UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 2013
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 001-33197
GUIDANCE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware |
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95-4661210 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
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1055 E. Colorado Blvd. |
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Pasadena, California 91106 |
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(626) 229-9191 |
(Address of principal executive offices) |
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Registrants telephone number, including area code |
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par value per share.
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 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 (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x 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.
Large accelerated filer o |
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Accelerated filer o |
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Non- accelerated filer x |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 2, 2013, there were approximately 28,705,000 shares of the registrants Common Stock outstanding.
GUIDANCE SOFTWARE, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013
GUIDANCE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
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June 30, |
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December 31, |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
23,032 |
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$ |
32,606 |
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Trade receivables, net of allowance for doubtful accounts of $547 and $437, respectively |
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17,113 |
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23,558 |
| ||
Inventory |
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1,739 |
|
2,008 |
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Prepaid expenses and other current assets |
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5,917 |
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3,753 |
| ||
Total current assets |
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47,801 |
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61,925 |
| ||
|
|
|
|
|
| ||
Long-term assets: |
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|
|
|
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Property and equipment, net |
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18,542 |
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10,227 |
| ||
Intangible assets, net |
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11,089 |
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12,411 |
| ||
Goodwill |
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14,632 |
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14,632 |
| ||
Other assets |
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1,520 |
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2,026 |
| ||
Total long-term assets |
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45,783 |
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39,296 |
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|
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|
|
|
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Total assets |
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$ |
93,584 |
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$ |
101,221 |
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|
| ||
LIABILITIES AND STOCKHOLDERS EQUITY |
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|
| ||
|
|
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Current liabilities: |
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|
|
|
| ||
Accounts payable |
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$ |
8,120 |
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$ |
3,058 |
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Accrued liabilities |
|
11,196 |
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12,929 |
| ||
Capital lease obligations |
|
279 |
|
393 |
| ||
Deferred revenues |
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34,195 |
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37,337 |
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Total current liabilities |
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53,790 |
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53,717 |
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|
|
|
|
| ||
Long-term liabilities: |
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|
|
|
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Rent incentives |
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4,574 |
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730 |
| ||
Capital lease obligations |
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66 |
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181 |
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Deferred revenues |
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5,015 |
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6,115 |
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Contingent earn-out, net of current portion |
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413 |
|
569 |
| ||
Deferred tax liabilities |
|
935 |
|
889 |
| ||
Total long-term liabilities |
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11,003 |
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8,484 |
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|
|
|
|
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Commitments and Contingencies (Note 13) |
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Stockholders equity: |
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Preferred stock, $0.001 par value: 10,000,000 shares authorized; no shares issued or outstanding |
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Common stock, $0.001 par value; 100,000,000 shares authorized; 30,362,000 and 26,776,000 shares issued, respectively; and 28,667,000 and 25,281,000 shares outstanding, respectively |
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25 |
|
25 |
| ||
Additional paid-in capital |
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98,061 |
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93,037 |
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Treasury stock, at cost, 1,695,000 and 1,495,000 shares, respectively |
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(10,724 |
) |
(8,644 |
) | ||
Accumulated deficit |
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(58,571 |
) |
(45,398 |
) | ||
Total stockholders equity |
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28,791 |
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39,020 |
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|
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|
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Total liabilities and stockholders equity |
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$ |
93,584 |
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$ |
101,221 |
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The accompanying notes are an integral part of these condensed consolidated financial statements
GUIDANCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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2013 |
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2012 |
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2013 |
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2012 |
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Revenues: |
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Product revenues |
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$ |
7,695 |
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$ |
12,042 |
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$ |
15,225 |
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$ |
22,551 |
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Subscription revenues |
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2,909 |
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2,843 |
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5,491 |
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4,068 |
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Services and maintenance revenues |
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16,702 |
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16,183 |
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33,534 |
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30,468 |
| ||||
Total revenues |
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27,306 |
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31,068 |
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54,250 |
|
57,087 |
| ||||
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|
|
|
|
|
|
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| ||||
Cost of revenues (excluding amortization and depreciation, shown below): |
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|
|
|
|
|
|
|
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Cost of product revenues |
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1,733 |
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1,904 |
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3,501 |
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3,587 |
| ||||
Cost of subscription revenues |
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1,054 |
|
1,283 |
|
2,180 |
|
1,869 |
| ||||
Cost of services and maintenance revenues |
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6,968 |
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6,097 |
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13,529 |
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11,547 |
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Total cost of revenues (excluding amortization and depreciation, shown below) |
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9,755 |
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9,284 |
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19,210 |
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17,003 |
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Operating expenses: |
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Selling and marketing |
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10,412 |
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9,914 |
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19,865 |
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18,551 |
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Research and development |
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7,123 |
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6,294 |
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14,667 |
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11,584 |
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General and administrative |
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4,615 |
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5,092 |
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9,884 |
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11,312 |
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Depreciation and amortization |
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1,993 |
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1,964 |
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3,690 |
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3,590 |
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Total operating expenses |
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24,143 |
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23,264 |
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48,106 |
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45,037 |
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Operating income (loss) |
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(6,592 |
) |
(1,480 |
) |
(13,066 |
) |
(4,953 |
) | ||||
Other income and expense: |
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Interest income |
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6 |
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8 |
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16 |
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22 |
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Interest expense |
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(7 |
) |
(25 |
) |
(20 |
) |
(38 |
) | ||||
Other income, net |
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4 |
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9 |
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13 |
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15 |
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Total other income and expense |
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3 |
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(8 |
) |
9 |
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(1 |
) | ||||
Income (loss) before income taxes |
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(6,589 |
) |
(1,488 |
) |
(13,057 |
) |
(4,954 |
) | ||||
Income tax provision |
|
51 |
|
75 |
|
116 |
|
209 |
| ||||
Net income (loss) |
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$ |
(6,640 |
) |
$ |
(1,563 |
) |
$ |
(13,173 |
) |
$ |
(5,163 |
) |
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Net income (loss) per share: |
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Basic |
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$ |
(0.26 |
) |
$ |
(0.06 |
) |
$ |
(0.51 |
) |
$ |
(0.21 |
) |
Diluted |
|
$ |
(0.26 |
) |
$ |
(0.06 |
) |
$ |
(0.51 |
) |
$ |
(0.21 |
) |
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|
|
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Weighted average number of shares used in per share calculation: |
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|
|
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|
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|
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Basic |
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25,802 |
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24,767 |
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25,657 |
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24,274 |
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Diluted |
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25,802 |
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24,767 |
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25,657 |
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24,274 |
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The accompanying notes are an integral part of these condensed consolidated financial statements
GUIDANCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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Six Months Ended |
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|
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2013 |
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2012 |
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Operating Activities: |
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|
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|
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Net loss |
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$ |
(13,173 |
) |
$ |
(5,163 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
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Depreciation and amortization |
|
3,690 |
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3,590 |
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Provision for doubtful accounts |
|
150 |
|
100 |
| ||
Share-based compensation |
|
3,635 |
|
2,756 |
| ||
Deferred taxes |
|
693 |
|
96 |
| ||
Loss on disposal of assets |
|
42 |
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18 |
| ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Trade receivables |
|
6,295 |
|
2,788 |
| ||
Inventory |
|
269 |
|
(567 |
) | ||
Prepaid expenses and other assets |
|
(1,847 |
) |
(29 |
) | ||
Accounts payable |
|
1,493 |
|
(35 |
) | ||
Accrued liabilities |
|
1,726 |
|
(1,164 |
) | ||
Deferred revenues |
|
(4,242 |
) |
(4,492 |
) | ||
Net cash used in operating activities |
|
(1,269 |
) |
(2,102 |
) | ||
|
|
|
|
|
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Investing Activities: |
|
|
|
|
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Purchase of property and equipment |
|
(7,157 |
) |
(1,424 |
) | ||
Acquisition, net of cash acquired |
|
|
|
(9,642 |
) | ||
Net cash used in investing activities |
|
(7,157 |
) |
(11,066 |
) | ||
|
|
|
|
|
| ||
Financing Activities: |
|
|
|
|
| ||
Proceeds from the exercise of stock options |
|
1,389 |
|
1,919 |
| ||
Common stock repurchased or withheld |
|
(2,079 |
) |
(1,198 |
) | ||
Principal payments on capital lease obligations and other obligations |
|
(458 |
) |
(684 |
) | ||
Net cash used in (provided by) financing activities |
|
(1,148 |
) |
37 |
| ||
Net decrease in cash and cash equivalents |
|
(9,574 |
) |
(13,131 |
) | ||
Cash and cash equivalents, beginning of period |
|
32,606 |
|
37,048 |
| ||
Cash and cash equivalents, end of period |
|
$ |
23,032 |
|
$ |
23,917 |
|
|
|
|
|
|
| ||
Supplemental disclosures of cash flow information: |
|
|
|
|
| ||
Net cash paid during the period for: |
|
|
|
|
| ||
Interest |
|
$ |
22 |
|
$ |
36 |
|
Income taxes |
|
$ |
40 |
|
$ |
47 |
|
|
|
|
|
|
| ||
Non-cash investing and financing activities: |
|
|
|
|
| ||
Purchase of equipment included in accounts payable and accrued expenses |
|
$ |
3,845 |
|
$ |
460 |
|
Contingent consideration included in the purchase price of acquisition |
|
$ |
|
|
$ |
600 |
|
849,554 shares of common stock issued as part of the purchase price of acquisition |
|
$ |
|
|
$ |
9,498 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements
GUIDANCE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Description of the Business
General
Guidance Software, Inc. was incorporated in the state of California in 1997 and reincorporated in Delaware on December 11, 2006. Guidance and its subsidiaries are collectively referred to herein as Guidance, we or the Company. Headquartered in Pasadena, California, Guidance is the leading global provider of digital investigative solutions. Our EnCase® platform provides an investigative infrastructure that enables our customers to search, collect and analyze electronically stored information in order to address human resources matters, litigation matters, allegations of fraud, suspicious network endpoint activity and defend their organizations data assets.
Our main products and services are:
EnCase®Enterprise, a comprehensive, network-enabled digital investigative solution that enables corporations and government agencies to search, collect, preserve and analyze data across all of the servers, desktops and laptops that comprise their entire network from a single location. It also serves as a platform on which more powerful electronic discovery and cybersecurity products, as described below, are built;
EnCase® eDiscovery, which automates the search, collection preservation and processing of electronically stored information for litigation and compliance purposes;
EnCase® Cybersecurity, which provides the ability to identify and analyze undiscovered threats, such as polymorphic or metamorphic malware, and other advanced hacking techniques that evade traditional network or host-based defenses and includes investigative capabilities that target confidential or sensitive data and perform risk mitigation by wiping sensitive data from unauthorized locations;
EnCase® Forensic, a desktop-based product primarily used by law enforcement, government agencies, and consultancies, for collecting, preserving, analyzing and authenticating electronic computer forensic data for use in criminal and civil court proceedings;
Tableau , a family of data acquisition forensic hardware products, including forensic duplicators, multiple write blockers and other hardware; and
CaseCentral®, a cloud-based document review and production software-as-a-service (SaaS) for corporations and law firms.
In addition, we complement these offerings with a comprehensive array of professional and training services including technical support and maintenance services to help our customers implement our solutions, conduct investigations and train their IT and legal professionals to effectively and efficiently use our products.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated balance sheets as of June 30, 2013 and the condensed consolidated statements of operations for the three and six months ended June 30, 2013 and 2012 and cash flows for the six months ended June 30, 2013 and 2012 are unaudited. These statements should be read in conjunction with the audited consolidated financial statements and related notes, together with managements discussion and analysis of financial position and results of operations, contained in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the U.S. Securities and Exchange Commission (the SEC) on February 21, 2012. The operating results for the three and six month periods ended June 30, 2013 and cash flows for the six month period ended June 30, 2013 are not necessarily indicative of the results that will be achieved for the full fiscal year or for future periods.
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or (GAAP), and pursuant to the rules and regulations of the SEC for interim financial reporting. In the opinion of our management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012 and include all adjustments necessary for the fair presentation of our financial position as of June 30, 2013 and our results of operations for the three and six months ended June 30, 2013 and 2012 and our cash flows for the six month period ended June 30, 2013 and 2012. The condensed consolidated balance sheet as of December 31, 2012 has been derived from the December 31, 2012 audited financial statements. The interim financial information contained in this Quarterly Report is not necessarily indicative of the results to be expected for any other interim period or for the entire year.
The condensed consolidated financial statements include the accounts of Guidance and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The Companys restricted stock award agreements provide that holders of the restricted stock awards shall have all the rights of a stockholder upon the grant date, including the right to vote as a stockholder. As such, these shares are considered issued and outstanding on the date of grant. As of December 31, 2012, the Company previously excluded unvested restricted stock awards from the presented quantity of common shares issued and outstanding. The Company has increased the number of common shares issued and outstanding by 2,511,000 as of December 31, 2012 to reflect these unvested restricted stock awards.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to revenue recognition, share-based compensation, bad debts, income taxes, contingent consideration, commitments, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Cash and Cash Equivalents
We invest excess cash in money market funds and highly liquid debt instruments of the US government and its agencies. Highly liquid investments with stated maturities of three months or less from the date of purchase are classified as cash and cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturities of these instruments. Based on borrowing rates currently available to us for borrowings with similar terms, the carrying values of our capital lease obligations also approximate fair value.
Trade Receivables
Trade receivables are carried at original invoice amount less an allowance for doubtful accounts. The allowance is established through a provision for bad debt expense, which is included in general and administrative expenses. We determine the adequacy of this allowance by evaluating individual customer accounts receivable, through consideration of the customers financial condition, credit history and current economic conditions. In addition, we analyze our historical credit loss history and apply these loss rates to our current accounts receivable balances to verify the reasonableness of our allowance. Trade receivables are written off when deemed uncollectible. A trade receivable is generally considered past due if any portion of the receivable balance is outstanding for more than 30 days unless alternate terms are provided.
Inventory
Inventory is comprised of hardware components, packaged software components and finished goods and is valued at the lower of cost or market, using the weighted average cost method. We conduct quarterly inventory reviews for obsolescence, and inventory considered unlikely to be sold is adjusted to net realizable value.
Business Combinations
The purchase price of an acquisition is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. To the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. We determine the estimated fair values after review and consideration of relevant information including discounted cash flows, quoted market prices and estimates made by management. Accordingly, these can be affected by certain performance measurements and other factors over time, which may cause final amounts to differ materially from original estimates. We adjust the preliminary purchase price allocation, as necessary, up to periods of one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed. We refer to this preliminary purchase price allocation period as the measurement period.
Goodwill acquired in business combinations is assigned to the reporting unit(s) expected to benefit from the combination as of the acquisition date. Acquisition related costs are recognized separately from the acquisition and are expensed as incurred.
Amortization of Intangible Assets with Finite Lives
Intangible assets with finite lives are recorded at their fair value at the time of acquisition. With the exception of our customer relationships intangible asset, which is amortized on a double-declining basis, the acquisition date fair values of such assets are amortized on a straight-line basis over the estimated useful lives.
Goodwill and Indefinite-Lived Intangibles
Goodwill represents the excess of purchase price over fair value of net assets acquired and is assigned to a reporting unit at the date the goodwill is initially recorded. Goodwill and indefinite-lived intangible assets are not amortized but evaluated for impairment annually, or whenever events or changes in circumstances indicate that the value may not be recoverable. Commencing on January 1, 2013, the Company adopted the ASU 2011-08 issued by the Financial Accounting Standards Board (FASB) for the revised guidance on Testing of Goodwill for Impairment. Under this guidance, the Company has the option to choose whether it will apply the qualitative assessment first before the quantitative assessment. If a quantitative assessment is necessary a two-step test is performed at the reporting unit level to assess goodwill for impairment. First, the fair value of the reporting unit is compared to its carrying value. If the fair value exceeds the carrying value, the reporting unit is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. If the carrying value of the reporting unit exceeds its implied fair value, an impairment loss equal to the difference will be recorded. Indefinite-lived intangible assets are assessed for impairment by comparing the carrying value of the assets with their fair values.
Application of the impairment test requires significant judgment to estimate the fair value. Changes in estimates and assumptions could materially affect the determination of fair value and/or impairment.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We restrict our investments in cash and cash equivalents to financial institutions, US government or federal agency instruments and obligations of corporations with high credit ratings. At June 30, 2013, the majority of our cash balances were held at financial institutions located in California in accounts that are insured by the Federal Deposit Insurance Corporation for up to $250,000. Uninsured balances aggregate approximately $22.4 million as of June 30, 2013. At June 30, 2013, all of our cash equivalents consisted of financial institution obligations. We periodically perform credit evaluations of our customers and maintain reserves for potential losses on our accounts receivable. We do not believe we are subject to concentrations of credit risk with respect to such receivables.
Revenue Recognition
We generate revenues principally from the sale of EnCase®Enterprise and EnCase® Forensic software products. Revenues associated with the sale of software licenses and revenues associated with forensic hardware sales are referred to as product revenues. With the acquisition of CaseCentral, Inc. (CaseCentral) in February of 2012, we now have revenue associated with cloud-based document review and production SaaS, which is referred to as subscription revenues. Revenues are also generated from training courses, implementation services and consulting services in which we assist customers with the performance of digital investigations and train their IT and legal professionals in the use of our software products, which we collectively refer to as services revenues. Our proprietary products are generally sold with one to three years of maintenance, which can be renewed at a stated renewal rate and is referred to as maintenance revenues.
We recognize revenue in accordance with Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements, (amendment to Accounting Standards Codification (ASC) Topic 605, Revenue Recognition), Software Industry-Revenue Recognition topic (ASC 985-605) and Revenue Recognition (ASC 605). While the standards govern the basis for revenue recognition, significant judgment and the use of estimates are required in connection with the allocation of revenues between product, subscription, services and maintenance revenues, as well as the amount of deferred revenues to be recognized in each accounting period.
When arrangements involve multiple elements that qualify as separate units of accounting, the consideration is allocated at inception of the arrangement to all deliverables based on the relative selling price method in accordance with the selling price hierarchy, which includes: 1) vendor-specific objective evidence of fair value (VSOE), if available, 2) third-party evidence (TPE) if VSOE is not available, or 3) best estimate of selling price (BESP) if neither VSOE nor TPE is available.
· VSOE. VSOE is determined based on its historical pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for these services fall within a reasonably narrow pricing range.
· TPE. When VSOE cannot be established for deliverables in a multiple element arrangement, judgment is applied with respect to whether we can establish a selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that comparable pricing of services with similar functionality has not been obtained. Furthermore, we have been unable to reliably determine selling prices of similar competitive services on a stand-alone basis. As a result, we have not been able to establish selling prices based on TPE.
· BESP. When VSOE or TPE is unable to be established, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the service were sold on a stand-alone basis. We determine BESP for deliverables by considering multiple factors including but not limited to prices we charge for similar offerings, market conditions, competitive landscape and pricing practices.
We have established VSOE for our proprietary products and services, but have not established VSOE or TPE for our subscription services or usage-based fee arrangements and therefore we use BESP to allocate the selling price to subscription services and usage-based fee deliverables.
Product revenues. The timing of product revenues recognition is dependent on the nature of the product sold. We do not have any product offerings where software components and non-software components function together to deliver the tangible products essential functionality. Product arrangements comprising multiple deliverables including software and hardware are generally categorized into one of the following:
· EnCase® Enterprise Solutions and EnCase® Forensic Solutions: Revenues associated with these arrangements, exclusive of amounts allocated to maintenance and other undelivered elements, for which we have VSOE, is recognized upon delivery, provided that all other criteria for revenue recognition have been met.
· Hardware: Revenues associated with the sale of forensic hardware is recognized upon shipment to the customers which include certain resellers, provided that all other criteria for revenue recognition have been met.
Subscription revenues. Customers pay subscription fees to access our cloud-based document review and production software; however, they may not take possession of the software at any time during the term of the agreement. In general, we recognize revenues for subscription fees on a straight-line basis over the contract period commencing on the date the subscription is made available to the customer. Usage-based fees, which are determined monthly, are recognized when incurred.
Services and Maintenance revenues. The majority of our consulting and implementation services are performed under per hour, or fixed fee arrangements. Revenues from such services are recognized as the services are provided or upon expiration of the contractual service period.
Training revenues are either recognized on a per-class basis upon a participants attendance or, for those customers who have subscribed to our Annual Training Passport program, revenues are recognized ratably over the annual period.
Revenues related to technical support and software updates on a when-and-if available basis is referred to as maintenance revenues. We recognize maintenance revenues ratably over the applicable maintenance period. We determine the amount of maintenance revenues to be deferred through reference to substantive maintenance renewal provisions contained in multiple element arrangements. We consider substantive maintenance provisions to be provisions where the cost of the maintenance renewal, stated in the contract with our customer as a percentage of the product fee, is comparable to the normal pricing for maintenance only renewals.
Revenue Recognition Criteria. Our basic revenue recognition criteria are as follows:
· Persuasive evidence of an arrangement: If we either enter into contracts or receive written purchase orders issued by a customer that legally bind us and the customer, we consider that as evidence of an arrangement.
· Product delivery: We deem delivery of a product to have occurred when the title and risk of ownership have passed to the buyer. Services revenues are recognized as delivered.
· Fixed or determinable fee: We consider the fee to be fixed or determinable if the fee is not subject to refund or adjustment and the payment terms are within normal established practices. If the fee is not fixed or determinable, we recognize revenues as amounts become due and payable provided all other revenue recognition criteria have been met.
· Collection is deemed probable: We conduct a credit review for all significant transactions at the time of the arrangement to determine the credit-worthiness of the customer. Collection is deemed probable if we have a reasonable basis to expect that a customer will pay amounts due under an arrangement as they become due.
Note 3. Business Combination
On February 21, 2012, we acquired CaseCentral, a privately held cloud-based document review and production SaaS provider for an aggregate purchase price of approximately $21.1 million. The results of operations of CaseCentral have been included in the Companys financial statements subsequent to the acquisition date. We acquired CaseCentral to extend our market leadership by delivering a complete and integrated platform solving the e-discovery needs of corporate and government customers.
In connection with the CaseCentral acquisition, we may be required to pay former CaseCentral shareholders additional consideration based on three 12-month periods (earn-out periods) starting April 1, 2012. The amount of contingent consideration payable with respect to each of the earn-out periods is equal to 35% of certain qualifying CaseCentral SaaS revenues and EnCase® eDiscovery revenues in excess of $11.1 million during each of the three earn-out periods and is limited to certain cumulative limits. No contingent consideration was paid for the period ending April 1, 2013. At June 30, 2013, the fair value of the contingent consideration, which is calculated by summing the present values of various probability-weighted possible outcomes, was estimated to be $0.6 million and was included as a liability on our condensed consolidated balance sheets. We incurred $2.0 million in acquisition-related costs during the three months ended March 31, 2012, which was expensed as incurred and included in general and administrative expenses. No acquisition-related costs were incurred for the six months ended June 30, 2013. For a detailed description of the CaseCentral acquisition, please refer to Note 3 in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 21, 2013.
The following table sets forth the unaudited pro forma condensed consolidated financial statements of the combined entity for the six months ended June 30, 2012 assuming the business combination had occurred on January 1, 2012 (in thousands, except per share amounts):
|
|
Six Months Ended |
| |
|
|
June 30, 2012 |
| |
Total revenues |
|
$ |
59,759 |
|
Total net expenses |
|
66,617 |
| |
Loss before income taxes |
|
(6,858 |
) | |
Income tax provision |
|
209 |
| |
Net loss |
|
$ |
(7,067 |
) |
Net loss per share basic and diluted |
|
$ |
(0.29 |
) |
Note 4. Net Income (Loss) Per Share
Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted net income (loss) per share is calculated based on the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the shares issuable upon the exercise of stock options and upon the vesting of restricted stock awards under the treasury stock method. In net loss periods, basic net loss per share and diluted net loss per share are identical since the effect of potential common shares is anti-dilutive and therefore excluded.
The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
|
$ |
(6,640 |
) |
$ |
(1,563 |
) |
$ |
(13,173 |
) |
$ |
(5,163 |
) |
Denominator: |
|
|
|
|
|
|
|
|
| ||||
Basic weighted average shares outstanding |
|
25,802 |
|
24,767 |
|
25,657 |
|
24,274 |
| ||||
Effect of dilutive share-based awards |
|
|
|
|
|
|
|
|
| ||||
Diluted weighted average shares outstanding |
|
25,802 |
|
24,767 |
|
25,657 |
|
24,274 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) per share: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
(0.26 |
) |
$ |
(0.06 |
) |
$ |
(0.51 |
) |
$ |
(0.21 |
) |
Diluted |
|
$ |
(0.26 |
) |
$ |
(0.06 |
) |
$ |
(0.51 |
) |
$ |
(0.21 |
) |
Antidilutive securities, which consist of stock options and restricted stock awards that are not included in the diluted net loss per share calculation, consisted of an aggregate of approximately 3,299,000 and 3,472,000 shares for the three and six months ended June 30, 2013, respectively, and 3,360,000 and 3,431,000 shares for the three and six months ended June 30, 2012, respectively.
Note 5. Inventory
Inventory is comprised of hardware components, packaged software components and finished goods and is valued at the lower of cost or market, using the weighted average cost method. The following table sets forth, by major classes, inventory as of June 30, 2013 and December 31, 2012 (in thousands):
|
|
June 30, |
|
December 31, |
| ||
Inventory: |
|
|
|
|
| ||
Components |
|
$ |
730 |
|
$ |
967 |
|
Finished goods |
|
1,009 |
|
1,041 |
| ||
Total inventory |
|
$ |
1,739 |
|
$ |
2,008 |
|
Note 6. Goodwill and Other Intangibles
We assess goodwill and indefinite-lived intangible assets for impairment for CaseCentral and Tableau acquisitions as of January 31 and April 30, respectively, annually, or more frequently if circumstances indicate impairment may have occurred. Since the initial recording of the goodwill and indefinite-lived intangible assets balances reflected in the tables below, there have been no impairment charges related to such assets through June 30, 2013. We expect the balance of goodwill assigned to our products segment to be deductible for tax purposes while the balance of goodwill assigned to our subscription segment will not be deductible for tax purposes. The following table summarizes how goodwill is assigned to our reporting segments (in thousands):
|
|
Products |
|
Subscription |
|
Services |
|
Maintenance |
|
Unassigned |
|
Total |
| ||||||
Goodwill balance, December 31, 2012 |
|
$ |
3,711 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
10,921 |
|
$ |
14,632 |
|
Goodwill assigned |
|
|
|
6,935 |
|
3,986 |
|
|
|
(10,921 |
) |
|
| ||||||
Goodwill balance, June 30, 2013 |
|
$ |
3,711 |
|
$ |
6,935 |
|
$ |
3,986 |
|
$ |
|
|
$ |
|
|
$ |
14,632 |
|
In February 2012, the Company acquired CaseCentral, resulting in acquired intangible assets. With the exception of customer relationships, which are amortized on a double-declining basis, the acquired intangible assets are being amortized on a straight-line basis over their estimated useful lives.
Amortization expense for intangible assets with finite lives was $0.8 million and $1.3 million, and $0.8 million and $1.3 million for the three and six months ended June 30, 2013, and 2012, respectively. The following table summarizes cumulative amortization expense related to intangible assets subject to amortization as of June 30, 2013 and December 31, 2012 (in thousands):
|
|
June 30, 2013 |
|
December 31, 2012 |
| ||||||||||||||
|
|
Gross Costs |
|
Accumulated |
|
Net |
|
Gross Costs |
|
Accumulated |
|
Net |
| ||||||
Core technology |
|
$ |
5,800 |
|
$ |
(1,258 |
) |
$ |
4,542 |
|
$ |
5,800 |
|
$ |
(867 |
) |
$ |
4,933 |
|
Existing and developed technology |
|
2,300 |
|
(1,931 |
) |
369 |
|
2,300 |
|
(1,648 |
) |
652 |
| ||||||
Customer relationships |
|
6,475 |
|
(1,841 |
) |
4,634 |
|
6,475 |
|
(1,353 |
) |
5,122 |
| ||||||
Trade names |
|
2,100 |
|
(702 |
) |
1,398 |
|
2,100 |
|
(562 |
) |
1,538 |
| ||||||
Covenant not-to-compete |
|
200 |
|
(54 |
) |
146 |
|
200 |
|
(34 |
) |
166 |
| ||||||
Total |
|
$ |
16,875 |
|
$ |
(5,786 |
) |
$ |
11,089 |
|
$ |
16,875 |
|
$ |
(4,464 |
) |
$ |
12,411 |
|
The following table summarizes the estimated remaining amortization expense through 2017 and thereafter (in thousands):
Year ending |
|
Amortization |
| |
2013 |
|
$ |
1,136 |
|
2014 |
|
2,098 |
| |
2015 |
|
1,741 |
| |
2016 |
|
1,499 |
| |
2017 |
|
1,399 |
| |
Thereafter |
|
3,216 |
| |
Total amortization expense |
|
$ |
11,089 |
|
Note 7. Share Repurchase Program
In August 2008, our Board of Directors authorized a program to repurchase shares of our common stock having an aggregate value of up to $8.0 million. As of June 30, 2013, we had approximately $3.6 million remaining under this authorization. The authorization allows us to repurchase our common stock from time to time through open market purchases and negotiated transactions, or otherwise. The timing, nature and amount of such transactions will depend on a variety of factors, including market conditions, and the program may be suspended, discontinued or accelerated at any time. The sources of funds for the purchases under the remaining authorization are our existing cash on hand and cash from operations. Purchases are made in the open market, through block trades and other negotiated transactions. Repurchased shares are held in Treasury Stock and have not been retired. The Company did not repurchase any shares for either the three and six months ended June 30, 2013, or 2012.
In addition to the repurchased shares, the Company withheld approximately 83,000 and 200,000, and 63,000 and 132,000 common shares for the three and six months ended June 30, 2013 and 2012, respectively, from employees to satisfy their personal income tax withholding requirements upon the vesting of restricted stock awards issued under our equity compensation plans. The Company may engage in similar transactions from time to time related to future vesting of employee restricted stock awards. See Part II. Item 2 of this Quarterly Report for further information regarding the share repurchase program.
Note 8. Debt Obligations
On July 12, 2012, we entered into a Loan and Security Agreement (the Loan Agreement) with a bank. The Loan Agreement created a line of credit to provide for one or more revolving loans, non-revolving loans or term loans and up to $3.0 million in standby letters of credit (the Loans). The maximum principal amount of Loans that may be outstanding at any given time under the Loan Agreement, including standby letters of credit, is $7.0 million. Any borrowings under the Loan Agreement would be collateralized by substantially all our assets. The Loan Agreement requires that we remain in compliance with certain financial covenants, including that we maintain unrestricted cash and marketable securities of not less than $12.5 million, that we maintain a ratio of total funded indebtedness to earnings before interest, taxes, depreciation, amortization and stock compensation expense (EBITDA) of not greater than 2.25 to 1, that we maintain a ratio of cash flow to current portion of long-term debt of not less than 1.25 to 1, and that we shall not allow a cumulative net loss, before non-cash stock compensation expense, of more than $5.0 million during any fiscal year. Borrowings under the Loan Agreement bear interest at one of the following rates (as selected by us): a rate equal to the banks alternate base rate plus 1.00% or LIBOR plus 2.25%. All principal, interest and other amounts owing under the Loan Agreement will be due and payable in full on or prior to June 30, 2014. The Loan Agreement supersedes and replaces our Amended and Restated Credit Agreement, dated as of May 1, 2007, which would have expired on August 31, 2012.
We have letters of credit outstanding against the line in the amount of $1.8 million as of June 30, 2013, and as of that date there were no other borrowings outstanding, resulting in available borrowing under the Loan Agreement of $5.2 million. As of June 30, 2013, the Company was not in compliance wth the covenant that requires the Company to not exceed a cumulative loss of $5.0 million during any fiscal year. The Company is currently engaged in discussions with the bank to obtain a waiver for the remainder of 2013.
Note 9. Equity Incentive Plan
At June 30, 2013, approximately 1,617,000 shares were available for grant as options or nonvested share awards under the Guidance Software, Inc. Second Amended and Restated 2004 Equity Incentive Plan (the Plan).
Stock Options
The terms of the options granted under the Plan are determined at the time of grant, and generally vest 25% annually over a four-year service period and typically must be exercised within 10 years from the date of grant.
A summary of stock option activity follows:
|
|
Number of |
|
Weighted |
|
Weighted Average |
|
Aggregate |
| ||
Outstanding, December 31, 2012 |
|
2,538,000 |
|
$ |
8.99 |
|
4.3 |
|
$ |
8,312,000 |
|
Granted |
|
|
|
$ |
|
|
|
|
|
| |
Exercised |
|
(219,000 |
) |
$ |
6.35 |
|
|
|
|
| |
Forfeited or expired |
|
(54,000 |
) |
$ |
10.91 |
|
|
|
|
| |
Outstanding, June 30, 2013 |
|
2,265,000 |
|
$ |
9.20 |
|
3.9 |
|
$ |
3,599,000 |
|
|
|
|
|
|
|
|
|
|
| ||
Exercisable, June 30, 2013 |
|
1,698,000 |
|
$ |
8.29 |
|
3.6 |
|
$ |
3,370,000 |
|
We define in-the-money options at June 30, 2013 as options that had exercise prices that were lower than the $8.74 fair market value of our common stock at that date. The aggregate intrinsic value of options outstanding at June 30, 2013 is calculated as the difference between the exercise price of the underlying options and the fair market value of our common stock for the 930,000 shares that were in-the-money at that date, of which 864,000 were exercisable.
Restricted Stock Awards
We issue restricted stock awards to certain directors, officers and employees. Compensation expense for such awards, based on the fair market value of the awards on the grant date, is recorded during the vesting period. Restricted stock awards generally vest 25% annually over a four-year service period.
A summary of restricted stock awards activity follows:
|
|
Number of |
|
Weighted Average |
| |
Outstanding, December 31, 2012 |
|
2,511,000 |
|
$ |
8.31 |
|
Granted |
|
993,000 |
|
10.11 |
| |
Vested |
|
(589,000 |
) |
7.55 |
| |
Forfeited |
|
(137,000 |
) |
9.50 |
| |
Outstanding, June 30, 2013 |
|
2,778,000 |
|
$ |
9.06 |
|
The total grant date fair value of shares vested under such grants during the six months ended June 30, 2013 was $4,445,000.
Note 10. Share-Based Compensation
We account for share-based compensation in accordance with Compensation-Stock Compensation (ASC 718). The Company uses the Black-Scholes option pricing model to determine the fair value of stock options on the grant date. We recognize the cost, net of an estimated forfeiture rate, as compensation expense on a straight-line basis over the vesting period. We estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We recognize share-based compensation on a straight-line basis over the requisite service period of the awards, which is generally the vesting period.
The following table summarizes the share-based compensation expense we recorded (in thousands):
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
Stock option awards |
|
$ |
39 |
|
$ |
84 |
|
$ |
90 |
|
$ |
200 |
|
Restricted stock awards |
|
1,854 |
|
1,375 |
|
3,545 |
|
2,556 |
| ||||
Share-based compensation expense |
|
$ |
1,893 |
|
$ |
1,459 |
|
$ |
3,635 |
|
$ |
2,756 |
|
As of June 30, 2013, there was approximately $104,000 of total unrecognized share-based compensation cost related to stock options that is expected to be recognized over a weighted-average period of 0.7 of a year and approximately $22.2 million of total unrecognized share-based compensation cost related to restricted stock awards that is expected to be recognized over a weighted-average period of 3.1 years. We expect to record approximately $4.3 million in share-based compensation for the remainder of fiscal year 2013 related to stock options and restricted stock awards outstanding at June 30, 2013.
Note 11. Income Taxes
We account for income taxes in accordance with Income Taxes (ASC 740). Deferred income taxes are recorded for the expected tax consequences of temporary differences between the tax bases of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. We record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. As of June 30, 2013, we have recorded a valuation allowance against our net deferred tax assets resulting in a carrying value of zero.
In accordance with ASC 740, the valuation allowance for a particular tax jurisdiction is allocated between current and non-current deferred tax assets for that tax jurisdiction on a pro-rata basis. For the year ended December 31, 2012, the Company previously netted its valuation allowance in total against net deferred tax assets. The Company has revised the presentation of the valuation allowance for the year ended December 31, 2012 to show the allocation of the valuation allowance to the current and non-current deferred tax assets. The total impact was an increase to current deferred tax assets and an increase to non-current deferred tax liabilities of $647,000 for the year ended December 31, 2012.
Managements judgment is required in assessing the realizability of future deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance. Likewise, in the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such a determination.
We file income tax returns with the Internal Revenue Service and the taxing authorities of various state and foreign jurisdictions. We periodically perform a review of our uncertain tax positions. An uncertain tax position represents our expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. At June 30, 2013, our liability for uncertain tax positions was $0.5 million. We do not expect there to be any material changes to the estimated amount of liability associated with our uncertain tax positions over the next twelve months. The tax years 2009 through 2011 remain subject to review by the taxing authorities in several jurisdictions. Most foreign jurisdictions have statute of limitations that range from three to six years.
Note 12. Fair Value Measurements
In accordance with Fair Value Measurements and Disclosures (ASC 820) we measure our financial assets and liabilities at fair value on a recurring basis. Fair Value Measurements and Disclosures (ASC 820) requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. Under this standard, fair value is defined as the price that would be received in exchange for selling an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. Fair Value Measurements and Disclosures (ASC 820) establishes a hierarchy for inputs used in measuring fair value that minimizes the use of unobservable inputs by requiring the use of observable market data when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on active market data. Unobservable inputs would be inputs that reflect our assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. The statement requires fair value measurements be classified and disclosed in one of the following three categories:
Level 1: |
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities. |
Level 2: |
|
Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly, and corroborated by market data. |
Level 3: |
|
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. |
The following table sets forth, by level within the fair value hierarchy, financial assets and liabilities that are accounted for at fair value on a recurring basis as of June 30, 2013 and December 31, 2012 (in thousands):
|
|
Fair Value Measurements at June 30, 2013 |
| ||||||||||
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury Securities |
|
$ |
6,004 |
|
$ |
6,004 |
|
$ |
|
|
$ |
|
|
Money market accounts |
|
8,685 |
|
8,685 |
|
|
|
|
| ||||
Total assets |
|
$ |
14,689 |
|
$ |
14,689 |
|
$ |
|
|
$ |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Acquisition contingent consideration earn-out |
|
600 |
|
|
|
|
|
600 |
| ||||
Total liabilities |
|
$ |
600 |
|
$ |
|
|
$ |
|
|
$ |
600 |
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
Fair Value Measurements at December 31, 2012 |
| ||||||||||
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury Securities |
|
$ |
5,999 |
|
$ |
5,999 |
|
$ |
|
|
$ |
|
|
Money market accounts |
|
$ |
19,671 |
|
$ |
19,671 |
|
$ |
|
|
$ |
|
|
Total assets |
|
$ |
25,670 |
|
$ |
25,670 |
|
$ |
|
|
$ |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Acquisition contingent consideration earn-out |
|
600 |
|
|
|
|
|
600 |
| ||||
Total liabilities |
|
$ |
600 |
|
$ |
|
|
$ |
|
|
$ |
600 |
|
The Company has obligations, to be paid in cash, to the former shareholders of CaseCentral if certain SaaS revenue thresholds are achieved during the three 12-month periods starting April 1, 2012. The fair value of this contingent consideration is determined using an expected present value calculation. Expected cash flows are determined using the probability-weighted average of possible outcomes that would occur should certain revenue metrics be reached. There are no market data available to use in valuing the contingent consideration; therefore, the Company developed its own assumptions related to the future financial performance of the businesses to evaluate the fair value of these liabilities. As such, the contingent consideration is classified within Level 3, as described above.
In connection with estimating the fair value of the contingent consideration, the Company developed various scenarios (base case, downside case, and upside case) and weighted each case according to the probability of occurrence. The probabilities ranged from 20 percent to 50 percent, with the most significant weighting given to the base case at 50 percent. These scenarios were developed based on the expected financial performance of CaseCentral, with SaaS revenue growth rates being a primary input in the calculation. An increase or decrease in the probability of achievement of any of the scenarios could result in a significant increase or decrease to the estimated fair value.
The fair value will be reviewed quarterly based on the financial performance of the most recently completed fiscal quarter. An analysis will also be performed at the end of each fiscal quarter to compare actual results to forecasted financial performance. If performance has deviated from projected levels, the valuation will be updated for the latest information available.
The significant assumptions that may materially affect fair value are developed in conjunction with the guidance of our senior management to ensure that the most accurate and latest financial projections are used and compared with the most recent financial results in the fair value measurement.
Note 13. Commitments and Contingencies
Office Lease
On July 26, 2012, we entered into an Office Lease Agreement (the Lease) to lease approximately 90,000 rentable square feet of an office building located in Pasadena, California. The Lease commences on August 1, 2013 and expires in May 2024. The Lease allows the Company to consolidate its Pasadena operations into a single location. The total annual rent under the Lease ranges from approximately $2.5 million for the first year to approximately $3.4 million for the final year of the Lease. The Company has two options to extend the Lease, each for a period of five years.
Third-party Software License
During the year ended December 31, 2012, the Company entered into a $1.5 million third-party software license agreement that authorizes the Company to integrate database software as a component of its products through November 2015. The agreement also provides for maintenance and support over a two-year period for $0.3 million, which may be renewed by the Company after the expiration of the two-year period ending November 2014. The $1.8 million is payable in eight quarterly installments of $229,000 through January 2014. The license, maintenance and remaining liability have been recorded on the accompanying condensed consolidated balance sheets.
Legal Matters
On May 20, 2011, MyKey Technology Inc. (MyKey) filed a complaint against us and certain other parties for patent infringement in the United States District Court for the District of Delaware. With respect to the Company, the complaint alleged that certain of our data acquisition forensic hardware products that we acquired as a result of our acquisition of certain assets of Tableau, LLC, (Tableau) infringe three of MyKeys patents relating to write blocking, duplication and data removal technologies, respectively. The complaint sought a declaration of infringement, a finding of willful infringement, compensatory damages, treble damages, injunctive relief, interest, expenses, costs and attorneys fees.
On July 22, 2011, MyKey also filed a complaint with the United States International Trade Commission (the ITC), alleging infringement by the Company and certain other parties of the three patents discussed in the preceding paragraph and requesting that the ITC commence an investigation pursuant to Section 337 of the Tariff Act of 1930. The complaint sought injunctive relief barring the Company from the importation of products that allegedly infringed the three patents of MyKey. On August 24, 2011, the ITC commenced an investigation of the Company and certain other parties related to the complaint by MyKey. On August 31, 2011 the proceeding in the District Court was stayed pending the resolution of the ITC matter. On August 1, 2012, MyKey amended its ITC complaint to remove allegations that its duplication patent had been infringed by the Company and to reduce the number of claims it alleges the Company has infringed related to MyKeys data removal patent. In August 2012, the parties completed the ITC trial on the remaining patent claims at issue.
On December 28, 2012, the ITC released a final determination and Order holding that no violation of Section 337 of the Tariff Act of 1930 occurred as a result of the Companys importation into the United States and sale of the products at issue. This Order effectively ended the ITC proceeding. On February 20, 2013, the U.S. District Court of Delaware lifted the stay of the proceedings in the MyKey matter. Effective April 8, 2013, the parties stipulated to a transfer of the matter to the U.S. District Court for the Central District of California. On April 16, 3013, the Company filed its Answer and Counterclaim.
We intend to defend the ongoing MyKey matter vigorously and, at this time, are unable to estimate what, if any, liability we may have in connection with these matters. We are unable to estimate a range of reasonably possible losses due to various reasons, including, among others, that (1) certain of the proceedings are at an early stage, (2) there is uncertainty as to the outcome of pending appeals, motions, or settlements, (3) there are significant factual issues to be resolved, (4) there are unresolved negotiations with certain indemnitors or indemnitees of the Company, related to the actions, and (5) we have meritorious defenses that we intend to assert.
From time to time, we may become involved in various other lawsuits and legal proceedings that arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are not currently aware of any such other legal proceedings or claims that are likely to have a material impact on our business.
Indemnifications
We have agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by them in any action or proceeding to which any of them is, or is threatened to be, made a party by reason of his or her services in their role as a director or officer.
Note 14. Stockholders Equity
During the six months ended June 30, 2013, as disclosed in Note 9, stock options for 219,000 shares of common stock were exercised at an average price per share of $6.35, resulting in an increase in stockholders equity of $1,389,000. During the six months ended June 30, 2013, 589,000 restricted stock awards vested and as a result, the Company withheld 200,000 shares for tax purposes, which are included in treasury stock, resulting in a decrease to stockholders equity of $2,079,000. In addition, as disclosed in Note 10, share-based compensation expense for the six months ended June 30, 2013 was approximately $3,635,000.
Note 15. Related Party Transactions
Certain of our stockholders guarantee an obligation due under one of our capital and operating leases as disclosed in Note 11 of our Annual Report on Form 10-K for the year ended December 31, 2012.
Note 16. Segment Information
We have adopted Segment Reporting (ASC 280) requiring segmentation based on our internal organization and reporting of revenue and other performance measures. Our segments are designed to allocate resources internally and provide a framework to determine management responsibility. Operating segments are defined as components of an enterprise about which discrete financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer. We have five operating segments, as summarized below:
· Products segmentIncludes EnCase® Enterprise, EnCase® eDiscovery, EnCase® Cybersecurity, EnCase® Forensic, EnCase® Portable, Premium License Support Program and hardware sales.
· Subscription segmentIncludes subscription services for cloud-based document review and production software. The subscription segment is new as of February 2012 due to our acquisition of CaseCentral.
· Professional services segmentPerforms consulting services and implementations.
· Training segmentProvides training classes by which we train our customers to effectively and efficiently use our software products.
· Maintenance segmentIncludes maintenance related revenues.
We present the revenues generated by our services and maintenance segments collectively. Currently, we do not separately allocate operating expenses to these segments, nor do we allocate specific assets, with the exception of goodwill, to these segments. Therefore, the segment information reported includes only revenues, cost of revenues and segment profit. The following tables present the results of operations for each operating segment (in thousands):
|
|
Three Months Ended June 30, 2013 |
| ||||||||||||||||
|
|
Products |
|
Subscription |
|
Professional |
|
Training |
|
Maintenance |
|
Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Revenues |
|
$ |
7,695 |
|
$ |
2,909 |
|
$ |
5,169 |
|
$ |
2,039 |
|
$ |
9,494 |
|
$ |
27,306 |
|
Cost of revenues |
|
1,733 |
|
1,054 |
|
4,823 |
|
1,618 |
|
527 |
|
9,755 |
| ||||||
Segment profit |
|
$ |
5,962 |
|
$ |
1,855 |
|
$ |
346 |
|
$ |
421 |
|
$ |
8,967 |
|
17,551 |
| |
Total operating expenses |
|
|
|
|
|
|
|
|
|
|
|
24,143 |
| ||||||
Operating loss |
|
|
|
|
|
|
|
|
|
|
|
$ |
(6,592 |
) |
|
|
Three Months Ended June 30, 2012 |
| ||||||||||||||||
|
|
Products |
|
Subscription |
|
Professional |
|
Training |
|
Maintenance |
|
Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Revenues |
|
$ |
12,042 |
|
$ |
2,843 |
|
$ |
4,546 |
|
$ |
2,432 |
|
$ |
9,205 |
|
$ |
31,068 |
|
Cost of revenues |
|
1,904 |
|
1,283 |
|
4,013 |
|
1,556 |
|
528 |
|
9,284 |
| ||||||
Segment profit |
|
$ |
10,138 |
|
$ |
1,560 |
|
$ |
533 |
|
$ |
876 |
|
$ |
8,677 |
|
21,784 |
| |
Total operating expenses |
|
|
|
|
|
|
|
|
|
|
|
23,264 |
| ||||||
Operating loss |
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,480 |
) |
|
|
Six Months Ended June 30, 2013 |
| ||||||||||||||||
|
|
Products |
|
Subscription |
|
Professional |
|
Training |
|
Maintenance |
|
Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Revenues |
|
$ |
15,225 |
|
$ |
5,491 |
|
$ |
10,552 |
|
$ |
4,205 |
|
$ |
18,777 |
|
$ |
54,250 |
|
Cost of revenues |
|
3,501 |
|
2,180 |
|
9,223 |
|
3,298 |
|
1,008 |
|
19,210 |
| ||||||
Segment profit |
|
$ |
11,724 |
|
$ |
3,311 |
|
$ |
1,329 |
|
$ |
907 |
|
$ |
17,769 |
|
35,040 |
| |
Total operating expenses |
|
|
|
|
|
|
|
|
|
|
|
48,106 |
| ||||||
Operating loss |
|
|
|
|
|
|
|
|
|
|
|
$ |
(13,066 |
) |
|
|
Six Months Ended June 31, 2012 |
| ||||||||||||||||
|
|
Products |
|
Subscription |
|
Professional |
|
Training |
|
Maintenance |
|
Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Revenues |
|
$ |
22,551 |
|
$ |
4,068 |
|
$ |
7,899 |
|
$ |
4,727 |
|
$ |
17,842 |
|
$ |
57,087 |
|
Cost of revenues |
|
3,587 |
|
1,869 |
|
7,448 |
|
3,036 |
|
1,063 |
|
17,003 |
| ||||||
Segment profit |
|
$ |
18,964 |
|
$ |
2,199 |
|
$ |
451 |
|
$ |
1,691 |
|
$ |
16,779 |
|
40,084 |
| |
Total operating expenses |
|
|
|
|
|
|
|
|
|
|
|
45,037 |
| ||||||
Operating loss |
|
|
|
|
|
|
|
|
|
|
|
$ |
(4,953 |
) |
Revenues, classified by the major geographic areas in which we operate, are as follows (in thousands):
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
Revenues |
|
|
|
|
|
|
|
|
| ||||
United States |
|
$ |
21,668 |
|
$ |
24,822 |
|
$ |
42,890 |
|
$ |
44,842 |
|
Europe |
|
3,182 |
|
2,826 |
|
6,597 |
|
6,198 |
| ||||
Asia |
|
1,115 |
|
2,488 |
|
2,215 |
|
3,314 |
| ||||
Other |
|
1,341 |
|
932 |
|
2,548 |
|
2,733 |
| ||||
|
|
$ |
27,306 |
|
$ |
31,068 |
|
$ |
54,250 |
|
$ |
57,087 |
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes that are included elsewhere in this Quarterly Report. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in this Quarterly Report under Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2012 under Risk Factors and in other parts of this Quarterly Report.
Overview
We were incorporated and commenced operations in 1997. From 1997 through 2002, we generated a substantial portion of our revenues from the sale of our EnCase® Forensic products and related services. We have experienced increases in our revenues as a result of the release of EnCase® Enterprise in 2002, the release of EnCase® eDiscovery in 2005 and the release of EnCase® Information Assurance in 2006 (which was replaced by EnCase® Cybersecurity in 2009), which expanded our customer base into corporate enterprises and federal government agencies. In May 2010, we added a family of data acquisition forensic hardware products including forensic duplicators, multiple write blockers and other hardware through our acquisition of Tableau, LLC (Tableau). In February 2012, we added cloud-based document review and production software-as-a-service (SaaS) for corporations and law firms through our acquisition of CaseCentral, Inc. (CaseCentral).
We develop and provide leading software and hardware solutions for digital investigations, including EnCase® Enterprise, a network-enabled product primarily for large corporations and government agencies, and EnCase® Forensic, a desktop-based product primarily for law enforcement agencies. We anticipate that sales of subscriptions for our cloud-based review and production software, our EnCase® Enterprise products and related services, in particular our EnCase® eDiscovery and EnCase® Cybersecurity solutions, and the sales of our forensic hardware products, will comprise a substantial portion of our future revenues.
Factors Affecting Our Results of Operations
There are a number of trends that may affect our business and our industry. Some of these trends or other factors include:
· Legislative and regulatory developments. Our digital investigation solutions allow law enforcement agencies, government organizations and corporations to conduct investigations within the legal and regulatory framework. Historically, the implementation of new laws and regulations surrounding digital investigations has helped create demand for our products. Future changes in applicable laws or regulations could enhance or detract from the desirability of our products.
· Information technology budgets. Deployment of our solutions may require substantial capital expenditures by our customers. Budgets for information technology-related capital expenditures at corporations and all levels of government organizations are typically cyclical in nature, with generally higher budgets in times of improving economic conditions and lower budgets in times of economic slowdowns.
· Law enforcement agency budgets. We sell our EnCase® Forensic products and training services primarily to law enforcement agencies. Because of the limited nature of law enforcement budgets, funds are typically initially allocated toward solving issues perceived to be the most pressing. Sales of our products could be impacted by changes in the budgets of law enforcement agencies or in the relative priority assigned to digital law enforcement investigations.
· Prevalence and impact of hacking incidents and spread of malicious software. The increasing sophistication of hacking attacks on government and private networks and the global spread of malicious software, such as viruses, worms and rootkits, have increased the focus of corporations and large government organizations on digital investigations and other aspects of network security, which has, in turn, increased demand for our products. Future changes in the number and severity of such attacks or the spread of malicious software could have an effect on the demand for our products.
· Seasonality in revenues. We experience seasonality in our revenues, with the third and fourth quarters typically having the highest revenues for the year. We believe that this seasonality results primarily from our customers budgeting cycles. The federal governments budget year ends in the third calendar quarter of the year and a majority of corporate budget years end in the fourth calendar quarter of the year. In addition, our customers also tend to make software purchases near the end of a particular quarter, which tends to make our revenues for a particular quarter unpredictable for a significant portion of that quarter. We expect that this seasonality in our revenues and unpredictability of our revenues within particular quarterly periods will continue for the foreseeable future.
· Amount of commercial litigation. Because commercial litigation often involves eDiscovery, an increase in commercial litigation could increase demand for our products and services, while a decrease in commercial litigation could decrease demand.
Critical Accounting Policies and Estimates
In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. There have been no significant changes in those critical accounting policies and estimates during the three and six months ended June 30, 2013 other than the addition to revenue recognition mentioned below.
With the acquisition of CaseCentral in February 2012, we now also generate revenues from cloud-based document review and production SaaS where customers have the right to access our document review management software via the web; however, they may not take possession of the software at any time during the term of the agreement. In general, we recognize revenues for subscriptions on a straight-line basis over the contractual contract period commencing on the date the subscription is made available to the customer. Usage-based fees, which are determined monthly, are recognized when incurred.
When subscription services and usage-based fee arrangements involve multiple elements that qualify as separate units of accounting, we allocate arrangement consideration in multiple deliverable revenue arrangements at the inception of an arrangement to all deliverables based on the relative selling price method in accordance with the selling price hierarchy, which includes: 1) vendor-specific objective evidence of fair value (VSOE), if available, 2) third-party evidence (TPE) if VSOE is not available; or 3) best estimate of selling price (BESP) if neither VSOE nor TPE is available.
· VSOE. We determine VSOE based on its historical pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for these services fall within a reasonably narrow pricing range.
· TPE. When VSOE cannot be established for deliverables in a multiple element arrangement, we apply judgment with respect to whether we can establish a selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that comparable pricing of services with similar functionality has not been able to be obtained. Furthermore, we have been unable to reliably determine selling prices of similar competitive services on a stand-alone basis. As a result, we have not been able to establish selling prices based on TPE.
· BESP. When VSOE or TPE is unable to be established, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the service were sold on a stand-alone basis. We determine BESP for deliverables by considering multiple factors including but not limited to prices we charge for similar offerings, market conditions, competitive landscape and pricing practices.
We have not established VSOE or TPE for our subscription services or usage-based fee arrangements and therefore we use BESP to allocate the selling price to subscription services and usage-based fee deliverables.
Results of Operations
The following table sets forth our results of operations for the three and six months ended June 30, 2013 and 2012, respectively, expressed as a percentage of total revenues:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
Product revenues |
|
28.2 |
% |
38.8 |
% |
28.1 |
% |
39.5 |
% |
Subscription revenues |
|
10.6 |
|
9.1 |
|
10.1 |
|
7.1 |
|
Services and maintenance revenues |
|
61.2 |
|
52.1 |
|
61.8 |
|
53.4 |
|
Total revenues |
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
Cost of product revenues |
|
6.3 |
|
6.2 |
|
6.5 |
|
6.3 |
|
Cost of subscription revenues |
|
3.9 |
|
4.1 |
|
4.0 |
|
3.3 |
|
Cost of services and maintenance revenues |
|
25.5 |
|
19.6 |
|
24.9 |
|
20.2 |
|
Total cost of revenues |
|
35.7 |
|
29.9 |
|
35.4 |
|
29.8 |
|
Gross profit |
|
64.3 |
|
70.1 |
|
64.6 |
|
70.2 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
38.1 |
|
31.9 |
|
36.6 |
|
32.5 |
|
Research and development |
|
26.1 |
|
20.3 |
|
27.0 |
|
20.3 |
|
General and administrative |
|
16.9 |
|
16.4 |
|
18.2 |
|
19.8 |
|
Depreciation and amortization |
|
7.3 |
|
6.3 |
|
6.8 |
|
6.3 |
|
Total operating expenses |
|
88.4 |
|
74.9 |
|
88.6 |
|
78.9 |
|
Operating loss |
|
(24.1 |
) |
(4.8 |
) |
(24.0 |
) |
(8.7 |
) |
|
|
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
Other income, net |
|
|
|
|
|
|
|
|
|
Total other income and expense |
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
(24.1 |
) |
(4.8 |
) |
(24.0 |
) |
(8.7 |
) |
Income tax provision |
|
0.2 |
|
0.2 |
|
0.2 |
|
0.3 |
|
Net loss |
|
(24.3 |
)% |
(5.0 |
)% |
(24.2 |
)% |
(9.0 |
)% |
The following table sets forth share-based compensation expense recorded in each of the respective periods (in thousands):
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
Non-cash Share Based Compensation Data (1): |
|
|
|
|
|
|
|
|
| ||||
Cost of product revenues |
|
$ |
33 |
|
$ |
24 |
|
$ |
65 |
|
$ |
47 |
|
Cost of subscription revenues |
|
46 |
|
50 |
|
90 |
|
70 |
| ||||
Cost of services and maintenance revenues |
|
349 |
|
261 |
|
671 |
|
479 |
| ||||
Selling and marketing |
|
537 |
|
432 |
|
979 |
|
809 |
| ||||
Research and development |
|
474 |
|
335 |
|
935 |
|
625 |
| ||||
General and administrative |
|
457 |
|
357 |
|
895 |
|
726 |
| ||||
Total non-cash share based compensation |
|
$ |
1,896 |
|
$ |
1,459 |
|
$ |
3,635 |
|
$ |
2,756 |
|
(1) Non-cash share-based compensation recorded in the three and six month periods ended June 30, 2013 and 2012 relates to stock options and restricted share awards granted to employees measured under the fair value method. See Notes 9 and 10 to the condensed consolidated financial statements.
Comparison of Results of Operations for the Three and Six Months Ended June 30, 2013 and 2012
Sources of Revenues
Our software product sales transactions typically include the following elements: (i) a software license fee paid for the use of our products under a perpetual license term, or for a specific term; (ii) an arrangement for first-year support and maintenance, which includes unspecified software updates, upgrades and post-contract support; (iii) and professional services for installation, implementation, consulting and training. With our acquisition of CaseCentral in February 2012, we began to generate revenues from cloud-based document review and production software sold as subscription services. We derive the majority of our revenues from sales of our software products. We sell our software products and services primarily through our direct sales force and in some cases we utilize resellers. We sell our hardware products primarily through resellers.
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||||||
(Dollars in thousands) |
|
2013 |
|
Change |
|
2012 |
|
2013 |
|
Change |
|
2012 |
| ||||
Product revenues |
|
$ |
7,695 |
|
(36)% |
|
$ |
12,042 |
|
$ |
15,225 |
|
(32)% |
|
$ |
22,551 |
|
Subscription revenues |
|
2,909 |
|
2% |
|
2,843 |
|
5,491 |
|
35% |
|
4,068 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Services and maintenance revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Professional services |
|
5,169 |
|
14% |
|
4,546 |
|
10,552 |
|
34% |
|
7,899 |
| ||||
Training |
|
2,039 |
|
(16)% |
|
2,432 |
|
4,205 |
|
(11)% |
|
4,727 |
| ||||
Maintenance |
|
9,494 |
|
3% |
|
9,205 |
|
18,777 |
|
5% |
|
17,842 |
| ||||
Total services and maintenance revenues |
|
16,702 |
|
3% |
|
16,183 |
|
33,534 |
|
10% |
|
30,468 |
| ||||
Total revenues |
|
$ |
27,306 |
|
(12)% |
|
$ |
31,068 |
|
$ |
54,250 |
|
(5)% |
|
$ |
57,087 |
|
Product Revenues
We generate product revenues principally from two product categories: Enterprise and Forensic products. Our Enterprise products include perpetual licenses and are related to our EnCase® Enterprise, eDiscovery, and EnCase® Cybersecurity products. Our Forensic products include revenues related to EnCase® Forensic, EnCase® Portable, and forensic hardware sales. During the first two quarters of each fiscal year, we typically experience our lowest levels of product sales due to the seasonal budgetary cycles of our customers. The third quarter is typically the strongest quarter for sales to our federal government customers. Typically, sales to our corporate customers are highest in the fourth quarter.
Product revenues decreased by $4,347,000, or 36%, from $12,042,000 to $7,695,000 and decreased by $7,326,000, or 32%, from $22,551,000 to $15,225,000 for the three and six months ended June 30, 2013, respectively, as compared with the same periods in 2012. The decrease in product revenues for the three months ended June 30, 2013 as compared to the same period in 2012 was due to a decrease in Enterprise revenues of $3,508,000, or 58%, from $6,061,000 to $2,553,000 and a decrease in Forensic revenues of $839,000, or 14%, from $5,981,000 to $5,142,000. The decrease in product revenues for the six months ended June 30, 2013 as compared to the same period in 2012 was due to a decrease in Enterprise revenues of $4,927,000, or 49%, from $10,154,000 to $5,227,000 and a decrease in Forensic revenues of $2,399,000, or 19%, from $12,397,000 to $9,998,000. The decreases in Enterprise and Forensic revenues were primarily due to significantly reduced spending by our government customers impacted by the federal budget sequestration.
During the three months ended June 30, 2013, we added 78 new EnCase® Enterprise customers, as compared to 100 for the comparable period in the prior year. During the six months ended June 30, 2013, we added 143 new EnCase® Enterprise customers, as compared to 164 for the comparable period in the prior year. During the three months ended June 30, 2013, 49% of Enterprise product revenues were the result of sales to existing customers, compared to 72% in the comparable period in the prior year. During the six months ended June 30, 2013, 54% of Enterprise product revenues were the result of sales to existing customers, compared to 71% in the comparable period in the prior year.
We expect product revenues for the next six month period ending December 31, 2013 to decrease by approximately 35% - 40% as compared to the same period in 2012.
Subscription Revenues
With our acquisition of CaseCentral in February 2012, we began to generate revenues from cloud-based document review and production software sold as subscription services. Subscription service customers have the right to access our cloud-based document review and production software; however, they may not take possession of the software at any time during the term of the agreement. In general, we recognize revenues for subscriptions on a straight-line basis over the contract period commencing on the date the subscription is made available to the customer. Usage-based fees, that are determined monthly, are recognized when incurred.
Subscription revenues increased $66,000, or 2%, from $2,843,000 to $2,909,000 and increased $1,423,000, or 35%, from $4,068,000 to $5,491,000 for the three and six months ended June 30, 2013, respectively, as compared with the same periods in 2012. The six months ended June 30, 2012 included only a partial quarter of subscription revenues, since we only started to earn subscription revenues in February 2012 as a result of our acquisition of CaseCentral.
Services and Maintenance Revenues
Services and maintenance revenues increased by $519,000, or 3%, from $16,183,000 to $16,702,000 and $3,066,000, or 10%, from $30,468,000 to $33,534,000 for the three and six months ended June 30, 2013, respectively, as compared with the same periods in 2012.
Services revenues increased $230,000, or 3%, from $6,978,000 to $7,208,000 and $2,131,000, or 17%, from $12,626,000 to $14,757,000 for the three and six months ended June 30, 2013, respectively, as compared with the same periods in 2012.
The increases in services revenues for the three months and six months ended June 30, 2013 were primarily due to increases in professional services revenues of $623,000 and $2,653,000, respectively, related to case work and incident response work for existing customers of our EnCase Enterprise products, offset by reductions of $393,000 and $522,000, respectively, in our training revenues due to significantly reduced spending by our government customers impacted by the federal budget sequestration. The increase for the six months ended June 30, 2013 includes approximately $600,000 in professional services related to the timing of our acquisition of CaseCentral in February, 2012
Maintenance revenues increased $289,000, or 3%, from $9,205,000 to $9,494,000 and $935,000 million, or 5%, from $17,842,000 to $18,777,000 for the three and six months ended June 30, 2013, respectively, as compared with the same periods in 2012. The increases were primarily a result of sustained increases in our installed product base and high annual renewal rates by customers desiring continuing maintenance support on our products. Our installed product base increased primarily through the addition of 337 new EnCase Enterprise customers and sales of 78 new EnCase eDiscovery and EnCase Cybersecurity modules to existing EnCase Enterprise customers during the twelve-month period ending June 30, 2013.
Cost of Revenues
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||||||
(Dollars in thousands) |
|
2013 |
|
Change % |
|
2012 |
|
2013 |
|
Change % |
|
2012 |
| ||||
Cost of product revenues |
|
$ |
1,733 |
|
(9)% |
|
$ |
1,904 |
|
$ |
3,501 |
|
(2)% |
|
$ |
3,587 |
|
Cost of subscription revenues |
|
1,055 |
|
(18)% |
|
1,283 |
|
2,180 |
|
17% |
|
1,869 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of services and maintenance revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Services revenues |
|
4,823 |
|
20% |
|
4,013 |
|
9,223 |
|
24% |
|
7,448 |
| ||||
Training |
|
1,618 |
|
4% |
|
1,556 |
|
3,298 |
|
9% |
|
3,036 |
| ||||
Maintenance revenues |
|
527 |
|
0% |
|
528 |
|
1,008 |
|
(5)% |
|
1,063 |
| ||||
Total cost of services and maintenance revenues |
|
6,968 |
|
14% |
|
6,097 |
|
13,529 |
|
17% |
|
11,547 |
| ||||
Total cost of revenues |
|
$ |
9,755 |
|
5% |
|
$ |
9,284 |
|
$ |
19,210 |
|
13% |
|
$ |
17,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Share-based compensation included above: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of product revenues |
|
$ |
33 |
|
|
|
$ |
24 |
|
$ |
65 |
|
|
|
$ |
47 |
|
Cost of subscription revenues |
|
$ |
46 |
|
|
|
$ |
50 |
|
$ |
90 |
|
|
|
$ |
70 |
|
Cost of services and maintenance revenues |
|
$ |
349 |
|
|
|
$ |
261 |
|
$ |
671 |
|
|
|
$ |
479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Gross Margin Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Products |
|
77.5 |
% |
|
|
84.2 |
% |
77.0 |
% |
|
|
84.1 |
% | ||||
Subscriptions |
|
63.7 |
% |
|
|
54.9 |
% |
60.3 |
% |
|
|
54.1 |
% | ||||
Services and maintenance |
|
58.3 |
% |
|
|
62.3 |
% |
59.7 |
% |
|
|
62.1 |
% | ||||
Total |
|
64.3 |
% |
|
|
70.1 |
% |
64.6 |
% |
|
|
70.2 |
% |
Cost of Product Revenues
Cost of product revenues consists principally of the cost of producing our software products, the cost of manufacturing our hardware products and product distribution costs, including the cost of compact discs, packaging, shipping, customs duties, and, to a lesser extent, compensation and related overhead expenses. While these costs are primarily variable with respect to sales volumes, they remain low in relation to the revenues generated and result in higher gross margins than our services and training businesses. Our gross margins can be affected by product mix, as our enterprise products are generally higher margin products than our forensic products, which include software and hardware.
Cost of product revenues decreased $171,000, or 9%, from $1,904,000 to $1,733,000, and $86,000, or 2%, from $3,587,000 to $3,501,000, for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012. The decreases were primarily a result of decreases in cost of forensic hardware due to lower sales of our forensic hardware products.
Product gross margin for the three and six months ended June 30, 2013 decreased to 77.5% and 77.0%, respectively, compared to 84.2% and 84.1% for the same periods in 2012. The decreases in gross margin percentages were primarily due to forensic hardware product revenues comprising 31% and 29% of product revenues for the three months and six months ended June 30, 2013, respectively, compared to 23% for the same periods in 2012.
Cost of Subscription Revenues
The cost of subscription revenues consist principally of employee compensation costs, including share-based compensation and related overhead, software maintenance paid to third party vendors, and SaaS hosting infrastructure costs. The cost of subscription revenues decreased $228,000, or 18%, from $1,283,000 to $1,055,000 and increased $311,000, or 17%, from $1,869,000 to $2,180,000, for the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012. The decrease for the three months ended June 30, 2013 was primarily due to a decrease in equipment lease and software expenses as a result of synergies gained from the integration of CaseCentral into the Companys existing infrastructure. The increase for the six month ended June 30, 2013 was due primarily to the cloud-based document review and production software products not becoming a part of our product mix until the completion of our acquisition of CaseCentral in February 2012.
Cost of Services and Maintenance Revenues
The cost of services and maintenance revenues is largely comprised of employee compensation costs, including share-based compensation, and related overhead, travel and facilities costs. The cost of maintenance revenues is primarily outsourced, but also includes employee compensation cost for customer technical support and related overhead costs.
Total cost of services and maintenance revenues increased $870,000, or 14%, from $6,097,000 to $6,967,000 and $1,982,000, or 17%, from $11,547,000 to $13,529,000, for the three and six months ended June 30, 2013, respectively, as compared with the same periods in 2012.
The increase in cost of services and maintenance revenues for the three months ended June 30, 2013 was primarily due to an increase in the cost of professional services revenues of $810,000, or 20%, from $4,013,000 to $4,823,000. This increase was primarily due to an increase in compensation and related expenses, associated with an increase in headcount in our professional services organization.
The increase in cost of services and maintenance revenues for the six months ended June 30, 2013 was primarily due to the increase in the cost of professional services revenues of $1,775,000, or 24%, from $7,448,000 to $9,223,000. This increase was primarily due to an increase in compensation and related expenses, associated with higher revenues and an increase in headcount in our professional services organization. Approximately $700,000 of the increase was a result of the timing of the acquisition of CaseCentral in February, 2012.
Services and maintenance gross margin for the three and six months ended June 30, 2013 was 58.3% and 59.7%, respectively, compared to 62.3% and 62.1% for the same periods in 2012. The decrease in gross margin for the three months ended June 30, 2013 was primarily a result of the professional services gross margin decreasing to 6.7% from 11.7% in 2012 and the training gross margin decreasing to 20.6% from 36.0% in 2012. These margin decreases were due primarily to higher compensation and related expenses associated with higher headcount, lower utilization rates, and an increase in compensation and related expenses incurred in preparation of expansion into additional markets.
The decrease in gross margin for the six months ended June 30, 2013 was primarily a result of the training gross margin decreasing to 21.6% from 35.8% in 2012 due to an increase in compensation and related expenses incurred in preparation of expansion into additional markets.
Operating Expenses
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||||||
(Dollars in thousands) |
|
2013 |
|
Change % |
|
2012 |
|
2013 |
|
Change % |
|
2012 |
| ||||
Selling and marketing expenses |
|
$ |
10,412 |
|
5% |
|
$ |
9,914 |
|
$ |
19,865 |
|
7% |
|
$ |
18,551 |
|
Research and development expenses |
|
$ |
7,123 |
|
13% |
|
$ |
6,294 |
|
$ |
14,667 |
|
27% |
|
$ |
11,584 |
|
General and administrative expenses |
|
$ |
4,614 |
|
(9)% |
|
$ |
5,092 |
|
$ |
9,884 |
|
(13)% |
|
$ |
11,312 |
|
Depreciation and amortization expenses |
|
$ |
1,994 |
|
2% |
|
$ |
1,964 |
|
$ |
3,691 |
|
3% |
|
$ |
3,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Share-based compensation included above: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Selling and marketing expenses |
|
$ |
537 |
|
|
|
$ |
432 |
|
$ |
979 |
|
|
|
$ |
809 |
|
Research and development expenses |
|
$ |
474 |
|
|
|
$ |
335 |
|
$ |
935 |
|
|
|
$ |
625 |
|
General and administrative expenses |
|
$ |
457 |
|
|
|
$ |
357 |
|
$ |
895 |
|
|
|
$ |
726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
As a percentage of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Selling and marketing expenses |
|
38.1 |
% |
|
|
31.9 |
% |
36.6 |
% |
|
|
32.5 |
% | ||||
Research and development expenses |
|
26.1 |
% |
|
|
20.3 |
% |
27.0 |
% |
|
|
20.3 |
% | ||||
General and administrative expenses |
|
16.9 |
% |
|
|
16.4 |
% |
18.2 |
% |
|
|
19.8 |
% | ||||
Depreciation and amortization expenses |
|
7.3 |
% |
|
|
6.3 |
% |
6.8 |
% |
|
|
6.3 |
% |
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of personnel costs and costs related to our sales force and marketing staff. Selling and marketing expenses also include expenses relating to advertising, brand building, marketing promotions and trade show events (net of amounts received from sponsors and participants), product management, and travel and allocated overhead.
Selling and marketing expenses increased $498,000, or 5%, from $9,914,000 to $10,412,000, and $1,314,000, or 7%, from $18,551,000 to $19,865,000, for the three and six months ended June 30, 2013, respectively, as compared with the same periods in 2012.
The increase for the three months ended June 30, 2013 was due primarily to a $469,000 increase in compensation and other employee-related expenses due to an increase in headcount and a $638,000 increase in expenses for other marketing activities, partially offset by a decrease of $609,000 in sales commissions due to lower revenues for the three months ended June 30, 2013 as compared to the same period in the prior year.
The increase for the six months ended June 30, 2013 was due primarily to a $1,874,000 increase in compensation and other employee-related expenses due to an increase in headcount and a $344,000 increase in expenses for other marketing activities, partially offset by a decrease of $904,000 in sales commissions due to lower revenues for the six months ended June 30, 2013 as compared to the same period in the prior year.
Research and Development Expenses
Research and development expenses consist primarily of compensation, including share-based compensation and related overhead expenses. In order to develop new product offerings, continue developing existing products and improve quality assurance, and incorporate personnel to support our new cloud-based subscription offerings, we increased the number of research and development personnel that we employed during the three and six months ended June 30, 2013 compared to the same periods in 2012.
Research and development expenses increased $829,000, or 13%, from $6,294,000 to $7,123,000, and $3,083,000, or 27%, from $11,584,000 to $14,667,000 for the three and six months ended June 30, 2013, respectively, as compared with the same periods in 2012. The increases were due to higher compensation costs and other employee-related expenses associated with increased headcount due to the number of products in development. Approximately $0.6 million of the increase in the six months ended June 30, 2012 was due to increased compensation and other-employee related expenses due to an increase in headcount in connection with the acquisition of CaseCentral in February of 2012.
General and Administrative Expenses
General and administrative expenses consist of personnel and related costs for accounting, legal, information systems, human resources and other administrative functions. In addition, general and administrative expenses include professional service fees, bad debt expense, and other corporate expenses and related overhead.
General and administrative expenses decreased $478,000, or 9%, from $5,092,000 to $4,614,000, and $1,428,000, or 13%, from $11,312,000 to $9,884,000 for the three and six months ended June 30, 2013, respectively, as compared with the same periods in 2012.
The decrease in general and administrative expenses for the three months ended June 30, 2013, was primarily attributable to a decrease of $508,000 in legal fees related to the patent infringement complaints filed in 2012.
The decrease in general and administrative expenses for the six months ended June 30, 2013, was primarily attributable to a decrease in acquisition related costs of $1,999,000 related to the CaseCentral acquisition and a decrease of $863,000 in legal fees related to the patent infringement complaints filed in 2012, partially offset by an increase of $1,434,000 in higher compensation costs and other employee-related expenses associated with increased headcount and our new headquarters building.
Depreciation and Amortization Expenses
Depreciation and amortization expenses consist of depreciation and amortization of our leasehold improvements, furniture, computer hardware and software, and intangible assets. Depreciation and amortization expenses increased $30,000, or 2%, from $1,964,000 to $1,994,000, and $101,000, or 3%, from $3,590,000 to $3,691,000 for the three and six months ended June 30, 2013, respectively, as compared with the same periods in 2012, primarily as a result of the amortization of intangibles assets and depreciation expense as a result of the acquisition of CaseCentral in February 2012.
Other Income and Expense
Total other income and expense consists of interest earned on cash balances, interest expense paid and other miscellaneous income and expense items. For the three months ended June 30, 2013, we recorded income of $3,000 as compared with expense of $8,000 for the same period in 2012. The change from 2012 to 2013 was primarily due to a decrease in interest expense. For the six months ended June 30, 2013, we recorded income of $9,000 as compared with expense of $1,000 for the same period in 2012. The change from 2012 to 2013 was primarily due to a decrease in interest expense.
Income Tax Provision
The Company recorded an income tax provision for the three and six months ended June 30, 2013 of $51,000 and $116,000, respectively as compared to $75,000 and $209,000, respectively for the same period in 2012. The income tax provision is based on our estimated effective annual tax rate and taxable income (loss) for the respective years. Our income tax provision for the three and six months ended June 30, 2013 and 2012 differs from the U.S. statutory rate of 34% primarily due to state taxes, foreign taxes, the tax impact of certain share-based compensation charges, and the impact of providing a valuation allowance against research & development credits and deferred tax assets.
Liquidity and Capital Resources
Since inception, we have largely financed our operations from the cash flow generated from the sale of our products and services. As of June 30, 2013, we had $23.0 million in cash and cash equivalents. On February 21, 2012, we acquired CaseCentral, a privately-held provider of cloud-based document review and production software for approximately $25.5 million, consisting of $9.5 million in cash (net of $1.4 million in cash acquired), $9.5 million in Company common stock and contingent consideration with an acquisition date fair value of $0.6 million. Depending on CaseCentrals SaaS revenues, we may be required to pay up to a maximum of $33.0 million in cash to CaseCentrals former shareholder over the next two 12-month periods starting April 1, 2013. We did not pay any contingent consideration with respect to the first 12-month period ending March 31, 2013. We believe that our cash flow from operations and our cash and cash equivalents are sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months.
Changes in Cash Flow
We generate cash from operating activities primarily from cash collections related to the sale of our products and services. Net cash used in operating activities was $1,269,000 and $2,102,000 for the six months ended June 30, 2013 and 2012, respectively. The decrease in net cash used in operating activities was primarily a result of the net loss of $13,173,000 in 2013 compared to the net loss of $5,163,000 in 2012, a decrease in trade receivables of $6,295,000 in 2013 compared to a decrease of $2,788,000 in 2012, an increase in accrued liabilities of $1,726,000 for 2013 compared to a decrease of $1,164,000 in 2012, partially offset by a decrease in prepaid expenses and other assets of $1,847,000 in 2013 compared to a decrease of $29,000 in 2012.
Net cash used in investing activities was $7,157,000 for the six months ended June 3, 2013, as compared with $11,066,000 for the same period in 2012. The decrease in cash used in investing activities was primarily related to the $9,642,000 in cash that was used to fund the acquisition of CaseCentral In February 2012.
Net cash used in financing activities was $1,148,000 for the six months ended June 30, 2013, as compared to cash provided by financing activities of $37,000 for the same period in 2012. The change in financing activities was due primarily to $2,079,000 in common stock withheld from employees to satisfy their personal income tax withholding requirement upon the vesting of share awards issued under our equity compensation plans during the six months ended June 30, 2013, as compared to $1,198,000 withheld for the comparable period in 2012. This was partially offset by $1,389,000 of cash received from the proceeds of employee stock options during the six months ended June 30, 2013, as compared to $1,919,000 of cash received during the same period in the prior year.
On July 12, 2012, we entered into a Loan and Security Agreement (Loan Agreement) with a bank. The Loan Agreement created a line of credit to provide for one or more revolving loans, non-revolving loans or term loans and up to $3.0 million in standby letters of credit. The maximum principal amount of loans that may be outstanding at any given time under the Loan Agreement, including standby letters of credit, is $7.0 million. Any borrowings under the Loan Agreement would be collateralized by substantially all our assets. The Loan Agreement requires that we remain in compliance with certain financial covenants, including that we maintain unrestricted cash and marketable securities of not less than $12.5 million, that we maintain a ratio of total funded indebtedness to EBITDA of not greater than 2.25 to 1, that we maintain a ratio of cash flow to current portion of long-term debt of not less than 1.25 to 1, and that we shall not allow a cumulative net loss of more than $5.0 million during any fiscal year. Borrowings under the Loan Agreement bear interest at one of the following rates (as selected by us): a rate equal to the banks alternate base rate plus 1.00% or LIBOR plus 2.25%. All principal, interest and other amounts owing under the Loan Agreement will be due and payable in full on or prior to June 30, 2014. The Loan Agreement supersedes and replaces our Amended and Restated Credit Agreement, dated as of May 1, 2007, which would have expired on August 31, 2012.
We have letters of credit outstanding against the line in the amount of $1.8 million as of June 30, 2013, and as of that date there were no other borrowings outstanding, resulting in available borrowing under the Loan Agreement of $5.2 million. As of June 30, 2013, the Company was not in compliance with the covenant that requires the Company to not exceed a cumulative loss of $5.0 million during any fiscal year. The Company is currently engaged in discussions with the bank to obtain a waiver for the remainder of 2013.
Contractual Obligations and Commitments
In connection with the CaseCentral acquisition, we may be required to pay former CaseCentral shareholders a total of up to $33 million with respect to the three 12-month periods (earn-out periods) starting April 1, 2012. The amount of contingent consideration payable with respect to each of the earn-out periods is equal to 35% of certain qualifying CaseCentral SaaS revenues and EnCase® eDiscovery revenues in excess of $11.1 million during each of the three earn-out periods and is limited to $3.0 million for the first earn-out period, a cumulative total of $13.0 million for the first and second earn-out periods and a cumulative total of $33.0 million for all three earn-out periods. Any earn-out consideration is payable within 65 days after the end of the applicable earn-out period. We did not pay any contingent consideration with respect to the first 12-month period ending March 31, 2013. At June 30, 2013, the fair value of the contingent consideration for the remaining two 12-month periods, which is calculated by summing the present values of various probability-weighted possible outcomes, was estimated to be $600,000 and was included as a liability on our condensed consolidated balance sheets.
On July 26, 2012, we entered into an Office Lease Agreement (the Lease) to lease approximately 90,000 rentable square feet of an office building located in Pasadena, California. The Lease begins on August 1, 2013 and has an initial term of ten years and ten months. The Lease will allow the Company to consolidate its Pasadena, California operations into a single location. The total annual rent under the Lease ranges from approximately $2.5 million for the first year to approximately $3.4 million for the final year of the Lease. The Company has two options to extend the Lease, each for a period of five years.
During 2012, the Company entered into a $1.5 million third-party software license agreement authorizing the Company to integrate database software as a component of its products through November 2015. The agreement also provides for maintenance and support over a two-year period for $0.3 million, which may be renewed by the Company at the expiration of the two-year period ending November 2014. The $1.8 million is payable in eight quarterly installments of $229,000 through January 2014. The license, maintenance and remaining liability have been recorded on the accompanying condensed consolidated balance sheets.
At June 30, 2013, other than the CaseCentral contingent consideration, our outstanding contractual cash commitments were largely limited to our non-cancellable lease obligations, primarily relating to office facilities. In Managements Discussion and Analysis of Financial Condition and Results of Operations, in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012, we reported that our contractual obligation for these non-cancellable lease obligations as of December 31, 2012 was approximately $34.2 million, of which $3.8 million is due during 2013. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our selling and marketing activities, the timing and extent of research and development spending to support product development and enhancement efforts, costs associated with expansion into new territories or markets, the timing of the introduction of new products and services, the enhancement of existing products and the continuing market acceptance of our products and services. To the extent that our existing cash, cash from operations or the availability of cash under our line of credit are insufficient to fund our future activities and planned growth, we may need to raise additional funds through public or private equity or debt financings. Additional funds may not be available on terms favorable to us or at all. Furthermore, although we cannot accurately anticipate the effect of inflation or foreign exchange markets on our operations, we do not believe these external economic forces have had, or are likely in the foreseeable future to have, a material impact on our results of operations.
Other than the items stated above, we currently have no other material cash commitments, except our normal recurring trade payables, expense accruals, leases and license obligations, all of which are currently expected to be funded through existing working capital and future cash flows from operations.
Off-Balance Sheet Arrangements
At June 30, 2013, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the SECs Regulation S-K. We do not have material relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties except as disclosed in this report.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Market Risk. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign exchange rates, interest rates and credit risk. We do not hold or issue financial instruments for trading purposes.
Foreign Currency Risk. To date, substantially all of our international sales have been denominated in US dollars, and therefore, the majority of our revenues are not subject to foreign currency risk. Our operating expenses and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, but such changes have historically had relatively little impact on our operating results and cash flows. A strengthening of the dollar could make our products and services less competitive in foreign markets and therefore could reduce our revenues. In the future, an increased portion of our revenues and costs may be denominated in foreign currencies. We do not enter into derivative instrument transactions for trading or speculative purposes.
Interest Rate Risk. Our investment portfolio, consisting of highly liquid debt instruments of the US government at June 30, 2013, is subject to interest rate risk. The fair value of our investment portfolio would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due mainly to the short-term nature of our investment portfolio.
Item 4. Controls and Procedures
Management, with the participation of the President and Chief Executive Officer and Chief Financial Officer, has performed an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). This evaluation includes consideration of the controls, processes and procedures that are designed to ensure that information required to be disclosed by us in the reports we file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our President and Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2013, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the six months ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
On May 20, 2011, MyKey Technology Inc. (MyKey) filed a complaint against us and certain other parties for patent infringement in the United States District Court for the District of Delaware. With respect to the Company, the complaint alleged that certain of our data acquisition forensic hardware products that we acquired as a result of our acquisition of certain assets of Tableau, LLC (Tableau) infringe three of MyKeys patents relating to write blocking, duplication and data removal technologies, respectively. The complaint sought a declaration of infringement, a finding of willful infringement, compensatory damages, treble damages, injunctive relief, interest, expenses, costs and attorneys fees.
On July 22, 2011, MyKey also filed a complaint with the United States International Trade Commission (the ITC), alleging infringement by the Company and certain other parties of the three patents discussed in the preceding paragraph and requesting that the ITC commence an investigation pursuant to Section 337 of the Tariff Act of 1930. The complaint sought injunctive relief barring the Company from the importation of products that allegedly infringed the three patents of MyKey. On August 24, 2011, the ITC commenced an investigation of the Company and certain other parties related to the complaint by MyKey. On August 31, 2011 the proceeding in the District Court was stayed pending the resolution of the ITC matter. On August 1, 2012, MyKey amended its ITC complaint to remove allegations that its duplication patent had been infringed by the Company and to reduce the number of claims it alleges the Company has infringed related to MyKeys data removal patent. In August 2012, the parties completed the ITC trial on the remaining patent claims at issue.
On December 28, 2012, the ITC released a final determination and Order holding that no violation of Section 337 of the Tariff Act of 1930 occurred as a result of the Companys importation into the United States and sale of the products at issue. This Order effectively ended the ITC proceeding. On February 20, 2013, the U.S. District Court of Delaware lifted the stay of the proceedings in the MyKey matter. Effective April 8, 2013, the parties stipulated to a transfer of the matter to the U.S. District Court for the Central District of California. On April 16, 3013, the Company filed its Answer and Counterclaim.
We intend to defend the ongoing MyKey matter vigorously and, at this time, are unable to estimate what, if any, liability we may have in connection with these matters. We are unable to estimate a range of reasonably possible losses due to various reasons, including, among others, that (1) certain of the proceedings are at an early stage, (2) there is uncertainty as to the outcome of pending appeals, motions, or settlements, (3) there are significant factual issues to be resolved, (4) there are unresolved negotiations with certain indemnitors or indemnitees of the Company, related to the actions, and (5) we have meritorious defenses that we intend to assert.
From time to time, we may become involved in various other lawsuits and legal proceedings that arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are not currently aware of any such other legal proceedings or claims that are likely to have a material impact on our business.
There have been no material changes to the risk factors as presented in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the U.S. Securities and Exchange Commission on February 16, 2012.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer
Period |
|
Total Number |
|
Average |
|
Total Number |
|
Approximate |
| ||
April 1, 2013 to April 30, 2013 |
|
|
|
|
|
|
|
|
| ||
Repurchase program (1) |
|
|
|
|
|
|
|
$ |
3,649,000 |
| |
Employee transactions(2) |
|
18,068 |
|
$ |
10.23 |
|
|
|
|
| |
May 1, 2013 to May 31, 2013 |
|
|
|
|
|
|
|
|
| ||
Repurchase program(1) |
|
|
|
|
|
|
|
$ |
3,649,000 |
| |
Employee transactions(2) |
|
65,416 |
|
$ |
8.67 |
|
|
|
|
| |
June 1, 2013 to June 30, 2013 |
|
|
|
|
|
|
|
|
| ||
Repurchase program(1) |
|
|
|
|
|
|
|
$ |
3,649,000 |
| |
Employee transactions(2) |
|
|
|
|
|
|
|
|
| ||
Total |
|
|
|
|
|
|
|
|
| ||
Repurchase program (1) |
|
|
|
|
|
|
|
$ |
3,649,000 |
| |
Employee transactions(2) |
|
83,484 |
|
$ |
9.01 |
|
|
|
|
|
(1) In August 2008, our Board of Directors authorized a program to repurchase shares of our common stock having an aggregate value of up to $8.0 million. As of June 30, 2013, we had approximately $3.6 million remaining under this authorization. The authorization allows us to repurchase our common stock from time to time through open market purchases and negotiated transactions, or otherwise. The timing, nature and amount of such transactions will depend on a variety of factors, including market conditions, and the program may be suspended, discontinued or accelerated at any time. The sources of funds for the purchases under the remaining authorization are our existing cash on hand and cash from operations. Purchases are made in the open market, through block trades and other negotiated transactions. Repurchased shares are held in Treasury Stock and have not been retired.
(2) Consists of shares withheld by the Company to satisfy employee personal income tax withholding requirements upon the vesting of share awards issued under our equity compensation plans.
Item 3. Defaults upon Senior Securities
No information is required in response to this item.
Item 4. [Removed and Reserved]
No information is required in response to this item.
No information is required in response to this item.
Exhibit |
|
Description of Documents |
|
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 |
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 |
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS |
|
XBRL Instance Document |
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
These certifications are being furnished solely to accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Guidance Software, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.
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.
|
Guidance Software, Inc. | |
|
|
|
|
By: |
/s/ Barry J. Plaga |
|
|
Barry J. Plaga |
|
|
Chief Financial Officer |
Dated: August 8, 2013
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Victor T. Limongelli, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Guidance Software, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 8, 2013 |
/s/ Victor T. Limongelli |
|
Victor T. Limongelli |
|
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Barry J. Plaga, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Guidance Software, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 8, 2013 |
/s/ Barry J. Plaga |
|
Barry J. Plaga |
|
Chief Financial Officer |
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Guidance Software, Inc. (the Company) hereby certifies that:
(i) the accompanying Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2013 (the Report) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 8, 2013 |
/s/ Victor T. Limongelli |
|
Victor T. Limongelli |
|
President and Chief Executive Officer |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 (Section 906), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Guidance Software, Inc. and will be retained by Guidance Software, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Guidance Software, Inc. (the Company) hereby certifies that:
(i) the accompanying Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2013 (the Report) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 8, 2013 |
/s/ Barry J. Plaga |
|
Barry J. Plaga |
|
Chief Financial Officer |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 (Section 906), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Guidance Software, Inc. and will be retained by Guidance Software, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Income Taxes
|
6 Months Ended |
---|---|
Jun. 30, 2013
|
|
Income Taxes | |
Income Taxes | Note 11. Income Taxes
We account for income taxes in accordance with Income Taxes (ASC 740). Deferred income taxes are recorded for the expected tax consequences of temporary differences between the tax bases of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. We record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. As of June 30, 2013, we have recorded a valuation allowance against our net deferred tax assets resulting in a carrying value of zero.
In accordance with ASC 740, the valuation allowance for a particular tax jurisdiction is allocated between current and non-current deferred tax assets for that tax jurisdiction on a pro-rata basis. For the year ended December 31, 2012, the Company previously netted its valuation allowance in total against net deferred tax assets. The Company has revised the presentation of the valuation allowance for the year ended December 31, 2012 to show the allocation of the valuation allowance to the current and non-current deferred tax assets. The total impact was an increase to current deferred tax assets and an increase to non-current deferred tax liabilities of $647,000 for the year ended December 31, 2012.
Management’s judgment is required in assessing the realizability of future deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance. Likewise, in the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such a determination.
We file income tax returns with the Internal Revenue Service and the taxing authorities of various state and foreign jurisdictions. We periodically perform a review of our uncertain tax positions. An uncertain tax position represents our expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. At June 30, 2013, our liability for uncertain tax positions was $0.5 million. We do not expect there to be any material changes to the estimated amount of liability associated with our uncertain tax positions over the next twelve months. The tax years 2009 through 2011 remain subject to review by the taxing authorities in several jurisdictions. Most foreign jurisdictions have statute of limitations that range from three to six years. |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Per Share data, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2013
|
Jun. 30, 2012
|
Jun. 30, 2013
|
Jun. 30, 2012
|
|
Revenues: | ||||
Product revenues | $ 7,695 | $ 12,042 | $ 15,225 | $ 22,551 |
Subscription revenues | 2,909 | 2,843 | 5,491 | 4,068 |
Services and maintenance revenues | 16,702 | 16,183 | 33,534 | 30,468 |
Total revenues | 27,306 | 31,068 | 54,250 | 57,087 |
Cost of revenues (excluding amortization and depreciation, shown below): | ||||
Cost of product revenues | 1,733 | 1,904 | 3,501 | 3,587 |
Cost of subscription revenues | 1,054 | 1,283 | 2,180 | 1,869 |
Cost of services and maintenance revenues | 6,968 | 6,097 | 13,529 | 11,547 |
Total cost of revenues (excluding amortization and depreciation, shown below) | 9,755 | 9,284 | 19,210 | 17,003 |
Operating expenses: | ||||
Selling and marketing | 10,412 | 9,914 | 19,865 | 18,551 |
Research and development | 7,123 | 6,294 | 14,667 | 11,584 |
General and administrative | 4,615 | 5,092 | 9,884 | 11,312 |
Depreciation and amortization | 1,993 | 1,964 | 3,690 | 3,590 |
Total operating expenses | 24,143 | 23,264 | 48,106 | 45,037 |
Operating income (loss) | (6,592) | (1,480) | (13,066) | (4,953) |
Other income and expense: | ||||
Interest income | 6 | 8 | 16 | 22 |
Interest expense | (7) | (25) | (20) | (38) |
Other income, net | 4 | 9 | 13 | 15 |
Total other income and expense | 3 | (8) | 9 | (1) |
Income (loss) before income taxes | (6,589) | (1,488) | (13,057) | (4,954) |
Income tax provision | 51 | 75 | 116 | 209 |
Net income (loss) | $ (6,640) | $ (1,563) | $ (13,173) | $ (5,163) |
Net income (loss) per share: | ||||
Basic (in dollars per share) | $ (0.26) | $ (0.06) | $ (0.51) | $ (0.21) |
Diluted (in dollars per share) | $ (0.26) | $ (0.06) | $ (0.51) | $ (0.21) |
Weighted average number of shares used in per share calculation: | ||||
Basic (in shares) | 25,802 | 24,767 | 25,657 | 24,274 |
Diluted (in shares) | 25,802 | 24,767 | 25,657 | 24,274 |
Net Income (Loss) Per Share
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Net Income (Loss) Per Share | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Income (Loss) Per Share | Note 4. Net Income (Loss) Per Share
Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted net income (loss) per share is calculated based on the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the shares issuable upon the exercise of stock options and upon the vesting of restricted stock awards under the treasury stock method. In net loss periods, basic net loss per share and diluted net loss per share are identical since the effect of potential common shares is anti-dilutive and therefore excluded.
The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):
Antidilutive securities, which consist of stock options and restricted stock awards that are not included in the diluted net loss per share calculation, consisted of an aggregate of approximately 3,299,000 and 3,472,000 shares for the three and six months ended June 30, 2013, respectively, and 3,360,000 and 3,431,000 shares for the three and six months ended June 30, 2012, respectively. |
Business Combination (Tables)
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Business Combination | |||||||||||||||||||||||||||||||||||||||||
Schedule of unaudited pro forma condensed consolidated financial statement | The following table sets forth the unaudited pro forma condensed consolidated financial statements of the combined entity for the six months ended June 30, 2012 assuming the business combination had occurred on January 1, 2012 (in thousands, except per share amounts):
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Fair Value Measurements
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Jun. 30, 2013
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Fair Value Measurements | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurements | Note 12. Fair Value Measurements
In accordance with Fair Value Measurements and Disclosures (ASC 820) we measure our financial assets and liabilities at fair value on a recurring basis. Fair Value Measurements and Disclosures (ASC 820) requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. Under this standard, fair value is defined as the price that would be received in exchange for selling an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. Fair Value Measurements and Disclosures (ASC 820) establishes a hierarchy for inputs used in measuring fair value that minimizes the use of unobservable inputs by requiring the use of observable market data when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on active market data. Unobservable inputs would be inputs that reflect our assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. The statement requires fair value measurements be classified and disclosed in one of the following three categories:
The following table sets forth, by level within the fair value hierarchy, financial assets and liabilities that are accounted for at fair value on a recurring basis as of June 30, 2013 and December 31, 2012 (in thousands):
The Company has obligations, to be paid in cash, to the former shareholders of CaseCentral if certain SaaS revenue thresholds are achieved during the three 12-month periods starting April 1, 2012. The fair value of this contingent consideration is determined using an expected present value calculation. Expected cash flows are determined using the probability-weighted average of possible outcomes that would occur should certain revenue metrics be reached. There are no market data available to use in valuing the contingent consideration; therefore, the Company developed its own assumptions related to the future financial performance of the businesses to evaluate the fair value of these liabilities. As such, the contingent consideration is classified within Level 3, as described above.
In connection with estimating the fair value of the contingent consideration, the Company developed various scenarios (base case, downside case, and upside case) and weighted each case according to the probability of occurrence. The probabilities ranged from 20 percent to 50 percent, with the most significant weighting given to the base case at 50 percent. These scenarios were developed based on the expected financial performance of CaseCentral, with SaaS revenue growth rates being a primary input in the calculation. An increase or decrease in the probability of achievement of any of the scenarios could result in a significant increase or decrease to the estimated fair value.
The fair value will be reviewed quarterly based on the financial performance of the most recently completed fiscal quarter. An analysis will also be performed at the end of each fiscal quarter to compare actual results to forecasted financial performance. If performance has deviated from projected levels, the valuation will be updated for the latest information available.
The significant assumptions that may materially affect fair value are developed in conjunction with the guidance of our senior management to ensure that the most accurate and latest financial projections are used and compared with the most recent financial results in the fair value measurement. |
Commitments and Contingencies (Details) (USD $)
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12 Months Ended | 0 Months Ended | ||||||
---|---|---|---|---|---|---|---|---|
Jun. 30, 2013
|
Jun. 30, 2013
Software license agreement
item
|
Dec. 31, 2012
Software license agreement
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Dec. 31, 2012
Maintenance and support agreement
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Jul. 26, 2012
Office Lease Agreement
item
sqft
|
Jul. 26, 2012
Office Lease Agreement
Minimum
|
Jul. 26, 2012
Office Lease Agreement
Maximum
|
Jul. 22, 2011
Patent infringement complaint
item
|
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Commitments and contingencies | ||||||||
Rentable area of office (in square feet) | 90,000 | |||||||
Annual rent | $ 2,500,000 | $ 3,400,000 | ||||||
Number of options available for lease extension | 2 | |||||||
Period of lease extension available under each option | 5 years | |||||||
Agreement term | 2 years | |||||||
Payment to be made over the license term | 1,800,000 | 1,500,000 | ||||||
Number of quarterly installments | 8 | |||||||
Quarterly installments | 229,000 | |||||||
Maintenance and support obligation | $ 300,000 | |||||||
Number of patents for which infringement is alleged | 3 |
Goodwill and Other Intangibles (Details) (USD $)
In Thousands, unless otherwise specified |
6 Months Ended | 6 Months Ended | ||||
---|---|---|---|---|---|---|
Jun. 30, 2013
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Jun. 30, 2013
Products
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Dec. 31, 2012
Products
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Jun. 30, 2013
Subscription
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Jun. 30, 2013
Services
|
Jun. 30, 2013
Unassigned
|
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Goodwill and Other Intangibles | ||||||
Impairment charges related to goodwill and indefinite-lived intangible assets | $ 0 | |||||
Goodwill | ||||||
Goodwill balance at the beginning of the period | 14,632 | 3,711 | 3,711 | 10,921 | ||
Goodwill assigned | 6,935 | 3,986 | (10,921) | |||
Goodwill balance at the end of the period | $ 14,632 | $ 3,711 | $ 3,711 | $ 6,935 | $ 3,986 |
Goodwill and Other Intangibles (Tables)
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Goodwill and Other Intangibles | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of assignment of goodwill to the reporting segments | The following table summarizes how goodwill is assigned to our reporting segments (in thousands):
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Summary of cumulative amortization expense related to intangible assets subject to amortization | The following table summarizes cumulative amortization expense related to intangible assets subject to amortization as of June 30, 2013 and December 31, 2012 (in thousands):
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Schedule of estimated remaining amortization expense | The following table summarizes the estimated remaining amortization expense through 2017 and thereafter (in thousands):
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Inventory (Tables)
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Inventory | |||||||||||||||||||||||||||||||||||||||||
Schedule of inventory by major classes | The following table sets forth, by major classes, inventory as of June 30, 2013 and December 31, 2012 (in thousands):
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Income Taxes (Details) (USD $)
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6 Months Ended | 12 Months Ended |
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Jun. 30, 2013
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Dec. 31, 2012
ASC 740
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Income Taxes | ||
Carrying value of net deferred tax assets | $ 0 | |
Liability for uncertain tax positions | 500,000 | |
Lower range of statute of limitations of foreign jurisdictions | 3 years | |
Higher range of statute of limitations of foreign jurisdictions | 6 years | |
Impact of changes in accordance with ASC 740 | ||
Increase in current deferred tax assets due to revision in presentation | 647,000 | |
Increase in non-current deferred tax liabilities due to revision in presentation | $ 647,000 |
Summary of Significant Accounting Policies (Details 3)
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6 Months Ended |
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Jun. 30, 2013
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Minimum
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Summary of Significant Accounting Policies | |
Period of maintenance of proprietary products | 1 year |
Maximum
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Summary of Significant Accounting Policies | |
Period of maintenance of proprietary products | 3 years |
Goodwill and Other Intangibles (Details 3) (USD $)
In Thousands, unless otherwise specified |
Jun. 30, 2013
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Dec. 31, 2012
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---|---|---|
Goodwill and Other Intangibles | ||
Gross Costs | $ 16,875 | $ 16,875 |
Accumulated Amortization | (5,786) | (4,464) |
Net | 11,089 | 12,411 |
Core technology
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Goodwill and Other Intangibles | ||
Gross Costs | 5,800 | 5,800 |
Accumulated Amortization | (1,258) | (867) |
Net | 4,542 | 4,933 |
Existing and developed technology
|
||
Goodwill and Other Intangibles | ||
Gross Costs | 2,300 | 2,300 |
Accumulated Amortization | (1,931) | (1,648) |
Net | 369 | 652 |
Customer relationships
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Goodwill and Other Intangibles | ||
Gross Costs | 6,475 | 6,475 |
Accumulated Amortization | (1,841) | (1,353) |
Net | 4,634 | 5,122 |
Trade names
|
||
Goodwill and Other Intangibles | ||
Gross Costs | 2,100 | 2,100 |
Accumulated Amortization | (702) | (562) |
Net | 1,398 | 1,538 |
Covenant not-to-compete
|
||
Goodwill and Other Intangibles | ||
Gross Costs | 200 | 200 |
Accumulated Amortization | (54) | (34) |
Net | $ 146 | $ 166 |
Stockholders' Equity (Details) (USD $)
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3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2013
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Jun. 30, 2012
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Jun. 30, 2013
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Jun. 30, 2012
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Stockholders' Equity | ||||
Stock options for shares of common stock exercised (in shares) | 219,000 | |||
Average price at which stock options were exercised (in dollars per share) | $ 6.35 | |||
Increase in stockholders' equity owing to exercise of stock options | $ 1,389,000 | |||
Restricted stock awards vested (in shares) | 589,000 | |||
Shares withheld for tax purposes (in shares) | 83,000 | 63,000 | 200,000 | 132,000 |
Decrease in stockholders' equity owing to vesting of restricted stock awards | 2,079,000 | |||
Share-based compensation expense | $ 1,893,000 | $ 1,459,000 | $ 3,635,000 | $ 2,756,000 |
Segment Information (Tables)
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Jun. 30, 2013
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Segment Information | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of results of operations for each operating segment | The following tables present the results of operations for each operating segment (in thousands):
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Schedule of revenues, classified by the major geographic areas | Revenues, classified by the major geographic areas in which we operate, are as follows (in thousands):
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Net Income (Loss) Per Share (Tables)
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Jun. 30, 2013
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Net Income (Loss) Per Share | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of computation of basic and diluted net income (loss) per share | The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical)
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6 Months Ended |
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Jun. 30, 2013
|
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |
Common stock issued as part of the purchase price of acquisition | 849,554 |
Summary of Significant Accounting Policies
|
6 Months Ended |
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Jun. 30, 2013
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Summary of Significant Accounting Policies | |
Summary of Significant Accounting Policies | Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated balance sheets as of June 30, 2013 and the condensed consolidated statements of operations for the three and six months ended June 30, 2013 and 2012 and cash flows for the six months ended June 30, 2013 and 2012 are unaudited. These statements should be read in conjunction with the audited consolidated financial statements and related notes, together with management’s discussion and analysis of financial position and results of operations, contained in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 21, 2012. The operating results for the three and six month periods ended June 30, 2013 and cash flows for the six month period ended June 30, 2013 are not necessarily indicative of the results that will be achieved for the full fiscal year or for future periods.
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or (“GAAP”), and pursuant to the rules and regulations of the SEC for interim financial reporting. In the opinion of our management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012 and include all adjustments necessary for the fair presentation of our financial position as of June 30, 2013 and our results of operations for the three and six months ended June 30, 2013 and 2012 and our cash flows for the six month period ended June 30, 2013 and 2012. The condensed consolidated balance sheet as of December 31, 2012 has been derived from the December 31, 2012 audited financial statements. The interim financial information contained in this Quarterly Report is not necessarily indicative of the results to be expected for any other interim period or for the entire year.
The condensed consolidated financial statements include the accounts of Guidance and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The Company’s restricted stock award agreements provide that holders of the restricted stock awards shall have all the rights of a stockholder upon the grant date, including the right to vote as a stockholder. As such, these shares are considered issued and outstanding on the date of grant. As of December 31, 2012, the Company previously excluded unvested restricted stock awards from the presented quantity of common shares issued and outstanding. The Company has increased the number of common shares issued and outstanding by 2,511,000 as of December 31, 2012 to reflect these unvested restricted stock awards.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to revenue recognition, share-based compensation, bad debts, income taxes, contingent consideration, commitments, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Cash and Cash Equivalents
We invest excess cash in money market funds and highly liquid debt instruments of the US government and its agencies. Highly liquid investments with stated maturities of three months or less from the date of purchase are classified as cash and cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturities of these instruments. Based on borrowing rates currently available to us for borrowings with similar terms, the carrying values of our capital lease obligations also approximate fair value.
Trade Receivables
Trade receivables are carried at original invoice amount less an allowance for doubtful accounts. The allowance is established through a provision for bad debt expense, which is included in general and administrative expenses. We determine the adequacy of this allowance by evaluating individual customer accounts receivable, through consideration of the customer’s financial condition, credit history and current economic conditions. In addition, we analyze our historical credit loss history and apply these loss rates to our current accounts receivable balances to verify the reasonableness of our allowance. Trade receivables are written off when deemed uncollectible. A trade receivable is generally considered past due if any portion of the receivable balance is outstanding for more than 30 days unless alternate terms are provided.
Inventory
Inventory is comprised of hardware components, packaged software components and finished goods and is valued at the lower of cost or market, using the weighted average cost method. We conduct quarterly inventory reviews for obsolescence, and inventory considered unlikely to be sold is adjusted to net realizable value.
Business Combinations
The purchase price of an acquisition is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. To the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. We determine the estimated fair values after review and consideration of relevant information including discounted cash flows, quoted market prices and estimates made by management. Accordingly, these can be affected by certain performance measurements and other factors over time, which may cause final amounts to differ materially from original estimates. We adjust the preliminary purchase price allocation, as necessary, up to periods of one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed. We refer to this preliminary purchase price allocation period as the measurement period.
Goodwill acquired in business combinations is assigned to the reporting unit(s) expected to benefit from the combination as of the acquisition date. Acquisition related costs are recognized separately from the acquisition and are expensed as incurred.
Amortization of Intangible Assets with Finite Lives
Intangible assets with finite lives are recorded at their fair value at the time of acquisition. With the exception of our customer relationships intangible asset, which is amortized on a double-declining basis, the acquisition date fair values of such assets are amortized on a straight-line basis over the estimated useful lives.
Goodwill and Indefinite-Lived Intangibles
Goodwill represents the excess of purchase price over fair value of net assets acquired and is assigned to a reporting unit at the date the goodwill is initially recorded. Goodwill and indefinite-lived intangible assets are not amortized but evaluated for impairment annually, or whenever events or changes in circumstances indicate that the value may not be recoverable. Commencing on January 1, 2013, the Company adopted the ASU 2011-08 issued by the Financial Accounting Standards Board (“FASB”) for the revised guidance on “Testing of Goodwill for Impairment.” Under this guidance, the Company has the option to choose whether it will apply the qualitative assessment first before the quantitative assessment. If a quantitative assessment is necessary a two-step test is performed at the reporting unit level to assess goodwill for impairment. First, the fair value of the reporting unit is compared to its carrying value. If the fair value exceeds the carrying value, the reporting unit is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. If the carrying value of the reporting unit exceeds its implied fair value, an impairment loss equal to the difference will be recorded. Indefinite-lived intangible assets are assessed for impairment by comparing the carrying value of the assets with their fair values.
Application of the impairment test requires significant judgment to estimate the fair value. Changes in estimates and assumptions could materially affect the determination of fair value and/or impairment.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We restrict our investments in cash and cash equivalents to financial institutions, US government or federal agency instruments and obligations of corporations with high credit ratings. At June 30, 2013, the majority of our cash balances were held at financial institutions located in California in accounts that are insured by the Federal Deposit Insurance Corporation for up to $250,000. Uninsured balances aggregate approximately $22.4 million as of June 30, 2013. At June 30, 2013, all of our cash equivalents consisted of financial institution obligations. We periodically perform credit evaluations of our customers and maintain reserves for potential losses on our accounts receivable. We do not believe we are subject to concentrations of credit risk with respect to such receivables.
Revenue Recognition
We generate revenues principally from the sale of EnCase®Enterprise and EnCase® Forensic software products. Revenues associated with the sale of software licenses and revenues associated with forensic hardware sales are referred to as product revenues. With the acquisition of CaseCentral, Inc. (“CaseCentral”) in February of 2012, we now have revenue associated with cloud-based document review and production SaaS, which is referred to as subscription revenues. Revenues are also generated from training courses, implementation services and consulting services in which we assist customers with the performance of digital investigations and train their IT and legal professionals in the use of our software products, which we collectively refer to as services revenues. Our proprietary products are generally sold with one to three years of maintenance, which can be renewed at a stated renewal rate and is referred to as maintenance revenues.
We recognize revenue in accordance with Accounting Standards Update (“ASU”) 2009-13, Multiple-Deliverable Revenue Arrangements, (amendment to Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition), Software Industry-Revenue Recognition topic (ASC 985-605) and Revenue Recognition (ASC 605). While the standards govern the basis for revenue recognition, significant judgment and the use of estimates are required in connection with the allocation of revenues between product, subscription, services and maintenance revenues, as well as the amount of deferred revenues to be recognized in each accounting period.
When arrangements involve multiple elements that qualify as separate units of accounting, the consideration is allocated at inception of the arrangement to all deliverables based on the relative selling price method in accordance with the selling price hierarchy, which includes: 1) vendor-specific objective evidence of fair value (“VSOE”), if available, 2) third-party evidence (“TPE”) if VSOE is not available, or 3) best estimate of selling price (“BESP”) if neither VSOE nor TPE is available.
· VSOE. VSOE is determined based on its historical pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for these services fall within a reasonably narrow pricing range.
· TPE. When VSOE cannot be established for deliverables in a multiple element arrangement, judgment is applied with respect to whether we can establish a selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that comparable pricing of services with similar functionality has not been obtained. Furthermore, we have been unable to reliably determine selling prices of similar competitive services on a stand-alone basis. As a result, we have not been able to establish selling prices based on TPE.
· BESP. When VSOE or TPE is unable to be established, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the service were sold on a stand-alone basis. We determine BESP for deliverables by considering multiple factors including but not limited to prices we charge for similar offerings, market conditions, competitive landscape and pricing practices.
We have established VSOE for our proprietary products and services, but have not established VSOE or TPE for our subscription services or usage-based fee arrangements and therefore we use BESP to allocate the selling price to subscription services and usage-based fee deliverables.
Product revenues. The timing of product revenues recognition is dependent on the nature of the product sold. We do not have any product offerings where software components and non-software components function together to deliver the tangible product’s essential functionality. Product arrangements comprising multiple deliverables including software and hardware are generally categorized into one of the following:
· EnCase® Enterprise Solutions and EnCase® Forensic Solutions: Revenues associated with these arrangements, exclusive of amounts allocated to maintenance and other undelivered elements, for which we have VSOE, is recognized upon delivery, provided that all other criteria for revenue recognition have been met.
· Hardware: Revenues associated with the sale of forensic hardware is recognized upon shipment to the customers which include certain resellers, provided that all other criteria for revenue recognition have been met.
Subscription revenues. Customers pay subscription fees to access our cloud-based document review and production software; however, they may not take possession of the software at any time during the term of the agreement. In general, we recognize revenues for subscription fees on a straight-line basis over the contract period commencing on the date the subscription is made available to the customer. Usage-based fees, which are determined monthly, are recognized when incurred.
Services and Maintenance revenues. The majority of our consulting and implementation services are performed under per hour, or fixed fee arrangements. Revenues from such services are recognized as the services are provided or upon expiration of the contractual service period.
Training revenues are either recognized on a per-class basis upon a participant’s attendance or, for those customers who have subscribed to our Annual Training Passport program, revenues are recognized ratably over the annual period.
Revenues related to technical support and software updates on a when-and-if available basis is referred to as maintenance revenues. We recognize maintenance revenues ratably over the applicable maintenance period. We determine the amount of maintenance revenues to be deferred through reference to substantive maintenance renewal provisions contained in multiple element arrangements. We consider substantive maintenance provisions to be provisions where the cost of the maintenance renewal, stated in the contract with our customer as a percentage of the product fee, is comparable to the normal pricing for maintenance only renewals.
Revenue Recognition Criteria. Our basic revenue recognition criteria are as follows:
· Persuasive evidence of an arrangement: If we either enter into contracts or receive written purchase orders issued by a customer that legally bind us and the customer, we consider that as evidence of an arrangement.
· Product delivery: We deem delivery of a product to have occurred when the title and risk of ownership have passed to the buyer. Services revenues are recognized as delivered.
· Fixed or determinable fee: We consider the fee to be fixed or determinable if the fee is not subject to refund or adjustment and the payment terms are within normal established practices. If the fee is not fixed or determinable, we recognize revenues as amounts become due and payable provided all other revenue recognition criteria have been met.
· Collection is deemed probable: We conduct a credit review for all significant transactions at the time of the arrangement to determine the credit-worthiness of the customer. Collection is deemed probable if we have a reasonable basis to expect that a customer will pay amounts due under an arrangement as they become due. |
Inventory
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Inventory | Note 5. Inventory
Inventory is comprised of hardware components, packaged software components and finished goods and is valued at the lower of cost or market, using the weighted average cost method. The following table sets forth, by major classes, inventory as of June 30, 2013 and December 31, 2012 (in thousands):
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Business Combination
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Business Combination | Note 3. Business Combination
On February 21, 2012, we acquired CaseCentral, a privately held cloud-based document review and production SaaS provider for an aggregate purchase price of approximately $21.1 million. The results of operations of CaseCentral have been included in the Company’s financial statements subsequent to the acquisition date. We acquired CaseCentral to extend our market leadership by delivering a complete and integrated platform solving the e-discovery needs of corporate and government customers.
In connection with the CaseCentral acquisition, we may be required to pay former CaseCentral shareholders additional consideration based on three 12-month periods (“earn-out periods”) starting April 1, 2012. The amount of contingent consideration payable with respect to each of the earn-out periods is equal to 35% of certain qualifying CaseCentral SaaS revenues and EnCase® eDiscovery revenues in excess of $11.1 million during each of the three earn-out periods and is limited to certain cumulative limits. No contingent consideration was paid for the period ending April 1, 2013. At June 30, 2013, the fair value of the contingent consideration, which is calculated by summing the present values of various probability-weighted possible outcomes, was estimated to be $0.6 million and was included as a liability on our condensed consolidated balance sheets. We incurred $2.0 million in acquisition-related costs during the three months ended March 31, 2012, which was expensed as incurred and included in general and administrative expenses. No acquisition-related costs were incurred for the six months ended June 30, 2013. For a detailed description of the CaseCentral acquisition, please refer to Note 3 in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 21, 2013.
The following table sets forth the unaudited pro forma condensed consolidated financial statements of the combined entity for the six months ended June 30, 2012 assuming the business combination had occurred on January 1, 2012 (in thousands, except per share amounts):
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Goodwill and Other Intangibles (Details 4) (USD $)
In Thousands, unless otherwise specified |
Jun. 30, 2013
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Dec. 31, 2012
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Estimated remaining amortization expense | ||
2013 | $ 1,136 | |
2014 | 2,098 | |
2015 | 1,741 | |
2016 | 1,499 | |
2017 | 1,399 | |
Thereafter | 3,216 | |
Net | $ 11,089 | $ 12,411 |
Equity Incentive Plan (Tables)
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Schedule of stock option activity |
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Schedule of restricted stock awards activity |
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Summary of Significant Accounting Policies (Details)
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6 Months Ended | |
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Jun. 30, 2013
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Dec. 31, 2012
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Basis of Presentation | ||
Increase in common shares issued to reflect unvested restricted stock awards | 2,511,000 | |
Increase in common shares outstanding to reflect unvested restricted stock awards | 2,511,000 | |
Trade Receivables | ||
Minimum number of days after which receivables are considered past due | 30 days |
Inventory (Details) (USD $)
In Thousands, unless otherwise specified |
Jun. 30, 2013
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Dec. 31, 2012
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Inventory | ||
Components | $ 730 | $ 967 |
Finished goods | 1,009 | 1,041 |
Total inventory | $ 1,739 | $ 2,008 |