UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





(Mark One)





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





For the quarterly period ended September 30, 2010





or





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





For the transition period from _________ to ________





Commission File Number: 000-30587





SPARE BACKUP, INC.


(Exact name of registrant as specified in its charter)





Delaware

23-3030650(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)





72757 Fred Waring Drive, Palm Desert, CA 92260


(Address of principal executive offices)





(760) 779-0251


(Registrant’s telephone number, including area code)





na


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





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





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss. 232.405 of this chapter) during the preceding 12 (or for such shorter period that the registrant was required to submit and post such files).Yes o   No o





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





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





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





Indicated the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date, 185,032,738 shares of common stock are issued and outstanding as of November 22, 2010.










OTHER PERTINENT INFORMATION





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





CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION





Certain statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, our ability to raise sufficient capital to fund our ongoing operations and satisfy our obligations as they become due, including approximately $2.9 million of accrued payroll taxes and approximately $3,081,000 of past due notes, our ability to generate any meaningful revenues, our ability to compete within our market segment, our ability to implement our strategic initiatives, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, U.S. and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, as well as our annual report on Form 10-K for the year ended December 31, 2009 including the risks described in Part I. Item 1A. Risk Factors of that report. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.









SPARE BACKUP, INC.





INDEX





PagePART I – FINANCIAL INFORMATION:Item 1.
Financial Statements
F-1Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17Item 3.
Quantitative and Qualitative Disclosures About Market Risk
27Item 4T.
Controls and Procedures
27PART II – OTHER INFORMATIONItem 1.
Legal Proceedings
28Item 1A.
Risk Factors
28Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
28Item 3.
Defaults Upon Senior Securities
28Item 4.
Submission of Matters to a Vote of Security Holders
28Item 5.
Other Information
28Item 6.
Exhibits
28Signatures
29











SPARE BACKUP, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETSSeptember 30,


December 31,ASSETS

2010


2009(Unaudited)



(1
)Current Assets:Accounts receivable


4,211



51,371Prepaid  expenses


72,404



17,487Total current assets


76,615



68,858Property and equipment, net of accumulated depreciation of $698,585 and $2,384,638 atSeptember 30, 2010 and December 31, 2009, respectively


361,974



528,639Other assets


54,603



161,104Total assets

$
493,192


$
758,601LIABILITIES AND STOCKHOLDERS' DEFICITCurrent Liabilities:Accounts payable and accrued expenses

$
2,686,632


$
2,546,236Overdraft liability


69,197



43,489Accrued payroll taxes


2,895,561



2,027,3788% convertible promissory notes, net of debt discountof $4,237 and $96,865 at September 30, 2010 and  December 31, 2009, respectively


2,889,263



3,276,13510% convertible promissory notes, net of debt discountof $1,073 and $0 at September 30, 2010 and  December 31, 2009, respectively


504,927



581,000Accrued interest on convertible promissory notes


154,503



125,829Notes payable


745,000



-Derivative liabilities


309,979



246,973Deferred revenue


-



621,127Due to stockholder


15,000



15,000Total current liabilities


10,270,062



9,483,1678% convertible promissory notes, net of debt discountof $0 and $24,846 at September 30, 2010 and December 31, 2009, respectively


-



71,154Total liabilities


10,270,062



9,554,321Stockholders' Deficit:Preferred stock, $0.001 par value, 5,000,000 shares authorized:50,000 issued and outstanding


50



50Common stock; $.001 par value; 300,000,000 shares authorized;178,694,276 and 134,036,062 issued and outstandingat September 30, 2010 and December 31, 2009, respectively


178,694



134,036Additional paid-in capital


98,625,771



90,886,623Accumulated deficit


(108,081,385
)


(99,816,429
)Deferred compensation


(500,000
)


-Total stockholders’ deficit


(9,776,870
)


(8,795,720
)Total liabilities and stockholders’ deficit

$
493,192


$
758,601(1) Derived from audited financial statementsSee Notes to Unaudited Consolidated Financial Statements.




F - 1




SPARE BACKUP, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONSFor the Three Months Ended


For the Nine Months EndedSeptember 30,


September 30,2010


2009


2010


2009(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)Net Revenues

$
104,832


$
768,006


$
878,425


$
1,855,344Operating expenses:Research and development


510,384



356,919



2,010,556



883,414Selling, general and administrative


1,345,129



2,564,721



5,899,203



7,612,193Total operating expenses


1,855,513



2,921,640



7,909,759



8,495,607Operating loss


(1,750,681
)


(2,153,634
)


(7,031,334
)


(6,640,263
)Other income (expense):Change in fair value of derivative liabilities


(52,849
)


239,011



(135,468
)


256,736Gain from debt settlements


24,906



-



320,633



297,799Interest expense


(497,093
)


(1,270,727
)


(1,418,787
)


(1,870,678
)Total other income (expense)


(525,036
)


(1,031,716
)


(1,233,622
)


(1,316,143
)Net loss

$
(2,275,717
)

$
(3,185,350
)

$
(8,264,956
)

$
(7,956,406
)Basic and diluted loss per common share

$
(0.01
)

$
(0.03
)

$
(0.05
)

$
(0.07
)Basic and diluted weighted average commonshares outstanding


172,378,312



119,519,735



154,170,175



112,010,114See Notes to Unaudited Consolidated Financial Statements.




F - 2




SPARE BACKUP, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Nine Months EndedSeptember 30,2010


2009(Unaudited)


(Unaudited)Cash flows from operating activities:Net loss

$
(8,264,956
)

$
(7,956,406
)Adjustments to reconcile net loss to net cash used inoperating activities:Change in fair value of derivative liabilities


135,468



(256,737
)Fair value of options and warrants issued to employees


703,231



701,578Fair value of options and warrants issued to consultants


234,572



177,427Fair value of option and warrant modifications


721,464



-Fair value of warrants issued to convertible promissory note holder


12,160



-Fair value of warrants issued for accrued interest


28,918



14,944Fair value of common stock issued in connection with service rendered


759,341



270,800Fair value of common stock issued in connection with convertiblepromissory notes modifications


79,167



-Fair value of convertible promissory notes modifications


164,966



-Fair value of common stock issued in connection with note payable issuance


184,200



-Fair value of common stock issued in connection with debt settlement


20,000



-Fair value of common stock issued in connection with the conversionof convertible promissory notes


(484
)


-Depreciation


221,298



697,206Amortization of debt discount


585,950



1,313,732Amortization of prepaid expenses


24,770



463,352Amortization of deferred financing costs


106,501



259,773Gain from debt settlement


(320,633
)


(297,799
)Changes in operating assets and liabilities:Accounts receivable


47,160



12,317Prepaid expense and other current assets


(79,687
)


(1,054,374
)Accounts payable, accrued expense and accrued payroll taxes


1,329,212



1,167,539Deferred revenues


(621,127
)


969,768Accrued interest on convertible promissory notes


228,734



281,474Net cash used in operating activities


(3,699,775
)


(3,235,406
)Cash flows used in investing activities:Capital expenditures


(54,633
)


(267,476
)Net cash used in investing activities


(54,633
)


(267,476
)Cash flows from financing activities:Proceeds from issuance of convertible promissory notes


152,500



1,804,000Proceeds from issuance of notes payable


1,150,000



-Repayment of notes payable


(405,000
)Net proceeds from issuance of common stock for cash


2,249,474



1,736,000Cash overdraft


25,708



-Proceeds from exercise of stock options


6,368



-Proceeds from exercise of warrants


575,358



-Principle repayments of convertible promissory notes


-



(20,000
)Payment of deferred financing costs


-



-Net cash provided by financing activities


3,754,408



3,520,000Net decrease in cash


-



17,118Cash, beginning of period


-



18,946Cash, end of period

$
-


$
36,064Supplemental disclosures of cash flow information:Cash paid for interest

$
-


$
-Cash paid for income taxes

$
-


$
-Non-cash investing and financing activities:Satisfaction of obligation

$
-


$
59,530Write off of fully depreciated property and equipment

$
1,907,351


$
-Fair value of warrants and embedded conversion features issued inconnection with the issuance of convertible promissory notes andcorresponding debt discount

$
469,549


$
1,775,250Conversion of debt issuance costs into shares of common stock

$
-


$
213,127Conversion of convertible promissory notes and accrued interestinto shares of common stock

$
869,306


$
1,293,921Fair value of shares of common stock issued for payment ofaccrued interest

$
133,270


$
232,310Fair value of common stock issued for deferred compensation

$
500,000


$
-See Notes to Unaudited Consolidated Financial Statements.




F - 3





SPARE BACKUP, INC. AND SUBSIDIARY


NOTES TO UNAUDITED 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 balance sheet presented as of September 30, 2010 has been derived from our audited financial statements. The unaudited financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant to those rules and regulations, but we believe that the disclosures are adequate to make the information presented not misleading. The financial statements and notes included herein should be read in conjunction with the annual financial statements and notes for the year ended December 31, 2009 included in our Annual Report on Form 10-K filed on April 15, 2010.  The results of operations for the nine-month period ended September 30, 2010 are not necessarily indicative of the results for the year ending December 31, 2010.





The accompanying unaudited consolidated financial statements have been prepared on a going concern basis. The Company has incurred net losses of approximately $8 million during the nine-month period ended September 30, 2010. The Company also has approximately $2.9 million of unpaid payroll taxes due to the IRS at September 30, 2010.  The Company's ability to continue as a going concern is dependent upon its ability to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due, and to generate profitable operations in the future. Management plans to continue to provide for its capital requirements by issuing additional equity securities and debt. The outcome of these matters cannot be predicted at this time and there are no assurances that if achieved, the Company will have sufficient funds to execute its business plan or generate positive operating results.





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





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




F - 4





The Company’s cash and cash equivalents accounts are held at financial institutions and are insured by the Federal Deposit Insurance Corporation, or the FDIC, up to $250,000. During the nine-month period ended September 30, 2010, the Company has reached bank balances exceeding the FDIC insurance limit. To reduce its risk associated with the failure of such financial institutions, the Company periodically evaluates the credit quality of the financial institutions in which it holds deposits.





The Company's accounts receivable were due from two customers, both of which are located in the United Kingdom. At September 30, 2010, there was only one customer who made up the accounts receivable. One of the Company’s customers accounted for 98% of its accounts receivables at December 31, 2009.





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. At September 30, 2010 and December 31, 2009, management has determined that an allowance is not necessary.





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 September 30, 2010 and December 31, 2009 amounted to $0 and $621,127, 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.





Customer Concentration





One of the Company's customers accounted for approximately 75% of its revenues during the nine-month period ending September 30, 2010. One of the Company’s customers accounted for 89% of the Company’s revenue during the nine-month period ending September 30, 2009.





Product Concentration





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




F - 5





Fair Value of Financial Instruments





Effective January 1, 2008, the Company adopted FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 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 liabilitiesLevel 2:
Observable market-based inputs or unobservable inputs that are corroborated by market dataLevel 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 September 30, 2010 and December 31, 2009, with the exception of its convertible promissory notes.  The carrying amount of the convertible promissory notes at September 30, 2010 and December 31 2009, approximate their respective fair value based on the Company’s incremental borrowing rate.





Cash and cash equivalents include money market securities that are considered to be highly liquid and easily tradable as of September 30, 2010 and December 31, 2009, respectively. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy.





In addition, FASB ASC 825-10-25 Fair Value Option was effective for January 1, 2008. ASC 825-10-25 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value option for any of its qualifying financial instruments.





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 September 30, 2010. 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.




F - 6





Share-based Payments





The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation(“ASC 718”) for all the stock awards granted after December 31, 2005, and granted prior to but not yet vested as of December 31, 2005. 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. See Note 7 for further information regarding the Company’s stock-based compensation assumptions and expenses. The Company elected to use the modified prospective transition method as permitted by ASC 718.





Effective January 1, 2006, the Company changed its method of attributing the value of stock-based compensation to expense from the accelerated multiple-option approach to the straight-line single option method. Compensation expense for all share-based payment awards granted prior to January 1, 2006 will continue to be recognized using the accelerated multiple-option approach while compensation expense for all share-based payment awards granted on or subsequent to January 1, 2006 has been and will continue to be recognized using the straight-line single-option approach.





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.





Recent Accounting Pronouncements





In October 2009, the FASB issued guidance for amendments to FASB Emerging Issues Task Force on EITF Issue No. 09-1 “Accounting for Own-Share Lending Arrangements in Contemplation of a Convertible Debt Issuance or Other Financing” (Subtopic 470-20) “Subtopic”. This update establishes the accounting and reporting guidance for such arrangements. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2009. Earlier adoption is not permitted. Management believes this Statement will have no impact on the consolidated financial statements of the Company once adopted.





In December 2009, the FASB issued guidance for Consolidations – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (Topic 810). The amendments in this update are a result of incorporating the provisions of SFAS No. 167, Amendments to FASB Interpretation No. 46(R). The provisions of such Statement are effective for fiscal years, and interim periods within those fiscal years, beginning on or after November 15, 2009. Earlier adoption is not permitted. The presentation and disclosure requirements shall be applied prospectively for all periods after the effective date. Management believes this Statement will have no impact on the consolidated financial statements of the Company once adopted.





In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements, which enhances the usefulness of fair value measurements. The amended guidance requires both the disaggregation of information in certain existing disclosures, as well as the inclusion of more robust disclosures about valuation techniques and inputs to recurring and nonrecurring fair value measurements.





The amended guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disaggregation requirement for the reconciliation disclosure of Level 3 measurements, which is effective for fiscal years beginning after December 15, 2010 and for interim periods within those years. The Company does not anticipate that this pronouncement will have a material impact on its results of operations or financial position.





Effective January 29, 2010, the Company adopted FASB ASC Topic No. 815 – 40, Derivatives and Hedging - Contracts in Entity’s Own Stock (formerly Emerging Issues Task Force Issue No. 07-5, Determining Whether an Instrument or Embedded Feature is Indexed to an Entity’s Own Stock ). The adoption of FASB ASC Topic No. 815 –40’s requirements can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions). As a result of the Company issuing a convertible note on January 29, 2010, the Company adopted ASC Topic No. 815 – 40, Derivatives and Hedging - Contracts in Entity’s Own Stock (formerly Emerging Issues Task Force Issue No. 07-5, Determining Whether an Instrument or Embedded Feature is Indexed to an Entity’s Own Stock ). As such, the embedded feature convertible option on the January 29, 2010 convertible note are classified as liabilities as of January 29, 2010 as these exercise price reset features and are not deemed to be indexed to the Company’s own stock. See Note 6 for further discussion.




F - 7





Management does not believe that any other 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 120,565,206 and 100,224,653 at September 30, 2010 and 2009, respectively. Accordingly, these common share equivalents at September 30, 2010 and 2009 are excluded from the loss per share computation for that period due to their antidilutive effect.





The following sets forth the computation of basic and diluted earnings per share for the nine-month periods ended September 30, 2010 and 2009:





For the nine-month periods endedSeptember 30,2010


2009Numerator:Net loss attributable to common stock

$
(8,264,956
)

$
(7,956,406
)Denominator:Denominator for basic earnings per share-Weighted average shares outstanding


154,170,175



112,010,114Denominator for diluted earnings per share-Weighted average shares outstanding


154,170,175



112,010,114Basic earnings per share

$
(0.05
)

$
(0.07
)Diluted earnings per share

$
(0.05
)

$
(0.07
)





NOTE 3 - PREPAID EXPENSES





Prepaid expenses generally is compromised of marketing and sales commissions paid to sales agents for the 1 year prepaid subscriptions related to the Company's online back-up services, as well as prepaid insurance. The prepaid marketing expense is being amortized over the term of the respective subscription sold in accordance with GAAP whereby incremental direct costs are recognized in earnings in the same pattern as revenue is recognized. During the nine-month periods ended September 30, 2010 and 2009, amortization of prepaid expenses amounted to $24,770 and $463,352, respectively and was recorded as sales, general and administrative expense in the accompanying statement of operations. On September 30, 2010 and December 31, 2009, prepaid expenses amounted to $72,404 and $17,487, respectively.




F - 8





NOTE 4 - PROPERTY AND EQUIPMENT





Property and equipment consisted of the following:





September 30,


December 31,Estimated life

2010


2009Computer and office equipment
3 to 5 years

$
858,261


$
2,710,979Leasehold improvements
5 years


202,298



202,2981,060,559



2,913,277Less: Accumulated depreciation



(698,585
)


(2,384,638
)$
361,974


$
528,639





During the nine-month period ended September 30, 2010, the Company wrote-off $1,907,351 of fully depreciated computer equipment. Depreciation expense amounted to $221,298 and $697,206 during the nine-month periods ended September 30, 2010 and 2009, respectively.





NOTE 5 - OTHER ASSETS





Other assets generally consists of deferred financing costs related to the issuance of convertible promissory notes and is amortized on the terms of such notes. Amortization of other assets- deferred financing costs amounted to $106,501 and $259,773 during the nine-months ended September 30, 2010 and 2009, respectively and is included in interest expense.





NOTE 6 - CONVERTIBLE PROMISSORY NOTES-CURRENT





Convertible promissory notes consist of the following as of:




September 30,


December 31,2010


20098% Convertible promissory notes, bearing interest at 8% per annum, maturing between August 2009 and

June 20110. Interest payable commencing the quarter ended December 31, 2007, payable within thirty (30) days of the end of the quarter. Interest may be paid in cash or common stock at the option of the Company. Interest paid in common stock will be calculated at ninety percent (90%) of the average closing price for the common stock for the five (5) trading days preceding the interest payment date. The promissory notes are convertible at any time at the option of the holder, into shares of common stock at an effective conversion rate ranging from $0.05 to $0.25

$
2,893,500


$
3,373,000Less: unamortized discount


(4,237
)


(96,865
)Convertible promissory notes- short-term

$
2,889,263


$
3,276,135





During the nine-month period ended September 30, 2009, the Company classified $628,000 8% convertible promissory notes from long-term to short-term, along with the debt discount of $331,908.





During the nine-month period ended September 30, 2010, the Company modified certain 8% convertible promissory notes agreements with principals aggregating $333,000, repricing the conversion rate from $0.16 to $0.12 per share and the warrant exercise price from $0.20 to $0.16. As a result of these modifications, the Company recognized a $164,966 increase in additional paid-in capital and an increase in interest expense. In connection with these modifications, the Company issued 416,666 shares of common stock at a fair value of $79,167.





During the nine-month period ended September 30, 2010, the Company classified $96,000 8% convertible promissory note from long-term to short-term along with the debt discount of $24,846.





During the nine-month period ended September 30, 2010, the Company issued 5,390,098 shares of common stock in connection with the conversion of 8% convertible promissory notes with an aggregate principal of $678,000 and accrued interest of $66,790. The fair value of such shares issued amounted to $747,790, or $0.13 per share.





During the nine-month period ended September 30, 2010, the Company issued $102,500 of 8% convertible promissory notes.




F - 9




September 30,


December 31,2010


200910% Convertible promissory notes, bearing interest at 10% per annum, maturing between August 2008 and October 2010. Interest payable commencing the quarter ended September 30, 2008, payable within thirty (30) days of the end of the quarter. Interest may be paid in cash or common stock at the option of the Company. Interest paid in common stock will be calculated at the volume weighted average price for the common stock for the ten (10) trading days preceding the interest payment date. The promissory notes are convertible at any time at the option of the holder, into shares of common stock at a rate ranging from $0.10 to $0.25

$
506,000


$
581,000Less: unamortized discount


(1,073
)


(-
)Convertible promissory notes- short-term

$
504,927


$
581,000





During the nine-month period ended September 30, 2009, the Company issued 1,150,000 shares of common stock in connection with the conversion of 10% convertible promissory notes with an aggregate principal of $220,000. The fair value of such shares issued amounted to approximately $220,000, or an average of $0.19.





During the nine-month period ended September 30, 2009, the Company modified certain 10% convertible promissory notes agreements with principals aggregating $336,000, repricing the conversion rate from $0.30 to $0.16 and $0.12 per share and the warrant exercise price to $0.20.





During the nine-month period ended September 30, 2010, the Company issued 725,000 shares of common stock in connection with the conversion of 10% convertible promissory notes with an aggregate principal of $125,000. The fair value of such shares issued amount to $125,000, or an average of $0.17 per share.





During the nine-month period ended September 30, 2010, the Company issued $50,000 of 10% convertible promissory notes. In connection with the issuance of these convertible promissory notes, upon maturity or conversion, the Company shall issue 250,000 warrants at an exercise price of $0.12. The warrants expire three years from grant date. The Company recognized a debt discount of $17,175 in connection of the issuance of 10% convertible promissory notes.





At September 30, 2010Principal- 8% convertible promissory notes past due

$
2,625,000Principal- 10% convertible promissory notes past due

$
456,000





In accordance with FASB ASC 740 Debt- Debt with Conversion Options, the Company recorded a beneficial conversion feature related to the Convertible promissory notes. Under the terms of these notes, the intrinsic value of the beneficial conversion feature was calculated assuming that the conversion date was the same as the issue date. During the nine-month periods ended September 30, 2010 and 2009, respectively, there were no beneficial conversion features.





Total amortization of debt discounts for the convertible promissory notes - current amounted to $585,950 and $90,070 for the nine-month periods ended September 30, 2010 and 2009, respectively, and is included in interest expense.





NOTE 7 – NOTES PAYABLE





During the nine-month period ended September 30, 2010, the Company issued $1,150,000 notes payable that are due over the next 6 months. In connection with these notes payable, the Company issued 980,000 shares of common stock that have a fair value of $184,200, which was allocated to interest expense. At September 30, 2010, the Company has repaid $405,000.




F - 10





NOTE 8 - DERIVATIVE LIABILITIES





The adoption of ASC 815 will affect accounting for convertible instruments and warrants with provisions that protect holders from declines in the stock price ("round-down" provisions). Warrants with such provisions will no longer be recorded in equity. The Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Earlier application by an entity that has previously adopted an alternative accounting policy is not permitted.





Instruments with round-down protection are not considered indexed to a company's own stock under GAAP, because neither the occurrence of a sale of common stock by the company at market nor the issuance of another equity-linked instrument with a lower strike price is an input to the fair value of a fixed-for-fixed option on equity shares. The appendix to the Consensus contains an example (example 8) of warrants with round-down provisions that concludes they are not indexed to the company's owned stock. A round-down provision may be viewed by some as a form of guarantee provided to the holder of the instrument, which is inconsistent with equity classification.





GAAP’s guidance is to be applied to outstanding instruments as of the beginning of the fiscal year in which the Issue is applied. The cumulative effect of the change in accounting principle shall be recognized as an adjustment to the opening balance of retained earnings (or other appropriate components of equity) for that fiscal year, presented separately. The cumulative-effect adjustment is the difference between the amounts recognized in the statement of financial position before initial application of this Issue and the amounts recognized in the statement of financial position at initial application of this Issue. The amounts recognized in the statement of financial position as a result of the initial application of this Issue shall be determined based on the amounts that would have been recognized if the guidance in this Issue had been applied from the issuance date of the instrument.





Since the Company did not previously account for warrants with round-down provisions as a liability in previously issued financial statements earlier application of GAAP is not permitted.





The Company recorded a cumulative effect of a change in accounting principle as of January 1, 2009 in the amount of the estimated fair value of such warrants and embedded conversion features and will record future changes in fair value in results of operations. Based on fair value computations of estimated fair value, using a $0.18 closing stock price on December 31, 2008 there would be a cumulative effect of approximately $467,000 as of January 1, 2009, which would be recorded as a credit to derivative liability and debit to accumulated deficit.





The variation in fair value of the derivative liabilities between measurement dates amounted to an increase of $135,468 and a decrease of $256,737 during the nine-month periods ended September 30, 2010 and 2009, respectively. The decrease in fair value of the derivative liabilities has been recognized as other income/expense.





NOTE 9 - CONVERTIBLE PROMISSORY NOTES - LONG TERM





Convertible promissory notes consist of the following as of:





September 30,


December 31,2010


20098% Convertible promissory notes, bearing interest at 8% per annum, maturing between February 2010 and December 2010. The promissory notes are convertible at any time at the option of the holder, into shares of common stock at an effective conversion rate of $0.16.

$
-


$
96,000Less: unamortized discount


(-
)


(24,846
)Convertible promissory notes- long-term

$
-


$
71,154





During the nine-month period ended September 30, 2009, the Company issued $1,194,000 of 8% convertible promissory notes. In connection with the issuance of these convertible promissory notes, upon maturity or conversion, the Company shall issue 7,462,500 warrants at an exercise price of $0.20. The warrants expire two years from the date of grant.  The Company recognized a debt discount of $1,477,750 in connection of the issuance of 8% convertible promissory notes. In connection with this issuance, the Company paid commissions of $131,950, issued 200,000 shares of common stock valued at $44,000 and issued five year warrants to purchase 1,096,750 shares of common stock at an exercise price of $0.20. These warrants were valued using utilizing the Black-Scholes options pricing model at an average of $0.15 or $174,127 and was recorded as an increase in additional-paid in capital and an increase in other assets.




F - 11





During the nine-month period ended September 30, 2009, the Company issued 2,764,160 shares in connection with the conversion of 8% convertible promissory notes with an aggregate principal of $425,000 and accrued interest amounting to $17,266. The fair value of such shares issued amount to $442,266, or $0.16 per share.





During the nine-month period ended September 30, 2009, the Company classified $628,000 8% convertible promissory notes from long-term to short-term, along with the debt discount of $331,908.





During the nine-month period ended September 30, 2009, the Company repaid $20,000 in principal of an 8% convertible promissory note.





During the nine-month period ended September 30, 2010, the Company classified $96,000 8% convertible promissory note from long-term to short-term along with the debt discount of $24,846.





September 30,


December 31,2010


200910% Convertible promissory notes, bearing interest at 10% per annum, maturing between October 2010 and January 2011. The promissory notes are convertible at any time at the option of the holder, into shares of common stock at a effective conversion rate of $0.16

$
-


$
-Less: unamortized discount


(-
)


(-
)Convertible promissory notes- long-term

$
-


$
-





During the nine-month period ended September30, 2009, the Company issued $610,000 of 10% convertible promissory notes. In connection with the issuance of these convertible promissory notes, upon maturity or conversion, the Company shall issue 2,093,750 warrants at an exercise price of $0.20. The warrants expire two years from the date of grant.  The Company recognized a debt discount of $593,458 in connection of the issuance of 10% convertible promissory notes.





During the nine-month period September 30, 2009, the Company issued 3,812,500 shares of common stock in connection with the conversion of 10% convertible promissory notes with an aggregate principal of $610,000. The fair value of such shares issued amount to $610,000, or an average of $0.16 per share.





In accordance with FASB ASC 740 Debt- Debt with Conversion Options, the Company recorded a beneficial conversion feature related to the Convertible promissory notes. Under the terms of these notes, the intrinsic value of the beneficial conversion feature was calculated assuming that the conversion date was the same as the issue date. During the nine-month periods ended September 30, 2010 and 2009, respectively, the beneficial conversion feature amounted to $17,175 and $1,775,250. This beneficial conversion feature is reflected in the accompanying financial statements as additional paid-in capital and corresponding debt discount.





Total amortization of debt discounts for the convertible promissory notes – long term amounted to $0 and $1,223,663 during the nine-month periods ended September 30, 2010 and 2009, respectively, and is included in interest expense.





NOTE 10 - STOCKHOLDERS' DEFICIT





On August 15, 2008, the Company increased the authorized common shares from 150,000,000 to 300,000,000 shares of common stock at $0.001 par value and approval for a 1-for-10 reverse stock split of its issued and outstanding common stock.





The Company filed a Certificate of Amendment to its certificate of incorporation increasing the number of authorized shares of its common stock to 300,000,000 shares. Additionally, the stockholders granted the Company's Board of Directors the authority to decide within six months from the date of the special meeting to implement a reverse stock split, set the timing for such split, and select a ratio for the reverse split up to a maximum of a one for ten (1:10). The Company did not implement a reverse stock split during 2009.




F - 12





The issuance of common stock during the nine-month period ended September 30, 2009 is summarized in the table below:





Number of Shares of Common Stock


Fair Value at Issuance


Fair Value at Issuance

(per share)Accrued interest payment for 8% and 10% convertible promissory notes


1,343,965


$
232,310


$
0.17Services performed- Investor Relations


600,000



134,000



0.22 - 0.24Services performed- Legal


771,428



126,000



0.14 - 0.18Services performed- Payroll


60,000



10,800



0.18Conversion of 8% convertible promissory notes


2,764,160



442,266



0.15Conversion of 10% convertible promissory notes, includes write off of derivative liability of $21,665 which increase additional paid-in capital


4,962,500



851,665



0.16Finder’s fee for 8% convertible promissory notes


246,875



44,000



0.17Private placement, net of finder’s fee of $82,000


11,347,500



1,736,000



0.1622,096,428


$
3,577,041





The issuance of common stock during the nine-month period ended September 30, 2010 is summarized in the table below:





Number of Shares of Common Stock


Fair Value at Issuance


Fair Value at Issuance

(per share)Accrued Interest Payment for 8% and 10% convertible promissory notes


972,944


$
133,270


$
0.14Services performed- Investor relations


2,750,000



434,000



0.135 - 0.165Services performed- Legal expense


175,398



28,941



0.165Services performed- Project management expense


360,677



48,277



0.10 - 0.21Services performed- Business development


1,200,000



205,000



0.12 - 0.20Services performed- Strategy consulting


25,000



4,125



0.165Services performed- Payroll


300,000



39,000



0.13Deferred compensation- Marketing


4,000,000



500,000



0.12Exercised stock options


636,752



6,368



0.01Exercised warrants


5,703,595



575,358



0.10Conversion of 8% convertible promissory notes


5,390,098



744,306



.012 – 0.16Conversion of 10% convertible promissory notes


725,000



125,000



0.17Private placement, net of finder’s fee of $39,000


20,922,084



2,249,474



0.10 - 0.20Debt settlement agreement


100,000



20,000



0.20Convertible note repricing


416,666



79,167



0.19Interest associated with issuance of notes payable


980,000



184,200



0.16 - 0.2244,658,214


$
5,376,486





NOTE 11 - STOCK OPTIONS AND WARRANTS





Warrants





During the nine-month period ended September 30, 2009, in connection with a general business and marketing advisory agreement, the Company issued warrants to purchase 993,528 shares of Common Stock at price of $0.20 per share during 2009. The Company valued these warrants utilizing the Black-Scholes options pricing model at $0.06 per share or $59,611 and was recorded as an increase in additional-paid in capital and an increase in stock-based consulting expense.




F - 13





During the nine-month period ended September 30, 2009, in connection with the private placements the Company issued warrants to purchase 11,187,500 shares of common stock at an exercise price range of $0.18 to 0.20 per share. The warrants expire three years from the date of grant.  In addition, the Company issued warrants to purchase 106,250 shares of common stock at an exercise price of $0.20 as finder’s fees. The warrants expire three years from the date of grant.





During the nine-month period ended September 30, 2009, in connection with the issuance of 8% convertible promissory notes, the Company issued warrants to purchase 7,462,500 shares of common stock at an exercise price of $0.20 per share. The warrants expire two years from the date of grant. In addition, the Company issued warrants to purchase 1,096,750 shares of common stock at an exercise price of $0.20 as finder’s fees. The warrants expire five years from the date of grant.  These warrants were valued using utilizing the Black-Scholes options pricing model at an average of $0.15 or $174,127 and was recorded as an increase in additional-paid in capital and an increase in other assets.





During the nine-month period ended September 30, 2009, in connection with the issuance of 10% convertible promissory notes, the Company issued warrants to purchase 2,093,750 shares of common stock at an exercise price of $0.20 per share. The warrants expire two year from the date of grant.





During the nine-month period ended September 30, 2009, in connection with the conversion of 8% and 10% convertible promissory notes issued warrants to purchase 194,074 shares of common stock at an exercise price range of $0.20 per share for accrued interest. The warrants expire in 2011. The warrants were valued at $14,944 using the Black-Scholes option pricing model.





During the nine-month period ended September 30, 2010, the Company issued warrants to purchase 200,000 shares of common stock at an exercise price of $0.20 per shares. The warrants expire three years from the date of grant. The Company valued the warrants at $12,160 using the Black-Scholes option pricing model, increasing additional paid-in capital, and increase to interest expense.





During the nine-month period ended September 30, 2010, in connection with the modifications to certain 8% convertible promissory notes, the Company also repriced 1,335,222 warrants from an exercise price of $0.20 to $0.16. As a result of this modification, the Company recognized $15,585 as an increase in additional paid-in capital and an increase in interest expense.





During the nine-month period ended September 30, 2010, the Company extended the maturity dates of 2,210,195 warrants for a certain investor for an additional five years from the original maturity dates. As a result of the extension, the Company recognized an expense of $235,944 as an increase in additional paid-in capital and an increase in consulting expense.





During the nine-month period ended September 30, 2010, the Company repriced 5,453,595 warrants from an exercise price ranging from $0.20 to $1.00, to $0.10. As a result of this modification, the Company recognized $230,114 as an increase in additional paid-in capital and an increase in modification expense. As a result of this repricing, the warrant holders exercised their 5,453,595 warrants for common stock.





During the nine-month period ended September 30, 2010, in connection with the private placements the Company issued warrants to purchase 16,470,140 shares of common stock at an exercise price range of $0.12 to $0.20 per share. The warrants expire three years from the date of grant.





During the nine-month period ended September 30, 2010, in connection with the conversion of 8% convertible promissory notes issued warrants to purchase 5,390,098 shares of common stock at an exercise price range of $0.16 to $0.20 per share. The warrants expire in 2012. Of these warrants, 473,433 warrants were issued for accrued interest, were valued at $28,918 using the Black-Scholes option pricing model.





During the nine-month period ended September 30, 2010, the Company issued warrants to purchase 500,000 shares of common stock to a consultant. The warrants have an exercise price of $0.12 and expire between three years from grant. The warrants were valued at $57,100 utilizing the Black-Scholes options pricing model and was recorded as an increase in additional-paid in capital and an increase in consulting fees.




F - 14





The fair value of the warrants granted during the nine-month period ended September 30, 2010 and 2009 is based on the Black Scholes Model using the following assumptions:





September 30, 2010


September 30, 2009Exercise price:

$
0.10 - $0.32


$
0.01 - $0.40Market price at date of grant:

$
0.135 $0.225


$
0.10 - $0.23Expected volatility:


64.25% - 168.64
%


69% - 112
%Term:

2 – 9 years


2 – 5 yearsRisk-free interest rate:


0.34% - 3.59
%


0.75% - 2.72
%





Stock Options





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


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





In February 2009, the Company entered into a 1 year marketing agreement with Cydcor Inc. whereby Cydcor will market the Company's services and perform marketing campaigns as it may determine from time to time. Cydcor will be paid on a commission basis on all customer orders that has an authorization for customer payment received via the efforts of Cydcor. In addition, Cydcor will receive volume bonuses based on total number of sales generated in any given calendar month. In addition, the Company granted 250,000 three-year stock options to purchase common stock to Cydcor at an exercise price of $0.20. The Company valued these options utilizing the Black-Scholes options pricing model at $0.09 per share or $22,500 and recorded marketing expense for the nine-month period ended September 30, 2009.





In February 2009, the Company issued in aggregate 700,000 five-year stock options to purchase common stock for legal services with a vesting period of 12 months at an exercise price of $0.20. The Company valued these options utilizing the Black-Scholes options pricing model at $0.19 per share or $133,000. For the nine-month period ended September 30, 2009, total stock-based legal expense charged to operations amounted to $77,583. At September 30, 2009, there was $55,417 of total unrecognized legal expense related to non-vested option-based compensation arrangements.





In July 2009, the Company issued in aggregate 500,000 three-year stock options to purchase common stock for consulting services with a vesting period of 6 months. The Company valued these options utilizing the Black-Scholes options pricing model at $0.22 per share or $53,200. For the nine months ended September 30, 2009, total stock-based consulting expense charged to operations amounted to $17,733. At September 30, 2009, there was approximately $35,467 of total unrecognized consulting expense related to non-vested option-based compensation arrangements.





For the nine-month period ended September 30, 2009, the Company granted 5,725,000 five-year stock options to purchase common stock to employees at exercise prices ranging from $0.15 to $0.21 per share. For the nine-month period ended September 30, 2009, total stock-based compensation charged to operations for option-based arrangements amounted to $701,578. At September 30, 2009, there was $551,901 of total unrecognized compensation expense related to non-vested option-based compensation arrangements under the Qualified Stock Option Plan and Non Qualified Stock Option Plan.





In March 2010, the Company issued in aggregate 671,428 five-year stock options to purchase common stock for legal services that vest immediately at an exercise price of $0.01. The Company valued these options utilizing the Black-Scholes options pricing model at $0.22 per share or $146,438. For the six-month period ended June 30, 2010, total stock-based legal and consulting expense charged to operations amounted to $168,605 and $8,867, respectively. At June 30, 2010, there was no unrecognized legal and consulting expense related to non-vested option-based compensation arrangements.




F - 15





During the nine-month period ended September 30, 2010, the Company modified the exercise price of certain options aggregating 15,825,342 to $0.18 exercise price. As a result of the modification, the Company recognized an expense of $239,821 as an increase in additional paid-in capital and an increase in selling, general & administrative expense.





For the nine-month period ended September 30, 2010, the Company granted 3,756,252 ranging from three to five-year stock options to purchase common stock to employees at exercise prices ranging from $0.12 to $0.21 per share. For the nine-month period ended September 30, 2010, total stock-based compensation charged to operations for option-based arrangements amounted to $703,231. At September 30, 2010, there was $395,673 of total unrecognized compensation expense related to non-vested option-based compensation arrangements under the Qualified Stock Option Plan and Non Qualified Stock Option Plan.





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:





September 30, 2010


September 30, 2009Exercise Price

$
0.01 - $ 0.20


$
0.15- $ 0.21Market price at date of grant

$
0.125 - $ 0.225


$
0.13 - $ 0.225Expected volatility


78.2% - 100.4
%


68% - 199
%Risk-free interest rate


0.75% - 2.47
%


1.34% - 3.87
%





NOTE 12 - COMMITMENTS AND CONTINGENCIES





Litigation




In January 2009, the Company filed a declaratory relief in connection with an investment banking agreement entered into fiscal 2008 against Merriman Curhan Ford & Co. in the Supreme Court of California - County of Riverside Case No. 083346. In February 2009, the Company received a notice of petition for order compelling arbitration in the Superior Court California- San Francisco County, Case No. CFP 09-509186, which was filed on January 28, 2009 by a placement agent, Merriman Curhan Ford & Co., for failure to pay fees for services associated with an investment banking agreement. The placement agent is seeking for the reimbursement for out of pocket fees of approximately $31,000, payment of notes payable with principal amount of $161,200 and 370,370 shares of the Company. The case is set for hearing in 2011. The Company contends that the agreement was obtained by misrepresentations and concealment and that it is unenforceable and void. If the case proceeds, the Company intends to respond aggressively to the arbitration and believes that there is a very low likelihood of an unfavorable outcome.


NOTE 13 - RELATED PARTY TRANSACTIONS





The Company made rental payments for property owned by the Chief Executive Officer of the Company during the nine-month periods ended September 30, 2010 and 2009 amounting $12,500 and $28,000, respectively. The rental property was used for temporary employee housing during such periods.





NOTE 14 - ACCRUED PAYROLL TAXES





As of September 30, 2010, the Company recorded a liability related to unpaid payroll taxes for the period from May 16, 2008 to September 30, 2010 for $2,895,561, of which, $583,000 is relates to accrued interest and penalty.





NOTE 15 - SEGMENTS





During the nine-months ended September 30, 2010 and 2009, the Company operated in one business segment. The percentages of sales by geographic region for the nine-month periods ended September 30, 2010 and 2009 were approximately:





2010


2009United States


25
%


11
%Europe


75
%


89
%





NOTE 16 - SUBSEQUENT EVENTS





During October 2010, a convertible promissory noteholder exercised 100,000 warrants at $0.10.





During October 2010, the Company issued 300,000 shares of common stock for the settlement of $35,000 debt.





During October 2010, the Company issued 5,938,462 shares of common stock pursuant to a private placement which generated gross proceeds of $355,000. In connection with this private placement, the Company issued warrants to purchase an additional 500,000 shares of common stock. The warrants are exercisable at a price of $0.12 per share. The warrants expire three years from the date of grant.





F - 16





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





Overview





Our flagship product is Spare Backup, a fully-automated remote backup solution designed and developed especially for the small office or home environment which automatically and efficiently backs up all data on selected laptop or desktop computers, as well as mobile devices. As a result, we believe small companies can ensure file safety in PCs and laptops for backup and retrieval. We launched our Spare Back-up service and software product version 1.0 in March 2005 and we are currently offering version 6.0 of the product. Our Spare Switch software enables users to complete the transfer of personal files from one personal computer (PC) to another via a high speed Internet connection. We focus on owners and executives of businesses that use technology to support their businesses, but do not have an IT (information technology) department, as well as consumers who desire to secure available files and documents vital to the continuity of their operations, business, or personal information. Our concept is to develop a suite of complementary products and services which are designed for use by technical and non-technical users featuring a user interface that can cross both sets of users. Our software has unique 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.





In 2009 Spare formed its Enterprise division, as we have successfully launched our product with Sony Corp.





During 2009, we introduced our new advertising division, which has the ability to sell or cross market products to our data base of clients. We can partner with our exiting clients and or solicit new customers to cross market products based on the end users behavior.





Currently, our services include the following:





· My Hub - offers 2 GB of free storage to all customers from the web-site and at point of sale. We are now also offering the option to purchase monthly and annual plans for multiple devices. My Hub offers Mobile Sync, which provides customers with the ability to sync their mobile phones, including data, contacts and photos, allowing them to be accessed online. My Hub also includes PC Backup and Music Anywhere, which allows our customer to access all of their music from anywhere in the world.  In December we will launch My Hub 2.5, which is a thinned down version of the original My Hub 1.0.  My Hub 2.5 was developed based off of suggestions from user acceptance reports critiquing the original My Hub.  In December, we will also be launching a monthly service at point of sale.







Link: http://www.carphonewarehouse.com/my-hub





· Wirefly Mobile Backup/Contact Mover– provides backup for mobile devices’ contacts, photos, music and videos, as well as DATA transfer service, allowing the transfer of contacts between the customers old and new phone. We "soft launched" this service on November 1st, with full roll out over the Simplexity network of partners throughout the next 6 months.  The service will also be bundled into certain offerings to add additional value.








Link: http://www.wirefly.com/backup




17





· Comet on Call File Safe– offered in Europe providing back up services in retail stores. This product is being sold on the shelf and bundled with promotions, however we are seeing little results from this retailer.


· Spare Backup– unlimited storage for $59.99 a year. Link:  www.sparebackup.com


· My Memory Center (Sony)– backup with Viao Carewarranty support service from Sony for Viao products, as well as a 90 day free trial. Also offered through "Back Stage" stores, where it is bundled.


· Spare backup Enterprise– offering backup services for corporate clients with varying needs, from clients with 5 PCs to 100 PCs, ranging in prices.


Link: http://my.sparebackup.com/product_wizard.asp?source=SPBU





Third Quarter 2010 Developments
 
 While the third quarter was challenging, we have overcome the two most significant issues addressing the company for over a year.   First, we have finally developed what we feel is the optimal product positioning and pricing that has enabled our business model to achieve substantial growth. Secondly, this has enabled us to have visibility for funding ourself from the cash flow generated by this revenue growth.
 
 We have now completed the full roll out for Simplexity.  This has necessitated our Research and Development spending to stay at a high level.  We have now completed the synchronization across 1,200 possible cell phone models, carriers, and different operating systems, permiting the transfer of data from an older cell phone to a new one.   Additionally, we enhanced and tested Spare Backup’s efficacy at backing up and recovering multiple types of data for each mobile phone operating system.   New data recovered includes contacts and calendar items, photos, music catalogs, and videos.  While this software enhancement and testing caused a delay in starting our full rollout with Simplexity (prior to the soft launch in early November), it is now in a position to fully launch.   A quick note on Simplexity, Wirefly.  It is a privately owned cellular device fulfillment company.  It is the number one authorized fulfillment agent for every major cell phone carrier, and many major retail distributors, having held this position for the past six years.    Spare Backup’s software development has uniquely positioned itself.  We are not aware of any other software company that has accomplished this range of cell phone capabilities across all major manufacturers, brands, and different operating systems.   This present a unique software offering to cell phone users, distributors, and carriers, and we are enthusiastic about the prospects resulting from the foundational work completed.  We also anticipate rolling out our security suite of products in December.  We believe that this set of products, along with the backup solution, will give consumers great added protection.  Our marketing and distribution strategy is in place with a few of our partners, some will sell it as a standalone bundle with Backup, and through our insurance partners they will bundled into warranty programs.
 
 We expect that the full roll out with Simplexity will increase our revenues and improve our cash flows from operations for the foreseeable future.   During the Third Quarter we decreased our selling, general and administrative by 40% from the comparable prior year quarter.  We believe we can continue to reduce our operating expenses which will help us achieve break-even.  Our Equity Line financing is anticipated to close within the next six months.   The delay in this Equity Line being effective has caused us to bridge its funding through its strategic investors.




During the nine-month period ended September 30, 2010 we have been developing various new product lines, such as Spare Mobile and Spare Sync/Collaborate, as well as improving our already existing products such as Spare Backup and Spare Switch.  Spare Mobilefocuses on mobile phones, ensuring users that their contacts, photos and data are securely backed up and can be accessed from anywhere in the world.  Spare Sync/Collaborateallows our customers to move date effortlessly between devices. We have worked on ensuring that our products are compatible with all of the newest technologies, allowing connection between laptops, cameras, televisions, mobile phones and other mobile devices.  We have improved our photo storage along with our mobile storage. New to our products, we now provide the back up of movies and calendar through the phone. Customers can now also remotely control their various devices from other devices, making sharing content and moving files and data with a single touch. In December, our customers will have the ability to find their mobile phones and remotely control it, providing them with the opportunity to get the location, lock the device and wipe the date via a browser, through the Spare Suite of security products.  These products will be bundled into our Spare mobile products and sold at a premium in some cases.





The following is an example of our website, showing the different device and information that our products cover, as well as an example of what a user will see when managing their devices and information.





18










19








Second Generation Software:





We have completed the enhancement of our software, as well as successfully deployed“My Hub” for Car Phone Warehouse. We started training in the third quarter, where trainers went to stores to explain the offering. We have been able to this thanks to feedback from the initial user base, as well comments from focus groups.  As a result of the feedback, we completely redesigned the user experience.  We have established a simple sign up process that automatically downloads to both the mobile client through an “SMS” message and backs up onto the client’s computer.   We are marketing this new software with an upfront one-year subscription fee, and are easily deployed by the sales person at the retail point of purchase.  We hope this will accelerate our path to cash flow growth.




20





While we have been working to complete the development of our second-generation software, we have succeeded in making significant progress in reducing costs.  We anticipate that we will see the benefits of our research and development outsourcing throughout the remainder of the year. As our products gain market acceptance and our rollouts continue with our current and future partners, we anticipate significant improvement in both revenues and profitability.  We have placed a great deal of emphasis on our mobile platforms, specifically mobile phones, as we have completed the deployment of our software so that it is compatible for all phones varieties. The following lists the mobile operating systems we support: Blackberry OS v4.6, 4.7 and 5.0, Android OS v1.5, 1.6 and 2.1, WinMobile OS v6.1 and 6.5, Java S60 Phones with MIDP 2.0 and 2.1, and iPhone OS v3.0, 3.1 and 4.0.
 We have generated minimal revenue since our inception on September 12, 2002, and have incurred net losses of approximately $108 million from cash and non-cash activity since inception through September 30, 2010. 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.  We have secured a line of credit of $10 million; at September 30, 2010, however, we have not closed on the line of credit.  We expect to close on the line of credit within the next six months and plan to draw down from it in fiscal 2011, using portions of it to pay off liabilities and taxes.  We plan to be operating on our own cash flow around December 2011 though.





Financing:





We have negotiated down our liabilities, as well as settled numerous lawsuits in our favor. We have been communicating with the IRS regarding our outstanding payroll tax liability. Our understanding is that once we pay the current federal withholding taxes, we may be able to secure a payment plan for our outstanding payroll tax liability. The current financing environment has been challenging, but we are encouraged by the plans we have in place which have helped us to focus on growing the business and executing our business model. We expect to have enough capital and /or receivables to be self-sufficient and not need to seek additional financing within the next six months, however we cannot guarantee this.




21





New business relationships:





We have replaced DSGI with Comet stores and the Car Phone Warehouse group, which includes Best Buy Europe, and their affiliates throughout Europe, providing them, with custom applications designed specifically for them. The process of back filing DSGI has taken almost three quarters to complete, as we have gone from providing back up service, to expanding our offerings to cloud service, mobile backup, syncing and a suite of other services as previously discussed. We now expect to start seeing improvement throughout the rest of the year, as we did last year when we launched DSGI.





We are continuing to expand our current distribution partners with scheduled launches throughout the remanding part of the year. We are adding new partners, such as the phone house in Spain.  Wirefly/Simplexity have started selling the custom solutions that we developed, through a soft launch in November that rolls out accross their network of affiliates throughout the next six months. We are also looking into and negotiating licensing deals where potential partners can license our software for a flat fee as they incur all costs associated, such as storage and customer support. It is still to early to tell if our cloud offerings are going to be successful, however, we believe very strongly in its potential. We believe that our technology is already proven with our box sales product at retail and as the mobile phone market, specifically smart phones, continues to grow. We believe our offerings will adopt to the customers as our cloud system provides smart phones with the ability to link into our cloud and connect to multiple devices.





We are working on providing our partners with real time data analytics from their consumers via Spare's subsidiary company SMA, which will provide them with behavioral pattern matching and market research.





We are currently in negotiations with certain U.S. and South Pacific partners, who we are hoping to secure throughout the remainder of the year. We are now in the process of rapidly expanding sales as our software is completed and ready to be distributed.





Results of Operations





SPARE BACKUP, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONSFor the Three Months Ended


Increase/


Increase/


For the Nine Months Ended


Increase/


Increase/September 30,


(Decrease)


(Decrease)


September 30,


(Decrease)


(Decrease)2010


2009


in $ 2010


in % 2010


2010


2009


in $ 2010


in % 2010vs 2009


vs 2009








vs 2009


vs 2009Net Revenues

$
104,832


$
768,006


$
(663,174
)


-86.4
%

$
878,425


$
1,855,344


$
(976,919
)


-52.7
%Operating expenses:Research and development


510,384



356,919



153,465



43.0
%


2,010,556



883,414



1,127,142



127.6
%Selling, general and administrative


1,345,129



2,564,721



(1,219,592
)


-47.6
%


5,899,203



7,612,193



(1,712,990
)


-22.5
%Total operating expenses


1,855,513



2,921,640



(1,066,127
)


-36.5
%


7,909,759



8,495,607



(585,848
)


-6.9
%Operating loss


(1,750,681
)


(2,153,634
)


402,953



-18.7
%


(7,031,334
)


(6,640,263
)


(391,071
)


5.9
%Other income (expense):Change in fair value of derivative liabilities


(52,849
)


239,011



(291,860
)


-122.1
%


(135,468
)


256,736



(392,204
)


-152.8
%Gain from debt settlement


24,906



-



24,906


100
%


320,633



297,799



22,834



7.7
%Interest expense


(497,093
)


(1,270,727
)


773,634



-60.9
%


(1,418,787
)


(1,870,678
)


451,891



-24.2
%Total other income (expense)


(525,036
)


(1,031,716
)


506,680



-49.1
%


(1,233,622
)


(1,316,143
)


82,521



-6.3
%Net loss


(2,275,717
)


(3,185,350
)


909,633



-28.6
%


(8,264,956
)


(7,956,406
)


(308,550
)


3.9
%




Revenues





Our net revenues primarily consist of subscription fees charged for online back-up services. Our net revenues decreased during the three and nine-month period ended September 30, 2010, when compared to the comparable periods in 2009, due to a decrease in the base over which deferred revenue is amortized, as well as a shift in our positioning from a traditional online backup provider, to a cloud computing platform that includes Mobile and Sync features. The deferred revenue is resulted from our previous partnership with DSG International. During the end of fiscal 2009, we mutually ended our agreement with DSG International, and therefore expect the amount of revenue recognized from the amortization of deferred revenue to decline over fiscal year 2010. We are currently concentrating our resources on bringing in new customers to replace this missing income.  We believe that our alliance with Simplexity will improve our operating cash flows during the remainder of 2010 and 2011.




22





Research and Development





Research and development expenses consist primarily of compensation expenses paid to our software engineers, employees and consultants in conjunction with the development or enhancement of our products. Our research and development expenses for the three and nine-month period ended September 30, 2010 include costs associated with continued development of user interfaces and additional products, including version 6.0 of Spare-Backup, Spare’s cloud or Spare Room, Spare Mobile, Spare Switch, and Spare Synchronization, and reflected increased research and development efforts to successfully meet various deadlines set by our OEM partners. The increase in our research and development expenses when compared to the comparable period in 2009 is primarily attributable to an increased in the our efforts to produce new products and appeal to new customers as previously mentioned.  We have been steadily working to ensure that our services operate with the latest technologies, including the following mobile operating system: Blackberry OS v4.6, 4.7 and 5.0, Android OS v1.5, 1.6 and 2.1, WinMobile OS v6.1 and 6.5, Java S60 Phones with MIDP 2.0 and 2.1, iPhone OS v3.0, 3.1 and 4.0. We have also worked very hard to ensure that we are compatible with the following mobile devices, as we are adding new devices on a weekly basis:





Make

Model

Make

ModelApple iPhone

iPhone 3G

NOKIA

3600Apple iPhone

iPhone 3GS

NOKIA

5130Apple iPhone

iPhone 4G

NOKIA

2720 BlueAT&T

AT&T Til (TyTn II, Kaiser)

NOKIA

6220 ClassicBlackBerry

8320

NOKIA

6600 FoldBlackBerry

8520

NOKIA

Mural 6750 GunmetalBlackBerry

8800

NOKIA

N73BlackBerry

8800

NOKIA

N80BlackBerry

8900

NOKIA

N86 8MPBlackBerry

9630

NOKIA

N91BlackBerry

9700

NOKIA

N93iBlackBerry

9000 (Bold)

NOKIA

N97BlackBerry

9500 (Storm)

NOKIA

Nokia 3250BlackBerry

8100 (Pearl)

NOKIA

Nokia 3600BlackBerry

8110 (Pearl)

NOKIA

Nokia 5800 XpressMusicBlackBerry

8120 (Pearl)

NOKIA

Nokia 6220 ClassicBlackBerry

8130 (Pearl)

NOKIA

Nokia 6600 FoldBlackBerry

8220 (Pearl flip)

NOKIA

Nokia E51BlackBerry

8230 (Pearl flip)

NOKIA

Nokia E65BlackBerry

8300 (Curve)

NOKIA

Nokia E71BlackBerry

8310 (Curve)

NOKIA

Nokia E75BlackBerry

8330 (Curve)

NOKIA

Nokia E90 CommunicatorBlackBerry

8520 (Curve)

NOKIA

Nokia N73BlackBerry

8530 (Curve)

NOKIA

Nokia N78BlackBerry

8630 (Tour)

NOKIA

Nokia N80BlackBerry

8700g

NOKIA

Nokia N82BlackBerry

88xx Series

NOKIA

Nokia N86 8MPBlackBerry

8900 (Curve)

NOKIA

Nokia N91BlackBerry

8910 (Curve)

NOKIA

Nokia N93iBlackBerry

9520 (Storm2)

NOKIA

NOKIA N95 8GBBlackBerry

9530 (Storm)

NOKIA

Nokia N95 8GB Comes With MusicBlackBerry

9550 (Storm 2)

NOKIA

Nokia N96BlackBerry

9630 (Tour)

NOKIA

Nokia N97BlackBerry

9700 (Bold)

NOKIA

Nuron 5230HTC

Ted Baker Needle

O2 XDA

TrionHTC

Hero

Palm

TreoHTC

HTC Fuze

Pantech

Pantech Matrix ProHTC

HTC Ozone

Samsung

i900 OmniaHTC

HTC Snap

Samsung

Exclaim M550 BerryHTC

HTC TOUCH

Samsung

Galaxy / i7500HTC

Leo

Samsung

GT-B7300  OmniLITEHTC

Magic / myTouch 3G

Samsung

I5700 Galaxy SpicaHTC

Touch 2

Samsung

Impression A877 BlueHTC

Touch 2 (Windows Phone)

Samsung

Instinct s30 CopperHTC

Touch Diamond

Samsung

Intensity u450 BlackHTC

Touch Diamond 2

Samsung

MomentHTC

Touch HD

Samsung

Mythic a897 BlackHTC

Viva

Samsung

Omnia 2 (Windows Phone)HTC

XDA Atmos (HTC S730)

Samsung

Omnia Lite (Windows Phone)HTC

XDA Flint (HTC Advantage)

Samsung

Samsung ACE IIHTC

XDA Guide (HTC Iolite)

Samsung

Samsung Blackjack IIHTC

XDA Ignito (HTC Diamond)

Samsung

Samsung EpixHTC

XDA Mantle (HTC P6500)

Samsung

Samsung Highlight BlueHTC

XDA Serra (HTC Touch Pro)

Samsung

Samsung i8510 16GBHTC

XDA Zest (Asus)

Samsung

Samsung i8510 8GBHuawei

Pulse

Samsung

Samsung i8910 HDLG

Chocolate TOUCH

Samsung

Samsung JackLG

COOKIE

Samsung

Samsung OmniaLG

Eve / GW620

Samsung

Samsung Propel ProLG

Incite CT810

Samsung

Samsung SagaLG

KP500 Cookie

Samsung

SGH-617LG

LG Accolade Gray

Samsung

Solstice a887 BlackLG

LG Arena GT950

Sanyo

Incognito BlackLG

LG enV Touch VX11000 Black

Sony Ericsson

Ericsson C905a SilverLG

LG enV3 VX9200 Slate Blue

Sony Ericsson

Ericsson Equinox CarbonLG

LG Incite

Sony Ericsson

Ericsson Xperia X1LG

LG KP500 Cookie

Sony Ericsson

W580iLG

Rumor Touch Blue

Sony Ericsson

XPERIALG

Vu CU920 Red Wine

Sony Ericsson

Xperia X10LG

Xenon Red

T-Mobile

G1 AndroidMotorola

CLIQ / DEXT

T-Mobile

T-Mobile Dash 3GMotorola

Droid

T-Mobile

T-Mobile ShadowMotorola

EM330 Titanium

T-Mobile

T-Mobile Shadow IIMotorola

Moto Q 9m

T-Mobile

MDA Vario 2Motorola

Moto Q Global





23




As a result of the completion of our software, we are now moving from full time development, to maintenance mode, where we will be working on updates for any new handsets and networks that our current and new business brings us throughout the world.





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 increase in selling, general and administrative expenses during the three-month period ended September 30, 2010 when compared with the prior period is primarily due to the following:





•
a decrease in sales and marketing of approximately $365,000 due to paying commissions to DSG International occurring only during the 2009 period than the comparable period in 2010;•
a decrease in employee related costs of approximately $355,500 due to the company’s effort to concentrate their resources;•
a decrease in depreciation expense of approximately $161,000 due to certain assets being fully depreciated during 2009 and the first quarter of 2010;•
a decrease in professional and consulting fees of approximately $97,00 due mainly to higher legal fees in the three month period in 2009 when compared to 2010.





The decrease in selling, general and administrative expenses during the nine-month period ended September 30, 2010 when compared with the prior period is primarily due to the following:





•
a decrease in sales and marketing of approximately $1,211,000 due to paying commissions to DSG International occurring only during the 2009 period than the comparable period in 2010;•
a decrease in employee related costs of approximately $844,000 due to the company’s effort to concentrate their resources;•
a decrease in depreciation expense of approximately $476,000 due to certain assets being fully depreciated during 2009 and the first quarter of 2010; offset by,•
an increase in professional and consulting fees of approximately $768,000 due primarily to the issuance of shares of common stock  and options for services, such services are related to worldwide business development as we attempt to expand our international markets; and•
an increase in warrant  expense of approximately $241,00 due to the modification of certain warrant terms.




24




Other Expenses





Our total other expenses, net for the three and nine-month period ended September 30, 2010 decreased $506,680 and $82,521, or approximately 49.1% and 6.3%, respectively, from the same period in fiscal 2009. The decrease in total other expenses from 2010 to 2009 were primarily attributable to the following:





Change in Fair Value of Derivative Liabilities and Derivative Liabilities Expense





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. The difference in fair value of the derivative liabilities between the date of their issuance and their measurement date, which amounted to an increase and decrease of approximately $53,000 and $239,000 for the three-month period ended September 30, 2010 and 2009, respectively has been recognized as other income in those periods. The difference in fair value of the derivative liabilities between the date of their issuance and their measurement date, which amounted to an increase and a decrease of approximately $135,500 and $257,000, respectively for the nine-month period ended September 30, 2010 and 2009, respectively has been recognized as other income in those periods.





Historically we have been at a disadvantage in negotiating the terms of financing transactions which have resulted in the recognition of these derivative liabilities. We have reassessed at September 30, 2010, the number of authorized but unissued shares and taking into consideration the floorless feature in connection with the redemption provision on the 10% and 8% convertible promissory notes and have concluded that a derivative liability of approximately $310,000 is necessary.





Gain from Debt Settlement





During 2010, we settled numerous court cases and disputes with vendors. As a result, we recognized a total gain from debt settlement of approximately $320,000, representing an increase of approximately $23,000, or 7.7% from 2009.





Interest Expense





Interest expense consists primarily of interest recognized in connection with the amortization of debt discount and interest on our convertible promissory notes. The decrease in interest expense during the three and nine-month period ended September 30, 2010 when compared to the comparable 2009 periods of approximately $774,000 and $452,000, or 60.9% and 24.2%, respectively.





Liquidity and Capital Resources





At September30, 2010, our cash overdraft amounted to approximately $69,000 and our working deficit amounted to approximately $10,193,000 as compared with cash overdraft of approximately $43,000 and a working deficit of approximately $9,414,000 at December 31, 2009.





During the nine-month period ended September 30, 2010, we used cash of approximately $3,700,000 in our operating activities. Our cash used in operating activities was comprised of our net loss of approximately $8,265,000 adjusted for the following:





•
Fair value of options and warrants issued to employees of approximately $703,000;•
Depreciation of property and equipment, amortization of debt discount, amortization of prepaid expenses and amortization deferred financing costs of approximately $938,500;•
Fair value of convertible promissory notes modification of approximately $165,000;•
Fair value of common stock issued in connection with note payable issuance of approximately $184,000;•
Fair value of options and warrants issued to consultants of approximately $235,000;•
Fair value of option and warrant modifications of approximately $721,000;•
Change in fair value of derivative liabilities of approximately $135,500;•
Fair value of common stock issued in connection with services rendered of approximately $759,000; offset by the•
Gain from debt settlement of approximately $321,000




25




Additionally, the following variations in operating assets and liabilities impacted our cash used in operating activity:





•
Increase in accrued interest on convertible promissory notes of approximately $229,000, resulting from the 8% convertible notes issued in later fiscal 2009.•
Increase in accounts payable, accrued expenses and accrued payroll taxes of approximately $1,329,000, resulting from an increase of unpaid payroll taxes; offset by the•
Decrease in deferred revenue of approximately $621,000, resulting from the mutual release of our agreement with DSG International.





During the nine-month period ended September 30, 2010, we incurred capital expenditures of approximately $55,000. Such capital expenditures were primarily made to provide more servers to support our back-up services.





During the nine-month period ended September 30, 2010, we generated cash from financing activities of approximately $3,754,000, which primarily consisted of the proceeds from notes payable of $1,150,000,proceeds from the convertible promissory notes of $152,500, the net issuance of common stock of approximately $2,249,500, proceeds from the exercise of stock options of $6,000, proceeds from the exercise of warrants of approximately $575,000, repayment of notes payable of $405,000 and decrease in cash overdraft of approximately $26,000.





Off-Balance Sheet Arrangements





We have no off-balance sheet arrangements.





Capital Raising Transactions





During the nine-month period ended September 30, 2010, we issued in aggregate 20,922,084 common shares pursuant to a private placement which generated gross proceeds of approximately $2,249,474. In connection with this private placement, we issued 16,470,140 warrants exercisable at a price range of $0.12 to $0.20 per share. The warrants expire three years from the date of grant. We paid finder's fee of $39,000.





During the nine-month period ended September 30, 2010, we issued $102,500 of 8% convertible promissory notes.





During the nine-month period ended September 30, 2010, we issued $50,000 of 10% convertible promissory notes. In connection with the issuance of these convertible promissory notes, upon maturity or conversion, we shall issue 250,000 warrants at an exercise price of $0.12. The warrants expire three years from grant date.





During the nine-month period ended September 30, 2010, we issued $1,150,000 of notes payable.





During October 2010, we issued in aggregate 5,938,462 common shares pursuant to a private placement which generate gross proceeds of approximately $355,000. In connection with this private placement, we issued 500,000 warrants exercisable at $0.12 per share. The warrants expire three years from the date of grant.





Going Concern





We have generated minimal revenue since our inception on September 12, 2002, and have incurred net losses of approximately $108 million from cash and non-cash activity since inception through Septeember 30, 2010.  We also have approximately $2.9 million of unpaid payroll taxes due to the IRS at September 30, 2010.  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, 2009 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. We have no firm commitments from any third party to provide this financing and we can offer no assurances that we will be successful in raising working capital as needed particularly in the current economic climate. 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.




26





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 back up service fees received in advance are reflected as deferred revenue on the accompanying balance sheet. Deferred revenue as of December 31, 2008 amounted to $240,436 and will be recognized as revenue over the respective service period.





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





Item 3.   Quantitative and Qualitative Disclosures About Market Risk





Not applicable for a smaller reporting company.





Item 4.   Controls and Procedures





Evaluation of Disclosure Controls and Procedures





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




27





Changes in Internal Control over Financial Reporting





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





PART II - OTHER INFORMATION





Item 1.   Legal Proceedings





No significant updates.





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





During the three-month period ended September 30, 2010, we issued 3,561,641 shares of common stock to 12 accredited investors in connection with the payment of accrued interest of the 8% and 10% convertible promissory notes. The fair value of such shares issued amounted to $463,041 or $0.13 per share.  This private transaction is exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Regulation D of that Act.





During the three-month period ended September 30, 2010, we issued 5,150,000 shares of common stock to five vendors in connection with services performed of $640,976. 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.





During the three-month period ended September 30, 2010, we  issued in aggregate 6,216,667 common shares to 14 accredited investors pursuant to a private placement which generated gross proceeds of approximately $721,000. In connection with this private placement, the Company issued 4,216,667 warrants exercisable at a price range of $0.12 to $0.16 per share. The warrants expire three years from the date of grant. The Company paid finder's fee of $7,250. 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.





Item 3.   Defaults Upon Senior Securities





None.





Item 4.   Submission of Matters to a Vote of Security Holders





None.





Item 5.   Other Information





Item 6.    Exhibits





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





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





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





28




SIGNATURES





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





SPARE BACK UP, INC.Dated: November 22, 2010
By:
/s/ Cery B. PerleCery B. Perle

President, Chief Executive Officer and Director

and Principal Financial and Accounting Officer