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 March 31, 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  o No  x





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, 144,769,266 shares of common stock are issued and outstanding as of May 24, 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 $2.3 million of accrued payroll taxes and approximately $3,006,000 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
19Item 3.
Quantitative and Qualitative Disclosures About Market Risk
24Item 4T.
Controls and Procedures
24PART II – OTHER INFORMATIONItem 1.
Legal Proceedings
24Item 1A.
Risk Factors
25Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
25Item 3.
Defaults Upon Senior Securities
25Item 4.
Submission of Matters to a Vote of Security Holders
25Item 5.
Other Information
26Item 6.
Exhibits
26Signatures
26










Item 1. Financial Statements




SPARE BACKUP, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETSMarch 31,


December 31,ASSETS

2010


2009(Unaudited)


(1)Current Assets:Cash

$
-


$
-Accounts receivable


-



51,371Prepaid  expenses


26,671



17,487Total current assets


26,671



68,858Property and equipment, net of accumulated depreciation of $552,747 and $2,384,638 atMarch 31, 2010 and December 31, 2009, respectively


482,012



528,639Other assets


118,991



161,104Total assets

$
627,674


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

$
2,286,118


$
2,546,236Overdraft liability


59,505



43,489Accrued payroll taxes


2,278,048



2,027,3788% convertible promissory notes, net of debt discountof $78,150 and $96,865 at March 31, 2010 and  December 31, 2009, respectively


3,295,850



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


456,000



581,000Accrued interest on convertible promissory notes


130,343



125,829Notes payable


220,000



-Derivative liabilities


447,181



246,973Deferred revenue


188,579



621,127Due to stockholder


15,000



15,000Total current liabilities


9,376,624



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


-



71,154Total liabilities


9,376,624



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;144,769,266 and 134,036,062 issued and outstandingat March 31, 2010 and December 31, 2009, respectively


144,769



134,036Additional paid-in capital


93,463,836



90,886,623Accumulated deficit


(102,357,605
)


(99,816,429
)Total stockholders’ deficit


(8,748,950
)


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

$
627,674


$
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 Ended2010


2009(Unaudited)


(Unaudited)Net Revenues

$
546,242


$
455,589Operating expenses:Research and development


511,085



241,785Selling, general and administrative


2,205,525



2,815,897Total operating expenses


2,716,610



3,057,682Operating loss


(2,170,368
)


(2,602,093
)Other income (expense):Change in fair value of derivative liabilities


(200,207
)


(143,503
)Gain from debt settlements


295,727



297,799Interest expense


(466,328
)


(201,664
)Total other income (expense)


(370,808
)


(47,368
)Net loss

$
(2,541,176
)

$
(2,649,461
)Basic and diluted loss per common share

$
(0.02
)

$
(0.02
)Basic and diluted weighted average commonshares outstanding


139,207,361



106,816,011See Notes to Unaudited Consolidated Financial Statements.




F-2




SPARE BACKUP, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Three Months EndedMarch 31,2010


2009(Unaudited)


(Unaudited)Cash flows from operating activities:Net loss

$
(2,541,176
)

$
(2,649,461
)Adjustments to reconcile net loss to net cash used inoperating activities:Change in fair value of derivative liabilities


200,208



143,503Fair value of options and warrants issued to employees


362,834



379,924Fair value of options and warrants issued to consultants


234,572



33,583Fair value of option and warrant modifications


456,288



-Fair value of warrants issued to convertible promissory note holder


12,160



59,611Fair value of warrants issued for accrued interest


4,363



-Amortization of debt discount


129,811



99,307Fair value of common stock issued in connection with service rendered


108,886



112,000Fair value of common stock issued in connection with convertiblepromissory notes modifications


79,167



-Fair value of convertible promissory notes modifications


42,499



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


47,600



-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


(130
)


-Depreciation


75,460



234,737Amortization of prepaid expenses


18,316



70,166Amortization of deferred financing costs


45,176



19,980Gain from debt settlement


(295,727
)


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


51,371



91,920Prepaid expense and other current assets


(30,563
)


(296,951
)Accounts payable, accrued expense and accrued payroll taxes


286,279



423,740Deferred revenues


(432,548
)


548,782Accrued interest on convertible promissory notes


81,746



82,377Net cash used in operating activities


(1,043,408
)


(944,581
)Cash flows used in investing activities:Capital expenditures


(28,833
)


(203,206
)Net cash used in investing activities


(28,833
)


(203,206
)Cash flows from financing activities:Proceeds from issuance of convertible promissory notes


-



803,000Proceeds from issuance of notes payable


220,000



-Net proceeds from issuance of common stock for cash


835,225



287,500Cash overdraft


16,016



128,803Proceeds from exercise of stock options


1,000



-Payment of deferred financing costs


-



(90,462
)Net cash provided by financing activities


1,072,241



1,128,841Net decrease in cash


-



(18,946
)Cash, beginning of period


-



18,946Cash, end of period

$
-


$
-Supplemental disclosures of cash flow information:Cash paid for interest

$
-


$
-Cash paid for income taxes

$
-


$
-Non-cash investing and financing activities:Common stock reclassified as convertible promissory note

$
10,000


$
-Write off of fully depreciated propery 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

$
86,250


$
781,750Conversion of convertible promissory notes and accrued interestinto shares of common stock

$
238,465


$
60,000Fair value of shares of common stock issued for payment ofaccrued interest

$
68,637


$
77,434See 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 March 31, 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 three-month period ended March 31, 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 $2.5 million during the three-month period ended March 31, 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
  F-4
 
 The Company is subject to concentrations of credit risk primarily from cash and cash equivalents.
 
 The Company’s cash and cash equivalents accounts are held at financial institutions and are insured by the Federal Deposit Insurance Corporation, or the FDIC, up to $250,000. During the three-month period ended March 31, 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. One of the Company’s customers accounted for 98% of its accounts receivables at December 31, 2009.   There are no accounts receivable at March 31, 2010.
 
 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 March 31, 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 March 31, 2010 and December 31, 2009 amounted to $188,579 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 88% of its revenues during the three-month period ending March 31, 2010. One of the Company’s customers accounted for 81% of the Company’s revenue during the three-month period ending March 31, 2009.
 
 F-5
 
 Product Concentration
 
 The Company offers subscriptions to online and software backup products to assist individuals, small businesses and home business users.
 
 Fair Value of Financial Instruments
 
 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 March 31, 2010 and December 31, 2009, with the exception of its convertible promissory notes.  The carrying amount of the convertible promissory notes at March 31, 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 March 31, 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 March 31, 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.
  F-6
 
 Income Taxes
 
 Income taxes are accounted for in accordance with the provisions of FASB ASC-740 – Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized, but no less than quarterly.
 
 Share-based Payments
 
 The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation(“ASC 718”) 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 accounting standards update establishes the accounting and reporting guidance for arrangements under which own-share lending arrangements issued in contemplation of convertible debt issuance.
  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 financial statements of the Company once adopted.
 
 Basic and Diluted Earnings per Share
  F-7
 
 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 117,826,507 and 90,533,587 at March 31, 2010 and 2009, respectively. Accordingly, these common share equivalents at March 31, 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 three-month periods ended March 31, 2010 and 2009:
 
 For the three-month periods endedMarch 31,2010


2009Numerator:Net loss attributable to common stock

$
(2,541,176
)

$
(2,649,461
)Denominator:Denominator for basic earnings per share-Weighted average shares outstanding


139,207,361



106,816,011Denominator for diluted earnings per share-Weighted average shares outstanding


139,207,361



106,816,011Basic earnings per share

$
(0.02
)

$
(0.02
)Diluted earnings per share

$
(0.02
)

$
(0.02
)
 
 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. 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 years ended March 31, 2010 and 2009, amortization of prepaid expenses amounted to $18,315 and $70,166, respectively and was recorded as sales, general and administrative expense in the accompanying statement of operations. On March 31, 2010 and December 31, 2009, prepaid expenses amounted to $26,671 and $17,487, respectively
 
 NOTE 4 - PROPERTY AND EQUIPMENT
 
 Property and equipment consisted of the following:
 
 March 31,


December 31,Estimated life

2010


2009Computer and office equipment
3 to 5 years

$
832,461


$
2,710,979Leasehold improvements
5 years


202,298



202,2981,034,759



2,913,277Less: Accumulated depreciation



(552,747
)


(2,384,638
)$
482,012


$
528,639
 
 F-8
 
 During the three-month period ended March 31, 2010, the Company wrote-off $1,907,351 of fully depreciated computer equipment. Depreciation expense amounted to $75,460 and $234,737 during the three-month periods ended March 31, 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 $45,175 and $20,000 during the three-months ended March 31, 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:
  March 31,


December 31,2010


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

February 2010. 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 $0.12 to $0.25

$
3,374,000


$
3,373,000Less: unamortized discount


(78,150
)


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

$
3,295,850


$
3,276,135
 
 During the three-month period ended March 31, 2009, the Company classified $50,000 8% convertible promissory notes from long-term to short-term, along with the debt discount of $21,477.
 
 During the three-month period ended March 31, 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 recognize a $42,499 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 three-month period ended March 31, 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 three-month period ended March 31, 2010, the Company issued 709,161 shares of common stock in connection with the conversion of 8% convertible promissory notes with an aggregate principal of $105,000 and accrued interest of $8,595. The fair value of such shares issued amounted to $113,595, or $0.16 per share.
 
 F-9
 
 During the three-month period ended March 31, 2010, the Company reclassified 62,500 shares of common stock with a fair value of $10,000 as an 8% convertible promissory note with a principal of $10,000.
  March 31,


December 31,2010


200910% Convertible promissory notes, bearing interest at 10% per annum, maturing between August 2008 and January 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 $0.16 to $0.25

$
456,000


$
581,000Less: unamortized discount


(-
)


(-
)Convertible promissory notes- short-term

$
456,000


$
581,000
 
 During the three-month period ended March 31, 2009, the Company issued 375,000 shares of common stock in connection with the conversion of 10% convertible promissory notes with an aggregate principal of $60,000. The fair value of such shares issued amounted to approximately $60,000, or an average of $0.16.
 
 During the three-month period ended March 31, 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.
 
 At March 31, 2010Principal- 8% convertible promissory notes past due

$
2,550,000Principal- 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 three-month periods ended March 31, 2010 and 2009, respectively, the beneficial conversion feature amounted to $86,250 and $0. 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 - current amounted to $129,811 and $36,125 for the three-month periods ended March 31, 2010 and 2009, respectively, and is included in interest expense.
 
 NOTE 7 – NOTES PAYABLE
 
 During the three-month period ended March 31, 2010, the Company issued $220,000 notes payable that are due between March 31 and May 15, 2010. In connection with these notes payable, the Company issued 230,000 shares of common stock that have a fair value of $47,600, which was allocated to interest expense. During April and May 2010, the Company repaid these notes.
 
 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.
  F-10
 
 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 a decrease of $200,207 and an increase of $143,503 during the three-month periods ended March 31, 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:
  March 31,


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 three-month period ended March 31, 2009, the Company issued $200,000 of 8% convertible promissory notes. In connection with the issuance of these convertible promissory notes, upon maturity or conversion, the Company shall issue 5,018,750 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 $781,750 in connection of the issuance of 8% convertible promissory notes. In connection with this issuance, the Company paid commissions of $90,000 and issued five year warrants to purchase 602,250 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 $0.17 or $102,168 and was recorded as an increase in additional-paid in capital and an increase in other assets.
  F-11
 
 During the three-month period ended March 31, 2009, the Company classified $50,000 8% convertible promissory notes from long-term to short-term, along with the debt discount of $21,477.
 
 During the three-month period ended March 31, 2010, the Company classified $96,000 8% convertible promissory note from long-term to short-term along with the debt discount of $24,846.
  March 31,


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

$
-


$
-
 
 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 three-month periods ended March 31, 2010 and 2009, respectively, the beneficial conversion feature amounted to $0 and $781,750. 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 $63,182 during the three-month periods ended March 31, 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 three-month period ended March 31, 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


489,896


$
77,434


$
0.16Services performed –Investor Relations


500,000



111,500



0.22 - 0.24Conversion of 10% convertible promissory notes


375,000



60,000



0.16Private placement, net of finder’s fee of $12,500


1,875,000



287,500



0.163,239,896


$
536,434
 
 The issuance of common stock during the three-month period ended March 31, 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


619,600


$
68,637


$
0.11Services performed- Investor relations


400,000



66,000



0.165Services performed- Legal expense


175,398



28,941



0.165Services performed- Project management expense


66,406



13,944



0.21Exercised stock options


100,000



1,000



0.01Conversion of 8% convertible promissory notes


709,161



113,466



0.16Conversion of 10% convertible promissory notes


725,000



125,000



0.17Private placement, net of finder’s fee of $31,750


7,253,473



835,225



0.10 – 0.18Debt settlement agreement


100,000



20,000



0.20Convertible note repricing


416,666



79,167



0.19Interest associated with issuance of notes payable


230,000



47,600



0.205 – 0.22Reclassification to 8% convertible promissory note - short-term


(62,500)



(10,000)



0.1610,733,204


$
1,388,980
 
 NOTE 11 - STOCK OPTIONS AND WARRANTS
 
 Warrants
 
 During the three-month period ended March 31, 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 $59,612 and was recorded as an increase in additional-paid in capital and an increase in stock-based consulting expense.
 
 During the three-month period ended March 31, 2009, in connection with the private placements the Company issued warrants to purchase 1,875,000 shares of common stock at an exercise price of $0.20 per share. The warrants expire three years from the date of grant.
 
 During the three-month period ended March 31, 2009, in connection with the issuance of 8% convertible promissory notes, the Company issued warrants to purchase 5,018,750 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 602,250 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 $0.17 or $102,168 and was recorded as an increase in additional-paid in capital and an increase in other assets.
  F-13
 
 During the three-month period ended March 31, 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 three-month period ended March 31, 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 three-month period ended March 31, 2010, the Company extended the maturity dates of 1,953,528 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 $216,467 as an increase in additional paid-in capital and an increase in consulting expense.
 
 During the three-month period ended March 31, 2010, in connection with the private placements the Company issued warrants to purchase 6,920,140 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 three-month period ended March 31, 2010, in connection with the conversion of 8% convertible promissory notes issued warrants to purchase 709,161 shares of common stock at an exercise price range of $0.20 per share. The warrants expire in 2012. Of these warrants, 52,911 warrants were issued for accrued interest, were valued at $4,363 using the Black-Scholes option pricing model.
 
 During the three-month period ended March 31, 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.
 
 The fair value of the warrants granted during the three-month period ended March 31, 2010 and 2009 is based on the Black Scholes Model using the following assumptions:
 
 March 31, 2010


March 31, 2009Exercise price:


$0.12 - $0.20



$0.20 - $0.40Market price at date of grant:


$0.174 $0.225



$0.10 - $0.37Expected volatility:


74.52% - 75.12%



69% - 110%Term:

2 – 3 years


3 – 5 yearsRisk-free interest rate:


0.595% - 1.38%



0.96% - 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 three-month period ended March 31, 2009.
  F-14
 
 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 three-month period ended March 31, 2009, total stock-based legal expense charged to operations amounted to $11,083. At March 31, 2009, there was $121,917 of total unrecognized legal expense related to non-vested option-based compensation arrangements.
 
 For the three-month period ended March 31, 2009, the Company granted 2,630,000 five-year stock options to purchase common stock to employees at exercise prices ranging from $0.18 to $0.19 per share. For the three-month period ended March 31, 2009, total stock-based compensation charged to operations for option-based arrangements amounted to $379,924. At March 31, 2009, there was $377,788 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 three-month period ended March 31, 2010, total stock-based legal and consulting expense charged to operations amounted to $168,605 and $8,867, respectively. At March 31, 2010, there was no unrecognized legal and consulting expense related to non-vested option-based compensation arrangements.
 
 During the three-month period ended March 31, 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 three-month period ended March 31, 2010, the Company granted 2,956,252 five-year stock options to purchase common stock to employees at exercise prices ranging from $0.16 to $0.21 per share. For the three-month period ended March 31, 2010, total stock-based compensation charged to operations for option-based arrangements amounted to $362,834. At March 31, 2009, there was $668,303 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:
 
 March 31, 2010


March 31, 2009Exercise Price


$0.01 - $ 0.20



$0.18- $ 0.20Market price at date of grant


$0.16 - $ 0.225



$0.19 -$ 0.24Expected volatility


78.2% - 100.4
%


75% - 111
%Risk-free interest rate


1.39% - 2.47
%


1.40% - 1.88
%
 
 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 arbitration in September 2010, and mediation will be completed by July 2010. 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.
  F-15
 
 The Company is a party to litigation in the Riverside County Superior Course, Case No. INC084243, which was filed in February 2009 by Accretive Solutions in the state of Florida. The vendor is claiming a breach of contract, resulting in damages from a 2007 corporate compliance agreement. The Company contends that no services were ever provided. The vendor is seeking damages of approximately $37,000. The case will most likely be referred to arbitration. The Company believes that there is a 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 three-month periods ended March 31, 2010 and 2009 amounting $10,100 and $7,500, respectively. The rental property was used for temporary employee housing during such periods.
 
 NOTE 14 - ACCRUED PAYROLL TAXES
 
 As of March 31, 2010, the Company recorded a liability related to unpaid payroll taxes for the period from May 16, 2008 to March 31, 2010 for $2,278,048, of which, $368,000 is relates to accrued interest and penalty.
 
 NOTE 15 - SEGMENTS
 
 During the three-months ended March 31, 2010 and 2009, the Company operated in one business segment. The percentages of sales by geographic region for the three-month periods ended March 31, 2010 and 2009 were approximately:
 
 2010


2009United States


11
%


19
%Europe


89
%


81
%
 
 NOTE 16 - SUBSEQUENT EVENTS
 
 At May 24, 2010, the date the financial statements were issued, the following items were considered significant subsequent events.
 
 During April and May 2010, an employee exercised 536,752 options with a fair value of $5,368, or $0.01 per share.
 
 During April 2010, the Company issued 948,697 shares of common stock in connection with the conversion of various 8% convertible promissory notes with principals aggregating $109,000 and accrued interest of $9,112. The fair value of such shares issued amounted to $118,112, or $0.12 per share. In connection with the conversion, the Company also granted warrants to purchase 948,697 shares of common stock, of these warrants, 73,698 were for accrued interest.
 
 During April 2010, the Company issued notes payable of $270,000. During April and May 2010, $220,000 of the notes payable outstanding had been paid back. In connection with a $250,000 note payable, the Company issued 250,000 shares of common stock valued at $50,000 that was booked as interest expense.
 
 During April 2010, the Company issued 94,271 shares of common stock for consulting services rendered valued at $18,354.
 
 During April 2010, the Company issued 353,344 shares of common stock for 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 $64,633 or $0.18 per share.
 
 During April and May 2010, the Company issued 3,066,667 shares of common stock pursuant to a private placement which generated gross proceeds of $406,000.


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.





We are also spending significant time with our new partner Cydcor, which has over 3,000 door to door sales people starting to sell our small to medium business (“SMB”) products. In February 2009, we entered into a 1 year marketing agreement with Cydcor Inc. whereby Cydcor will market our services and perform marketing campaigns as it may determine from time to time. Cydcor will be paid in 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 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.





We have generated minimal revenue since our inception on September 12, 2002, and have incurred net losses of approximately $102 million from cash and non-cash activity since inception through March 31, 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.  While we have secured a line of credit of $7 million, this line of credit has not been funded yet.  Until the line of credit is funded, or alternative financing is secured, it will be difficult for the Company to meets its current financial obligations.




The management team built our business along three areas of focus during the first several months of this year.  Firstly, we are in the process of completing a financing plan for both short term needs through a $1 million line of credit, which will close in June 2010 and we secured a $7 million lending facility for longer term funding ease, collateralized with restricted shares, during the first three-month ended March 31, 2010. Secondly, we have enhanced our flagship software collaboratively with Car Phone Wharehouse.  This enhancement incorporates inputs from user groups that simplify software installation and deployment.   This has been developed with Car Phone Wharehouse in conjunction with their user groups, and will serve as a licensing platform for other distributor relationships.  Thirdly, we have validated the scalability of our software in both backup and access to cloud computing capability by deploying our software with additional distributors.
  Financing:
  The credit line we have announced we have yet to draw down, but we expect to do so within the upcoming weeks.  We have negotiated down our liabilities and have settled numerous lawsuits in favorably.  We have notified the IRS on our tax issue and have scheduled a payment at the end of July.  We estimate our interest rate and penalties will amount to less than 3% of the total balance owed.   The financing we have announced will enable the company to eliminate its debt, and furnish the company with the necessary working capital to carry the company until it  is cash flow positive.   The current financing environment has been challenging but we are encouraged to have the current plans in place so we can focus on growing the business and executing on our business model.
  Second Generation Software:
  We have currently completed the enhancement of software.  It has successfully been deployed at  “My Hub” for Car Phone Warehouse.  This has been possible through feedback from the initial user base, as well, comments from focus groups.  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, as well, backs up onto the client’s computer.   We are marketing this new software with an upfront one-year subscription fee.   This will accelerate the company’s path to cash flow growth, and is easily deployed by the sales person at the retail point of purchase.
  19
 Even though the company has worked to complete the development of its second generation software, it has also succeeded in making significant progress in reducing costs.  The company anticipates that it will see the benefits of our R&D outsourcing throughout the remainder of the year.  We will see savings in our Research and Development in the third quarter.   As our products gain market acceptance and our roll-outs 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, and specifically mobile phones, as we have completed the deployment of our software so that it is compatible for all phones varities.
  New business relationships:
  We have completed the transition of doing business with its new partners, and should start seeing improvements in the 3rd quarter.  We replaced DSGi with Comet stores and the Car Phone Warehouse group, which includes Best Buy Europe, and their affiliates throughout Europe.
  The company is continuing to expand its current distribution partners, with scheduled launches at the end of the second quarter with Wire Fly/Simplicity, and Comet.  We believe that our technology is already proven with our box sales product at retail.  It is still too early to tell if our cloud offerings are going to be successful, however, we believe very strongly in its potential. Our revenue sharing with the distributors as well as the additional marketing opportunities they will be able to mine makes a compelling opportunity for the computer and cell phone distributor to not only expand their recurring revenue, but also generate additional marketing opportunities.


Results of Operations





SPARE BACKUP, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF OPERATIONS


For the Three Months Ended


Increase/


Increase/March 31,


(Decrease)


(Decrease)2010


2009


in $ 2010


in % 2010vs 2009


vs 2009Net Revenues

$
546,242


$
455,589


$
90,653



19.9
%Operating expenses:Research and development


511,085



241,785



269,300



111.4
%Selling, general and administrative


2,205,525



2,815,897



(610,372
)


-21.7
%Total operating expenses


2,716,610



3,057,682



(341,072
)


-11.2
%Operating loss


(2,170,368
)


(2,602,093
)


431,725



-16.6
%Other income (expense):Change in fair value of derivative liabilities


(200,207
)


(143,503
)


(56,704
)


39.5
%Gain from debt settlement


295,727



297,799



(2,072
)


-0.7
%Interest expense


(466,328
)


(201,664
)


(264,664
)


131.2
%Total other income (expense)


(370,808
)


(47,368
)


(323,440
)


682.8
%Net loss


(2,541,176
)


(2,649,461
)


108,285



-4.1
%NM: Not Meaningful
  20





Revenues





Our net revenues primarily consist of subscription fees charged for online back-up services. Our net revenues increased during the three-month period ended March 31, 2010, when compared to the comparable period in 2009, due to an increase in the base over which deferred revenue is amortized. 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.




Research and Development





Research and development expenses consist primarily of compensation expenses paid to our software engineers, employees and consultants in conjunction with the development or enhancement of our products. Our research and development expenses for the three-month period ended March 31, 2010 include costs associated with continued development of user interfaces and additional products, including version 6.0 of Spare-Backup, a family pack, and our SMB (small to medium business) products Spare’s cloud or Spare Room, Spare Mobile, Spare Synchronization and Spare Diagnostics, 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 compensation of our employees for research and development of our products. Subject to the availability of sufficient working capital, we anticipate that we will continue to incur research and development expenses in future periods as a result of the addition of new features, the launch of new versions of our products and the expansion of our engineering staff, however we are not able at this time to quantify the amount of such expenditures. In some cases as we develop or co-develop additional services and products, we may from time to time get our partners to contribute funding for some of these projects.





Selling, General, and Administrative Expenses





The decrease in selling, general and administrative expenses in the three-month period ended March 31, 2010, as compared to the comparable period in 2009 of $610,372 or 21.7% is primarily due to the general decrease in substantially all expenses, including advertising and sales and marketing, technology services, employee related expenses, option expenses and professional and consulting services, due to management’s initiative to cut costs implemented in 2010.





Other Expenses





Our total other expenses, net for the three-month period ended March 31, 2010 increased $323,440, or approximately 682.8% from the same period in fiscal 2009. The increase 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 and derivative liabilities expense consist of income or expense associated with the change in the fair value of derivative liabilities as a result of the application of ASC 815. The difference in fair value of the derivative liabilities between the date of their issuance and their measurement date, which amounted to an increase of approximately $200,000 and $144,000 for the three-month period ended March 31, 2010 and 2009, respectively has been recognized as other income/expense 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 March 31, 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 $447,000 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 $296,000, representing a decrease of approximately $2,000, or 0.7% 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 increase in interest expense during the three-month period ended March 31, 2010 when compared to the comparable 2009 period of approximately $265,000, or 131.2% is primarily attributable to the issuance of 200,000 shares of common stock issued at the issuance of note payable valued at $41,000 and approximately $142,000 recognized in connection with the modification of certain 8% convertible promissory notes that occurred in 2010 only.




21





Liquidity and Capital Resources





At March 31, 2010, our cash overdraft amounted to approximately $59,000 and our working deficit amounted to approximately $9,350,000 as compared with cash overdraft of approximately $43,000 and a working deficit of approximately $9,414,000 at December 31, 2009.





During the three-month period ended March 31, 2010, we used cash of approximately $1,043,000 in our operating activities. Our cash used in operating activities was comprised of our net loss of approximately $2,541,000 adjusted for the following:





•
Fair value of options and warrants issued to employees of approximately $363,000;•
Depreciation of property and equipment, amortization of debt discount, amortization of prepaid expenses and amortization deferred financing costs of approximately $269,000;•
Change in the fair value of derivative liabilities of approximately $200,000;•
Fair value of options and warrants issued to consultants of approximately $235,000;•
Fair value of option and warrant modifications of approximately $456,000;•
Fair value of common stock issued in connection with services rendered of approximately $109,000; offset by the•
Gain from debt settlement of approximately $296,000





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





•
Increase in accounts payable, accrued expenses and accrued payroll taxes of approximately $287,000, resulting from an increase of unpaid payroll taxes; offset by the•
Decrease in deferred revenue of approximately $433,000, resulting from the mutual release of our agreement with DSG International.





During the three-month period ended March 31, 2010, we incurred capital expenditures of approximately $29,000. Such capital expenditures were primarily made to provide more servers to support our back-up services.





During the three-month period ended March 31, 2010, we generated cash from financing activities of approximately $1,072,000, which primarily consisted of the proceeds from notes payable of $220,000, the net issuance of common stock of approximately $835,000, proceeds from the exercise of stock options of $1,000 and cash overdraft of approximately $16,000.





During the three-month period ended March 31, 2009, we used cash of approximately $945,000 in our operating activities. Our cash used in operating activities was comprised of our net loss of approximately $2,649,000 adjusted for the following:





•
Fair value of options and warrants issued to employees of approximately $380,000;•
Depreciation of property and equipment, amortization of debt discount, amortization of prepaid expenses and amortization deferred financing costs of approximately $424,000;•
Change in the fair value of derivative liabilities of approximately $144,000;•
Fair value of common stock issued in connection with services rendered of approximately $112,000; offset by the•
Gain from debt settlement of approximately $298,000





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





•
Increase in deferred revenue of approximately $549,000, resulting from an increased number of consumers successfully prepaying for online backup services;•
Increase in accounts payable, accrued expenses and accrued payroll taxes of approximately $423,000, resulting from an increase in expenditures; offset by the•
Increase in prepaid expenses and other current assets of approximately $297,000, resulting from an increase in the prepaid commissions and marketing fees associated with our DSG International agreement.





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During the three-month period ended March 31, 2009, we incurred capital expenditures of approximately $203,000. Such capital expenditures were primarily made to provide more servers to support our back-up services.





During the three-month period ended March 31, 2009, we generated cash from financing activities of approximately $1,129,000, which primarily consisted of the proceeds from convertible promissory notes of $803,000, the net issuance of common stock of approximately $288,000 and cash overdraft of approximately $129,000, offset by the payment of deferred financing costs of approximately $90,000.





Off-Balance Sheet Arrangements





We have no off-balance sheet arrangements.





Capital Raising Transactions





During the three-month period ended March 31, 2010, we issued in aggregate 7,253,473 common shares pursuant to a private placement which generated gross proceeds of approximately $866,975. In connection with this private placement, we issued 6,920,140 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 $31,750.





During April and May 2010, the Company issued 3,066,667 shares of common stock pursuant to a private placement which generated gross proceeds of $406,000.





Going Concern





We have generated minimal revenue since our inception on September 12, 2002, and have incurred net losses of approximately $102 million from cash and non-cash activity since inception through March 31, 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.





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.




23





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 4T. Controls and Procedures





Evaluation of Disclosure Controls and Procedures





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





Changes in Internal Control over Financial Reporting





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





PART II - OTHER INFORMATION




Item 1. Legal Proceedings





No significant updates.





24




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





During the three-month period ended March 31, 2010, we issued 619,600 shares of common stock to 16 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 $68,637 or $0.11per 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 March 31, 2010, we issued 641,804 shares of common stock to three vendors in connection with services performed of $108,886. 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 March 31, 2010, we  issued in aggregate 7,253,473 common shares to 24 accredited investors pursuant to a private placement which generated gross proceeds of approximately $866,975. In connection with this private placement, the Company issued 6,920,140 warrants exercisable at a price range of $0.12 to $0.20 per share. The warrants expire three years from the date of grant. The Company paid finder's fee of $31,750. This private transaction is exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Regulation D, Rule 506 and Section 4(2) of that act.





During the three-month period ended March 31, 2010, we issued 100,000 shares of common stock in connection with a debt settlement agreement with a vendor, valued at $20,000. 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 March 31, 2010, we issued 416,666 shares of common stock to three accredited investors  in connection with our 8% convertible promissory notes repricing valued at $79,167. 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 March 31, 2010, we issued 230,000 shares of common stock to 16 accredited investors as interest associated with the issuance of notes payable valued at $47,600. This private transaction is exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Regulation D of that Act.





Item 3. Defaults Upon Senior Securities





None.





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





None.




25





Item 5.Other Information





Item 6. Exhibits





4.13
Spare Backup, Inc. Confidential Private Offering Memorandum, dated January 1, 2009





4.14
Spare Backup Inc., Private Placement Memorandum, dated May 7, 2009





4.15
Spare Backup, Inc. Confidential Private Offering Memorandum, dated August 4, 2009





4.16
Spare Backup Inc., Private Placement Memorandum, dated September 15, 2009





4.17
Spare Backup, Inc. Confidential Private Offering Memorandum, dated September 30, 2009





4.18
Spare Backup, Inc. Confidential Private Offering Memorandum, dated December 16, 2009




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





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: May 24, 2010
By:
/s/ Cery B. PerleCery B. Perle

President, Chief Executive Officer and Director

and Principal Financial and Accounting Officer