DBTK Double-Take Software (MM)

 

 

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 September 30, 2007

OR

o		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)

DOUBLE-TAKE SOFTWARE, INC.
For The Quarterly Period Ended September 30, 2007

INDEX

				Page No.
PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements			1
		Condensed Consolidated Balance Sheets at September 30, 2007 (unaudited) and December 31, 2006			1
		Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and September 30, 2006			2
		Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and September 30, 2006			3
		Unaudited Notes to Condensed Consolidated Financial Statements			4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			25
Item 4.		Controls and Procedures			25
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings			26
Item 1A.		Risk Factors			26
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 3.		Defaults Upon Senior Securities			26
Item 4.		Submission of Matters to a Vote of Security Holders			26
Item 5.		Other Information			26
Item 6.		Exhibits			27
		Signatures			28

PART I — FINANCIAL INFORMATION

See notes to financial statements

See notes to financial statements

DOUBLE-TAKE SOFTWARE, INC.
Unaudited Notes to Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

     Double-Take Software, Inc. (the “Company”), a Delaware corporation, is engaged in developing, marketing and supporting data protection software solutions for high availability, disaster recovery and centralized backup. 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 primarily in the United States and in Europe.

     The Company completed an initial public offering of its common stock in December 2006.

     In connection with the Company’s initial public offering, or IPO:

	•		There were 7.5 million shares of common stock sold at $11.00 per share to the public, comprising 5 million shares of common stock sold by the Company and 2.5 million shares of common stock sold by existing stockholders. The Company received gross proceeds of $55,000, or $47,549 after deducting underwriting discounts and commissions of $3,850 and offering costs of $3,601. Upon closing of the IPO, all shares of redeemable preferred stock automatically converted into 11,553,130 shares of common stock.
	•		On January 4, 2007, the underwriters of the Company’s initial public offering exercised their over-allotment option to purchase an additional 1,125,000 shares of common stock of the Company from certain existing stockholders. The Company did not receive any proceeds from the sale of the shares of the selling stockholders.

     The Company completed a secondary offering of its common stock in August 2007.

     In connection with this secondary offering:

	•		There were 2.8 million shares of common stock sold at $16.00 per share to the public, comprising 100,000 shares of common stock sold by the Company and 2.7 million shares of common stock sold by existing stockholders. The Company did not receive any proceeds from shares of common stock sold by the selling stockholders. The Company received gross proceeds of $1,600, or $1,002 after deducting underwriting discounts and commissions of $88 and offering costs of $510. The Company paid the offering costs of the selling stockholders.
	•		On August 13, 2007, the underwriters of the Company’s secondary offering exercised their over-allotment option to purchase an additional 15,750 shares from the Company and 402,750 shares from one of the selling stockholders. The Company did not receive any proceeds from the sale of shares by the selling stockholder. The Company received gross proceeds of $252, or $238 after underwriting commissions of $14.

Significant Accounting Policies

Principles of Consolidation

     The consolidated financial statements include all subsidiaries. All inter-company transactions and balances have been eliminated. Double-Take Software S.A.S., or Double-Take EMEA, was acquired by the Company on May 23, 2006; therefore the consolidated financial statements only include Double-Take EMEA’s financial results and activities from the date of acquisition.

Basis of Presentation

     The accompanying consolidated balance sheet as of September 30, 2007, the consolidated statements of operations for the three and nine months ended September 30, 2007 and September 30, 2006, and the consolidated statements of cash flows for the nine months ended September 30, 2007 and September 30, 2006 are unaudited. The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2006.

     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 our statement of financial position as of September 30, 2007, our results of operations for the three and nine months ended September 30, 2007 and September 30, 2006, and cash flows for the nine months ended September 30, 2007 and September 30, 2006. All adjustments are of a normal recurring nature. The results for the three and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for any subsequent period or for the fiscal year ending December 31, 2007. Other than the adoption of the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109, or FIN 48, there have been no significant changes in our accounting policies during the nine months ended September 30, 2007 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2006.

Use of Estimates

     GAAP requires us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates and assumptions made by management include the determination of the fair value of stock options issued, estimates in connection with the acquisition of Double-Take EMEA, and the allowance for doubtful accounts. The estimates and judgments upon which we rely are based upon information available to us at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected.

Goodwill

     The Company accounts for goodwill in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” (“FAS 142”). FAS 142 requires that goodwill with indefinite lives is not amortized but reviewed for impairment if impairment indicators arise and, at a minimum, annually.

Revenue Recognition

     In accordance with EITF Issue No. 01-9, our revenue is reported net of rebates and discounts because we do not receive an 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 software licenses and services. The Company applies the provisions of Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, and related interpretations to all transactions to determine the recognition of revenue.

     For software arrangements involving multiple elements, the Company recognizes revenue using the residual method as described in SOP 98-9. 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.

     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 sells 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. 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 in accordance with SOP 98-9.

          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 on 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. Software and/or software license keys for add-on orders or software updates are typically delivered digitally, over the internet. We recognize software revenue upon shipment to resellers and distributors because there is no right of return or refund and 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

          Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment,” using the prospective transition method, which requires the Company to apply its provisions only to awards granted, modified, repurchased or cancelled after the effective date. Under this transition method, stock-based compensation expense recognized beginning January 1, 2006 is 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 under SFAS 123, all options unmodified granted prior to January 1, 2006 continue to be accounted for under APB Opinion No. 25.

     The Company accounts for stock option grants to non-employees in accordance with SFAS No. 123(R) and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” which require that the fair value of these instruments be recognized as an expense over the period in which the related services are rendered.

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

Income Taxes

     The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for 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.

2. NET INCOME (LOSS) PER COMMON SHARE

     Basic and diluted net income (loss) per share information for all periods is presented under the requirements of SFAS No. 128, “Earnings Per Share.” Basic loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted loss per share is calculated by dividing net loss attributable to common stockholders 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 (loss) per share:

		Three months Ended September 30,								Nine months Ended September 30,
		2007				2006				2007				2006
Net Income (loss) attributable to common stockholders		$	3,308			$	432			$	13,738			$	(1,116	)
Weighted average common shares outstanding net of weighted-average shares subject to repurchase – basic			21,524,576				3,795,846				21,152,464				3,793,721
Dilutive effect of stock options			1,527,871				2,298,360				1,774,913				—
Dilutive effect of common stock warrants			—				128,202				23,015				—
Weighted average common shares outstanding net of weighted-average shares subject to repurchase – diluted			23,052,447				6,222,408				22,950,392				3,793,721
Basic net income (loss) per share		$	0.15			$	0.11			$	0.65			$	(0.29	)
Diluted net income (loss) per share		$	0.14			$	0.07			$	0.60			$	(0.29	)
The following potential common shares were excluded from the computation of diluted net income (loss) attributable to common stockholders per share because they had an anti-dilutive impact:
		Three Months Ended September 30,								Nine Months Ended September 30,
		2007				2006				2007				2006
Stock options			633,874				237,121				647,374				3,020,303
Warrants			—				—				—
Redeemable convertible preferred stock			—				11,347,662				—				11,347,662

3. CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS

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

     Short term investments, which are carried at fair value, consist of commercial paper and corporate bonds 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, if any, 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. As of September 30, 2007, the fair value of these securities approximated their cost.

4. PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:

5. INTANGIBLE ASSETS

     In connection with the acquisition of Double-Take EMEA, a portion of the contingent purchase price equal to the excess of the fair value of the assets acquired and liabilities assumed over the non-contingent portion of the purchase price was accrued in accordance with SFAS No. 141. Earn-out payments in excess of the initial amount recorded as a liability are recorded as additional purchase price and result in goodwill. For the nine months ended September 30, 2007, the Company paid aggregate earn-out payments of $4,484 to the former owners of Double-Take EMEA, $3,059 of which was recorded as goodwill. Earn-out payments to the former owners of Double-Take EMEA will continue through December 31, 2007.

     Intangible assets consist of the following:

6. CONTINGENCIES

     In the normal course of its business, the Company may be involved in various claims, negotiations and legal actions; however, at September 30, 2007, 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

Common stock

     Options to purchase 812,977 and 6,186 shares of common stock were exercised for the nine months ended September 30, 2007 and September 30, 2006, respectively, and the Company received aggregated proceeds of $1,188 and $6, respectively.

Warrants

     For the nine months ended September 30, 2007, the Company issued 67,918 shares of common stock upon the exercise of warrants to purchase shares of common stock. The warrants were exercisable for up to 81,632 shares of common stock, however, pursuant to the terms of the warrant agreements, the holders of the warrants performed cashless exercises in which the Company issued fewer shares in lieu of receiving proceeds of $201.

As of September 30, 2007, no warrants were outstanding to purchase common stock.  

Stock option plans

     In the nine months ended September 30, 2007, the Company issued options to purchase 489,153 shares of common stock, with a weighted average exercise price of $16.74 per share, which is based on exercise prices equal to 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 $12.43.

     A summary of the Company’s stock option activity for the nine months ended September 30, 2007 is presented below:

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

     The aggregate intrinsic value of stock options outstanding at September 30, 2007 was approximately $33,034. The aggregate intrinsic value of stock options exercisable at September 30, 2007 was approximately $24,425.

     All options granted are equity awards and the Company has not granted any liability awards. The Company expects to recognize future compensation costs aggregating $6,901 for options granted but not vested as of September 30, 2007. Such amount will be recognized over the weighted average requisite service period, which is expected to be approximately 3 years. The options generally have a contractual life of ten years.

     The following table presents the stock-based compensation expense for the three and nine months ended September 30, 2007 and September 30, 2006:

Executive bonus plans

     In February 2006, the Company issued 67,998 shares of Series C Preferred to certain of its executives and recorded a compensation charge of $102 based on the fair value of the Series C Preferred at $1.50 per share. In connection with the completion of the Company’s initial public offering in December 2006, all preferred shares were converted into common shares.

8. INCOME TAXES

     In the three and nine months ended September 30, 2007, the Company recorded a current tax expense of $2,055 and $5,167 related to income generated during the periods using an effective tax rate expected to be in effect for the full year.

     As of December 31, 2006, the Company recorded a full valuation allowance against net deferred tax assets, which are primarily comprised of net operating loss carryforwards as a result of operating losses incurred since inception. Realization of deferred tax assets is dependent upon future earnings, if any, the timing of which is uncertain. Accordingly, the net deferred tax assets were fully offset by a valuation allowance. If not utilized, the federal and state net operating loss and tax credit carryforwards will expire between 2011 and 2025. Utilization of these net operating losses and credit carryforwards are subject to annual limitations due to provisions of the Internal Revenue Code of 1986, as amended, that are applicable due to “ownership changes” that have occurred.

     The Company analyzes the carrying value of its deferred tax assets on a regular basis. Because the Company has delivered consistent profitability over the past two years, it was concluded that it was more likely than not that the Company would generate sufficient taxable income to utilize the benefit from the net operating loss carryforwards eligible to be used in 2007 and 2008. As a result, as of June 30, 2007, the Company reversed the valuation allowance on $5,698 of deferred tax assets. 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 September 30, 2007, the remaining valuation allowance on the deferred tax asset is approximately $19,300 and will be maintained until sufficient further positive evidence exists to support a reversal of, or decrease in, the valuation allowance.

     The Company adopted the provisions of FIN 48 on January 1, 2007. The application of this Interpretation requires a two-step process that separates recognition from measurement. Upon implementing FIN 48 and performing the analysis, we did not recognize any uncertain tax positions and during the nine months ended September 30, 2007, we did not recognize any increase or decrease to reserves for uncertain tax positions.

     The Company is 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 2002.

     The Company has elected to record interest and penalties recognized in accordance with FIN 48 in the financial statements as income taxes. Any subsequent change in classification of FIN 48 interest and penalties will be treated as a change in accounting principle subject to the requirements of SFAS No. 154, Accounting Changes and Error Corrections.

9. PROFIT SHARING 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. The Company recorded an expense of $55, $227, $0 and $0 for the three and nine months ended September 30, 2007 and September 30, 2006, respectively.

10. SEGMENT INFORMATION

     The Company operates in one reportable segment.

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

11. RELATED PARTY TRANSACTIONS

     The Company has had transactions with Sunbelt Software Distribution, Inc., or Sunbelt Distribution. An officer of the Company who joined the Company as a result of the acquisition of Double-Take EMEA is Chairman of Sunbelt Distribution. The balances and transactions with Sunbelt Distribution are described below:

(1) The related party information includes only information after the date of the acquisition of Double-Take EMEA. The acquisition date was May 23, 2006.

12. RECENT ACCOUNTING PRONOUNCEMENTS

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (FAS 159) . The fair value option established by FAS 159 permits, but does not require, all entities to choose to measure eligible items at fair value at specified election dates. An entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. FAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently assessing what the impact of the adoption of this Statement will be on the Company’s financial position and results of operations.

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

CAUTIONARY ADVICE REGARDING FORWARD-LOOKING STATEMENT

     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;
	•		demand for replication software;
	•		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 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 cash needs and expectations regarding cash flow from operations;
	•		our ability to manage and grow our business and execution of our business strategy; 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 29, 2007 and the Risk Factors section of our Prospectus that forms a part of our Registration Statement on Form S-1, as amended, which Prospectus was filed pursuant to Rule 424(b)(1) on August 10, 2007 (Registration No. 333-144746). 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 reduces downtime and protects data for business-critical systems. We believe that we are the leading supplier of replication software for Microsoft server environments. By simply loading our software onto servers running current Windows operating systems, organizations of any size can maintain an off-site standby server with replicated data, providing rapid recovery in the event of a disaster. We estimate that we have sold licenses for approximately 125,000 copies of Double-Take to more than 10,000 customers.

     In recent years, we have experienced substantial growth, increasing our total revenue from $14.3 million for the year ended December 31, 2002 to $60.8 million for the year ended December 31, 2006, and we have gone from having net losses of $14.3 million to a net income of $6.8 million during that same period. Revenue for the nine months ended September 30, 2007 totaled $59.2 million and we recorded net income of $13.7 million. We believe that our focus on providing affordable replication software to companies of all sizes through an efficient direct sales team and a robust distribution network has been instrumental to our continued revenue growth. Revenue generated by sales of our software represented 59% and 63% of our total revenue in the nine months ended September 30, 2007 and September 30, 2006, respectively. Sales of maintenance and professional services generated the remainder of our revenue.

     As a result of our investments in developing our software and establishing our broad distribution network, as well as legal fees and settlement costs associated with the defense and settlement of a legal case involving our intellectual property, we experienced significant operating losses through 2005. Our ability to increase the productivity of our sales force and distribution partners while controlling our other expenses has driven an improvement in our results, from an operating loss of $3.8 million and a net loss of $3.8 million in 2005 to an operating income of $7.0 million and net income of $6.8 million in 2006. Our acquisition of Double-Take EMEA on May 23, 2006 has also contributed to our improved results. We achieved operating income of $11.1 million and net income of $13.7 million for the nine months ended September 30, 2007.

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.

     Software sales made to or through our indirect channels such as distributors, value-added resellers and OEMs generated approximately 94% of total software revenue in the nine months ended September 30, 2007 and September 30, 2006. During the nine months ended September 30, 2007 and September 30, 2006, approximately 6% of our software sales were made solely by our direct sales force, approximately 12% and 19%, respectively, were made to our distributors for sale to value-added resellers, approximately 75% and 67%, respectively, were made directly through resellers and approximately 7% and 8%, respectively, were made through OEMs, primarily Hewlett-Packard Co. 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.

     In the nine months ended September 30, 2007, the median price of sales of Double-Take software licenses to customers was approximately $4,000 and the average sales cycle was less than three months. On May 1, 2007, we implemented a nominal price increase across all of our products except in a few international markets where the price was already commensurate with the nominal price increase. We believe that relatively small deal levels have contributed to more balanced sales throughout the quarter and more predictable revenue streams in comparison to other software companies with perpetual license models.

     On May 23, 2006, we completed our acquisition of Sunbelt System Software S.A.S., which is now known as Double-Take Software S.A.S., or Double-Take EMEA. From 1998 through the acquisition date, Double-Take EMEA was the principal or exclusive distributor of our software in our European, Middle Eastern and African markets and a certified Double-Take training organization. Sales of our software and related services generated 93% of Double-Take EMEA’s revenue in 2005. Our acquisition of Double-Take EMEA has provided us with a direct presence in the European, Middle Eastern and African markets, the opportunity to further our strategic initiative to increase revenue generated outside of the United States, and opportunities for improved margins. The inclusion of Double-Take EMEA’s assets and operations in our business since May 23, 2006 has contributed to a significant increase in the size of our business.

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. In accordance with EITF 01-9, 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 59% and 63% of our total revenue in the nine months ended September 30, 2007 and September 30, 2006, respectively. Our software revenue generally experiences some seasonality. Many organizations make the bulk of their information technology purchases, including software, in the second half of the year. We believe that this generally has resulted in higher revenue generated by software sales during the last half of any year. We believe this pattern is consistent in 2007. Software revenue has increased each consecutive quarter during 2007.

      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. This policy has contributed to increasing deferred revenue balances on our balance sheet and positive cash flow from operations.

     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 application high availability, 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 recognize the revenue for professional services once we complete the engagement.

     Of total maintenance and professional services revenue, maintenance revenue represented 88% and 86% in the nine months ended September 30, 2007 and September 30, 2006, respectively. Professional services generated the remainder of our total maintenance and professional services revenue in these periods.

     Of our total revenue, maintenance revenue represented 36% and 32% in the nine months ended September 30, 2007 and September 30, 2006, respectively. Professional services accounted for 5% of our total revenue in the nine months ended September 30, 2007 and September 30, 2006. 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 76% and 72% in the nine months ended September 30, 2007 and September 30, 2006, respectively. We expect the proportion of revenue derived from sales of maintenance to increase in the future as we increase the number of software licenses sold and in service. As the percentage of total revenue attributable to maintenance increases, our overall gross margins will be adversely affected.

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 may in the future include 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 no longer capitalize costs of our internally-developed software. As a result, we do not believe that amortization of internally developed software will have any effect on our cost of software revenue in future periods.

      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, 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 increase the number of direct sales professionals and invest in marketing programs.

      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.

      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.

     General and administrative expenses have increased as we have incurred increased expenses related to being a publicly-traded company and have invested in an infrastructure to support our continued growth. However, we expect general and administrative expenses to decrease as a percentage of revenue for the foreseeable future, as we believe the rate at which our revenue will increase will exceed the rate at which we expect to incur these additional expenses.

      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 September 30, 2007 Compared to Three Months Ended September 30, 2006

      Revenue. We derive our revenue from sales of our products and support and services. Revenue increased 30% to $21.3 million, from $16.4 million for the three months ended September 30, 2007 compared to September 30, 2006. Of our total revenue in the three months ended September 30, 2007, 88% was attributable to sales to or through our indirect channels such as distributors, value-added resellers and OEMs, which was a decrease from 96% of our total revenue attributable to sales to or through our indirect channels for the three months ended September 30, 2006. This percentage can vary from quarter to quarter and we do not plan to significantly increase our proportion of sales from direct sales. Of our total revenue in the three months ended September 30, 2007, 12% was attributable to direct sales to end users, an increase from 4% of our total revenue attributable to end users in the three months ended September 30, 2006.

      Software License Revenue. Software revenue increased $2.4 million, or 23%, from $10.2 million in the three months ended September 30, 2006 to $12.6 million in the three months ended September 30, 2007. The increase in software revenue was primarily due to the increased number of software licenses sold resulting from broader demand for, and acceptance of, our software.

      Maintenance and Professional Services Revenue. Maintenance and professional services revenue increased $2.5 million, or 41%, from $6.2 million in the three months ended September 30, 2006 to $8.7 million in the three months ended September 30, 2007. Maintenance and professional services revenue represented 38% of our total revenue in the three months ended September 30, 2006 and 41% of our total revenue in the three months ended September 30, 2007. Maintenance revenue increased $2.4 million, or 46%, from $5.3 million in the three months ended September 30, 2006 to $7.7 million in the three months ended September 30, 2007. The increase in maintenance revenue was attributable to higher sales to our expanding base of customers in both North America and through Double-Take EMEA as well as continued maintenance renewals from our existing customers. Professional services revenue increased $0.1 million, or 8%, from $0.9 million in the three months ended September 30, 2006 to $1.0 million in the three months ended September 30, 2007. The slight increase in professional services revenue was due to more professional service deliveries due to an increase in professional services personnel as well as increased revenue generated by Double-Take EMEA.

      Cost of Revenue and Gross Profit

     Total cost of revenue decreased $0.2 million, or 10%, from $2.2 million for the three months ended September, 30 2006 to $2.0 million in the three months ended September 30, 2007. Total cost of revenue represented 14% of our total revenue in the three months ended September 30, 2006 and 9% of our total revenue in the three months ended September 30, 2007.

     Cost of software revenue decreased $0.4 million, or 86%, from $0.5 million for the three months ended September 30, 2006 to $0.1 million for the three months ended September 30, 2007. The decrease was due to cost of software for Double-Take EMEA sales in the three month period ending September 30, 2006 relating to the inventory of Double-Take products on hand at May 23, 2006 of $1.4 million. The balance of the inventory was sold from the acquisition date through the three months ended March 31, 2007, resulting in no similar cost of revenue for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006. Cost of software revenue represented 5% and 1% of our software revenue in the three months ended September 30, 2006 and September 30, 2007, respectively.

     Cost of services revenue increased $0.2 million, or 13%, from $1.7 million for the three months ended September 30, 2006 to $1.9 million in the three months ended September 30, 2007. The increase was primarily a result of an increase in personnel. Cost of services revenue represented 28% of our services revenue in the three months ended September 30, 2006 and 22% in the three months ended September 30, 2007.

     Gross profit increased $5.1 million, or 36%, from $14.2 million for the three months ended September 30, 2006 to $19.3 million for the three months ended September 30, 2007. Gross margin increased from 86% in the three months ended September 30, 2006 to 91% in the three months ended September 30, 2007. This increase is primarily related to higher cost of software revenue relating to Double-Take EMEA’s inventory in the three months ended September 30, 2006.

      Operating Expenses

      Sales and Marketing. Sales and marketing expenses increased $1.3 million, or 23%, from $5.6 million for the three months ended September 30, 2006 to $6.9 million for the three months ended September 30, 2007. The increase was substantially due to increased compensation expense related to an increase in personnel as well as increased commission expense resulting from increased sales.

      Research and Development. Research and development expenses increased $0.2 million, or 10%, from $2.8 for the three months ended September 30, 2006 to $3.0 million for the three months ended September 30, 2007. The increase primarily resulted from higher compensation expense of $0.1 million due to an increase in personnel and $0.1 million from outsourced development projects.

      General and Administrative. General and administrative expenses increased $1.5 million, or 59%, from $2.6 million for the three months ended September 30, 2006 to $4.1 million for the three months ended September 30, 2007. The increase was substantially related to an increase of $0.5 million in compensation expense in the three months ended September 30, 2007 attributable to stock option expense, a $0.1 increase in compensation due to increased personnel, an increase in insurance expense of $0.2 million related to higher premiums associated with coverages for a public company, an increase of $0.3 million in legal and accounting fees due to being a public company, an increase of $0.4 million of costs from Double-Take EMEA primarily related to personnel expense, and a $0.3 decrease in bad debt expense.

      Depreciation and Amortization. Depreciation and amortization expense increased $0.1 million, or 23%, from $0.5 million in the three months ended September 30, 2006 to $0.6 million for the three months ended September 30, 2007. The increase was attributable to increased depreciation expense associated with increased capital expenditures.

      Interest Income. Interest income increased $0.7 million, or 767%, from $0.1 million for the three months ended September 30, 2006 to $0.8 million for the three months ended September 30, 2007. The increase is attributable to higher balances in our cash and short term investment accounts, mainly as a result of our initial public offering in December 2006, our secondary offering in August 2007, and our positive cash flow from operations.

      Foreign Exchange gains (losses)

     Foreign currency losses increased a nominal amount due to foreign currency fluctuations related to Double-Take EMEA for the three months ended September 30, 2007.

      Income Tax Expense (Benefit)

     Income tax expense increased by $1.8 million, or 548%, from $0.3 million for the three months ended September 30, 2006 to $2.1 million for the three months ended September 30, 2007 substantially as a result of increased taxable income generated from operations in the United States. In the three months ended September 30, 2007, we recorded a current tax expense of $2.1 million related to income generated during the period using an effective tax rate expected to be in effect for the full year.

     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 September 30, 2007, the valuation allowance against net deferred tax assets, which are primarily comprised of net operating loss carryforwards as a result of operating losses incurred since inception, is approximately $19.3 million. Realization of deferred tax assets is dependent upon future earnings, if any, the timing of which is uncertain. Accordingly, the net deferred tax assets were offset by the valuation allowance. If not utilized, the federal and state net operating loss and tax credit carryforwards will expire between 2011 and 2025. Utilization of these net operating losses and credit carryforwards are subject to annual limitations due to provisions of the Internal Revenue Code of 1986, as amended, that are applicable due to “ownership changes” that have occurred. The valuation allowance as of September 30, 2007 will be maintained until sufficient further positive evidence exists to support a reversal of, or decrease in, the valuation.

      Net Income

     Net income increased $0.8 million, or 32%, from $2.5 million for the three months ended September 30, 2006 to $3.3 million for the three months ended September 30, 2007. This increase is substantially related to our revenue growth of $4.9 million during the three months ended September 30, 2007. The increase in revenue is a result of the continued leverage of our existing sales forces and partners to generate revenue. Operating expenses increased by only $3.2 million in the same period as we are continuing to focus on expense control. The revenue and operating expenses are partially offset by the increase in income tax expense of $1.8 million and the increase in net interest income and foreign currency expense of $0.6 million.

      Preferred Stock

     Accretion on our Series B and Series C Preferred stock decreased from $1.3 million in the three months ended September 30, 2006 to $0.0 million in the three months ended September 30, 2007. The accretion increased the carrying value of the preferred shares from their carrying value to their redemption value on a straight-line basis over the period from the investment date to the mandatory redemption date. Accretion ceased as of November 12, 2006, the original redemption date for both issuances.

     Dividends on our Series B and Series C Preferred stock decreased from $0.7 million in the three months ended September 30, 2006 to $0.0 million in the three months ended September 30, 2007. In connection with our public offering in December 2006, our Series B and Series C Preferred stock converted into an aggregate of 11,553,130 shares of common stock. Thus, there are no dividends for the three months ended September 30, 2007.

      Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

      Revenue. We derive our revenue from sales of our products and support and services. Revenue increased 42% to $59.2 million, from $41.8 million for the nine months ended September 30, 2007 compared to September 30, 2006. Revenue for the nine months ended September 30, 2007 includes revenue from Double-Take EMEA for the full nine months whereas revenue for the nine months ended September 30, 2006 only includes revenue from Double-Take EMEA from the acquisition date of May 23, 2006 through September 30, 2006. Of our total revenue in the nine months ended September 30, 2007, 91% was attributable to sales to or through our indirect channels such as distributors, value-added resellers and OEMs, which was a decrease from 94% of our total revenue attributable to sales to or through our indirect channels in the nine months ended September 30, 2006. Of our total revenue in the nine months ended September 30, 2007, 9% was attributable to direct sales to end users, an increase from 6% of our total revenue attributable to end users in the nine months ended September 30, 2006.

      Software License Revenue. Software revenue increased $8.8 million, or 33%, from $26.2 million in the nine months ended September 30, 2006 to $35.0 million in the nine months ended September 30, 2007. The increase in software revenue was primarily due to increased volume of $3.8million resulting from broader demand for, and acceptance of, our software, $0.7 million from new products available during the nine months ended September 30, 2007, and $4.3 million from sales through Double-Take EMEA, which was acquired on May 23, 2006.

      Maintenance and Professional Services Revenue. Maintenance and professional services revenue increased $8.8 million, or 56%, from $15.5 million in the nine months ended September 30, 2006 to $24.3 million in the nine months ended September 30, 2007. Maintenance and professional services revenue represented 37% of our total revenue in the nine months ended September 30, 2006 and 41% of our total revenue in the nine months ended September 30, 2007. Maintenance revenue increased $7.9 million, or 60%, from $13.3 million in the nine months ended September 30, 2006 to $21.2 million in the nine months ended September 30, 2007. The increase in maintenance revenue was attributable to higher sales to our expanding base of customers, continued maintenance revenue from our existing customers, as well as maintenance revenue of $4.5 million generated by Double-Take EMEA, which was acquired on May 23, 2006. Professional services revenue increased $0.8 million, or 35%, from $2.2 million in the nine months ended September 30, 2006 to $3.1 million in the nine months ended September 30, 2007. The increase in professional services revenue was due to more professional service deliveries due to an increase in professional services personnel as well as $0.7 million of revenue generated by Double-Take EMEA which was acquired on May 23, 2006.

      Cost of Revenue and Gross Profit

     Total cost of revenue increased $0.2 million, or 4%, from $5.8 million for the nine months ended September 30, 2006 to $6.0 million in the nine months ended September 30, 2007. Total cost of revenue represented 14% of our total revenue in the nine months ended September 30, 2006 and 10% of our total revenue in the three months ended September 30, 2007.

     Cost of software revenue decreased $1.1 million, or 84%, from $1.3 million in the nine months ended September 30, 2006 to $0.2 million in the nine months ended September 30, 2007. The decrease was due to cost of software for Double-Take EMEA sales in the period from May 24, 2006 through September 30, 2006 relating to the inventory of Double-Take products on hand at May 23, 2006 of $1.4 million. The balance of the inventory was sold from the acquisition date through the three months ended March 31, 2007, resulting in a decrease of similar cost of revenue for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006. Cost of software revenue represented 5% and 1% of our software revenue in the nine months ended September 30, 2006 and September 30, 2007.

     Cost of services revenue increased $1.4 million, or 31%, from $4.4 million for the nine months ended September 30, 2006 to $5.8 million in the nine months ended September 30, 2007. The increase was the result of higher employee compensation of $0.6 million and $0.1 of travel expenses due to an increase in the number of our maintenance and professional services personnel and $0.7 million of costs of maintenance and professional services personnel of Double-Take EMEA which was acquired on May 23, 2006. Cost of services revenue represented 28% of our services revenue in the nine months ended September 30, 2006 and 24% of our services revenue in the nine months ended September 30, 2007.

     Gross profit increased $17.2 million, or 48%, from $36.0 million for the nine months ended September 30, 2006 to $53.2 million for the nine months ended September 30, 2007. Gross margin increased from 86% in the nine months ended September 30, 2006 to 90% in the nine months ended September 30, 2007. This increase is primarily related to the lower cost of revenue in the nine months ended September 30, 2007 as a result of the use of Double-Take EMEA’s inventory during the nine months ended September 30, 2006 and the increased maintenance revenue in the nine months ended September 30, 2007 from Double-Take EMEA.

      Operating Expenses

      Sales and Marketing. Sales and marketing expenses increased $5.1 million, or 33%, from $15.6 million for the nine months ended September 30, 2006 to $20.7 million for the nine months ended September 30, 2007. The increase was substantially due to an increase of compensation and commission expense of $1.4 million resulting from increased sales and headcount, an increase of $0.6 million in marketing and advertising related to creating Double-Take brand awareness and an increase of $2.9 million of costs of sales and marketing efforts through Double-Take EMEA which was acquired on May 23, 2006.

      Research and Development. Research and development expenses increased $1.0 million, or 13%, from $7.8 million for the nine months ended September 30, 2006 to $8.8 million for the nine months ended September 30, 2007. The increase resulted primarily from higher compensation expense of $0.6 million due to an increase in personnel and $0.4 million from outsourced development projects.

      General and Administrative. General and administrative expenses increased $4.6 million, or 73%, from $6.4 million for the nine months ended September 30, 2006 to $11.0 million for the nine months ended September 30, 2007. The increase was substantially related to an increase of $1.0 million in compensation expense in the nine months ended September 30, 2007 attributable to stock option expense, $0.2 million associated with an increase in headcount, an increase in insurance expense of $0.6 million related to higher premiums associated with coverages for a public company, an increase of $1.0 million in legal and accounting fees due to being a public company and an increase of $1.5 million of costs from Double-Take EMEA which was acquired on May 23, 2006.

      Depreciation and Amortization. Depreciation and amortization expense increased $0.6 million, or 56%, from $1.1 million for the nine months ended September 30, 2006 to $1.7 million for the nine months ended September 30, 2007. The increase was attributable to increased depreciation expense associated with increased capital expenditures, which were applied primarily for product development and other computer-related equipment, as well as amortization related to the intangible assets acquired in the Double-Take EMEA acquisition.

      Interest Income. Interest income increased $2.0 million, or 939%, from $0.2 million for the nine months ended September 30, 2006 to $2.2 million for the nine months ended September 30, 2007. The increase is attributable to higher balances in our cash and short term investment accounts, mainly as a result of our initial public offering in December 2006, our secondary offering in August 2007, and our positive cash flow from operations.

      Foreign Exchange gains (losses)

     Foreign currency losses increased a nominal amount due to foreign currency fluctuations related to Double-Take EMEA for the nine months ended September 30, 2007.

      Income Tax Expense (Benefit)

     Income tax expense was $0.4 million for the nine months ended September 30, 2006 and was a benefit of $0.5 million for the nine months ended September 30, 2007. In the nine months ended September 30, 2007, we recorded a current tax expense of $5.2 million related to income generated during the period using an effective tax rate expected to be in effect for the full year. Because we have delivered consistent profitability over the past two years, we concluded that it was more likely than not that we would generate sufficient taxable income to utilize the benefit from our net operating loss carryforwards eligible to be used in 2007 and 2008. As a result, the Company reversed the valuation allowance on $5.7 million of deferred tax assets resulting in a net benefit of $0.5 million for the nine months ended September 30, 2007.

     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 September 30, 2007, the valuation allowance against net deferred tax assets, which are primarily comprised of net operating loss carryforwards as a result of operating losses incurred since inception, is approximately $19.3 million. Realization of deferred tax assets is dependent upon future earnings, if any, the timing of which is uncertain. Accordingly, the net deferred tax assets were offset by the valuation allowance. If not utilized, the federal and state net operating loss and tax credit carryforwards will expire between 2011 and 2025. Utilization of these net operating losses and credit carryforwards are subject to annual limitations due to provisions of the Internal Revenue Code of 1986, as amended, that are applicable due to “ownership changes” that have occurred. The valuation allowance as of September 30, 2007 will be maintained until sufficient further positive evidence exists to support a reversal of, or decrease in, the valuation.

      Net Income

     Net income increased $8.7 million, or 172%, from $5.0 million for the nine months ended September 30, 2006 to $13.7 million for the nine months ended September 30, 2007. This increase is primarily related to our revenue growth of $17.5 million during the nine months ended September 30, 2007 while operating expenses have increased by only $11.3 million in the same period. This increase was the result of our continued focus on expense control and continuing to leverage our existing sales force and partners to generate incremental revenue, as well as our acquisition of Double-Take EMEA, which occurred on May 23, 2006. The other contributing factors are the reversal of the valuation allowance on our deferred tax assets as well as increased interest income during the nine months ended September 30, 2007.

      Preferred Stock

     Accretion on our Series B and Series C Preferred stock decreased from $4.0 million in the nine months ended September 30, 2006 to $0.0 million in the nine months ended September 30, 2007. The accretion increased the carrying value of the preferred shares from their carrying value to their redemption value on a straight-line basis over the period from the investment date to the mandatory redemption date. Accretion ceased as of November 12, 2006, the original redemption date for both issuances.

     Dividends on our Series B and Series C Preferred stock decreased from $2.2 million in the nine months ended September 30, 2006 to $0.0 million in the three months ended September 30, 2007. In connection with our initial public offering in December 2006, our Series B and Series C Preferred stock converted into an aggregate of 11,553,130 shares of common stock. Thus, there are no dividends for the nine months ended September 30, 2007.

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

     We derive revenue 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. We apply the provisions of Statement of Position, or SOP, 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, and related interpretations to all transactions to determine the recognition of revenue.

     For software arrangements involving multiple elements, we recognize revenue using the residual method as described in SOP 98-9. 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, or 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 and when all other basic revenue recognition criteria are met as described below. Revenue from software licenses sold through an OEM 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 sell 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. Based on our analysis of such other professional services transactions sold on a stand-alone basis, we establish VSOE for such other professional services when sold in connection with a multiple-element software arrangement.

     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 in accordance with SOP 98-9.

     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 on an agreement.

Delivery or performance has occurred. Our software applications are usually physically delivered to customers with standard transfer terms such as FOB shipping point. Software and/or software license keys for add-on orders or software updates are typically delivered digitally, over the internet. We recognize software revenue upon shipment to resellers and distributors because there is no right of return or refund and 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 our OEM partners are recognized as revenue in the month the product is shipped to the end user. 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 a 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.

     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

     Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment,” using the prospective transition method, which requires the Company to apply its provisions only to awards granted, modified, repurchased or cancelled after the effective date. Under this transition method, stock-based compensation expense recognized beginning January 1, 2006 is 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 under SFAS 123, all unmodified options granted prior to January 1, 2006 continue to be accounted for under APB Opinion No. 25.

     The Company accounts for stock option grants to non-employees in accordance with SFAS No. 123(R) and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” which require that the fair value of these instruments be recognized as an expense over the period in which the related services are rendered.

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

Income Taxes

     In the three and nine months ended September 30, 2007, we recorded a current tax expense of $2.1 million and $5.2 million related to income generated during the periods using an effective tax rate expected to be in effect for the full year.

     As of December 31, 2006, we recorded a full valuation allowance against net deferred tax assets, which are primarily comprised of net operating loss carryforwards as a result of operating losses incurred since inception. Realization of deferred tax assets is dependent upon future earnings, if any, the timing of which is uncertain. Accordingly, the net deferred tax assets were fully offset by a valuation allowance. If not utilized, the federal and state net operating loss and tax credit carryforwards will expire between 2011 and 2025. Utilization of these net operating losses and credit carryforwards are subject to annual limitations due to provisions of the Internal Revenue Code of 1986, as amended, that are applicable due to “ownership changes” that have occurred.

     We analyze the carrying value of our deferred tax assets on a regular basis. Because we have delivered consistent profitability over the past two years, we concluded that it was more likely than not that we would generate sufficient taxable income to utilize the benefit from our net operating loss carryforwards eligible to be used in 2007 and 2008. As a result, in the nine months ended September 30, 2007, we reversed the valuation allowance on $5.7 million of deferred tax assets. 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 September 30, 2007, the remaining valuation allowance is approximately $19.3 million. This valuation allowance will be maintained until sufficient further positive evidence exists to support a reversal of, or decrease in, the valuation allowance.

     We adopted the provisions of FIN 48 on January 1, 2007. The application of this Interpretation requires a two-step process that separates recognition from measurement. Upon implementing FIN 48 and performing the analysis we did not recognize any uncertain tax positions and during the nine months ended September 30, 2007, we did not recognize any increase or decrease to reserves for uncertain tax positions.

     The Company is 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 2002.

     We have elected to record interest and penalties recognized in accordance with FIN 48 in the financial statements as income taxes. Any subsequent change in classification of FIN 48 interest and penalties will be treated as a change in accounting principle subject to the requirements of SFAS No. 154, Accounting Changes and Error Corrections.

Liquidity and Capital Resources

Overview

     During the development stages of our business, we incurred significant losses from operating activities. Since the three months ended June 30, 2005, however, our operations have generated sufficient cash flow to meet the cash requirements of our business, including our operating, capital and other cash requirements. 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 29, 2007, and those described under “Risk Factors” in our Prospectus that forms a part of our Registration Statement on Form S-1, as amended, which Prospectus was filed pursuant to Rule 424(b)(1) on August 10, 2007 (Registration No. 333-144746), and to changes in our business plan, capital structure and other events.

     From the start of our operations in 1991 until the three months ended June 30, 2005, we financed our operations primarily through the issuance of preferred stock and common stock. Since the three months ended June 30, 2005, we have primarily financed our operations through internally generated cash flows. In December 2006, we received $47.5 million in net proceeds from our initial public offering. As of September 30, 2007, we had cash and short term investments of $67.4 million and accounts receivable of $16.1 million.

     In January 2006, in connection with the settlement of an intellectual property dispute reached in December 2005, we paid $3.8 million to another company. We also agreed to make future payments of $0.5 million in each of January 2007, 2008, 2009 and 2010, which we collateralized by a $2.0 million letter of credit to that company. In December 2006, we purchased $0.5 million of the company’s products which was paid for in January 2007 and the letter of credit was reduced to $1.5 million. Our future obligations under the settlement will be reduced on a dollar-for-dollar basis to the extent that we purchase or resell the other company’s products.

     In May 2006, we paid $1.1 million to the former stockholders of Double-Take EMEA, which was our primary distributor in Europe, the Middle East and Africa as the initial payment for the acquisition of that company. Subsequent payments totaling $6.9 million have been made through September 30, 2007. The remaining portion of the total purchase price, which we estimate will range between $2.0 million and $3.0 million, will be payable in monthly increments based upon a specified percentage of the intercompany amounts paid by Double-Take EMEA to us each month in respect of purchases under our intercompany distribution agreement with Double-Take EMEA through December 31, 2007. A portion of our earn-out payments are held in escrow through December 31, 2007, to satisfy claims against the selling shareholders that we may have from time to time as a result of breaches of representations, warranties or covenants.

     At September 30, 2007, we had no borrowings under our existing credit facility with Silicon Valley Bank (“Bank”). There was a letter of credit relating to our settled legal proceeding (noted above) outstanding for $1.5 million

     In May 2007, we entered into an amendment to our credit facility that extended the term of the facility to April 29, 2008. Under the terms of the amended credit facility, our maximum borrowings are $2 million less the aggregate amounts undrawn on all outstanding letters of credit, foreign exchange contracts, or any other accommodations issued or incurred, or caused to be issued or incurred by the bank. Up to $0.5 million of the facility is available for foreign exchange contracts. The rate of interest for this facility is 0.75% above the prime rate. The facility is collateralized by all of our assets, excluding our intellectual property.

     Our credit facility contains a number of restrictions that will limit our ability, among other things, to do the following: borrow money; enter into transactions outside the ordinary course of business; pledge our accounts receivable, inventory, intellectual property and most of our other assets as security in other borrowings or transactions; pay dividends on stock, redeem or acquire any of our securities; sell certain assets; make certain investments; guaranty obligations of third-parties; undergo a merger or consolidation; or engage in any business other than the business in which we are currently engaged or business that is reasonably related to that business.

Cash Flows from Financing Activities

     Cash provided by financing activities increased $6.9 million in the nine months ended September 30, 2007 compared to September 30, 2006 due to tax benefits associated with stock based compensation, proceeds associated with exercises of stock options, and net proceeds from the secondary offering completed in August 2007. This was offset by additional costs paid in connection with the public offering.

Off-Balance Sheet Arrangements

     As of September 30, 2007, other than our operating leases and letter of credit, 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, 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, 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 to a lesser extent, the United States dollar versus the British Pound. 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.

PART II — OTHER INFORMATION

     The description of the letter agreements and the amended and restated employment/severance agreement in this Item 5 is qualified in its entirety by reference to the full text of those agreements, copies of which are attached hereto as Exhibits 10.48 and 10.50 and incorporated herein by reference.

Item 6. Exhibits.

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.

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