UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





(Mark One)





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





For the quarterly period ended March 31, 2011





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, 229,536,632 shares of common stock are issued and outstanding as of May 19, 2011.





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 $3.5 million of accrued payroll taxes and approximately $2,090,000 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, 2010 including the risks described in Part I. Item 1A. Risk Factors of that report. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.









SPARE BACKUP, INC.





INDEX





PagePART I – FINANCIAL INFORMATION:Item 1.
Financial Statements
F-1Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17Item 3.
Quantitative and Qualitative Disclosures About Market Risk
22Item 4T.
Controls and Procedures
22PART II – OTHER INFORMATIONItem 1.
Legal Proceedings
23Item 1A.
Risk Factors
23Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
23Item 3.
Defaults Upon Senior Securities
23Item 4.
[Removed and Reserved]
23Item 5.
Other Information
23Item 6.
Exhibits
23Signatures
24











SPARE BACKUP, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETSMarch 31,


December 31,ASSETS

2011


2010(Unaudited)


(1)Current Assets:Accounts receivable, net allwance for bad debt of $65,000 and $65,000

$
8,716


$
28,536Prepaid  expenses


42,599



58,798Total current assets


51,315



87,334Property and equipment, net of accumulated depreciation of $634,702 and $758,902


246,717



305,342Other assets


50,000



50,648Total assets

$
348,032


$
443,324LIABILITIES AND STOCKHOLDERS' DEFICITCurrent Liabilities:Accounts payable and accrued expenses

$
2,910,308


$
2,989,495Overdraft liability


149,722



127,321Accrued payroll taxes


3,501,015



3,203,1898% convertible promissory notes, net of debt discount $0 and $365


1,713,772



1,835,90710% convertible promissory notes, net of debt discount of $28,753 and $0


442,210



420,963Accrued interest on convertible promissory notes


71,354



31,473Notes payable


588,000



892,500Derivative liabilities


1,022,052



470,871Deferred revenue


102,500



102,500Due to stockholder


15,000



15,000Total current liabilities


10,515,933



10,089,219Stockholders' 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;227,213,894 and 200,342,955 issued and outstanding


227,214



200,343Additional paid-in capital


100,597,445



101,097,359Accumulated deficit


(110,992,610
)


(110,943,647
)Total stockholders’ deficit


(10,167,901
)


(9,645,895
)Total liabilities and stockholders’ deficit

$
348,032


$
443,324(1) Derived from audited financial statementsSee Notes to Unaudited Consolidated Financial Statements.




F-1




SPARE BACKUP, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONSThree-month periods endedMarch 31,2011


2010(Unaudited)


(Unaudited)Net Revenues

$
37,594


$
546,242Operating expenses:Research and development


258,259



511,085Selling, general and administrative


1,478,924



2,205,525Total operating expenses


1,737,183



2,716,610Operating loss


(1,699,589
)


(2,170,368
)Other income (expense):Change in fair value of derivative liabilities


1,761,726



(200,207
)Gain from debt settlements


(279
)


295,727Interest expense


(110,821
)


(466,328
)Total other income (expense)


1,650,626



(370,808
)Net (loss)

$
(48,963
)

$
(2,541,176
)Basic and diluted loss per common share

$
(0.00
)

$
(0.02
)Basic and diluted weighted average commonshares outstanding


215,197,805



139,207,361See Notes to Unaudited Consolidated Financial Statements.




F-2




SPARE BACKUP, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Three Months EndedMarch 31,2011


2010(Unaudited)


(Unaudited)Cash flows from operating activities:Net (loss)

$
(48,963
)

$
(2,541,176
)Adjustments to reconcile net loss to net cash used inoperating activities:Change in fair value of derivative liabilities


(1,761,726
)


200,208Fair value of options and warrants issued to employees


108,596



362,834Fair value of options and warrants issued to consultants


-



234,572Fair value of option and warrant modifications


121,621



456,288Fair value of warrants issued to convertible promissory note holder


-



12,160Fair value of warrants issued to note holder


-



-Fair value of warrants issued for accrued interest


198



4,363Fair value of common stock issued in connection with service rendered


194,000



108,886Fair value of common stock issued in connection with convertiblepromissory notes modifications


-



79,167Fair value of convertible promissory notes modifications


266



42,499Fair value of beneficial conversion features modifications


-



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


44,000



47,600Fair value of common stock issued in connection with debt settlement


-



20,000Fair value of common stock issued in connection with the conversionof convertible promissory notes


(332
)


(130
)Depreciation


59,441



75,460Amortization of debt discount


19,284



129,811Amortization of prepaid expenses


16,199



18,316Amortization of deferred financing costs


648



45,176Gain from debt settlement


279



(295,727
)Changes in operating assets and liabilities:Accounts receivable


19,820



51,371Prepaid expense and other current assets


-



(30,563
)Accounts payable, accrued expense and accrued payroll taxes


218,360



286,279Deferred revenues


-



(432,548
)Accrued interest on convertible promissory notes


46,755



81,746Net cash used in operating activities


(961,554
)


(1,043,408
)Cash flows used in investing activities:Capital expenditures


(816
)


(28,833
)Net cash used in investing activities


(816
)


(28,833
)Cash flows from financing activities:Proceeds from issuance of convertible promissory notes


50,000



-Proceeds from issuance of notes payable


264,000



220,000Repayment of notes payable


(110,000
)Net proceeds from issuance of common stock for cash


735,969



835,225Cash overdraft


22,401



16,016Proceeds from exercise of stock options


-



1,000Net cash provided by financing activities


962,370



1,072,241Net decrease in cash


-



-Cash, beginning of period


-



-Cash, end of period

$
-


$
-Supplemental 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 property and equipment

$
183,641


$
1,907,351Fair value of warrants and embedded conversion features issued inconnection with the issuance of convertible promissory notes andcorresponding debt discount

$
47,672


$
86,250Conversion of convertible promissory notes and accrued interestinto shares of common stock

$
129,374


$
238,465Conversion of notes payable into shares of common stock

$
458,500


$
-Fair value of shares of common stock issued for payment ofaccrued interest

$
-


$
68,637Fair value of derivative liability

$
2,313,564


$
-See Notes to Unaudited Consolidated Financial Statements.




F-3




SPARE BACKUP, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN





Spare Backup, Inc., (the "Company") was incorporated in Delaware in December 1999. The Company sells on-line backup solutions software and services to individuals, business professionals, small office and home office companies, and small to medium sized businesses.





The balance sheet presented as of March 31, 2011 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, 2010 included in our Annual Report on Form 10-K filed on April 22, 2011.  The results of operations for the three-month period ended March 31, 2011 are not necessarily indicative of the results for the year ending December 31, 2011.





The accompanying consolidated unaudited financial statements have been prepared on a going concern basis. The Company has incurred net losses of approximately $49,000 during the three-month period ended March 31, 2011. 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 unaudited 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 unaudited 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 three-month period ended March 31, 2011, the Company did not exceed the FDIC insurance limit.





The Company's accounts receivable are due from a few customers, which are located in the Unites States and United Kingdom. At March 31, 2011, two of the Company’s customers accounted for 25% and 75% of its accounts receivable. Two of the Company’s customers accounted for 24% and 72% of its accounts receivables at December 31, 2010.





Accounts Receivable





The Company has a policy of reserving for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the bad debt expense after all means of collection have been exhausted and the potential for recovery is considered remote.  Management determined that an allowance of $65,000 and $65,000 was necessary at March 31, 2011 and December 31, 2010, respectively.





Property and Equipment





Property and equipment, which primarily consists of office equipment and computer software, are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives of three to five years. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. At the retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in other income (expense) in the accompanying statements of operations.





Revenue Recognition





The Company follows the guidance of the FASB ASC 605-10-S99 "Revenue Recognition Overall – SEC Materials". The Company records revenue when persuasive evidence of an arrangement exists, on-line back-up services have been rendered, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.





The Company has collected annual fees related to online back-up services. Online back up service fees received in advance or collected up front are reflected as deferred revenue on the accompanying balance sheet. Deferred revenue as of March 31, 2011 and December 31, 2010 amounted to $102,500 and $102,500, respectively, and will be recognized as revenue over the respective subscription period.





Revenue consists of the gross value of billings to clients. The Company reports this revenue gross in accordance with Generally Accepted Accounting Pronouncements (“GAAP”) because it is responsible for fulfillment of the service, has substantial latitude in setting price and assumes the credit risk for the entire amount of the sale, and it is responsible for the payment of all obligations incurred for sales marketing and commissions.





Customer Concentration





None of the Company's customers accounted for a material amount of its revenues during the three-month period ending March 31, 2011. One of the Company’s customers accounted for 88% of the Company’s revenue during the three-month period ending March 31, 2010.





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 December 31, 2010 and 2009, with the exception of its convertible promissory notes.  The carrying amount of the convertible promissory notes at March 31, 2011 and December 31, 2010, approximate their respective fair value based on the Company’s incremental borrowing rate.





Cash and cash equivalents include money market securities that are considered to be highly liquid and easily tradable as of March 31, 2011 and December 31, 2010, respectively. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy.





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





Software Development Costs





Costs incurred in the research and development of software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional costs are capitalized in accordance with FASB ASC 985-20, “Costs of Software to be Sold, Leased, or Marketed.” The Company believes that the current process for developing software is essentially completed concurrently with the establishment of technological feasibility. Accordingly, no software development costs have been capitalized as of March 31, 2011. Instead, such amounts are included in the statement of operations under the caption "Research and development".





Foreign Currency Transactions





The Company periodically engages in transactions in countries outside the United States which may result in foreign currency transaction gains or losses. Gains and losses resulting from foreign currency transactions are recognized as foreign currency gain (loss) in the statement of operations of the period incurred.





Income Taxes





Income taxes are accounted for in accordance with the provisions of FASB ASC-740 – Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized, but no less than quarterly.




F-6





Share-based Payments





The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation(“ASC 718”) for all the stock awards granted after December 31, 2005, and granted prior to but not yet vested as of December 31, 2005. Under the fair value recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. See Note 7 for further information regarding the Company’s stock-based compensation assumptions and expenses. The Company elected to use the modified prospective transition method as permitted by ASC 718.





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





The Company has elected to use the Black-Scholes-Merton (“BSM”) option-pricing model to estimate the fair value of its options, which incorporates various subjective assumptions including volatility, risk-free interest rate, expected life, and dividend yield to calculate the fair value of stock option awards. Compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest and reflects estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.





Recent Accounting Pronouncements





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





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





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





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





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




F-7





Management does not believe that any other recently issued, but not yet effective, accounting standards could have a material effect on the accompanying consolidated financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.





Basic and Diluted Earnings per Share





Basic earnings per share is calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding for each period. Diluted earnings per share is computed using the weighted-average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise of stock options and warrants (calculated using the reverse treasury stock method). The outstanding options, warrants and shares equivalent issuable pursuant to convertible promissory notes amounted to 117,217,064 and 117,826,507 at March 31, 2011 and 2010, respectively. Accordingly, these common share equivalents at March 31, 2011 and 2010 are excluded from the loss per share computation for that period due to their antidilutive effect.





The following sets forth the computation of basic and diluted earnings per share for the three-month periods ended March 31, 2011 and 2010:





For the three-month periods endedMarch 31,2011


2010Numerator:Net loss attributable to common stock

$
(48,963
)

$
(2,541,176
)Denominator:Denominator for basic earnings per share-Weighted average shares outstanding


215,197,805



139,207,361Denominator for diluted earnings per share-Weighted average shares outstanding


215,197,805



139,207,361Basic earnings per share

$
(0.00
)

$
(0.02
)Diluted earnings per share

$
(0.00
)

$
(0.02
)





NOTE 3 - PREPAID EXPENSES





Prepaid expenses generally is comprised of marketing and sales commissions paid to sales agents for the 1 year prepaid subscriptions related to the Company's online back-up services, as well as prepaid insurance. The prepaid marketing expense is being amortized over the term of the respective subscription sold in accordance with GAAP whereby incremental direct costs are recognized in earnings in the same pattern as revenue is recognized. During the three-month period ended March 31, 2011 and 2010, amortization of prepaid expenses amounted to $16,199 and $18,315, respectively and was recorded as sales, general and administrative expense in the accompanying statement of operations. On March 31, 2011 and December 31, 2010, prepaid expenses amounted to $42,599 and $58,798, respectively





NOTE 4 - PROPERTY AND EQUIPMENT





Property and equipment consisted of the following:




F-8





March 31,


December 31,Estimated life

2011


2010Computer and office equipment
3 to 5 years

$
679,121


$
861,946Leasehold improvements
5 years


202,298



202,298881,419



1,064,244Less: Accumulated depreciation



(634,702
)


(758,902
)$
246,717


$
305,342





During the three-month period ended March 31, 2011, the Company wrote-off $183,641 of fully depreciated computer equipment. Depreciation expense amounted to $59,441 and $75,460 during the three-month period ended March 31, 2011 and 2010, 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 $648 and $45,175 during the three-month period ended March 31, 2011 and 2010, respectively and is included in interest expense.





NOTE 6 - CONVERTIBLE PROMISSORY NOTES-CURRENT





Convertible promissory notes consist of the following as of:





March 31,

2011


December 31,

20108% Convertible promissory notes, bearing interest at 8% per annum, maturing between August 2009 andSeptember 2011. 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

$
1,713,772


$
1,836,272Less: unamortized discount


(-
)


(365
)Convertible promissory notes- short-term

$
1,713,772


$
1,835,907





During the three-month period ended March 31, 2010, the Company modified certain 8% convertible promissory notes agreements with principals aggregating $333,000, repricing the conversion rate from $0.16 to $0.12 per share and the warrant exercise price from $0.20 to $0.16. As a result of these modifications, the Company recognize a $42,499 increase in additional paid-in capital and an increase in interest expense. In connection with these modifications, the Company issued 416,666 shares of common stock at a fair value of $79,167.





During the three-month period ended March 31, 2010, the Company classified $96,000 8% convertible promissory note from long-term to short-term along with the debt discount of $24,846.





During the three-month period ended March 31, 2010, the Company issued 709,161 shares of common stock in connection with the conversion of 8% convertible promissory notes with an aggregate principal of $105,000 and accrued interest of $8,595. The fair value of such shares issued amounted to $113,595, or $0.16 per share.





During the three-month period ended March 31, 2010, the Company reclassified 62,500 shares of common stock with a fair value of $10,000 as an 8% convertible promissory note with a principal of $10,000.




F-9





During the three-month period ended March 31, 2011, the Company issued 2,369,966 shares of common stock in connection with the conversion of certain 8% convertible promissory notes with an aggregate principal of $122,500 and accrued interest of $6,542. The fair value of such shares issued amounted to $129,042, or $0.05 per share.





March 31,

2011


December 31,

201010% Convertible promissory notes, bearing interest at 10% per annum, maturing between August 2008 and October 2011. 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 $0.05 to $0.16

$
470,963


$
420,963Less: unamortized discount


(28,753
)


(-
)Convertible promissory notes- short-term

$
442,210


$
420,963





During the three-month period ended March 31, 2010, the Company issued 725,000 shares of common stock in connection with the conversion of 10% convertible promissory notes with an aggregate principal of $125,000. The fair value of such shares issued amounted to $125,000, or an average of $0.17 per share.





During the three-month period ended March 31, 2011, the Company issued a $50,000 of 10% convertible promissory note. In connection with the issuance of this convertible promissory note, upon maturity or conversion, the Company shall issue 250,000 warrants at an exercise price of $0.10. The warrants expire three years from the date of grant. The Company recognized a debt discount of $37,672 in connection of the issuance of the 10% convertible promissory note.





At March 31, 2011Principal- 8% convertible promissory notes past due

$
1,668,772Principal- 10% convertible promissory notes past due

$
420,963





In accordance with FASB ASC 740 Debt- Debt with Conversion Options, the Company recorded a beneficial conversion feature related to the Convertible promissory notes. Under the terms of these notes, the intrinsic value of the beneficial conversion feature was calculated assuming that the conversion date was the same as the issue date. During the three-month period ended March 31, 2011 and 2010, respectively, the beneficial conversion feature amounted to $47,672 and $86,250. This beneficial conversion feature is reflected in the accompanying financial statements as additional paid-in capital and corresponding debt discount.





Total amortization of debt discounts for the convertible promissory notes - current amounted to $19,284 and $129,811 for the three-month periods ended March 31, 2011 and 2010, respectively, and is included in interest expense.





NOTE 7 – NOTES PAYABLE





During the three-month period ended March 31, 2011, the Company issued $264,000 notes payable that are due over the next 6 months. In connection with these notes payable, the Company issued 500,000 shares of common stock that have a fair value of $44,000, which was allocated to interest expense.





During the three-month period ended March 31, 2011, the Company issued 6,420,000 shares of common stock in connection with the conversion of certain notes payable with an aggregate principal of $458,500. The fair value of such shares issued amounted to $458,500, or an average of $0.07 per share.





During the three-month period ended March 31, 2011, the Company repaid $110,000 of the note payable.




F-10





NOTE 8 - DERIVATIVE LIABILITIES





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





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





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





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





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





During the three-month period ended March 31, 2011, the Company wrote off $656 of the derivative liability as a result of the expiration of certain warrants associated with the 10% convertible promissory notes





During the three-month period ended March 31, 2011, the Company issued warrants in connection with the sale of the Company’s common stock, conversion of convertible promissory notes, and short-term note payable, as well a convertible promissory note. The maximum number of shares required to be delivered during the period under which the warrants issued pursuant to common stock, conversion of promissory notes and short-term note payables, as well as the issuance of convertible promissory note, together with all the outstanding convertible debt, stock options, warrants and common stock, exceeds the amount of authorized common stock shares at March 31, 2011.  As a result, the Company recorded a derivative liability aggregating $2,313,564, and was offset against the additional-paid in capital.





The fair value of the derivative instruments were based on the following assumptions:





Exercise price:


$0.05 - $0.20Market price at date of grant:


$0.08 - $0.225Expected volatility:


50.83% - 89.35%Term:

>1 year – 5 yearRisk-free interest rate:


0.17% - 2.14%




F-11


The variation in fair value of the derivative liabilities between measurement dates amounted to a decrease of $1,761,726 and an increase of $200,208 during the three-month periods ended March 31, 2011 and 2010, respectively. The decrease in fair value of the derivative liabilities has been recognized as other income/expense.





NOTE 9 - CONVERTIBLE PROMISSORY NOTES - LONG TERM





Convertible promissory notes consist of the following as of:





March 31,

2011


December 31,

20108% 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.

$
-


$
-Less: unamortized discount


(-
)


(-
)Convertible promissory notes- long-term

$
-


$
-





During the three-month period ended March 31, 2010, the Company classified $96,000 8% convertible promissory note from long-term to short-term along with the debt discount of $24,846.





March 31,

2011


December 31,

201010% Convertible promissory notes, bearing interest at 10% per annum, maturing between October 2010 and January 2011. The promissory notes are convertible at any time at the option of the holder, into shares of common stock at a effective conversion rate of $0.16

$
-


$
-Less: unamortized discount


(-
)


(-
)Convertible promissory notes- long-term

$
-


$
-





In accordance with FASB ASC 740 Debt- Debt with Conversion Options, the Company recorded a beneficial conversion feature related to the Convertible promissory notes. Under the terms of these notes, the intrinsic value of the beneficial conversion feature was calculated assuming that the conversion date was the same as the issue date.





NOTE 10 - STOCKHOLDERS' DEFICIT





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





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





The issuance of common stock during the three-month period ended March 31, 2010 is summarized in the table below:





Number of Shares of Common Stock


Fair Value at Issuance


Fair Value at Issuance

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


619,600


$
68,637


$
0.11Services performed- Investor relations


400,000



66,000



0.165Services performed- Legal expense


175,398



28,941



0.165Services performed- Project management expense


66,406



13,944



0.21Exercised stock options


100,000



1,000



0.01Conversion of 8% convertible promissory notes


709,161



113,466



0.16Conversion of 10% convertible promissory notes


725,000



125,000



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


7,253,473



835,225



0.10 – 0.18Debt settlement agreement


100,000



20,000



0.20Convertible note repricing


416,666



79,167



0.19Interest associated with issuance of notes payable


230,000



47,600



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


(62,500
)


(10,000
)


0.1610,733,204


$
1,388,980





F-12





The issuance of common stock during the three-month period ended March 31, 2011 is summarized in the table below:





Number of Shares of Common Stock


Fair Value at Issuance


Fair Value at Issuance

(per share)Services performed- Investor relations


2,000,000


$
194,000


$
0.095 - 0.10Conversion of 8% convertible promissory notes


2,369,966



129,042



.05 – 0.12Private placement, net of finder’s fee of $44,080


15,580,973



735,969



0.05 - 0.06Conversion of notes payable


6,420,000



458,500



0.05 – 0.10Interest associated with issuance of note payable


500,000



44,000



0.08826,870,939


$
1,561,511





NOTE 11 - STOCK OPTIONS AND WARRANTS





Warrants





During the three-month period ended March 31, 2010, the Company issued warrants to purchase 200,000 shares of common stock at an exercise price of $0.20 per shares. The warrants expire three years from the date of grant. The Company valued the warrants at $12,160 using the Black-Scholes option pricing model, increasing additional paid-in capital, and increase to interest expense.





During the three-month period ended March 31, 2010, in connection with the modifications to certain 8% convertible promissory notes, the Company also repriced 1,335,222 warrants from an exercise price of $0.20 to $0.16. As a result of this modification, the Company recognized $15,585 as an increase in additional paid-in capital and an increase in interest expense.





During the three-month period ended March 31, 2010, the Company extended the maturity dates of 1,953,528 warrants for a certain investor for an additional five years from the original maturity dates. As a result of the extension, the Company recognized an expense of $216,467 as an increase in additional paid-in capital and an increase in consulting expense.





During the three-month period ended March 31, 2010, in connection with the private placements the Company issued warrants to purchase 6,920,140 shares of common stock at an exercise price range of $0.12 to $0.20 per share. The warrants expire three years from the date of grant.





During the three-month period ended March 31, 2010, in connection with the conversion of 8% convertible promissory notes issued warrants to purchase 709,161 shares of common stock at an exercise price range of $0.20 per share. The warrants expire in 2012. Of these warrants, 52,911 warrants were issued for accrued interest, were valued at $4,363 using the Black-Scholes option pricing model.




F-13





During the three-month period ended March 31, 2010, the Company issued warrants to purchase 500,000 shares of common stock to a consultant. The warrants have an exercise price of $0.12 and expire between three years from grant. The warrants were valued at $57,100 utilizing the Black-Scholes options pricing model and was recorded as an increase in additional-paid in capital and an increase in consulting fees.





During the three-month period ended March 31, 2011, in connection with the private placements the Company issued warrants to purchase 1,090,000 shares of common stock at an exercise price of $0.09 per shares. In connection with the private placement, the Company also issued additional warrants to purchase 4,575,000 shares of common stock at an exercise price range of $0.05 to $0.12 as finder’s fee. The warrants expire between 2014 and  2016.





During the three-month period ended March 31, 2011, in connection with the conversion of a 8% convertible promissory note issued warrants to purchase 166,667 shares of common stock at an exercise price of $0.16 per share. The warrants expire in 2013.





During the three-month period ended March 31, 2011, in connection with the conversion of a 8% convertible promissory note, the Company issued warrants to purchase 19,981 shares of common stock at an exercise price of $0.16 per shares for accrued interest. The warrants expire in 2013. The warrants were valued at $198 using the Black-Scholes option pricing model.





The fair value of the warrants granted during the years ended December 31, 2010 and 2009 is based on the Black Scholes Model using the following assumptions:





March 31, 2011


March 31, 2010Exercise price:


$0.16



$0.12 - $0.20Market price at date of grant:


$0.089



$0.174 - $0.225Expected volatility:


50.83%



74.52% - 75.12%Term:

2 years


2 – 3 yearsRisk-free interest rate:


0.63%



0.595% - 1.38%





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 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 and recorded the legal and consulting expense in the year 2010.





During the three-month period ended March 31, 2010, the Company modified the exercise price of certain options aggregating 15,825,342 to $0.18 exercise price. As a result of the modification, the Company recognized an expense of $239,821 as an increase in additional paid-in capital and an increase in selling, general & administrative expense.





For the three-month period ended March 31, 2010, the Company granted 2,956,252 five-year stock options to purchase common stock to employees at exercise prices ranging from $0.16 to $0.21 per share. For the three-month period ended March 31, 2010, total stock-based compensation charged to operations for option-based arrangements amounted to $362,834.





F-14





For the three-month period ended March 31, 2011, total stock-based compensation charged to operations for option-based arrangements amounted to $108,596. At March 31, 2011, there was $176,898 of total unrecognized compensation expense related to non-vested option-based compensation arrangements under the Qualified Stock Option Plan and Non Qualified Stock Option Plan.





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





March 31, 2011


March 31, 2010Exercise Price


N/A



$0.01- $ 0.20Market price at date of grant


N/A



$0.16 -$ 0.225Expected volatility


N/A



78.2% - 100.4%Risk-free interest rate


N/A



1.39% - 2.47%





NOTE 12 - COMMITMENTS AND CONTINGENCIES





Litigation





On October 10, 2010, a consultant filed suit against the Company in San Francisco Superior Court.  The Company filed motions reducing the scope of their claims and also filed x-complaint for the consultant’s failure to perform and negligence. The consultant is asserting claims of approximately $200,000 but the likelihood of an unfavorable outcome is very low.





In May 2010, a consultant filed suit against SPBU in Broward County Florida Circuit Court seeking recovery of approximately $50,000 in unpaid fees for accounting services.  The matter was pending as of December 31, 2010. Subsequently, the consultant obtained a judgment against the Company for approximately $55,000.  Settlement discussions continue.





The Company has appealed to the California Court of Appeals, in the matter involving a consultant.  The issue on appeal is the California Superior Court’s failure to disregard a NY state court judgment for approximately $100,000, which the Company asserts was improperly entered and therefore should not be recognized as a valid sister state judgment.  The Company’s likelihood of success on this appeal cannot be determined at this time.





Management is contesting all cases vigorously. The financial statements reflect accruals for any losses in these matters.





NOTE 13 - RELATED PARTY TRANSACTIONS





The Company made rental payments for property owned by the Chief Executive Officer of the Company during the three-month periods ended March 31, 2011 and 2010 amounting $2,500 and $10,100, respectively. The rental property was used for temporary employee housing during such periods.





NOTE 14 - ACCRUED PAYROLL TAXES





As of March 31, 2011, the Company’s liability related to unpaid payroll taxes amounted to $3,501,015, of which, $833,000 relates to accrued interest and penalty.





NOTE 15 - SEGMENTS





During the three-month periods ended March 31, 2011 and 2010, the Company operated in one business segment. The percentages of sales by geographic region for the three-month periods ended March 31, 2011 and 2010 were approximately:





2011


2010United States


11%



11%Europe


89%



89%





F-15





NOTE 17 - SUBSEQUENT EVENTS





During April 2011, the Company issued 1,400,000 shares of common stock valued at $70,000 pursuant to a private placement.





During April 2011, the Company issued 225,000 shares of common stock for services rendered valued at $18,000.




F-16





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





Overview





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





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





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





We have generated minimal revenue since our inception on September 12, 2002, and have incurred net losses of approximately $110 million from non-cash and cash  activity since inception through March 31, 2011. 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.





New business relationships:





We have replaced DSGI with a number of distribution partners such as Comet stores, Car Phone Warehouse group, which includes Best Buy Europe, Life Style Group  and their affiliates throughout Europe, providing them, with custom applications designed specifically for them. The process of back filing DSGI has taken almost eighteen months  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, Assurant, or federal Home Warranty and Life Styles Group ( A UK warranty provider).  We expect that they will market our services during the later part of the second quarter of 2011. 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 too early to tell if our cloud offerings are going to be successful, however, we are seeing a growing number of companies that want to establish programs with our companyl.. We believe our offerings have adopted to the customers needs, as our cloud system provides smart phones and PC backup 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., European, South American and South Pacific partners, which we are hoping to secure throughout the remainder of the year.


17




Additionally, as we unveiled our Spare Mobile backup and security services, our current partners, along with some potential channel partners wanted these services to be included in the launches..  While this substantially increased our potential target markets, it further delayed the full scale launch of our services in the 1st and 2nd quarters of 2011.We worked throughout the 1st quarter to integrate and scale the full PC and mobile functionalities of the software    We have now begun our initial small scale launch with the Carphone Warehouse the Netherlands in May 2011 and anticipate a progressive ramp in their distribution efforts throughout the remainder of 2011 and into 2012, along with new programs in the UK, as a bundle service.
  As we migrated to our diverse mobile and PC solution, we began to focus our distribution efforts in four vertical channels:


·
Insurance and warranties (Assurant and Lifestyle Group);


·
Retail-  Car Phone Warehouse and Simplexity;


·
Original Equipment Manufacturers;


·
Carriers.





In September 2010 we reached a distribution agreement with Simplexity, LLC.,(“Simplexity”), the parent company of Wirefly.com.  Simplexity, a privately held company, is the Internet's leading authorized seller of cell phones and wireless services. Wirefly is Simplexity's shopping and comparison site for consumers, bringing online shoppers an unprecedented selection of cell phones and service plans from every major U.S. carrier with the convenience of automated application processing and cell phone activation. For the last six years Wirefly has been the internet's #1 authorized dealer for AT&T, Verizon Wireless, Sprint, and T-Mobile.  Simplexity also operates and maintains similar online websites for a number of major retailers in North America. We believe Simplexity is uniquely positioned in the U.S. market to reach potential mobile customers across a wide variety of carriers through online mobile sales sites they own or manage   within North America.  We anticipate the sales launch of our services through Simplexity’s distribution network, emphasizing our important security features as well as our ability to seamlessly port data across numerous mobile device platforms, to progressively grow in 2011 and beyond. The service will be offered as an add-on or inclusive in the service packages currently marketed by Simplexity to its channel partners and customers. Second, we opened a new distribution channel for our mobile platform through mobile insurance and warrantee providers.
 In North America we reached an agreement with Assurant (Federal Warranty Service Corporation), which develops, underwrite and market specialty insurance, extended service contracts and other risk management solutions with leading financial institutions, retailers such as Radio Shack, Staples, and other entities such as Sprint,, have now started bundled us into their services.
 
 h Life Style Group (LSG), provider of leading lifestyle solutions and insurance products. LSG specializes in supporting its client brands, attracting customers, improving the customer journey and reducing customer attrition rates. LSG’s portfolio includes Mobile Phone Insurance, Card Protection and Tech Protect®, all of which can be delivered using their innovative HubbT approach. The HubbT allows clients to seamlessly integrate a complete suite of products and services all accessed via one number.  Their customer base includes ”3”, Phones 4 U, Barclay’s and Lloyds bank to name a few, in the U.K.  Both of these companies will offer our mobile platform with its security features to their customers incorporated in their various warrantee programs.  The software will be marketed as a way to not only protect their data from loss but, to also increase the likelihood of retrieving the phone and rendering any data on the phone useless if it is not retrieved.  As mobile devices become more prevalent and more powerful, we believe this channel will be a larger source of revenue to our company beginning late in the first half of 2011.
 
 We intend to continue to broaden our distribution efforts in 2011 through traditional and online retail, mobile warrantee and insurance, device manufacturers and Telco’s which will provide  exposure in the market place.  We believe we have developed cost effective, reoccurring revenue model.   We expect to develop new distribution relationships in the four  vertical channels above and in the  additional geographic areas in order to reach the widest potential subscriber base.


Software Development


Our decision to expand the scope of our “cloud” based platform into mobile backup and security caused us to have to make substantial changes to our software and back end to provide for the scalability and functionality to provide this service across a wide array of devices and platforms.  This expansion delayed our ability to launch a number of important programs in order to make sure the launches provided the type of reliability and user experience our distribution partners required.  Our development team continued to test and improve the mobile platform throughout the second half of 2010 and into the first quarter of 2011, now enabling us to begin the launch of Assurant, Simplexity, and LSG in the second quarter of 2011.  We will continue to change and improve the platform as new and more powerful mobile devices enter the marketplace, however we believe the backbone for our service platform has been substantially developed.




18





Tarsin Acquisition


As part of our plan incorporate and migrate data across carrier and device platforms we engaged in talks early in 2011 to work with Tarsin, Ltd., a U.K. based mobile services provider, to integrate their mobile feature phone data backup platform with our smart phone platform.   The Tarsin platform has support in over 100 countries worldwide, and on deck partnerships with Motorola, BestBuy\CarPhoneWarehouse, and Nextel.  When we began the undertaking of marrying Tarsin’s platform with ours in order to create a scalable end to end solution for all of our distribution partners, we decided to acquire the platform including Tarsin’s existing subscriber base and partnerships with Motorola and Nextel.  We believe this represents a substantial opportunity for us in partnership with Nextel and Motorola to keep their subscriber’s data backed up and migrate it to new smart phones they offer.  This represents a unique and cost effective way for them to keep their existing clients through an effortless migration of their data from their current Nextel or Motorola device to a new one.  We believe this acquisition also strengthens our partnership with BBE and offers them the ability to reduce churn through special offerings to these customers including data migration and backup.  We intend to work closely with these partners to launch these combined services and offerings to Tarsin’s millions of customers throughout the remainder of 2011.





We estimate that with the integration of the Tarsin platform we will have the ability to market our solutions in over 120 countries and will enable us to market our feature phone to smart phone migration offerings as well as all of our services to hundreds of millions of customers through distribution partners worldwide.





The combined offering is very compelling to all of our existing and potential distribution partners, some of whom have over 100 million active customers. During the remainder of 2011 we will focus our efforts on distribution and revenue producing partnerships.





We expect to close this transaction by August 2011.





Results of Operations for the three-month period ended March 31, 2011 compared to the three-month period ended March 31, 2010





SPARE BACKUP, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONSThree-month periods ended


Increase/


Increase/March 31,


(Decrease)


(Decrease)2011


2010


in $ 2011


in % 2011(Unaudited)


(Unaudited)


vs 2010


vs 2010Net Revenues

$
37,594


$
546,242


$
(508,648
)


-93.1%Operating expenses:Research and development


258,259



511,085



(252,826
)


-49.5%Selling, general and administrative


1,478,924



2,205,525



(726,601
)


-32.9%Total operating expenses


1,737,183



2,716,610



(979,427
)


-36.1%Operating loss


(1,699,589
)


(2,170,368
)


470,779



-21.7%Other income (expense):Change in fair value of derivative liabilities


1,761,726



(200,207
)


1,961,933



-980.0%Gain from debt settlement


(279
)


295,727



(296,006
)


-100.1%Interest expense


(110,821
)


(466,328
)


355,507



-76.2%Total other income (expense)


1,650,626



(370,808
)


2,021,434



-545.1%Net loss


(48,963
)


(2,541,176
)


2,492,213



-98.1%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 month period ended March 31, 2011, when compared to the prior year period, due to a decrease in the base over which deferred revenue is amortized and the delay in certain program launches. The amortization of deferred revenue resulted from our previous partnership with DSG International, which terminated in 2009. We expect that our revenues during 2011 will increase sequentially from the first quarter of 2011.


Research and Development




Research and development expenses consist primarily of compensation expenses paid to our software engineers, employees and consultants in conjunction with the development or enhancement of our products. Our research and development expenses for the three-month period ended March 31, 2011 include costs associated with continued development of user interfaces and enhancements of existing products and the scalability of our product, pursuant to our roadmap.
 
 The decrease in our research and development expenses during the three-month period ended March 31, 2011 when compared to the prior year period is primarily attributable to the completion of our Spare backup mobile offerings p such  asour cloud solution during the first quarter of 2010, while our research and development expenses consisted mostly of enhancements to our existing solutions.


Selling, General, and Administrative Expenses





Selling, general, and administrative expenses primarily consist of consultant fees related to the marketing and enhancement of our products, advertising, as well as other general and administrative expenses, such as payroll expenses, necessary to support our existing and anticipated growth in our revenues and legal and professional fees.




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The decrease in selling, general and administrative expenses during the three-month period ended March 31, 2011, when compared with the prior period is primarily due to the following:





•
a decrease in fair value of options and warrants issued to employees and consultants, amounting to approximately $500,000 and fair value of modifications to options amounting to approximately $180,000 which occurred during the quarter ended March 31, 2010.  We did not issue as many options and warrants during the three-month period ended March 31, 2011.





Change in Fair Value of Derivative Liabilities





Change in fair value of derivative liabilities results from the changes in the fair value of the derivative liability due to the application of ASC 815, resulting in either income or expense. The difference in fair value of the derivative liabilities between the date of their issuance and their measurement date, which amounted to a decrease and an increase  of approximately $1.8 million and $200,000 for the three-month period ended March 31, 2011 and 2010, respectively, has been recognized as other income and other expense in each respective periods. The difference in fair value of the derivative liabilities between the date of their issuance and their measurement date is primarily due to a decrease and an increase of the Company’s common stock quoted price between measurement dates and during the three-month period ended March 31, 2011 and 2010, respectively.  The Company’s common stock quoted price is one of the primary assumptions used in the computation of its derivative liabilities.





Gain from Debt Settlement





During the three-month period ended March 2010, we settled numerous court cases and disputes with vendors, which resulted in gains from debt settlements amounting to approximately $296,000. During the three-month period ended March 31, 2011, we did not settle any payables.





Interest Expense





Interest expense consists primarily of interest recognized in connection with the amortization of debt discount and interest on our convertible promissory notes. The decrease in interest expense during the three-month period ended March 31, 2011 when compared to the prior year period is primarily due to a higher weighted-average interest bearing debt and modification of warrants associated with convertible promissory notes during the three-month period ended March 31, 2010.





Liquidity and Capital Resources





At March 31, 2011, our cash overdraft amounted to approximately $150,000 and our working deficit amounted to approximately $10.5 million.





During the three-month period ended March 31, 2011, we used cash of approximately $962,000 in our operating activities. Our cash used in operating activities was comprised of our net loss of approximately $48,963 adjusted for the following:





•
Decrease in fair value of our derivative liabilities of approximately $1.8 million;

Fair value of options and warrants issued to employees of approximately $109,000

Fair value of modifications to options and warrants of approximately $122,000;•
Fair value of common stock issued in connection with services rendered of approximately $194,000;




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





•
Increase in accounts payable, accrued expenses and accrued payroll taxes of approximately $218,000, resulting from an increase of unpaid payroll taxes.





During the three-month period ended March 31, 2011, we generated cash from financing activities of approximately $960,000, which consisted of the proceeds from notes payable, including convertible promissory notes of  $314,000, and the net proceeds from the issuance of common stock of approximately $735,000 offset by principal repayments of certain notes payable aggregating $110,000.





Off-Balance Sheet Arrangements





We have no off-balance sheet arrangements.





Capital Raising Transactions





During the three-month period ended March 31, 2011, we issued in aggregate 15,580,973 common shares pursuant to a private placement which generated gross proceeds of approximately $780,000. In connection with this private placement, we issued 1,090,000 warrants exercisable at a price  of $0.09 per share. The warrants expire three years from the date of grant. We paid finder's fee of $44,000.





During the three-month period ended March 31, 2011, we issued $264,000 of 8% promissory notes.





During the three-month period ended March 31, 2011, we issued $50,000 of 10% convertible promissory notes. In connection with the issuance of these convertible promissory notes, upon maturity or conversion, we shall issue 250,000 warrants at an exercise price of $0.10. The warrants expire three years from grant date.





We expect to generate proceeds of approximately $1.5 million by issuing 13,636,363 shares to an accredited investor and 6,818,182 warrants at an exercise price of $0.16 which would mature in three years.  This transaction should close by June 2011





Going Concern





Since our inception in 2002 through March 31, 2011, we have incurred net losses of approximately $111 million from cash and non-cash activities. 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, 2010 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.




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Critical Accounting Policies





A summary of significant accounting policies is included in Note 2 to the unaudited consolidated financial statements included elsewhere in this quarterly 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 March 31, 2011 amounted to $102,500 when persuasive of an arrangement exists.





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.




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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 March 31, 2011, we issued $50,000 of 10% convertible promissory notes. In connection with the issuance of these convertible promissory notes, upon maturity or conversion, we shall issue 250,000 warrants at an exercise price of $0.10. The warrants expire three years from grant date.




During the three-month period ended March 31, 2011, we issued 500,000 shares of common stock to  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 $44,000 or $$0.088 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 March 31, 2011, we issued 2,000,000 shares of common stock to one investor relation provider for service performed at a fair value of $194,000 or $0.975 per share . This private transaction is exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that Act.





During the three-month period ended March 31, 2011, we  issued in aggregate 15,580,973 common shares to 16 accredited investors pursuant to a private placement which generated gross proceeds of approximately $780,000 or $0.06 per share. In connection with this private placement, the Company issued 1,090,000 warrants exercisable at a price of $0.16 per share. The warrants expire three years from the date of grant. The Company paid finder's fee of $44,000. This private transaction is exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Regulation D, Rule 506 and Section 4(2) of that act.





Item 3.   Defaults Upon Senior Securities





None.





Item 4.   [Removed and Reserved]





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





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SIGNATURES





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





SPARE BACK UP, INC.Dated: May 23, 2011
By:
/s/ Cery B. PerleCery B. Perle

President, Chief Executive Officer and Director

and Principal Financial and Accounting Officer