UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





(Mark One)





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





For the quarterly period ended June 30, 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, 169,055,970 shares of common stock are issued and outstanding as of August 23, 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 $2.6 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
16Item 3.
Quantitative and Qualitative Disclosures About Market Risk
28Item 4.
Controls and Procedures
28PART II – OTHER INFORMATIONItem 1.
Legal Proceedings
28Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
28Item 3.
Defaults Upon Senior Securities
29Item 4.
Submission of Matters to a Vote of Security Holders
29Item 5.
Other Information
29Item 6.
Exhibits
29Signatures
29










SPARE BACKUP, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETSJune 30,


December 31,2010



2009(Unaudited)



(1)Current Assets:Accounts receivable


-



51,371Prepaid  expenses


24,386



17,487Total current assets


24,386



68,858Property and equipment, net of accumulated depreciation of $629,263 and $2,384,638 atJune 30, 2010 and December 31, 2009, respectively


424,395



528,639Other assets


82,202



161,104Total assets

$
530,983


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

$
2,534,875


$
2,546,236Overdraft liability


19,794



43,489Accrued payroll taxes


2,614,913



2,027,3788% convertible promissory notes, net of debt discountof $26,777 and $96,865 at June 30, 2010 and  December 31, 2009, respectively


3,203,223



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


456,000



581,000Accrued interest on convertible promissory notes


130,021



125,829Notes payable


695,000



-Derivative liabilities


257,130



246,973Deferred revenue


8,153



621,127Due to stockholder


15,000



15,000Total current liabilities


9,934,109



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


-



71,154Total liabilities


9,934,109



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;162,572,358 and 134,036,062 issued and outstandingat June 30, 2010 and December 31, 2009, respectively


162,572



134,036Additional paid-in capital


96,239,920



90,886,623Accumulated deficit


(105,805,668
)


(99,816,429
)Total stockholders’ deficit


(9,403,126
)


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

$
530,983


$
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 Six Months EndedJune 30,


June 30,2010


2009


2010


2009(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)Net Revenues

$
227,351


$
631,749


$
773,593


$
1,087,338Operating expenses:Research and development


989,087



284,710



1,500,172



526,495Selling, general and administrative


2,348,549



2,231,575



4,554,074



5,047,472Total operating expenses


3,337,636



2,516,285



6,054,246



5,573,967Operating loss


(3,110,285
)


(1,884,536
)


(5,280,653
)


(4,486,629
)Other income (expense):Change in fair value of derivative liabilities


117,588



161,228



(82,619
)


17,725Gain from debt settlements


-



-



295,727



297,799Interest expense


(455,366
)


(398,287
)


(921,694
)


(599,951
)Total other income (expense)


(337,778
)


(237,059
)


(708,586
)


(284,427
)Net loss

$
(3,448,063
)

$
(2,121,595
)

$
(5,989,239
)

$
(4,771,056
)Basic and diluted loss per common share

$
(0.02
)

$
(0.02
)

$
(0.04
)

$
(0.04
)Basic and diluted weighted average commonshares outstanding


153,895,574



111,481,835



146,689,129



109,161,814See Notes to Unaudited Consolidated Financial Statements.




F-2




SPARE BACKUP, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Six Months EndedJune 30,2010


2009(Unaudited)


(Unaudited)Cash flows from operating activities:Net loss

$
(5,989,239
)

$
(4,771,056
)Adjustments to reconcile net loss to net cash used inoperating activities:Change in fair value of derivative liabilities


82,619



(17,725
)Fair value of options and warrants issued to employees


533,341



543,998Fair value of options and warrants issued to consultants


234,572



126,444Fair 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


11,568



2,695Fair value of common stock issued in connection with service rendered


618,365



225,800Fair value of common stock issued in connection with convertiblepromissory notes modifications


79,167



-Fair value of convertible promissory notes modifications


125,128



-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


(328
)


-Depreciation


151,976



467,131Amortization of debt discount


247,996



331,498Amortization of prepaid expenses


20,601



233,221Amortization of deferred financing costs


81,964



88,147Gain from debt settlement


(295,727
)


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


51,371



(452,764
)Prepaid expense and other current assets


(30,562
)


(696,719
)Accounts payable, accrued expense and accrued payroll taxes


871,901



657,287Deferred revenues


(612,974
)


1,261,964Accrued interest on convertible promissory notes


157,663



177,409Net cash used in operating activities


(2,722,774
)


(2,120,469
)Cash flows used in investing activities:Capital expenditures


(47,732
)


(219,016
)Net cash used in investing activities


(47,732
)


(219,016
)Cash flows from financing activities:Proceeds from issuance of convertible promissory notes


-



1,383,000Proceeds from issuance of notes payable


1,100,000



-Repayment of notes payable


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


1,547,475



914,000Cash overdraft


(23,695
)


175,883Proceeds from exercise of stock options


6,368



-Proceeds from exercise of warrants


545,358



-Payment of deferred financing costs


-



(125,351
)Net cash provided by financing activities


2,770,506



2,347,532Net increase in cash


-



8,047Cash, beginning of period


-



18,946Cash, end of period

$
-


$
26,993Supplemental disclosures of cash flow information:Cash paid for interest

$
-


$
-Cash paid for income taxes

$
-


$
-Non-cash investing and financing activities: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

$
153,062


$
1,361,750Conversion of convertible promissory notes and accrued interestinto shares of common stock

$
383,873


$
216,520Fair value of shares of common stock issued for payment ofaccrued interest

$
133,270


$
148,719See 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 June 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 six-month period ended June 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 $6 million during the six-month period ended June 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 six-month period ended June 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. One of the Company’s customers accounted for 98% of its accounts receivables at December 31, 2009.   There are no accounts receivables at June 30, 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 June 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 June 30, 2010 and December 31, 2009 amounted to $8,153 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 85% of its revenues during the six-month period ending June 30, 2010. One of the Company’s customers accounted for 87% of the Company’s revenue during the six-month period ending June 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 June 30, 2010 and December 31, 2009, with the exception of its convertible promissory notes.  The carrying amount of the convertible promissory notes at June 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 June 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 June 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 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





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 116,379,937 and 91,361,841 at June 30, 2010 and 2009, respectively. Accordingly, these common share equivalents at June 30, 2010 and 2009 are excluded from the loss per share computation for that period due to their antidilutive effect.




F-7


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





For the six-month periods endedJune 30,2010


2009Numerator:Net loss attributable to common stock

$
(5,989,239
)

$
(4,771,056
)Denominator:Denominator for basic earnings per share-Weighted average shares outstanding


146,689,129



109,161,814Denominator for diluted earnings per share-Weighted average shares outstanding


146,689,129



109,161,814Basic earnings per share

$
(0.04
)

$
(0.04
)Diluted earnings per share

$
(0.04
)

$
(0.04
)





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 six-month periods ended June 30, 2010 and 2009, amortization of prepaid expenses amounted to $20,601 and $233,221, respectively and was recorded as sales, general and administrative expense in the accompanying statement of operations. On June 30, 2010 and December 31, 2009, prepaid expenses amounted to $24,386 and $17,487, respectively





NOTE 4 - PROPERTY AND EQUIPMENT





Property and equipment consisted of the following:





June 30,


December 31,Estimated life

2010


2009Computer and office equipment
3 to 5 years

$
851,360


$
2,710,979Leasehold improvements
5 years


202,298



202,2981,053,658



2,913,277Less: Accumulated depreciation



(629,263
)


(2,384,638
)$
424,395


$
528,639





During the six-month period ended June 30, 2010, the Company wrote-off $1,907,351 of fully depreciated computer equipment. Depreciation expense amounted to $151,976 and $467,131 during the six-month periods ended June 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 $81,964 and $88,147 during the six-months ended June 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:




F-8




June 30,


December 31,2010


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

$
3,230,000


$
3,373,000Less: unamortized discount


(26,777
)


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

$
3,203,223


$
3,276,135





During the six-month period ended June 30, 2009, the Company classified $100,000 8% convertible promissory notes from long-term to short-term, along with the debt discount of $31,960.





During the six-month period ended June 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 $125,128 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 six-month period ended June 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 six-month period ended June 30, 2010, the Company issued 1,828,457 shares of common stock in connection with the conversion of 8% convertible promissory notes with an aggregate principal of $239,000 and accrued interest of $20,201. The fair value of such shares issued amounted to $259,201, or $0.14 per share.




June 30,


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 six-month period ended June 30, 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 six-month period ended June 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 six-month period ended June 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.




F-9





At June 30, 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 six-month periods ended June 30, 2010 and 2009, respectively, the beneficial conversion feature amounted to $153,062 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 $247,996 and $71,173 for the six-month periods ended June 30, 2010 and 2009, respectively, and is included in interest expense.





NOTE 7 – NOTES PAYABLE





During the six-month period ended June 30, 2010, the Company issued $1,100,000 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 June 30, 2010, the Company has repaid $405,000.




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 $82,619 and a decrease of $17,725 during the six-month periods ended June 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




F-10





Convertible promissory notes consist of the following as of:




June 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 six-month period ended June 30, 2009, the Company issued $1,048,000 of 8% convertible promissory notes. In connection with the issuance of these convertible promissory notes, upon maturity or conversion, the Company shall issue 6,550,000 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 $1,043,292 in connection of the issuance of 8% convertible promissory notes. In connection with this issuance, the Company paid commissions of $125,350 and issued five year warrants to purchase 774,750 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 $0.16 or $124,338 and was recorded as an increase in additional-paid in capital and an increase in other assets.





During the six-month period ended June 30, 2009, the Company classified $100,000 8% convertible promissory notes from long-term to short-term, along with the debt discount of $31,960.





During the six-month period ended June 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.




June 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 six-month period ended June 30, 2009, the Company issued $335,000 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 $318,458 in connection of the issuance of 10% convertible promissory notes.





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 six-month periods ended June 30, 2010 and 2009, respectively, the beneficial conversion feature amounted to $0 and $1,361,750. 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 $260,325 during the six-month periods ended June 30, 2010 and 2009, respectively, and is included in interest expense.





NOTE 10 - STOCKHOLDERS' DEFICIT




F-11





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.





The issuance of common stock during the six-month period ended June 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


844,020


$
148,719


$
0.17Services performed- Investor Relations


600,000



134,000



0.22 - 0.24Services performed- Legal


450,000



81,000



0.18Services performed- Payroll


60,000



10,800



0.18Conversion of 8% convertible promissory notes


978,254



156,520



0.15Conversion of 10% convertible promissory notes


375,000



60,000



0.16Private placement, net of finder’s fee of $82,000


6,225,000



914,000



0.169,532,274


$
1,505,039





The issuance of common stock during the six-month period ended June 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


2,450,000



393,500



0.159 - 0.165Services performed- Legal expense


175,398



28,941



0.165Services performed- Project management expense


110,677



22,799



0.20 - 0.21Services performed- Business development


900,000



169,000



0.145 - 0.20Services performed- Strategy consulting


25,000



4,125



0.165Exercised stock options


636,752



6,368



0.01Exercised warrants


5,453,595



545,358



0.10Conversion of 8% convertible promissory notes


1,828,457



258,873



0.14Conversion of 10% convertible promissory notes


725,000



125,000



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


13,761,807



1,547,475



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 - 0.2228,536,296


$
3,518,076





NOTE 11 - STOCK OPTIONS AND WARRANTS





Warrants





During the six-month period ended June 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 $59,612 and was recorded as an increase in additional-paid in capital and an increase in stock-based consulting expense.




F-12





During the six-month period ended June 30, 2009, in connection with the private placements the Company issued warrants to purchase 6,225,000 shares of common stock at an exercise price of $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 six-month period ended June 30, 2009, in connection with the issuance of 8% convertible promissory notes, the Company issued warrants to purchase 6,550,000 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 774,750 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 $0.16 or $124,338 and was recorded as an increase in additional-paid in capital and an increase in other assets.





During the six-month period ended June 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 six-month period ended June 30, 2009, in connection with the conversion of 8% convertible promissory notes issued warrants to purchase 40,754 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 $2,695 using the Black-Scholes option pricing model.





During the six-month period ended June 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 six-month period ended June 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 six-month period ended June 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 six-month period ended June 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 six-month period ended June 30, 2010, in connection with the private placements the Company issued warrants to purchase 11,136,807 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 six-month period ended June 30, 2010, in connection with the conversion of 8% convertible promissory notes issued warrants to purchase 1,828,457 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, 140,958 warrants were issued for accrued interest, were valued at $11,568 using the Black-Scholes option pricing model.





During the six-month period ended June 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.





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




F-13





June 30, 2010


June 30, 2009Exercise price:


$0.10 - $0.32



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


$0.145 $0.225



$0.10 - $0.21Expected volatility:


64.25% - 168.64%



69% - 110%Term:

2 – 9 years


3 – 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 six-month period ended June 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 six-month period ended June 30, 2009, total stock-based legal expense charged to operations amounted to $44,332. At June 30, 2009, there was $88,668 of total unrecognized legal expense related to non-vested option-based compensation arrangements.





For the six-month period ended June 30, 2009, the Company granted 3,725,000 five-year stock options to purchase common stock to employees at exercise prices ranging from $0.15 to $0.21 per share. For the six-month period ended June 30, 2009, total stock-based compensation charged to operations for option-based arrangements amounted to $543,998. At June 30, 2009, there was $349,481 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.





During the six-month period ended June 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 six-month period ended June 30, 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 six-month period ended June 30, 2010, total stock-based compensation charged to operations for option-based arrangements amounted to $533,341. At June 30, 2010, there was $497,798 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.




F-14


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





June 30, 2010


June 30, 2009Exercise Price


$0.01 - $ 0.20



$0.15- $ 0.20Market price at date of grant


$0.16 - $ 0.225



$0.13 -$ 0.25Expected volatility


78.2% - 100.4%



75% - 199%Risk-free interest rate


1.39% - 2.47%



1.40% - 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 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.





NOTE 13 - RELATED PARTY TRANSACTIONS





The Company made rental payments for property owned by the Chief Executive Officer of the Company during the six-month periods ended June 30, 2010 and 2009 amounting $10,000 and $15,000, respectively. The rental property was used for temporary employee housing during such periods.





NOTE 14 - ACCRUED PAYROLL TAXES





As of June 30, 2010, the Company recorded a liability related to unpaid payroll taxes for the period from May 16, 2008 to June 30, 2010 for $2,614,913, of which, $469,000 is relates to accrued interest and penalty.





NOTE 15 - SEGMENTS





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





2010


2009United States


15%



13%Europe


85%



87%





NOTE 16 - SUBSEQUENT EVENTS




During July 2010, a consultant exercised 250,000 warrants with a fair value of $30,000, or $0.12 per share.





During July and August 2010, the Company issued 2,316,946 shares of common stock in connection with the conversion of various 8% convertible promissory notes with principals aggregating $277,000 and accrued interest of $27,206. The fair value of such shares issued amounted to $304,206, or $0.13 per share. In connection with the conversion, the Company also granted warrants to purchase 2,316,946 shares of common stock, of these warrants, 200,279 were for accrued interest.




During July 2010, the Company issued 8% convertible promissory note of $60,000, which matures in May 2011.





During July and August 2010, the Company issued 3,916,666 shares of common stock pursuant to a private placement which generated gross proceeds of $392,000. In connection with the private placement, the Company issued 3,916,666 warrants exercisable at $0.12 per share. The warrants expire three years from the date of grant.




During July 2010, the Company secured a $10 million line of credit which bears interest at a rate of 10% on the unpaid principal balance and at a rate of 4% on the unfunded balance. The interest is payable monthly commencing October 1, 2010. The line of credit is secured by the Company's accounts receivable and matures in July 2013.
 
 The line of credit is convertible by the holder at anytime prior to maturity as follows:
 
 If the unpaid principal balance is
 ·
up to $1 million                                                      $0.20
 ·
between $1 and 2 million                                      $0.25
 ·
between $2 and 7 million                                      $0.30
 ·
between $7 and 10 million                                    $0.35
 
 The Company may convert the line of credit  prior to maturity if  the ten day average closing price per share of the Company’s common stock exceeds $0.60.
 
 Additionally, the Company issued 15,000,000 warrants to the lender. The warrants are exercisable at a price of $0.30 per share. The warrants expire in July 2015.
 
 Finally, the Company issued 50,000 shares of Series B Preferred Stock. The Series B Preferred Stock has the following rights: each share of Series B Preferred entitles the holder to 400 votes and dividend distributions declared by the Corporation to or for the holders of its common stock.




F-15





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.
 
 
 
 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 plan on launching this service shortly with our partner.
 
 Link: http://www.wirefly.com/backup
 
 · 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
 · 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.
 · 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
 
 During the six-month period ended June 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 apps, games, movies, books, calendar and mail. Customers can now also remotely control their various devices from other devices, making sharing content and moving files and data with a single touch. Our customers now 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.


16
 
 
 17







18





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.  We have secured a line of credit of $10 million; at June 30, 2010 we drew down a small amount of the line.  We plan to draw down more over the remainder of fiscal 2010 and use portions of it to pay off liabilities.





Financing:





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.  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 and have successfully deployed it  “My Hub” for Car Phone Warehouse. Training started in the third quarter, where trainers are going to all stores to explain the offering. 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. 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. 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, iPhone OS v3.0, 3.1 and 4.0.





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, along with previously announced partners, such as Wirefly/Simplexity and Comet that will soon begin selling the custom solutions that we developed. 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, which 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




20





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


Increase/


Increase/


For the Six Months Ended


Increase/


Increase/June 30,


(Decrease)


(Decrease)


June 30,


(Decrease)


(Decrease)2010


2009


in $ 2010


in % 2010


2010


2009


in $ 2010


in % 2010vs 2009


vs 2009








vs 2009


vs 2009Net Revenues


$227,351



$631,749



$(404,398
)


-64.0
%


$773,593



$1,087,338



$(313,745
)


-28.9
%Operating expenses:Research and development


989,087



284,710



704,377



247.4
%


1,500,172



526,495



973,677



184.9
%Selling, general and administrative


2,348,549



2,231,575



116,974



5.2
%


4,554,074



5,047,472



(493,398
)


-9.8
%Total operating expenses


3,337,636



2,516,285



821,351



32.6
%


6,054,246



5,573,967



480,279



8.6
%Operating loss


(3,110,285
)


(1,884,536
)


(1,225,749
)


65.0
%


(5,280,653
)


(4,486,629
)


(794,024
)


17.7
%Other income (expense):Change in fair value of derivative liabilities


117,588



161,228



(43,640
)


-27.1
%


(82,619
)


17,725



(100,344
)


-566.1
%Gain from debt settlement


-



-



-


NM



295,727



297,799



(2,072
)


-0.7
%Interest expense


(455,366
)


(398,287
)


(57,079
)


14.3
%


(921,694
)


(599,951
)


(321,743
)


53.6
%Total other income (expense)


(337,778
)


(237,059
)


(100,719
)


42.5
%


(708,586
)


(284,427
)


(424,159
)


149.1
%Net loss


(3,448,063
)


(2,121,595
)


(1,326,468
)


62.5
%


(5,989,239
)


(4,771,056
)


(1,218,183
)


25.5
%NM: Not Meaningful




Revenues





Our net revenues primarily consist of subscription fees charged for online back-up services. Our net revenues decreased during the three and six-month period ended June 30, 2010, when compared to the comparable periods in 2009, due to an decrease 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. We are currently concentrating our resources on bringing in new customers to replace this missing income.





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 six-month period ended June 30, 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 Switch, 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 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:




21





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 5230  22
  HTC

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 June 30, 2010 when compared with the prior period is primarily due to the following:





•
a decrease in sales and marketing of approximately $400,000 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 $124,000 due to the company’s effort to concentrate their resources;•
a decrease in depreciation expense of approximately $156,000 due to certain assets being fully depreciated during 2009 and the first quarter of 2010; offset by,•
an increase in consulting fees of approximately $555,000 due primarily to the issuance of shares of common stock for consulting 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 $265,00 due to the modification of certain warrant terms.





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





•
a decrease in sales and marketing of approximately $486,000 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 $846,000 due to the company’s effort to concentrate their resources;•
a decrease in depreciation expense of approximately $315,000 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 $752,000 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 $265,00 due to the modification of certain warrant terms.





Other Expenses




24





Our total other expenses, net for the three and six-month period ended June 30, 2010 decreased $100,719 and $424,159, or approximately 42.5% and 149.1%, 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 a decrease of approximately $118,000 and $161,000 for the three-month period ended June 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 $83,000 and $17,000, respectively for the six-month period ended June 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 June 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 $257,000 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 and six-month period ended June 30, 2010 when compared to the comparable 2009 periods of approximately $57,000 and $322,000, or 14.3% and 53.6%, respectively.





Liquidity and Capital Resources





At June 30, 2010, our cash overdraft amounted to approximately $20,000 and our working deficit amounted to approximately $9,910,000 as compared with cash overdraft of approximately $43,000 and a working deficit of approximately $9,414,000 at December 31, 2009.





During the six-month period ended June 30, 2010, we used cash of approximately $2,723,000 in our operating activities. Our cash used in operating activities was comprised of our net loss of approximately $5,989,000 adjusted for the following:





•
Fair value of options and warrants issued to employees of approximately $533,000;•
Depreciation of property and equipment, amortization of debt discount, amortization of prepaid expenses and amortization deferred financing costs of approximately $503,000;•
Fair value of convertible promissory notes modification of approximately $125,000;•
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;•
Fair value of common stock issued in connection with services rendered of approximately $618,000; offset by the•
Gain from debt settlement of approximately $296,000





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 $158,000, resulting from the 8% convertible notes issued in later fiscal 2009.•
Increase in accounts payable, accrued expenses and accrued payroll taxes of approximately $871,000, resulting from an increase of unpaid payroll taxes; offset by the•
Decrease in deferred revenue of approximately $613,000, resulting from the mutual release of our agreement with DSG International.





During the six-month period ended June 30, 2010, we incurred capital expenditures of approximately $48,000. Such capital expenditures were primarily made to provide more servers to support our back-up services.





During the six-month period ended June 30, 2010, we generated cash from financing activities of approximately $2,770,000, which primarily consisted of the proceeds from notes payable of $1,100,000, the net issuance of common stock of approximately $1,547,000, proceeds from the exercise of stock options of $6,000, proceeds from the exercise of warrants of approximately $545,000, repayment of notes payable of $405,000 and decrease in cash overdraft of approximately $24,000.





During the six-month period ended June 30, 2009, we used cash of approximately $2,120,000 in our operating activities. Our cash used in operating activities was comprised of our net loss of approximately $4,771,000 adjusted for the following:





•
Fair value of options and warrants issued to employees of approximately $544,000;•
Depreciation of property and equipment, amortization of debt discount, amortization of prepaid expenses and amortization deferred financing costs of approximately $1,120,000;•
Fair value of options and warrants issued to consultants of approximately $126,000;•
Fair value of common stock issued in connection with services rendered of approximately $226,000; 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 accrued interest on convertible promissory notes of approximately $177,000, resulting from the issuance of 8% convertible promissory notes during the period;•
Increase in deferred revenue of approximately $1,262,000, 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 $657,000, resulting from an increase in expenditures; offset by the•
Increase in prepaid expenses and other current assets of approximately $697,000, resulting from an increase in the prepaid commissions and marketing fees associated with our DSG International agreement; and•
Increase in accounts receivable of approximately $453,000, resulting from our relationship with DSG International.





During the six-month period ended June 30, 2009, we incurred capital expenditures of approximately $219,000. Such capital expenditures were primarily made to provide more servers to support our back-up services.





During the six-month period ended June 30, 2009, we generated cash from financing activities of approximately $2,347,000, which primarily consisted of the proceeds from convertible promissory notes of $1,383,000, the net issuance of common stock of approximately $914,000 and cash overdraft of approximately $176,000, offset by the payment of deferred financing costs of approximately $125,000.





Off-Balance Sheet Arrangements





We have no off-balance sheet arrangements.





Capital Raising Transactions




26





During the six-month period ended June 30, 2010, we issued in aggregate 13,761,807 common shares pursuant to a private placement which generated gross proceeds of approximately $1,547,475. In connection with this private placement, we issued 11,136,807 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 July and August 2010, we issued in aggregate 3,916,666 common shares pursuant to a private placement which generate gross proceeds of approximately $392,000. In connection with this private placement, we issued 3,916,666 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 $106 million from cash and non-cash activity since inception through June 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.





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.




27





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





Item 3.   Quantitative and Qualitative Disclosures About Market Risk





Not applicable for a smaller reporting company.





Item 4.   Controls and Procedures





Evaluation of Disclosure Controls and Procedures





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





Changes in Internal Control over Financial Reporting





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





PART II - OTHER INFORMATION





Item 1.   Legal Proceedings





No significant updates.





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





During the three-month period ended June 30, 2010, we issued 353,344 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 $64,633 or $0.18 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 June 30, 2010, we issued 3,019,271 shares of common stock to five vendors in connection with services performed of $509,479. 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 June 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.




28





During the three-month period ended June 30, 2010, we issued 750,000 shares of common stock to 16 accredited investors as interest associated with the issuance of notes payable valued at $88,000. 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.





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





SIGNATURES





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





SPARE BACK UP, INC.Dated: August 23, 2010
By:
/s/ Cery B. PerleCery B. Perle

President, Chief Executive Officer and Director

and Principal Financial and Accounting Officer