- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)


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

For the quarterly period ended March 31, 2010


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

For the transition period from to .

Commission file number: 001-33184

Double-Take Software, Inc.

(Exact name of registrant as specified in its charter)


Delaware		20-0230046
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

257 Turnpike Road, Suite 210 , Southborough , MA		01772
(Address of Principal Executive Offices)		(Zip Code)

(877) 335-5674

(Registrant's telephone number, including area code)

None .

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).

Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller Reporting Company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as determined in Rule 12b-2 of the Exchange Act). YES o NO þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


Class		Outstanding at April 30, 2010
common stock, $0.001 par value		21,151,336

DOUBLE-TAKE SOFTWARE, INC.

Form 10-Q

For The Quarterly Period Ended March 31, 2010

INDEX

PART I	FINANCIAL INFORMATION	Page No.
Item 1.	Financial Statements
	Consolidated Balance Sheets at March 31, 2010 (unaudited) and December 31, 2009	1
	Unaudited Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009	2
	Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009	3
	Unaudited Notes to Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	18
Item 4.	Controls and Procedures	18

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Removed and Reserved	20
Item 5.	Other Information	20
Item 6.	Exhibits	20

	Signatures	21

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements .

DOUBLE-TAKE SOFTWARE, INC.

Consolidated Balance Sheets

As of March 31, 2010 and December 31, 2009

(in thousands, except share and per share amounts)

	March 31,			December 31,
	2010			2009
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	43,323		$	57,974
Short term investments		45,408			38,246
Accounts receivable, net of allowance for doubtful accounts of $676 and $696 at March 31, 2010 and December 31, 2009, respectively		13,902			16,676
Prepaid expenses and other current assets		1,774			1,153
Deferred tax assets		6,048			5,565
Total current assets		110,455			119,614
Property and equipment — at cost, net of accumulated depreciation of $9,676 and $9,149 at March 31, 2010 and December 31, 2009, respectively		2,697			3,074
Customer relationships, net of accumulated amortization of $1,748 and $1,634 at March 31, 2010 and December 31, 2009, respectively		519			633
Marketing relationships, net of accumulated amortization of $960 and $897 at March 31, 2010 and December 31, 2009, respectively		1,032			1,095
Technology related intangibles, net of accumulated amortization of $1,624 and $1,409 at March 31, 2010 and December 31, 2009, respectively		3,033			3,170
Goodwill		18,539			18,099
Other assets		641			786
Long-term deferred tax assets		5,460			5,460
Total assets	$	142,376		$	151,931

Liabilities
Current liabilities:
Accounts payable		1,176			1,624
Accrued expenses		4,883			4,724
Other liabilities		593			665
Deferred revenue		24,582			25,977
Total current liabilities		31,234			32,990

Long-term deferred revenue		4,350			4,726
Long-term deferred rent		208			144
Total long-term liabilities		4,558			4,870
Total liabilities		35,792			37,860

Stockholders’ Equity
Preferred Stock, $.01 par value per share; 20,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively		−			−
Common stock, $.001 par value per share; 130,000,000 shares authorized; 21,148,012 and 22,091,555 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively		21			22
Additional paid-in capital		150,065			157,480
Accumulated deficit		(42,362	)		(42,135	)
Accumulated other comprehensive income:
Unrealized gain (loss) on short term investments		(8	)		(5	)
Cumulative foreign currency translation		(1,132	)		(1,291	)
Total stockholders’ equity		106,584			114,071
Total liabilities and stockholders’ equity	$	142,376		$	151,931

See notes to financial statements

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DOUBLE-TAKE SOFTWARE, INC.

Unaudited Consolidated Statements of Operations

(in thousands, except per share amounts)

	Three Months Ended March 31,
	2010			2009

Revenue:
Software licenses	$	8,244		$	7,722
Maintenance and professional services		10,636			10,444
Total revenue		18,880			18,166

Cost of revenue:
Software licenses		73			82
Maintenance and professional services		2,204			2,057
Total cost of revenue		2,277			2,139

Gross profit		16,603			16,027

Operating expenses:
Sales and marketing		8,690			8,239
Research and development		4,233			3,903
General and administrative		3,178			3,057
Depreciation and amortization		970			990
Total operating expenses		17,071			16,189

Income (loss) from operations		(468	)		(162	)

Interest income		45			132
Interest expense		-			(3	)
Foreign exchange gain (loss)		(105	)		(63	)

Income (loss) before income taxes		(528	)		(96	)
Income tax expense (benefit)		(301	)		(51	)

Net income (loss)		(227	)		(45	)

Net income (loss) per share:
Basic	$	(0.01	)	$	0.00
Diluted	$	(0.01	)	$	0.00

Weighted-average number of shares used in per share amounts:
Basic		21,591			22,018
Diluted		21,591			22,018

See notes to financial statements

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DOUBLE-TAKE SOFTWARE, INC.

Unaudited Consolidated Statements of Cash Flows

(in thousands, except per share amounts)

	Three Months Ended March 31,
	2010			2009

Cash flows from operating activities:
Net income (loss)	$	(227	)	$	(45	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		556			613
Amortization of intangible assets		414			377
Provision for doubtful accounts		63			65
Stock based compensation		1,164			1,092
Deferred income tax (benefit) expense		(482	)		(51	)
Excess tax benefits from stock based compensation		(35	)		-

Changes in:
Accounts receivable		2,451			6,248
Prepaid expenses and other assets		(643	)		(79	)
Other assets		108			(148	)
Accounts payable and accrued expenses		(50	)		(163	)
Other liabilities		(49	)		293
Deferred revenue		(1,239	)		(1,536	)
Net cash provided by operating activities		2,031			6,666

Cash flows from investing activities:
Purchase of property and equipment		(188	)		(563	)
Purchase of short term investments		(13,006	)		(22,007	)
Sales of short term investments		5,500			17,660
Cash flows used in investing activities		(7,694	)		(4,910	)

Cash flows from financing activities:
Proceeds from exercise of stock options		32			10
Excess tax benefits from stock based compensation		35			-
Repurchase of common stock		(8,646	)		-
Payments on capital lease obligations		-			(6	)
Net cash provided by (used in) financing activities		(8,579	)		4

Effect of exchange rate changes on cash		(409	)		47

Net increase (decrease) in cash and cash equivalents		(14,242	)		1,760
Cash and cash equivalents — beginning of period		57,974			40,659
Cash and cash equivalents — end of period	$	43,323		$	42,466

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes	$	153		$	59

See notes to financial statements

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DOUBLE-TAKE SOFTWARE, INC.

Unaudited Notes to Consolidated Financial Statements

(in thousands, except per share amounts)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Double-Take Software, Inc. (the “Company”), a Delaware corporation, develops, sells and supports affordable software that allows IT organizations of all sizes to move, protect and recover workloads across any distance and any combination of physical and virtual server environments. The Company operates in one reportable segment and its revenues are mainly derived from sales of software and related services. Software is licensed by the Company primarily to distributors, value added resellers (“VARS”) and original equipment manufacturers (“OEMS”), located worldwide.

Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include all subsidiaries including Double-Take Software Canada, Inc. (“Double-Take Canada”) and Double-Take Software S.A.S. (“Double-Take EMEA”). All inter-company transactions and balances have been eliminated. Double-Take Canada, a Canadian corporation and wholly-owned subsidiary of the Company, entered into a share purchase agreement with TimeSpring Software Corporation (“TimeSpring”) on December 24, 2007 and a share purchase agreement with emBoot, Inc (“emBoot”) on July 28, 2008 to acquire 100 percent of both entities, respectively. The consolidated financial statements include the financial results and activities related to Double-Take Canada’s acquisition of TimeSpring and emBoot from the dates of each acquisition.

Basis of Presentation

The accompanying consolidated balance sheet as of March 31, 2010, the consolidated statements of operations for the three months ended March 31, 2010 and 2009, and the consolidated statements of cash flows for the three months ended March 31, 2010 and 2009 are unaudited. The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. They do not include all of the financial information and footnotes required by GAAP for complete financial statements. The consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments considered necessary for the fair presentation of the Company’s statement of financial position as of March 31, 2010, the Company’s results of operations for the three months ended March 31, 2010 and 2009, and cash flows for the three months ended March 31, 2010 and 2009. All adjustments are of a normal recurring nature. The results for the three months ended March 31, 2010 are not necessarily indicative of the results to be expected for any subsequent period or for the fiscal year ending December 31, 2010. There have been no significant changes in the Company’s accounting policies during the three months ended March 31, 2010, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue, costs and expenses during the periods presented. Based on historical experience and current account information, estimates are made regarding provisions for allowances for doubtful accounts receivable, sales discounts and other allowances, depreciation, amortization, asset valuations and stock based compensation. Actual results could differ from those estimates.

Goodwill

Goodwill with indefinite lives is not amortized but reviewed for impairment if impairment indicators arise and, at a minimum, annually.

Revenue Recognition

The Company’s revenue is reported net of rebates and discounts because there is no identifiable benefit in exchange for the rebate or discount. The Company derives revenues from two primary sources or elements: software licenses and services. Services include customer support, consulting, installation services and training. A typical sales arrangement includes both of these elements.

For software arrangements involving multiple elements, the Company recognizes revenue using the residual method. Under the residual method, the Company allocates and defers revenue for the undelivered elements based on relative fair value and recognizes the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue. The determination of fair value of the undelivered elements in multiple element arrangements is based on the price charged when such elements are sold separately, which is commonly referred to as vendor-specific objective-evidence (“VSOE”).

The Company’s software licenses typically provide for a perpetual right to use the Company’s software and are sold on a per-copy basis. The Company recognizes software revenue through direct sales channels and resellers upon receipt of a purchase order or other persuasive evidence and when all other basic revenue recognition criteria are met as described below. Revenue from software licenses sold through an original equipment manufacturer partner is recognized upon the receipt of a royalty report evidencing sales.

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Services revenue includes revenue from customer support and other professional services. Customer support includes software updates (including unspecified product upgrades and enhancements) on a when-and-if-available basis, telephone support and bug fixes or patches. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year. To determine the price for the customer support element when sold separately, the Company uses actual rates at which it has previously sold support as established VSOE.

Other professional services such as consulting and installation services provided by the Company are not essential to the functionality of the software and can also be performed by the customer or a third party. Revenues from consulting and installation services are recognized when the services are completed. Training fees are recognized after the training course has been provided. Any paid professional services, including training, that have not been performed within three years of the original invoice date are recognized as revenue in the quarter that is three years after the original invoice date. Based on the Company’s analysis of such other professional services transactions sold on a stand-alone basis, the Company has concluded it has established VSOE for such other professional services when sold in connection with a multiple-element software arrangement. The price for other professional services has not materially changed for the periods presented.

The Company has analyzed all of the undelivered elements included in its multiple-element arrangements and determined that VSOE of fair value exists to allocate revenues to services. Accordingly, assuming all basic revenue recognition criteria are met, software revenue is recognized upon delivery of the software license using the residual method.

The Company considers the four basic revenue recognition criteria for each of the elements as follows:

Persuasive evidence of an arrangement with the customer exists. The Company’s customary practice is to require a purchase order and, in some cases, a written contract signed by both the customer and the Company prior to recognizing revenue with respect to an arrangement.

Delivery or performance has occurred. The Company’s software applications are usually physically delivered to customers with standard transfer terms such as FOB shipping point and/or delivered via email. Software and/or software license keys for add-on orders or software updates are typically delivered via email. The Company recognizes software revenue upon shipment to resellers and distributors because there is no right of return or refund and generally no price protection agreements. In situations where multiple copies of licenses are purchased, all copies are delivered to the customer in one shipment and revenue is recognized upon shipment. Occasionally, the Company enters into a site license with a customer that allows the customer to use a specified number of licenses within the organization. When a site license is sold, the Company delivers a master disk to the customer that allows the product to be installed on multiple servers. The Company has no further obligation to provide additional copies of the software or user manuals. Revenue on site licenses is recognized upon shipment of the master disk to the customer. Sales made by the Company’s Original Equipment Manufacturer (OEM) partners are recognized as revenue in the month the product is shipped. The Company estimates the revenue from a preliminary report received from the OEM shortly after the end of the month. Once the final report is received, the revenue is adjusted to that based on the final report, usually in the following month. Services revenue is recognized when the services are completed, except for customer support, which is recognized ratably over the term of the customer support agreement, which is typically one year.

Fee is fixed or determinable. The fee customers pay for software applications, customer support and other professional services is negotiated at the outset of an arrangement. The fees are therefore considered to be fixed or determinable at the inception of the arrangement.

Collection is probable. Probability of collection is assessed on a customer-by-customer basis. Each new customer undergoes a credit review process to evaluate its financial position and ability to pay. If the Company determines from the outset of an arrangement that collection is not probable based upon the review process, revenue is recognized on a cash-collected basis.

The Company’s arrangements do not generally include acceptance clauses. However, if an arrangement does include an acceptance clause, revenue for such an arrangement is deferred and recognized upon acceptance. Acceptance occurs upon the earliest of receipt of a written customer acceptance, waiver of customer acceptance or expiration of the acceptance period.

Stock-Based Compensation

The Company recognizes stock option expense using the fair value recognition method. The Company applies the fair value recognition method only to awards granted, modified, repurchased or cancelled after January 1, 2006. Stock-based compensation expense is recognized based on the grant-date fair value of stock option awards granted or modified after January 1, 2006. As the Company had used the minimum value method for valuing its stock options prior to January 1, 2006, all unmodified options granted prior to January 1, 2006 continue to be accounted for under using the minimum value method.

The Company accounts for stock-based compensation expense related to restricted stock units using the fair value of the nonvested stock on the grant date. The fair value is measured as the market price of a share of nonrestricted stock on the grant date.

The Company accounts for stock awards to non-employees by recognizing the fair value of these instruments as an expense over the period in which the related services are rendered.

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Income Taxes

The Company records income tax expense related to income generated during the periods using an effective tax rate expected to be in effect for the full year. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted laws and tax rates that are expected to be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits not expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted.

The Company accounts for any uncertainty in income taxes using a two-step process that separates recognition from measurement. During the three months ended March 31, 2010, the Company did not recognize any increase or decrease to reserves for uncertain tax positions.

Reclassifications

Certain reclassifications have been made to prior year amounts to conform to the current period presentation.

2. NET INCOME PER COMMON SHARE

Basic net income per share is calculated by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding, adjusted for the dilutive effect, if any, of potential common shares.

The following table sets forth the computation of income per share:

	Three months Ended March 31,
	2010			2009

Net income (loss)	$	(227	)	$	(45	)

Weighted average common shares outstanding – basic		21,591			22,018
Dilutive effect of stock options		-			-
Dilutive effect of restricted stock units		-			-
Weighted average common shares outstanding – diluted		21,591			22,018

Basic net income per share	$	(0.01	)	$	0.00
Diluted net income per share	$	(0.01	)	$	0.00

The following potential common shares were excluded from the computation of diluted net income per share because they had an anti-dilutive impact:

	Three Months Ended March 31,
	2010		2009
Stock options		3,159		3,102
Restricted stock units		556		290

3. CASH AND CASH EQUIVALENTS, SHORT TERM INVESTMENTS AND FAIR VALUE

Cash and cash equivalents consist primarily of highly liquid investments in time deposits held at major banks, and other money market securities with original maturities at date of purchase of 90 days or less.

Short term investments, which are carried at fair value, generally consist of commercial paper, corporate notes and Federal agency discount notes with original maturities of one year or less with Standard and Poor’s ratings ranging from A to AA, certificates of deposit and United States Treasury obligations with original maturities of one year or less. The Company classifies these securities as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and at each balance sheet date. Available-for-sale securities are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income. Interest received on these securities is included in interest income. Realized gains or losses upon disposition of available-for-sale securities are included in other income.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy has been established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following three levels of inputs may be used to measure fair value:

·	Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

·	Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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The Company’s assets that are measured at fair value on a recurring basis are generally classified within Level 1 or Level 2 of the fair value hierarchy. The types of instruments valued based on quoted market prices in active markets generally include most money market securities and equity investments and can include certain corporate notes, United States treasury obligations and some federal notes and bonds. Such instruments are generally classified within Level 1 of the fair value hierarchy. The Company invests in money market funds that are traded daily and does not adjust the quoted price for such instruments. The types of instruments valued based on quoted prices in less active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency generally include the Company’s commercial paper and can include certain federal notes and bonds. Such instruments are generally classified within Level 2 of the fair value hierarchy. The Company uses consensus pricing, which is based on multiple pricing sources, to value its cash equivalents and short term investments.

The following table sets forth a summary of the Company’s financial assets, classified as cash and cash equivalents and short term investments on its consolidated balance sheet, measured at fair value on a recurring basis as of March 31, 2010:

Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant unobservable Inputs (Level 3)

Cash & cash equivalents
Cash Management Funds	$	17,842	$	17,842	$	-	$	-
Total		17,842		17,842		-		-

Short-term Investments
Certificate of Deposit		4,972		4,972		-	$	-
Commercial Paper		12,190		-		12,190		-
Corporate Notes		9,375		9,375		-		-
Federal Agency Notes		3,991		-		3,991		-
United States Treasury Bills		14,880		14,880		-		-
Total	$	45,408	$	29,227	$	16,181	$	-

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

	March 31,		December 31,
	2010		2009
Equipment	$	216	$	216
Furniture and fixtures		531		546
Motor Vehicles		96		102
Computer hardware		10,689		10,517
Leasehold improvements		841		842
		12,373		12,223
Less accumulated depreciation and amortization		9,676		9,149
	$	2,697	$	3,074

5. INTANGIBLE ASSETS

Intangible assets consist of the following:

	March 31,			December 31,
	2010			2009
Customer relationships	$	2,267		$	2,267
Less accumulated amortization		(1,748	)		(1,634	)
	$	519		$	633

Marketing relationships	$	1,992		$	1,992
Less accumulated amortization		(960	)		(897	)
	$	1,032		$	1,095

Technology related intangibles	$	4,936		$	4,936
Foreign currency translation		(279	)		(357	)
Less accumulated amortization		(1,624	)		(1,409	)
	$	3,033		$	3,170

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6. CONTINGENCIES

In the normal course of its business, the Company may be involved in various claims, negotiations and legal actions; however, at March 31, 2010, 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. STOCKHOLDERS’ EQUITY (in thousands, except share and per share amounts)

Common stock

In February 2010, the Company’s Board of Directors approved a stock repurchase program for its common stock under which the Company may purchase up to a maximum aggregate purchase price of $15,000 through December 31, 2010. Repurchases may be made from time to time in the open market at prevailing market prices or in privately negotiated transactions from time to time based on business and market conditions. The stock repurchase program may be suspended or discontinued at any time, and will be funded using the Company's available cash. For the three months ended March 31, 2010, the company used $8,436 to purchase and cancel 1,003,432 shares of common stock.

Options to purchase 18,265 and 10,470 shares of common stock were exercised for the three months ended March 31, 2010 and 2009, respectively, and the Company received aggregated proceeds of $32 and $10, respectively.

Restricted Stock Units

In the three months ended March 31, 2010 and 2009, the Company issued 313,498 and 289,804, respectively, restricted stock units with a weighted average grant date fair value of $8.63 and $7.03, respectively. Except for the restricted stock units granted to the French employees, the restricted stock units vest annually in four equal installments from the grant date. The restricted stock units granted to the French employees vest in two equal installments on the second and fourth anniversaries from the grant date. Upon each vesting, the restricted stock units become unrestricted shares of common stock.

A summary of the Company’s restricted stock unit activity for the three months ended March 31, 2010 is presented below:

	Restricted Stock Units			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2009		317,690		$	7.21
Restricted stock units granted		313,498		$	8.63
Restricted stock units cancelled		(8,744	)	$	7.86
Restricted stock units released		(66,365	)	$	7.03
Outstanding at March 31, 2010		556,079		$	8.03

In the three months ended March 31, 2010, 66,365 restricted stock units vested and became unrestricted shares of common stock. In order to cover the employees’ tax obligation, the Company withheld 24,741 shares of common stock which had a fair value of $8.48 and remitted $210 to the appropriate taxing authorities on behalf of the employee.

In the three months ended March 31, 2010, the Company recognized compensation expense of $273 relating to these restricted stock units. The remaining $4,014 will be recognized over the remaining vesting period which is approximately 3.32 years.

Stock option plans

In the three months ended March 31, 2010, the Company issued options to purchase 133,050 shares of common stock, with a weighted average exercise price of $8.46 per share. The exercise price of all options granted equals the fair market value per share on the dates of grant. The weighted average fair value as of the grant date of the options issued was $3.88.

A summary of the Company’s stock option activity for the three months ended March 31, 2010 is presented below:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2009		3,078,435		$	8.15
Options granted		133,050		$	8.46
Options cancelled		(34,387	)	$	10.83
Options exercised (cash received $32)		(18,265	)	$	1.77
Outstanding at March 31, 2010		3,158,833		$	8.17		6.48	$	10,249
Options exercisable at March 31, 2010		2,347,040		$	7.02		5.84	$	9,878
Options expected to vest at March 31, 2010		719,109			11.49		8.33	$	347

The Company’s policy is to issue new shares upon exercise of options as the Company does not hold shares in treasury.

All options granted are equity awards and the Company has not granted any liability awards. The Company expects to recognize future compensation costs aggregating $5,319 for options granted but not vested as of March 31, 2010. Such amount will be recognized over the weighted average requisite service period, which is expected to be approximately 2 years. The options generally have a contractual life of ten years.

The fair values of options granted were estimated at the date of grant using the following assumptions:

	Three Months Ended March 31,
	2010	2009
Expected Term	7 years	7 years
Volatility	38.94%	42.27%
Risk free rate	3.03%	2.28%
Dividend Yield	—	—

The following table presents the stock-based compensation expense, including both stock options and restricted stock units for the three months ended March 31, 2010 and 2009:

	Three Months Ended March 31,
	2010		2009
Cost of revenue, maintenance and professional services	$	120	$	99
Sales and marketing		255		269
Research and development		329		295
General and administrative		460		429
	$	1,164	$	1,092

8. INCOME TAXES

In the three months ended March 31, 2010 and 2009, the Company recorded a tax benefit of $301 and $51, respectively related to loss generated during the periods using an effective tax rate currently expected to be in effect for the full year.

As of December 31, 2009, the Company had recorded net deferred tax assets of $17,126 and a valuation allowance of $6,101 against the net deferred tax assets. The valuation allowance is primarily comprised of net operating loss carryforwards related to Canada and some state net operating loss carryforwards where the Company currently believes these net operating loss carryforwards do not qualify as more likely than not to be utilized. When further positive evidence exists that the Company will be able to utilize the available net operating loss carryforwards, the Company will reverse additional valuation allowance on the deferred tax assets.

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The Company analyzes the carrying value of its deferred tax assets on a regular basis. In determining future taxable income, assumptions are made to forecast federal, state and international operating income, the reversal of temporary timing differences, and the implementation of any feasible and prudent tax planning strategies. The assumptions require significant judgment regarding the forecasts of future taxable income, and are consistent with forecasts used to manage the business. Should these assumptions change based upon changes to the forecast of future taxable income in any particular quarter, the effective tax rate in any quarter could be significantly different. During the three months ended March 31, 2010, there was no increase in or reversal of the valuation allowance.

The Company analyzes any uncertain tax positions through the application of a two-step process that separates recognition from measurement. During the three months ended March 31, 2010, the Company did not recognize any uncertain tax positions and the Company did not recognize any increase or decrease to reserves for uncertain tax positions.

The Company has elected to record interest and penalties recognized in the financial statements as income taxes. Any subsequent change in classification interest and penalties will be treated as a change in accounting principle.

9. DEFINED CONTRIBUTION PLAN

Effective March 1, 1996, the Company adopted a defined contribution plan (the “Plan”), which, as amended, qualifies under Section 401(k) of the Internal Revenue Code. The Plan covers all employees who meet eligibility requirements. Employer contributions are discretionary. In the first quarter of 2009 the Company discontinued employer contributions to the Plan. The Company did not make any employer contributions to the Plan for the three months ended March 31, 2010 and 2009.

10. SEGMENT INFORMATION

The Company operates in one reportable segment.

The Company operates in three geographic regions: The Americas, Europe, Middle East & Africa and Asia-Pacific. All transfers between geographic regions have been eliminated from consolidated revenues. Revenue, property and equipment and intangible assets by geographic region are as follows:

	Three Months Ended March 31,
	2010		2009
Revenue:
The Americas	$	11,731	$	11,061
Europe, Middle East & Africa		5,741		5,833
Asia-Pacific		1,408		1,272
	$	18,880	$	18,166

	March 31,		December 31,
	2010		2009
Property and equipment:
The Americas	$	2,422	$	2,778
Europe, Middle East & Africa		275		296
Asia-Pacific		—		—
	$	2,697	$	3,074

	March 31,		December 31,
	2010		2009
Intangible assets:
The Americas	$	3,033	$	3,170
Europe, Middle East & Africa		1,551		1,728
Asia-Pacific		—		—
	$	4,584	$	4,898

11. RELATED PARTY TRANSACTIONS

After the acquisition of Double-Take EMEA, the Company has had transactions with Sunbelt Software, Inc. or Sunbelt Software. An executive officer of Double-Take Software, Inc. is the chairman of the board of directors of Sunbelt Software. The balances and transactions with Sunbelt Software are described below:

	March 31, 2010		December 31, 2009
Trade Receivable	$	1,325	$	1,218
Trade Payable	$	-	$	15

	Three Months Ended March 31, 2010		Three Months Ended March 31, 2009
Sales to Sunbelt Distribution	$	2,067	$	1,909
Purchases from Sunbelt Distribution	$	33	$	51

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12. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued new guidance which improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This standard is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company adopted this standard effective January 1, 2010 and the implementation did not have an impact on the Company’s consolidated results of operations and financial position.

In June 2009, the FASB issued guidance to amend previous guidance related to determining whether an enterprise has a controlling financial interest in a variable interest entity. This determination identifies the primary beneficiary of a variable interest entity as the enterprise that has both the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance, and the obligation to absorb losses or the right to receive benefits of the entity that could potentially be significant to the variable interest entity. The guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary and eliminates the quantitative approach previously required for determining the primary beneficiary. The standard is effective January 1, 2010. The Company adopted this standard effective January 1, 2010 and the implementation did not have an impact on the Company’s consolidated results of operations and financial position.

In October 2009, the FASB issued new guidance which provides principles for allocation of consideration among its multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. The guidance introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. This standard is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted. The Company is currently evaluating the impact on its consolidated results of operations and financial position of adopting this pronouncement.

In October 2009, the FASB issued new guidance which clarifies which guidance should be used in allocating and measuring revenue arrangements which include both tangible products and software. In particular, tangible products containing software components and nonsoftware components that function together to deliver the tangible product's essential functionality will no longer be within the scope of the software revenue guidance. This guidance also significantly expands related disclosure requirements. This standard is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted. The Company must adopt this standard in the same period using the same transition method as it uses for the adoption of the guidance related to multiple element arrangements previously discussed. The Company is currently evaluating the impact on its consolidated results of operations and financial position of adopting this pronouncement.

In January 2010, the FASB issued new guidance intended to improve disclosures related to fair value measurements. This guidance requires new disclosures as well as clarifies certain existing disclosure requirements. New disclosures under this guidance requires separate information about significant transfers in and out of Level 1 and Level 2 and the reason for such transfers, and also requires purchases, sales, issuances, and settlements information for Level 3 measurement to be included in the rollforward of activity on a gross basis. The guidance also clarifies the requirement to determine the level of disaggregation for fair value measurement disclosures and the requirement to disclose valuation techniques and inputs used for both recurring and nonrecurring fair value measurements in either Level 2 or Level 3. Except for the revised accounting guidance for the rollforward of activity on a gross basis for Level 3 fair value measurement which will be effective for years beginning after December 15, 2010, the Company adopted this standard effective January 1, 2010. The implementation did not have an impact on the Company’s consolidated results of operations and financial position. The Company does not believe the adoption of the rollforward of activity on a gross basis for Level 3 fair value measurement will have an impact on the Company’s consolidated results of operations and financial position.

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

CAUTIONARY ADVICE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements contained in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-Q is filed with the Securities and Exchange Commission (“SEC”).

We may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” “will,” or “may,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this Form 10-Q include statements about:


	•	competition and competitive factors in the markets in which we operate;

	•	the impact of macro-economic trends on our business;

	•	demand for our software;

	•	our ability to transition to a broader focus on software to move, protect and recover workloads;

	•	the advantages of our technology as compared to others;

	•	changes in customer preferences and our ability to adapt our product and services offerings;

	•	our ability to obtain and maintain distribution partners and the terms of these arrangements;

	•	our plans for future product development;

	•	the integration of emBoot, Inc. (“emBoot”) and its products into our business;

	•	our ability to develop and maintain positive relationships with our customers;

	•	our ability to maintain and establish intellectual property rights;

	•	our ability to retain and hire necessary employees and appropriately staff our development, marketing, sales and distribution efforts;

	•	our ability to scale our support efforts;

	•	our cash needs and expectations regarding cash flow from operations;

	•	our ability to manage and grow our business and execution of our business strategy;

	•	our expectations for future revenue; and

	•	our financial performance.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition and results of operations may vary materially from those expressed in our forward-looking statements. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include those that we discuss in this section of our Form 10-Q and in the “Risk Factors” section in our annual report on Form 10-K, which we filed with the SEC on March 12, 2010. You should read these factors and the other cautionary statements made in this Form 10-Q in combination with the more detailed description of our business in our annual report on Form 10-K as being applicable to all related forward-looking statements wherever they appear in this quarterly report. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview

Double-Take Software develops, sells and supports affordable software that allows IT organizations of all sizes to move, protect and recover workloads across any distance and any combination of physical and virtual server environments. As enterprise IT systems evolve the ability to manage information freely, intelligently and securely becomes critical. Our hardware- and application-independent software benefits these infrastructures by efficiently protecting, moving and recovering data created by any application on almost any type or brand of disk storage on any brand of server running on Microsoft Windows operating systems as well as many versions of the Linux operating system. In addition we offer an alternative to Virtual Desktop Infrastructure solutions, making desktop administration and provisioning easy, and reducing drastically the desktop total cost of ownership.

We believe that we are the leading supplier of replication software for Microsoft server environments and that our business is distinguished by our focus on software license and recurring maintenance sales, our productive distribution network and our efficient services infrastructure.

Our success has been driven in large part by our flagship “Double-Take” software technology, which was first released in 1995 and has been enhanced by years of customer feedback and is now called Double-Take Availability. Double-Take Availability, among other things, continuously replicates software and data changes made on a primary operating server to a duplicate server at a different location. Because the duplicate server can commence operating in place of the primary server at almost any time, Double-Take Availability facilitates rapid failover and application recovery in the event of a disaster or other service interruption.

The disaster recovery market has been our primary historical focus, but as a result of acquisitions and internal development, we are expanding into adjacent markets for system migrations, back-up and network booting. With our acquisition of TimeSpring Software Corporation in December 2007, now known as Double-Take Canada, and its TimeData products, now included in Double-Take Backup, we can also recover data from almost any point in time from a repository located on- or off-site. In July 2008, we acquired emBoot, Inc. which is now a part of Double-Take Canada, and which specializes in network booting technology. The technology acquired with emBoot, now included in Double-Take Flex, allows organizations to easily assign and re-assign computing workloads to any available Windows or Linux physical servers or desktops or any virtual machine in their environment. IT organizations can now move those workloads around in a matter of minutes, whether it is because a disaster has occurred, a data center is moving, the company has decided to virtualize its infrastructure or an application needs more capacity. Double-Take Move, released in April 2009, is a server migration product that can migrate live server workloads across physical and virtual platforms. Double-Take Cloud, released in February 2010, allows for the recovery of data, applications, and operating systems, and rapid recovery of workloads into an automatically provisioned Amazon virtual machine. For all of our products, we estimate we have about 22,000 customers.

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

In 2009, for the first time since 2004, we experienced decreased revenue in a fiscal year as compared to the prior year. Additionally, 2009 was the second consecutive year we have experienced decreased net income as compared to the prior year. Total revenue decreased by $13.1 million or 14% as compared to 2008. Our 2009 operating profit decreased $4.3 million or 6% as compared to 2008. Our 2009 net income decreased $4.2 million or 24% as compared to 2008. The 2009 decrease was primarily related to the decline in revenue during 2009, which we believe was primarily due to the economic downturn. During the three months ended March 31, 2010 we continued to experience some of the effects of worsening economic conditions that began in the second half of 2008. We experienced some order delays, lengthening sales cycles and slowing deployments worldwide as customers remain cautious in their purchasing decisions, which resulted in lower than expected total revenue for the three months ended March 31, 2010.

Significant uncertainty around current macroeconomic and industry conditions persists, particularly the effect these conditions and any sustained lack of liquidity in the capital markets may have upon the capital spending of our customers. Moreover, we are uncertain of the impact of any near-term change of enterprise and consumer spending and behavior, in response to these market conditions, may have on the spending or financial position of our customers. The level of competition we face during periods of economic weakness can be expected to increase. We cannot be certain how long these conditions will continue and the magnitude of their effects on our business and results of operations. Consequently, these conditions have negatively affected visibility of our business and made our forecasting and planning more difficult.

While we expect the near term market conditions to continue to be challenging, we continue to believe in our ability to execute our business plan in the near term and our longer term market opportunities. We believe the need for organizations to protect, recover and maintain their data, applications and operating systems and affordable software that enables companies to move, protect and recover workloads will require our current customers as well as new customers to continue 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.

Some Important Aspects of Our Operations

We license our software under perpetual licenses to end-user customers directly and to a network of distributors, value-added resellers and original equipment manufacturers, or OEMs. Our distributors primarily sell our software to our resellers. Our resellers bundle or sell our software together with their own products and also sell our software independently. Our OEMs market, sell and support our software and services on a stand-alone basis and incorporate our software into their own hardware and software products.

Double-Take EMEA has continued to provide us with a direct presence in the European, Middle Eastern and African markets, as well as provide the opportunity to further our strategic initiative to increase revenue generated outside of the United States. Our acquisitions TimeSpring and emBoot (both now part of Double-Take Canada) helped broaden the development efforts of our products. As a result, in the first quarter of 2009 we released Double-Take Flex which includes the technology acquired with the emBoot acquisition and in the fourth quarter of 2009, we released Double-Take Backup which includes the technology acquired with the TimeSpring acquisition. We expect substantially all of the on-going expenses of Double-Take Canada will be related to research and development and to a lesser extent depreciation and amortization.

Revenue

We derive revenue from sales of perpetual licenses for our software and from maintenance and professional services.

Software Licenses . We derive the majority of our revenue from sales of perpetual licenses of our software applications, which allow our customers to use the software indefinitely. We do not customize our software for a specific end user customer. We recognize revenue from sales of perpetual licenses generally upon shipment of the software. Our software revenue is reported net of rebates and discounts because we do not receive an identifiable benefit in exchange for the rebate or discount.

Our software revenue generated approximately 44% and 43% of our total revenue for the three months ended March 31, 2010 and 2009, respectively. Our software revenue generally experiences some seasonality. We believe that many organizations do not make the bulk of their information technology purchases, including software, in the first quarter of any year. We believe that this historically has generally resulted in lower revenue generated by software sales in our first quarter of any year. Historically, we have also experienced lower revenue in the summer months. Due to the economic downturn that started in the second half of 2008 and continued into 2010, our quarterly revenue predictability has decreased significantly. As a result, future quarterly revenue may trend differently than it has historically. Currently predicting the quarterly revenue trending remains challenging, but we believe that in line with our historical seasonality the first quarter of 2010 should be the weakest quarter of the year.

Maintenance and Professional Services . We also generate revenue by providing our customers with maintenance comprised of software updates and product support. We generally include our maintenance for a designated period in the price of the software at the time of sale. In addition, some of our customers enter into a maintenance agreement for periods longer than a year. These agreements entitle our customers to software updates on a when-and-if-available basis and product support for an annual fee based on the licenses purchased and the level of service subscribed. Almost all of our customers that purchase maintenance pay the entire amount payable under the agreement in advance, although we recognize maintenance revenue ratably over the term of the agreement.

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In some cases, most often in connection with the licensing of our software, we provide professional services to assist our customers in strategic planning for disaster recovery and high availability application, the installation of our software and the training of their employees to use our software. We provide most of our professional services on a fixed price basis and we generally recognize the revenue for professional services once we complete the engagement. For any paid professional services, including training, that have not been performed within three years of the original invoice date, we recognize the services as revenue in the quarter that is three years after original invoice date.

Of total maintenance and professional services revenue, maintenance revenue represented 93% for the three months ended March 31, 2010 and 2009, respectively. Professional services generated the remainder of our total maintenance and professional services revenue in these periods.

Of our total revenue, maintenance revenue represented 52% and 53% for the three months ended March 31, 2010 and 2009, respectively. Professional services accounted for 4% of our total revenue for the three months ended March 31, 2010 and 2009. Our maintenance and professional services revenue historically has generated lower gross margins than our software revenue. The gross margin generated by our maintenance and professional services revenue was 79% and 80% for the three months ended March 31, 2010 and 2009, respectively. We have focused on increasing our maintenance revenue and we believe it has increased more rapidly than license revenue due to maintenance price increases and increased renewal rates attributable to focused sales efforts and the inclusion of significant new functionality in the product at no charge for licenses on which maintenance has been purchased. As the percentage of total revenue attributable to maintenance increases, our overall gross margins will be adversely affected. Additionally, as a result of the current economic conditions, companies may decide not to renew their annual maintenance. Should this happen, maintenance and professional services revenue may decrease.

Cost of Revenue

Our cost of revenue primarily consists of the following:

Cost of Software Revenue. Cost of software revenue consists primarily of media, manual, translation and distribution costs, and royalties to third-party software developers for technology embedded within our software. Because our development initiatives have resulted in insignificant time and costs incurred between technological feasibility and the point at which the software is ready for general release, we do not capitalize any of our internally-developed software.

Cost of Services Revenue. Cost of services revenue consists primarily of salary and other personnel-related costs incurred in connection with our provision of maintenance and professional services. Cost of services revenue also includes other allocated overhead expenses for our professional services and product support personnel, as well as travel-related expenses for our staff to perform work at a customer’s site.

Operating Expenses

We classify our operating expenses as follows:

Sales and Marketing. Sales and marketing expenses primarily consist of the following:


•	personnel and related costs for employees engaged in sales, corporate marketing, product marketing and product management with partners in our distribution network, including salaries, commissions and other incentive compensation, including equity-based compensation, related employee benefit costs and allocated overhead expenses;

•	travel related expenses to meet with existing and potential customers, and for other sales and marketing related purposes; and

•	sales promotion expenses, public relations expenses and costs for marketing materials and other marketing events, including trade shows, industry conventions and advertising, and marketing development funds for our distribution partners.

We expense our sales commissions at the time of sale. We expect our sales and marketing expense to increase in the future as we continue to invest in marketing programs and we increase various sales activities which may include an increase in the number of direct sales professionals.

Research and Development. Research and development expenses primarily represent the expense of developing new software and modifying existing software. These expenses primarily consist of the following:


•	personnel and related costs, including salaries, employee benefits, equity and other incentive compensation and allocated overhead expenses, for research and development personnel, including software engineers, software quality assurance engineers and systems engineers; and

•	contract labor expense and consulting fees paid to independent consultants and others who provide software engineering services to us, as well as other expenses associated with the design and testing of our software.

To date, our research and development efforts have been primarily devoted to increases in features and functionality of our existing software. We expect research and development expense to increase in the future as we continue to develop new solutions for our customers. We expect research and development expense to increase as a percentage of revenue in 2010 as we continue to invest in product development efforts.

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General and Administrative. General and administrative expenses represent the costs and expenses of managing and supporting our operations. General and administrative expenses consist primarily of the following:


•	personnel and related costs including salaries, employee benefits, equity and other incentive compensation and allocated overhead expenses, for our executives, finance, human resources, corporate information technology systems, strategic business, corporate quality, corporate training and other administrative personnel;

•	legal and accounting professional fees;

•	recruiting and training costs;

•	travel related expenses for executives and other administrative personnel; and

•	computer maintenance and support for our internal information technology system.

We generally expect general and administrative expenses to remain substantially similar or slightly decrease as a percentage of revenue for the foreseeable future.

Depreciation and Amortization. Depreciation and amortization expense consists of depreciation expense primarily for computer equipment we use for information services and in our development and test labs, and amortization of intangible assets acquired.

Results of Operations

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

Revenue. We derive our revenue from sales of our products and support and services. Revenue increased 4% to $18.9 million, for the three months ended March 31, 2010, from $18.2 million for the three months ended March 31, 2009. Of our sales in the three months ended March 31, 2010, 92% was attributable to sales to or through our indirect channels such as distributors, value-added resellers and OEMs, which was an increase from 90% of our sales attributable to sales to or through our indirect channels for the three months ended March 31, 2009. This percentage can vary from quarter to quarter and we do not expect to significantly increase our proportion of sales from direct sales. Of our sales in the three months ended March 31, 2010, 8% was attributable to direct sales to end users, a decrease from 10% of our total sales attributable to end users in the three months ended March 31, 2009. Historically, our total revenue has generally increased each quarter within a calendar year with the first quarter of the year being the weakest quarter. While we currently expect revenue growth each quarter in 2010, each quarter’s revenue may be substantially similar or slightly less than the same quarter of the previous year as customers remain cautious with their purchasing decisions. (See Effect of Recent Market Conditions and Uncertain Economic Environment on our Business discussed above.)

Effect of Changing Foreign Currency Exchange Rates on Revenue. During the three months ended March 31, 2010 as compared to the three month ended March 31, 2009, the United States dollar was weaker than the euro and the pound sterling and stronger than the Canadian dollar. As a result, revenue increased by approximately 2% during the three months ended March 31, 2010 from what it would have during the time period had foreign currency exchange rates remained constant from the three months ended March 31, 2009. The overall fluctuation in revenue, which includes the effect of foreign currency exchange rates, is described below.

Software License Revenue. Software revenue increased $0.5 million, or 7%, from $7.7 million in the three months ended March 31, 2009 to $8.2 million in the three months ended March 31, 2010. The increase in software revenue was less than what we have experienced in the past primarily related to less IT spending as customers remain cautious with their purchasing decisions.

Software sales made to or through our distributors, value-added resellers and OEMs generated approximately 94% and 91% of total software sales in the three months ended March 31, 2010 and 2009, respectively. During the three months ended March 31, 2010 and 2009, approximately 6% and 9%, respectively, of our software sales were made solely by our direct sales force. During the three months ended March 31, 2010 and 2009, approximately 25% and 14%, respectively, of our software sales were made to our distributors for sale to value-added resellers, approximately 58% and 70%, respectively, of our software sales were made directly through resellers and approximately 11% and 7%, respectively, of our software sales were made through OEMs. We believe that we will need to continue to maintain close relationships with our partners to sustain and increase profitability. We have no current plans to focus future growth on one distribution channel versus another. We believe our direct sales force complements our indirect distribution network, and we intend to continue to increase revenue generated by both.

In the three months ended March 31, 2010, the median price of sales of Double-Take software licenses to customers was approximately $3,600 as compared to $4,000 in the three months ended March 31, 2009. Since the nominal price increases implemented during 2007, the pricing of our product has not changed. We believe that, historically, the pricing and sales cycles have contributed to more balanced sales throughout the year and more predictable revenue streams in comparison to other software companies with perpetual license models. We believe that the affordability of our software is a competitive advantage. However, the predictability of software sales has declined over the past several quarters.

Maintenance and Professional Services Revenue. Maintenance and professional services revenue increased $0.2 million, or 2%, from $10.4 million in the three months ended March 31, 2009, to $10.6 million in the three months ended March 31, 2010. Maintenance and professional services revenue represented 56% of our total revenue in the three months ended March 31, 2010 and 57% of our total revenue in the three months ended March 31, 2009. Maintenance revenue increased $0.2 million, or 2%, from $9.7 million in the three months ended March 31, 2009, to $9.9 million in the three months ended March 31, 2010. The slight increase in maintenance revenue was attributable to continued maintenance renewals resulting from heightened sales focus and the inclusion of significant new functionality in the product at no charge for licenses on which maintenance has been purchased. Professional services revenue was basically flat at $0.7 million in the three months ended March 31, 2010 and March 31, 2009. There are variations in scheduling of the delivery of professional services from quarter to quarter which will impact the amount of professional services recognized in each quarter.

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Cost of Revenue and Gross Profit

Total cost of revenue increased $0.2 million, or 7%, from $2.1 million for the three months ended March 31, 2009 to $2.3 million in the three months ended March 31, 2010. Total cost of revenue represented 12% of our total revenue in the three months ended March 31, 2010 and 2009.

Cost of software revenue decreased $9,000, or 11%, from $82,000 for the three months ended March 31, 2009 to $73,000 for the three months ended March 31, 2010. The decrease was a result of decreased royalties paid to third parties related to software included in our product. In the three months ended March 31, 2010 and 2009 the cost of software was 1% of total revenue.

Cost of services revenue increased $0.1 million, or 7%, from $2.1 million for the three months ended March 31, 2009 to $2.2 million in the three months ended March 31, 2010. The increase was primarily related to an increase of $0.2 million of expense related to increased employee compensation during the quarter. This increase was partially offset by a decrease in expense related to retaining third party assistance in completing services engagements. Cost of services revenue represented 21% of our services revenue in the three months ended March 31, 2010 and 20% in the three months ended March 31, 2009.

Gross profit increased $0.6 million, or 4%, from $16.0 million for the three months ended March 31, 2009 to $16.6 million for the three months ended March 31, 2010. The increase is due primarily to the increase in revenue in the first quarter 2010. Gross margin remained constant at 88% in the three months ended March 31, 2010 and 2009.

Operating Expenses

Effect of Changing Foreign Currency Rates on Expenses. During the three months ended March 31, 2010 as compared to the three months ended March 31, 2009, the United States dollar was weaker than the euro, the pound sterling and stronger than the Canadian dollar. As a result, operating expenses increased by approximately 3% during the three months ended March 31, 2010 from what they would have been during the time period had foreign currency exchange rates remained constant from the three months ended March 31, 2009. The overall fluctuation in operating expenses, which includes the effect of foreign currency rates, is described below.

Sales and Marketing. Sales and marketing expenses increased $0.5 million, or 6%, from $8.2 million for the three months ended March 31, 2009 to $8.7 million for the three months ended March 31, 2010. The increase was mostly attributable to compensation, marketing and travel expense. The increase of compensation expense of $0.2 million was primarily due to salary increases that were implemented during the quarter. During Q1 2010, there was a focus on marketing programs that increased the expense by $0.2 million as compared to Q1 2009. Travel expenses increased by $0.1 million as sales and marketing activity expanded during the three months ended March 31, 2010 as compared to the three months ended March 31, 2009.

Research and Development. Research and development expenses increased $0.3 million, or 8%, from $3.9 million for the three months ended March 31, 2009 to $4.2 million for the three months ended March 31, 2010. The majority of the increase is related to an increase of $0.2 million from outsourced development projects. Compensation expense increased due to salary increases that were implemented during the quarter. This increase was partially offset by decreased headcount.

General and Administrative. General and administrative expenses increased $0.1 million, or 4%, from $3.1 million for the three months ended March 31, 2009 to $3.2 million for the three months ended March 31, 2010. There was an increase of $0.1 million attributable to salary increases that were implemented during the quarter and an increase of $0.1 million in a combination of travel, dues and subscriptions and utilities. The expense increases were partially offset by a decrease of approximately $0.1 million of legal and accounting expense.

Depreciation and Amortization. Depreciation and amortization expense remained constant at $1.0 million for the three months ended March 31, 2010 and March 31, 2009. There were no significant changes in business operations between the periods to cause a noticeable change.

Interest Income. Interest income was $45,000 for the three months ended March 31, 2010 as compared to $132,000 for the three months ended March 31, 2009. During 2010, should the interest rates continue to remain at lower or even similar levels as those experienced in 2009, we expect our interest income to remain at lower amounts.

Foreign Exchange (loss)

For the three months ended March 31, 2010 and 2009, the foreign exchange loss was $0.1 million. The foreign currency losses are substantially related to Double-Take EMEA. Our reorganization of the legal entity structure of Double-Take EMEA at the end of 2008 reduced the amount of Double-Take EMEA assets denominated in pounds sterling therefore reducing our exposure to currency fluctuations between the pound sterling and the euro. We may from time to time have assets which are denominated in currencies other than the functional currency of the Double-Take EMEA entity. As a result, we do still have exposure to currency differences between the pound sterling and the euro.

Income Tax Expense (Benefit)

In the three months ended March 31, 2010 and 2009, we recorded a tax benefit of $301 and $51, respectively related to the loss generated during the periods using an effective tax rate currently expected to be in effect for the full year. Because we experienced a net loss for the three months ended March 31, 2010 and 2009, we recorded a tax benefit. The effective tax rate increased from 53% for the three months ended March 31, 2009 to 57% for the three months ended March 31, 2010. The increase in the effective tax rate was substantially a result of decreased taxable income generated from operations in the United States and increased stock based compensation expense which is not deductible for tax purposes.

In determining future taxable income, assumptions are made to forecast federal, state and international operating income, the reversal of temporary timing differences, and the implementation of any feasible and prudent tax planning strategies. The assumptions require significant judgment regarding the forecasts of future taxable income, and are consistent with forecasts used to manage the business. As of December 31, 2009, we had recorded net deferred tax assets of $17,126 and a valuation allowance of $6,101 against the net deferred tax assets. The valuation allowance is primarily comprised of net operating loss carryforwards related to Canada and some state net operating loss carryforwards where we currently believe these net operating loss carryforwards do not qualify as more likely than not to be utilized. When further positive evidence exists that we will be able to utilize the available net operating loss carryforwards, we will reverse additional valuation allowance on the deferred tax assets.

Net Income (Loss)

For the three months ended March 31, 2010, we recorded a net loss of $227,000 which is a decrease of 404% or $182,000 from the net loss recorded for the three months ended March 31, 2009. During the three months ended March 31, 2010 revenue increased by $0.7 million. The increase in revenue was partially offset by increased cost of revenue of $0.1 million and increased operating expenses of $0.9 million. The increase in operating expenses is substantially a result of increased sales and marketing expense of $0.5 million and research and development of $0.3 million. Our income from operations decreased by $0.3 million, or 189%, from a loss of $0.2 million for the three months ended March 31, 2009 to a loss of $0.5 million for the three months ended March 31, 2010.

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Critical Accounting Policies

In presenting our financial statements in conformity with accounting principles generally accepted in the United States, we are required to make estimates and judgments that affect the amounts reported in our financial statements. Some of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We formulate these estimates and assumptions based on historical experience and on various other matters that we believe to be reasonable and appropriate. Actual results may differ significantly from these estimates. Of our significant accounting policies described in Note 1 to the financial statements included elsewhere in this Form 10-Q, we believe that the following policies may involve a higher degree of judgment and complexity.

Revenue Recognition

Our revenue is reported net of rebates and discounts because there is no identifiable benefit in exchange for the rebate or discount. We derive revenues from two primary sources or elements: software licenses and services. Services include customer support, consulting, installation services and training. A typical sales arrangement includes both of these elements.

For software arrangements involving multiple elements, we recognize revenue using the residual method. Under the residual method, we allocate and defer revenue for the undelivered elements based on relative fair value and recognize the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue. The determination of fair value of the undelivered elements in multiple element arrangements is based on the price charged when such elements are sold separately, which is commonly referred to as vendor-specific objective-evidence (“VSOE”).

Our software licenses typically provide for a perpetual right to use our software and are sold on a per-copy basis. We recognize software revenue through direct sales channels and resellers upon receipt of a purchase order or other persuasive evidence and when all other basic revenue recognition criteria are met as described below. Revenue from software licenses sold through an OEM partner is recognized upon the receipt of a royalty report evidencing sales.

Services revenue includes revenue from customer support and other professional services. Customer support includes software updates (including unspecified product upgrades and enhancements) on a when-and-if-available basis, telephone support and bug fixes or patches. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year. To determine the price for the customer support element when sold separately, we use actual rates at which we have previously sold support as established VSOE.

Other professional services such as consulting and installation services provided by us are not essential to the functionality of the software and can also be performed by the customer or a third party. Revenues from consulting and installation services are recognized when the services are completed. Training fees are recognized after the training course has been provided. Any paid professional services, including training, that have not been performed within three years of the original invoice date are recognized as revenue in the quarter that is three years after the original invoice date. Based on our analysis of such other professional services transactions sold on a stand-alone basis, we have concluded we have established VSOE for such other professional services when sold in connection with a multiple-element software arrangement. The price for other professional services has not materially changed for the periods presented.

We have analyzed all of the undelivered elements included in our multiple-element arrangements and determined that VSOE of fair value exists to allocate revenues to services. Accordingly, assuming all basic revenue recognition criteria are met, software revenue is recognized upon delivery of the software license using the residual method.

We consider the four basic revenue recognition criteria for each of the elements as follows:

Persuasive evidence of an arrangement with the customer exists. Our customary practice is to require a purchase order and, in some cases, a written contract signed by both the customer and us prior to recognizing revenue with respect to an arrangement.

Delivery or performance has occurred. Our software applications are usually physically delivered to customers with standard transfer terms such as FOB shipping point and/or delivered by email. Software and/or software license keys for add-on orders or software updates are typically delivered via email. We recognize software revenue upon shipment to resellers and distributors because there is no right of return or refund and generally no price protection agreements. In situations where multiple copies of licenses are purchased, all copies are delivered to the customer in one shipment and revenue is recognized upon shipment. Occasionally, we enter into a site license with a customer that allows the customer to use a specified number of licenses within the organization. When a site license is sold, we deliver a master disk to the customer that allows the product to be installed on multiple servers. We have no further obligation to provide additional copies of the software or user manuals. Revenue on site licenses is recognized upon shipment of the master disk to the customer. Sales made by our Original Equipment Manufacturer (“OEM”) partners are recognized as revenue in the month the product is shipped. We estimate the revenue from a preliminary report received from the OEM shortly after the end of the month. Once the final report is received, the revenue is adjusted to that based on the final report, usually in the following month. Services revenue is recognized when the services are completed, except for customer support, which is recognized ratably over the term of the customer support agreement, which is typically one year.

Collection is probable. Probability of collection is assessed on a customer-by-customer basis. Each new customer undergoes a credit review process to evaluate its financial position and ability to pay. If we determine from the outset of an arrangement that collection is not probable based upon the review process, revenue is recognized on a cash-collected basis.

Our arrangements do not generally include acceptance clauses. However, if an arrangement does include an acceptance clause, revenue for such an arrangement is deferred and recognized upon acceptance. Acceptance occurs upon the earliest of receipt of a written customer acceptance, waiver of customer acceptance or expiration of the acceptance period.

Stock-Based Compensation

We recognize stock option expense using the fair value recognition method. We apply the fair value recognition method only to awards granted, modified, repurchased or cancelled after January 1, 2006. Stock-based compensation expense is recognized based on the grant-date fair value of stock option awards granted or modified after January 1, 2006. As we had used the minimum value method for valuing our stock options, all unmodified options granted prior to January 1, 2006 continue to be accounted using the minimum value method.

We account for stock-based compensation expense related to restricted stock units using the fair value of the nonvested stock on the grant date. The fair value is measured as the market price of a share of nonrestricted stock on the grant date.

We account for stock awards to non-employees by recognizing the fair value of these instruments as an expense over the period in which the related services are rendered.

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Income Taxes

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted laws and tax rates that are expected to be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits not expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted.

We analyze any uncertain tax positions through the application of a two-step process that separates recognition from measurement. During the three months ended March 31, 2010 and 2009, the Company did not recognize any increase or decrease to reserves for uncertain tax positions.

We are subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax assessments by tax authorities for the years before 2004.

We have elected to record interest and penalties in the financial statements as income taxes. Any subsequent change in classification of interest and penalties will be treated as a change in accounting principle.

Liquidity and Capital Resources

Overview

Our ability to sustain a level of positive cash flow from operations that is sufficient to continue to meet all of our future operating, capital and other cash requirements is subject to the risks associated with our business, including those described under “Risk Factors” in our annual report on Form 10-K, which we filed with the Securities and Exchange Commission on March 12, 2010 and to changes in our business plan, capital structure and other events. As of March 31, 2010, we had cash and short term investments of $88.7 million and accounts receivable of $13.9 million.

At March 31, 2010, we had no borrowings under our existing $2.0 million credit facility with Silicon Valley Bank (“SVB”), which credit facility expired on April 28, 2010. We are currently in the process of renewing our credit facility. There is no guarantee we will be able to renew this credit facility with similar terms as the expired agreement or that we will be able to renew the credit facility at all.

Sources and Uses of Cash

	Three Months Ended March 31,
	2010			2009
	(in thousands)
Cash flow data:
Net cash provided by operating activities	$	2,031		$	6,666
Net cash used in investing activities		(7,694	)		(4,910	)
Net cash provided by (used in) financing activities		(8,579	)		4
Effect of exchange rate changes on cash and cash equivalents		(409	)		47
Net increase in cash and equivalents		(14,651	)		1,807
Cash and cash equivalents, beginning of period		57,974			40,659
Cash and equivalents, end of period	$	43,323		$	42,466

Cash Flows from Operating Activities

Cash provided by operating activities decreased by $4.6 million from $6.7 million in the three months ended March 31, 2009 to $2.0 million in the three months ended March 31, 2010. The decrease in cash provided by operations is primarily a result of the decrease in accounts receivable of $2.8 million in the three months ended March 31, 2010 as compared to the decrease of $6.6 million in the three months ended March 31, 2009. Both decreases are primarily related to cash collections and less billings in the respective three months.

Cash Flows from Investing Activities

Cash used in investing activities was $7.7 million in the three months ended March 31, 2010 which was an increase of $2.8 million from $4.9 million of cash used in investing activities in the three months ended March 31, 2009. The fluctuation is primarily due to less maturities of short term investments in the three months ended March 31, 2010.

Cash Flows from Financing Activities

Cash used in investing activities was $8.6 million in the three months ended March 31, 2010 which was an increase of $8.6 million as compared to net cash provided by financing activities in the three months ended March 31, 2009. The increase was a result of stock repurchases which included $8.4 million related to the stock repurchase program approved by the board of directors and $0.2 million related to shares withheld to cover the employees’ tax obligation related to the vesting of their restricted stock units.

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Off-Balance Sheet Arrangements

As of March 31, 2010, other than our operating leases, we do not have off-balance sheet financing arrangements, including any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Historically, our exposure to foreign currency exchange rates was limited as our international sales were denominated in the United States dollar. As a result of our acquisition of Double-Take EMEA in May 2006, Double-Take Canada in December 2007, and emBoot in July 2008, we now have international sales that are denominated in foreign currencies, and we face exposure to adverse movements in foreign currency exchange rates. Depending on the amount of our revenue generated from Double-Take EMEA and Double-Take Canada (including emBoot), adverse movement in foreign currency exchange rates could have a material adverse impact on our financial results. Our primary exposures are to fluctuations in exchange rates for the United States dollar versus the euro and Canadian dollar, as well as the euro versus the pound sterling. Changes in currency exchange rates could adversely affect our reported revenue and could require us to reduce our prices to remain competitive in foreign markets, which could also materially adversely affect our results of operations. We have not historically hedged exposure to changes in foreign currency exchange rates and, as a result, we could incur unanticipated gains or losses.

Item 4. Controls and Procedures.

We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our CEO and CFO, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

There were no changes in the Company’s internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

We currently have no material legal proceedings pending.

Item 1A. Risk Factors.

An investment in our stock involves a high degree of risk. You should carefully consider the risks set forth in the Risk Factors section of our annual report on Form 10-K, which we filed with the SEC on March 12, 2010, and all of the other information set forth in this Form 10-Q and our Form 10-K before deciding to invest in our common stock.

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

Unregistered Sales of Equity Securities

None.

Use of Proceeds

None

Repurchases

During the three month period ending March 31, 2010, the Company repurchased 1,003,432 shares of the Company's common stock, par value $0.001 per share. The chart below provides further detail as to the Company’s repurchases during the period.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 1, 2010 – January 31, 2010		-		-		-
February 1, 2010 – February 28, 2010		1,003,432	$	8.38		1,003,432
March 1, 2010 – March 31, 2010		-		-		-
Total		1,003,432	$	8.41		1,003,432	$	6,564,000

(1) On February 3, 2010, the Company’s Board of Directors approved a stock repurchase program for its common stock under which the Company may purchase up to a maximum aggregate purchase price of $15.0 million through December 31, 2010. Repurchases may be made from time to time in the open market at prevailing market prices or in privately negotiated transactions from time to time based on business and market conditions. The stock repurchase program may be suspended or discontinued at any time, and will be funded using the Company's available cash.

Item 3. Defaults Upon Senior Securities.

Not Applicable.

Item 4. Removed and Reserved.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit No.	Exhibit Description
31.01	Certification of Chief Executive officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

DOUBLE-TAKE SOFTWARE, INC.

May 10, 2010 By: /s/ S. Craig Huke

S. Craig Huke

Chief Financial Officer

(Principal Financial and Principal Accounting Officer)

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