29,254	$	5,896,756	$	(10,530,056	)	$	(4,604,046	)

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

SPOT MOBILE INTERNATIONAL LTD.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)


	Nine months ended July 31,
	2011			2010

Cash flows from operating activities:
Net loss	$	(3,966,766	)	$	(2,135,469	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization expense		346,769			223,530
Accrued interest waived by shareholder		—			70,000
Shares issued for services		75,000			—
Loss on disposal of fixed assets		—			5,490
Inventory write down		149,349			—
Loss on impairment of goodwill		300,000			—
Loss on legal settlement		—			825,000
Changes in operating assets and liabilities:
Accounts receivable		24,103			(28,268	)
Prepaid expenses		(10,091	)		—
Inventory		(437,824	)		(737	)
Deposits		(204,000	)		(63,500	)
Accounts payable and accrued liabilities		467,470			431,487
Deferred revenue		286,738			18,516


Net cash used in operating activities		(2,969,252	)		(653,951	)


Cash flows from investing activities:
Purchases of equipment		(23,216	)		(4,465	)


Net cash used in investing activities		(23,216	)		(4,465	)


Cash flows from financing activities:
Repayments of advances to related parties		—			(18,809	)
Advances from related parties		785,437			—
Proceeds from sale of common stock		1,991,000			959,990
Note payable increase		73,366			—
Proceeds from convertible promissory note		—			500,000


Net cash provided by financing activities		2,849,803			1,441,181


Net (decrease) increase in cash		(142,665	)		782,765

Cash - beginning		156,466			72,023


Cash - ending	$	13,801		$	854,788


Supplemental disclosure of non-cash activities:

Liabilities assumed on reverse merger	$	—		$	1,325,000

Settlement of debt for shares of common stock	$	—		$	2,000,000

Share subscription receivable	$	—		$	240,000

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

SPOT MOBILE INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JULY 31 30, 2011 AND 2010

(UNAUDITED)

1.	Organization and nature of business, going concern and recent developments:

Organization and nature of business:

Through its operating subsidiaries, Mr. Prepaid Inc., a Florida corporation, (“Mr. Prepaid”) and Spot Mobile Corporation (“Spot Mobile”), Spot Mobile International Ltd. (the “Company”) markets and distributes electronic prepaid telecommunication products and services through independent retailers in the Eastern United States, and operates a mobile virtual network operation offering principally prepaid mobile telephones.

Through February 24, 2010, Mr. Prepaid was a wholly-owned subsidiary of Blackbird Corporation (“Blackbird”), a telecommunications company. On February 24, 2010, Mr. Prepaid was party to the initial closing under a Share Exchange Agreement, dated October 13, 2009, as amended by an Amendment to Share Exchange Agreements dated January 21, 2010 (collectively, the “Share Exchange Agreement”), by and among Rapid Link Corporation (“Rapid Link”), Blackbird, certain of the Rapid Link’s principal shareholders, certain principal shareholders of Blackbird, and Mr. Prepaid. Pursuant to the Share Exchange Agreement, Rapid Link acquired from Blackbird all of the issued and outstanding shares of capital stock of Mr. Prepaid in exchange for 10,000,000 shares of Rapid Link’s newly-created Series A Convertible Preferred Stock (the “Series A Preferred Stock”). As a result, Mr. Prepaid became a wholly-owned subsidiary of Rapid Link.

The Series A Preferred Stock had certain rights and preferences including full voting rights. In addition, the shares of Series A Preferred Stock issued to Blackbird upon the initial closing were convertible into 17,333,333 shares of’ the Company’s common stock. As a result, on an as-converted basis, these 17,333,333 shares of common stock would constitute approximately 80% of the then-issued and outstanding shares of common stock. The conversion of the Series A Preferred Stock issued to Blackbird was subject to amending the Company’s certificate of incorporation to increase the amount of shares of common stock authorized to be issued by the Company to an amount sufficient to permit the conversion of all such shares of Series A Preferred Stock, which occurred in June 2010. The description of the rights and preferences of the Series A Preferred Stock is qualified in its entirety by reference to the Certificate of Designations, Rights and Preferences of Series A Convertible Preferred Stock (the “Certificate of Designations”).

Immediately after the initial closing, all of the outstanding capital stock of the Rapid Link’s former wholly-owned subsidiaries, Telenational Communications, Inc. (“Telenational”) and One Ring Networks, Inc. (“One Ring”), was transferred to a third party. In connection with this transfer, the transferee also assumed the balance of the indebtedness due to the Lenders. The transfer of Telenational and One Ring is without recourse or liability to the Company. After the transfer, and in accordance with the Share Exchange Agreement, the Company retained no significant assets of Rapid Link and assumed approximately $1,325,000 of liabilities, consisting of a $1,250,000 senior secured note payable (Note 8) and $75,000 of accounts payable. Because all of the operating businesses of Rapid Link were transferred immediately after initial closing, the transaction has been accounted for as a recapitalization of Mr. Prepaid.

A subsequent closing under the Share Exchange Agreement was to occur subject to the satisfaction of certain additional conditions including obtaining consents to transfer certain telecommunications licenses from the Federal Communication Commission and state regulatory authorities. At such subsequent closing, Blackbird was to deliver to the Company all of the issued and outstanding shares of capital stock of all other Blackbird subsidiaries. Additionally, certain assets necessary to conduct the core business of Telenational, Rapid Link’s former subsidiary, were to be transferred to a wholly-owned subsidiary of the Company in exchange for the assumption by such transferee of certain indebtedness.

On June 7, 2010, Blackbird notified the Company that due to the inability of certain conditions to the consummation of subsequent closing to be satisfied timely, the subsequent closing was incapable of being completed. As a result, Blackbird advised the Company that it was exercising its rights to terminate the remaining portions of the Share Exchange Agreement which had yet to be performed, namely, the subsequent closing. Accordingly, as of June 7, 2010, the Share Exchange Agreement was terminated with no further force or effect, and no assets of Telenational and One Ring were transferred to the Company.

Notwithstanding the termination of the Share Exchange Agreement, Blackbird agreed to transfer its wholly-owned subsidiary, Spot Mobile, to the Company. The merger of Spot Mobile with the Company on June 7, 2010 was accounted for as a merger between companies under common control. The results of operations of Spot Mobile are included in the results of the Company’s operations for all periods presented. Spot Mobile has recently completed network development, testing and market analysis.

SPOT MOBILE INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JULY 31, 2011 AND 2010

(UNAUDITED)

1.	Organization and nature of business, going concern and recent developments (continued):

The accompanying balance sheet as of July 31, 2011, and the statements of operations for the three and nine months ended July 31, 2011, and statements of cash flows for the three and nine months ended July 31, 2011, have been prepared by the Company without audit. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for such periods have been made. The results of operations for the three and nine months ended July 31, 2011 are not necessarily indicative of operating results for the full year.

Going concern and recent developments:

The Company is subject to various risks in connection with the operation of its business including, among other things, (i) changes in external competitive market factors, (ii) inability to satisfy anticipated working capital or other cash requirements, (iii) changes in the Company’s business strategy or an inability to execute its strategy due to unanticipated changes in the market, (iv) various competitive factors that may prevent the Company from competing successfully in the marketplace, and (v) the Company’s lack of liquidity and its ability to raise additional capital. The Company has an accumulated deficit of approximately $10,530,000 as of July 31, 2011. For the fiscal year ended October 31, 2010, the Company’s net loss was approximately $3,560,000, on revenues of approximately $16 million.

On June 6, 2011, we received a notice from LV Administrative Services, Inc., as administrative and collateral agent for Valens Offshore SPV II, Corp., Valens U.S. SPV I, LLC, Laurus Master Fund, Ltd. (In Liquidation) (collectively, the “Creditor Parties”) under that certain Master Security Agreement, dated February 24, 2010, executed by the Company and Mr. Prepaid, our wholly-owned subsidiary, and a Secured Term Note, dated February 24, 2010, issued by the Company in favor of the Creditor Parties that we were in default under such loan documents for failure to pay scheduled interest payments and failure to provide certain financial reports. On July 12, 2011, we received further notice from the Creditor Parties regarding the acceleration of all amounts due under their senior secured note and demanding payment of $1,323,366. On July 15, 2011, the Creditor Parties filed a lawsuit against the Company and Mr. Prepaid in the Supreme Court of the State of New York seeking summary judgment due to our failure to pay the amounts due under the senior secured note and seeking to enforce their rights and remedies under our loan documents.

As a result of the default on our senior secured note payable and the demand for the repayment of the note we have a working capital deficiency of $6,172,855. We are not able to repay the senior secured note payable and we do not have sufficient cash to continue operations. We are unable to raise further debt or equity without settling this matter with our senior secured lender. We have also been unsuccessful in renegotiating our carrier and network arrangements for lower pricing and additional products to be competitive in our marketplace to be able to successfully implement our business strategy.

As of September 19, 2011, the Company has therefore decided to cease all retail distribution operations pending the outcome of these matters and to evaluate strategic alternatives. Our subsidiary, Spot Mobile Corp., has made arrangements to obtain limited funding (Note 16) while it renegotiates new carrier and network arrangements in order to evaluate its strategic plans.

Our independent auditors have included a going concern emphasis paragraph in their audit opinion on our consolidated financial statements for the fiscal year ended October 31, 2010. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

SPOT MOBILE INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JULY 31, 2011 AND 2010

(UNAUDITED)

2.	Summary of significant accounting policies:

Use of estimates:

The preparation of financial statements in conformity 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. Actual results could differ from those estimates.

Revenue recognition:

Revenues generated by point of sale activated Personal Identification Numbers (“PINs”), which represent the primary sources of the Company’s revenues, are recognized as revenue at the point of sale. Revenue from the sale of Spot Mobile cellular air time is recognized when air time is used. Revenue from sale of Spot Mobile prepaid telephones is recognized at the point of sale.

Inventory:

Inventory consists of prepaid calling cards and point of sale activated PINs, and cellular phones and SIM cards, held for resale, which are valued at the lower of cost and net realizable value.

Accounts receivable:

Trade accounts receivable are stated at the amount the Company expects to collect. The Company regularly monitors credit risk exposures in accounts receivable and maintains a general allowance for doubtful accounts based on historical experience for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer creditworthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. Should any of these factors change, the estimates made by management would also change, which in turn would impact the level of the Company’s future provision for doubtful accounts. Specifically, if the financial condition of the Company’s customers were to deteriorate, affecting their ability to make payments, additional customer-specific provisions for doubtful accounts may be required. The Company reviews its credit policies on a regular basis and analyzes the risk of each prospective customer individually in order to minimize risk. Based on management’s assessment the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Interest is typically not charged on overdue accounts receivable. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. The valuation allowance was approximately $34,000 and $9,000 as of July 31, 2011 and October 31, 2010, respectively.

Equipment:

Equipment is stated at cost less accumulated depreciation and amortization. Depreciation of office and computer equipment, furniture and fixtures and point of sale activation terminals is calculated using the straight-line method over the estimated useful lives of the assets ranging from three to seven years. Telecommunication switching systems are depreciated on the straight-line method over seven years. Expenditures for repairs and maintenance are charged to expense as incurred.

Goodwill:

Goodwill relates to the Mr. Prepaid operations. The Company reviews goodwill arising from business combinations for impairment annually in the fourth quarter, or more frequently if impairment indicators arise. Impairment indicators include (i) a significant decrease in the market value of an asset (ii) a significant change in the extent or manner in which an asset is used or a significant physical change in an asset, (iii) a significant adverse change in legal factors or in the business climate that could affect the value of an asset or an adverse action by a regulator, and (iv) a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with an asset used for the purpose of producing revenue. The Company considers the number of active stores and applies a fair value per store to determine the fair value of its goodwill.

Net loss per share:

Basic net loss per share is computed by dividing the net loss applicable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share reflects the potential dilution that could occur if the preferred shares were converted into common stock. For each of the periods presented, the effect of the inclusion of the dilutive shares (including 6,950,428 and 1,430,428 common shares as of July 31, 2011 and 2010, respectively, issued under outstanding warrants, and 617,283 common shares as of both July 31, 2011 and 2010 respectively, issuable under convertible debt and equity instruments) in which would have resulted in a decrease in loss per share and have been excluded from the calculation of diluted loss per common share.

SPOT MOBILE INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JULY 31, 2011 AND 2010

(UNAUDITED)

2.	Summary of significant accounting policies (continued):

Segment information:

Prior to October 29, 2010 the Company operated in one segment, however, with the acquisition of the technology assets from Yak America on October 29, 2010, we began operating our business in two segments: our Mr. Prepaid retail segment which markets and distributes electronic prepaid telecommunication products through independent retailers; and our Spot Mobile MVNO offering prepaid mobile telephones and SIM cards and airtime utilizing our telecommunications assets. These two segments are reviewed on a regular basis by our chief operating decision makers. All our operations are in the United States, and no customers are individually material to our operations.

Long-lived assets:

Long-lived assets, including the Company’s customer lists and intellectual property related to the Mr. Prepaid operations, arising from business combinations, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. The Company does not perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if an impairment is indicated by its carrying value not being recoverable through undiscounted cash flows. The impairment loss is the difference between the carrying amount and the fair value of the asset estimated using discounted cash flows. Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell.

During 2010, and the quarter ended July 31, 2011, the Company completed goodwill and long-lived asset impairment analyses. Based on the work performed, management concluded that an impairment loss existed. Accordingly, the Company recorded non-cash impairment charges for goodwill in 2010 ($200,000) and the quarter ended July 31, 2011 ($200,000). The impairment charges resulted primarily from a decline in the customer base. Management estimated the impairment charges by cash flow analyses and by consideration of current market conditions and transactions in the prepaid telecommunications industry.

Fair value of financial instruments:

The carrying amount of financial instruments included in current assets and liabilities and long-term debt is not materially different from fair value because of the short maturity of the instruments and/or their respective interest rate amounts and other terms have been negotiated recently. The fair value of related party notes and advances payable are not practicable to estimate due to the related party nature of the underlying transactions.

Income taxes:

The Company utilizes the asset and liability approach to financial accounting and reporting for income taxes. Deferred income taxes and liabilities are computed for differences between the financial statement carrying amounts and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are recorded when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. For the three and nine month periods ended July 31, 2011 and 2010, the Company did not record any income tax benefit, because management does not believe realization of such related deferred income tax assets is more likely than not.

Recent accounting pronouncements:

In October 2009, the FASB issued a new accounting standard which provides guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on management’s best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation. In October 2009, the FASB also issued a new accounting standard which changes revenue recognition for tangible products containing software and hardware elements. Specifically, tangible products containing software and hardware that function together to deliver the tangible products’ essential functionality are scoped out of the existing software revenue recognition guidance and will be accounted for under the multiple-element arrangements revenue recognition guidance discussed above. Both standards were effective for the Company in the first quarter of fiscal year 2011. The Company is currently evaluating the impact that the adoption of this standard may have on its consolidated financial statements.

SPOT MOBILE INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JULY 31, 2011 AND 2010

(UNAUDITED)

3.	Equipment:


	July 31, 2011 *(unaudited)*		October 31, 2010

Computer equipment	$	26,467	$	3,251
Furniture and fixtures		3,122		3,122
Point of sale activation terminals		126,362		126,362
Telecommunications switching platform (Note 14)		1,175,000		1,175,000

		1,330,951		1,307,735
Less accumulated depreciation and amortization		262,809		103,539

	$	1,068,142	$	1,204,196

4.	Goodwill and other intangible assets:

The following sets forth information for intangible assets subject to amortization and for intangible assets not subject to amortization.


	July 31, 2011 (unaudited)			October 31, 2010
Customer lists:
Gross carrying amount	$	750,000		$	750,000
Accumulated amortization		(650,000	)		(537,500	)

	$	100,000		$	212,500


Intellectual property:
Gross carrying amount	$	500,000		$	500,000
Accumulated amortization		(433,333	)		(358,333	)

	$	66,667		$	141,667


Unamortized intangible asset:
Goodwill	$	100,000		$	400,000

During the three months ended July 31, 2011, the Company recorded an impairment charge of $200,000.

5.	Due to related parties:

The amounts due to related parties represent cash advances made to the Company from other companies under common control. These amounts are unsecured and non-interest bearing with no specific terms of repayment, and payable upon demand.

6.	Note payable:

This note payable to a third party, is non-interest bearing and is secured by a priority claim on all assets of the Company. This note was originally due in June 2008, and extended to December 2009. The note remains unpaid and is now due on demand.

7.	Convertible promissory note:

During the year ended October 31, 2010, the Company entered into a note with a third party that bears interest at 3% per year commencing February 28, 2011, and is due on December 31, 2011. Prior to maturity, the note may be converted at the option of the holder into common shares at a rate of $0.81 per share. The note has a standard conversion feature. As of the date of the transaction, the market price of the Company’s common stock was not in excess of the conversion price. Therefore, management determined that there was no beneficial conversion feature.

SPOT MOBILE INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JULY 31, 2011 AND 2010

(UNAUDITED)

8.	Senior secured note payable:

Upon initial closing under the Share Exchange Agreement on February 24, 2010, the Company assumed a senior secured note payable of $1,250,000. The terms of this secured note provide for interest only payments monthly at the rate of 8% per year. The principal amount of $1,250,000 is due on February 28, 2013. This note is collateralized by all assets of the Company.

On June 6, 2011, we received a notice from V Administrative Services, Inc., as administrative and collateral agent for Valens Offshore SPV II, Corp., Valens U.S. SPV I, LLC, Laurus Master Fund, Ltd. (In Liquidation) (collectively, the “Creditor Parties”) under that certain Master Security Agreement, dated February 24, 2010, executed by the Company and Mr. Prepaid, our wholly-owned subsidiary, and a Secured Term Note, dated February 24, 2010, issued by the Company in favor of the Creditor Parties that we were in default under such loan documents for failure to pay scheduled interest payments and failure to provide certain financial reports. On July 12, 2011, we received further notice from the Creditor Parties regarding the acceleration of all amounts due under their senior secured note and demanding payment of $1,323,366. On July 15, 2011, the Creditor Parties filed a lawsuit against the Company and Mr. Prepaid in the Supreme Court of the State of New York seeking summary judgment due to our failure to pay the amounts due under the senior secured note and seeking to enforce their rights and remedies under our loan documents.

9.	Secured notes payable:

On October 29, 2010, the Company assumed certain secured indebtedness of Blackbird in the amount of $1,175,000 in exchange for the technology assets acquired from Yak America Inc. a wholly owned subsidiary of Blackbird. These notes are secured by the telecommunications switching platform and are payable interest only at 10% per annum and are due on demand.

10.

Secured note payable, related party:

On November 1, 2009, the Company had a $2,000,000 note payable to Blackbird. Interest on this note was at 6% per annum, and was due September 30, 2017. The note was collateralized by all assets of the Company. Blackbird waived all interest of $70,000 to June 14, 2010 and $120,000 for the year ended October 31, 2009. The Company has accounted for this waived interest as a contribution of capital from the shareholder. On June 14, 2010, the Company and Blackbird agreed to convert the note to 1,333,333 shares of common stock. The conversion rate of $1.50 per share was consistent with the share price per share of the Company’s July 2010 private placement (Note 11).

11.

Capital stock:


	July 31, 2011 (unaudited)		October 31, 2010

Authorized
Preferred stock:
Series A preferred stock, no par value; authorized 100,000,000 shares at July 31, 2011 and October 31, 2010.

Common stock, $0.001 par value, authorized 1,000,000,000 at July 31, 2011, and October 31, 2010

Issued
29,253,594 and 24,153,594 shares of common stock	$	29,254	$	24,154

	$	29,254	$	24,154

On June 7, 2010, the Company’s shareholders approved the amended and restated certificate of incorporation which includes the following amendments: (i) an amendment to change our corporate name to Spot Mobile International Ltd; (ii) an amendment to increase the number of authorized shares of our common stock available for issuance from 175,000,000 to 1,000,000,000 and to increase the number of authorized shares of our preferred stock available for issuance from 10,000,000 to 100,000,000; and (iii) a restatement of our certificate of incorporation to incorporate all prior amendments, including those mentioned above. In this respect, effective June 7, 2010, we filed our amended and restated certificate of incorporation with the Secretary of State of Delaware. Upon the filing of the amended and restated certificate of incorporation, all of the outstanding shares of our Series A Convertible Preferred Stock were automatically converted into 17,333,333 shares of our common stock.

SPOT MOBILE INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JULY 31, 2011 AND 2010

(UNAUDITED)

In July 2010, the Company completed a private placement of 803,333 shares of common stock at a price of $1.50 per share. Each share included a warrant for one share of common stock exercisable at $2.70 and a warrant for one share of common stock exercisable at $4.50. These warrants are exercisable immediately and will expire on October 31, 2011.

On October 27, 2010, the Company filed an amendment to its certificate of incorporation to effect a reverse stock split of our common stock on the basis of one post split share for every thirty pre-split shares. All references to shares and earnings per share have been retroactively restated to reflect the reverse stock split.

SPOT MOBILE INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JULY 31, 2011 AND 2010

(UNAUDITED)

11.

Capital stock (continued):

At October 31, 2010, an additional 627,095 warrants exercisable at $0.30 for shares of common stock were outstanding. These warrants were issued by Rapid Link prior to the Share Exchange Agreement.

On January 25, 2011, the Company completed the initial closing of a private placement with approximately 30 accredited investors under which it sold 4,100,000 common shares at a price of $0.50 per share and received net proceeds of approximately $1,800,000 after payment of agent fees and costs. In addition, the Company issued 4,100,000 warrants to purchase 4,100,000 common shares at an exercise price of $0.75 until January 25, 2017. In conjunction with this placement, warrants were issued to the placement agent to purchase 410,000 common shares at an exercise price of $0.60 until January 25, 2016.

On February 28, 2011, the Company completed the initial closing of a private placement under which the Company sold 500,00 common shares at a price $0.50 per share and received net proceeds of $216,000 after payment of agent fees and costs. In addition, the Company issued 500,000 warrants to purchase 500,000 common shares at an exercise price of $0.75 until January 25, 2014 and 50,000 warrants to the placement agent to purchase 50,000 common shares at an exercise price of $0.60 until January 25, 2016.

On May 26, 2011, the Company issued 500,000 common shares for consulting services valued at $75,000.

12.

Related party transactions:

Allocation of expenses:

Many operating expenses, primarily salary costs and rent of Mr. Prepaid, were incurred and paid by Blackbird, a company under common control. In accordance with SEC Staff Accounting Bulletin No. 55, these financial statements reflect all of the costs associated with the operations of the Company. While certain costs incurred by Blackbird are directly attributable to the Company, other costs were shared between the two organizations. In situations where the costs were shared, expense has been allocated between Blackbird and Mr. Prepaid. Management believes that the methodologies used are reasonable. Salaries, taxes and benefits were allocated based upon functions of employers. Rent and occupancy costs were allocated based on space utilized. Total allocated expenses charged to the Company were approximately $NIL and $258,000, for the nine month periods ended July 31, 2011 and 2010, respectively, and $NIL and $96,000, for the three month periods ended July 31, 2011 and 2010, respectively.

Use of premises:

The Company’s subsidiary currently operates from office space leased by Yak America Inc. at its monthly cost of $5,006 and its executive office space leased by Cipher Networks Inc. Yak America Inc. and Cipher Networks Inc. are principally owned and controlled by Charles Zwebner, our chief executive officer.

13.

Commitments and contingencies:

On June 10, 2010, Coastline Capital Partners was awarded $300,000 as its arbitration award in its proceeding against the Company. This matter related to Rapid Link and arose before the closing of the transactions contemplated by the Share Exchange Agreement. Coastline Capital Partner has since obtained a judgment in California against the Company in the amount of $434,000 inclusive of attorney fees and costs and is currently seeking to have the judgment enforced in Florida. A full provision for this amount is included in these financial statements as loss on legal settlement.

On July 28, 2010, the Company entered into a settlement agreement with Matthew Liotta and other parties in which 350,000 shares of the Company were issued. This matter related to Rapid Link and arose before closing of the transactions contemplated by the Share Exchange Agreement. The Company estimated the value of these shares to be approximately $525,000 ($0.05 per share) and a provision for this amount is included in the year ended October 31, 2010 as loss on legal settlement. As the current trading volume of the Company’s listed shares is limited, management estimated the value of the shares based on the July 2010 private placement transaction. The settlement agreement also included a full release of all liabilities, damages and obligations relating to this matter as well as a dismissal of the lawsuit.

The Company has received correspondence from Telenational Communications, Inc., a former subsidiary of the Company regarding an alleged breach by the Company of its obligations under the Share Exchange Agreement of October 13, 2009 to consummate a subsequent closing which was to occur on June 30, 2010 upon satisfaction of certain conditions. Under such subsequent closing, the Company was to acquire certain assets of Telenational and assume certain indebtedness related to such

SPOT MOBILE INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JULY 31, 2011 AND 2010

(UNAUDITED)

11.

Commitments and contingencies (continued):

assets. The Company terminated the share exchange agreement on June 7, 2010, as the Company determined that Telenational was unable to comply with its obligations under the agreement. No formal proceedings have been commenced with respect to this matter. The Company believes that it has no further obligations in this regard and that any claim is without merit and will be defended. No provision for loss, if any, has been made in these financial statements as any claim and loss is cannot be determined.

On July 12, 2011, Brune & Richard LLP filed an interpleader complaint against the Creditor Parties, the Company and Mr. Prepaid, among other parties, in the Supreme Court of the State of New York. In connection with a proposed settlement of the dispute between the Creditor Parties and the Company, the Company had previously delivered a good faith deposit in the amount of $200,000 to Brune & Richard LLP. Due to the failure of the parties to resolve the dispute, Brune & Richard placed such deposit in the court pursuant to the interpleader action. The Company has filed a response setting forth various defenses. This matter is ongoing pending a resolution of the LV Administrative Services, Inc. lawsuit described above.

SPOT MOBILE INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JULY 31, 2011 AND 2010

(UNAUDITED)

14.

Telecommunications switching platform:

Until October 29, 2010, Spot Mobile had an agreement to utilize a telecommunications switching platform (“technology assets”, or “the platform”) in order to rout its calls and in connection with its cellular business. The agreement was with, and the platform was owned by Yak America, Inc. (“Yak”), an entity controlled by the Company’s CEO and majority shareholder. Spot Mobile incurred expense in 2010 of $40,000, related to the use of the platform. On October 29, 2010, the Company acquired these technology assets from Yak. These technology assets had an historical carrying cost to Yak of $1,175,000 and Spot Mobile acquired the technology assets in exchange for Spot Mobile’s assumption of certain secured indebtedness of Yak’s parent, Blackbird, in the amount of $1,175,000 (Note 9). The Company obtained a valuation of the technology assets by a third party that indicated there was no impairment of the historical carrying costs of the technology assets as of October 31, 2010. This switch has current capacity to route 75 million minutes each month and is scalable up to 250 million minutes each month. For the year ended October 31, 2010, Spot Mobile used 218,000 minutes. Spot Mobile plans to use the platform’s capacity to offer mobile virtual network services. Spot Mobile has entered into an agreement with Yak whereby Yak will be able to use any excess capacity not utilized by the Company.

The Company did not acquire any of Yak’s business operations related to the technology assets, including any customers or revenues, or any of Yak’s receivables, payables or employees related to the technology assets acquired. Effective November 1, 2010, Yak was entitled to use the platform until June 20, 2012 for a service fee equal to 8% of Yak’s net revenue from the use of the platform for its customers. Based upon Yak’s historical use of the technology assets, these service fees are not expected to be significant to the Company’s consolidated financial statements for the year ended October 31, 2011. Service fees earned for the three months and nine months ended July 31, 2011 were approximately $62,000 and $221,000.

15.

Segmented information:

Prior to October 29, 2010, the Company operated in one segment, however with the acquisition of the technology assets from Yak America on October 29, 2010 we began operating our business in two segments: Mr. Prepaid and Spot Mobile. The Mr. Prepaid segment markets and distributes electronic prepaid telecommunication products through independent retailers. The Spot Mobile MVNO segment offers prepaid mobile telephones, SIM cards and airtime utilizing our telecommunication assets. The operations of our segments are managed separately and each has unique technology and services.

Of our revenue for the nine months ended July 31, 2011 and 2010 of $8,825,000 and $12,941,000 respectively: (i) approximately $154,200 and $36,000, respectively, was from the Spot Mobile segment, and (ii) $8,671,000 and $12,915,000, respectively, was from the Mr. Prepaid segment. Our Spot Mobile division, for the nine months ended July 31, 2011 and 2010, had gross losses of $908,000 and $437,000, respectively, and losses from operations of $3,044,000 and $1,632,000, respectively, as we developed the business. Our Mr. Prepaid segment had a gross profit of $72,000 and $313,000, respectively for such periods, and operating losses of $679,000 and $382,000, respectively for such periods, after amortization and impairment charges of $520,000 and $188,000, respectively. At October 31, 2010, our Spot Mobile division accounted for $1,301,000 of our total assets after acquisition of the technology assets. All other assets of $1,018,000 were employed in our Mr. Prepaid segment. At July 31, 2011 our Spot Mobile division accounted for $1,514,000 of our total assets. All other assets of $949,000 were employed in our Mr. Prepaid segment.

Of our revenue for the three month periods ended July 31, 2011 and 2010, of $2,949,000 and $3,836,000 respectively: (i) approximately $97,000 and $7,000, respectively, was from the Spot Mobile segment, and (ii) $2,852,000 and $3,800,000, respectively, was from the Mr. Prepaid segment. Our Spot Mobile division, for the three month periods ended July 31, 2011 and 2010, had gross losses of $512,000 and $38,000, respectively, and losses from operations of $1,496,000 and $363,000, respectively, as we developed the business. Our Mr. Prepaid segment had a gross profit of $26,000 and $80,000, respectively for such periods, and operating losses of $313,000 and $73,000, respectively, after amortization and impairment charges of $273,000 and $63,000, respectively for such periods.

SPOT MOBILE INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JULY 31, 2011 AND 2010

(UNAUDITED)

16.

Subsequent event:

On September 16, 2011, Spot Mobile Corp., our wholly owned subsidiary, executed a Secured Promissory Note evidencing a revolving line of credit facility in the principal amount of up to $3,000,000 in favor of existing third party lender (the “Secured Note”). The principal amount under the Secured Note will accrue interest at the rate of 8.00% per year. The principal amount of the Secured Note and all accrued interest is due on demand upon 30 days’ notice from the lender. The proceeds of the Secured Note will be used to finance Spot Mobile’s needs for working capital. Of the $3,000,000 face amount of the Secured Note, $1,450,000 had been previously funded to Spot Mobile by the lender. In consideration of these prior advances, and in order to obtain additional funding from this lender, we provided security for Spot Mobile’s obligations. Accordingly, the obligations of Spot Mobile under the Secured Note are secured by a security interest in all of the assets of Spot Mobile as well as a pledge by the Company of all of the capital stock of Spot Mobile in favor of the lender.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Throughout this Quarterly Report on Form 10-Q, the terms “we,” “Spot Mobile,” and the “Company” refer to Spot Mobile International Ltd., a Delaware corporation, and its subsidiaries.

This Quarterly Report on Form 10-Q contains “forward-looking statements,” which are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by the use of such terms as “expects,” “will,” “anticipates,” “estimates,” “believes,” “plans” and words of similar meaning. These forward-looking statements relate to business plans, programs, trends, results of future operations, satisfaction of future cash requirements, funding of future growth, acquisition plans, and other matters. In light of the risks and uncertainties inherent in all such projected matters, the inclusion of forward-looking statements in this report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved or that our operating expectations will be realized. Revenues and results of operations are difficult to forecast and could differ materially from those projected in forward-looking statements contained herein, including without limitation statements regarding our belief of the sufficiency of capital resources and our ability to compete in the telecommunications industry. Actual results could differ from those projected in any forward-looking statements for, among others, the following reasons: (a) increased competition from existing and new competitors, (b) the price-sensitive nature of consumer demand, (c) the relative lack of customer loyalty to any particular provider of telecommunications services, (d) our dependence upon favorable pricing from our suppliers to compete in the diversified communication services industry, (e) increased consolidation in the telecommunications industry, which may result in larger competitors being able to compete more effectively, (f) failure to attract or retain key employees, (g) our ability to successfully integrate the operations of acquired companies, (h) continuing changes in governmental regulations affecting the telecommunications industry, and (i) changing consumer demand, technological developments and industry standards that characterize the industry. You are also urged to carefully review and consider the various disclosures we have made which describe certain factors that affect our business throughout this report. For a discussion of these factors and others, please see “Risk Factors” below in this section of this report. Readers are cautioned not to place undue reliance on the forward-looking statements made in this report or in any document or statement referring to this report. All forward-looking statements attributable to the Company are expressly qualified in their entirety by such language, and we are not obligated, and do not intend, to update any forward-looking statements at any time unless an update is required by applicable securities laws. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.

General

Spot Mobile International Ltd., a Delaware corporation formerly known as Rapid Link, Incorporated, is a telecommunications services company which, through its wholly-owned subsidiaries, provides prepaid telecommunication and transaction based point of sale activation solutions through over 350 independent retailers in the Eastern United States. Our operations are conducted primarily through our wholly-owned subsidiaries: Mr. Prepaid, Inc., a Florida corporation (“Mr. Prepaid”) and Spot Mobile Corp., a Florida corporation (“Spot Mobile Corp.”). Mr. Prepaid operates as a retail point of sale distributor of prepaid wireless airtime. Spot Mobile Corp. is a prepaid wireless Mobile Virtual Network Operator (“MVNO”). We distribute and sell prepaid wireless handsets and SIM cards, offering talk, text and data services for wireless subscribers. Our MVNO operates on the Global System for Mobile Communications (“GSM”) platform service and can offer wireless service on the AT&T and T-Mobile networks.

Spot Mobile’s principal executive offices are located at 4950 Yonge Street, Suite 904, North York, Ontario M2N 6K1. The telephone number is (416) 229-9333.

Recent Developments

As of September 19, 2011, the Company has therefore decided to cease all retail distribution operations pending the outcome of these matters and to evaluate strategic alternatives. Our subsidiary, Spot Mobile Corp., has made arrangements to obtain limited funding while it renegotiates new carrier and network arrangements in order to evaluate its strategic plans.

On September 16, 2011, Spot Mobile Corp., our wholly owned subsidiary, executed a Secured Promissory Note evidencing a revolving line of credit facility in the principal amount of up to $3,000,000 in favor of a third party lender (the “Secured Note”). The principal amount under the Secured Note will accrue interest at the rate of 8.00% per year. The principal amount of the Secured Note and all accrued interest is due on demand upon 30 days’ notice from the lender. The proceeds of the Secured Note will be used to finance Spot Mobile’s needs for working capital. Of the $3,000,000 face amount of the Secured Note, $1,450,000 had been previously funded to Spot Mobile by the lender. In consideration of these prior advances, and in order to obtain additional funding from this lender, we provided security for Spot Mobile’s obligations. Accordingly, the obligations of Spot Mobile under the Secured Note are secured by a security interest in all of the assets of Spot Mobile as well as a pledge by the Company of all of the capital stock of Spot Mobile in favor of the lender.

Business Strategy

Our core objective has been to expand both our product base with the offering of our proprietary Spot Mobile prepared cellular product and the market for our products by increasing the number of retailers which offer our products through both Mr. Prepaid’s distribution network and through wholesale distribution. We also offer our mobile virtual network operator (MVNO) mobile telephones through Mr. Prepaid’s distribution network and to offer Mr. Prepaid’s products to our MVNO retailers.

As a result of the default on our senior secured note payable and the demand for the repayment of the note we have a working capital deficiency of $6,172,855. We are not able to repay the senior secured note and we do not have sufficient cash to continue operations and are unable to raise further debt or equity without settling this matter with our senior secured lender. We have also been unsuccessful in renegotiating our carrier and network arrangements to be able to successfully implement our business strategy.

Products and Services

Prepaid Services

We offer prepaid telecommunication and transaction based point of sale activation solutions through approximately 350 independent retailers in the Eastern United States.

Mobile and Wireless Services

We currently market our proprietary Spot Mobile prepaid cellular telephones and plan to expand our product offering to include additional mobile and wireless services under various usage plans.

Critical Accounting Policies

This disclosure is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe to be proper and reasonable under the circumstances. We continually evaluate the appropriateness of estimates and assumptions used in the preparation of its consolidated financial statements. Actual results could differ from those estimates. The following key accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements.

Use of estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our 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. Actual results could differ from those estimates.

Revenue recognition:

Revenues generated by prepaid calling cards and point of sale activated Personal Identification Numbers (“PINs”), which represent the primary sources of our revenues, are recognized as revenue at the point of sale. Revenue from the sale of Spot Mobile cellular air time is recognized when the air time is used. Revenue from sale of Spot Mobile prepaid telephones is recognized at the point of sale.

Inventory:

Inventory consists of prepaid calling cards, PINs, cellular telephones and SIM cards which are valued at the lower of cost and net realizable value.

Accounts receivable:

Trade accounts receivable are stated at the amount we expect to collect. We regularly monitor credit risk exposures in accounts receivable and maintain a general allowance for doubtful accounts based on historical experience for estimated losses resulting from the inability of our customers to make required payments. We consider the following factors when determining the collectability of specific customer accounts: customer creditworthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. Should any of these factors change, the estimates made by our management would also change, which in turn would impact the level of our future provision for doubtful accounts. Specifically, if the financial condition of our customers were to deteriorate, affecting their ability to make payments, additional customer-specific provisions for doubtful accounts may be required. We review our credit policies on a regular basis and analyze the risk of each prospective customer individually in order to minimize risk. Based on our management’s assessment we provide for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Interest is typically not charged on overdue accounts receivable. Balances which remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. The valuation allowance was approximately $34,000 and $9,000 as of July 31, 2011 and October 31, 2010, respectively.

Property and equipment:

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets ranging from three to seven years. Expenditures for repairs and maintenance are charged to expense as incurred.

Goodwill:

Goodwill relates to our Mr. Prepaid operating segment. The Company reviews goodwill arising from business combinations for impairment annually, or more frequently if impairment indicators arise. Impairment indicators include (i) a significant decrease in the market value of an asset, (ii) a significant change in the extent or manner in which an asset is used or a significant physical change in an asset, (iii) a significant adverse change in legal factors or in the business climate that could affect the value of an asset or an adverse action by a regulator, and (iv) a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with an asset used for the purpose of producing revenue. The Company considers the number of active stores and applies a fair market value per store to determine the fair market value of its goodwill.

Segment information:

Prior to October 29, 2010, we had one operating segment and one reporting unit. For the purpose of identifying the reporting units (i) an operating segment is a reporting unit if discrete financial information is available, (ii) management regularly reviews individual operating results, and (iii) similar economic characteristics of components within one operating segment in a single reporting unit. Our management regularly reviews one set of financial information, and all of our products share similar economic characteristics. To date, we have been developing and testing our Spot Mobile phone products. With the acquisition of the technology assets on October 29, 2010, we began operating in two segments; (i) our Mr. Prepaid retail segment which markets and distributes electronic prepaid telecommunication products through independent retailers, and (ii) our Spot Mobile MVNO offering prepaid mobile telephones and SIM cards and airtime utilizing our telecommunication assets. These two segments are required on a regular basis by our chief operating decision makers. All of our operations are in the United States and no customers are individually material to our operations.

Long-lived assets:

Long-lived assets, including our customer lists and intellectual property arising from business combinations, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. We do not perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, we recognize an impairment loss only if an impairment is indicated by its carrying value not being recoverable through undiscounted cash flows. The impairment loss is the difference between the carrying amount and the fair value of the asset estimated using discounted cash flows. Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell.

During 2011 and 2010, we completed goodwill and long-lived asset impairment analyses. Based on the work performed, our management concluded that an impairment loss existed. Accordingly, we recorded non-cash impairment charges for goodwill and intangible assets in 2011 of $300,000. The impairment charges resulted primarily from a decline in the customer base since 2010. Our management estimated the impairment charges by cash flow analyses and by consideration of current market conditions and transactions in the prepaid telecommunications industry.

Fair value of financial instruments:

Income taxes:

We utilize the asset and liability approach to financial accounting and reporting for income taxes. Deferred income taxes and liabilities are computed for differences between the financial statement carrying amounts and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are recorded when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

Recent accounting pronouncements:

In October 2009, the FASB issued a new accounting standard which provides guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on our management’s best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation. In October 2009, the FASB also issued a new accounting standard which changes revenue recognition for tangible products containing software and hardware elements. Specifically, tangible products containing software and hardware that function together to deliver the tangible products’ essential functionality are scoped out of the existing software revenue recognition guidance and will be accounted for under the multiple-element arrangements revenue recognition guidance discussed above. Both standards were effective for the Company in the first quarter of 2011. We are currently evaluating the impact that the adoption of this standard may have on its consolidated financial statements.

Results of Operations

Comparison of the Three months Ended July 31, 2011 to the Three months Ended July 31, 2010

Operating Revenues

Revenues for the third quarter of fiscal 2011 decreased $887,000, or 23%, as compared to the same period of fiscal year 2010. This decrease is due to greater competition and lower margins resulting in a loss of stores from which we operate as some of these stores became unprofitable. Our profit margin of a group of PINs that represents 60% of our sales has been reduced significantly, due to lower discounts from the supplier. Revenues for the 2011 period also include $95,000 from our Spot Mobile Corp. subsidiary.

Costs of Revenues

Costs of revenues for the third quarter of fiscal 2011 decreased $352,000, or 9%, as compared to the same period of fiscal year 2010. The decrease in costs of revenues is consistent with reduction in revenues. Cost of revenues for the 2011 period also includes $608,000 from our Spot Mobile Corp. subsidiary.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $369,000, or 120%, for the third quarter of fiscal 2011 as compared to the same period of fiscal year 2010. This increase is primarily attributable to costs of Spot Mobile Corp. of $515,000 and legal, accounting and other professional costs related to being a publicly reporting company of $155,000. These expenses have been reduced by cost recovered through our service fee arrangement with Yak America Inc. of $62,000.

Depreciation and Amortization

Depreciation and amortization expense increased $46,000 during the third quarter of fiscal 2011 as compared to the same period of fiscal 2010. The increase was primarily due to depreciation of $42,000 on the technology assets of Spot Mobile Corp., which were acquired on October 29, 2010.

Impairment

Impairment expense of $200,000 was charged against goodwill during the third quarter of fiscal 2011, primarily due to a decline in customer base.

Interest Expense

Interest expense increased by $62,000 which relates to the arrears interest of $32,000 on our senior secured debt of $1,250,000 and secured notes payable of $1,175,000 assumed upon acquisition of the technology assets.

Comparison of the Nine months Ended July 31, 2011 to the Nine months Ended July 31, 2010

Operating Revenues

Revenues for the nine months ended July 31, 2011 decreased $4,116,000, or 32%, as compared to the same period of fiscal year 2010. This decrease is due to greater competition and lower margins resulting in a loss of stores from which we operate as some of these stores became unprofitable. Our profit margin of a group of PINs that represents 66% of our sales has been reduced significantly, due to lower discounts from the supplier. Revenues for the 2011 period also include $154,000 from our Spot Mobile Corp. subsidiary.

Costs of Revenues

Costs of revenues for the nine months ended July 31, 2011 decreased $3,054,000, or 24%, as compared to the same period of fiscal year 2010. The decrease in costs of revenues is consistent with reduction in revenues. Cost of revenues for the 2011 period also includes $1,062,000 from our Spot Mobile Corp. subsidiary.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1,328,000, or 140%, for the nine months ended July 31, 2011 as compared to the same period of fiscal year 2010. This increase is primarily attributable to costs of Spot Mobile Corp. of $1,240,000 and legal, accounting and other professional costs related to being a publicly reporting company of $315,000. These expenses have been reduced by cost recovered through our service fee arrangement with Yak America Inc. of $221,000.

Depreciation and Amortization

Depreciation and amortization expense increased $123,000 during the third quarter of fiscal 2011 as compared to the same period of fiscal 2010. The increase was primarily due to depreciation of $126,000 on the technology assets of Spot Mobile Corp., which were acquired on October 29, 2010.

Interest Expense

Interest expense increased by $89,000 which relates to the arrears interest of $32,000 on our senior secured debt of $1,250,000 and secured notes payable of $1,175,000 assumed upon acquisition of the technology assets.

Liquidity and Sources of Capital

As a result of the default on our senior secured note payable and the demand payable for the repayment of the note we have a working capital deficiency of $6,172,855. We are not able to repay the senior secured note and we do not have sufficient cash to continue operations. We are unable to raise further debt or equity without settling this matter with our senior secured lender. We have also been unsuccessful in renegotiating our carrier and network arrangements to be able to successfully implement our business strategy.

The Company has therefore decided to cease all retail distribution operations pending the outcome of these matters and to evaluate strategic alternatives. Our subsidiary, Spot Mobile Corp., has made arrangements to obtain limited funding while it renegotiates new carrier and network arrangements in order to evaluate its strategic plans.

On January 25, 2011, we completed the initial closing of the Private Placement with approximately 30 Investors, pursuant to which we sold to the Investors an aggregate of 41 Units at a purchase price of $50,000 per Unit. Each Unit is comprised of (i) 100,000 shares of our common stock; and (ii) a three-year warrant to purchase 100,000 shares of common stock at an exercise price of $0.75 per share, subject to adjustment for stock splits, stock dividends, recapitalizations and similar events. In the initial closing, we sold 41 Units and received net proceeds of approximately $1.8 million after payment of placement agent fees and costs relating to the Private Placement. On February 28, 2011, we completed the final closing of the Private Placement with approximately 9 Investors, pursuant to which we sold to the Investors an aggregate of 5 Units. In the final closing, we sold 5 Units and received net proceeds of approximately $216,000 after payment of placement agent fees and costs relating to the Private Placement.

The total gross proceeds of the Private Placement were $2.3 million and we sold an aggregate of 46 Units comprised of 4,600,000 shares of our common stock.

Overall Cash Inflows and Outflows

Our operating activities used approximately $3,044,000 of cash during the nine months ended July 31, 2011, which primarily resulted from decreased operating revenues and changes in our current assets and liabilities. Based on a negative operating cash flow during fiscal year 2010, and generally a history of negative operating cash flows, our fiscal 2010 audit report includes an explanatory paragraph indicating doubt about our ability to continue as a going concern.

At July 31, 2011, we had cash and cash equivalents of $13,801, representing a reduction of $143,000 from the balance at October 31, 2010. We had working capital deficits at July 31, 2011 and October 31, 2010 of approximately $6,173,000 and $2,942,000, respectively. This increase in working capital deficit is primarily attributable to the reclassification of $1,750,000 of our long term debt to current liability and our losses to date.

We have an accumulated deficit of approximately $10,530,000 as of July 31, 2011, as well as a significant working capital deficit of $6,172,855. As described above, we have obtained financing of $2,016,250 for our current working capital needs in connection with our January – February 2011 private placement of common stock. Our sources of revenue are not sufficient to fund operations and we have not identified other sources of capital which have required us to modify our business plan. Our inability to obtain needed debt and/or equity financing when needed or to generate sufficient cash from operations will require us to cease operations as well as examine other strategic alternatives.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated can provide only reasonable, but not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management was necessarily 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 upon that evaluation, management concluded that our disclosure controls and procedures were ineffective as of the end of the period covered in this report because of the material weakness in internal controls over financial reporting described below.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected. Management identified the following control deficiencies which represent material weaknesses in our internal control over financial reporting:

•

We did not maintain a sufficient depth of personnel with clearly delineated and fully documented responsibilities and with an appropriate level of accounting expertise.

•

We have insufficient documented procedures to identify and prepare a conclusion on matters involving material accounting issues and to independently review conclusions as to the application of generally accepted accounting principles.

•

We did not have effective entity level controls at our subsidiaries. These weaknesses included: lack of sufficient formalized and consistent finance and accounting policies and procedures; lack of adequate communication and division of employees’ duties which includes the lack of delegation of authority guidelines; authority granted to our officers without sufficient controls; lack of adequate mechanisms for anticipating and identifying financial reporting risks, particularly the lack of risk assessment processes used in reacting to changes in the operating environment that could have a potential effect on financial reporting; and lack of controls to provide reasonable assurance that accounts were complete and accurate and agreed to detailed support and that reconciliations of accounts were properly performed, reviewed and approved.

These control deficiencies could result in material misstatements of significant accounts and disclosures that would result in a material misstatement to our interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that these control deficiencies constitutes a material weaknesses.

Due to the material weaknesses described above, our management performed additional analyses and other post-closing procedures to ensure that our unaudited interim condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, our management believes that the unaudited interim condensed consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the third quarter of fiscal 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. It is important to note that though no changes were made to internal controls in the first fiscal quarter of 2011, our management intends to implement enhancements and changes to internal control over financial reporting to provide reasonable assurance that errors and control deficiencies will not recur. Prior to February 24, 2010, Mr. Prepaid was a privately held company and prior to June 7, 2010, Spot Mobile Corp. was a privately held company and neither subsidiary had an appropriate internal control structure designed for external reporting purposes. These enhancements include the hiring of additional personnel with appropriate skills and experience in the application of GAAP commensurate with our financial reporting requirements, ongoing training, and development and communication of a delegation of authority policy and other process enhancements.

PART II. OTHER INFORMATION.

Item 1. Legal Proceedings

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks and other intellectual property of third parties by the Company. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.

Coastline Capital On May 5, 2008, we filed a lawsuit against Coastline Capital for Declaratory Relief related to certain debenture transactions. Our suit for Declaratory Relief sought a Judgment from the Court that Coastline Capital had not earned a broker’s fee in the subject transaction in that Coastline Capital did not represent us in the transaction that closed and, pursuant to the terms of the brokerage contract, Coastline Capital was not entitled to a broker’s fee. The parties agreed to binding arbitration to resolve the dispute and the arbitration proceeding was concluded in May 2010. On June 10, 2010, the arbitrator awarded Coastline Capital the amount of $300,000. We recorded the net amount of the award in the first quarter of fiscal year 2010 as a loss on legal settlement. Coastline Capital has obtained a judgment against the Company in the amount of $434,520.20, inclusive of attorney fees and costs, in the Superior Court of California. As of January 5, 2011, Coastline Capital has filed a petition in the Circuit Court of the Eleventh Judicial District, Miami-Dade County, State of Florida for the enforcement and execution in Florida of its California state court judgment. The Company will attempt to settle this matter. However, there can be no assurance that a settlement can be reached.

In connection with the initial closing under the Share Exchange Agreement, our former subsidiary Telenational agreed to indemnify and hold us harmless from all liabilities of Telenational and One Ring including any claims, losses or damages arising from or relating to the legal proceeding described above.

LV Administrative Services, Inc. On June 6, 2011, we received a notice from V Administrative Services, Inc., as administrative and collateral agent for Valens Offshore SPV II, Corp., Valens U.S. SPV I, LLC, Laurus Master Fund, Ltd. (In Liquidation) (collectively, the “Creditor Parties”) under that certain Master Security Agreement, dated February 24, 2010, executed by the Company and Mr. Prepaid, our wholly-owned subsidiary, and a Secured Term Note, dated February 24, 2010, issued by the Company in favor of the Creditor Parties that we were in default under such loan documents for failure to pay scheduled interest payments and failure to provide certain financial reports. On July 12, 2011, we received further notice from the Creditor Parties regarding the acceleration of all amounts due under their senior secured note and demanding payment of $1,323,366. On July 15, 2011, the Creditor Parties filed a lawsuit against the Company and Mr. Prepaid in the Supreme Court of the State of New York seeking summary judgment due to our failure to pay the amounts due under the senior secured note and seeking to enforce their rights and remedies under our loan documents. The Company has filed a response setting forth various defenses and counterclaims against the Creditor Parties. A hearing regarding the summary judgment is pending.

Brune & Richard LLP. On July 12, 2011, Brune & Richard LLP filed an interpleader complaint against the Creditor Parties, the Company and Mr. Prepaid, among other parties, in the Supreme Court of the State of New York. In connection with a proposed settlement of the dispute between the Creditor Parties and the Company, the Company had previously delivered a good faith deposit in the amount of $200,000 to Brune & Richard LLP. Due to the failure of the parties to resolve the dispute, Brune & Richard placed such deposit in the court pursuant to the interpleader action. The Company has filed a response setting forth various defenses. This matter is ongoing pending a resolution of the LV Administrative Services, Inc. lawsuit described above.

Item 1A. Risk Factors

There are no material changes to the risk factors set forth in Part I, Item 1, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended October 31, 2010. Please refer to that section for disclosures regarding the risks and uncertainties related to our business. You should carefully consider such risk factors in evaluating our business because such factors may have a significant impact on our business, operating results, liquidity and financial condition. As a result of the identified risk factors, actual results could differ materially from those projected in any forward-looking statements. Additional risks and uncertainties not presently known to us, or that we currently consider to be immaterial, may also impact our business, operating results, liquidity and financial condition, including the potential effects of the current global unrest in the principal financial markets which could negatively affect current and future business prospects in our market segments. If any such risks occur, our business, operating results, liquidity and financial condition could be materially affected in an adverse manner. In addition, the trading price of our stock, when and if a market develops for our stock, could decline.

Item 6. Exhibits

Exhibit Index


NO.		DESCRIPTION OF EXHIBIT

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith)

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith)

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith)

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith)

SIGNATURES

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


	SPOT MOBILE INTERNATIONAL LTD.

Date: September 19, 2011	By:	/s/ Charles J. Zwebner
		Charles J. Zwebner
		Chief Executive Officer

Date: September 19, 2011	By:	/s/ David Stier
		David Stier
		Chief Financial Officer

Exhibit Index


No.		Description of Exhibit

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

SPOT MOBILE INTERNATIONAL LTD. 10-Q