UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, DC 20549





FORM 10-K





[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended December 31, 2010





or





[   ] TRANSITION REPORT PURSUANT TO 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)

(IRS Employer Identification No.)





72757 Fred Waring Drive,

Palm Desert, CA 92260(Address of principal  executive offices) (Zip Code)





Registrant's telephone number, including area code: (760) 779 0251





Securities registered pursuant to Section 12(b) of the Act: None





Securities registered pursuant to Section 12(g) of the Act:


Common Stock, par value $0.001


(Title of class)





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [  ]  No [X]





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [  ]  No [X]





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 [  ]





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





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [  ]





1


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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):





Large accelerated filer [   ]                                                                    Accelerated filer [  ]





Non-accelerated filer [   ]                                                                      Smaller reporting company [X]


(Do not check if a smaller reporting company)





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





The aggregate market value of the common equity voting shares of the registrant held by non-affiliates on June 30, 2010, the registrant's most recently completed second fiscal quarter, was $23,412,552. For purposes of this calculation, an aggregate of 6,488,681 shares of Common Stock were held by the directors and officers of the registrant on June 30, 2010 and have been included in the number of shares of Common Stock held by affiliates.





The number of the registrant’s shares of common stock outstanding as of March 31, 2011: 220,542,925.





CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION





Certain statements in this annual 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, 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 annual report in its entirety, including the risks described in Part I. Item 1A. Risk Factors. 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 annual report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.





When used in this annual report, the terms "Spare Backup," " we," "our," and "us" refers to Spare Backup, Inc., a Delaware corporation formerly known as Newport International Group, Inc., and our subsidiaries.





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SPARE BACKUP, INC.

2010 ANNUAL REPORT ON FORM 10-KTable of ContentsPART IPageItem 1.
Business
4Item 1A.
Risk Factors
10Item 1B.
Unresolved Staff Comments
15Item 2.
Properties
15Item 3.
Legal Proceedings
15Item 4.
(Removed and Reserved)
16





PART IIItem 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
16Item 6.
Selected Financial Data
17Item 7.
Management ’s Discussion and Analysis of Financial Condition and Results of Operations
17Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
26Item 8.
Financial Statements and Supplementary Data
26Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
26Item 9A(T).
Controls and Procedures
26Item 9B.
Other Information
27PART IIIItem 10.
Directors, Executive Officers and Corporate Governance
27Item 11.
Executive Compensation
29Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
36Item 13.
Certain Relationships and Related Transactions, and Director Independence
37Item 14.
Principal Accountant Fees and Services
37





PART IVItem 15.
Exhibits, Financial Statement Schedules
38





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PART I





Item 1.  Business





We are a developer and marketer of a line of software products specifically designed for consumers as well as the small business and home business users. Our products are designed and developed so that technical skills are not necessary to use or manage the software. Our Spare line of software products includes our Spare Backup service, Spare Backup software and our Spare Switch PC data migration software.





Our Products and Services





Our flagship products are Spare MobileTM and Spare BackupTM, a fully-automated remote backup solution designed and developed for mobile devices and small office or home environment users, allowing automatic and efficient back ups of all data on selected mobile devices, laptop and desktop computers. As a result, we believe consumers and small companies can ensure file safety of all files contained on their mobile devices, personal computers (PCs) and laptops for backup and retrieval. We launched our Spare Back-up service and software product version 1.0 in March 2005 and are currently offering version 6.0 of the product. Our Spare SwitchTM software enables users to complete the transfer of personal files from one PC to another via a high speed Internet connection. 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.





Spare Mobile will provide a user with the ability to backup data and content from their phone to the Spare cloud without the need to connect the mobile device to a PC via a cable.





●
Backup is performed securely using the users’ mobile or Wi-Fi network; mobile network usage charges may apply.●
Backup captures data stored both on the Mobile devices onboard memory as well as any add on memory devices such as a memory card.●
Backup captures all pertinent user data and configuration if feasible.●
A user has the ability to configure the frequency that backups occur.●
The Spare Mobile software detects files that should be backed up automatically.●
Users have the ability to customize which files to back up and have the ability to recover a backed up file(s) to their mobile device.●
If a user also has a Spare Backup account, the user has the ability to retrieve mobile files from a variety of devices using our Spare Synchronization service.●
Spare Mobile will support the following Mobile device operating systems:●
Blackberry Platform v4.3 & above, some exceptions based on models and hardware/software features available on the phone, such as GPS chip;●
Android OS v1.5 & 1.6 backup and security functions;●
Android OS v2.1 & above backup and security functions;●
WinMobile OS v6.0, v6.1 & v6.5 backup and security functions;●
iPhone OS v3.1.3 supports backup only;●
iPhone OS v4.0 & above backup and security functions; and●
Java phones with MIDP 2.0 and/or MIDP 2.1 backup only.





***NOTE: Due to differences in OS functionality the Spare Mobile application may differ slightly in appearance between each supported OS. The functionality however shall remain static.





Spare Backup offers:





●
An automatic program installation that requires absolutely no user interaction to configure backups,●
No complicated file selection - Spare Backup scans the user's computer and has a number of presets which it backs up automatically, such as:●
All contacts, email messages and attachments, address book, contacts, folders and contents, signature files from Outlook,●
Word, Excel, PowerPoint files, templates and settings from MS Office,  4
 ●
My Documents, My Music, My Pictures, Quicken, QuickBooks, MS Money, Turbo Tax and Tax Cut; and●
All desktop files.





In addition, users can manually include any files that are not in the present group.





●
Simple, fast data recovery of individual files or the complete desktop●
Open file backup, giving the user the ability to back up while a particular program is open●
Reports automatically available to users in Spare Backup●
Redundant file support - select a restore from the last five backups●
Online file retrieval from any Internet connection - using Spare Key●
Provides files security via 256 Rijndael AES 256 block cipher with unique user encryption key●
Decryption protected by Spare Key in the user's computer and with broker so complete loss of the computer is not a problem





The VeriSign/Starfield Technology high assurance certificates provide authenticity for web based transactions. The encryption we use for ensuring privacy is the 256 Rijndael AES, a block cypher adopted as an encryption standard by the U.S. Government. The data is protected in transit and communication via Secure Sockets Layer (SSL), a cryptographic protocol which provides secure communications over the public Internet.





An overview of customer benefits includes:





●
Ease-of-use - Spare Backup provides fast, easy and fully automated data protection. Users benefit from automated data file selection, which distinguishes user data files from operating system and application files. As a result, users do not have to remember where all of their data files are stored. Spare Backup allows users to retrieve multiple past versions of a file, not just the most recently backed-up version.●
Impenetrable Security and Protection of Corporate Data - Spare Backup ensures that all data is encrypted with advanced 256-bit encryption on the user's machine using a user provided "key" or password. The data is encrypted a second time using SSL, or secure sockets layer, while it is being transmitted and a third time before it is stored on the RAID, or redundant array of independent disc, servers using a strong private key.●
SSL Support - SSL based protocol enhancements to address security parameters during: registration, upgrade, backup and retrieve.





Spare Switch is used by either downloading the software from the Internet or by inserting an installation CD into the old computer. Spare Switch then scans the hard drive and inventories of personal directories, giving the user a detailed report of the documents and other files. From that inventory, the user can then select the exact files that he or she wishes to transfer to the new PC. Spare Switch avoids the need for PC-to-PC transfer cable by compacting, encrypting and then transferring the files via the Internet. Spare Switch's data center can then hold the encrypted data for as long as a week, giving the user the flexibility to choose when to download the files to the new PC. The files are downloaded from our secure. Spare Switch uses a 256-bit encryption cipher with non-algorithmic key to ensure that the information is impervious to hackers at every step of the process. Spare Switch pricing is done on a case by case basis per partner.





Spare Backup software comes with the monthly service and enables users to also back up to local storage devices with or without using the online service.





Our offers vary depending on partnerships, in some cases we offer new users a free 14-day trial, other could be an allocation of space of 1 gigabyte. Spare Backup services cost between $0.99 and $6.99 per month and certain partners offer annual plans.





We developed new products and integrated new feature functionality into our Spare Backup® software. The new offerings in our Spare line of software products include: Spare RoomTM, Spare MobileTM and Spare SynchronizationTM. The following paragraphs provide certain information regarding our line of products and features:





Spare Room is designed to complement the Spare Backup software. We launched this product in the second quarter of fiscal 2009. This is a first step to digital contract management and cloud computing for Spare Backup users. This feature has been distributed and is available to our active Spare backup users by downloading and installing the software which is obtainable thru our distribution partners. We are currently in production with this product for Car Phone Warehouse Limited, which distributes this under the name “My Hub”.





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The Spare Backup software easily and automatically backs up a user's files from the user's desktop to the Spare Backup's cloud. Once files are stored securely in the cloud, the Spare Room application allows a user to take advantage of a wide range of sharing and social networking tools. The solution allows the user to get the most out of available tools and services on the Internet while providing the security of online backup.





In the first version of the Spare Room, the applications allow our customers to easily access and manage their backed-up photos, videos, music and documents.  As well as enabling users to access other services and applications, such as for music, mobile devices and mobile banking for purchases and or convenience. Future versions of Spare Room will include additional features beyond photo sharing to include Video, Contact Management and Calendar management. These features will be displayed on the Spare Room Dashboard allowing a user to easily navigate Spare Room and manage their digital data stored in the Spare cloud from a variety of devices.





Spare Mobile works in conjunction with the users of Spare Backup and Spare Room accounts. Spare Room provides an interface for a user to manage their mobile device and the files contained on their mobile device.





Another feature functionality that we have developed is Spare Synchronization. In order to take advantage of the synchronization functionality, the user must first possess an active Spare Backup account with Spare Room. Synchronization will be an add on product to a users standard Family Pack account. Spare Synchronization is defined as the mirroring or synchronization of content across multiple machines. Spare Backup defines synchronization rules based on file types. A user who chooses to synchronize pictures will synchronize all pictures that exist on two machines. Photos on both machines will be replicated between the two machines so that when the synchronization process is complete the same files will exist on both machines.





The user will configure their synchronization preferences from within Spare Room. Each machine that is to be synchronized must have the Spare Backup client software installed and have an active connection to the internet. The user will not need to make any configuration changes to their existing Spare Backup account. However the client software will provide the user a link to Spare Room from the client software. If the user chooses this link from within the Spare Backup client software the user will be re-directed to the Spare Room website and automatically logged in.





Our Target Customers





We focus on owners and executives of businesses which do not have an IT (information technology) department that use technology to support their businesses as well as small business users and consumers who desire to secure the redundancy of available files and documents vital to the continuity of their operations, business, or personal information. Since our products and services allow non-technical users to quickly, easily and thoroughly secure and backup their files or data archiving and storage, we believe that our business is uniquely relevant to enabling small companies to succeed using technology. Our products and services also support individual business professionals working in companies of all sizes, as well as individuals who use mobile devices. Other unique characteristics are additional coding that enables easy to scale infrastructure and support elements. We believe that this characteristic provides a competitive advantage over other providers whose products require large investments in hardware, as well as professional installation, training and support. Spare Backup now has a SMB product directed toward the small to mid-size business with 500 or less computers. The same ease of use that the consumer product is known for the SMB product has with an ease to use administrative dashboard for set up, grouping of departments and storage controls.





How We Market Our Products and Services





Our strategy is to partner with leading companies such as computer manufacturers (OEMs), high speed cable providers (MSOs), retailers mobile operators, mobile resellers, warranty and service companies that have established brands as a way to gain acceptance for, and create a demand for, our products and services. We believe that by bundling our products and services as one feature of a value-added service offered by major national and international brands that we will be able to leverage their brand recognition and marketing efforts to accelerate our market acceptance and significantly increase our adoption rates. We have been focusing as of lately, on four vertical channels: insurance/warranty, retail, OEM’s and Telco’s.





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Our products are sold direct to the customer via our web site for online distribution. Users may try our products and services at no cost for a limited trial period or by a quantity of storage, which can be easily downloaded.





In January 2010, we renewed our license agreement with Sony Electronics, Inc.© (Sony), under which we granted Sony a non-exclusive, world-wide license to our Spare Backup fully-automated remote backup solution and software tools, including the right to reproduce, publish, prepare derivative works and sell the product, as well as the right to use our trade name, trademarks and other identifying logos. Under a one year program, Sony may distribute out product through their “Back-Stage” stores and preinstall our Spare Backup service and software tools, on hardware, and or other Sony products it sells, as it determines, on a royalty-fee basis. Sony will receive a percentage of each subscription sold to the end user during the term of the agreement and for 24 months after its termination.





Under the terms of the agreement, we are responsible for delivery of the service to Sony's end users as well as providing for training, at our expense, to Sony's technical support personnel. We have indemnified Sony in connection with claims related to our products and service raising from non-performance. The agreement, which may be renewed for successive 12 month terms, may be immediately terminated by Sony in the event we should directly or indirectly defraud Sony, for any misrepresentation or breach of any warranty made by us in the agreement, or in the event of our bankruptcy or insolvency.





In February 2010, we renewed our 1 year agreement with privately held Cydcor whereby Cydcor will market our line of backup services for consumers and small businesses throughout its business to business direct sales network. Cydcor is a market leader in outsourced direct sales with over 3,000 direct sales professionals servicing hundreds of thousands of business clients in North America. Their clients represent some of the brands, covering many different industries, including telecommunications, cable, internet, office products, merchant services and energy. Under the terms of the agreement, Cydcor will offer Spare Backup's business data storage solutions to its network of business clients. Cydcor will be paid in a commission basis on all customer orders that has an authorization for customer payment received via the efforts of Cydcor. In addition, Cydcor will receive volume bonuses based on total number of sales generated in any given calendar month.





In April 2010, we entered into a 3 year agreement with Simplexity, LLC, owner of the website Wirefly.com (“Simplexity”). Simplexity is based in Reston, Virginia and is the Internet’s leading authorized seller of cell phones and wireless services. The agreement gives Simplexity the exclusive right for marketing and distribution of our data storage and cloud computing services through online mobile sales sites. We will provide the co-branded platform to Simlexity’s Wiefly.com customers, as well as affiliated companies through a promotional offer anticipated to begin in the second quarter of 2010. We will share all revenue derived from this agreement with Simplexity on an undisclosed basis.





In April 2010, we entered into a 2 year agreement with Saveology, LLC (“Saveology”), which automatically renews for another 2 years unless either party terminates. The agreement provides Saveology with the non-exclusive license to market our services to their customers, giving them the opportunity to register for our services directly through a co-branded website maintained and constructed by us. We will share all revenue derived from this agreement with Saveology on a undisclosed basis.





In April 2010, we entered into a 2 year agreement with Federal Warranty Service Corporation (“Assurant”), which automatically renews for another 2 years unless either party terminates. The agreement provides Assurant with our Spare Backup, Spare Mobil, Spare Switchand Spare Synchronizationproducts, which will be marketed in conjunction with their warranty products to the public. Our product line will be Assurant’s exclusive provider for it’s eligible products, unless requested other wise by the retail provider.





In December 2010, we entered into a 2 year agreement with Lifestyle Services Group Limited Group (“LSG”), which automatically renews for another 2 years unless either party terminates. The agreement provides for a co-branded cloud-based digital platform service that will be incorporated into LSG’s warrantee and service programs. The services will be provided on an exclusive basis to the financial services industry clients served by LSG in the U.K. and on a non-exclusive basis for all other customers. The online data backup system will maintain and restore data for LSG's consumers and partners which include a number of world's leading financial services companies.





7


The various deliverables under each of these agreements require that we devote additional resources to enhance and port our offerings across devices in a short time frame.  However, allocating resources is not sufficient to solve the technical and marketing issues we face and reduce time to market.  This is why we approached Tarsin Ltd to provide us with the following:


·
Seasoned mobile software development team;


·
Mobile backup solutions for feature phones;


·
Existing relationships with device manufacturers, such as Motorola, Nextel


·
Improve the depth of our relationship with existing parnters;


·
Increased coverage of devices offered by device manufacturers, which offers a migration opportunity millions of feature phone users.





We expect to complete our transaction with Tarsin Ltd within 60 days.





Customer Support





We provide tier 1 and tier 2 support for our services. Our tier 1 customer support provides initial call resolution and direct linking capabilities to our tier 2 customer support. Tier 2 customer support is managed by an internal group of specialists who are co-located within our Network Operation Center and software development headquarters in Palm Desert. Co-location with the software development group allows for the resolution of highly specific technical issues as well as identification of potential application flaws. Our support services were initially available from during evening hours during the week and extended hours on weekends. In March 2007 we began offering 24/7/365 customer support.





Research and Development





Our products were developed primarily by our employees assisted by contractors in certain specialty areas. We have invested approximately $2.3 million and approximately $1.1 million in research and development during fiscal 2010 and fiscal 2009, respectively.





Technology





Our products use a sophisticated combination of hardware, software, and networking to intelligently select files and settings from a customer's computer and reliably transfer these to secure redundant data centers, making the data highly available.





The networking systems used by us were designed to use outbound Internet connections for all communications, thus allowing many users who are behind a firewall access to the backup services. The proprietary software designed by us has been developed to remove the technical knowledge required to use other backup products by selecting files and backup settings for the user.





We own all of our servers and utilize hosting in geographically dispersed TIA-964 Tier-3 rated collocation facilities. Our server architecture employs multiple servers and switching equipment to provide redundancy and high availability to Spare Backup service users. The entire storage area network (SAN) storage system is replicated in near real-time to a secondary SAN to backup the primary one, which will automatically become available in the event of an outage at the primary storage array. Our servers use the latest enterprise level operating system available from Microsoft and use industry standard networking and communication protocols. This provides a highly available network that can scale rapidly using off the shelf hardware. These systems are fully redundant and we anticipate our reliability at 99.9%. We can expand our network capacity quickly and with highly predictable costs.





Our business will suffer if our systems fail or our third-party facilities become unavailable. A reduction in the performance, reliability and availability of our systems and network infrastructure may harm our ability to distribute our products and services to our customers and other users, as well as harm our reputation and ability to attract and retain customers. Our systems and operations are susceptible to, and could be damaged or interrupted by, outages caused by fire, flood, power loss, telecommunications failure, Internet breakdown, earthquake and similar events. If for some reason we should not have redundancy in our facilities, any damage or destruction to our systems would significantly harm our business. Our systems are also subject to human error, security breaches, power losses, computer viruses, break-ins, "denial of service" attacks, sabotage, intentional acts of vandalism and tampering designed to disrupt our computer systems, Web sites and network communications which are beyond our control. This could lead to slower response times or system failures.





8


Our computer and communications infrastructure is located in a leased facility in Arizona. While our infrastructure is fully redundant and Tier 3 rated, our insurance coverage covers lost profits and accordingly we may not have adequate business interruption insurance to compensate us for losses that may occur from a system outage. Despite our efforts, our network infrastructure and systems could be subject to service interruptions or damage and any resulting interruption of services could harm our business, operating results and reputation.





Competition





We face intense and increasing competition in the web-based backup solutions market. If we do not compete effectively or if we experience reduced market share from increased competition, our business will be harmed. In addition, the more successful we are in the emerging market for web-based storage solutions, the more competitors are likely to emerge. We believe that the principal competitive factors in our market include:





●
service functionality, quality and performance;●
ease of use, reliability and security of services;●
establishment of a significant base of customers and distribution partners;●
ability to introduce new services to the market in a timely manner by adding additional suite of products to our Backup client;●
customer service and support; and●
pricing.





Our primary competitors are various Internet-based backup providers’ such as Connected.com, Livevault, and backup.com, Carbonite and EMC/Mozy. These companies provide services similar to our PC backup and each have to various degrees a market presence. We also compete with providers of traditional backup technologies, such as Veritas and Symantec (swampdrive) (Norton 360). With mobile technology, we have very few competitors that can compete with our service of synchronization between the PC and mobile devices. Competitors include SugarSync, Inc., Lookout, Inc.  and to an extent McAfee, Inc.





Substantially most of our competitors have more capital, longer operating histories, greater brand recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. These competitors may also engage in more extensive development of their technologies, adopt more aggressive pricing policies and establish more comprehensive marketing and advertising campaigns than we can. Our competitors may develop products and service offerings that we do not offer or that are more sophisticated or more cost effective than our own. For these and other reasons, our competitors' products and services may achieve greater acceptance in the marketplace than our own, limiting our ability to gain market share and customer loyalty and to generate sufficient revenues to achieve a profitable level of operations. Our failure to adequately address any of the above factors could harm our business and operating results.





Intellectual Property





Our intellectual property is critical to our business, and we may seek to protect our intellectual property through copyrights, trademarks, patents, trade secrets, confidentiality provisions in our customer, supplier, potential investors, and strategic relationship agreements, nondisclosure agreements with third parties, and invention assignment agreements with our employees and contractors, although we do not execute such agreements in every case. Our protection efforts may prove to be unsuccessful, and unauthorized parties may copy or infringe upon aspects of our technology, services or other intellectual property rights. In addition, these parties may develop similar technology independently. Existing trade secret, copyright and trademark laws offer only limited protection and may not be available in every country in which we will offer our services.





We plan on filing additional patent applications in 2011.





Government Regulation





Although there are currently relatively few laws and regulations directly applicable to the Internet, it is likely that new laws and regulations will be adopted in the United States and elsewhere covering issues such as limitations on the use of mass-delivered e-mails, broadcast license fees, copyrights, privacy, pricing, sales taxes and the characteristics and quality of Internet services. The adoption of restrictive laws or regulations could slow Internet growth. The application of existing laws and regulations governing Internet issues such as property ownership, libel and personal privacy is also subject to substantial uncertainty. There can be no assurance that current or new government laws and regulations, or the application of existing laws and regulations (including laws and regulations governing issues such as property ownership, taxation, defamation and personal injury), will not expose us to significant liabilities, slow Internet growth or otherwise hurt us financially.





9


Employees





As of March 31, 2011 we had 24 full-time employees, including all of our executive officers. None of our employees are covered by collective bargaining agreements, and we believe our relationships with our employees to be good.





Our History





We were incorporated in Delaware on December 27, 1999 under the name First Philadelphia Capital Corp. to serve as a vehicle to effect a merger, exchange of common stock, asset acquisition or other business combination with domestic or foreign private business. On October 30, 2000, we completed a business combination with Conservation Anglers Manufacturing, Inc., a real estate holding and development company that was originally organized in Florida on February 7, 2000. The combination was a stock-for-stock merger that was accounted for as a "pooling-of-interests". In connection with the merger, we issued 235,000 shares of our common stock in exchange for all the outstanding stock of Conservation Anglers Manufacturing, Inc. In January 2001 we changed our name to Newport International Group, Inc. to better reflect and describe our then current strategic direction.





On February 6, 2004, we closed an Agreement and Plan of Merger with Grass Roots Communications Inc., a Delaware corporation. Grass Roots was a development stage company incorporated in Delaware in June 2002 initially to create, produce, deliver and track targeted multimedia communications over the Internet. Under the terms of this agreement, Grass Roots became our wholly-owned subsidiary. At the effective time of the merger, the stockholders of Grass Roots exchanged their securities for approximately 12,300,000 shares of our common stock, representing approximately 93% of our common stock. Contemporaneous with this transaction, Grass Roots' President and Chief Executive Officer, Mr. Cery B. Perle, was elected as a member of our Board of Directors and appointed CEO. Mr. Edward L. Hagan, Secretary of Grass Roots, was appointed our secretary. Mr. Perle, the principal stockholder of Grass Roots, and members of his family/household received an aggregate of 46% of our shares of common stock as a result of the exchange upon the merger.





Effective August 16, 2006 we changed our name to Spare Backup, Inc. The corporate name change was brought about by a merger of a wholly-owned subsidiary into Newport International Group, Inc. with Newport International Group, Inc. surviving but renamed Spare Backup, Inc.





Item 1A. Risk Factors





An investment in our common stock involves a significant degree of risk. You should not invest in our common stock unless you can afford to lose your entire investment. You should consider carefully the following risk factors and other information in this annual report before deciding to invest in our common stock. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected and you could lose your entire investment in our company.





If we are unable to obtain financing necessary to support our operations, we may be unable to continue as a going concern.




Our net losses for the fiscal years ended December 31, 2010 and 2009 were $11,127,218 and $10,571,914, respectively. We have never generated sufficient revenues to fund our ongoing operations. Our operating losses for fiscal 2010 and fiscal 2009 were $9,966,532 and $8,795,283, respectively, and these losses are primarily attributable to our sales, general and administrative expense. 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, cash used in operations and working capital deficit. Our ability to continue as a going concern is dependent upon our ability to raise additional capital as described below. The financial statements included in this annual 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 able to continue as a going concern.





10


Our revenues are not sufficient to fund our operating expenses and we will need to raise additional capital.





Our operating loss has increased approximately 13% for fiscal 2010 over fiscal 2009; we will need to significantly increase our revenues to fund these costs. At December 31, 2010 we had approximately $127,000 cash overdraft and a working capital deficit of approximately $10 million. We have raised subsequent to December 31, 2010, approximately $660,049 from the sale of our common stock. We intend to use the proceeds form the sale of the common stock for working capital purposes. Our current working capital is not sufficient to pay our operating expenses, our obligations as they become due or certain tax liabilities nor is our working capital sufficient to fund any expansion of our company.





While we are constantly evaluating our cash needs and existing burn rate in order to make appropriate adjustments in operating expenses, we need to raise additional debt or equity capital to provide funding for ongoing and future operations and to satisfy our obligations as they become due. While we have historically been able to raise capital, the current capital markets are very challenging and there are no assurances that we will be successful in obtaining additional capital, or that such capital will be available on terms acceptable to us. Our continued existence is dependent upon, among other things, our ability to raise capital and to market and sell our products successfully. If we are unable to raise capital as needed, it is possible that we would be required to cease operations in which event you would lose your entire investment in our Company.





We cannot predict our future revenues or whether our products will be accepted. If the markets for our products and services do not develop, our future results of operations will be adversely affected.





Net revenues from the sales of our Spare Backup line of products have been limited and insufficient to fund our ongoing operations. We reported net revenues of $958,886 and $2,692,320, respectively, for the fiscal years ended December 31, 2010 and 2009. Our net revenues significantly decreased for fiscal 2010 over fiscal 2009 and we will need to significantly increase if we are to provide cash to fund our operating expenses. We cannot guarantee either that the demand for our Spare Backup line of software products will develop, that such demand will be sustainable or that we will ever effectively compete in our market segment. In addition, we cannot predict what impact, if any, the reduction in discretionary spending will have on future sales of our products. If we are unable to generate any significant net revenues from our products and services, our business, operating results and financial condition in future periods will be materially and adversely affected and we may not be able to continue our business as presently operated, if at all.





We have approximately $2,560,000 of debt which is presently past due and an additional $247,000 which will become due during 2011 and we do not have the funds necessary to pay these obligations.





In addition to funding our operating expenses, we need capital to pay various debt obligations totaling approximately $3,150,000 which are either currently past due or which are due in the current fiscal year. Currently, there are $1,688,772 principal amount of the 8% short-term notes which are past due, $420,963 principal of the 10% short-term notes which are past due, and $892,500 of notes payable which are past due.  In 2011, $119,000 principal of the 8% short-term notes and $128,000 of notes payable become due. During 2011, we have been in contact with numerous note holders to work out either a repayment or extension of these notes. The existence of these obligations provides additional challenges to us in our efforts to raise capital to fund our operations. If we are unable to restructure these notes and we are unable to raise the capital necessary to satisfy the obligations, it is possible we will be forced to cease operations.





We will need additional financing which we may not be able to obtain on acceptable terms. If we are unable to raise additional capital as needed, our continued operations will be adversely affected and the future growth of our business and operations will be severely limited.





Historically, our operations have been financed primarily through the issuance of equity and debt. Because we have a history of losses and have never generated sufficient revenue to fund our ongoing operations, we are dependent on our continued ability to raise working capital through the issuance of equity or debt to fund our present operations. Because our operating expenses have continued to grow and we do not know if our net revenues will grow at a pace sufficient to fund our current operations, the continuation of our operations and any future growth will depend upon our ability to raise additional capital, possibly through the issuance of long-term or short-term indebtedness or the issuance of our equity securities in private or public transactions. While the actual amount of our future capital requirements, however, depend on a number of factors, including our ability to grow our net revenues and manage our business, it is likely we will need to raise a significant amount of capital during fiscal 2011 if we are to continue our current operations and satisfy our obligations as they become due. In addition to the challenges facing the capital markets today which make raising equity capital much more difficult for a company such as our than in prior years, the existence of a number of short term notes which are either currently past due or which will become due in 2011, together with the pending litigation facing our company and the piggy-back registration rights we have granted a number of investors serve to also make it harder to raise the capital we need. There can be no assurance that acceptable financing can be obtained on suitable terms, if at all. If we are unable to raise additional working capital as needed, our ability to continue our current business will be adversely affected and may be forced to curtail some or all of our operations.





11


We are past due in the payment of payroll taxes.





At December 31, 2010 we had approximately $3,203,000 of accrued but unpaid payroll taxes due to the federal government and since that date, through March 31, 2011 the amount has increased to $3,375,555. We do not have the funds necessary to satisfy this obligation. During April 2011, the Company had entered into an installment plan with the state of California to pay off their outstanding balance, the payment scales up and works with the our cash flow, $25,000 for 3 months, $35,000 for the next 3 months and $50,000 per month there after till paid off, allowing us to still maintain our cash flow. The company has made payments against our outstanding balance. If we are unable to raise the funds necessary, it is possible that we will be subject to significant additional fines and penalties, Mr. Perle, our President, and our Board of Directors could be personally subject to a 100% penalty on the amount of unpaid taxes and the government could file liens against our company and our bank accounts until such time as the amounts have been paid. We are also currently working with the IRS on a payment plan for our outstanding balance with them.





Our pricing model for our products and services is unproven and may be less than anticipated, which may harm our gross margins.





The pricing model of our products and services may be lower than expected as a result of competitive pricing pressures, promotional programs and customers who negotiate price reductions in exchange for longer term purchase commitments or otherwise. Our pricing model depends on the duration of the agreement, the specific requirements of the order, purchase volumes, the sales and service support and other contractual agreements. We expect to experience pricing pressure and anticipate that the average selling prices and gross margins for our products may decrease over product life cycles. We may not be successful in developing and introducing on a timely basis new products with enhanced features and services that can be sold at higher gross margins.





We are a defendant in a number of lawsuits.





We are currently a defendant in three separate lawsuits in which the plaintiffs are seeking approximately $355,000 together with attorney's fees, costs and prejudgment interest. We are also incurring additional legal fees in our efforts to defend these actions. While we believe our defenses are meritorious in each of these cases, should we not prevail in one or more of the actions we could be forced to pay significant amounts which, given our current cash position and need for working capital, could materially adversely affect our ability to continue as a going concern.





The exercise of outstanding warrants and the conversion of outstanding notes will be dilutive to our existing stockholders.





As of March 31, 2011 the following securities which are convertible or exercisable into shares of our common stock were outstanding:





●
common stock purchase warrants to purchase a total of 73,710,562 shares of our common stock at prices ranging between $0.05 to $1.30 per share;●
9,843,357 shares of our common stock issuable upon the possible conversion of the outstanding $2,208,735 principal amount 8% and 10% convertible promissory notes due between August 2008 and June 2011, and●
27,081,497 shares of our common stock issuable upon exercise of outstanding options with exercise prices ranging from $0.01 to $0.30.





The exercise of these warrants and the conversion of the notes may materially adversely affect the market price of our common stock and will have a dilutive effect on our existing stockholders.





12


Our quarterly financial results will continue to fluctuate making it difficult to forecast out operating results.





Our quarterly operating results have fluctuated in the past and we expect our net revenues and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are beyond our control, including:





●
the announcement or introduction of new services and products by us and our competitors;●
our ability to upgrade and develop our products in a timely and effective manner;●
our ability to retain existing customers and attract new customers at a steady rate, and maintain customer satisfaction;●
the amount and timing of operating costs and capital expenditures relating to expansion of our business and operations;●
government regulation; and●
general economic conditions and economic conditions specific to development and marketing of software products, the market acceptance of new products offered by us, our competitors and potential competitors.





Our limited operating history and unproven business model further contribute to the difficulty of making meaningful quarterly comparisons. Our current and future levels of expenditures are based primarily on our growth plans and estimates of expected future net revenues. Such expenditures are primarily fixed in the short term and our sales cycle can be lengthy. Accordingly, we may not be able to adjust spending or generate new revenue sources timely to compensate for any shortfall in net revenues. If our operating results fall below the expectations of investors, our stock price will likely decline significantly.





Because we expect to continue to incur net losses, we may not be able to implement our business strategy and the price our stock may decline.





We have incurred net losses quarterly from inception through December 31, 2010, and at December 31, 2010 we had an accumulated deficit of approximately $111 million. We expect to continue to incur net losses for the foreseeable future absent a significant increase in our revenues, of which there are no assurances. Accordingly, our ability to operate our business and implement our business strategy may be hampered by negative cash flows in the future, and the value of our stock may decline as a result. Our capital requirements may vary materially from those currently planned if, for example, we incur unforeseen capital expenditures, unforeseen operating expenses or investments to maintain our competitive position. If this is the case, we may have to delay or abandon some or all of our development plans or otherwise forego market opportunities. We will need to generate significant additional net revenues to be profitable in the future and we may not generate sufficient net revenues to be profitable on either a quarterly or annual basis in the future. To address the risks and uncertainties facing our business strategy, we must, among other things:





●
Achieve broad customer adoption and acceptance of our products and services;●
Successfully raise additional capital in the future;●
Successfully integrate, leverage and expand our product distribution;●
Successfully scale our current operations;●
Implement and execute our business and marketing strategies;●
Address intellectual property rights issues that affect our business;●
Develop and maintain strategic relationships to enhance the development and marketing of our existing and new products and services; and●
Respond to competitive developments in the software industry.





We might not be successful in achieving any or all of these business objectives in a cost-effective manner, if at all, and the failure to achieve these could have a serious adverse impact on our business, results of operations and financial position. Each of these objectives may require significant additional expenditures on our part. Even if we ultimately do achieve profitability, we may not be able to sustain or increase profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.





13


We have not voluntarily implemented various corporate governance measures, in the absence of which, stockholders may have more limited protections against interested director transactions, conflicts of interest and similar matters.





Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or The NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address board of directors' independence, audit committee oversight, and the adoption of a code of ethics. Although we have adopted a Code of Ethics, we have not yet adopted any of these other corporate governance measures and, since our securities are not yet listed on a national securities exchange, we are not required to do so. We have not adopted corporate governance measures such as an audit or other independent committees of our board of directors as we presently have only two independent directors. If we expand our board membership in future periods to include additional independent directors, we may seek to establish an audit and other committees of our board of directors. It is possible that if we were to adopt some or all of these corporate governance measures, stockholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.





We cannot be certain that we will be able to protect our intellectual property, and we may be found to infringe on proprietary rights of others, which could harm our business.





Our intellectual property is critical to our business, and we seek to protect our intellectual property through copyrights, trademarks, patents, trade secrets, confidentiality provisions in our customer, supplier, potential investors, and strategic relationship agreements, nondisclosure agreements with third parties, and invention assignment agreements with our employees and contractors. We cannot assure you that measures we take to protect our intellectual property will be successful or that third parties will not develop alternative solutions that do not infringe upon our intellectual property.





In addition, we could be subject to intellectual property infringement claims by others. Claims against us, and any resultant litigation, should it occur in regard to any of our services and applications, could subject us to significant liability for damages including treble damages for willful infringement. In addition, even if we prevail, litigation could be time-consuming and expensive to defend and could result in the diversion of our time and attention. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims. Further, we plan to offer our services and applications to customers worldwide including customers in foreign countries that may offer less protection for our intellectual property than the United States. Our failure to protect against misappropriation of our intellectual property, or claims that we are infringing the intellectual property of third parties could have a negative effect on our business, revenues, financial condition and results of operations.





Competition may decrease our market share, net revenues, and gross margins.





We face intense and increasing competition in the web-base backup solutions market. If we do not compete effectively or if we experience reduced market share from increased competition, our business will be harmed. In addition, the more successful we are in the emerging market for web-based storage solutions, the more competitors are likely to emerge. We believe that the principal competitive factors in our market include:





●
Service functionality, quality and performance;●
Ease of use, reliability and security of services;●
Establish a significant base of customers and distribution partners;●
Ability to introduce new services to the market in a timely manner;●
Customer service and support; and●
Pricing.





Our primary competitors are various Internet-based backup providers’ broadcasters, such as Connected.com, Livevault, and backup.com, Carbonite and EMC/Mozy. These companies provide services similar to our PC backup and each have to various degrees a market presence. We also compete with providers of traditional backup technologies, such as Veritas and Symantec (swampdrive) (Norton 360). With mobile technology, we have very few competitors that can compete with our service of synchronization between the PC and mobile devices. Competitors include SugarSync, Inc., Lookout, Inc.  and to an extent McAfee, Inc.





14


Substantially all of our competitors may have more capital, longer operating histories, greater brand recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. These competitors may also engage in more extensive development of their technologies, adopt more aggressive pricing policies and establish more comprehensive marketing and advertising campaigns than we can. Our competitors may develop products and service offerings that we do not offer or that are more sophisticated or more cost effective than our own. For these and other reasons, our competitors' products and services may achieve greater acceptance in the marketplace than our own, limiting our ability to gain market share and customer loyalty and to generate sufficient net revenues to achieve a profitable level of operations. Our failure to adequately address any of the above factors could harm our business and operating results.





Provisions of our certificate of incorporation and bylaws may delay or prevent a takeover which may not be in the best interests of our stockholders. We recently issued our CEO a series of super voting preferred stock which increased his ability to control the outcome of stockholder votes.





Provisions of our certificate of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our stockholders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions of Delaware law also may be deemed to have certain anti-takeover effects which include that control of shares acquired in excess of certain specified thresholds will not possess any voting rights unless these voting rights are approved by a majority of a corporation's disinterested stockholders.





In addition, our certificate of incorporation authorizes the issuance of up to 5,000,000 shares of preferred stock with such rights and preferences as may be determined by our board of directors. Our board of directors may, without stockholder approval, issue preferred stock with dividends, liquidation, conversion or voting rights that could adversely affect the voting power or other rights of our common stockholders. In January 2008 we created a series of 50,000 shares of Series A Preferred Stock which carries super voting rights of 400 votes per share which were issued to our CEO as additional compensation. Prior to the issuance of the shares of Series A Preferred Stock to Mr. Perle he controlled the vote of approximately 10% of our outstanding voting securities. As a result of the issuance of these securities, Mr. Perle now controls the vote of approximately 7.61% of our outstanding voting securities. This action was approved by our Board of Directors of which Mr. Perle is a member in accordance with the provisions of our certificate of incorporation.





Our common stock is currently quoted on the OTCBB, but trading in our stock is limited. Because our stock currently trades below $5.00 per share, and is quoted on the OTC Bulletin Board, our stock is considered a “penny stock” which can adversely affect its liquidity.





The market for our common stock is extremely limited and there are no assurances an active market for our common stock will ever develop. Accordingly, purchasers of our common stock cannot be assured any liquidity in their investment. In addition, the trading price of our common stock is currently below $5.00 per share and we do not anticipate that it will be above $5.00 per share in the foreseeable future. Because the trading price of our common stock is less than $5.00 per share, our common stock is considered a "penny stock," and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. SEC regulations also require additional disclosure in connection with any trades involving a "penny stock," including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of our securities in the secondary market because few broker or dealers are likely to undertake these compliance activities.





Item 1B. Unresolved Staff Comments





Not applicable to a smaller reporting company.





Item 2.  Properties





In November 2006 we entered into a five year lease agreement, commencing January 1, 2007, with an unrelated third party for approximately 6,850 square feet which serves as our principal executive offices. Under the terms of the lease our initial annual base rent is approximately $152,000 and we will be responsible for our pro-rata share of common area expenses. The annual rent will escalate annually during the term of the lease to approximately $171,000 in the fifth year. We believe this facility meets our operational needs for the foreseeable future.





Item 3.  Legal Proceedings




We are currently a defendant in three separate lawsuits in which the plaintiffs are seeking approximately $355,000 together with attorney's fees, costs and prejudgment interest. We are also incurring additional legal fees in our efforts to defend these actions. While we believe our defenses are meritorious in each of these cases, should we not prevail in one or more of the actions we could be forced to pay significant amounts which, given our current cash position and need for working capital, could materially adversely affect our ability to continue as a going concern.


15


Item 4. (Removed and Reserved)





PART II





Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities





Our common stock is quoted on the OTCBB under the symbol SPBU. The reported high and low sales prices for the common stock as reported on the OTCBB are shown below for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.








Fiscal Year Ended December 31, 2009

High


LowFirst quarter ended March 31, 2009

$
0.26


$
0.13Second quarter ended June 30, 2009

$
0.24


$
0.11Third quarter ended September 30, 2009

$
0.26


$
0.13Fourth quarter ended December 31, 2009

$
0.17


$
0.09





Fiscal Year Ended December 31, 2010

High


LowFirst quarter ended March 31, 2010

$
0.23


$
0.12Second quarter ended June 30, 2010

$
0.22


$
0.13Third quarter ended September 30, 2010

$
0.17


$
0.09Fourth quarter ended December 31, 2010

$
0.15


$
0.08








High


LowFirst quarter ended March 31, 2011

$
0.11


$
0.07





Stockholders





On March 31, 2011, the last sale price of our common stock as reported on the OTCBB was $0.08. As of March 31, 2011, there were approximately 439 record owners of our common stock.





Dividend Policy





We have never paid cash dividends on our common stock. Under Delaware law, we may declare and pay dividends on our capital stock either out of our surplus, as defined in the relevant Delaware statutes, or if there is no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. If, however, the capital of our company, computed in accordance with the relevant Delaware statutes, has been diminished by depreciation in the value of our property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, we are prohibited from declaring and paying out of such net profits any dividends upon any shares of our capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired.





16


Unregistered Sales of Equity Securities





During October 2010 we issued 5,153,691 shares of our common stock for the conversion of certain 8% short-term convertible promissory notes with a principal aggregating $1,187,265 and interest of $4,866.





During October 2010 we issued 100,000 shares of our common stock valued at $10,000 for the exercise of warrants.





Between October and December 2010 we issued 670,000 shares of our common stock for services valued at $37,600.





Between October and December 2010 we issued 11,233,364 shares of our common stock valued at $625,800 pursuant to a private placement. In connection with the issuance of shares, we also issued warrants to purchase 2,645,604 shares of common stock at an exercise price range of $0.065 to $0.12.





During December 2010 we issued 1,491,623 shares of our common stock valued at $169,354 in connection with the payment of the accrued interest on the 8% and 10% convertible promissory notes.





During December 2010 we issued 1,000,000 shares of our common stock valued at $16,024 for the exercise of options.





During January 2011 we issued 5,700,000 shares of our common stock for the conversion of certain short-term loans with principals aggregating $422,500.





During January 2011 we issued 500,000 shares of our common stock for interest related to the issuance of a short-term loan valued at $44,000.





Between January and March 2011 we issued 818,988 shares of our common stock for the conversion of certain 8% short-term convertible promissory notes with a principal of $48,500 and interest of $4,142.





Between January and March 2011 we issued 13,180,973 shares of our common stock valued at $660,049 pursuant to a private placement. In connection with the issuance of shares, we also issued warrants to purchase 1,090,000 shares of common stock at an exercise price of $0.09.





Item 6. Selected Financial Data





Not applicable to a smaller reporting company.





Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation





The following information should be read in conjunction with our financial statements and accompanying notes included in this Annual Report on Form 10-K.





Overview





Our flagship products are Spare MobileTM and Spare BackupTM, a fully-automated remote backup solution designed and developed for mobile devices and small office or home environment users, allowing automatic and efficient back ups of all data on selected mobile devices, laptop and desktop computers. As a result, we believe consumers and small companies can ensure file safety of all files contained on their mobile devices, personal computers (PCs) and laptops for backup and retrieval. We launched our Spare Back-up service and software product version 1.0 in March 2005 and are currently offering version 6.0 of the product. Our Spare SwitchTM software enables users to complete the transfer of personal files from one PC to another via a high speed Internet connection. 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. We also introduced during 2009 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.





17


Currently, our contracts include the following:





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







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





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










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





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





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


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





· Assurant Solutions– develops, underwrites and markets specialty insurance, extended service contracts and other risk management solutions with leading financial institutions, retailers and other entities have bundled us into their packages.




18




Throughout the full year of 2010, we began to shift our focus from providing our Spare Backup services primarily as a resource for PC users to affordably backup data remotely and have access to that data through a “cloud” based portal with wide functionality, to a comprehensive “cloud” based solution not only for PC’s but also fully integrated with mobile security and data storage.  We further enhanced this functionality by enabling our subscribers to maneuver their data across device platforms in a way that we believe to be unique in the industry.  Our decision to move in this direction resulted in a costly and time consuming development plan to enable our software architecture and backend to seamlessly provide an end to end solution for mobile security and mobile/PC backup with a fully functional cloud based portal for our distribution partners and the ultimate subscribers.  As we took on this extensive expansion of our software we also worked to substantially change our distribution approach to more effectively market to this potential large scale worldwide opportunity.  While this resulted in a loss of potential near term revenue we believe it greatly increases our potential markets and will lead to much stronger sales in the future.
  Marketing and Distribution Initiatives
  Beginning in the second half of 2009 and throughout 2010 we focused our PC distribution efforts in Europe on migrating from our previous relationship with DSG International to our current distribution partners, the largest being the Carphone Warehouse (a subsidiary of Best Buy Europe).  Through the Carphone Warehouse we began test launches of our white labeled service named MyHub through different offerings to determine the best way to maximize subscription rates.  Through these test launches it was determined that our software was to be included in a “Geek Squad Support Max offering late in 2010, delaying our initial penetration throughout their U.K. stores.  Additionally, as we unveiled our Spare Mobile backup and security services, our European partners wanted these services to be included in the launch of their support programs.  While this substantially increased our potential target markets, it further delayed the full scale launch of our services as we worked 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 in April of 2011 and anticipate a progressive ramp in their distribution efforts throughout the remainder of 2011 and into 2012.
  As we migrated to our diverse mobile and PC solution, we began to focus our distribution efforts in two additional areas.  First, we looked to isolate a major distribution partner for our mobile platform domestically.  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 contractsand other risk management solutions with leading financial institutions, retailers, and other entities has bundled us into their services. and with 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 Virgin Mobile Phone, 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 significant source of revenue to our company beginning late in the first half of 2011.
  19
  We intend to continue to broaden our distribution efforts in 2011 through traditional and online retail, mobile warrantee and insurance, device manufacturers and Telcom service providers to maximize our exposure in the market place.  We believe we have developed cost effective, revenue generating propositions for our distribution partners as we launch offerings covered under our current agreements. We expect to develop new distribution relationships in 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 enabling us to begin the launch of Assurant and LSG early 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.
  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 Nextell.  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 be focus our efforts on distribution and revenue producing partnerships


20





Results of Operations




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


Increase/


Increase/December 31,


(Decrease)


(Decrease)2010


2009


in $ 2010


in % 2010vs 2009


vs 2009Net Revenues

$
958,886


$
2,692,320


$
(1,733,434
)


-64.4
%Operating expenses:Research and development


2,341,738



1,139,951



1,201,787



105.4
%Selling, general and administrative


8,583,680



10,347,652



(1,763,972
)


-17.0
%Total operating expenses


10,925,418



11,487,603



(562,185
)


-4.9
%Operating loss


(9,966,532
)


(8,795,283
)


(1,171,249
)


13.3
%Other income (expense):Change in fair value of derivative liabilities


446,027



179,689



266,338



148.2
%Gain from debt settlement


442,250



940,106



(497,856
)


-53.0
%Interest expense


(2,048,963
)


(2,896,426
)


847,463



-29.3
%Total other income (expense)


(1,160,686
)


(1,776,631
)


615,945



-34.7
%Net loss

$
(11,127,218
)

$
(10,571,914
)

$
(555,304
)


5.3
%NM: Not Meaningful


Revenues





Our net revenues primarily consist of subscription fees charged for online back-up services. Our net revenues decreased during the year ended December 31, 2010, when compared to fiscal 2009, due to a decrease in the base over which deferred revenue is amortized, as well as a shift in our positioning from a traditional online backup provider, to a cloud computing platform that includes Mobile and Sync features. The deferred revenue resulted from our previous partnership with DSG International. During the end of fiscal 2009, we mutually ended our agreement with DSG International,  creating a decline in the amortization of deferred revenue over fiscal year 2010. We believe that our revenues will increase during 2011 following the implementation of all the derivatives required pursuant to the agreements we have executed during the last 12 months and from the acquisition of the Tarsin Ltd mobile backup division.





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 fiscal 2010 include costs associated with continued development of user interfaces and additional products, including version 6.0 of Spare-Backup, a family pack, and our SMB (small to medium business) products Spare’s cloud or Spare Room, Spare Mobile, Spare Synchronization and Spare Diagnostics, and reflected increased research and development efforts to successfully meet various deadlines set by our OEM partners. The increase in our research and development expenses when compared to fiscal 2009 is primarily attributable to an increased in 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 Platform v4.3 & higher, Android OS v1.5 & 1.6, Android OS v2.1 & higher, WinMobile OS v6.0, 6.1 and 6.5 and iPhone OS v3.1.3, 4.0 & higher. We have also worked very hard to ensure that we are compatible with the following mobile devices, as we are adding new devices on a weekly basis:





Make

Model

Make

ModelApple iPhone

iPhone 3G

NOKIA

3600Apple iPhone

iPhone 3GS

NOKIA

5130Apple iPhone

iPhone 4G

NOKIA

2720 BlueAT&T

AT&T Til (TyTn II, Kaiser)

NOKIA

6220 ClassicBlackBerry

8320

NOKIA

6600 FoldBlackBerry

8520

NOKIA

Mural 6750 GunmetalBlackBerry

8800

NOKIA

N73BlackBerry

8800

NOKIA

N80BlackBerry

8900

NOKIA

N86 8MPBlackBerry

9630

NOKIA

N91BlackBerry

9700

NOKIA

N93iBlackBerry

9000 (Bold)

NOKIA

N97BlackBerry

9500 (Storm)

NOKIA

Nokia 3250BlackBerry

8100 (Pearl)

NOKIA

Nokia 3600BlackBerry

8110 (Pearl)

NOKIA

Nokia 5800 XpressMusicBlackBerry

8120 (Pearl)

NOKIA

Nokia 6220 ClassicBlackBerry

8130 (Pearl)

NOKIA

Nokia 6600 FoldBlackBerry

8220 (Pearl flip)

NOKIA

Nokia E51  21
 BlackBerry

8230 (Pearl flip)

NOKIA

Nokia E65BlackBerry

8300 (Curve)

NOKIA

Nokia E71BlackBerry

8310 (Curve)

NOKIA

Nokia E75BlackBerry

8330 (Curve)

NOKIA

Nokia E90 CommunicatorBlackBerry

8520 (Curve)

NOKIA

Nokia N73BlackBerry

8530 (Curve)

NOKIA

Nokia N78BlackBerry

8630 (Tour)

NOKIA

Nokia N80BlackBerry

8700g

NOKIA

Nokia N82BlackBerry

88xx Series

NOKIA

Nokia N86 8MPBlackBerry

8900 (Curve)

NOKIA

Nokia N91BlackBerry

8910 (Curve)

NOKIA

Nokia N93iBlackBerry

9520 (Storm2)

NOKIA

NOKIA N95 8GBBlackBerry

9530 (Storm)

NOKIA

Nokia N95 8GB Comes With MusicBlackBerry

9550 (Storm 2)

NOKIA

Nokia N96BlackBerry

9630 (Tour)

NOKIA

Nokia N97BlackBerry

9700 (Bold)

NOKIA

Nuron 5230HTC

Ted Baker Needle

O2 XDA

TrionHTC

Hero

Palm

TreoHTC

HTC Fuze

Pantech

Pantech Matrix ProHTC

HTC Ozone

Samsung

i900 OmniaHTC

HTC Snap

Samsung

Exclaim M550 BerryHTC

HTC TOUCH

Samsung

Galaxy / i7500HTC

Leo

Samsung

GT-B7300  OmniLITEHTC

Magic / myTouch 3G

Samsung

I5700 Galaxy SpicaHTC

Touch 2

Samsung

Impression A877 BlueHTC

Touch 2 (Windows Phone)

Samsung

Instinct s30 CopperHTC

Touch Diamond

Samsung

Intensity u450 BlackHTC

Touch Diamond 2

Samsung

MomentHTC

Touch HD

Samsung

Mythic a897 BlackHTC

Viva

Samsung

Omnia 2 (Windows Phone)HTC

XDA Atmos (HTC S730)

Samsung

Omnia Lite (Windows Phone)HTC

XDA Flint (HTC Advantage)

Samsung

Samsung ACE IIHTC

XDA Guide (HTC Iolite)

Samsung

Samsung Blackjack IIHTC

XDA Ignito (HTC Diamond)

Samsung

Samsung EpixHTC

XDA Mantle (HTC P6500)

Samsung

Samsung Highlight BlueHTC

XDA Serra (HTC Touch Pro)

Samsung

Samsung i8510 16GBHTC

XDA Zest (Asus)

Samsung

Samsung i8510 8GBHuawei

Pulse

Samsung

Samsung i8910 HDLG

Chocolate TOUCH

Samsung

Samsung JackLG

COOKIE

Samsung

Samsung OmniaLG

Eve / GW620

Samsung

Samsung Propel ProLG

Incite CT810

Samsung

Samsung SagaLG

KP500 Cookie

Samsung

SGH-617LG

LG Accolade Gray

Samsung

Solstice a887 BlackLG

LG Arena GT950

Sanyo

Incognito BlackLG

LG enV Touch VX11000 Black

Sony Ericsson

Ericsson C905a SilverLG

LG enV3 VX9200 Slate Blue

Sony Ericsson

Ericsson Equinox CarbonLG

LG Incite

Sony Ericsson

Ericsson Xperia X1LG

LG KP500 Cookie

Sony Ericsson

W580iLG

Rumor Touch Blue

Sony Ericsson

XPERIALG

Vu CU920 Red Wine

Sony Ericsson

Xperia X10LG

Xenon Red

T-Mobile

G1 AndroidMotorola

CLIQ / DEXT

T-Mobile

T-Mobile Dash 3GMotorola

Droid

T-Mobile

T-Mobile ShadowMotorola

EM330 Titanium

T-Mobile

T-Mobile Shadow IIMotorola

Moto Q 9m

T-Mobile

MDA Vario 2Motorola

Moto Q Global





22


During the fourth quarter we found problems with the scalability of our software and had to add additional resources to our development team to ensure that we can meet the demand of our current customers road maps and the new business partners we are negotiating to bring on. We also are working on implementing additional features that our current and prospective customers have requested, which include the addition of the feature phones backup that Tarsin brings us.





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 decrease in selling, general and administrative expenses in 2010, as compared to 2009 of $1,763,972 or 17.0% is primarily due to the following:





●
an decrease in advertising and sales and marketing expenses of approximately $1,063,000; this decrease is primarily due to paying commissions to DSG International, occurring only during the fiscal 2009 than 2010;●
a decrease in employee related expenses of approximately $1,027,000; this decrease is due to a decrease in penalties and interest related to payroll taxes of approximately $144,000 and a decrease in payroll expense of $883,000;●
a decrease in depreciation expense of approximately $517,000; this decrease is primarily due to certain assets being  fully depreciating during 2009 and the first quarter of 2010; offset by●
an increase in professional and consulting services of approximately $820,000; this increase is primarily due to an increase in consulting fees of $768,000 due to an increase in our efforts to decrease our spending on payroll expenses, and an increase in litigation expenses of approximately $53,000 due to our strong efforts to settle legal disputes;●
a increase in option and warrant expenses of approximately $528,000; this increase is primarily due to certain modifications of our options and warrants during 2010 creating one time expenses of approximately $509,000.





Other Expenses





Our total other expenses, net for fiscal 2010 decreased $615,945, or approximately 34.7%, from fiscal 2009. The decrease in total other expenses from fiscal 2009 to 2010 were primarily attributable to the following:





Change in Fair Value of Derivative Liabilities and Derivative Liabilities Expense





Change in fair value of derivative liabilities results from the changes in the fair value of the derivative liability due to the application of ASC 815, resulting in either income or expense. The difference in fair value of the derivative liabilities between the date of their issuance and their measurement date, which amounted to an increase of approximately $266,000 from fiscal 2009 and derivative liability expense of approximately $446,000 and $180,000 for fiscal 2010 and 2009, respectively has been recognized as other income in those fiscal years





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 December 31, 2010, the number of authorized but unissued shares and taking into consideration the floorless feature in connection with the redemption provision on the 10% and 8% convertible promissory notes and have concluded that a derivative liability of approximately $471,000 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 $442,000, representing a decrease of approximately $498,000, or 53% from 2009.





23


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 fiscal 2010 when compared to fiscal 2009 of $847,000 or $29.3% , respectively.





Liquidity and Capital Resources





At December 31, 2010, our cash overdraft amounted to $127,321 and our working deficit amounted to approximately $10,002,000 as compared with the cash overdraft of $43,489 and a working deficit of approximately $9,414,000 at December 31, 2009.





During the year ended December 31, 2010, we used cash in our operating activities amounting to approximately $4,588,000. Our cash used in operating activities was comprised of our net loss of approximately $11,127,000 adjusted for the following:





●
Change in fair value of derivative liabilities of approximately $446,000;●
Fair value of options and warrants granted to employees of approximately $1,025,000;●
Depreciation or property and equipment, amortization of prepaid expenses, amortization of debt discount and amortization of deferred financing costs of approximately $2,333,000;●
Gain from debt settlement of approximately $442,000;●
Fair value of convertible promissory notes modifications of approximately $175,000;●
Fair value of common stock issued in connection with convertible promissory notes modifications and conversions of approximately $79,000;●
Fair value of common stock issued in connection with note payable issuance of approximately $156,000;●
Fair value of option and warrant modifications of approximately $726,000;●
Fair value of warrants issued to convertible promissory note holders and note holders of approximately $48,000;●
Fair value of common stock issued in connection with debt settlement of $20,000;●
Fair value of shares, warrants or options issued for services of approximately $1,831,000; and●
Fair value of shares issued for interest payment of approximately $30,000.





Additionally, the following variations in operating assets and liabilities impacted our cash used in operating activities:●
Increase in prepaid expense and other current assets of approximately $843,000, resulting from an increase in the prepaid commissions and marketing fees associated with our DSG International agreement;●
Decrease in deferred revenue of approximately $519,000, resulting from the mutual release of our agreement with DSG International; offset by●
Decrease in accounts receivable of approximately $26,000, resulting from a decrease in the amount of time it takes our customers to pay us;●
Increase in accounts payable, accrued expenses and accrued payroll taxes of approximately $2,061,000, resulting from an increase of unpaid payroll taxes; and●
Increase in accrued interest on convertible promissory notes of approximately $280,000, resulting from the8% convertible promissory notes issued in later fiscal 2009.





During the year ended December 31, 2010, we incurred capital expenditures of approximately $58,000.





During the year ended December 31, 2010, we generated cash from financing activities of approximately $4,646,000, which primarily consisted of the proceeds from convertible promissory notes of $197,500, proceeds from notes payable of $1,310,500, net proceeds from the issuance of common stock for cash of $2,864,794, proceeds from the exercise of stock options of $22,392, proceeds from the exercise of warrants of $585,359 and cash overdraft of approximately $84,000, offset by the repayment of notes payable of $418,000.





During the year ended December 31, 2009, we used cash in our operating activities amounting to approximately $4,031,000. Our cash used in operating activities was comprised of our net loss of approximately $10,572,000 adjusted for the following:





●
Change in fair value of derivative liabilities of approximately $180,000;●
Fair value of options and warrants granted to employees of approximately $1,004,000;●
Amortization of prepaid expenses, debt discount and deferred financing costs, and depreciation of fixed assets of approximately $3,300,000;  24
 ●
Gain from debt settlement of approximately $940,000;●
Fair value of beneficial conversion features modifications of approximately $1,069,000;●
Fair value of shares, warrants or options issued for services of approximately $532,000; and●
Fair value of shares issued for interest payment of approximately $15,000.





Additionally, the following variations in operating assets and liabilities impacted our cash used in operating activities:●
Increase in accounts payable, accrued expenses and accrued payroll taxes of approximately $2,074,000, resulting from a an increase in expenditures;●
Increase in deferred revenue of approximately $381,000, resulting from an increased number of consumers successfully prepaying for online backup services;●
Increase in accrued interest on convertible promissory notes of approximately $366,000, resulting from the issuance of $1,804,000 8% and 10% convertible promissory notes in 2009;●
Decrease in accounts receivable of approximately $81,000, resulting from a decrease in the amount of time it takes our customers to pay us; offset by●
Increase in prepaid expense and other current assets of approximately $1,164,000, resulting from an increase in the prepaid commissions and marketing fees associated with our DSG International agreement.





During the year ended December 31, 2009, we incurred capital expenditures of approximately $293,000.





During the year ended December 31, 2009, we generated cash from financing activities of approximately $4,305,000, which primarily consisted of the proceeds from convertible promissory notes of $1,804,000, net proceeds from the issuance of common stock for cash of $2,507,500 and cash overdraft of approximately $43,000, offset by the repayment of a convertible promissory note of $50,000.





Off Balance Sheet Arrangements





We have no off-balance sheet arrangements.





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.





25


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.





Going Concern





We have generated minimal revenue since our inception on September 12, 2002, and have incurred net losses of approximately $111 million from cash and non-cash activity since inception through December 31, 2010. Our current operations are not an adequate source of cash to fund our current operations and we have relied on funds raised from the sale of our securities to provide sufficient cash to operate our business. The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 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. 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.





Item 7A. Quantitative and Qualitative Disclosures About Market Risk





Not applicable to smaller reporting companies.





Item 8. Financial Statements and Supplementary Data





Our financial statements are contained in pages F-1 through F-20, which appear at the end of this annual report.





Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure





None.





Item 9A(T). 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.





26


Item 9B. Other Information





None.


PART III





Item 10. Directors, Executive Officers and Corporate Governance





Directors and Executive Officers





The following individuals serve as our executive officers and members of our Board of Directors:





Name
Age
PositionCery B. Perle
48
Chief Executive Officer, President and Chairman of the BoardIvor Newman
46
Chief Operating Officer and DirectorRobert Binkele
47
DirectorAndy Zeinfeld
50
Director





Cery B. Perle. Mr. Perle has served as our President, CEO and Chairman since February 2004. Mr. Perle co-founded Grass Roots in June of 2002. Mr. Perle has experience in numerous start-up ventures. A primary focus of Mr. Perle's experience has been on the sales and marketing of innovative ideas and products. Prior to Grass Roots, from 2001 to 2002, he was director of Crystal Consulting Group, a business-consulting firm. From 2000 to 2001, he was engaged as a consultant to Rxalternative.com, an alternative healthcare web site. From 1994 to 1998, he was President and Chief Executive Officer of Waldron & Co., a California-based registered broker-dealer, where he established four branch offices in addition to the West Coast based corporate office of the investment firm.





Ivor Newman. Mr. Newman has over 19 years of program management and product marketing experience. Prior to joining Spare Backup in 2007, Mr. Newman was the Worldwide cross line of business (X-Lob) Program Manager for Dell Inc. where he was responsible for the successful creation and implementation of global services programs. Mr. Newman joined Dell in 1999 and was intimately involved with the global services division. Prior to working for Dell, Mr. Newman was the District Director for a professional services corporation in New York City.





Robert Binkele. Mr. Binkele is the founder and CEO of The Estate Planning Team, Inc., a company that has grown to service over 2200 securities advisors, CPA's, attorneys and other professionals nationwide with tax strategies, estate and pension planning. Mr. Binkele is the Indian Wells, CA wealth manager for J.P. Turner & Company, LLC. a national full service registered broker dealer. Mr. Binkele has participated in many public offerings, and has become very knowledgeable in high tech and medical companies and is well versed in the financial needs of small emerging growth companies and the means to satisfy them. Prior to joining Atlanta based J.P. Turner & Company, Mr. Binkele was a wealth manager with Brook Street Securities and Raymond James Financial Services Inc., a highly regarded national brokerage based in St. Petersburg, FL. Prior to Raymond James Financial Services, Mr. Binkele was an Academic All American football player for the University of Utah where he majored in finance. Mr. Binkele continued his football career as a professional football player for the San Francisco Forty-Niners during 1985 and 1986.





Andy Zeinfeld. Mr. Zeinfeld is the Chief Executive Officer for Simplexity LLC since December 2007.  From October to December 2007, he was the Chief Executive Officer for InPhonic, Inc and from April 2006 to October 2007, he served as the President, E-Commerce for InPhonic Inc. During November 2007, he also served as Director of InPhonic, Inc.  Prior to April 2006, Inc., Mr. Zeinfeld was Senior Vice President and Chief Retail Services Officer for RadioShack Corporation. On September 9, 2010, Simplexity LLC and Spare Backup entered into a certain Digital Platform Agreement, wherein the parties are marketing the Company’s digital platform services to consumers.





There are no family relationships between any of the executive officers and directors, except as set forth above. Each director is elected at our annual meeting of stockholders and holds office until the next annual meeting of stockholders, or until his successor is elected and qualified.





27


Key Employees





Following is biographical information on those persons whom we consider key employees of our company:





Name
Age
PositionCery Perle
48
Chief Executive Officer, President and Chairman of the BoardIvor Newman
46
Chief Operating Officer and Director





Compliance with Section 16(A) of the Exchange Act





Section 16(a) of the Securities Exchange Act of 1934 requires that our executive officers, directors and persons who own more than ten percent of a registered class of our equity securities file reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the SEC. Such executive officers, directors and ten percent stockholders are also required by the SEC rules to furnish to us copies of all Section 16(a) reports that they file. Based solely on its review of the copies of such forms received by us, or written representations from certain reporting persons that they were not required to file a Form 5, we believe that during the fiscal year ended December 31, 2010, our executive officers, directors and ten percent stockholders complied with all Section 16(a) filing requirements applicable to such persons.





Code of Business Conduct and Ethics





We have adopted a Code of Business Conduct and Ethics to provide guiding principles to all of our employees. Our Code of Business Conduct and Ethics does not cover every issue that may arise, but it sets out basic principles to guide our employees and provides that all of our employees must conduct themselves accordingly and seek to avoid even the appearance of improper behavior. Any employee who violates our Code of Business Conduct and Ethics will be subject to disciplinary action, up to an including termination of his or her employment. Generally, our Code of Business Conduct and Ethics provides guidelines regarding:





●
compliance with laws, rules and regulations,●
conflicts of interest,●
insider trading,●
corporate opportunities,●
competition and fair dealing,●
discrimination and harassment,●
health and safety,●
record keeping,●
confidentiality,●
protection and proper use of company assets,●
payments to government personnel,●
waivers of the Code of Business Conduct and Ethics,●
reporting any illegal or unethical behavior, and●
compliance procedures.





In addition, we have also adopted a Code of Ethics for our Chief Executive Officer and Senior Financial Officers. In addition to our Code of Business Conduct and Ethics, our CEO and senior financial officers are also subject to specific policies regarding:





●
disclosures made in our filings with the SEC,.●
deficiencies in internal controls or fraud involving management or other employees who have a significant role in our financial reporting, disclosure or internal controls,●
conflicts of interests, and●
knowledge of material violations of securities or other laws, rules or regulations to which we are subject.





A copy of our Code of Business Conduct and Ethics has been filed with the Securities and Exchange Commission as an exhibit to this annual report. We will provide a copy, without charge, to any person desiring a copy of the Code of Business Conduct and Ethics, by written request to, 17257 Fred Waring Drive, Palm Desert, CA 92260, Attention: Corporate Secretary.





28


Committees of the Board of Directors





Our Board of Directors has not established any committees, including an Audit Committee, a Compensation Committee or a Nominating Committee, any committee performing a similar function. The functions of those committees are being undertaken by the entire board as a whole. Because of the small size of our company and the even number of independent directors, our Board of Directors believes that the establishment of committees of the Board would not provide any benefits to our company and could be considered more form than substance.





We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. Given our relative size and lack of directors and officers insurance coverage, we do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees.





None of our directors is an "audit committee financial expert" within the meaning of Item 401(e) of Regulation S-B. In general, an "audit committee financial expert" is an individual member of the audit committee or Board of Directors who:





●
understands generally accepted accounting principles and financial statements,●
is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves,●
has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements,●
understands internal controls over financial reporting, and●
understands audit committee functions.





Since our formation we have relied upon the personal relationships of our CEO to attract individuals to our Board of Directors. While we would prefer that one or more of our directors be an audit committee financial expert, the individuals whom we have been able to attract to our Board do not have the requisite professional backgrounds. As with most small companies until such time our company further develops its business, achieves a stronger revenue base and has sufficient working capital to purchase directors and officers insurance, we do not have any immediate prospects to attract independent directors. When we are able to expand our Board of Directors to include one or more additional independent directors, we intend to establish an Audit Committee of our Board of Directors. It is our intention that one or more of these additional independent directors will also qualify as an audit committee financial expert. Our securities are not quoted on an exchange that has requirements that a majority of our Board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include "independent" directors, nor are we required to establish or maintain an Audit Committee or other committee of our Board of Directors.





Item 11. Executive Compensation





The following table summarizes all compensation recorded by us in the last completed fiscal year for





●
our principal executive officer or other individual serving in a similar capacity,●
our two most highly compensated executive officers other than our principal executive officer who were serving as executive officers at December 31, 2010 as that term is defined under Rule 3b-7 of the Securities Exchange Act of 1934. In the case of our company this includes two key employees of our company, and●
up to two additional individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer at December 31, 2010.





For definitional purposes in this annual report these individuals are sometimes referred to as the "named executive officers." The value attributable to any option awards is computed in accordance with ASC 718.





29


Summary Compensation TableName and Principal Position
Year
Salary ($)
Stock Awards

($)
Option Awards

($) (1)
All Other

Compensation
Total ($)Cery Perle, President and
2008
269,923
101,160 (3)
603,810 (4)
195,073
1,169,966Chief Executive Officer (2)
2009
282,250
-
491,000 (5)
58,739
831,9892010
366,337

372,950 (6)
66,624
805,911Ivor Newman, Vice President
2008
98,963
161,735 (8)
31,810 (9)
16,011
308,519of Operations (7)
2009
163,800
-
194,650 (10)
14,141
372,5912010
206,250

101,800 (11)
6,624
304,549Darryl Adams, Director of
2008
156,750
138,326 (13)
200,137 (14)
4,189
499,402Software Operations (12)
2009
243,765
-
326,650 (15)
3,374
573,7892010
227,773
-
-
3,708
231,481Veronica Noboa (16)
2010
117,129
-
-
-
117,129Walter Heatlie (17)
2010
119,666
-
-
-
119,666





(1)              The dollar value recognized for the stock option awards was determine in accordance with ASC 718. For a disclosure of the assumptions made in the valuation please refer to footnote 10 in our consolidate financial statements filed under Item 8 of this Annual Report on Form 10-K.





(2)              During fiscal 2008, in addition to Mr. Perle’s base salary of $300,000, he was also paid other compensation of $195,073. During fiscal 2009, in addition to Mr. Perle’s base salary of $330,000, he was also paid other compensation of $58,739. During fiscal 2010, in addition to Mr. Perle’s base salary of $363,000, he was also paid other compensation of $66,624.





(3)              Stock awards of 353,180 shares of our common stock valued at $101,160.





(4)              Options to purchase 2,600,000 shares of our common stock at an exercise price ranging from $0.11 to $0.36 per share, vesting at a range from at the date of grant to over 24 months.





(5)              Options to purchase 2,750,000 shares of our common stock at an exercise price ranging from $0.15 to $0.19 per share, vesting at a range from at the date of grant to over 24 months.





(6)              Options to purchase 3,100,000 shares of our common stock at an exercise price ranging from $0.01 to $0.18 per share, vesting at a range from at the date of grant to over 24 months.





(7)              During fiscal 2008, in addition to Mr. Newman’s base salary of $180,000, he was also paid other compensation of $16,011. During fiscal 2009, in addition to Mr. Newman’s base salary of $180,000, he was also paid other compensation of $14,141. During fiscal 2010, in addition to Mr. Newman’s base salary of $250,000, he was also paid other compensation of $6,624.





(8)              Stock awards of 804,639 shares of our common stock valued at $161,735.





(9)              Options to purchase 200,000 shares of our common stock at an exercise price ranging from $0.11 to $0.30 per share, vesting at the date of grant.





(10)              Options to purchase 1,500,000 shares of our common stock at an exercise price ranging from $0.01 to $0.12 per share, vesting at the date of grant.





(11)              Options to purchase 1,850,000 shares of our common stock at an exercise price ranging from $0.15 to $0.20 per share, vesting at the date of grant.





(12)              On September 15, 2010, Mr. Adam voluntarily resigned from his position. During fiscal 2008, in addition to Mr. Adam’s base salary of $260,000, he was also paid other compensation of $4,189. During fiscal 2009, in addition to Mr. Adam’s base salary of $260,000, he was also paid other compensation of $3,374. During fiscal 2010, in addition to Mr. Adam’s base salary of $260,000, he was paid a bonus of $13,791 and other compensation of $3,708.





(13)              Stock awards of 351,848 shares of our common stock valued at $38,326.





30


(14)              Options to purchase 1,504,018 shares of our common stock at an exercise price ranging from $0.01 to $0.30 per share, vesting at the date of grant.





(15)              Options to purchase 2,650,000 shares of our common stock at an exercise price ranging from $0.18 to $0.21 per share, vesting at a range from at the date of grant to over 24 months.





(16)                Ms. Noboa did not serve as an executive officer during fiscal 2010.





(17)                Mr. Walter did not serve as an executive officer during fiscal 2010.





Employment Agreements and Narrative Regarding Executive Compensation





Employment Agreement with Cery Perle





On January 1, 2010, Cery Perle’s employment agreement automatically renewed for an additional year. Under the terms of this agreement, we currently pay Mr. Perle an annual base salary of $363,000. We initially granted him an option to purchase 1,000,000 shares of our common stock at an exercise price of $0.01 per share as additional compensation, which vest immediately.  During 2010, the Board Approved granted him options to purchase a total of 3,100,000 shares of our common stock at an exercise prices ranging from $0.01 to $0.18 per share which were valued at $372,950. In addition, during fiscal 2008, 2009 and 2010 we paid him certain additional compensation set forth in the above table which was approved by our Board of Directors. The agreement also provides for an automobile allowance which is presently $5,000 per month, paid vacation, fringe benefits commensurate with his duties and responsibilities and benefits in the event of disability, as well as containing certain non-disclosure and non-competition provisions. Under the terms of the agreement, we may terminate Mr. Perle's employment either with or without cause. If the agreement is terminated by us without good cause, or by Mr. Perle with cause, we would be obligated to pay him his base salary though the end of the term of the agreement, continue his benefits through the end of the term and all options would continue to vest during the remaining period of the term. To the extent that Mr. Perle is terminated for cause, or he voluntarily resigns, no severance benefits will be paid.





How Mr. Newman's compensation was determined





On October 20, 2010, we entered into an employment agreement with Mr. Newman to serve as our Chief Operating Officer and Director. Under the terms of this agreement, Mr. Newman's base salary was increased to $250,000. We granted him an option to purchase 500,000 shares of our common stock at an exercise price of $0.12 per share as additional compensation. This option vested immediately. Mr. Newman's employment with the company is "at will" basis.





How Mr. Adams's compensation was determined





On September 20, 2006, we entered into an employment agreement with Mr. Adams to serve as our Director of Software Operations. Under the terms of this agreement, Mr. Adam's base salary is $260,000. In addition, Mr. Adams will receive a guaranteed bonus of $80,000 whereby Mr. Adams has an option of accepting bonus payment in cash or stocks. We currently pay Mr. Adam an annual base salary of $260,000. We initially granted him an option to purchase 1,000,000 shares of our common stock at an exercise price of $0.51 per share as additional compensation. This option vested ratably over the two-year term of the agreement. Mr. Adams orally agreed to accept stock options as payment of bonus during fiscal 2007, 2008 and 2009. Mr. Adam's employment with the company is "at will" basis.





31


Outstanding Equity Awards at Fiscal Year End





The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of December 31, 2010:





Option Awards

Stock AwardsName
Number of securities underlying unexercised options (#) exercisable
Number of securities underlying unexercised options (#) unexercisable
Equity incentive plan awards: Number of securities underlying unexercised unearned options (#)
Option exercise price ($)
Option expiration date

Number of shares or units of stock that have not vested (#)
Market value of shares or units of stock that have not vested ($)
Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#)
Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested (#)Cery B. Perle
2,000,000


0.18
01/15/16500,000


0.18
05/31/16118,000


0.18
07/26/1650,000


0.18
10/12/16100,000


0.18
01/09/12500,000


0.18
04/05/12100,000


0.18
09/26/122,000,000


0.18
01/16/13500,000


0.18
03/26/13100,000


0.11
10/15/13150,000


0.18
01/23/14500,000


0.18
02/11/14100,000


0.15
06/18/141,500,000
500,000

0.18
07/13/14500,000


0.165
2/12/15427,397
572,603

0.14
2/22/15100,000


0.18
3/22/15500,000


0.14
7/1/151,000,000


0.01
10/20/15Ivor Newman
100,000


0.30
07/27/16350,000


0.30
08/01/16200,000


0.30
08/23/1650,000


0.30
10/13/16100,000


0.30
01/09/12100,000


0.30
05/04/12100,000


0.30
06/21/12100,000


0.30
09/13/12100,000


0.30
10/19/12100,000


0.30
01/18/13100,000


0.11
10/15/13150,000


0.18
01/23/14200,000


0.15
06/18/141,500,000


0.20
11/10/141,000,000


0.01
10/20/15500,000


0.12
10/20/13





32


2002 Stock Option and Stock Award Plan





Overview





On August 9, 2002, our board of directors authorized, and holders of a majority of our outstanding common stock approved and adopted, our 2002 Stock Option and Stock Award Plan covering 1,000,000 shares of common stock. On April 20, 2004, the plan was amended to increase the number of shares covered by the plan to 12,000,000 shares to accommodate grants previously provided under the Grass Roots Communications, Inc. compensation program, and on May 31, 2006 the plan was again amended to further increase the number of shares covered by the plan to 27,000,000 shares.





The purpose of the plan is to encourage stock ownership by our officers, directors, key employees and consultants, and to give such persons a greater personal interest in the success of our business and an added incentive to continue to advance and contribute to us. Our board of directors, or a committee of the board, will administer the Plan including, without limitation, the selection of the persons who will be awarded stock grants and granted options, the type of options to be granted, the number of shares subject to each option and the exercise price.





Plan options may either be options qualifying as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified options. In addition, the plan allows for the inclusion of a reload option provision, which permits an eligible person to pay the exercise price of the option with shares of common stock owned by the eligible person and receive a new option to purchase shares of common stock equal in number to the tendered shares. Furthermore, compensatory stock amounts may also be issued. Any incentive option granted under the plan must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of grant, but the exercise price of any incentive option granted to an eligible employee owning more than 10% of our outstanding common stock must not be less than 110% of fair market value on the date of the grant. The term of each plan option and the manner in which it may be exercised is determined by the board of directors or the committee, provided that no option may be exercisable more than 10 years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of the common stock, no more than five years after the date of the grant.





During fiscal 2010 we granted options to purchase an aggregate of 7,427,680 shares of our common stock at exercise prices ranging from $0.01 to $0.20 per share to our executive officers, directors, employees and consultants. At each of December 31, 2010 and March 31, 2011 we had 17,901,503 shares and 17,986,503 shares, respectively, available for grant under the plan.





On January 14, 2010, the board approved the repricing of all options granted to our employees and directors. The new exercise price for all options is $0.18.





Eligibility





Our officers, directors, key employees and consultants are eligible to receive stock grants and non-qualified options under the plan. Only our employees are eligible to receive incentive options.





Administration





The plan will be administered by our board of directors or an underlying committee. The board of directors or the committee determines from time to time those of our officers, directors, key employees and consultants to whom stock grants or plan options are to be granted, the terms and provisions of the respective option agreements, the time or times at which such options shall be granted, the type of options to be granted, the dates such plan options become exercisable, the number of shares subject to each option, the purchase price of such shares and the form of payment of such purchase price. All other questions relating to the administration of the plan, and the interpretation of the provisions thereof and of the related option agreements, are resolved by the board of directors or committee.





Shares Subject to Awards





We have currently reserved 27,000,000 of our authorized but unissued shares of common stock for issuance under the plan, and a maximum of 27,000,000 shares may be issued, unless the plan is subsequently amended, subject to adjustment in the event of certain changes in our capitalization, without further action by our board of directors and stockholders, as required. Subject to the limitation on the aggregate number of shares issuable under the plan, there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted to any person. Shares used for stock grants and plan options may be authorized and unissued shares or shares reacquired by us, including shares purchased in the open market. Shares covered by plan options which terminate unexercised will again become available for grant as additional options, without decreasing the maximum number of shares issuable under the plan, although such shares may also be used by us for other purposes.





33


The plan provides that, if our outstanding shares are increased, decreased, exchanged or otherwise adjusted due to a share dividend, forward or reverse share split, recapitalization, reorganization, merger, consolidation, combination or exchange of shares, an appropriate and proportionate adjustment will be made in the number or kind of shares subject to the plan or subject to unexercised options and in the purchase price per share under such options. Any adjustment, however, does not change the total purchase price payable for the shares subject to outstanding options. In the event of our proposed dissolution or liquidation, a proposed sale of all or substantially all of our assets, a merger or tender offer for our shares of common stock, the board of directors may declare that each option granted under the Plan terminates as of a date to be fixed by the board of directors; provided that not less than 30 days written notice of the date so fixed shall be given to each participant holding an option, and each such participant shall have the right, during the period of 30 days preceding such termination, to exercise the participant's option, in whole or in part, including as to options not otherwise exercisable.





Terms of Exercise





The plan provides that the options granted there under shall be exercisable from time to time in whole or in part, unless otherwise specified by the committee or by the board of directors.





The plan provides that, with respect to incentive stock options, the aggregate fair market value (determined as of the time the option is granted) of the shares of common stock, with respect to which incentive stock options are first exercisable by any option holder during any calendar year shall not exceed $100,000.





Exercise Price





The purchase price for shares subject to incentive stock options must be at least 100% of the fair market value of our common stock on the date the option is granted, except that the purchase price must be at least 110% of the fair market value in the case of an incentive option granted to a person who is a "10% stockholder." A "10% stockholder" is a person who owns, within the meaning of Section 422(b)(6) of the Internal Revenue Code of 1986, at the time the incentive option is granted, shares possessing more than 10% of the total combined voting power of all classes of our outstanding shares. The plan provides that fair market value shall be determined by the board of directors or the committee in accordance with procedures which it may from time to time establish. If the purchase price is paid with consideration other than cash, the Board or the Committee shall determine the fair value of such consideration to us in monetary terms.





The exercise price of non-qualified options shall be determined by the board of directors or the committee, but shall not be less than the par value of our common stock on the date the option is granted.





The per share purchase price of shares issuable upon exercise of a plan option may be adjusted in the event of certain changes in our capitalization, but no such adjustment shall change the total purchase price payable upon the exercise in full of options granted under the plan.





Manner of Exercise





Plan options are exercisable by delivery of written notice to us stating the number of shares with respect to which the option is being exercised, together with full payment of the purchase price therefore. Payment shall be in cash, checks, certified or bank cashier's checks, promissory notes secured by the shares issued through exercise of the related options, shares of common stock or in such other form or combination of forms which shall be acceptable to the board of directors or the committee, provided that any loan or guarantee by us of the purchase price may only be made upon resolution of the board of directors or committee that such loan or guarantee is reasonably expected to benefit us.





34


Option Period





All incentive stock options shall expire on or before the tenth anniversary of the date the option is granted except as limited above. However, in the case of incentive stock options granted to an eligible employee owning more than 10% of the common stock, these options will expire no later than five years after the date of the grant. Non-qualified options shall expire 10 years and one day from the date of grant unless otherwise provided under the terms of the option grant.





Termination





All plan options are non-assignable and nontransferable, except by will or by the laws of descent and distribution, and during the lifetime of the optionee, may be exercised only by such optionee. If an optionee shall die while our employee or within three months after termination of employment by us because of disability, or retirement or otherwise, such options may be exercised, to the extent that the optionee shall have been entitled to do so on the date of death or termination of employment, by the person or persons to whom the optionee's right under the option pass by will or applicable law, or if no such person has such right, by his executors or administrators.





In the event of termination of employment because of death while an employee or because of disability, the optionee's options may be exercised not later than the expiration date specified in the option or one year after the optionee's death, whichever date is earlier, or in the event of termination of employment because of retirement or otherwise, not later than the expiration date specified in the option or one year after the optionee's death, whichever date is earlier.





If an optionee's employment by us terminates because of disability and such optionee has not died within the following three months, the options may be exercised, to the extent that the optionee shall have been entitled to do so at the date of the termination of employment, at any time, or from time to time, but not later than the expiration date specified in the option or one year after termination of employment, whichever date is earlier.





If an optionee's employment shall terminate for any reason other than death or disability, optionee may exercise the options to the same extent that the options were exercisable on the date of termination, for up to three months following such termination, or on or before the expiration date of the options, whichever occurs first. In the event that the optionee was not entitled to exercise the options at the date of termination or if the optionee does not exercise such options (which were then exercisable) within the time specified herein, the options shall terminate.





If an optionee's employment shall terminate for any reason other than death, disability or retirement, all right to exercise the option shall terminate not later than 90 days following the date of such termination of employment.





If an optionee's employment with us is terminated for any reason whatsoever, and within three months after the date thereof optionee either (i) accepts employment with any competitor of, or otherwise engages in competition with us, or (ii) discloses to anyone outside our company or uses any confidential information or material of our company in violation of our policies or any agreement between the optionee and our company, the committee, in its sole discretion, may terminate any outstanding stock option and may require optionee to return to us the economic value of any award that was realized or obtained by optionee at any time during the period beginning on that date that is six months prior to the date optionee's employment with us is terminated.





The committee may, if an optionee's employment with us is terminated for cause, annul any award granted under this plan to such employee and, in such event, the committee, in its sole discretion, may require optionee to return to us the economic value any award that was realized or obtained by optionee at any time during the period beginning on that date that is six months prior to the date optionee's employment with us is terminated.





Modification and Termination of Plan





The board of directors or committee may amend, suspend or terminate the plan at any time. However, no such action may prejudice the rights of any holder of a stock grant or optionee who has prior thereto been granted options under the plan. Further, no amendment to this plan which has the effect of (a) increasing the aggregate number of shares subject to this plan (except for adjustments due to changes in our capitalization), or (b) changing the definition of "Eligible Person" under the plan, may be effective unless and until approved by our stockholders in the same manner as approval of this plan is required. Any such termination of the plan shall not affect the validity of any stock grants or options previously granted there under. Unless the plan shall theretofore have been suspended or terminated by the board of directors, the plan will terminate on August 9, 2012.





35


Director Compensation





Our Board of Directors is comprised of Messrs. Perle, Binkele and Zeinfeld. Mr. Perle, who is also an executive officer of our company, does not receive any compensation specifically for his Board services. The following table provides information concerning the compensation of Messrs. Binkele and Zeinfelde for services as members of our Board of Directors for fiscal 2010. The value attributable to any option awards is computed in accordance with FAS 123R.





Director CompensationName
Fees earned

or paid in

cash ($)
Stock awards ($)
Warrant

and Option

awards ($)
Non-equity

incentive plan

compensation ($)
Nonqualified

deferred

compensation

earnings ($)
All other

compensation ($)
Total ($)Robert Binkele (1)
-
-
72,950
-
-
-
72,950Andy Zeinfeld (2)
-
-
28,000
-
-
-
28,000





(1)
Represents the value of options to purchase 500,000 shares of our common stock with an exercise price of $0.165 per share.(2)
Represents the value of options to purchase 500,000 shares of our common stock with an exercise price of $0.09





We have not established standard compensation arrangements for our directors and the compensation payable to each individual for their service on our Board is determined from time to time by our Board of Directors based upon the amount of time expended by each of the directors on our behalf.





Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters





At March 31, 2011 we had 220,542,925 shares of common stock, 50,000 shares of Series A Preferred Stock and 50,000 shares of Series B Preferred Stock issued and outstanding. Each share of common stock entitles the holder to one vote, each share of Series A Preferred Stock entitles the holder to 400 votes, and each share of Series B Preferred Stock entitles the holder to 400 votes at any meeting of our stockholders and the shares of common stock, Series A Preferred Stock and Series B Preferred Stock vote together on all matters submitted to a vote of our stockholders.





The following table sets forth information known to us as of March 31, 2011 relating to the beneficial ownership of shares of our voting securities by:





●
each person who is known by us to be the beneficial owner of more than five percent of our outstanding voting stock;●
each director;●
each named executive officer; and●
all named executive officers and directors as a group.





Unless otherwise indicated, the business address of each person listed is in care of 17257 Fred Waring Drive, Palm Desert, California 92260. The percentages in the table have been calculated on the basis of treating as outstanding for a particular person, all shares of our common stock outstanding on that date and all shares of our common stock issuable to that holder in the event of exercise of outstanding options, warrants, rights or conversion privileges owned by that person at that date which are exercisable within 60 days of that date. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of our common stock owned by them, except to the extent that power may be shared with a spouse.





Amount and Nature of Beneficial OwnershipCommon Stock
Series A Preferred Stock
Series B Preferred StockName (1)
# of Shares
% of Class
# of Shares
% of Class
# of Shares
% of Class
% of VoteCery B. Perle (2)
17,627,694
7.59%
50,000
100%
-
n/a
14.91%Robert Binkele (3)
1,349,487
0.61%
-
n/a
-
n/a
0.61%Ivor Newman (4)
4,750,000
2.11%
-
n/a
-
n/a
2.11%Andy Zeinfeld (5)
500,000
0.23%
-
n/a
-
n/a
0.23%AlAll named executive officers and directors as a group (five persons)
24,227,181
10.53%
50,000
100%
-
n/a
17.86%* represents less than 1%





36


(1)
Unless otherwise indicated, the business address of each person listed is in care of Spare Backup, Inc., 72757 Fred

Waring Drive, Palm Desert, CA 92260(2)   Includes:
Common stock of 5,809,694, of which 1,085,194 shares is held by Mr. Perle, 4,000,000 shares are held in a trust for his benefit and 724,500 shares held in a trust for his minor children; and11,818,000 options, exercisable at a range of $0.01 to $0.18 per share.(3)   Includes:
Common stock of 99,487, which is held by Mr. Binkele;750,000 options, exercisable at a price range of $0.165 to $0.19 per shares; and500,000 warrants, exercisable at $0.13 per share.(4)   Includes:
4,750,000 options, exercisable at a range of $0.01 to $0.18 per share.(5)   Includes:
500,000 options, exercisable at a $0.09 per share.





Item 13. Certain Relationships and Related Transactions, and Director Independence





Mr. Perle, our CEO, has made an available home owned by him for our use as temporary housing for new employees at monthly rental costs which we believe are below market. During each of these years we used this home for approximately 70% of the year. We reimburse each of Mr. Perle for the actual mortgage payment and pay ordinary operating expenses associated with such home including utilities, maintenance and insurance. During fiscal 2010 and 2009 we made rental payments to Mr. Perle of $15,000 and $15,000, respectively.





In January 2008 we issued Mr. Cery Perle, our CEO and a member of our Board of Directors, 50,000 shares of a newly created Series A Preferred Stock as additional compensation valued at $.001 per share or $50.00. The designations, rights and preferences of the Series A Preferred Stock includes:





●
each share has a stated value and a liquidation preference of $0.001 per share which equals the par value of the shares,●
the shares are not convertible or exchange into any other security,●
each share entitles the holder to 400 votes at any meeting of our stockholders and such shares will vote together with our common stockholders, provided, however, that Mr. Perle is not eligible to vote the shares in connection with an amendment to increase the number of our authorized shares of common stock if such amendment is proposed to our stockholders within four months from the date of issuance of the shares,.●
the shares are not subject to redemption, and●
so long as the shares are outstanding we have agreed not to alter or change the rights of the security in a manner which would adversely affect the Series A Preferred Stock, or take any action which would result in the taxation of the holder under Section 305 of the Internal Revenue Code.





Director Independence





Messrs. Binkele and Zeinfeld are "independent" within the meaning of Marketplace Rule 5605 of the NASDAQ Stock Market, Inc.





Item 14. Principal Accountant Fees and Services





Sherb & Co., LLP served as our independent registered public accounting firm for fiscal 2009 and fiscal 2010. The following table shows the fees that were billed for the audit and other services provided by such firm for fiscal 2009 and fiscal 2010.





37


Fee Category

2009


2010Audit Fees (1)

$
74,000


$
74,000Audit Related Fees


-



-Tax Fees (2)


-



-All Other Fees


-



-Total

$
74,000


$
74,000





(1)  Consists of fees for professional services rendered in connection with the review of our three quarterly reports on Form 10-Q and the financial statements included in our annual report on Form 10-K


(2)  Consists of fees relating to our tax compliance and tax planning.





We do not have an Audit Committee. Our Board of Directors pre-approves all auditing services and permissible non-audit services provided to us by our independent registered public accounting firm. All fees listed above were pre-approved in accordance with this policy.





PART IV





Item 15. Exhibits, Financial Statement Schedules





The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:




a.
Index to Consolidated Financial Statements and Financial Statement Schedules


PageReport of Independent Registered Public Accounting Firm
F-2Consolidated Balance Sheets as of December 31, 2009 and 2010
F-3Consolidated Statements of Operations for each of the two years ended December 31, 2010
F-4Consolidated Statements of Shareholders’ Deficit for each of the two years ended December 31, 2010
F-5Consolidated Statements of Cash Flows for each of the two years ended December 31, 2010
F-6Notes to Consolidated Financial Statements
F-7 – F-20




b.
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, or are inapplicable, and therefore have been omitted.


c.
Exhibits




EXHIBIT NO.
DESCRIPTION





2.1    Acquisition Agreement and Plan of Merger(3)


2.     Agreement and Plan of Merger(4)


3.1    Certificate of Incorporation(1)


3.2    By-Laws (1)


3.3    Certificate of Incorporation, as amended(2)


3.4    Certificate of Amendment to the Certificate of Incorporation(5)


3.5    Certificate of Amendment to the Certificate of Incorporation (8)


3.6    Certificate of Ownership merging Spare Backup, Inc. into Newport International Group, Inc. (19)


3.7    Certificate of designations, rights and preferences of Series A Preferred Stock (23)


4.1    Form of Investor Warrant to Purchase Common Stock issued with 8% promissory note (12)


4.2    Form of Common Stock Purchase Warrant issued with 10% secured note (12)


4.3    Form of Common Stock Purchase Warrant issued to Robinson Reed Inc. and First Capital Holdings International, Inc.(11)


4.4    Form of $0.75 Investor Warrant (11)


4.5    Common stock purchase warrant issued March 31, 2005 to purchase 256,667 shares of common stock issued to Jenelle Fontes (10)




38


4.6    Common stock purchase warrant issued March 31, 2005 to purchase  280,000 shares of common stock issued to Curtis Lawler (10)


4.7    Form of $1.30 common stock purchase warrant (13)


4.8    Form of common stock purchase warrant issued to Langley Park Investment Trust, PLC (16)


4.9    Form of placement agent warrant issued to Brookstreet Securities Corporation (20)


4.10   Option to Purchase Common Stock issued to Wolfe Axlerod Weinberger (20)


4.11   Option to Purchase Common Stock issued to The Sterling Group (20)


4.12   Form of warrant issued to DSG Plc.(24)


10.1   2002 Stock Option and Stock Award Plan (15)


10.2   Lease for principal executive offices (24)


10.3   Stock Purchase Agreement with Langley Park Investment Trust PLC (9)


10.4   Employment Agreement with Cery B. Perle (11)


10.5   Common Stock and Warrant Purchase Agreement dated as of August 27, 2004 (9)


10.6   Registration Rights Agreement dated as of August 27, 2004 (9)


10.7   Amendment No. 1 to Common Stock and Warrant Purchase Agreement dated as of November 2, 2004 (9)


10.8   Settlement Agreement and Release between Newport International Group, Inc., Robinson Reed, Inc., First Capital Holdings International, Inc., Continental Blue Limited and E-Holdings, Inc. (11)


10.9   Supplier Agreement with CompUSA (12)


10.10  Form of Settlement Agreement between Newport International Group, Inc, Robinson Reed, Inc. and First Capital Holdings International, Inc. (14)


10.11  Amendment No. 1 to the 2002 Stock Option and Stock Award Plan (6)


10.12  Form of Repurchase Agreement with Langley Park Investment Trust PLC (16)


10.13  Form of Amendment to Escrow Agreement with Langley Park Investment Trust PLC (16)


10.14  Amendment No. 2 to the 2002 Stock Option and Stock Award Plan (17)


10.15  Customer Technical Support Services Agreement with Circuit City Stores, Inc. (18)


10.16  Standard Services Agreement and Statement of Work with Hewlett-Packard Company (20)


10.17  Finder's Agreement dated February 5, 2007 between Spare Backup, Inc. and Skyebanc, Inc. (21)


10.18  Agreement Regarding Put Option dated as of May 8, 2007 by and among Spare Backup, Inc., Robinson Reed, Inc. and First Capital Holdings International, Inc. (22)


10.19  Software License and Distribution Agreement with Gateway Companies, Inc. (22) Portions of this agreement have been omitted and separately filed with the Securities and Exchange Commission with a request for confidential treatment.


10.20  Data Storage Services Agreement dated February 2, 2007 between DSG Retail and Spare Backup, Inc. (24) Portions of this agreement have been omitted and separately filed with the Securities and Exchange Commission with a request for confidential treatment.


14.1   Code of Business Conduct and Ethics and Code of Ethics for the Chief Executive Officer and Senior Financial Officers (11)


21.1   Subsidiaries of the registrant (11)


23.1   Consent of Sherb & Co., LLP *


31.1   Section 302 Certificate of Chief Executive Officer *


31.2   Section 302 Certificate of principal accounting and financial officer *


32.1   Section 906 Certificate of Chief Executive Officer and principal financial and accounting officer *





* filed herewith





(1)    Incorporated by reference to the Quarterly Report on Form 10-QSB as filed with the SEC on May 10, 2000.


(2)    Incorporated by reference to the Current Report on Form 8-K as filed with the SEC on February 5, 2001.


(3)    Incorporated by reference to the Current Report on Form 8-K filed with the SEC on November 6, 2000.


(4)    Incorporated by reference to the Current Report on Form 8-K filed with the SEC on February 13, 2004.


(5)    Incorporated by reference to the definitive Information Statement on Schedule 14C as filed with the SEC on November 14, 2003.


(6)    Incorporated by reference to the registration statement on Form S-8 as filed with the SEC on August 8, 2004.


(7)    Intentionally omitted.


(8)    Incorporated by reference to the quarterly report on Form 10-QSB for the three and six months ended June 30, 2004.


(9)    Incorporated by reference to the Quarterly Report on Form 10-QSB for the three and nine months ended September 30, 2004.




39


(10)   Incorporated by reference to the Current Report on Form 8-K as filed with the SEC on May 5, 2005.


(11)   Incorporated by reference to the registration statement on Form SB-2, as amended, file number 333-123096, as declared effective on May 19, 2005.


(12)   Incorporated by reference to the Quarterly Report on Form 10-QSB for the three and six months ended June 30, 2005. Portions of this agreement have been omitted and separately filed with the Securities and Exchange Commission with a request for confidential treatment.


(13)   Incorporated by reference to the registration statement on Form SB-2, SEC file number 333-128980, as amended, as declared effective by the SEC on November 14, 2005.


(14)   Incorporated by reference to the Current Report on Form 8-K as filed with the SEC on December 15, 2005.


(15)   Incorporated by reference to the registration statement on Form S-8, SEC File No. 333-98229, as filed on August 16, 2002.


(16)   Incorporated by reference to the Current Report on Form 8-K as filed on May 31, 2006.


(17)   Incorporated by reference to the Current Report on Form 8-K as filed on June 6, 2006.


(18)   Incorporated by reference to the Current Report on Form 8-K as filed on August 18, 2006. Portions of this agreement have been omitted and marked with a [_] and separately filed with the Securities and Exchange Commission with a request for confidential treatment.


(19)   Incorporated by reference to the Current Report on Form 8-K as filed on August 16, 2006.


(20)   Incorporated by reference to the registration statement on Form SB-2, SEC File No. 333-139138, as amended, as declared effective by the SEC on February 13, 2007.


(21)   Incorporated by reference to the Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006 as filed on April 2, 2007.


(22)   Incorporated by reference to the Quarterly Report on Form 10-QSB for the period ended March 31, 2007 as filed on May 21, 2007.


(23)   Incorporated by reference to the Current Report on Form 8-K as filed on January 18, 2008.


(24)   Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 2007 as filed on April 14, 2008.




40


SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) 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 BACKUP, INC.





By: /s/ Cery Perle


Cery Perle


Executive Officer, President and Director





Date: April 22, 2011





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





Signature

Title
DateBy: /s/ Cery Perle

Chief Executive Officer, President and Chairman of the Board
April 22, 2011(Principal Executive Officer and Financial Officer)By: /s/ Ivor Newman

Chief Operating Officer
April 22, 2011





41


SPARE BACKUP, INC. AND SUBSIDIARY


CONSOLIDATED FINANCIAL STATEMENTS


AS OF DECEMBER 31, 2010





Index to Consolidated Financial Statements and Financial Statement Schedules





PageReport of Independent Registered Public Accounting Firm
F-2Consolidated Balance Sheets as of December 31, 2009 and 2010
F-3Consolidated Statements of Operations for each of the two years ended December 31, 2010
F-4Consolidated Statements of Shareholders’ Deficit for each of the two years ended December 31, 2010
F-5Consolidated Statements of Cash Flows for each of the two years ended December 31, 2010
F-6Notes to Consolidated Financial Statements
F-7 – F-20





All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the




F-1


Report of Independent Registered Public Accounting Firm





To the Board of Directors





Spare Backup, Inc.





We have audited the accompanying consolidated balance sheets of Spare Backup, Inc. and Subsidiary as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years ended December 31, 2010 and 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spare Backup, Inc. and Subsidiary at December 31, 2010 and 2009, and the results of their operations and their cash flows for the year ended December 31, 2010 and 2009 in conformity with accounting principles generally accepted in the United States of America.





The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has negative working capital and a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.





/s/ Sherb & Company LLP



New York, New York

April 22, 2011





F-2
 
  SPARE BACKUP, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETSDecember 31,


December 31,ASSETS

2010


2009Current Assets:Accounts receivable, net allowance for bad debt of $65,000 and $0 atDecember 31, 2010 and 2009, respectively

$
28,536


$
51,371Prepaid  expenses


58,798



17,487Total current assets


87,334



68,858Property and equipment, net of accumulated depreciation of $758,902 and $2,384,638 atDecember 31, 2010 and 2009, respectively


305,342



528,639Other assets


50,648



161,104Total assets

$
443,324


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

$
2,989,495


$
2,546,236Overdraft liability


127,321



43,489Accrued payroll taxes


3,203,189



2,027,3788% convertible promissory notes, net of debt discountof $365 and $96,865 at December 31, 2010 and 2009, respectively


1,835,907



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


420,963



581,000Accrued interest on convertible promissory notes


31,473



125,829Notes payable


892,500



-Derivative liabilities


470,871



246,973Deferred revenue


102,500



621,127Due to stockholder


15,000



15,000Total current liabilities


10,089,219



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


-



71,154Total liabilities


10,089,219



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;200,342,955 and 134,036,062 issued and outstandingat December 31, 2010 and 2009, respectively


200,343



134,036Additional paid-in capital


101,097,359



90,886,623Accumulated deficit


(110,943,647
)


(99,816,429
)Total stockholders’ deficit


(9,645,895
)


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

$
443,324


$
758,601See Notes to Consolidated Financial Statements.


F-3
 
  SPARE BACKUP, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONSFor the Years EndedDecember 31,2010


2009Net Revenues

$
958,886


$
2,692,320Operating expenses:Research and development


2,341,738



1,139,951Selling, general and administrative


8,583,680



10,347,652Total operating expenses


10,925,418



11,487,603Operating loss


(9,966,532
)


(8,795,283
)Other income (expense):Change in fair value of derivative liabilities


446,027



179,689Gain from debt settlements


442,250



940,106Interest expense


(2,048,963
)


(2,896,426
)Total other income (expense)


(1,160,686
)


(1,776,631
)Net loss

$
(11,127,218
)

$
(10,571,914
)Basic and diluted loss per common share

$
(0.07
)

$
(0.09
)Basic and diluted weighted average commonshares outstanding


164,011,500



117,190,142


See Notes to Consolidated Financial Statements.




F-4





SPARE BACKUP, INC. AND SUBSIDIARYCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)From January 1, 2008 to December 31, 2009TotalPreferred Stock

Common Stock


Additional

Paid-in


Accum-

ulated


Stockholders'

EquityShares


$

Shares


$


Capital


Deficit


(Deficit)Balance, January 1, 2009


50,000


$
50


105,193,730


$
105,194


$
82,772,427


$
(88,777,244
)

$
(5,899,573
)Common stock issued for cash, net of costs


-



-


17,098,124



17,098



2,490,402



-



2,507,500Fair value of shares issued for interest payment


-



-


1,748,372



1,748



285,777



-



287,525Fair value of shares issued for services


-



-


1,621,839



1,622



293,526



-



295,148Fair value of warrants issued for debt issuance costs


-



-


-



-



174,495



-



174,495Fair value of shares issued for debt issuance costs


-



-


246,875



247



43,753



-



44,000Fair value of warrants issued for interest


-



-


-



-



14,944



-



14,944Conversion of convertible promissory notes


-



-


8,127,122



8,127



1,328,213



-



1,336,340Write off of derivative liability as a result of conversion


-



-


-



-



40,609



-



40,609Beneficial conversion features of convertible notes


-



-


-



-



1,130,378



-



1,130,378Fair value of beneficial conversion features modifications


-



-


-



-



1,068,707



-



1,068,707Fair value of warrants issued for services


-



-


-



-



59,611



-



59,611Fair value of options issued for services


-



-


-



-



177,666



-



177,666Fair value of options granted


-



-


-



-



1,004,120



-



1,004,120Fair value of options modifications


-



-


-



-



1,995



-



1,995Change in accounting principle


-



-


-



-



-



(467,271
)


(467,271
)Net loss


-



-


-



-



-



(10,571,914
)


(10,571,914
)Ending balance, December 31, 2009


50,000



50


134,036,062



134,036



90,886,623



(99,816,429
)


(8,795,720
)Common stock issued for cash, net of costs


-



-


32,155,449



32,155



2,832,639



-



2,864,794Fair value of shares issued for interest payment


-



-


2,464,567



2,464



300,160



-



302,624Fair value of shares issued for services


-



-


11,481,076



11,481



1,584,490



-



1,595,971Fair value of shares issued for debt settlement agreement


-



-


100,000



100



19,900



-



20,000Conversion of convertible promissory notes


-



-


11,268,790



11,269



2,050,096



-



2,061,365Fair value of shares issued for exercise of stock options


-



-


1,636,752



1,637



20,755



-



22,392Fair value of shares issued for exercise of warrants


-



-


5,803,593



5,804



579,555



-



585,359Beneficial conversion features of convertible notes


-



-


-



-



1,021,351



-



1,021,351Fair value of convertible promissory note repricing


-



-


-



-



174,706



-



174,706Fair value of shares issued for convertible promissory note repricing


-



-


416,666



417



78,750



-



79,167Fair value of warrants issued to convertible promissory note holder


-



-


-



-



12,160



-



12,160Fair value of warrants issued for accrued interest


-



-


-



-



29,626



-



29,626Fair value of warrants issued for services


-



-


-



-



57,100



-



57,100Fari value of warrants issued for interest


-



-


-



-



36,401



-



36,401Fair value of shares issued in connection with the issuance of notes payable


-



-


980,000



980



154,727



-



155,707Reclassification of derivative liability to equity


-



-


-



-



72,462



-



72,462Fair value of derivative liability


-



-


-



-



(742,387
)


-



(742,387
)Fair value of options issued for services


-



-


-



-



177,472



-



177,472Fair value of options issued granted


-



-


-



-



1,025,210



-



1,025,210Fair value of options and warrants modifications


-



-


-



-



725,563



-



725,563Net loss


-



-


-



-



-



(11,127,218
)


(11,127,218
)Ending balance, December 31, 2010


50,000


$
50


200,342,955


$
200,343


$
101,097,359


$
(110,943,647
)

$
(9,645,895
)





See Notes to Consolidated Financial Statements.




F-5
 
  SPARE BACKUP, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Years EndedDecember 31,2010


2009Cash flows from operating activities:Net loss

$
(11,127,218
)

$
(10,571,914
)Adjustments to reconcile net loss to net cash used inoperating activities:Change in fair value of derivative liabilities


(446,027
)


(179,689
)Fair value of options and warrants issued to employees


1,025,210



1,004,120Fair value of options and warrants issued to consultants


234,572



237,277Fair value of option and warrant modifications


725,563



1,995Fair value of warrants issued to convertible promissory note holder


12,160



-Fair value of warrants issued to note holder


36,401



-Fair value of warrants issued for accrued interest


29,626



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


1,595,971



295,148Fair value of common stock issued in connection with convertiblepromissory notes modifications


79,167



-Fair value of convertible promissory notes modifications


174,706



-Fair value of beneficial conversion features modifications


-



1,068,707Fair value of common stock issued in connection with note payable issuance


155,707



-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


(555
)


-Depreciation


281,615



798,203Amortization of debt discount


1,142,697



1,143,338Amortization of prepaid expenses


798,376



1,057,053Amortization of deferred financing costs


110,456



301,326Gain from debt settlement


(442,250
)


(940,106
)Changes in operating assets and liabilities:Accounts receivable


25,835



81,018Prepaid expense and other current assets


(842,687
)


(1,163,860
)Accounts payable, accrued expense and accrued payroll taxes


2,061,320



2,074,098Deferred revenues


(518,627
)


380,691Accrued interest on convertible promissory notes


279,923



366,356Net cash used in operating activities


(4,588,059
)


(4,031,295
)Cash flows used in investing activities:Capital expenditures


(58,318
)


(292,640
)Net cash used in investing activities


(58,318
)


(292,640
)Cash flows from financing activities:Proceeds from issuance of convertible promissory notes


197,500



1,804,000Proceeds from issuance of notes payable


1,310,500



-Repayment of notes payable


(418,000
)Net proceeds from issuance of common stock for cash


2,864,794



2,507,500Cash overdraft


83,832



43,489Proceeds from exercise of stock options


22,392



-Proceeds from exercise of warrants


585,359



-Principle repayments of convertible promissory notes


-



(50,000
)Payment of deferred financing costs


-



-Net cash provided by financing activities


4,646,377



4,304,989Net decrease in cash


-



(18,946
)Cash, beginning of period


-



18,946Cash, end of period

$
-


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

$
-


$
-Cash paid for income taxes

$
-


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

$
-


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

$
1,907,351


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

$
1,021,351


$
1,130,378Conversion of convertible promissory notes and accrued interestinto shares of common stock

$
2,061,365


$
1,336,340Fair value of shares of common stock issued for payment ofaccrued interest

$
302,624


$
287,525Fair value of derivative liability

$
742,387


$
-Fair value of common stock issued for debt issuance costs

$
-


$
44,000Fair value of of warrants issued for debt issuance costs

$
-


$
174,495


See Notes to Consolidated Financial Statements.




F-6




SPARE BACKUP, INC. AND SUBSIDIARY
 NOTES TO 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 accompanying consolidated financial statements have been prepared on a going concern basis. The Company has incurred net losses of approximately $11 million during the year ended December 31, 2010. The Company's ability to continue as a going concern is dependent upon its ability to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due, and to generate profitable operations in the future. Management plans to continue to provide for its capital requirements by issuing additional equity securities and debt. The outcome of these matters cannot be predicted at this time and there are no assurances that if achieved, the Company will have sufficient funds to execute its business plan or generate positive operating results.
 
 These matters, among others, raise substantial doubt about the ability of the Company to continue as a going concern. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.
 
 The accompanying consolidated financial statements include the accounts of Spare Backup and its wholly-owned subsidiary. All material inter-company balances and transactions have been eliminated in consolidation.
 
 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Use of Estimates
 
 The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management include, but are not limited to share-based payments and useful life of property and equipment. Actual results will differ from these estimates.
 
 Cash and Cash Equivalents
 
 The Company considers all highly liquid temporary cash investments with an original maturity of three months or less when purchased, to be cash equivalents.
 
 Concentration of Credit Risks
 
 The Company is subject to concentrations of credit risk primarily from cash and cash equivalents.
 
 The Company’s cash and cash equivalents accounts are held at financial institutions and are insured by the Federal Deposit Insurance Corporation, or the FDIC, up to $250,000. During the year ended December 31, 2010, the Company did not exceed the FDIC insurance limit.
 
 The Company's accounts receivable are due from a few customers, of which are located in the Unites States and United Kingdom. At December 31, 2010, two of the Company’s customers accounted for 24% and 72% of its accounts receivable. One of the Company’s customers accounted for 98% of its accounts receivables at December 31, 2009.
 
 Accounts Receivable
 
 The Company has a policy of reserving for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the bad debt expense after all means of collection have been exhausted and the potential for recovery is considered remote.  Management determined that an allowance of $65,000 and $0 was necessary at December 31, 2010 and 2009, respectively.
 
 F-7
 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 December 31, 2010 and 2009 amounted to $102,500 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 70% of its revenues during the year ending December 31, 2010. One of the Company’s customers accounted for 89% of the Company’s revenue during the year ending December 31, 2009.
 
 Product Concentration
 
 The Company offers subscriptions to online and software backup products to assist individuals, small businesses and home business users.
 
 Fair Value of Financial Instruments
 
 Effective January 1, 2008, the Company adopted FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results, but did expand certain disclosures.
 
 ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
 
 Level 1:
Observable inputs such as quoted market prices in active markets for identical assets or liabilitiesLevel 2:
Observable market-based inputs or unobservable inputs that are corroborated by market dataLevel 3:
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
 
 F-8
 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 December 31, 2010 and 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 December 31, 2010 and 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 December 31, 2010. Instead, such amounts are included in the statement of operations under the caption "Research and development".
 
 Foreign Currency Transactions
 
 The Company periodically engages in transactions in countries outside the United States which may result in foreign currency transaction gains or losses. Gains and losses resulting from foreign currency transactions are recognized as foreign currency gain (loss) in the statement of operations of the period incurred.
 
 Income Taxes
 
 Income taxes are accounted for in accordance with the provisions of FASB ASC-740 – Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized, but no less than quarterly.
 
 Share-based Payments
 
 The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation(“ASC 718”) for all the stock awards granted after December 31, 2005, and granted prior to but not yet vested as of December 31, 2005. Under the fair value recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. See Note 7 for further information regarding the Company’s stock-based compensation assumptions and expenses. The Company elected to use the modified prospective transition method as permitted by ASC 718.
 
 Effective January 1, 2006, the Company changed its method of attributing the value of stock-based compensation to expense from the accelerated multiple-option approach to the straight-line single option method. Compensation expense for all share-based payment awards granted prior to January 1, 2006 will continue to be recognized using the accelerated multiple-option approach while compensation expense for all share-based payment awards granted on or subsequent to January 1, 2006 has been and will continue to be recognized using the straight-line single-option approach.
 
 F-9
 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.
 
 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 110,599,038 and 108,113,194 at December 31, 2010 and 2009, respectively. Accordingly, these common share equivalents at December 31, 2010 and 2009 are excluded from the loss per share computation for that period due to their antidilutive effect.
 
 F-10
 The following sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2010 and 2009:
 
 For the years endedDecember 31,2010


2009Numerator:Net loss attributable to common stock

$
(11,127,218
)

$
(10,571,914
)Denominator:Denominator for basic earnings per share-Weighted average shares outstanding


164,011,500



117,190,142Denominator for diluted earnings per share-Weighted average shares outstanding


164,011,500



117,190,142Basic earnings per share

$
(0.07
)

$
(0.09
)Diluted earnings per share

$
(0.07
)

$
(0.09
)
 
 NOTE 3 - PREPAID EXPENSES
 
 Prepaid expenses generally is compromised of  prepaid insurance. On December 31, 2010 and 2009, prepaid expenses amounted to $58,798 and $17,487, respectively.
 
 NOTE 4 - PROPERTY AND EQUIPMENT
 
 Property and equipment consisted of the following:
 
 December 31,


December 31,Estimated life

2010


2009Computer and office equipment
3 to 5 years

$
861,946


$
2,710,979Leasehold improvements
5 years


202,298



202,2981,064,244



2,913,277Less: Accumulated depreciation



(758,902
)


(2,384,638
)$
305,342


$
528,639
 
 During the year ended December 31, 2010, the Company wrote-off $1,907,351 of fully depreciated computer equipment. Depreciation expense amounted to $281,615 and $798,203 during the years ended December 31, 2010 and 2009, respectively.
 
 NOTE 5 - OTHER ASSETS
 
 Other assets generally consists of deferred financing costs related to the issuance of convertible promissory notes and is amortized on the terms of such notes. Amortization of other assets- deferred financing costs amounted to $110,456 and $301,326 during the years ended December 31, 2010 and 2009, respectively and is included in interest expense.
 
 F-11
 NOTE 6 - CONVERTIBLE PROMISSORY NOTES-CURRENT
 
 Convertible promissory notes consist of the following as of:
 
 December 31,


December 31,2010


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

June 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 $0.05 to $0.25

$
1,836,272


$
3,373,000Less: unamortized discount


(365
)


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

$
1,835,907


$
3,276,135
 
 During 2009, the Company classified $873,000 8% convertible promissory notes from long-term to short-term, along with the debt discount of $380,063.
 
 During the year ended December 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 recognized a $174,706 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 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 year ended December 31, 2010, the Company issued 10,012,308 shares of common stock in connection with the conversion of 8% convertible promissory notes with an aggregate principal of $1,780,228 and accrued interest of $71,655. The fair value of such shares issued amounted to $1,851,883, or $0.18 per share.
 
 During 2010, the Company issued $147,500 of 8% convertible promissory notes.
 
 December 31,


December 31,2010


200910% Convertible promissory notes, bearing interest at 10% per annum, maturing between August 2008 and October 2010. Interest payable commencing the quarter ended September 30, 2008, payable within thirty (30) days of the end of the quarter. Interest may be paid in cash or common stock at the option of the Company. Interest paid in common stock will be calculated at the volume weighted average price for the common stock for the ten (10) trading days preceding the interest payment date. The promissory notes are convertible at any time at the option of the holder, into shares of common stock at a rate ranging from $0.16 to $0.25

$
420,963


$
581,000Less: unamortized discount


(-
)


(-
)Convertible promissory notes- short-term

$
420,963


$
581,000
 
 F-12
 During 2009, the Company issued 1,464,298 shares of common stock in connection with the conversion of 10% convertible promissory notes with an aggregate principal of $270,000. The fair value of such shares issued amounted to approximately $270,000, or an average of $0.18.
 
 During 2010, the Company issued 1,256,482 shares of common stock in connection with the conversion of 10% convertible promissory notes with an aggregate principal of $210,037. The fair value of such shares issued amount to $210,037, or an average of $0.17 per share.
 
 During 2010, the Company issued $50,000 of 10% convertible promissory notes. In connection with the issuance of these convertible promissory notes, upon maturity or conversion, the Company shall issue 250,000 warrants at an exercise price of $0.12. The warrants expire three years from grant date. The Company recognized a debt discount of $17,175 in connection of the issuance of 10% convertible promissory notes.
 
 At December 31, 2010Principal- 8% convertible promissory notes past due

$
1,688,772Principal- 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 years ended December 31, 2010 and 2009, respectively, the beneficial conversion feature amounted to $1,021,351 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 $1.1 million and $1.1 million for the years ended December 31, 2010 and 2009, respectively, and is included in interest expense.
 
 NOTE 7 – NOTES PAYABLE
 
 During the year ended December 31, 2010, the Company issued $1,310,500 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 $155,707, which was allocated to interest expense. At December 31, 2010, the Company has repaid $418,000.
 
 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.
 
 F-13
 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 2009, the Company wrote off $40,609 respectively of the derivative liability as a result of the conversion of a certain 10% convertible promissory notes. During 2010, the Company wrote off $72,462 of the derivative liability as a result of the exercise of certain warrants associated with the 10% convertible promissory notes
 
 During 2010, 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 December 31, 2010.  As a result, the Company recorded a derivative liability aggregating $742,563, and was offset against the additional-paid in capital.
 
 The fair value of the derivative instruments were based on the following assumptions:
 
 Exercise price:

$
0.065 - $0.20Market price at date of grant:

$
0.09 - $0.165Expected volatility:


55.77% - 79.13
%Term:

> 1 year – 5 yearsRisk-free interest rate:


0.11% - 1.51
%
 
 The variation in fair value of the derivative liabilities between measurement dates amounted to a decrease of $446,027 and a decrease of $179,689 during years ended December 31, 2010 and 2009, respectively. The decrease in fair value of the derivative liabilities has been recognized as other income/expense.
 
 NOTE 9 - CONVERTIBLE PROMISSORY NOTES - LONG TERM
 
 Convertible promissory notes consist of the following as of:
 
 December 31,


December 31,2010


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

$
-


$
96,000Less: unamortized discount


(-
)


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

$
-


$
71,154
 
 During 2009, the Company issued 2,764,160 shares in connection with the conversion of 8% convertible promissory notes with an aggregate principal of $425,000. The fair value of such shares issued amount to approximately $425,000, or $0.15 per share.
 
 During 2009, the Company repaid $50,000 to two noteholders of the 8% convertible promissory notes.
 
 F-14
 During 2009, the Company classified $873,000 8% convertible promissory note from long-term to short-term along with the debt discount of $380,063.
 
 During 2010, the Company classified $96,000 8% convertible promissory note from long-term to short-term along with the debt discount of $24,846.
 
 December 31,


December 31,2010


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

$
-


$
-Less: unamortized discount


(-
)


(-
)Convertible promissory notes- long-term

$
-


$
-
 
 During 2009, the Company issued $610,000 of 10% convertible promissory notes. In connection with the issuance of these convertible promissory notes, upon maturity or conversion, the Company shall issue 3,812,500 warrants at an exercise price of $0.20. The warrants expire two years from grant date. The Company recognized a debt discount of $610,000 in connection of the issuance of 10% convertible promissory notes.
 
 During 2009, the Company issued 3,812,500 shares in connection with the conversion of 10% convertible promissory notes with an aggregate principal of $610,000. The fair value of such shares issued amount to approximately $610,000, or $0.16 per share.
 
 During 2009, the Company classified $318,458 of 8% convertible promissory note- long term debt discount to 10% convertible promissory note- long term debt discount.
 
 During 2009, the Company recognized an expense of approximately $1,069,000 due to the modification of the 8% and 10% convertible promissory notes beneficial conversion features, which also increased additional-paid in capital as
 
 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 years ended December 31, 2010 and 2009, respectively, the beneficial conversion feature amounted to $0 and $1,130,378. 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 $26,000 during the years ended December 31, 2010 and 2009, respectively, and is included in interest expense.
 
 NOTE 10 - STOCKHOLDERS' DEFICIT
 
 On August 15, 2008, the Company increased the authorized common shares from 150,000,000 to 300,000,000 shares of common stock at $0.001 par value and approval for a 1-for-10 reverse stock split of its issued and outstanding common stock.
 
 The Company filed a Certificate of Amendment to its certificate of incorporation increasing the number of authorized shares of its common stock to 300,000,000 shares. Additionally, the stockholders granted the Company's Board of Directors the authority to decide within six months from the date of the special meeting to implement a reverse stock split, set the timing for such split, and select a ratio for the reverse split up to a maximum of a one for ten (1:10). The Company did not implement a reverse stock split during 2009.
 
 F-15
 The issuance of common stock during the year ended December 31, 2009 is summarized in the table below:
 
 Number of

Sharesof

Common Stock


Fair Value at

Issuance


Fair Value at

Issuance

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


1,748,372


$
287,525


$
0.16Services performed- Investor Relations


600,000



134,000



0.22 - 0.24Services performed- Legal


771,428



126,000



0.14 - 0.18Services performed- Payroll


60,000



10,800



0.18Services performed- Project management expense


190,411



24,348



0.13Conversion of 8% convertible promissory notes


2,764,160



442,266



0.16Conversion of 10% convertible promissory notes, includes write off of derivative liability of $21,665 which increase additional paid-in capital


5,362,962



894,074



0.17Finder’s fee for 8% convertible promissory notes


246,875



44,000



0.17Private placement, net of finder’s fee of $113,000


17,098,124



2,507,500



0.11 – 0.1728,842,332


$
4,470,513
 
 The issuance of common stock during the year ended December 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


2,464,567


$
302,624


$
0.12Services performed- Investor relations


2,870,000



445,100



0.0925 - 0.165Services performed- Legal expense


175,398



28,941



0.165Services performed- Project management expense


360,678



48,277



0.10 - 0.21Services performed- Business development


1,750,000



270,528



0.106 - 0.20Services performed- Strategy consulting


25,000



4,125



0.165Services performed- Payroll


300,000



39,000



0.13Services performed- Marketing


6,000,000



760,000



0.12 – 0.13Exercised stock options


1,636,752



22,392



0.01Exercised warrants


5,803,593



585,359



0.10Conversion of 8% convertible promissory notes


10,012,308



1,851,328



.012 – 0.16Conversion of 10% convertible promissory notes


1,256,482



210,037



0.17Private placement, net of finder’s fee of $50,980


32,155,449



2,864,794



0.05 - 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



176,700



0.16 - 0.2266,306,893


$
7,708,372
 
 NOTE 11 - STOCK OPTIONS AND WARRANTS
 
 Warrants
 
 During 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. The Company valued these warrants utilizing the Black-Scholes options pricing model at $0.06 per share or $59,611 and was recorded as an increase in additional-paid in capital and an increase in stock-based consulting expense.
 
 During 2009, in connection with the private placements the Company issued warrants to purchase 15,767,708 shares of common stock at an exercise price range of $0.18 to 0.20 per share. The warrants expire between 2011 and 2012.  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.
 
 F-16
 During 2009, in connection with the conversion of 8% and 10% convertible promissory notes, the Company issued warrants to purchase 5,531,250 shares of common stock at an exercise price of $0.20 per share. The warrants expire two years from the date of grant. In addition, the Company issued warrants to purchase 1,145,500 shares of common stock at an exercise price range of $0.18 to $0.20 as finder’s fees. The warrants expire between three and five years from the date of grant.  These warrants were valued using utilizing the Black-Scholes options pricing model at an average of $0.15 or $174,495 and was recorded as an increase in additional-paid in capital and an increase in other assets.
 
 During 2009, in connection with the conversion of 8% and 10% convertible promissory notes, the Company issued warrants to purchase 194,074 shares of common stock at an exercise price range of $0.16 to $0.20 per share for accrued interest. The warrants expire in 2011. The warrants were valued at $14,944 using the Black-Scholes option pricing model.
 
 During 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 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 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 $235,943as an increase in additional paid-in capital and an increase in consulting expense.
 
 During 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 2010, in connection with the private placements the Company issued warrants to purchase 19,136,517 shares of common stock at an exercise price range of $0.065 to $0.20 per share. The warrants expire three to five years from the date of grant.
 
 During 2010, in connection with the conversion of 8% convertible promissory notes issued warrants to purchase 5,249,998 shares of common stock at an exercise price range of $0.16 to $0.20 per share. The warrants expire in 2012.
 
 During 2010, in connection with the conversion of 8% convertible promissory notes, the Company issued warrants to purchase 513,397 shares of common stock at an exercise price range of $0.16 to $0.20 per shares for accrued interest. The warrants expire in 2012. The warrants were valued at $29,626 using the Black-Scholes option pricing model.
 
 During 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 2010, the Company issued warrants to purchase 750,000 shares of common stock to two short-term note holders. The warrants  have an exercise price ranging from $0.10 to $0.14 and expire five year from grant. The warrants were valued at $36,401 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:
 
 2010


2009Exercise price:

$
0.10 - $0.32


$
0.20Market price at date of grant:

$
0.135 $0.225


$
0.135 - $0.23Expected volatility:


64.25% - 168.64
%


104% - 119
%Term:

2 – 9 years


2 – 5 yearsRisk-free interest rate:


0.34% - 3.59
%


0.81% - 2.53
%
 
 F-17
 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 in the year 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 year ended December 31, 2009 and 2010, total stock-based legal expense charged to operations amounted to $110,833 and $22,167, respectively. At December 31, 2010, there was no unrecognized legal expense related to non-vested option-based compensation arrangements.
 
 In July 2009, the Company issued in aggregate 500,000 three-year stock options to purchase common stock for consulting services with a vesting period of 6 months. The Company valued these options utilizing the Black-Scholes options pricing model at $0.22 per share or $53,200. For the year ended December 31, 2009 and 2010, total stock-based consulting expense charged to operations amounted to $44,333 and $8,667, respectively. At December 31, 2010, there was no unrecognized consulting expense related to non-vested option-based compensation arrangements.
 
 During 2009, the Company recognized a modification expense of $1,995 for the reduction of the exercise price of one of the option holders.
 
 For the year ended December 31, 2009, the Company granted 9,450,000 five-year stock options to purchase common stock to employees at exercise prices ranging from $0.15 to $0.21 per share. For the year ended December 31, 2009, total stock-based compensation charged to operations for option-based arrangements amounted to $1,004,120.
 
 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 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 year ended December 31, 2010, the Company granted 6,756,252 ranging from three to five-year stock options to purchase common stock to employees at exercise prices ranging from $0.01 to $0.20 per share. For the year ended December 31 2010, total stock-based compensation charged to operations for option-based arrangements amounted to $1,025,210. At December 31, 2010, there was $285,494 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-18
 Stock option activity for the years ended December 31, 2010 and 2009, respectively is summarized as follows:
 
 Options


Weighted

Average

Exercise Price


Weighted

Average

Contractual Terms


Aggregate

Intrinsic ValueOutstanding at January 1, 2009


19,041,930


$
0.29



2.74Granted


10,900,000



0.19Exercised


-



-Expired


(1,437,508
)


0.31Outstanding at December 31, 2009


28,504,422



0.25



2.60


$
241,011Granted


7,427,680



0.09Exercised


(1,636,752
)


0.02Expired


(7,128,853
)


0.21Outstanding at December 31, 2010


27,166,497


$
0.18



1.45


$
269,711Exercisable and vested at December 31, 2010


25,061,959


$
0.18



3.79


$
12,447
 
 
 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:
 
 December 31, 2010


December 31, 2009Exercise Price

$
0.01 - $ 0.20


$
0.15- $ 0.21Market price at date of grant

$
0.09 - $ 0.225


$
0.13 - $ 0.225Expected volatility


73.1% - 100.4
%


68% - 199
%Risk-free interest rate


0.51% - 2.47
%


1.34% - 3.87
%
 
 NOTE 12: INCOME TAXES
 
 A reconciliation of the Company’s effective tax rate to the statutory federal rate is as follows at December 31:
 
 2010


2009Tax at US statutory rate


35.0
%


35.0
%State tax rate, net of federal benefits


4.0



4.0Permanent differences


(8.0
)


(8.0
)Change in valuation allowance


(31.0
)


(31.0
)Effective tax rate


0.0
%


0.0
%
 
 Management believes it is more likely than not that it will be able to offset its deferred tax liability against its net operating losses.
 
 The components of the deferred tax assets and liabilities are as follows:
 
 2009


2009Deferred tax assets:Net operating loss carryforward

$
24,700,000


$
21,300,000Options issued as compensation


1,800,000



1,400,00Less: valuation allowance


(26,500,000
)


(22,700,000
)Net deferred tax assets

$
-


$
-
 
 At December 31, 2010 the Company had estimated tax net operating loss carryforwards of approximately $63.4 million, which expire through its tax year ending in 2029.
 
 F-19
 
 NOTE 13 - 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.
 Employment Contract
 
 The Company entered into an employment agreement with its Chief Executive Officer which expires in December 2011 and is renewable for additional 3-year term. The employment agreement provides for an annual base salary of $310,000 with a 10% increase in his base salary annually. The Company has the obligation to pay the Chief Executive Officer's compensation through December 31, 2011 in the event 1) it terminates the employment without cause, 2) of the death of the Chief Executive Officer, and 3) of the consummation of a merger or disposition of substantially all assets of the Company.
 
 Operating Leases
 
 The Company entered into a new lease effective November 2006. The monthly base rent amounts to $16,141 per month, reduced to $9,809 in July 2010 and matures in December 2011.
 
 Future annual minimum payments, net of sublease income, required under operating lease obligations at December 31, 2010 are as follows:
 
 Future Minimum

Lease Payments2011

$
117,705
 
 
 NOTE 14 - RELATED PARTY TRANSACTIONS
 
 The Company made rental payments for property owned by the Chief Executive Officer of the Company during the years ended December 31, 2010 and 2009 amounting $15,000 and $15,000, respectively. The rental property was used for temporary employee housing during such periods.
 
 NOTE 15 - ACCRUED PAYROLL TAXES
 
 As of December 31, 2010, the Company recorded a liability related to unpaid payroll taxes for the period from May 16, 2008 to December 31, 2010 for $3,203,189, of which, $707,000 relates to accrued interest and penalty.
 
 NOTE 16 - SEGMENTS
 
 During the years ended December 31, 2010 and 2009, the Company operated in one business segment. The percentages of sales by geographic region for the years ended December 31, 2010 and 2009 were approximately:
 
 2010


2009United States


25
%


11
%Europe


75
%


89
%
 
 NOTE 17 - SUBSEQUENT EVENTS


During January 2011, the Company issued 5,700,000 shares of our common stock for the conversion of certain short-term loans with principals aggregating $422,500.
 
 During January 2011, the Company issued 500,000 shares of our common stock for interest related to the issuance of a short-term loan valued at $44,000.
 
 Between January and March 2011, the Company issued 818,988 shares of common stock for the conversion of certain 8% short-term convertible promissory notes with a principal of $48,500 and interest of $4,142.
 
 Between January and March 2011, the Company issued 13,180,973 shares of common stock valued at $660,049 pursuant to a private placement. In connection with the issuance of shares, the Company also issued warrants to purchase 1,090,000 shares of common stock at an exercise price of $0.09.