Bakbone Software (BKBO) 10-Q 2010 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

Commission file number 000-12230

BAKBONE SOFTWARE INCORPORATED

(Exact name of Registrant as specified in its charter)

Canada	Not applicable
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
9540 Towne Centre Drive, Suite 100 San Diego, California	92121
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (858) 450-9009

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 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 a check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (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

As of August 7, 2009 there were approximately 77,641,824 shares of the registrant’s common stock outstanding.

BAKBONE SOFTWARE INCORPORATED

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009

PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of June 30, 2009 (unaudited) and March 31, 2009	3
	Unaudited Consolidated Statements of Operations for the three months ended June 30, 2009 and 2008 (restated)	4
	Unaudited Consolidated Statements of Cash Flows for the three months ended June 30, 2009 and 2008 (restated)	5
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33
Item 4T.	Controls and Procedures	34
PART II. OTHER INFORMATION		35
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Submission of Matters to a Vote of Security Holders	44
Item 5.	Other Information	44
Item 6.	Exhibits	45
	Signatures	46
	Exhibit 2.1
	Exhibit 10.1
	Exhibit 10.2
	Exhibit 10.3
	Exhibit 10.4
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32.1
	Exhibit 32.2

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BAKBONE SOFTWARE INCORPORATED

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	June 30, 2009			March 31, 2009
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	7,427		$	8,398
Restricted cash		358			264
Accounts receivable, less allowances for doubtful accounts and sales returns of $169 at June 30, 2009 and $218 at March 31, 2009		8,622			9,646
Prepaid expenses		884			873
Other assets		499			286
Total current assets		17,790			19,467
Property and equipment, at cost		7,594			7,076
Less accumulated depreciation`		(4,803	)		(4,363	)
Property and equipment, net		2,791			2,713
Intangible assets, net		8,458			824
Trademarks		400			—
Goodwill		14,007			7,615
Other assets		1,011			939
Total assets	$	44,457		$	31,558
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	2,258		$	2,291
Accrued liabilities		8,221			7,312
Current portion of acquisition consideration payable		2,252			—
Current portion of deferred revenue		45,397			44,081
Total current liabilities		58,128			53,684
Deferred revenue, excluding current portion		47,208			47,684
Acquisition consideration payable, excluding current portion		4,328			—
Other liabilities		1,278			1,337
Total liabilities		110,942			102,705
Commitments and contingencies (Note 6)
Shareholders’ deficit:
Series A convertible preferred stock, no par value, 22,000 shares authorized at June 30, 2009, and March 31, 2009, 18,000 shares issued and outstanding at June 30, 2009 and March 31, 2009, liquidation preference of $23,356 and $21,607, respectively		11,160			11,160
Share capital, no par value, unlimited shares authorized, 77,642 and 64,633 shares issued and outstanding at June 30, 2009 and March 31, 2009, respectively		159,467			152,423
Employee benefit trust		(9	)		(11	)
Accumulated deficit		(231,966	)		(232,657	)
Accumulated other comprehensive loss		(5,137	)		(2,062	)
Total shareholders’ deficit		(66,485	)		(71,147	)
Total liabilities and shareholders’ deficit	$	44,457		$	31,558

See accompanying notes to consolidated financial statements.

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BAKBONE SOFTWARE INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(Unaudited)

	Three months ended June 30,
	2009			2008
				As Restated (see note 2)
Revenues:
License and service	$	15,190		$	13,671
Other		1,500			—
		16,690			13,671
Cost of revenues		1,472			1,832
Gross profit		15,218			11,839
Operating expenses:
Sales and marketing		6,632			7,578
Research and development		3,135			3,157
General and administrative		4,352			3,778
Total operating expenses		14,119			14,513
Operating income (loss)		1,099			(2,674	)
Interest income		3			37
Interest expense		(141	)		(37	)
Foreign exchange loss, net		(246	)		(499	)
Other income (expense), net		1			(3	)
Income (loss) before income taxes		716			(3,176	)
Provision for income taxes		25			86
Net income (loss)	$	691		$	(3,262	)
Net income (loss) per common share:
Basic	$	0.01		$	(0.05	)
Diluted	$	0.01		$	(0.05	)
Weighted-average common shares outstanding:
Basic		76,747			64,606
Diluted		94,819			64,606

See accompanying notes to consolidated financial statements.

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BAKBONE SOFTWARE INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Three months ended June 30,
	2009			2008
				As Restated (see note 2)
Cash flows from operating activities:
Net income (loss)	$	691		$	(3,262	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization		534			407
Loss on disposal of capital assets		6			11
Stock-based compensation		12			107
Operating expenses funded by financing arrangement		103			—
Non-cash interest expense		125			—
Changes in assets and liabilities, net of effects from acquisition of ColdSpark, Inc:
Accounts receivable		1,500			2,950
Prepaid expenses and other assets		(18	)		898
Accounts payable		(82	)		(21	)
Accrued and other liabilities		329			87
Deferred revenue		(3,290	)		(178	)
Net cash (used in) provided by operating activities		(90	)		999
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired		(1,014	)		—
Capital expenditures		(67	)		(634	)
Release of restricted cash		—			227
Net cash used in investing activities		(1,081	)		(407	)
Cash flows from financing activities:
Payments on capital lease obligations		(74	)		(94	)
Payments on long term debt obligations		(226	)		(112	)
Net cash used in financing activities		(300	)		(206	)
Effect of exchange rate changes on cash and cash equivalents		500			(286	)
Net (decrease) increase in cash and cash equivalents		(971	)		100
Cash and cash equivalents, beginning of period		8,398			9,496
Cash and cash equivalents, end of period	$	7,427		$	9,596
Cash paid during the period for:
Interest	$	13		$	24
Income taxes		42			65
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Equipment acquired under capital leases	$	12		$	90
Capital expenditures included in accounts payable at end of period		74			79

See accompanying notes to consolidated financial statements.

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BAKBONE SOFTWARE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. The Company

BakBone Software Incorporated (“BakBone” or the “Company”), a Canadian federal company, is a leading provider of data protection, retention and availability technologies that reduce storage management complexity. During the first quarter of fiscal 2010, the Company acquired ColdSpark, Inc, (“ColdSpark”) a Colorado-based company and provider of enterprise email infrastructure solutions and platforms. Effective May 2009, the Company commenced the sales and marketing efforts surrounding ColdSpark’s portfolio of solutions. These solutions will allow the Company to provide enterprise email and infrastructure solutions and platforms, which help customers manage and control their email and messaging environment based on pre-defined policies.

Effective with the ColdSpark acquisition, BakBone operates two reporting segments: (i) Storage Management, which sells the NetVault products and solutions; and (ii) Message Management, which sells ColdSpark’s SparkEngine, MailFusion and Compliance Catalyst families of products and solutions. The Company has operations in three primary geographic regions: North America, Asia-Pacific, and Europe, Middle East and Africa, or EMEA, and conducts commercial operations primarily through four of its respective wholly-owned subsidiaries: BakBone Software, Inc., BakBone Software KK, BakBone Software Ltd., and ColdSpark, Inc.

2. Basis of Presentation

The accompanying consolidated balance sheet at June 30, 2009, the consolidated statements of operations and cash flows for the three months ended June 2009 and 2008, have been prepared by the Company and have not been audited. These financial statements should be read in conjunction with the financial statements and notes thereto for the fiscal year ended March 31, 2009 included in the Company’s Annual Report on Form 10-K.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, in accordance with the instructions to Form 10-Q and the guidance in Article 10 of Regulation S-X. Accordingly, since they are interim financial statements, the accompanying unaudited consolidated financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. The accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results of operations for the interim periods presented. Interim operating results are not necessarily indicative of operating results for the full year.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company operates and reports using a fiscal year end of March 31.

Significant Customers

As of June 30, 2009, the Company had accounts receivable balances from one customer representing 17% of consolidated accounts receivable. During the three months ended June 30, 2009, the Company had one customer that comprised 11% of consolidated revenues. As of and during the three months ended June 30, 2008, there were no customers representing 10% or more of the Company’s consolidated accounts receivables or consolidated revenues.

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Restatement of Fiscal 2009 Financial Information

As discussed in Note 13 of the Company’s fiscal 2009 Annual Report on Form 10-K, the Company restated its unaudited consolidated financial information for each of the previously reported interim periods of fiscal 2009 to correct errors in such consolidated financial statements and financial information. The Company does not believe that these adjustments are material to any of the restated fiscal 2009 periods.

Adoption of Recent Accounting Pronouncements

Effective April 1, 2009, the Company adopted Statement of Financial Accounting Standard No. 141 (revised 2007),Business Combinations(“SFAS 141R”). Under SFAS 141R, an acquiring entity is required to recognize all the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred; that restructuring costs generally be expensed in periods subsequent to the acquisition date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. During the three months ended June 30, 2009, the Company acquired ColdSpark and certain assets from Asempra (Assignment for the Benefit of Creditors), LLC (“Asempra”), see Note 4 for a description of these acquisitions.

Effective April 1, 2009, the Company adopted FASB Staff Position (FSP) No. 142-3,Determination of the Useful Life of Intangible Assets, (“FSP 142-3”), which amends the factors considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible assets under SFAS No. 142,Goodwill and Other Intangible Assets. FSP 142-3 amends paragraph 11(d) of SFAS No. 142 to require an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset. The adoption did not have a material impact on the Company’s results of operations or financial condition for the three months ended June 30, 2009.

Effective June 15, 2009, the Company adopted the provisions of Statement of Financial Accounting Standards No. 165,Subsequent Events(“SFAS 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of SFAS 165 did not impact the Company’s financial position or results of operations. The Company evaluated all events or transactions that occurred after the balance sheet date of June 30, 2009 through August 13, 2009, the date it issued these financial statements. During this period, the Company did not have any material recognizable or nonrecognizable subsequent events.

Effective June 15, 2009, the Company adopted the Financial Accounting Standards Board Position No. FAS 107-1,Interim Disclosures about Fair Value of Financial Instruments(“FAS 107-1”), which extends the disclosure requirements regarding the fair value of financial instruments under FAS 107,Disclosures about Fair Value of Financial Instruments,to interim financial statements of publicly traded companies. The adoption of FAS 107-1 did not have a material effect on the Company’s consolidated financial statements.

Other than the adoption of these accounting pronouncements, there have been no significant changes in the Company’s accounting policies during the three months ended June 30, 2009, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended March 31, 2009.

3. Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of

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contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by management include the allowance for doubtful accounts, the accounting for income taxes including the future realizability of our deferred tax assets, the accounting for business combinations, and the determination of the estimated useful life of our software for purposes of revenue recognition amortization. Estimates have been prepared on the basis of the most current and best available information and actual results could differ from those estimates.

Revenue Recognition

The Company recognizes software license revenue in accordance with American Institute of Certified Public Accountants, Statements of Position 97-2,Software Revenue Recognition(“SOP 97-2”) and Statement of Position 98-9,Modification of SOP97-2“Software Revenue Recognition” With Respect to Certain Transactions(SOP 98-9). The Company derives revenues from software licenses, maintenance services, and professional services from three distinct groups of customers: resellers, OEMs, and direct end users.

The Company commences recognizing revenue under these arrangements when all of the following are met:

• Persuasive Evidence of an Arrangement Exists.It is the Company’s practice to require a contract signed by both the partner and the Company and/or a customer-issued purchase order depending on the underlying facts and circumstances of the business relationship.

• Delivery Has Occurred. The Company delivers software by both physical and electronic means. Both means of delivery transfer title and risk to the customer. Physical delivery terms are generally FOB shipping point. For electronic delivery of the software, delivery is complete when the customer has been provided electronic access to the software. Certain of the Company’s arrangements contain customer acceptance provisions. Under these arrangements, revenue recognition commences once the acceptance provisions have been satisfied.

• The Vendor’s Fee is Fixed or Determinable. Fees are generally considered fixed and determinable when payment terms are within the Company’s standard credit terms.

• Collectability is Probable. Customers must meet collectability requirements pursuant to the Company’s credit policy. For contracts that do not meet the Company’s collectability criteria, fees earned are deferred initially and recognized in accordance with its revenue policy once payment is received from the customer.

The Company’s customers are not contractually permitted to return products, but the Company accepts returns under certain circumstances. The Company accounts for potential returns from its reseller and OEM customers in accordance with SFAS No. 48,Revenue Recognition When Right of Return Exists(“SFAS 48”). The Company uses historical returns experience with these customers to determine potential returns and to establish the appropriate sales returns allowance.

Sales incentives or other consideration given by the Company to its customers are accounted for in accordance with EITF Issue 01-9,Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products) (“EITF 01-9”). In accordance with EITF 01-9, sales incentives and other consideration that are considered adjustments of the selling price of the Company’s products, such as rebates, are generally reflected as reductions to revenue.

Storage Management Division

The Company licenses its software to its reseller customers under multiple-element arrangements involving a combination of software, post-contract support and/or professional services. Post-contract support includes rights to unspecified upgrades and enhancements and telephone support. Professional services include services

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related to implementation of the Company’s software as well as training. Software license arrangements with resellers include implicit platform transfer rights (“PTRs”), which allow end users to exchange an original product for a different product or to exchange an original product on one platform for the same product operating on a different platform. The new product and/or different platform is not specified in the arrangement nor is the period of time in which the customer has to exercise this right. As no contract period exists under these arrangements, software-related revenue is recognized ratably over the estimated economic useful life of the software product of four years.

The economic useful life of the software product is estimated to be four years based upon the Company’s version release and end of life data as well as Company practice with respect to supporting the product. The Company weighted the product useful life and its years of sustaining support following the end of life to determine the estimated economic useful life of the software product.

Maintenance renewal fees are recognized ratably over the arrangement period, which is typically one year. Professional services may also be sold separately and all fees generated from stand-alone sales of professional services are recognized when the service is complete.

The Company has multiple-element arrangements with OEM customers and one large direct customer under which, in addition to providing software licenses and maintenance services, the Company has a commitment to provide unspecified future software products. As vendor specific objective evidence of fair value cannot be determined for the unspecified future software products, all sales amounts procured under these arrangements are deferred and recognized ratably over the arrangement period.

Message Management Division

Effective with the acquisition of ColdSpark on May 13, 2009, the Company’s revenues include sales transactions of ColdSpark, which became a wholly-owned subsidiary of the Company on this date (see Note 4). The revenues generated by ColdSpark are primarily from the sale of software licenses and professional services to large enterprise users. Revenues also include support services to its customers. The Company follows the residual method of revenue recognition for product agreements that include one or more elements to be delivered at a future date and vendor specific objective evidence (“VSOE”) of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the contract fee is recognized when all revenue recognition criteria are satisfied. If evidence of the fair value of one or more undelivered elements does not exist, all revenue is deferred and recognized when delivery of those elements occurs or when fair value is established. When the only undelivered element for which we do not have a fair value is maintenance services, revenue for the entire arrangement is bundled and recognized ratably over the maintenance service period. VSOE of fair value for elements of an arrangement is based upon the Company’s normal pricing and discounting practices for those services when sold separately. The Company’s product agreements generally include customer acceptance provisions, and as such, revenue recognition does not commence until satisfaction of the customer acceptance criteria.

Revenues related to implementation, installation, and testing services are recognized as the services are performed or ratably over the term of the agreement based upon the agreement terms.

Business Combinations

The Company accounts for business combinations pursuant to Financial Accounting Standards Board Statement of Financial Accounting Standard No. 141 (revised 2007),Business Combinations(“SFAS 141R”). Under SFAS 141R, the Company is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions, especially at acquisition

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date with respect to intangible assets, estimated contingent consideration payments and pre-acquisition contingencies. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:

• future expected cash flows from product sales, support agreements, consulting contracts, other customer contracts, and acquired developed technologies and patents; and

• discount rates.

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Additionally, any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in our estimate of the bookings targets, will be recognized in earnings in the period of the estimated fair value change. A change in fair value of the acquisition-related contingent consideration could have a material effect on the statement of operations and financial position in the period of the change in estimate.

Deferred Revenue

Deferred revenue represents software license, maintenance contract and professional services bookings, net of recognized revenue amounts. A majority of the Company’s sales transactions are deferred and recognized over the applicable period, generally three to five years. The following table provides detail of the change in deferred revenue balances for three months ended June 30, 2009 (in thousands):

Deferred revenue balance at March 31, 2009	$	91,765
Current period bookings deferred into subsequent periods		10,707
Current period revenue from prior period bookings		(13,829	)
Foreign exchange impact		3,962
Deferred revenue balance at June 30, 2009	$	92,605

Comprehensive Loss

Comprehensive loss is the total of net income (loss) and all other non-owner changes in shareholders’ deficit. The Company’s comprehensive loss combines net income (loss) and foreign currency translation adjustment. Comprehensive loss for the three months ended June 30, 2009 and 2008 is as follows:

	Three months ended June 30,
	2009			2008
				As Restated (see note 2)
Net income (loss)	$	691		$	(3,262	)
Foreign currency translation adjustment		(3,075	)		2,177
Total comprehensive loss	$	(2,384	)	$	(1,085	)

The foreign currency translation adjustment each period represents the effect of the translation of assets and liabilities that are denominated in the functional currencies of foreign subsidiaries to the Company’s reporting currency. During the three months ended June 30, 2009, the foreign currency translation decrease of $3.1 million was related primarily to the translation of the Company’s assets and liabilities in its EMEA subsidiary as the U.S. dollar weakened against the British pound during the period. During the three months ended June 30, 2008, the period increase of $2.2 million related primarily to the translation of the Company’s deferred revenue balance and was primarily the result of the strengthening of the U.S dollar against the Japanese Yen.

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Net Income (Loss) Per Share

In accordance with SFAS No. 128,Earnings Per Share (“SFAS 128”), basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common shareholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed by dividing the net income (loss) attributable to common shareholders for the period by the weighted average number of common shares and potential common shares outstanding during the period, except where the effect of including potential common shares would be anti-dilutive.

The following table summarizes potential common shares that are not included in the denominator used in the diluted net income (loss) per share calculation because to do so would be anti-dilutive (in thousands):

	Three months ended June 30,
	2009	2008
Stock options	5,474	5,738
Restricted stock units	—	186
Warrants	2,145	3,325
Unallocated shares held in EBT	23	—
Series A convertible preferred stock	—	18,000
Total anti-dilutive instruments	7,642	27,249

Recent Accounting Pronouncements

In June 2009, FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (“SFAS 168”). SFAS 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of the SFAS 168 to have an impact on its financial position or results of operations.

From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.

4. Acquisitions

ColdSpark, Inc.

The Company acquired ColdSpark on May 13, 2009, by means of a merger of a wholly-owned subsidiary, such that ColdSpark became a wholly-owned subsidiary of the Company. The Company acquired ColdSpark, among other reasons, to expand and enhance its product portfolio and further advance its Universal Data Management strategy.

Pursuant to the merger agreement, at the closing, the Company made cash payments totaling $750,000 and issued 9,117,877 common shares for 100% of the equity shares outstanding of ColdSpark. In addition, the Company has agreed to make cash payments totaling up to $7,375,000 and to issue up to 9,051,903 common shares over a three year period from June 2010 to June 2012. The total acquisition date fair value of the consideration to be transferred is estimated at $12.85 million, which includes the initial cash payment of

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$750,000, the initial issuance of 9,117,877 of the Company’s common shares, the deferred cash payments of $7,375,000, and the deferred issuance of 9,051,903 of the Company’s common shares. The total acquisition date fair value of consideration transferred is estimated as follows:

(in thousands)
Cash payments to ColdSpark shareholders	$	7,253
Common share issuances to ColdSpark shareholders		5,595
Total acquisition date fair value	$	12,848

The Company estimated the fair value of the cash consideration by discounting the future cash payments based upon its after tax cost of debt. In accordance with SFAS 141R, a liability has been recognized for the estimated acquisition date fair value of the future cash payments. Any change in the fair value of the future cash payments will be recognized in earnings in the period the estimated fair value changes.

The Company estimated the fair value of the common share consideration using the closing share price on the acquisition date and reduced the calculated value for: (i) the limited marketability of the common shares issued and to be issued, as they are unregistered shares and subject to Rule 144; and (ii) the impact of the Company issuing the shares over a three year period of time rather than at the acquisition date. Any change in the fair value of the stock consideration will be recognized in earnings in the period the estimated fair value changes.

Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed were recognized and measured as of the acquisition date based on their estimated fair values as of May 13, 2009, the acquisition date. The excess of the acquisition date fair value of consideration transferred over estimated fair value of the net tangible assets and intangible assets was recorded as goodwill.

The following table summarizes the estimated fair values of the assets and liabilities assumed at the acquisition date:

(in thousands)
Cash and cash equivalents	$	58
Restricted cash		51
Accounts receivable		271
Prepaid expenses and other assets		270
Property and equipment		82
Intangible assets		6,210
Trademarks		400
Total identifiable assets acquired		7,342
Accounts payable and accrued liabilities		649
Other liabilities		69
Deferred revenue		168
Total liabilities assumed		886
Goodwill		6,392
Net assets acquired	$	12,848

Intangible Assets

Management engaged a third-party valuation firm to assist in the determination of the fair value of the intangible assets. In determining the fair value of the intangible assets the Company considered, among other factors, the best use of acquired assets, analyses of historical financial performance and estimates of future performance of ColdSpark’s products. The fair values of the identified intangible assets related to the existing technology, patents and trademarks were calculated using a market approach which relies on empirical market

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data from comparable intangible assets in determining the fair value of the intangible assets acquired. The fair value of the maintenance agreements was calculated using an income approach which relies on estimates and assumptions provided by the Company. The rates utilized to discount net cash flows to their present values were based on a weighted average cost of capital of 18.5%. This discount rate was determined after consideration of the rate of return on debt capital and equity that typical investors would require in an investment in companies similar in size and operating in similar markets as ColdSpark. The following table sets forth the components of identified intangible assets associated with the ColdSpark acquisition and their estimated useful lives:

(in thousands)	Useful Life	Fair Value
Existing technology	10 years	$	4,960
Patents	10 years		1,240
Maintenance agreements	6 months		10
Trademarks	indefinite		400
Total intangible assets acquired		$	6,610

In accordance with FSP 142-3, the Company determined the useful life of intangible assets based on the expected future cash flows associated with the respective asset. Existing technology is comprised of products that have reached technological feasibility and are part of ColdSpark’s product line. Patents are related to the design and development of ColdSpark’s products that can be leveraged to develop new technology and products and improve their existing products. Maintenance agreements represent the underlying relationships and agreements with ColdSpark’s installed customer base. Trademarks represent the fair value of the brand and name recognition associated with the marketing of ColdSpark’s products and services. Amortization expense for the intangible assets is included in cost of revenues.

Goodwill

Of the total estimated purchase price, approximately $6.4 million was allocated to goodwill. Goodwill is defined as the excess of the purchase price of the acquired business over the fair value of the underlying net tangible and intangible assets and represents the benefits the Company expects to experience from the synergies and additional business opportunities created by the acquisition. In accordance with SFAS No. 142, goodwill resulting from business is tested for impairment at least annually and more frequently if certain indicators are present. In the event the Company determines that the value of goodwill has become impaired, it will incur an accounting charge for the amount of the impairment during the fiscal quarter in which the determination is made. None of the goodwill is expected to be deductible for income tax purposes. The Company has assigned the $6.4 million in goodwill to its Message Management reporting segment.

Deferred Revenue

In connection with the purchase price allocation, the Company estimated the fair value of the service obligations assumed from ColdSpark as a consequence of the acquisition. The estimated fair value of the service obligations was determined using a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligation plus a normal profit margin. The sum of the costs and operating profit approximates, in theory, the amount that the Company would be required to pay a third party to assume the service obligations. The estimated costs to fulfill the service obligations were based on the historical direct costs related to ColdSpark’s service agreements with its customers. Profit associated with selling efforts was excluded because ColdSpark had concluded the selling efforts on the service contracts prior to the date of the Company’s acquisition. The estimated research and development costs associated with support contracts have not been included in the fair value determination, as these costs were not deemed to represent a legal obligation at the time of acquisition. The Company recorded $168,000 in deferred revenue to reflect the estimate of the fair value of ColdSpark’s service obligations assumed.

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Pre-Acquisition Contingencies

The Company has evaluated and continues to evaluate pre-acquisition contingencies related to ColdSpark that existed as of the acquisition date. If these pre-acquisition contingencies that existed as of the acquisition date become probable in nature and estimable during the remainder of the measurement period, amounts recorded for such matters will be adjusted in the financial statements during the measurement period and subsequent to the measurement period. The merger agreement provides for the Company to reduce the future cash payments and stock consideration by up to $1,625,000 for pre-acquisition contingencies that existed as of the acquisition date. If the Company determines there were pre-acquisition contingencies in excess of the $1,625,000 the amounts would be included in its results of operations.

Results of Operations

The amount of revenues and operating loss of ColdSpark included in the Company’s consolidated statement of operations from the acquisition date to the period ending June 30, 2009:

(in thousands)
Revenues	$	90
Operating loss	$	(656	)

Unaudited Pro Forma Financial Information

The following table presents the Company’s unaudited pro forma results (including ColdSpark) for the three months ended June 30, 2009 and 2008 as though the companies had been combined as of the beginning of each of the periods presented. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each period presented nor is it indicative of results of operations which may occur in the future. The unaudited pro forma results presented include amortization charges for intangible assets and eliminations of intercompany transactions.

	Three months ended June 30,
(in thousands)	2009		2008
Total revenues	$	16,860	$	13,958
Net income (loss)	$	264	$	(4,486	)
Basic net income (loss) per common share	$	0.00	$	(0.07	)
Diluted net income (loss) per common share	$	0.00	$	(0.07	)

The estimated acquisition date fair value of consideration transferred, assets acquired and the liabilities assumed for ColdSpark presented above represent the Company’s best estimates.

Certain Assets from Asempra (Assignment for the Benefit of Creditors), LLC

The Company acquired certain technology assets of Asempra on May 1, 2009. The Company acquired these assets, among other reasons, to enhance its market position in the windows application data protection market.

Pursuant to the asset purchase agreement, the Company made cash payments totaling $350,000 and issued 3,846,154 common shares for certain technology assets relating to Asempra’s products and lab office equipment. The total acquisition date fair value of the consideration transferred is $1.7 million. The total acquisition date fair value of consideration transferred is estimated as follows:

(in thousands)
Cash payments to seller	$	350
Common share issuances to seller		1,389
Total acquisition date fair value	$	1,739

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The Company estimated the fair value of the common share consideration using the closing share price on the acquisition date and reduced the calculated value for the limited marketability of the common shares issued as they are unregistered shares and subject to Rule 144.

Under the acquisition method of accounting, the identifiable assets acquired were recognized and measured as of the acquisition date based on their estimated fair values as of May 1, 2009, the acquisition date.

The following table summarizes the estimated fair values of the assets and liabilities assumed at the acquisition date:

(in thousands)
Intangible assets	$	1,632
Property and equipment		107
Total assets acquired	$	1,739

Intangible Assets

Management engaged a third-party valuation firm to assist in the determination of the fair value of the intangible assets. In determining the fair value of the intangible assets the Company considered, among other factors, the best use of acquired assets, analyses of historical financial performance and estimates of future performance of the acquired technology. The fair values of the identified intangible assets related to the existing technology and patents were calculated using a market approach which relies on empirical market data from comparable intangible assets in determining the fair value of the intangible assets acquired. The rates utilized to discount net cash flows to their present values were based on a weighted average cost of capital of 18.5%. This discount rate was determined after consideration of the rate of return on debt capital and equity that typical investors would require in an investment in companies similar in size and operating in similar markets as Asempra. The following table sets forth the components of identified intangible assets associated with the Asempra asset acquisition and their estimated useful lives:

(in thousands)	Useful Life	Fair Value
Existing technology	4 years	$	1,469
Patents	14 years		163
Total intangible assets acquired		$	1,632

In accordance with FSP 142-3, the Company determined the useful life of intangible assets based on the expected future cash flows associated with the respective asset. Amortization expense for the intangible assets is included in cost of revenues.

The estimated asset acquisition date fair value of consideration transferred and assets acquired for the Asempra assets presented above represent the Company’s best estimates.

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Supplemental cash flow disclosure for acquisitions

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition for ColdSpark:

Current assets	$	650
Property and equipment		82
Identifiable intangible assets		6,210
Trademarks		400
Goodwill		6,392
Total assets acquired		13,734
Consideration paid for ColdSpark:
Cash paid at acquisition		(750	)
Deferred cash consideration		(6,503	)
Stock consideration		(5,595	)
Liabilities assumed	$	886

The Company acquired certain assets from Asempra for cash consideration of $350,000 and stock consideration of $1.4 million, for total consideration of $1.7 million. The assets acquired were primarily intangible assets.

5. Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net assets acquired. As of June 30, 2009, goodwill consists of the following:

Goodwill balance at March 31, 2009	$	7,615
Acquired in connection with the ColdSpark acquisition		6,392
Goodwill balance at June 30, 2009	$	14,007

Intangible assets consist of the following (in thousands):

	Estimated Useful life	Carrying value at March 31, 2009		Intangible assets acquired		Amortization expense			Carrying value at June 30, 2009
Technology	4 to 14 years	$	824	$	7,832	$	(205	)	$	8,451
Maintenance agreements	6 months		—		10		(3	)		7
Total intangible assets		$	824	$	7,842	$	(208	)	$	8,458

Amortization expense for intangible assets was $0.2 million and $0.1 million for the three months ended June 30, 2009 and 2008, respectively. For three months ended June 30, 2009, amortization expense is included in cost of revenues, in the consolidated statements of operations. For the three months ended June 30, 2008, amortization expense of $77,000 and $17,000, is included in cost of revenues and sales and marketing expense, respectively, in the consolidated statements of operations.

6. Commitments and Contingencies

In the normal course of business, the Company may be involved in various claims, negotiations and legal actions; however, as of June 30, 2009, the Company is not party to any litigation that is expected to have a material effect on the Company’s financial position, results of operations or cash flows.

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7. Shareholders’ Deficit

During the three months ended June 30, 2009, 75,000 restricted stock units vested pursuant to the vesting conditions of the amended award. In connection with the vesting of the restricted stock units, the Company issued 45,000 shares. The remaining 30,000 restricted stock units were settled in cash pursuant to the contingent cash-settlement conditions of the amended award. A summary of the change in restricted stock unit awards during the three months ended June 30, 2009 is as follows:

	Number of shares
Unvested at March 31, 2009	150,000
Awarded	—
Vested	(75,000	)
Forfeited	—
Unvested at June 30, 2009	75,000

8. Segment Disclosures

Effective with the ColdSpark acquisition on May 13, 2009, the Company operates two reporting segments: (i) Storage Management, which sells the NetVault products and solutions; and (ii) Message Management, which sells the ColdSpark SparkEngine, MailFusion and Compliance Catalyst families of products and solutions. The following table represents a summary of revenues, operating income or loss, and total assets for each reporting segment as of and for the three months ended June 30, 2009 (in thousands):

	Storage Management		Message Management			Total
Revenues form external customers	$	16,600	$	90		$	16,690
Operating income (loss)	$	1,755	$	(656	)	$	1,099
Total assets	$	30,817	$	13,640		$	44,457

There were no inter-segment revenues during the three months ended June 30, 2009.

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

Special Note About Forward-Looking Statements

This Quarterly Report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. We use words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” variations of such words, and similar expressions to identify forward-looking statements. In addition, statements that refer to projections of earnings, revenue, costs or other financial items; anticipated growth and trends in our business or key markets; future growth and revenues from our products; anticipated performance of products or services; plans, objectives and strategies for future operations; and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Form 10-Q. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including, without limitation, the disclosures, made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” and the audited consolidated financial statements and related notes included in our Form 10-K for the fiscal year ended March 31, 2009 and other reports and filings made with the securities and exchange commission. Risk factors that could cause actual results to differ from those contained in the forward-looking statements include, but are not limited to: the deteriorating economic and market conditions that lead to reduced spending on information technology products; competition in our target markets; potential capital needs; management of future growth and expansion; the development, implementation and execution of our Universal Data Management strategic vision; customer acceptance of our existing and newly introduced products and fee structures; the success of our brand development efforts; failure to integrate acquired operations; and other risks identified elsewhere in this Quarterly Report and in our most recent reports on Forms 10-K and 8-K. We assume no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made, other than as required under applicable securities laws.

Overview

We are a leading provider of data protection, retention and availability technologies that reduce storage management complexity. We develop, market, sell and support a portfolio of products sold globally under the NetVault brand name. Our products include award-winning Linux solutions, application-focused solutions to protect the Windows environment, and unique solutions to leverage emerging disk-based and virtual environments. Our products provide protection for the applications that drive the business computing environments such as Microsoft SQL Server, Oracle, Microsoft Exchange, MySQL, Lotus Notes and others. The object-oriented design of our products allows them to be flexibly installed in complex, multi-platform environments, providing users with a consistent look-and-feel across all platforms. The current NetVault portfolio of products provides customers with:

• Enterprise data protection, including backup and recovery;

• Long-term data retention capabilities;

• Disaster recovery of data and systems as well as application failover;

• Global replication of data;

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• Storage resource management and reporting; and

• Application resource reporting and discovery.

In May 2009 we acquired ColdSpark, Inc. (“ColdSpark”), a provider of enterprise email infrastructure solutions and platforms for approximately $12.9 million, including cash payments of $8.1 million and the issuance of 18.2 million common shares to be paid out over three years. This new portfolio of solutions is part of the SparkEngine Mail Transport Platform and includes the SparkEngine, MailFusion and Compliance Catalyst families of products. The ColdSpark technology portfolio is designed to provide a unique set of technologies which help customers manage and control their email and messaging environment based upon pre-defined policies. These products are designed to provide the following benefits:

• Single point of control for messaging policies and applications;

• End-to-end message forensics;

• Increased visibility and control for compliance; and

• Improved visibility and insights for campaign, event or transaction driven communications.

In May 2009, we acquired certain assets from Asempra (Assignment for the Benefit of Creditors), LLC (“Asempra”), for approximately $1.7 million, consisting of cash payments of $350,000 and the issuance of 3.8 million common shares. Following the purchase of these assets we were able to rebrand our portfolio of real-time, disk-based data protection products for the Microsoft Windows environment, including Microsoft Exchange and Microsoft SQL Server environments, as NetVault: FastRecover^™. The NetVault: FastRecover product family delivers real-time data protection to a broader segment of the enterprise and mid-tier computing markets and is designed to provide customers with:

• Real-time data protection for high availability;

• Disk-to-Disk backup for reliable, high performance operations;

• Any-point-in-time recovery to provide flexible recovery; and

• Virtual On Demand Recovery to allow systems to be used within 30 seconds of a failure.

Our strategic goal is to provide global data management capabilities by integrating our portfolio of products and using a more centralized approach to managing data which we have called our integrated data protection strategy. The addition of our newly acquired technology portfolios provides us with a better foundation from which we can execute on this strategy to meet the ever-increasing requirements around policy, compliance and message management as a whole. In keeping with this goal of providing global data management capabilities, we call this expanded focus our Universal Data Management strategy. This strategy focuses on providing a data-centric approach to integrating data protection, centralizing policy management and managing an organization’s messaging infrastructure to optimize performance, increase data availability and improve corporate compliance.

Effective with the ColdSpark acquisition, we operate two reporting segments: (i) Storage Management, which sells the NetVault products and solutions; and (ii) Message Management, which sells the ColdSpark SparkEngine, MailFusion and Compliance Catalyst families of products and solutions. The Company has operations in three primary geographic regions: North America, Asia-Pacific, and Europe, Middle East and Africa, or EMEA, and conducts commercial operations primarily through four of its respective wholly-owned subsidiaries: BakBone Software, Inc., BakBone Software KK, BakBone Software Ltd., and ColdSpark, Inc.

Revenues related to implementation, installation, and testing services are recognized upon completion of the related projects or ratably over the term of the agreement based upon the agreement terms.

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The following table summarizes consolidated revenues and revenues of each region on an absolute dollar basis and as a percentage of total consolidated revenues (in thousands):

	Three months ended June 30,
	2009			2008
Consolidated revenues, net	$	16,690		$	13,671
North America	$	7,175		$	5,228
As a percentage of consolidated revenues		43	%		38	%
Asia-Pacific	$	5,559		$	4,698
As a percentage of consolidated revenues		33	%		34	%
EMEA	$	3,956		$	3,745
As a percentage of consolidated revenues		24	%		28	%

In addition, we had consolidated deferred revenue balances as follows (in thousands):

	As of June 30, 2009		As of March 31, 2009
Consolidated deferred revenue	$	92,605	$	91,765

Portions of our Asia-Pacific revenues are currently denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our product more expensive and, therefore, potentially less competitive in those markets. A majority of our international business is presently conducted in currencies other than the U.S. dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which we conduct our business relative to the U.S. dollar will cause currency transaction gains and losses. Due to the volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results and we could experience currency losses in the future. We have not previously undertaken hedging transactions to cover currency exposure, and we do not currently intend to engage in hedging activities.

Cost of revenues consists of the direct cost of providing customer support, including payroll and other benefits of staff working in our customer support departments, as well as associated costs of computer equipment, telephone and other general costs necessary to maintain support for our end users. Also included in cost of revenues are third party software license royalties, third party professional service costs and the direct costs of products delivered to customers. As we amortize certain intangible assets acquired during the three months ended June 30, 2009, we expect cost of revenues to increase.

Sales and marketing expenses consist primarily of employee payroll and other benefits, commissions, trade show costs, web advertising and travel costs for our worldwide sales and marketing staff. Commissions are part of our sales personnel compensation package, which is based on the procurement of sales orders and subsequent collection of customer receivables. As we expand our sales and marketing force, we expect sales and marketing expenses to increase.

Research and development expenses consist primarily of salary and related costs for our worldwide engineering staff. We have engineering personnel in our Poole, United Kingdom, San Diego, California, Santa Clara, California, and Novosibirsk, Russia offices that are responsible for the development effort of our NetVault products and our application plug-in modules. We have engineering personnel in our Broomfield, Colorado office that are responsible for the development effort of our ColdSpark products.

General and administrative expenses include salaries and benefits for our corporate personnel and other expenses, such as facilities costs and professional services.

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As part of the process of preparing our consolidated financial statements, we are required to estimate our provision for income taxes in each of the tax jurisdictions in which we do business. This process involves estimating our actual current tax expense in conjunction with the evaluation and measurement of temporary differences resulting from differing treatment of certain items for tax and financial accounting purposes. These temporary differences result in the establishment of deferred tax assets and liabilities, which are presented on a net basis. We assess on a periodic basis the probability that our net deferred tax assets will be recovered. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, our ability to deduct tax loss carryforwards against future taxable income, and tax planning strategies among the various tax jurisdictions that we do business in when making this assessment. As of June 30, 2009 we have determined that it is not more likely than not that our deferred tax assets will be realized. Accordingly, we have recorded a valuation allowance for our net deferred tax assets and have not recorded a benefit for income taxes.

Our provision for income taxes is comprised of federal, state, and foreign income taxes. Our federal, state and foreign income taxes relate to income generated in the various tax jurisdictions in which we do business. We also recognize estimated tax liabilities for any tax positions we have taken which are not more likely than not to be sustained upon examination by the applicable taxing authority. The final payment of the amounts related to these uncertainties may ultimately prove to be less than or greater than our estimate. If this occurs we would record either a benefit or a charge to our income tax provision.

Effect of Recent Market Conditions, Uncertain Economic Environment and Recent Acquisitions on our Business

During the three months ended June 30, 2009, our overall financial performance remained solid. Our total revenues increased by $3.0 million, or 22%, as compared to the three months ended June 30, 2008. The increase in revenues can be attributed to a $1.5 million arrangement with one of our OEM partners which was recognized as revenue during the three months ended June 30, 2009 and the amortization of prior period bookings, partially off-set by a decrease in current period bookings. During the three months ended June 30, 2009, our consolidated bookings decreased $0.8 million, or 5%, as compared to the three months ended June 30, 2008. The decrease in bookings is primarily due to the weakening of the British pound during the three months ended June 30, 2009 as compared to the three months ended June 30, 2008.

In May 2009, we acquired ColdSpark, Inc., a provider of enterprise email infrastructure solutions and platforms with an established presence with some of the world’s largest companies, in industries including financial services, manufacturing and media. Pursuant to the merger agreement, we made cash payments totaling $750,000 and issued 9.1 million common shares for 100% of the equity shares outstanding of ColdSpark. In addition, we will make cash payments totaling up to $7.4 million and issue up to 9.1 million common shares over a three year period from June 2010 to June 2012.

We believe the acquired ColdSpark product portfolio provides us with a strong presence in the rapidly-growing enterprise message management market and will significantly contribute to the growth of our operations in the future. In the near term, this reporting segment will require significant cash investments in order to expand into new markets.

While we expect the near term market conditions to be challenging, we believe the need for organizations to protect, recover, maintain and manage their data will require our current customers, as well as new customers, to invest in their infrastructure. As a result, we intend to continue to prudently invest in our business, through continued product development and sales and marketing efforts. The predictability of bookings for existing products remains uncertain due to the economic environment. Additionally, the predictability and growth of our

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message management pipeline is uncertain. Therefore financial performance for fiscal 2010 is difficult to predict, including the extent of any revenue or bookings growth and the extent of operating income. We estimate that total bookings for the fiscal year ending March 31, 2010 will range from $62 to $64 million.

Application of Critical Accounting Policies

The preparation of our financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, valuation allowance for deferred tax assets, valuation of goodwill and stock-based compensation expense. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe there are several accounting policies that are critical to understanding our historical and future performance. These policies affect the reported amounts of revenue and other significant areas that involve management’s judgments and estimates. These significant accounting policies are:

• revenue recognition;

• valuation allowance for deferred tax assets;

• business combinations;

• valuation of goodwill; and

• stock-based compensation expense.

These policies, and our procedures related to these policies, are described below.

Revenue Recognition

We recognize software license revenue in accordance with SOP 97-2 and SOP 98-9. We derive revenues from software licenses, maintenance services, and professional services from three distinct groups of customers: resellers, OEMs, and direct end users.

We commence recognizing revenue under these arrangements when all of the following are met:

• Persuasive Evidence of an Arrangement Exists.It is our practice to require a contract signed by both the partner and BakBone and/or a customer-issued purchase order depending on the underlying facts and circumstances of the business relationship.

• Delivery Has Occurred. We deliver software by both physical and electronic means. Both means of delivery transfer title and risk to the customer. Physical delivery terms are generally FOB shipping point. For electronic delivery of the software, delivery is complete when the customer has been provided electronic access to the software. Certain of our arrangements contain customer acceptance provisions. Under these arrangements, revenue recognition commences once the acceptance provisions have been satisfied.

• The Vendor’s Fee is Fixed or Determinable. Fees are generally considered fixed and determinable when payment terms are within our standard credit terms.

• Collectability is Probable. Customers must meet collectability requirements pursuant to our credit policy. For contracts that do not meet our collectability criteria, fees earned are deferred initially and recognized in accordance with its revenue policy once payment is received from the customer.

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Our customers are not contractually permitted to return products, but we accept returns under certain circumstances. We account for potential returns from our customers in accordance with SFAS No. 48,Revenue Recognition When Right of Return Exists(“SFAS 48”). We use historical returns experience with these customers to determine potential returns and to establish the appropriate sales returns allowance.

Sales incentives or other consideration given by BakBone to our customers are accounted for in accordance with EITF Issue 01-9,Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products) (“EITF 01-9”). In accordance with EITF 01-9, sales incentives and other consideration that are considered adjustments of the selling price of our products, such as rebates, are generally reflected as reductions to revenue.

Storage Management Division

We license our software to our reseller customers under multiple-element arrangements involving a combination of software, post-contract support and/or professional services. Post-contract support includes rights to unspecified upgrades and enhancements and telephone support. Professional services include services related to implementation of our software as well as training. Software license arrangements with resellers include implicit platform transfer rights (“PTRs”), which allow end users to exchange an original product for a different product or to exchange an original product on one platform for the same product operating on a different platform. The new product and/or different platform is not specified in the arrangement nor is the period of time in which the customer has to exercise this right. As no contract period exists under these arrangements, software-related revenue is recognized ratably over the estimated economic useful life of the software product of four years.

The economic useful life of the software product is estimated to be four years based upon our version release and end of life data as well as our practice with respect to supporting the product. We weighted the product useful life and its years of sustaining support following the end of life to determine the estimated economic useful life of the software product.

Maintenance renewal fees are recognized ratably over the arrangement period, which is typically one year. Professional services may also be sold separately and all fees generated from stand-alone sales of professional services are recognized when the service is complete.

We have multiple-element arrangements with OEM customers and one large direct customer under which, in addition to providing software licenses and maintenance services, we have a commitment to provide unspecified future software products. As vendor specific objective evidence of fair value cannot be determined for the unspecified future software products, all sales amounts procured under these arrangements are deferred and recognized ratably over the arrangement period.

Message Management Division

Beginning May 13, 2009, our revenues include sales transactions of ColdSpark, which became a wholly-owned subsidiary of BakBone on this date. The revenues generated by ColdSpark are primarily from the sale of software licenses and professional services to large enterprise users. Revenues also include support services to our customers. We follow the residual method of revenue recognition for product agreements that include one or more elements to be delivered at a future date and vendor specific objective evidence (“VSOE”) of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the contract fee is recognized as license revenue when all of the revenue recognition criteria are satisfied. If evidence of the fair value of one or more undelivered elements does not exist, all revenue is generally deferred and recognized when delivery of those elements occurs or when fair value is established. When the only undelivered element for which we do not have a fair value is maintenance services, revenue for the entire arrangement is bundled and recognized ratably over the maintenance service period. VSOE

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of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately. Our arrangements generally include customer acceptance provisions, and as such, revenue recognition does not commence until satisfaction of the customer acceptance criteria.

Revenues related to implementation, installation, and testing services are recognized upon completion of the related projects or ratably over the term of the agreement based upon the agreement terms.

Valuation Allowance for Deferred Tax Assets

In preparing our consolidated financial statements, we estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial statement purposes. These differences result in deferred tax assets and liabilities. Significant management judgment is required in assessing the realizability of our deferred tax assets. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in each tax jurisdiction during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In the event that actual results differ from our estimates or we adjust our estimates in future periods, we may need to reduce our valuation allowance, which could materially impact our financial position and results of operations.

Business Combinations

We account for business combinations pursuant to Financial Accounting Standards Board Statement of Financial Accounting Standard No. 141 (revised 2007),Business Combinations(“SFAS 141R”). Under SFAS 141R, we are required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions, especially at acquisition date with respect to intangible assets, estimated contingent consideration payments and pre-acquisition contingencies.

Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired company and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:

• future expected cash flows from product sales, support agreements, consulting contracts, other customer contracts, and acquired developed technologies and patents; and

• discount rates.

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Additionally, any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in our estimate of the bookings targets, will be recognized in earnings in the period of the estimated fair value change. A change in fair value of the acquisition-related contingent consideration could have a material affect on the statement of operations and financial position in the period of the change in estimate.

Valuation of Goodwill

We have recorded goodwill in connection with the acquisitions we have completed in prior and current periods. In accordance with the provisions of SFAS No. 142,Goodwill and Other Intangible Assets(“SFAS 142”), we review our goodwill for impairment as of April 1^st of each fiscal year or when an event or a change in facts and circumstances indicates the fair value of a reporting unit may be below its carrying amount. Significant management

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judgment is required in assessing the impairment of our goodwill. For segment reporting, historically we have reported our results of operations based on a single business segment which consisted of our NetVault product line. As of the date of this report, we had not completed our assessment of our segment reporting requirements in light of the ColdSpark acquisition. SFAS 142 defines a reporting unit as an operating segment, or one unit below. Events or changes in facts and circumstances that we consider as impairment indicators include but are not limited to the following:

• significant underperformance of our business relative to expected operating results;

• significant adverse economic and industry trends;

• significant decline in our market capitalization for an extended period of time relative to net book value; and

• expectations that a reporting unit will be sold or otherwise disposed.

The annual goodwill impairment test consists of a two-step process as follows:

Step 1.We compare the fair value of each reporting unit to its carrying amount, including the existing goodwill. The fair value of each reporting unit is determined using a discounted cash flow valuation analysis. The carrying value of each reporting unit is determined by specifically identifying and allocating the assets and liabilities of BakBone to each reporting unit based on headcount, relative revenues, or other methods as deemed appropriate by management. If the carrying amount of a reporting unit exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and we then perform the second step of the impairment test. If the fair value of a reporting unit exceeds its carrying amount, no further analysis is required.

Step 2.If further analysis is required, we compare the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets and its liabilities in a manner similar to a purchase price allocation, to its carrying amount. If the carrying amount of the reporting unit’s goodwill exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess.

Stock-Based Compensation Expense

Under the provisions of SFAS No. 123(R),Share-Based Payment (“SFAS 123R”), stock-based compensation cost is estimated at the grant date based upon the fair-value of the award and is recognized as expense using the straight-line amortization method over the requisite service period of the award, which is normally the vesting period. For awards containing liability features, SFAS 123R requires that these awards be remeasured at each reporting date to fair-value. We estimate the fair value of stock options and warrants issued to a reseller using the Black-Scholes option pricing model, which requires the input of certain highly subjective assumptions, including expected stock price volatility, expected term and expected forfeiture rates. A small change in the estimates used can result in a relatively large change in the estimated fair-value. We established the assumption for expected stock price volatility based on our historical stock price volatility. The expected term assumption for stock options was developed based on historical experience and projected exercise behavior, while the expected term assumption for the warrant issued to a reseller was based upon the contractual term of the warrant. We estimate forward-looking forfeiture rates based upon our historical forfeiture experience.

For a performance-based stock award, the expense is dependent on the probability of the performance measure being achieved. We utilize forecasts of future performance to assess these probabilities and this assessment requires considerable judgment.

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Results of Operations

Comparison of Results for the Three Months Ended June 30, 2009 and 2008

The following summarizes consolidated revenues and their percentage changes over the same period of the prior year (dollars in thousands):

	Three months ended June 30,
	2009		2008
Consolidated revenues, net	16,690		13,671
Increase over same period of prior year	22	%
License and service revenues	15,190		13,671
Increase over same period of prior year	11	%
Other revenues	1,500		—

REVENUES—LICENSE AND SERVICE

We define bookings as the gross dollars invoiced through the sale of software licenses, maintenance contracts and professional services. We utilize bookings information as an operations measure, but it is not intended to replace U.S. GAAP accounting. Under the ratable revenue recognition method, license bookings are recognized as revenue over the appropriate period (generally three to five years). In general, variations in revenues period-over-period are affected by the amortization of current and prior period license bookings. Accordingly, we believe that trends in current and historical bookings are key factors in analyzing our operating results.

On a worldwide basis, we sell our storage management products through two different sales channels: value-added resellers (“VAR”) and original equipment manufacturers and direct customers (“OEM”). VAR revenues are sourced from the sale of software licenses, related maintenance contracts and professional services through the reseller channel. Software licenses sold through the reseller channel do not generally involve customer-specific customization. OEM revenues are sourced from the sale of software licenses, related maintenance contracts and professional services sold through our OEM partners and to direct customers. Software licenses sold through the OEM channel generally involve customer-specific customization and are governed by specifically-negotiated contracts. OEM bookings and revenues are billed and collected centrally in North America in U.S. dollars and presented for each of our three regions based upon the region in which the direct customer is located. As such, OEM bookings and revenues are not impacted by foreign exchange movements to the degree that our VAR bookings and revenues are impacted.

The following summarizes license and service revenues by operating segment and their percentage changes over the same period of the prior year (dollars in thousands):

	Three months ended June 30,
	2009		2008
Total License and service revenues	15,190		13,671
Increase over same period of prior year	11	%
Storage Management revenues	15,100		13,671
Increase over same period of prior year	10	%
Message Management revenues	90		—

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Storage Management

VAR revenues.The following table summarizes VAR revenues by geographic region and their percentage changes over the same period of the prior year (dollars in thousands):

	Three months ended June 30,
	2009			2008
North America	$	3,933		$	3,686
Increase over same period of prior year		7	%
Asia-Pacific	$	5,114		$	4,304
Increase over same period of prior year		19	%
EMEA	$	3,522		$	3,337
Increase over same period of prior year		6	%
Consolidated	$	12,569		$	11,327
Increase over same period of prior year		11	%

VAR revenues in North America increased by $0.2 million, or 7%, to $3.9 million for the three months ended June 30, 2009 compared to $3.7 million for the three months ended June 30, 2008. The increase in revenues during the three months ended June 30, 2009 was primarily due to increased maintenance and maintenance renewal bookings in prior periods, off-set partially by a decrease in license bookings in the current period.

VAR revenues in the Asia-Pacific region increased $0.8 million, or 19%, to $5.1 million for the three months ended June 30, 2009 compared to $4.3 million for the three months ended June 30, 2008. The increase in revenues during the three months ended June 30, 2009 was primarily due to increased license and maintenance renewal bookings in Japan in the prior periods, off-set partially by a decrease in license and maintenance bookings in the current period. Additionally, during the three months ended June 30, 2009, the average Japanese yen to U.S. dollar exchange rate increased 9% as compared to the three months ended June 30, 2008, causing an approximate increase of $0.4 million in our Asia-Pacific revenues as reported in U.S. dollars.

VAR revenues in EMEA increased $0.2 million, or 6%, to $3.5 million for the three months ended June 30, 2009 compared to $3.3 million for the three months ended June 30, 2008. During fiscal 2009, EMEA’s functional currency revenues increased approximately, $0.9 million, or 36% due to increased license and maintenance and maintenance renewal bookings in prior periods. However, this increase was partially off-set by a weakening of the British pound during the three months ended June 30, 2009 as compared to the three months ended June 30, 2008. During the three months ended June 30, 2009, the average British pound to U.S. dollar exchange rate decreased 23% as compared to the three months ended June 30, 2008, causing an approximate decrease of $1.0 million in our EMEA revenues as reported in U.S. dollars.

VAR bookings.As discussed above, revenues are impacted by both current and prior period bookings. The information below summarizes VAR bookings by geographic region and their percentage changes over the same period in the prior year (dollars in thousands):

	Three months ended June 30,
	2009			2008
North America	$	2,773		$	3,791
(Decrease) over same period of prior year		(27	%)
Asia-Pacific	$	4,241		$	4,222
Increase over same period of prior year		—	%
EMEA	$	3,654		$	4,097
(Decrease) over same period of prior year		(11	%)
Consolidated	$	10,668		$	12,110
(Decrease) over same period of prior year		(12	%)

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VAR bookings in North America decreased $1.0 million, or 27%, to $2.8 million for the three months ended June 30, 2009 from $3.8 million for the three months ended June 30, 2008, due to a decrease in license and maintenance, and maintenance renewal bookings. The decrease in bookings was the result of the continuing slowing of the economy in the United States which has impacted the region since the second quarter of fiscal 2009.

VAR bookings in Asia-Pacific remained relatively flat at $4.2 million for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008. During the three months ended June 30, 2009, our functional currency license and maintenance bookings decreased approximately $0.4 million, or 8%, as a result of the slowing of the economy. However, the decrease in functional currency bookings was off-set by the strengthening of the Japanese yen against the U.S. dollar during the three months ended June 30, 2009 as compared to the three months ended June 30, 2008. During the three months ended June 30, 2009, the average Japanese yen to U.S. dollar exchange rate increased 9% as compared to the three months ended June 30, 2008 causing an approximate increase of $0.3 million in our Asia-Pacific bookings as reported in U.S. dollars.

VAR bookings in EMEA decreased $0.4 million, or 11%, to $3.7 million for the three months ended June 30, 2009 from $4.1 million for the three months ended June 30, 2008. During the three months ended June 30, 2009, our functional currency license and maintenance bookings increased approximately $0.4 million, or 14%, as a result of strong growth in key markets such as Germany, France and Benelux, in addition to increased market penetration in Spain, Eastern Europe and the Middle East. The increase in functional currency bookings was off-set by the weakening of the British pound against the U.S. dollar during the three months ended June 30, 2009 as compared to the three months ended June 30, 2008. During the three months ended June 30, 2009, the average British pound to U.S. dollar exchange rate decreased 23% as compared to the three months ended June 30, 2008, causing an approximate decrease of $1.1 million in our EMEA bookings as reported in U.S. dollars.

OEM revenues. The following table summarizes OEM revenues by geographic region and their percentage changes over the same period of the prior year (dollars in thousands):

	Three months ended June 30,
	2009			2008
North America	$	1,652		$	1,542
Increase over same period of prior year		7	%
Asia-Pacific	$	445		$	394
Increase over same period of prior year		13	%
EMEA	$	434		$	408
Increase over same period of prior year		6	%
Consolidated	$	2,531		$	2,344
Increase over same period of prior year		8	%

North America OEM revenues increased $0.1 million or 7%, to $1.7 million for the three months ended June 30, 2009 from $1.5 million for the three months ended June 30, 2008. The increase in revenues is the result of historical period-over-period OEM bookings growth partially off-set by a decrease in current period bookings.

Asia-Pacific OEM revenues increased $51,000, or 13%, to $445,000 for the three months ended June 30, 2009 from $394,000 for the three months ended June 30, 2008. During the three months ended June 30, 2009, current period bookings declined, while the amortization of prior period bookings increased, causing an increase in revenues during the three months ended June 30, 2009.

EMEA OEM revenues remained flat for the three months ended June 30, 2009 and 2008. During the three months ended June 30, 2009, current period bookings declined, while the amortization from prior period bookings increased, causing a slight increase in revenues during the three months ended June 30, 2009.

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OEM bookings.As discussed above, revenues are impacted by both current and prior period bookings. Included below is a summary of OEM bookings by geographic region and their percentage changes over the same period of the prior year (dollars in thousands):

	Three months ended June 30,
	2009			2008
North America	$	620		$	1,148
(Decrease) over same period of prior year		(46	%)
Asia-Pacific	$	333		$	597
(Decrease) over same period of prior year		(44	%)
EMEA	$	357		$	498
(Decrease) over same period of prior year		(28	%)
Consolidated	$	1,310		$	2,243
(Decrease) over same period of prior year		(42	%)

North America OEM bookings decreased $0.5 million, or 46%, to $0.6 million for the three months ended June 30, 2009 from $1.1 million for the three months ended June 30, 2008. During fiscal 2009, several of our OEM arrangements terminated, thus resulting in a decline in OEM bookings for the first quarter of fiscal 2010. Additionally, we experienced a decrease in bookings related to two of our existing OEM partners.

Asia-Pacific OEM bookings decreased $0.3 million, or 44%, to $0.3 million for the three months ended June 30, 2009 from $0.6 million for the three months ended June 30, 2008. During fiscal 2009, one of our OEM arrangements terminated, thus resulting in a decline in OEM bookings for the first quarter of fiscal 2010. Additionally, we experienced a decrease in bookings related to one of our existing OEM partners.

EMEA OEM bookings decreased $0.1 million, or 28%, to $0.4 million for the three months ended June 30, 2009 from $0.5 million for the three months ended June 30, 2008. During the three months ended June 30, 2009, we experienced a decrease in bookings related to two of our existing OEM partners.

Included below is a reconciliation of our Storage Management VAR and OEM, bookings to the total revenues recognized for the three months ended June 30, 2009 and 2008 (in thousands):

For the three months ended June 30, 2009	VAR			OEM			Total
Revenues sourced from current period bookings:
Total bookings for the three months ended June 30, 2009	$	10,668		$	1,310		$	11,978
Bookings deferred into subsequent periods		(9,794	)		(892	)		(10,686	)
Revenues from fiscal 2010 bookings	$	874		$	418		$	1,292
Revenues sourced from prior period bookings:	$	11,695		$	2,113		$	13,808
Total revenues recognized in the three months ended June 30, 2009	$	12,569		$	2,531		$	15,100
For the three months ended June 30, 2008	VAR			OEM			Total
Revenues sourced from current period bookings:
Total bookings for the three months ended June 30, 2008	$	12,110		$	2,243		$	14,353
Bookings deferred into subsequent periods		(11,467	)		(2,013	)		(13,480	)
Revenues from fiscal 2009 bookings	$	643		$	230		$	873
Revenues sourced from prior period bookings:	$	10,684		$	2,114		$	12,798
Total revenues recognized in the three months ended June 30, 2008	$	11,327		$	2,344		$	13,671

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Message Management

On May 13, 2009 we acquired ColdSpark and from that date the wholly-owned subsidiary operated as our Message Management Division. From the acquisition date through June 30, 2009, the Message Management Division generated $0.1 in revenue and bookings, both of which related primarily to maintenance and service contracts. As we continue to integrate the ColdSpark operations, we anticipate revenue and bookings growth for the foreseeable future.

REVENUES—OTHER

During the three months ended June 30, 2009, we entered into an intellectual property transfer and license agreement with one of our OEM partners. Under the terms of this agreement we sold certain non-core intellectual property rights to this partner for $1.5 million. As our support commitment, as specified by the arrangement, was insignificant and no other obligation exists, the full contract amount was recognized as revenue during the three months ended June 30, 2009.

COST OF REVENUES

Cost of revenues for the three months ended June 30, 2009 totaled $1.5 million compared with cost of revenues of $1.8 million for the three months ended June 30, 2008. During the three months ended June 30, 2009, we allocated $0.3 million of payroll-related costs associated with our customer service group to research and development expense, thus causing a decrease in our costs of revenues. During the three months ended June 30, 2009, certain customer service employees performed quality assurance work which was previously performed by our outsourced research and development consultants during the three months ended June 30, 2008. During the three months ended June 30, 2009, costs of revenues attributable to our message management division totaled approximately $50,000.

SALES AND MARKETING EXPENSES

Sales and marketing expenses decreased by $0.9 million, or 12%, to $6.6 million for the three months ended June 30, 2009, from $7.6 million for the year ended June 30, 2008. During the three months ended June 30, 2009 we experienced a decrease in payroll related expenses of $0.3 million and a decrease in travel and marketing costs of $0.1 million as a result of the November 2008 reduction in personnel and the related travel costs. Additionally, during the three months ended June 30, 2009 we experienced significant fluctuations in our foreign currency exchange rates from both the Japanese yen and British pound to the U.S. dollar which resulted in an approximate $0.4 million net decrease in our sales and marketing expenses as reported in U.S. dollars. During the three months ended June 30, 2009, sales and marketing expenses attributable to our message management division totaled approximately $0.1 million.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development remained consistent at $3.1 million for the three months ended June 30, 2009 and 2008. During the three months ended June 30, 2009, we experienced a $0.4 million decrease in outsourced research and development costs, which was partially off-set by a $0.3 million increase payroll costs related to the allocation of the customer service group costs which were previously reported as costs of revenues. During the three months ended June 30, 2009, certain customer service employees performed quality assurance work which was previously performed by our outsourced research and development consultants during the three months ended June 30, 2008. Additionally, during the three months ended June 30, 2009, we experienced significant fluctuations in our foreign currency exchange rates from the British pound to the U.S. dollar which resulted in an approximate $0.2 million net decrease in our research and development expenses as reported in U.S. dollars. During the three months ended June 30, 2009, research and development expenses attributable to our message management division totaled approximately $0.3 million and primarily related to payroll costs.

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GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses increased by $0.6 million, or 15%, to $4.4 million for the three months ended June 30, 2009, from $3.8 million for the three months ended June 30, 2008. The increase was primarily attributable to $0.7 million in acquisition-related costs for the acquisition of ColdSpark and certain assets of Asempra and an increase in payroll related costs of $0.1 million. During the three months ended June 30, 2009, our audit-related costs decreased $0.4 million, as we incurred significant fees associated with the restatement of our historical financial statements during the three months ended June 30, 2008. During the three months ended June 30, 2009 general and administrative expenses attributable to our message management division totaled approximately $0.2 million and primarily related to payroll and payroll-related costs.

INTEREST EXPENSE

During the three months ended June 30, 2009, we incurred $0.1 million in interest expense associated with the ColdSpark acquisition. As the consideration given to the ColdSpark shareholders will be paid over three years, we calculated the present value of the consideration payable to the ColdSpark shareholders as of the acquisition date, for both the cash payments and common shares to be issued, and recorded the applicable interest expense using the effective interest method. We anticipate the following amounts of non-cash interest expense will be charged to earnings in each of the fiscal years related to the ColdSpark acquisition, until the acquisition consideration is paid in full in fiscal 2013:

Year ended March 31,	Non-cash Interest Expense (in Thousands)
2010	$	601
2011		586
2012		355
2013		64

FOREIGN EXCHANGE GAIN (LOSS), NET

During the three months ended June 30, 2009 and 2008, we recorded net foreign exchange losses of $0.2 million and $0.5 million, respectively, related to foreign exchange rate changes that impacted or are expected to impact cash flows. During the three months ended June 30, 2009, our net foreign exchange gains consisted of $0.1 million of foreign exchange gains related to the strengthening of the British pound against the U.S. dollar on intercompany balances, offset by $0.3 million of foreign exchange losses related to U.S. dollar and Euro currency holdings in our EMEA region. During the three months ended June 30, 2008, we recorded foreign exchange losses related primarily to the impact of the weakening of the Japanese yen against the U.S. dollar and the British pound on intercompany balances.

PROVISION FOR INCOME TAXES

During the three months ended June 30, 2009 and 2008, we recorded provisions for income taxes of $25,000 and $86,000, respectively. During the three months ended June 30, 2009, our provision for income taxes consisted of charges related primarily to taxes on income generated in certain foreign jurisdictions. During the three months ended June 30, 2008, our provision for income taxes was due primarily to the growth of our business in the EMEA and Asia-Pacific regions, where an increase in sales activity lead to income tax obligations in certain jurisdictions.

Although we have generated consolidated pre-tax income during the three months ended June 30, 2009, we have incurred operating losses in all periods prior to the first quarter of fiscal 2010. Management has determined that it is more likely than not that a tax benefit from such losses will not be realized. Accordingly, we did not record a benefit for income taxes for these periods.

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Liquidity and Capital Resources

As of June 30, 2009, we had $7.4 million of cash and cash equivalents and $40.3 million in negative working capital, or $5.1 million in positive working capital after excluding the current portion of deferred revenue, as compared to $8.4 million of cash and cash equivalents and $34.2 million in negative working capital, or $9.9 million in positive working capital after excluding the current portion of deferred revenue, as of June 30, 2008. Working capital, defined as current assets minus current liabilities, is intended to measure our short-term liquidity, or our ability to pay off short-term liabilities with current assets. Because short-term deferred revenue does not require the future use of current assets, management has excluded the current portion of deferred revenue from the calculation of working capital as an indicator of short-term liquidity. Our cash, combined with our cash flow from operating activities, have been our principal sources of liquidity.

Operating Activities

We generate cash from operations primarily from cash collected on software license and software maintenance contract sales. Net cash used in operating activities was $0.1 million during the three months ended June 30, 2009, compared to net cash provided by operating activities of $1.0 million for the three months ended June 30, 2008. Net cash provided by operating activities during the three months ended June 30, 2008 was primarily the result of an increase in cash collections during the period. During fiscal 2008 we experienced a higher percentage of bookings in the fourth quarter, which were subsequently collected during the three months ended June 30, 2008. At the end of the first quarter of fiscal 2010 we sold certain non-core intellectual property rights to one of our OEM partners for $1.5 million, which was recognized as revenue during the period. The cash was subsequently collected during July 2009. Additionally, during the three months ended June 30, 2009, we used significant cash resources for the acquisition transaction costs related to our acquisition of ColdSpark and certain assets of Asempra, as well as for the payroll and other operating costs associated with our acquired ColdSpark operations.

Investing Activities

Net cash used in investing activities was $1.1 million and $0.4 million for the three months ended June 30, 2009 and 2008, respectively. Capital expenditures were $0.1 million during the three months ended June 30, 2009 compared to $0.6 million during the three months ended June 30, 2008. During the three months ended June 30, 2009, we paid $1.0 million to acquire ColdSpark and certain assets of Asempra, net of cash acquired.

Financing Activities

During the three months ended June 30, 2009 and 2008, net cash used in financing activities of $0.3 million and $0.2 million, respectively, consisted of payments on capital lease and long term debt obligations.

Factors That May Affect Future Financial Condition and Liquidity

Currently our cash commitments include normal recurring trade payables, expense accruals, minimum royalty obligations, debt, and operating and capital leases, all of which are currently expected to be funded through existing working capital. Aside from these recurring operating expenses, we expect to incur approximately $0.6 million in capital expenditures during the remainder of fiscal 2010. In addition to the $1.1 million we paid to acquire ColdSpark and certain assets of Asempra during the three months ended June 30, 2009, the terms of the merger agreement with ColdSpark require us to make additional cash payments totaling $7.4 million, plus any applicable interest, over a three year period beginning in fiscal 2011.

During the three months ended June 30, 2009, we experienced a decrease in bookings as a result of the deteriorating economic and industry conditions as well as other financial and business factors, many of which are beyond our control. In addition, our acquisition of ColdSpark and certain assets of Asempra has resulted and may

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continue to result in additional costs associated with acquiring, integrating and developing the businesses and related products. As a result, although we have taken measures to reduce our operating costs, we expect our cash balance to decrease over the next year. We believe that our current cash and cash equivalents will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months from the date of the filing of this Quarterly Report and that we will have sufficient liquidity to fund our business and meet our contractual obligations over a period beyond the next 12 months. However, we may be required to obtain additional financing in order to fund our continued operations. Due to the tightening that has occurred in the credit markets, general economic conditions, our recent SEC filing delinquencies and other economic and business factors, this financing may not be available to us on acceptable terms or at all. Although we cannot accurately anticipate the effect of inflation or foreign exchange markets on our operations, we do not believe these external economic forces have had, or are likely in the foreseeable future to have, a material impact on our results of operations.

Off-Balance Sheet Arrangements

At June 30, 2009, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, special purpose or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we did not engage in trading activities involving non-exchange traded contracts. As a result, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. We do not have relationships and transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties except as disclosed elsewhere in this Quarterly Report and in our most recent Annual Report on Form 10-K.

Recent Accounting Pronouncements

In June 2009, FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (“SFAS 168”). SFAS 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. We do not expect the adoption of the SFAS 168 to have an impact on our financial position or results of operations.

From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact our consolidated financial statements through adverse changes in financial market prices and rates. Our market risk exposure results primarily from fluctuations in foreign exchange rates. We do not have a significant market risk exposure to fluctuations in interest rates. International revenues represented 57% and 62% of our total revenue for each of the three months ended June 30, 2009 and 2008, respectively. Portions of our Asia-Pacific revenues are currently denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and, therefore, potentially less competitive in those markets. A majority of our international business is presently conducted in currencies other than the U.S. dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which we conduct our business relative to the U.S. dollar will cause

33

currency transaction gains and losses, which we have experienced in the past and continue to experience. Due to the substantial volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results. We could experience currency losses in the future. We have not previously undertaken hedging transactions to cover currency exposure.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of June 30, 2009. Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2009, our disclosure controls and procedures were not effective because of the existence of unremediated material weaknesses, as described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

Changes in Internal Control over Financial Reporting

During the first quarter of fiscal 2010 we have continued to implement remediation measures in response to the material weaknesses described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2009. These remediation measures include enhancing and implementing controls over communication of corporate and accounting policies, the review of key spreadsheets, and billing, collecting and remitting sales taxes on software licenses and related maintenance contracts. As of the date of this Quarterly Report, our remediation efforts continue related to each of the material weaknesses reported in our Annual Report on Form 10-K for the year ended March 31, 2009. These material weaknesses will not be considered remediated until (1) the new processes are designed, appropriately controlled and implemented for a sufficient period of time and (2) we have sufficient evidence that the new processes and related controls are operating effectively.

Other than our ongoing remediation efforts described above, there have been no changes in our internal control over financial reporting that occurred during the first quarter of fiscal year 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance of achieving the desired control objectives. As a result, any controls and procedures, no matter how well designed and operated, may not prevent or detect misstatements. Internal control over financial reporting also can be circumvented by collusion or improper management override of controls. Projections of any evaluation of control effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in litigation and claims which arise from time to time in the normal course of business. In the opinion of management, any liability that may arise from such contingencies would not have a significant adverse effect on our consolidated financial position, results of operations or liquidity.

Item 1A. Risk Factors

We have identified material weaknesses in our internal control over financial reporting. If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or to prevent fraud.

As described in Item 4 of Part I of this Quarterly Report and Item 9A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2009, we have in the past identified material weaknesses in our internal controls and procedures, including in connection with the preparation of our financial statements for the period ended June 30, 2009. As a result, we have concluded that our disclosure controls and procedures were not effective as of the end of the period. We have implemented, and continue to implement, actions to address these weaknesses and to enhance the reliability and effectiveness of our internal controls and operations; however, the measures we have taken to date or any future measures may not remediate the material weaknesses discussed in this Quarterly Report as we expect.

In addition, we may not be able to maintain adequate controls over our financial processes and reporting in the future. We may discover additional material weaknesses, which we may not successfully remediate on a timely basis or at all. Any failure to remediate any material weaknesses identified by us or to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price of our stock. Moreover, we will be required to expend significant resources to design, implement and maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. The costs associated with external consultants, as well as internal resources are significant and difficult to predict. As a result of these matters, our business, results of operations, financial condition and cash flows could be adversely affected.

Our business could be harmed by the deteriorating general economic and market conditions that lead to reduced spending on information technology products.

As our business has expanded globally, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic and political conditions. Economic growth in the United States and other countries has slowed during calendar year 2009, which has caused our customers to delay or reduce information technology purchases. If economic activity in the United States and other countries remains slow, customers may continue to delay or further reduce information technology purchases. This could result in additional reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition. In addition, weakness in the end user market could negatively affect the cash flow of our resellers and customers who could, in turn, delay paying their obligations to us, which would increase our credit risk exposure and cause a decrease in operating cash flows. Also, if our resellers experience excessive financial difficulties and/or insolvency, and we are unable to successfully transition end users to purchase our product from other resellers or directly from us, our sales could decline significantly. Any of these events would likely harm our business, results of operations and financial condition.

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We have incurred substantial net losses since inception, and we may not be able to achieve or maintain profitability or positive cash flow.

We have incurred operating and net losses since the inception of our operations in March 2000. During the three months ended June 30, 2009, we generated net income of $0.7 million. However, our net losses were $5.5 million and $8.1 million for the years ended March 31, 2009 and 2008, respectively. As of June 30, 2009, our accumulated deficit was $232.0 million. We may not able to achieve positive cash flow from operations in future periods. If we cannot achieve and sustain operating profitability, we may not be able to meet our working capital requirements, which would have a material adverse effect on our business, results of operations, financial condition and cash flows.

Our future capital needs are uncertain and our ability to access additional financing may be negatively impacted by the volatility and disruption of the capital and credit markets and adverse changes in the global economy.

Our capital requirements in the future will depend on many factors, including:

• acceptance of and demand for our software products;

• the costs associated with integrating and developing acquired;

• the extent to which we invest in new technology and product development;

• the costs of developing new products, services or technologies;

• the number and timing of acquisitions and other strategic transactions; and

• the costs associated with the growth of our business, if any.

We intend to finance our operations and any growth of our business with existing cash and any cash flow from operations. Due to the costs of acquiring, integrating and further developing our ColdSpark business, we expect our cash balance to decrease over the next year. We believe that our existing cash and anticipated net cash flows from operations will be sufficient to meet our operating and capital requirements through at least the next 12 months from the date of the filing of this Quarterly Report. However, if the costs associated with integrating and further developing our ColdSpark business exceed our current projections or if adverse global economic conditions persist or worsen, we could experience an additional decrease in cash from operations and we may be required to obtain additional financing in order to fund our continued operations. Due to the existing uncertainty in the equity markets including debt, private equity and venture capital and traditional bank lending markets, as well as the existence of material weaknesses in our internal controls over financial reporting, access to additional debt or equity may not be available to us on acceptable terms or at all. If we cannot raise funds on acceptable terms when necessary, we may not be able to develop or enhance our products and services, execute our business plan including the integration of our ColdSpark business, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. Furthermore, if we issue equity or convertible debt securities to raise additional funds, our existing shareholders may experience dilution, and the new equity or debt securities may have rights, preferences, and privileges senior to those of our existing shareholders. If we incur additional debt, it would increase our leverage relative to our results of operations or to our equity capitalization.

We may make acquisitions or investments and if they are not successful may adversely affect our ongoing operations.

In May 2009, we acquired ColdSpark, Inc. and certain assets of Asempra. We may in the future make further acquisitions or investments in companies, products or technologies that we believe complement or expand our existing business and assist us in quickly bringing new products to market. However, we have limited experience in making acquisitions and investments. As a result, our ability to identify and evaluate prospects, complete acquisitions and properly manage the integration of businesses is relatively unproven. Failure to properly evaluate and execute acquisitions or investments and to integrate completed acquisitions may have a material adverse effect on our business, results of operations, financial condition and cash flows.

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In making or attempting to make acquisitions or investments, we face a number of risks, including risks related to:

• identifying suitable candidates, performing appropriate due diligence, identifying potential liabilities and negotiating acceptable terms;

• reducing our working capital and hindering our ability to expand or maintain our business, if we make acquisitions using cash;

• the potential distraction of our management, diversion of our resources and disruption of our business;

• retaining and motivating key employees of the acquired companies;

• managing operations that are distant from our current headquarters and operation locations;

• competing for acquisition opportunities with competitors that are larger than we are or have greater financial and other resources than we have;

• accurately forecasting the financial impact of a transaction;

• assuming liabilities of acquired companies, including existing or potential litigation related to the operation of the business prior to the acquisition;

• maintaining good relations with the customers and suppliers of the acquired company;

• effectively integrating acquired companies and assets and achieving expected synergies; and

• maintaining sufficient cash to build the acquired business operations until they generate positive cash flow.

In addition, any acquired businesses, products or technologies may not generate sufficient revenue and cash flows to offset the associated costs of such acquisitions, and such acquisitions could result in other adverse effects. Moreover, from time to time, we may enter into negotiations for the acquisition of businesses, products or technologies but be unable or unwilling to consummate the acquisitions under consideration. This could cause significant diversion of managerial attention and resources.

Competition in our target markets could reduce our sales.

We operate in a segment of the intensely competitive storage management software market. This market is characterized by rapidly changing technology and evolving standards. We have a number of competitors that vary in size and scope and breadth of products offered. Many of our competitors have greater financial resources than we do in the areas of sales, marketing, branding and product development, and we expect to face additional competition from these competitors in the future. Our current competitors include, among others, Symantec Corporation, EMC Corporation, IBM’s Tivoli division, CA Inc. and CommVault Systems, Inc. Some of these companies compete against us by offering a full suite of storage management tools, including software that addresses data protection. We also face competition from a number of smaller companies who, like us, focus solely or primarily on the data protection software market. Furthermore, our OEM partners, who do not currently compete with us, could decide to compete with us by offering their own data protection solutions that exclude our software, and other storage equipment vendors may enter our market either through acquisition of competing technologies or products, or through development of their own data protection software solutions.

Our existing and future competitors could introduce products with superior features, scalability and functionality at lower prices than our product. Most of our competitors provide broad suites of storage management software solutions and thus could gain market share by bundling existing or new data protection products with other more established storage products or by acquiring or forming strategic alliances with our other competitors. If our competitors are successful in gaining market share, our business, results of operations, financial condition and cash flows could be adversely affected.

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Our future revenues depend upon continued market acceptance of our NetVault product portfolio as well as successful integration of our ColdSpark, Inc. acquisition and market acceptance of our message management product portfolio.

Currently we derive substantially all of our revenues from our NetVault product portfolio, and we expect this will continue for the foreseeable future. If the market does not continue to accept these products, our revenues will decline significantly, and this would negatively affect our results of operations, financial condition and cash flows. Factors that may affect the market acceptance of our NetVault products include the performance, price and total cost of ownership of our products, and the availability, functionality and price of competing products and technologies. Many of these factors are beyond our control.

In May 2009 we acquired ColdSpark, Inc. and the products we obtained as part of this acquisition are included in our message management division. The growth of our future revenues is dependent on our ability to successfully integrate the message management products into our business and on the market acceptance of these new products. If the market does not accept these products, the growth of our revenues could be hindered and this would negatively affect our results of operations, financial condition and cash flows. Factors that may affect the market acceptance of our message management products include the performance, price and total cost of ownership of our products, and the availability, functionality and price of competing products and technologies. Many of these factors are beyond our control.

We are dependent on certain key customers.

During the three months ended June 30, 2009, we had one customer that comprised 11% of our consolidated revenues. We have derived, and may continue to derive, a significant portion of our revenues from a limited number of OEM customers. If any of our largest OEM customers were to reduce purchases from us or we are unable to attract new OEM customers, our business would be adversely affected. In addition, we do not have contracts with our key customers that require such customers to make any minimum purchases from us. Therefore, we cannot be sure that these customers will continue to purchase our product at current levels, or at all. As a result, a significant customer in one period may decide not to purchase our product in a subsequent period, which would have an adverse impact on our revenues, results of operations, financial condition and cash flows.

We rely on indirect sales channels such as value-added resellers, distributors and OEMs, and this makes it difficult for us to predict our revenues.

We rely, and will continue to rely, on our indirect sales channel for the marketing and distribution of our products. Our agreements with value-added resellers and distributors do not contain exclusivity provisions and in most cases may be terminated by either party without cause and with limited or no notice. Many of our resellers also carry other product lines that are competitive with ours. These resellers may not give a high priority to the marketing of our products. They may give a higher priority to other products, including the products of competitors, or may decide not to continue to carry our products. In addition, we may not be able to retain our current resellers or successfully recruit new resellers. Any such changes in our distribution channels could seriously harm our business, operating results and financial condition.

Our strategy also involves developing significant partnerships with key hardware and software providers to integrate NetVault products into their offerings to support more robust data protection solutions. We may fail to implement this strategy successfully. We are currently investing, and will continue to invest, resources to develop this channel. Such investments, if not successful, could seriously harm our operating margins. Before we can sell our products to an OEM, generally we must engage in a lengthy sales cycle and develop a version of our software customized for and integrated with the hardware or software product of the OEM. This process, which can take up to 12 months or more, requires the commitment of OEM personnel and resources, and we compete with other suppliers for these resources. Any delays in completing this process or any failure to timely develop a customized and integrated version of our software for an OEM would adversely affect our ability to sell our products.

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Sales of our products through our OEMs depend on the success of our OEMs in developing and effectively marketing new products, applications and product enhancements on a timely and cost-effective basis that meet changing customer needs and respond to emerging industry standards and other technological changes. Our reliance on OEMs exposes us to additional risks. If our OEMs do not meet these challenges our revenues may suffer. The OEMs we partner with may incorporate the technologies of other companies in addition to, or to the exclusion of, our technologies, and are not obligated to purchase our product from us, and they may not continue to include our products with their products. In addition, we have no control over the shipping dates or volumes of products the OEMs ship. Our OEM customers may compete with one another. If one of our OEM customers views the products we have developed for another OEM as competing with its products, it might decide to stop doing business with us, which could adversely affect our business, results of operations, financial condition and cash flows. The inability to recruit, or the loss of, important OEMs could seriously harm our business, operating results and financial condition. Finally, should one of our OEM partners create or acquire competitive products to ours, our OEM revenues would likely decline.

Failure to manage our growth could adversely affect our business.

We expect to continue to expand our operations domestically and internationally. If we fail to manage our expansion effectively, our business and operating results could be adversely affected, which could cause the market price of our stock to fall. Any expansion in our operations and staff could place a significant strain on our management systems and resources. If we fail to manage any future expansion, we may experience higher operating expenses. To manage this expansion effectively we must continue to:

• improve our financial and management controls, reporting systems and procedures;

• hire and integrate new employees;

• manage our relationship with our resellers, distributors and OEMs;

• control expenses; and

• expand geographically dispersed operations.

We may need to commit a significant amount of funds to obtain additional systems and facilities to accommodate any current and future anticipated expansion. To the extent any expansion does not occur or occurs more slowly than we expect, we may not be able to reduce expenses to the same degree. Any failure to manage our expansion effectively could adversely affect our business, results of operations, financial condition and cash flows.

Because our intellectual property is critical to the success of our business, our results of operations may suffer if we are unable to adequately protect or enforce our intellectual property rights.

Our proprietary technologies are crucial to our success and ability to compete. We rely primarily on a combination of copyrights, trade secret laws, contractual provisions and trademarks to establish and protect our intellectual property rights in our proprietary technologies. Sometimes our products are licensed under “shrink wrap” license agreements that do not require a physical signature by the end user licensee and therefore may be unenforceable under the laws of some jurisdictions. We presently have five patents issued and we continually invest resources to gain additional patent protection for our proprietary technology. We may not be issued additional patents in the future, and the benefit we may derive from any patents, if and when issued, may equal or exceed the costs of obtaining such patents.

Our general practice is to enter into confidentiality or license agreements with employees, consultants and customers and seek to control access to and distribution of our source code, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our product or to obtain and use information that we regard as proprietary. Policing unauthorized use of our proprietary information is difficult. Other parties also may independently develop or otherwise acquire

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equivalent or superior technology. In addition, the laws in some countries in which our product is or may be developed, manufactured or sold may not protect our intellectual property rights to the same extent as the laws of the United States, or at all. Our failure to protect our intellectual property rights could result in increased competition and therefore reduce our market share, which would have a material adverse effect on our business, results of operations, financial condition and cash flows.

We may become involved in costly and lengthy patent infringement or intellectual property litigation which could seriously harm our business.

In recent years, there has been significant litigation in the United States and in foreign countries involving patents and other intellectual property rights. We may become party to litigation in the future as a result of an alleged infringement of others’ intellectual property. From time to time, we receive inquiries from other companies concerning whether we used their proprietary information or technology. It also is possible that patent holders will assert patent rights which apply broadly to our industry, and that such patent rights, if valid, may apply to our product or technology. Any claims that we improperly use another party’s proprietary information or technology or that we infringe another party’s intellectual property, with or without merit, could adversely affect or delay sales of our product, result in costly and time-consuming litigation, divert our technical and management personnel, or require us to develop non-infringing technology or enter into royalty or licensing arrangements, any of which could adversely affect our business. We cannot be certain that the necessary licenses will be available or that they can be obtained on commercially reasonable terms. If we were to fail to obtain such royalty or licensing agreements in a timely manner or on reasonable terms, our business, results of operations, financial condition and cash flows could be materially adversely affected.

Our foreign operations create special challenges that could adversely affect our results of operations.

We have significant operations outside of the United States, including a significant portion of our engineering and sales operations, and we generate a significant portion of our revenues from sales outside the United States. It is our intention to expand our international operations in order to increase our revenues from sales outside the United States and to continue to take advantage of lower costs associated with software development outside the United States. As of August 7, 2009, we had 96 employees in Europe, the Middle East and Africa (“EMEA”) and 69 employees in the Asia-Pacific region out of 311 total employees. Our foreign operations and revenues are subject to a number of risks, including:

• potential loss of proprietary information due to piracy, misappropriation, or weaker intellectual property protection laws or weaker enforcement of such laws;

• imposition of foreign laws and other governmental controls, including trade restrictions, as well as the burdens of complying with a wide variety of multiple local, country and regional laws;

• unexpected domestic and international political or regulatory changes;

• fluctuations in currency exchange rates and general economic instability;

• lack of acceptance of localized products, if any, in foreign countries;

• longer negotiation and accounts receivable payment cycles;

• potentially adverse tax consequences;

• difficulties in coordinating the activities of our geographically dispersed and culturally diverse operations; and

• difficulties in ensuring that our subsidiaries maintain sufficient internal control over financial reporting in order to produce financial statements in compliance with accounting principles generally accepted in the United States (“U.S. GAAP”).

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Our continued growth will require further expansion of our international operations. To expand international operations successfully, we must establish additional foreign operations, hire and retain additional personnel and recruit additional international resellers, all of which will require significant management attention and financial resources. If we fail to further expand our international operations and revenues, we may not achieve our anticipated growth.

A majority of our international business is presently conducted in currencies other than the U.S. dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which we conduct our business relative to the U.S. dollar will cause currency transaction gains and losses, which we have experienced in the past and continue to experience. Due to the substantial volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results and we may experience currency losses. Portions of our Asia-Pacific revenues are currently denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and, therefore, potentially less competitive in those markets. We have not previously undertaken hedging transactions to cover currency exposure, and we do not currently intend to engage in hedging activities. As a result, our results of operations, financial condition and cash flows could be adversely affected by such exchange rate fluctuations.

Our success depends on our ability to keep pace with rapid technological developments in the storage industry.

Our future success depends, in part, on our ability to address the rapidly changing needs of organizations by developing and introducing new product updates and features on a timely basis. To achieve this objective we must extend the operation of our products to new platforms and keep pace with technological developments and emerging industry standards. To achieve broad acceptance of our software, we must obtain certifications from hardware vendors approving our software for use as a data protection solution on their platforms. This process requires continual testing and development, and we must invest significant technical resources in adapting our products to the changing hardware specifications. If we are unsuccessful in obtaining new certifications, the market for our software may be limited. Moreover, software products typically have a limited life cycle, and it is difficult to estimate when they will become obsolete. We must therefore continually develop and introduce innovative products and/or upgraded versions of our existing products before the current software has completed its life cycle. Our failure to do so may result in our inability to achieve and maintain profitability.

Our products may contain significant defects, which may result in liability and/or decreased sales.

Software products frequently contain errors or failures, especially when first introduced or when new versions are released. Despite our best efforts to test our products, we may experience significant errors or failures in our products, or software may not work with other hardware or software as expected, which could delay the development or release of new products or new versions of our products and adversely affect market acceptance of our products. End user customers use our products for applications that are critical to their businesses, and they have a greater sensitivity to product defects than the market for other software products generally. Our end users and distribution partners may claim that we are responsible for damages to the extent they are harmed by any failure of our products.

If we were to experience significant delays in the release of new products or new versions of our products, or if customers were dissatisfied with product functionality or performance, we could lose revenue or be subject to liability for service or warranty costs, and our business, results of operations, financial condition and cash flows could be adversely affected.

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Our success depends on retaining key personnel, including our executive officers, and hiring and retaining other qualified employees.

Our future growth and success depends on the continued contributions of our senior management, as well as our ability to hire and retain other key engineering, sales and marketing and operations personnel as needed. If we are unable to hire and retain qualified employees, our business and operating results may be adversely affected. We need to hire and retain qualified personnel to support the planned expansion of our business and to meet the anticipated increase in customer demand for our products and services, and we may not be able to do so. All of our employees are free to terminate their employment with us at any time. Competition for people with the skills we require is intense, particularly in the San Diego area where our headquarters are located, and the high cost of living in this area makes our recruiting and compensation costs higher. As a result, we expect to continue to experience increases in compensation costs.

We rely upon software licensed from third parties, and if it became unavailable to us, we could be required to modify our software or to acquire a license or right to use alternative technology.

We license and use software owned by third parties in our business, some of which is incorporated into our products. These third party software licenses may not continue to be available to us on acceptable terms. Also, these third parties may from time to time receive claims that they have infringed the intellectual property rights of others, including patent and copyright infringement claims, which may affect our ability to continue licensing this software. Our inability to use any of this third party software could result in shipment delays or other disruptions in our business, which could adversely affect our business, results of operations, financial condition and cash flows.

Because we are a Canadian corporation, certain civil liabilities and judgments against us or our directors by U.S. investors may be unenforceable.

We are incorporated under the laws of Canada and some of our directors are residents of Canada. As a result, it may be difficult for our U.S.-based shareholders to initiate a lawsuit within the United States. It may also be difficult for shareholders to enforce a U.S. judgment in Canada or elsewhere or to succeed in a lawsuit in Canada or elsewhere based only on violations of U.S. securities laws.

Litigation may harm our business or otherwise distract our management.

Substantial, complex or extended litigation could cause us to incur large expenditures and distract our management. For example, we may in the future be subject to class actions, other securities litigation or other proceedings or actions arising in relation to the restatement of our prior period financial statements. Litigation and any potential regulatory proceeding or action may be time consuming, expensive and distracting from the conduct of our business, and the outcome of litigation and any potential regulatory proceeding or action is difficult to predict. The adverse resolution of any specific lawsuit or any potential regulatory proceeding or action could have a material adverse effect on our business, results of operations and financial condition. To the extent expenses incurred in connection with litigation or any potential regulatory proceeding or action (which may include substantial fees of attorneys and other professional advisers and potential obligations to indemnify officers and directors who may be parties to such actions) are not covered by available insurance, such expenses could adversely affect our business, results of operations, financial condition and cash flows.

Our bookings, revenues and operating results may fluctuate significantly, which could cause the market price of our stock to fall.

Our operating results have fluctuated in the past and can be expected to fluctuate from time to time in the future. We may experience a shortfall in bookings or revenues in any given quarter in relation to our plans or investor expectations. In addition, if we have a shortfall in bookings or revenues, our efforts to reduce operating expenses in response will likely lag behind such shortfall. Our revenues and bookings, and our licensing revenues

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and bookings in particular, are difficult to forecast and are likely to fluctuate significantly from quarter-to-quarter due to a number of factors, many of which are outside of our control. Factors that may cause fluctuations in our revenues and bookings include the following:

• timing and magnitude of sales;

• historical sales patterns in the IT industry which often involve customer purchase decisions being made at or near the end of each calendar quarter;

• timing of large enterprise transactions which are typified by long solicitation and decision periods and often remain highly uncertain until the sale is actually completed;

• introduction, timing and market acceptance of new products by us and our competitors;

• rate of growth of Network Attached Storage and Storage Area Network technology deployment;

• rate of adoption and associated growth of the Linux operating system;

• changes in our pricing policies and distribution terms;

• possibility that our customers may defer purchases in anticipation of new products or product updates by us or by our competitors; and

• changes in market demand for IT products in general.

Any deterioration in our operating results, including fluctuations based on any shortfalls in bookings or revenues, could cause the market price of our stock to fall substantially. If our operating results are below the expectations of securities analysts or investors, the market price of our common stock may fall abruptly and significantly.

There is a limited market for our common shares and the trading price of our common shares is subject to volatility.

Our common shares have only recently been quoted on the OTCBB, following our delisting in February 2005 due to our failure to keep current in filing our periodic reports with the SEC. From February 2005 until May 27, 2009, trading of our common stock was conducted on the “Pink Sheets.” In addition, our common stock has not traded on the TSX since December 2004, when the Canadian jurisdictions of Ontario, Alberta and British Columbia issued cease trade orders due to delays in the filing of our financial statements. Our common shares were subsequently de-listed from the TSX in May 2006. In April 2009, the cease trade orders in all of the Canadian jurisdictions were lifted. The trading market for our common shares is limited and an active trading market may not develop. Selling our common shares may be difficult because the limited trading market for our shares on the OTCBB could result in lower prices and larger spreads in the bid and ask prices of our shares, as well as lower trading volume.

In addition, our stock may be defined as a “penny stock” under Rule 3a51-1 under the Exchange Act. “Penny stocks” are subject to Rule 15g-9, which imposes additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. Consequently, the rule may affect the ability of broker-dealers to sell our common stock and affect the ability of holders to sell their shares of our common stock in the secondary market. To the extent our common stock is subject to the penny stock regulations, the market liquidity for the shares will be adversely affected.

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Our stock price is volatile and your investment could decline in value.

Our stock price has fluctuated significantly in the past and is likely to continue to fluctuate significantly, making it difficult to resell shares when investors want to at prices they find attractive. Factors affecting the trading price of our common stock could include:

• variations in our financial results;

• our restatement of previously reported financial information and delayed filings for subsequent years;

• announcements of innovations, new solutions, strategic alliances or significant agreements by us or by our competitors;

• recruitment or departure of key personnel;

• changes in estimates of our financial results;

• changes in the recommendations of any securities analysts that elect to follow our common stock;

• market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors;

• any significant litigation brought against us;

• market conditions in our industry, the industries of our customers and the economy as a whole; and

• sales of substantial amounts of our common shares, or the perception that substantial amounts of our common shares will be sold, by our existing stockholders in the public.

General economic, political and stock market conditions may affect the market price of our common shares, and may cause our share price to fluctuate in ways unrelated or disproportionate to our operating performance. The stock market is subject to price and volume fluctuations that affect the market prices for companies in general, and small-capitalization, high technology companies in particular, which are often unrelated to the operating performance of these companies. In addition, in the past, securities class action litigation has been instituted against companies following periods of volatility in the market price of their securities, and we may be subject to a heightened risk of securities class action litigation and due to our restatement of previously published financial information.

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

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

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Item 6. Exhibits

Exhibit Number	Description of Document
2.1(1)	Agreement and Plan of Merger, dated May 11, 2009, by and among BakBone Software Incorporated, Chickasaw Acquisition Corporation, Chickasaw Acquisition Corporation II, ColdSpark, Inc. and Tom Neustaetter as stockholder representative. Certain schedules and exhibits referenced in the Agreement and Plan of Merger have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the Securities and Exchange Commission upon request.
10.1(2)	Asset Purchase Agreement, dated May 1, 2009, among BakBone Software, Inc., a California corporation, and Asempra (Assignment for the Benefit of Creditors), LLC (the “Seller”), as Assignee for the Benefit of Creditors of Asempra Technologies, Inc.
10.2(3)	Amendment to Offer Letter, dated June 19, 2009, by and between the registrant and Kenneth Horner
10.3(3)	Amendment to Offer Letter, dated June 19, 2009, by and between the registrant and Dan Woodward
10.4(3)	Offer Letter, dated June 15, 2009, by and between the registrant and Roy Hogsed
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) Previously filed with the SEC as an exhibit to and incorporated herein by reference from our Current Report on form 8-K filed on May 14, 2009.

(2) Previously filed with the SEC as an exhibit to and incorporated herein by reference from our Current Report on form 8-K filed on May 4, 2009.

(3) Previously filed with the SEC as an exhibit to and incorporated herein by reference from our Annual Report on Form 10-K filed on June 23, 2009.

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SIGNATURE

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

	BAKBONE SOFTWARE INCORPORATED
DATE: August 13, 2009	/s/    JAMES R. JOHNSON
	James R. Johnson
	President and Chief Executive Officer (Principal Executive Officer)
DATE: August 13, 2009	/s/    STEVEN R. MARTIN
	Steven R. Martin
	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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