Bakbone Software (BKBO) 10-Q 2010 Q3 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 DECEMBER 31, 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 January 29, 2010 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 December 31, 2009

PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of December 31, 2009 (unaudited) and March 31, 2009	3
	Unaudited Consolidated Statements of Operations for the three and nine months ended December 31, 2009 and 2008 (restated)	4
	Unaudited Consolidated Statements of Cash Flows for the nine months ended December 31, 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	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40
Item 4T.	Controls and Procedures	40
PART II. OTHER INFORMATION		42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Submission of Matters to a Vote of Security Holders	51
Item 5.	Other Information	51
Item 6.	Exhibits	52
	Signatures	53
	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)

	December 31, 2009			March 31, 2009
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	5,660		$	8,398
Restricted cash		51			264
Accounts receivable, less allowances for doubtful accounts and sales returns of $147 at December 31, 2009 and $218 at March 31, 2009		9,847			9,646
Prepaid expenses		985			873
Other assets		424			286
Total current assets		16,967			19,467
Property and equipment, at cost		7,721			7,076
Less accumulated depreciation		(5,471	)		(4,363	)
Property and equipment, net		2,250			2,713
Intangible assets, net		7,798			824
Trademarks		400			—
Goodwill		14,007			7,615
Other assets		957			939
Total assets	$	42,379		$	31,558
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	1,664		$	2,291
Accrued liabilities		7,114			7,312
Current portion of acquisition consideration payable		2,279			—
Current portion of deferred revenue		44,482			44,081
Total current liabilities		55,539			53,684
Deferred revenue, excluding current portion		46,719			47,684
Acquisition consideration payable, excluding current portion		4,452			—
Other liabilities		834			1,337
Total liabilities		107,544			102,705
Commitments and contingencies (Note 6)
Shareholders’ deficit:
Series A convertible preferred stock, no par value, 22,000 shares authorized at December 31, 2009, and March 31, 2009, 18,000 shares issued and outstanding at December 31, 2009, and March 31, 2009, liquidation preference of $25,729 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 December 31, 2009 and March 31, 2009, respectively		159,670			152,423
Employee benefit trust		(10	)		(11	)
Accumulated deficit		(230,226	)		(232,657	)
Accumulated other comprehensive loss		(5,759	)		(2,062	)
Total shareholders’ deficit		(65,165	)		(71,147	)
Total liabilities and shareholders’ deficit	$	42,379		$	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 December 31,						Nine months ended December 31,
	2009			2008			2009			2008
				As Restated (see note 2)						As Restated (see note 2)
Revenues:
License and service	$	15,199		$	14,348		$	45,619		$	41,606
Other		—			—			1,500			—
Total revenues		15,199			14,348			47,119			41,606
Cost of revenues		1,660			1,818			4,874			5,466
Gross profit		13,539			12,530			42,245			36,140
Operating expenses:
Sales and marketing		6,841			6,483			20,015			20,784
Research and development		3,292			2,780			9,685			8,804
General and administrative		2,614			4,366			9,734			12,350
Total operating expenses		12,747			13,629			39,434			41,938
Operating income (loss)		792			(1,099	)		2,811			(5,798	)
Interest income		—			2			5			63
Interest expense		(223	)		(33	)		(596	)		(103	)
Foreign exchange (loss) gain, net		(191	)		1,868			42			1,517
Income (loss) before income taxes		378			738			2,262			(4,321	)
(Benefit from) provision for income taxes		(231	)		100			(169	)		247
Net income (loss)	$	609		$	638		$	2,431		$	(4,568	)
Net income (loss) per common share:
Basic	$	0.01		$	0.01		$	0.03		$	(0.07	)
Diluted	$	0.01		$	0.01		$	0.02		$	(0.07	)
Weighted-average common shares outstanding:
Basic		86,644			64,610			83,368			64,616
Diluted		104,690			82,647			101,488			64,616

See accompanying notes to consolidated financial statements.

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BAKBONE SOFTWARE INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Nine months ended December 31,
	2009			2008
				As Restated (see note 2)
Cash flows from operating activities:
Net income (loss)	$	2,431		$	(4,568	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		1,868			1,274
Non-cash interest expense		474			—
Operating expenses funded by financing arrangement		267			59
Provision for bad debt		173			—
Stock-based compensation		29			229
Loss on disposal of capital assets		9			19
Changes in assets and liabilities, net of effects from acquisition of ColdSpark, Inc:
Accounts receivable		(116	)		2,356
Prepaid expenses and other assets		5			1,172
Accounts payable		(793	)		(541	)
Accrued and other liabilities		(1,133	)		198
Deferred revenue		(4,891	)		(609	)
Net cash used in operating activities		(1,677	)		(411	)
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired		(1,014	)		—
Capital expenditures		(256	)		(946	)
Release of restricted cash		325			227
Net cash used in investing activities		(945	)		(719	)
Cash flows from financing activities:
Payments on capital lease obligations		(227	)		(186	)
Payments on long-term debt obligations		(437	)		(419	)
Net cash used in financing activities		(664	)		(605	)
Effect of exchange rate changes on cash and cash equivalents		548			(257	)
Net decrease in cash and cash equivalents		(2,738	)		(1,992	)
Cash and cash equivalents, beginning of period		8,398			9,496
Cash and cash equivalents, end of period	$	5,660		$	7,504
Cash paid during the period for:
Interest	$	34		$	64
Income taxes	$	136		$	217
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Equipment acquired under capital leases	$	12		$	90
Capital expenditures included in accounts payable at end of period	$	40		$	15

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 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 December 31, 2009, the consolidated statements of operations for the three and nine months ended December 31, 2009 and 2008, and the consolidated statement of cash flows for the nine months ended December 31, 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 December 31, 2009 and 2008, the Company had no customers with an accounts receivable balance representing 10% of our consolidated accounts receivable balance. During the three and nine months ended December 31, 2009 and 2008, there were no customers representing 10% or more of the Company’s 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.

Income Taxes

During the three months ended December 31, 2009, the Company recorded a tax benefit of $0.3 million related to the reversal of certain tax accruals as a result of the expiration of the related statute of limitations.

Adoption of Recent Accounting Pronouncements

Effective April 1, 2009, the Company adopted the Financial Accounting Standards Board’s (“FASB”) authoritative guidance for business combinations. Under this authoritative guidance, 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 first quarter of fiscal 2010, 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 the FASB’s authoritative guidance for determining the useful life of intangible assets, which amends the factors considered in developing renewal or extension assumptions used to determine the useful life of recognized intangible assets. This guidance amends prior guidance and requires 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 and nine months ended December 31, 2009.

Effective June 15, 2009, the Company adopted the FASB’s authoritative guidance for subsequent events, 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 this guidance 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 December 31, 2009 through February 10, 2010, 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 FASB’s authoritative guidance for interim disclosures about fair value instruments, which requires publicly traded companies to disclose in their interim financial statements the same information that is disclosed in their annual financial statements about the fair value of financial instruments. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

Effective July 1, 2009, the Company adopted the new Accounting Standards Codification (ASC) as issued by the FASB. The ASC has become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The ASC is not intended to change or alter existing GAAP. The adoption of the ASC did not have a material impact on the Company’s consolidated financial statements.

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Other than the adoption of the authoritative guidance discussed above, there have been no significant changes in the Company’s accounting policies during the nine months ended December 31, 2009, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended March 31, 2009.

Recent Accounting Pronouncements

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.

In September 2009, the FASB issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. The accounting guidance will be applied prospectively and will become effective during the first quarter of fiscal 2012, however, early adoption is allowed. The Company does not believe this will have a material impact on its consolidated financial statements upon adoption.

In September 2009, the FASB issued new accounting guidance related to certain revenue arrangements that include software elements. Previously, companies that sold tangible products, with “more than incidental” software, were required to apply software revenue recognition guidance. This guidance often delayed revenue recognition for the delivery of the tangible product. Under the new guidance, tangible products that have software components that are “essential to the functionality” of the tangible product will be excluded from the software revenue recognition guidance. The new guidance includes factors to help companies determine what is “essential to the functionality.” Software-enabled products will now be subject to other revenue guidance and will likely follow the guidance for multiple deliverable arrangements issued by the FASB in September 2009. The new guidance is to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. If a vendor elects earlier application and the first reporting period of adoption is not the first reporting period in the vendor’s fiscal year, the guidance must be applied through retrospective application from the beginning of the vendor’s fiscal year and the vendor must disclose the effect of the change to those previously reported periods. The Company does not believe this will have a material impact on its consolidated financial statements upon adoption.

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 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 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 derives revenues from software licenses, maintenance services, and professional services from three distinct groups of customers: resellers, OEMs, and direct end users.

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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 using 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 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 related to implementation of the Company’s software as well as training. Software license arrangements with resellers include implicit platform transfer rights, 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

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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. The Company has established vendor specific objective evidence (“VSOE”) for the maintenance element of its contracts and as a result the fair value of the maintenance element is deferred and recognized ratably over the maintenance period. VSOE of fair value of the maintenance element of the arrangement is based upon the Company’s normal pricing and discounting practices for those services when sold separately. The remaining portion of the contract fee, which generally includes license and professional services, is recognized on a percent complete basis, over the period the services are performed, generally two to nine months. The Company calculates the percentage of professional services completed at each reporting period, based upon the actual hours incurred to date as compared to the total estimated hours to complete the agreed upon professional services. The Company’s product agreements generally include customer acceptance provisions, and as such, the Company assesses whether revenue recognition should be deferred pending customer acceptance.

Business Combinations

The Company accounts for business combinations by recognizing 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. 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 nine months ended December 31, 2009 (in thousands):

Deferred revenue balance at March 31, 2009	$	91,765
Current period bookings deferred into subsequent periods		32,604
Current period revenue from prior period bookings		(37,328	)
Foreign exchange impact		4,160
Deferred revenue balance at December 31, 2009	$	91,201

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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 and nine months ended December 31, 2009 and 2008 is as follows:

	Three months ended December 31,					Nine months ended December 31,
	2009		2008			2009			2008
Net income (loss)	$	609	$	638		$	2,431		$	(4,568	)
Foreign currency translation adjustment		859		(2,184	)		(3,697	)		1,701
Total comprehensive loss	$	1,468	$	(1,546	)	$	(1,266	)	$	(2,867	)

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 December 31, 2009, the foreign currency translation increase of $0.9 million was related primarily to the translation of the Company’s assets and liabilities in its Asia-Pacific subsidiary as the U.S. dollar strengthened against the Japanese yen during the period. During the nine months ended December 31, 2009, the foreign currency decrease of $3.7 million related to the translation of the Company’s assets and liabilities in its EMEA and Asia-Pacific subsidiaries as the U.S. dollar weakened against the British pound and Japanese yen during the period. During the three months ended December 31, 2008, the period decrease of $2.2 million was related primarily to the translation of the Company’s assets and liabilities in its Asia-Pacific subsidiary as a result of the weakening of the U.S dollar against the Japanese yen, off-set partially by the translation of the Company’s assets and liabilities in its EMEA subsidiary as a result of the U.S. dollar strengthening against the British pound. During the nine months ended December 31, 2008, the period increase of $1.7 million, related primarily to the translation of the Company’s deferred revenue balances and was primarily the result of the strengthening of the U.S. dollar against the British pound.

Net Income (Loss) Per Share

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 December 31,		Nine months ended December 31,
	2009	2008	2009	2008
Stock options	4,622	5,737	5,048	5,737
Restricted stock units	—	105	—	162
Employee Benefit Trust	23	—	23	—
Warrants	2,065	4,505	2,105	4,505
Series A convertible preferred stock	—	—	—	18,000
Total anti-dilutive instruments	6,710	10,347	7,176	28,404

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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 $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. The Company recognized a liability 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.

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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 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

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.

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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. The goodwill resulting from business acquisitions 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.

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 December 31, 2009:

(in thousands)
Revenues	$	662
Operating loss	$	(2,902	)

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Unaudited Pro Forma Financial Information

The following table presents the Company’s unaudited pro forma results (including ColdSpark) for the three and nine months ended December 31, 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 December 31,					Nine months ended December 31,
(in thousands)	2009		2008			2009		2008
Total revenues	$	15,199	$	14,616		$	47,289	$	42,913
Net income (loss)	$	609	$	(739	)	$	2,004	$	(8,385	)
Basic net income (loss) per common share	$	0.01	$	(0.01	)	$	0.02	$	(0.13	)
Diluted net income (loss) per common share	$	0.01	$	(0.01	)	$	0.02	$	(0.13	)

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

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 subject to Rule 144 and are subject to contractual resale restrictions.

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

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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

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.

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.

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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 December 31, 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 December 31, 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 December 31, 2009
Technology	4 to 14 years	$	824	$	7,832	$	(858	)	$	7,798
Maintenance agreements	6 months		—		10		(10	)		—
Total intangible assets		$	824	$	7,842	$	(868	)	$	7,798

Amortization expense for intangible assets was $0.3 million and $0.9 million for the three and nine months ended December 31, 2009, respectively and $0.1 million and $0.3 million for the three and nine months ended December 31, 2008, respectively. For three and nine months ended December 31, 2009, amortization expense is included in cost of revenues, in the consolidated statements of operations. For the three months ended December 31, 2008, amortization expense of $77,000 and $11,000, is included in cost of revenues and sales and marketing expense, respectively, in the consolidated statements of operations. For the nine months ended December 31, 2008, amortization expense of $232,000 and $45,000, 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 December 31, 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.

7. Shareholders’ Deficit

During the nine months ended December 31, 2009, 75,000 restricted stock units vested pursuant to the vesting conditions of an outstanding restricted stock unit 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 award. A summary of the change in restricted stock unit awards during the nine months ended December 31, 2009 is as follows:

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

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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 and nine months ended December 31, 2009 (in thousands):

	Three months ended December 31, 2009
	Storage Management		Message Management			Total
Revenues from external customers	$	14,930	$	269		$	15,199
Net income (loss)	$	1,703	$	(1,094	)	$	609
Total assets	$	29,077	$	13,302		$	42,379

	Nine months ended December 31, 2009
	Storage Management		Message Management			Total
Revenues from external customers	$	46,457	$	662		$	47,119
Net income (loss)	$	5,333	$	(2,902	)	$	2,431
Total assets	$	29,077	$	13,302		$	42,379

There were no inter-segment revenues during the three and nine months ended December 31, 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: weak economic and market conditions that could result in further reductions in 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;

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• Global replication of data;

• 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. We have operations in three primary geographic regions: North America, Asia-Pacific, and Europe, Middle East and Africa, or EMEA, and conduct commercial operations primarily through four respective wholly-owned subsidiaries: BakBone Software, Inc., BakBone Software KK, BakBone Software Ltd., and ColdSpark, Inc.

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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 December 31,						Nine months ended December 31,
	2009			2008			2009			2008
Consolidated revenues, net	$	15,199		$	14,348		$	47,119		$	41,606
North America		4,976			5,518			17,362			16,025
As a percentage of consolidated revenues		33	%		39	%		37	%		39	%
Asia-Pacific		5,944			5,364			17,333			14,754
As a percentage of consolidated revenues		39	%		37	%		37	%		35	%
EMEA		4,279			3,466			12,424			10,827
As a percentage of consolidated revenues		28	%		24	%		26	%		26	%

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

	As of December 31, 2009		As of March 31, 2009
Consolidated deferred revenue	$	91,201	$	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, the direct costs of products delivered to customers and amortization expense related to our technology-related intangible assets.

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.

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 who 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 who 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.

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

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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 December 31, 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

Our total revenues increased by $0.9 million, or 6%, during the three months ended December 31, 2009, and increased by $5.5 million, or 13%, during the nine months ended December 31, 2009. The increase in revenues during the three months ended December 31, 2009 was due to the amortization of prior period bookings. The increase in revenue during the nine months ended December 31, 2009 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 to the amortization of prior period bookings, partially off-set by a decrease in amortization from current period bookings. During the three and nine months ended December 31, 2009, our consolidated bookings decreased $0.3 million, or 2%, and $1.5 million, or 3%, respectively, as compared to the three and nine months ended December 31, 2008. The decrease in bookings during the three and nine months ended December 31, 2009 is primarily due to a decrease in bookings in our North America region as a result of a decrease in the volume of new license bookings sold through our existing distribution channel.

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 message management pipeline is uncertain. Our message management business is characterized by large transactions and long sales cycles, which makes the timing of transactions difficult to predict. Therefore financial

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performance for fiscal 2010, and beyond, is difficult to predict, including whether and to what extent we achieve 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 $56.5 to $57.5 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 and valuation of goodwill. 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; and

• valuation of goodwill.

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

Revenue Recognition

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.

Our customers are not contractually permitted to return products, but we accept returns under certain circumstances. We account for potential returns from our customers using historical returns experience with these customers to determine potential returns and to establish the appropriate sales returns allowance.

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Sales incentives or other consideration given by BakBone to our customers are considered adjustments of the selling price of our products, such as rebates, and 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, 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 have established vendor specific objective evidence (“VSOE”) for the maintenance element of our contracts and as a result the fair value of the maintenance element is deferred and recognized ratably over the maintenance period. VSOE of fair value of the maintenance element of the arrangement is based upon the normal pricing and discounting practices for those services when sold separately. The remaining portion of the arrangement fee, which generally includes license and professional services, is recognized on a percent complete basis over the period the services are performed, generally two to nine months. We calculate the percentage of professional services completed at each reporting period, based upon the actual hours incurred to date as compared to the total estimated hours to complete the agreed upon professional services. Our arrangements generally include customer acceptance provisions, and as such, we assess whether revenue recognition should be deferred pending customer acceptance.

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

24

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 by recognizing 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. 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 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. Effective with the acquisition of ColdSpark in May 2009, we operate in 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. A reporting unit is 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.

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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.

Results of Operations

Comparison of Results for the Three Months Ended December 31, 2009 and 2008

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 bookings. Accordingly, we believe that trends in current and historical bookings are key factors in analyzing our operating results.

On a worldwide basis, we categorize the sales from our Storage Management division into two different channel categories: (i) VAR, which includes sales through value-added resellers, or VAR’s, and sales of non-customized software to direct customers; and (ii) OEM, which includes sales to original equipment manufacturers, or OEM’s, and sales of customized software to large direct customers. VAR revenues are sourced from the sale of software licenses, related maintenance contracts and professional services through the resellers and direct customers. Software licenses sold through the resellers 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 large 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 December 31,
	2009			2008
Total License and Service revenues	$	15,199		$	14,348
Increase over same period of prior year		6	%
Storage Management revenues	$	14,930		$	14,348
Increase over same period of prior year		4	%
Message Management revenues	$	269			—

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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 December 31,
	2009			2008
North America	$	3,634		$	3,894
(Decrease) over same period of prior year		(7	%)
Asia-Pacific	$	5,562		$	4,941
Increase over same period of prior year		13	%
EMEA	$	3,946		$	2,861
Increase over same period of prior year		38	%
Consolidated	$	13,142		$	11,696
Increase over same period of prior year		12	%

VAR revenues in North America decreased $0.3 million, or 7%, to $3.6 million for the three months ended December 31, 2009 compared to $3.9 million for the three months ended December 31, 2008, primarily due to a decrease in license and maintenance bookings over the past two years.

VAR revenues in Asia-Pacific increased $0.6 million, or 13%, to $5.6 million for the three months ended December 31, 2009 compared to $4.9 million for the three months ended December 31, 2008, primarily due to increased license, maintenance, and maintenance renewal bookings in Japan in the current and prior periods.

VAR revenues in EMEA increased $1.1 million, or 38%, to $3.9 million for the three months ended December 31, 2009 compared to $2.9 million for the three months ended December 31, 2008. During the three months ended December 31, 2009, EMEA’s functional currency revenues increased approximately $0.6 million, or 23%, due to increased license and maintenance, and maintenance renewal bookings in current and prior periods. Additionally, during the three months ended December 31, 2009, the average British pound to U.S. dollar exchange rate increased 4% as compared to the three months ended December 31, 2008, causing an approximate increase of $0.4 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 December 31,
	2009			2008
North America	$	2,994		$	3,640
(Decrease) over same period of prior year		(18	%)
Asia-Pacific	$	4,866		$	4,899
(Decrease) over same period of prior year		(1	%)
EMEA	$	5,514		$	4,454
Increase over same period of prior year		24	%
Consolidated	$	13,374		$	12,993
Increase over same period of prior year		3	%

VAR bookings in North America decreased $0.6 million, or 18%, to $3.0 million for the three months ended December 31, 2009 from $3.6 million for the three months ended December 31, 2008, primarily due to a decrease in the volume of new license bookings sold through our existing distribution channels. During the three months ended December 31, 2009, maintenance renewal bookings remained consistent with the three months ended December 31, 2008.

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VAR bookings in Asia-Pacific remained consistent at $4.9 million for both the three months ended December 31, 2009 and 2008. During the three months ended December 31, 2009, license and maintenance bookings in Japan increased, however, license and maintenance bookings in Korea, Australia and Malaysia decreased resulting in consistent bookings period over period.

VAR bookings in EMEA increased $1.1 million, or 24%, to $5.5 million for the three months ended December 31, 2009 from $4.5 million for the three months ended December 31, 2008. During the three months ended December 31, 2009, our EMEA functional currency license and maintenance and maintenance renewal bookings increased approximately $0.4 million, or 10%, as a result of growth in key markets such as Germany. Additionally, during the three months ended December 31, 2009, the average British pound to U.S. dollar exchange rate increased 4% as compared to the three months ended December 31, 2008, causing an approximate increase of $0.6 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 December 31,
	2009			2008
North America	$	1,073		$	1,624
(Decrease) over same period of prior year		(34	%)
Asia-Pacific	$	381		$	423
(Decrease) over same period of prior year		(10	%)
EMEA	$	334		$	605
(Decrease) over same period of prior year		(45	%)
Consolidated	$	1,788		$	2,652
(Decrease) over same period of prior year		(33	%)

North America OEM revenues decreased $0.6 million, or 34%, to $1.1 million for the three months ended December 31, 2009 from $1.6 million for the three months ended December 31, 2008. The decrease in revenues is the result of a decrease in current and prior period OEM bookings.

Asia-Pacific OEM revenues decreased $42,000, or 10%, to $381,000 for the three months ended December 31, 2009 from $423,000 during the three months ended December 31, 2008, primarily due to a decrease in fiscal 2010 bookings. The decrease in current period bookings was partially off-set by the amortization of prior period bookings.

EMEA OEM revenues decreased $0.3 million, or 45%, to $0.3 million for the three months ended December 31, 2009 from $0.6 million for the three months ended December 31, 2008, primarily due to a decrease in fiscal 2010 bookings. The decrease in current period bookings was partially off-set by the amortization of prior period bookings.

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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 December 31,
	2009			2008
North America	$	909		$	1,204
(Decrease) over same period of prior year		(25	%)
Asia-Pacific	$	293		$	671
(Decrease) over same period of prior year		(56	%)
EMEA	$	248		$	673
(Decrease) over same period of prior year		(63	%)
Consolidated	$	1,449		$	2,548
(Decrease) over same period of prior year		(43	%)

North America OEM bookings decreased $0.3 million, or 25%, to $0.9 million for the three months ended December 31, 2009 from $1.2 million for the three months ended December 31, 2008. During fiscal 2009, several of our OEM arrangements terminated, thus resulting in a decline in OEM bookings for fiscal 2010. Additionally, we experienced a decrease in current period bookings related to four of our existing OEM partners, which was partially off-set by an increase in bookings from another one of our existing OEM partners.

Asia-Pacific OEM bookings decreased $0.4 million, or 56%, to $0.3 million for the three months ended December 31, 2009 from $0.7 million for the three months ended December 31, 2008, due to a decrease in bookings related to two of our existing OEM partners.

EMEA OEM bookings decreased $0.4 million, or 63%, to $0.2 million for the three months ended December 31, 2009 from $0.7 million for the three months ended December 31, 2008, due to 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 Storage Management revenues recognized for the three months ended December 31, 2009 and 2008 (in thousands):

For the three months ended December 31, 2009	VAR			OEM			Total
Revenues sourced from current period bookings:
Total bookings for the three months ended December 31, 2009	$	13,374		$	1,449		$	14,823
Bookings deferred into subsequent periods		(12,629	)		(1,416	)		(14,045	)
Revenues from bookings during the three months ended December 31, 2009	$	745		$	33		$	778
Revenues sourced from prior period bookings:		12,397			1,755			14,152
Total revenues recognized in the three months ended December 31, 2009	$	13,142		$	1,788		$	14,930
For the three months ended December 31, 2008	VAR			OEM			Total
Revenues sourced from current period bookings:
Total bookings for the three months ended December 31, 2008	$	12,993		$	2,548		$	15,541
Bookings deferred into subsequent periods		(12,373	)		(1,900	)		(14,273	)
Revenues from bookings during the three months ended December 31, 2008	$	620		$	648		$	1,268
Revenues sourced from prior period bookings:		11,076			2,004			13,080
Total revenues recognized in the three months ended December 31, 2008	$	11,696		$	2,652		$	14,348

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Message Management

On May 13, 2009, we acquired ColdSpark and from that date the wholly-owned subsidiary has operated as our Message Management division. During the three months ended December 31, 2009, the Message Management division generated $0.3 million and $0.4 million in revenue and bookings, respectively. Revenue related primarily to maintenance and service contracts while bookings related to license, maintenance and service contracts. During the third quarter of fiscal 2010, we entered into a contract with a current financial services customer, which included license, service and maintenance, and contributed to a significant portion of our bookings during the three months ended December 31, 2009. As we continue to expand the ColdSpark operations, we anticipate revenue and bookings growth in the Message Management division.

COST OF REVENUES

Cost of revenues decreased $0.2 million, or 9%, to $1.7 million for the three months ended December 31, 2009 from $1.8 million for the three months ended December 31, 2008. During the three months ended December 31, 2009, we allocated $0.4 million of payroll-related costs associated with our customer service group to research and development expense as certain customer service employees performed quality assurance work which was previously performed by our outsourced research and development consultants during the three months ended December 31, 2008. This decrease was partially off-set by an increase in amortization expense as a result of the acquisition of ColdSpark and certain assets of Asempra. During the three months ended December 31, 2009, costs of revenues attributable to our Message Management division totaled approximately $58,000.

SALES AND MARKETING EXPENSES

Sales and marketing expenses increased by $0.4 million, or 6%, to $6.8 million for the three months ended December 31, 2009, from $6.5 million for the year ended December 31, 2008. During the three months ended December 31, 2009 we experienced an increase in marketing expenses of $0.2 million related to the release of our new products and an increase in training and recruiting costs of $0.2 million. These increases were partially off-set by a decrease in payroll related expenses of $0.4 million as a result of the November 2008 reduction in personnel. During the three months ended December 31, 2009, the Japanese yen to U.S. dollar exchange rate increased 7% while the British pound to the U.S. dollar exchange rate increased 4%, resulting in an approximate $0.2 million increase in our sales and marketing expenses as reported in U.S. dollars, which is included in the fluctuations discussed above. During the three months ended December 31, 2009, sales and marketing expenses attributable to our Message Management division totaled approximately $0.5 million and related primarily to payroll costs.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased $0.5 million, or 18%, to $3.3 million for the three months ended December 31, 2009, from $2.8 million for the three months ended December 31, 2008. During the three months ended December 31, 2009, we experienced a $0.5 million decrease in outsourced research and development costs, which was partially off set by a $0.4 million increase in 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 December 31, 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 December 31, 2008. We also experienced an additional increase in payroll costs of $0.3 million primarily related to the hiring of research and development personnel associated with our acquisition of Asempra. During the three months ended December 31, 2009, research and development expenses attributable to our Message Management division totaled approximately $0.5 million and related primarily to payroll costs.

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GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses decreased by $1.8 million, or 40%, to $2.6 million for the three months ended December 31, 2009, from $4.4 million for the three months ended December 31, 2008. The decrease was primarily attributable to a decrease of $1.4 million in professional service-related expenses as we incurred significant fees associated with the preparation and audits of our fiscal 2007 and 2008 financial statements during the three months ended December 31, 2008. Additionally, our payroll and employee related costs decreased $0.6 million as a result of fewer general and administrative personnel during the three months ended December 31, 2009. During the three months ended December 31, 2009, general and administrative expenses attributable to our Message Management division totaled approximately $0.2 million and related primarily to payroll and payroll-related costs.

INTEREST EXPENSE

During the three months ended December 31, 2009, we incurred $0.2 million in interest expense primarily related to 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 related to the ColdSpark acquisition will be charged to earnings in each of the fiscal years, 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 December 31, 2009 we recorded net foreign exchange losses of $0.2 million as compared to net foreign exchange gains of $1.9 million during the three months ended December 31, 2008, related to foreign exchange rate changes that impacted or are expected to impact cash flows. During the three months ended December 31, 2009, our net foreign exchange losses related primarily to the weakening of the Japanese yen against the U.S. dollar on intercompany balances. During the three months ended December 31, 2008, we recorded significant foreign exchange gains, primarily related to the impact of the strengthening of the U.S. dollar and the Japanese yen against the British pound on intercompany balances.

PROVISION FOR INCOME TAXES

During the three months ended December 31, 2009 we recorded a net benefit from income taxes of $0.2 million. During the three months ended December 31, 2009, we recorded a tax benefit of $0.3 million related to the reversal of certain tax accruals as a result of the expiration of the related statute of limitations. The tax benefit was partially off-set by tax expense of $0.1 million, related primarily to taxes on income generated in certain foreign jurisdictions. During the three months ended December 31, 2008 we recorded a provision for income taxes of $0.1 million, related primarily to taxes on income generated in certain foreign jurisdictions.

Although we have generated consolidated pre-tax income during the three months ended December 31, 2009, we have incurred operating losses in all annual 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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Comparison of Results for the Nine Months Ended December 31, 2009 and 2008

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

	Nine months ended December 31,
	2009			2008
Consolidated revenues, net	$	47,119		$	41,606
Increase over same period of prior year		13	%
License and Service revenues	$	45,619		$	41,606
Increase over same period of prior year		10	%
Other revenues	$	1,500			—

REVENUES—LICENSE AND SERVICE

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):

	Nine months ended December 31,
	2009			2008
Total License and Service revenues	$	45,619		$	41,606
Increase over same period of prior year		10	%
Storage Management revenues	$	44,957		$	41,606
Increase over same period of prior year		8	%
Message Management revenues	$	662			—

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):

	Nine months ended December 31,
	2009			2008
North America	$	11,389		$	11,359
Increase over same period of prior year		—	%
Asia-Pacific	$	16,117		$	13,557
Increase over same period of prior year		19	%
EMEA	$	11,293		$	9,418
Increase over same period of prior year		20	%
Consolidated	$	38,799		$	34,334
Increase over same period of prior year		13	%

VAR revenues in North America remained consistent at $11.4 million for the nine months ended December 31, 2009 and 2008. License and maintenance bookings have decreased over the past two years while maintenance renewal bookings have increased resulting in consistent revenues during the nine months ended December 31, 2009 and 2008.

VAR revenues in the Asia-Pacific region increased $2.6 million, or 19%, to $16.1 million for the nine months ended December 31, 2009 compared to $13.6 million for the nine months ended December 31, 2008. During the nine months ended December 31, 2009 our Asia-Pacific functional currency revenues increased $1.5

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million, or 11%, due to increased license and maintenance, and maintenance renewal bookings in Japan in both current and prior periods. Additionally, during the nine months ended December 31, 2009, the average Japanese yen to U.S. dollar exchange rate increased 10% as compared to the nine months ended December 31, 2008, causing an approximate increase of $1.1 million in our Asia-Pacific revenues as reported in U.S. dollars.

VAR revenues in EMEA increased $1.9 million, or 20%, to $11.3 million for the nine months ended December 31, 2009 compared to $9.4 million for the nine months ended December 31, 2008. During the nine months ended December 31, 2009, EMEA’s functional currency revenues increased approximately $2.9 million, or 31%, due to increased license and maintenance, and maintenance renewal bookings in both current and prior periods. However, this increase was partially off-set by the weakening of the British pound against the U.S. dollar during the nine months ended December 31, 2009 as compared to the nine months ended December 31, 2008. During the nine months ended December 31, 2009, the average British pound to U.S. dollar exchange rate decreased 11% as compared to the nine months ended December 31, 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):

	Nine months ended December 31,
	2009			2008
North America	$	8,744		$	11,308
(Decrease) over same period of prior year		(23	%)
Asia-Pacific	$	14,087		$	13,513
Increase over same period of prior year		4	%
EMEA	$	12,853		$	12,379
Increase over same period of prior year		4	%
Consolidated	$	35,684		$	37,200
(Decrease) over same period of prior year		(4	%)

VAR bookings in North America decreased $2.6 million, or 23%, to $8.7 million for the nine months ended December 31, 2009 from $11.3 million for the nine months ended December 31, 2008, primarily due to a decrease in the volume of new license bookings sold through our existing distribution channels.

VAR bookings in Asia-Pacific increased $0.6 million, or 4%, to $14.1 million for the nine months ended December 31, 2009 from $13.5 million for the nine months ended December 31, 2008. The increase in bookings during the nine months ended December 31, 2009 is related primarily to the strengthening of the Japanese yen against the U.S. dollar as compared to the nine months ended December 31, 2008. During the nine months ended December 31, 2009, the average Japanese yen to U.S. dollar exchange rate increased 10% as compared to the nine months ended December 31, 2008 causing an approximate increase of $0.7 million in our Asia-Pacific bookings as reported in U.S. dollars. During the nine months ended December 31, 2009, our functional currency license and maintenance bookings remained consistent due to an increase in bookings in Japan, which were off-set by a decrease in bookings in Korea, Australia and Malaysia.

VAR bookings in EMEA increased $0.5 million, or 4%, to $12.9 million for the nine months ended December 31, 2009 from $12.4 million for the nine months ended December 31, 2008. During the nine months ended December 31, 2009, our functional currency license and maintenance, and maintenance renewal bookings increased approximately $1.7 million, or 13%, as a result of growth in key markets such as the United Kingdom. The increase in functional currency bookings was off-set by the weakening of the British pound against the U.S. dollar during the nine months ended December 31, 2009 as compared to the nine months ended December 31, 2008. During the nine months ended December 31, 2009, the average British pound to U.S. dollar exchange rate

33

decreased 11% as compared to the nine months ended December 31, 2008, causing an approximate decrease of $1.2 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):

	Nine months ended December 31,
	2009			2008
North America	$	3,811		$	4,666
(Decrease) over same period of prior year		(18	%)
Asia-Pacific	$	1,216		$	1,197
Increase over same period of prior year		2	%
EMEA	$	1,131		$	1,409
(Decrease) over same period of prior year		(20	%)
Consolidated	$	6,158		$	7,272
(Decrease) over same period of prior year		(15	%)

North America OEM revenues decreased $0.9 million, or 18%, to $3.8 million for the nine months ended December 31, 2009, from $4.7 million for the nine months ended December 31, 2008. The decrease in revenues is the result of a decrease in current period bookings partially off-set by the amortization of prior period bookings.

Asia-Pacific OEM revenues remained relatively consistent during the nine months ended December 31, 2009 as compared to the nine months ended December 31, 2008. During the nine months ended December 31, 2009, current period bookings declined, while the amortization of prior period bookings increased, causing a slight increase in revenues during the nine months ended December 31, 2009.

EMEA OEM revenues decreased $0.3 million, or 20%, to $1.1 million for the nine months ended December 31, 2009, from $1.4 million for the three months ended December 31, 2008. The decrease in revenues is the result of a decrease in current period bookings, partially off-set by the amortization of prior period bookings.

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):

	Nine months ended December 31,
	2009			2008
North America	$	2,136		$	3,419
(Decrease) over same period of prior year		(38	%)
Asia-Pacific	$	945		$	1,545
(Decrease) over same period of prior year		(39	%)
EMEA	$	852		$	1,680
(Decrease) over same period of prior year		(49	%)
Consolidated	$	3,933		$	6,644
(Decrease) over same period of prior year		(41	%)

North America OEM bookings decreased $1.3 million, or 38%, to $2.1 million for the nine months ended December 31, 2009, from $3.4 million for the nine months ended December 31, 2008. During fiscal 2009, several of our OEM arrangements terminated, thus resulting in a decline in OEM bookings during fiscal 2010. Additionally, we experienced a decrease in bookings related to four of our existing OEM partners, which were partially off-set by an increase in bookings related to another of our OEM partners.

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Asia-Pacific OEM bookings decreased $0.6 million, or 39%, to $0.9 million for the nine months ended December 31, 2009, from $1.5 million for the nine months ended December 31, 2008. During fiscal 2009, one of our OEM arrangements terminated, thus resulting in a decline in OEM bookings for fiscal 2010. Additionally, we experienced a decrease in bookings related to two of our existing OEM partners.

EMEA OEM bookings decreased $0.8 million, or 49%, to $0.9 million for the nine months ended December 31, 2009, from $1.7 million for the nine months ended December 31, 2008. During fiscal 2009, one of our OEM arrangements terminated, thus resulting in a decline in OEM bookings during fiscal 2010. Additionally, we experienced a decrease in bookings related to three 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 nine months ended December 31, 2009 and 2008 (in thousands):

For the nine months ended December 31, 2009	VAR			OEM			Total
Revenues sourced from current period bookings:
Total bookings for the nine months ended December 31, 2009	$	35,684		$	3,933		$	39,617
Bookings deferred into subsequent periods		(28,597	)		(3,139	)		(31,736	)
Revenues from fiscal 2010 bookings	$	7,087		$	794		$	7,881
Revenues sourced from prior period bookings:		31,712			5,364			37,076
Total revenues recognized in the nine months ended December 31, 2009	$	38,799		$	6,158		$	44,957
For the nine months ended December 31, 2008	VAR			OEM			Total
Revenues sourced from current period bookings:
Total bookings for the nine months ended December 31, 2008	$	37,200		$	6,644		$	43,844
Bookings deferred into subsequent periods		(30,581	)		(4,885	)		(35,466	)
Revenues from fiscal 2009 bookings	$	6,619		$	1,759		$	8,378
Revenues sourced from prior period bookings:		27,715			5,513			33,228
Total revenues recognized in the nine months ended December 31, 2008	$	34,334		$	7,272		$	41,606

Message Management

On May 13, 2009, we acquired ColdSpark and from that date the wholly-owned subsidiary has operated as our Message Management division. From the acquisition date through December 31, 2009, the Message Management division generated $0.7 million and $1.3 million in revenue and bookings, respectively. Revenue related primarily to maintenance and service contracts while bookings included license, maintenance and service contracts. During the second quarter of fiscal 2010, we entered into a contract with a large state-based health care network which included license, service and three years of maintenance, which resulted in significant bookings during the period. Additionally, during the third quarter of fiscal 2010, we entered into a contract with one of our existing financial services customers which included additional license, service and maintenance, and resulted in significant bookings during the period. As we continue to integrate the ColdSpark operations, we anticipate revenue and bookings growth in our Message Management division 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 first quarter of fiscal 2010.

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COST OF REVENUES

Cost of revenues decreased $0.6 million, or 11%, to $4.9 million for the nine months ended December 31, 2009 from $5.5 million for the nine months ended December 31, 2008. During the nine months ended December 31, 2009, we allocated $1.1 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 as certain customer service employees performed quality assurance work which was previously performed by our outsourced research and development consultants during the nine months ended December 31, 2008. This decrease was partially off-set by an increase in amortization expense as a result of the acquisition of ColdSpark and certain assets of Asempra. During the nine months ended December 31, 2009, costs of revenues attributable to our Message Management division totaled approximately $0.2 million.

SALES AND MARKETING EXPENSES

Sales and marketing expenses decreased by $0.8 million, or 4%, to $20.0 million for the nine months ended December 31, 2009, from $20.8 million for the year ended December 31, 2008. During the nine months ended December 31, 2009 we experienced a decrease in payroll related expenses of $1.1 million and a decrease in travel-related costs of $0.5 million as a result of the November 2008 reduction in personnel. Additionally, during the nine months ended December 31, 2009, we experienced decrease in professional service-related expenses of $0.3 million. During the nine months ended December 31, 2009, the Japanese yen to U.S. dollar exchange rate increased 10% while the British pound to the U.S. dollar exchange rate decreased 11%, resulting in an approximate $0.5 million net decrease in our sales and marketing expenses as reported in U.S. dollars, which is included in the fluctuations discussed above. During the nine months ended December 31, 2009, sales and marketing expenses attributable to our Message Management division totaled approximately $1.1 million and related primarily to payroll costs.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased $0.9 million, or 10%, to $9.7 million for the nine months ended December 31, 2009, from $8.8 million for the nine months ended December 31, 2008. During the nine months ended December 31, 2009, we experienced a $1.5 million decrease in outsourced research and development costs, which was partially off-set by a $1.1 million increase in payroll costs related to the allocation of the customer service group costs which were previously reported as costs of revenues. During the nine months ended December 31, 2009, certain customer service employees performed quality assurance work which was previously performed by our outsourced research and development consultants during the nine months ended December 31, 2008. We also experienced an additional increase of $0.4 million in payroll costs primarily related to hiring research and development personnel associated with our acquisition of certain assets from Asempra. During the nine months ended December 31, 2009, the British pound to U.S. dollar exchange rate decreased 11%, resulting in an approximate $0.3 million net decrease in our research and development expenses as reported in U.S. dollars, which is included in the fluctuations discussed above. During the nine months ended December 31, 2009, research and development expenses attributable to our Message Management division totaled approximately $1.2 million and related primarily to payroll costs.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses decreased by $2.6 million, or 21%, to $9.7 million for the nine months ended December 31, 2009, from $12.4 million for the nine months ended December 31, 2008. The decrease was primarily attributable to a decrease of $2.5 million in professional service-related expenses as we incurred significant fees associated with the restatement of our historical financial statements and the preparation and audits of our fiscal 2007 and 2008 financial statements during the nine months ended December 31, 2008. Additionally, we had fewer general and administrative personnel which resulted in a decrease in payroll and employee related expenses of $1.3 million and a decrease in facility related expenses of $0.2 million. These

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decreases were partially off-set by $0.7 million in acquisition related costs for the acquisition of ColdSpark and certain assets of Asempra. During the nine months ended December 31, 2009 general and administrative expenses attributable to our Message Management division totaled approximately $0.7 million and related primarily to payroll and payroll-related costs.

INTEREST EXPENSE

During the nine months ended December 31, 2009, we incurred $0.6 million in interest expense related primarily to 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.

FOREIGN EXCHANGE GAIN (LOSS), NET

During the nine months ended December 31, 2009 and 2008, we recorded net foreign exchange gains of $42,000 and $1.5 million, respectively, related to foreign exchange rate changes that impacted or are expected to impact cash flows. During the nine months ended December 31, 2009, our net foreign exchange gains consisted of $0.5 million of foreign exchange gains related to the strengthening of the British pound and Japanese yen against the U.S. dollar on intercompany balances, offset by $0.4 million of foreign exchange losses related to U.S. dollar and Euro asset holdings in our EMEA region and our U.S. dollar asset holdings in our Asia-Pacific region. During the nine months ended December 31, 2008, our net foreign exchange gains consisted of $0.8 million of foreign exchange gains related to the strengthening of the U.S. dollar and Japanese yen against the British pound on intercompany balances and foreign exchange gains of $0.7 million related to non-functional currency asset and liability holdings in each of our operating regions.

PROVISION FOR INCOME TAXES

During the nine months ended December 31, 2009 we recorded a net benefit from income taxes of $0.2 million. During the nine months ended December 31, 2009, we recorded a tax benefit of $0.3 million related to the reversal of certain tax accruals as a result of the expiration of the related statute of limitations. The tax benefit was partially off-set by tax expense of $0.1 million related primarily to taxes on income generated in certain foreign jurisdictions. During the nine months ended December 31, 2008, we recorded a provision for income taxes of $0.2 million, related primarily to taxes on income generated in certain foreign jurisdictions.

Although we have generated consolidated pre-tax income during the nine months ended December 31, 2009, we have incurred operating losses in all annual 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.

Liquidity and Capital Resources

As of December 31, 2009, we had $5.7 million of cash and cash equivalents and $38.6 million in negative working capital, or $5.9 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 March 31, 2009. 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.

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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 $1.7 million and $0.4 million during the nine months ended December 31, 2009 and 2008, respectively. During the nine months ended December 31, 2009, we used significant cash resources for acquisitions, including transaction costs for 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. During the nine months ended December 31, 2008 we used significant cash resources for the preparation and audits of our fiscal 2007 and 2008 financial statements, which was partially off-set by an increase in cash collections during the period as we experienced a higher percentage of bookings in the fourth quarter of fiscal 2008, which were subsequently collected during the nine months ended December 31, 2008.

Investing Activities

Net cash used in investing activities was $0.9 million and $0.7 million for the nine months ended December 31, 2009 and 2008, respectively. Capital expenditures were $0.3 million during the nine months ended December 31, 2009 compared to $0.9 million during the nine months ended December 31, 2008. During the nine months ended December 31, 2009, we paid $1.0 million to acquire ColdSpark and certain assets of Asempra, net of cash acquired. These cash outflows were off-set partially by the release of our restricted cash balances from the related escrow accounts of $0.3 million and $0.2 million during the nine months ended December 31, 2009 and 2008, respectively.

Financing Activities

During the nine months ended December 31, 2009 and 2008, net cash used in financing activities of $0.7 million and $0.6 million, respectively, consisting 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 $0.2 million in capital expenditures during the remainder of fiscal 2010.

In connection with the acquisition of ColdSpark in May of 2009, we are required to pay aggregate consideration of $8.1 million and issue up to 18.2 million common shares. The aggregate consideration included an initial cash payment of $1.5 million and issuance of 9.1 million common shares, and provided for $750,000 of the initial cash payment to be paid thirteen months after the closing date along with interest as specified in the merger agreement. At closing we paid $750,000 to the shareholders of ColdSpark and deferred the remaining $750,000.

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As of December 31, 2009, we are obligated to make cash payments totaling $7.4 million and issue up to 9.1 million shares to the shareholders of ColdSpark. The payments and share issuances are scheduled as follows:

(in thousands)
Payment Type	Due Date	Cash		Common Shares
Deferred initial payment	June 2010	$	750	—
Interest on deferred payment	June 2010		65	—
Second payment (1)	June 2010		1,500	3,488
Third payment (1)	June 2011		1,500	3,489
Fourth payment	June 2012		3,625	2,075
Total		$	7,440	9,052

(1) The merger agreement allows for us, at our discretion, to defer all or a portion of the cash amounts payable in June 2010 and 2011 by issuing a number of common shares equal to the deferred amount, provided that we pay interest on any deferred cash payments.

During the nine months ended December 31, 2009, we experienced a decrease in bookings as a result of weak 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 have resulted and may continue to result in additional costs associated with acquiring, integrating and developing the businesses and related products. We have taken measures to reduce our operating costs; however, our cash balance has decreased since the beginning of the fiscal year and we expect our cash balance to vary based on the timing of the growth in our bookings, our operating costs and the timing of the cash payments related to the ColdSpark acquisition. 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 previous SEC filing delinquencies, the existence of material weaknesses in our internal controls over financial reporting 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 December 31, 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

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.

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In September 2009, the FASB issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. The accounting guidance will be applied prospectively and will become effective during the first quarter of fiscal 2012, however, early adoption is allowed. We do not believe this will have a material impact on its consolidated financial statements upon adoption.

In September 2009, the FASB issued new accounting guidance related to certain revenue arrangements that include software elements. Previously, companies that sold tangible products, with “more than incidental” software, were required to apply software revenue recognition guidance. This guidance often delayed revenue recognition for the delivery of the tangible product. Under the new guidance, tangible products that have software components that are “essential to the functionality” of the tangible product will be excluded from the software revenue recognition guidance. The new guidance will include factors to help companies determine what is “essential to the functionality.” Software-enabled products will now be subject to other revenue guidance and will likely follow the guidance for multiple deliverable arrangements issued by the FASB in September 2009. The new guidance is to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. If a vendor elects earlier application and the first reporting period of adoption is not the first reporting period in the vendor’s fiscal year, the guidance must be applied through retrospective application from the beginning of the vendor’s fiscal year and the vendor must disclose the effect of the change to those previously reported periods. We do not believe this will have a material impact on its 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 63% and 61% of our total revenue for each of the nine months ended December 31, 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 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 December 31, 2009. Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 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.

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Changes in Internal Control over Financial Reporting

During the first three quarters 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. We expect our material weaknesses to be remediated by the end of fiscal 2010.

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 three quarters 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

Our business could be harmed by the weak 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.

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 nine months ended December 31, 2009, we generated net income of $2.4 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 December 31, 2009, our accumulated deficit was $230.2 million. We may not be 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, our

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cash balance has decreased since the beginning of the fiscal year. We expect our cash balance to vary based on the timing of the growth in our bookings, our operating costs and the timing of the cash portion of the payments related to the ColdSpark transaction. In June 2010 we are obligated to make a minimum cash payment of $815,000 to the shareholders of ColdSpark. 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.

Recent acquisitions and potential future acquisitions could 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 or to integrate completed acquisitions may have a material adverse effect on our business, results of operations, financial condition and cash flows.

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.

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Any acquired businesses, products or technologies may not generate sufficient revenue and cash flows to offset the associated costs of such acquisitions. In addition, such acquisitions could result in other adverse effects. For example, the acquired company is subject to annual review for goodwill impairment. If impairment testing indicates that the carrying value of a reporting unit exceeds its fair value, the goodwill of the reporting unit is deemed impaired. Accordingly, an impairment charge would be recognized for that reporting unit in the period identified, which could have a material adverse effect on our operating results. 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.

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 4T 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 December 31, 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.

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

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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.

Our future revenues depend upon continued market acceptance of our NetVault product portfolio 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 the market acceptance of these new products and our ability to grow the revenue from our message management 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 and nine months ended December 31, 2009, we had no customers that comprised 10% or more of our consolidated revenues. However, 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. For example, during fiscal 2009, several of our OEM arrangements terminated, resulting in a significant decline in OEM bookings for fiscal 2010. 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

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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.

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.

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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 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 January 29, 2009, we had 91 employees in Europe, the Middle East and Africa (“EMEA”) and 70 employees in the Asia-Pacific region out of 300 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

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• 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”).

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.

In addition, our message management business typically involves long sales cycles and large transactions, and our operating results could vary significantly from period to period. 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 been quoted on the OTCBB since May 2009. From February 2005 until May 27, 2009, trading of our common shares was conducted on the “Pink Sheets” due to our failure to keep current in filing our periodic reports with the SEC. In addition, our common shares have 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
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

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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: February 10, 2010	/s/    JAMES R. JOHNSON
	James R. Johnson
	President and Chief Executive Officer (Principal Executive Officer)
DATE: February 10, 2010	/s/    STEVE R. MARTIN
	Steve R. Martin
	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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