10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED June 30, 2015

OR

oTRANSITION 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	95-4661210
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
1055 E. Colorado Blvd.
Pasadena, California 91106	(626) 229-9191
(Address of principal executive offices)	Registrant’s 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	Accelerated filer x
Non- accelerated filer o	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 July 31, 2015, there were approximately 30,341,000 shares of the registrant’s Common Stock outstanding.

GUIDANCE SOFTWARE, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED June 30, 2015

Table of Contents

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets at June 30, 2015 and December 31, 2014	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014	5
	Notes to the Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults upon Senior Securities	30
Item 4.	Removed and Reserved	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
Signatures		31

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PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

GUIDANCE SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(Unaudited)

	June 30, 2015			December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	21,029		$	18,355
Restricted cash	—			153
Trade receivables, net of allowance for doubtful accounts of $541 and $634, respectively	17,314			20,255
Inventory	2,501			2,684
Prepaid expenses and other current assets	5,099			5,054
Total current assets	45,943			46,501
Long-term assets:
Property and equipment, net	15,215			14,558
Intangible assets, net	6,904			7,766
Goodwill	14,632			14,632
Other assets	2,236			2,370
Total long-term assets	38,987			39,326
Total assets	$	84,930		$	85,827
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,548		$	5,919
Accrued liabilities	10,826			8,407
Capital lease obligations	73			67
Deferred revenues	39,079			39,128
Total current liabilities	53,526			53,521
Long-term liabilities:
Deferred rent	7,344			7,661
Other long-term liabilities	655			645
Deferred revenues	7,863			6,232
Deferred tax liabilities	630			584
Total long-term liabilities	16,492			15,122
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.001 par value: 10,000,000 shares authorized; no shares issued or outstanding	—			—
Common stock, $0.001 par value; 100,000,000 shares authorized; 32,174,000 and 31,155,000 shares issued, respectively; and 30,394,000 and 29,376,000 shares outstanding, respectively	26			25
Additional paid-in capital	115,336			110,265
Treasury stock, at cost, 1,779,000 and 1,779,000 shares, respectively	(11,479		)	(11,479		)
Accumulated deficit	(88,971		)	(81,627		)
Total stockholders’ equity	14,912			17,184
Total liabilities and stockholders’ equity	$	84,930		$	85,827

The accompanying notes are an integral part of these condensed consolidated financial statements

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GUIDANCE SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Revenues:
Product revenue	$	8,280		$	8,888		$	15,334		$	15,749
Services revenue	9,264			8,466			17,446			17,424
Maintenance revenue	10,005			9,826			19,773			19,388
Total revenues	27,549			27,180			52,553			52,561
Cost of revenues (excluding amortization and depreciation, shown below):
Cost of product revenue	2,293			1,888			4,036			3,638
Cost of services revenue	6,285			6,506			12,501			12,934
Cost of maintenance revenue	690			565			1,180			1,078
Total cost of revenues (excluding amortization and depreciation, shown below)	9,268			8,959			17,717			17,650
Operating expenses:
Selling and marketing	10,257			9,732			19,201			19,797
Research and development	5,244			6,154			10,409			12,626
General and administrative	4,629			3,958			9,184			8,220
Depreciation and amortization	1,596			1,867			3,237			3,841
Total operating expenses	21,726			21,711			42,031			44,484
Operating loss	(3,445		)	(3,490		)	(7,195		)	(9,573		)
Other income and expense:
Interest income	2			5			5			6
Interest expense	(2		)	(3		)	(5		)	(7		)
Gain on sale of domain name	—			630			—			630
Other income, net	10			5			18			25
Total other income and expense	10			637			18			654
Loss before income taxes	(3,435		)	(2,853		)	(7,177		)	(8,919		)
Income tax provision	96			82			167			160
Net loss	$	(3,531	)	$	(2,935	)	$	(7,344	)	$	(9,079	)
Net loss per share:
Basic	$	(0.13	)	$	(0.11	)	$	(0.27	)	$	(0.34	)
Diluted	$	(0.13	)	$	(0.11	)	$	(0.27	)	$	(0.34	)
Weighted average number of shares used in per share calculation:
Basic	27,999			26,789			27,143			26,599
Diluted	27,999			26,789			27,143			26,599

The accompanying notes are an integral part of these condensed consolidated financial statements.

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GUIDANCE SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Six Months Ended June 30,
	2015			2014
Operating Activities:
Net loss	$	(7,344	)	$	(9,079	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	3,237			3,841
Share-based compensation	3,395			3,581
Gain on sale of domain name	—			(630		)
Deferred taxes	46			46
Loss on disposal of assets	12			84
Changes in operating assets and liabilities:
Restricted cash	153			—
Trade receivables	2,941			4,452
Inventory	183			(123		)
Prepaid expenses and other assets	88			(1,220		)
Accounts payable	(2,341		)	(208		)
Accrued liabilities	2,102			(544		)
Deferred revenues	1,582			(849		)
Net cash provided by (used in) operating activities	4,054			(649		)
Investing Activities:
Purchase of property and equipment	(3,015		)	(1,296		)
Net cash used in investing activities	(3,015		)	(1,296		)
Financing Activities:
Proceeds from the exercise of stock options	1,677			908
Principal payments on capital lease obligations and other obligations	(42		)	(124		)
Net cash provided by financing activities	1,635			784
Net increase (decrease) in cash and cash equivalents	2,674			(1,161		)
Cash and cash equivalents, beginning of period	18,355			19,919
Cash and cash equivalents, end of period	$	21,029		$	18,758
Non-cash investing and financing activities:
Purchase of equipment included in accounts payable and accrued expenses	$	269		$	95

The accompanying notes are an integral part of these condensed consolidated financial statements

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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,” “our,” 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 to defend and secure their organization’s 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® 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® Analytics, a security intelligence product designed to derive insights from the data generated by endpoint activity.  EnCase Analytics leverages kernel-level access for endpoint data collection providing a repository of the most reliable data for insights into undetected risks and threats.  Through its interactive visual interface, EnCase Analytics exposes suspicious patterns, commonalities, and anomalies, to proactively identify threats and minimize damage;

EnCase® eDiscovery, which automates the search, collection, preservation and processing of electronically stored information for litigation and compliance purposes;

EnCase® eDiscovery Review, a cloud-based document review and production software-as-a-service (“SaaS”) for corporations and law firms;

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;

EnCase® Portable, a triage and collection solution, delivered on a USB device, that allows forensic professionals and non-experts to quickly and easily triage and collect digital evidence in a forensically sound and court proven manner;

EnCase® App Central, an online marketplace that allows development and investigation professionals the opportunity to share and discover the latest apps that complement the Company’s EnCase solutions; and

Tableau ™, a family of data acquisition forensic hardware products, including forensic duplicators, multiple write blockers and other hardware.

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.

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Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated balance sheets as of June 30, 2015 and the condensed consolidated statements of operations for the three and six months ended June 30, 2015 and 2014 and cash flows for the six months ended June 30, 2015 and 2014 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, 2014, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 24, 2015.

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, 2014 and include all normal and recurring adjustments necessary for the fair presentation of our financial position as of June 30, 2015, our results of operations for the three and six months ended June 30, 2015 and 2014 and our cash flows for the six months ended June 30, 2015 and 2014.  The condensed consolidated balance sheet as of December 31, 2014 has been derived from the December 31, 2014 audited financial statements.  The operating results for the three and six months period ended June 30, 2015 are not necessarily indicative of the results that will be achieved for the full fiscal year or for future periods.

The condensed consolidated financial statements include the accounts of Guidance and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Reclassification of Revenues and Expenses

We have reclassified certain revenues and expenses to conform to the current period’s presentation for all periods presented in our condensed consolidated statements of operations.  Services revenue now includes professional services, training, and subscription revenues.  Similarly, cost of services revenue includes cost of professional services revenue, cost of training revenue, and cost of subscription revenue.

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 disclosures.  On an ongoing basis, we evaluate these estimates, including those related to revenue recognition, share-based compensation, bad debts, income taxes, contingent consideration, commitments, impairment considerations, 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 and credit history, and taking into account current economic conditions.  In addition, we analyze our historical credit loss

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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.

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

We account for our goodwill and indefinite-lived intangible assets in accordance with Intangibles — Goodwill and Other (ASC 350).  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.  We performed a quantitative assessment for our goodwill and indefinite-lived assets as of October 1, 2014, and determined they were not impaired.

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, 2015, 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 $20.5 million as of June 30, 2015.  At June 30, 2015 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 our EnCase® Enterprise and EnCase® Forensic software products.  Our Enterprise products include perpetual licenses and are related to our EnCase® Enterprise, EnCase® Cybersecurity, and eDiscovery products.  Our Forensic products include revenues related to EnCase® Forensic, EnCase® Portable, and forensic hardware sales.  Revenue associated with the sale of software licenses and revenue associated with forensic hardware sales are referred to as product revenue.  Revenues are generated from training courses 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, as well as subscription revenues associated with cloud-based document review and production software-as-a-service, 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), Revenue Recognition - Software 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 revenue between product, subscription, services and maintenance revenues, as well as the amount of deferred revenue to be recognized in each accounting period.

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Revenue Recognition Criteria: In general, we recognize revenue when the following criteria have been met:

·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 persuasive evidence of an arrangement.

·Delivery: We deem delivery of products to have occurred when the title and risk of ownership have passed to the buyer. Services revenues are considered delivered as they are performed.

·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 with respect to transactions with extended payment terms, or as refund rights lapse with respect to transactions containing such provisions, 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 the customer will pay amounts under the arrangement as payments become due.

We report our revenues in three categories: product revenue, services revenue, and maintenance revenue. Product revenue includes revenues from software products and hardware products. Services revenue includes revenue from professional services, training, and subscription revenues. Maintenance revenue includes maintenance revenue associated with our hardware and software products. Accounting treatment for each category of revenue and our most significant contract structures is further described below.

Revenue Recognition for Software Products and Software-Related Services (Software Elements)

Software product revenue.  The timing of software product revenue recognition is dependent on the nature of the product sold or the structure of the license.

EnCase® Enterprise Solutions and EnCase® Forensic Solutions: Revenue associated with these arrangements, exclusive of amounts allocated to maintenance and other undelivered elements, for which we have vendor-specific objective evidence of fair value (“VSOE”), is recognized upon delivery, provided that all other criteria for revenue recognition have been met.  Revenue associated with term licenses are recognized ratably over the term of the license because we have not established VSOE for post-contract customer support in term license arrangements.

Services revenue. The majority of our consulting and implementation services are performed under per hour, or fixed fee arrangements.  Revenue from such services is recognized as the services are provided or upon expiration of the contractual service period.

Training revenue is 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, revenue is recognized ratably over the annual period.

Maintenance revenue. Maintenance revenue includes technical support and software updates on a when-and-if-available basis.  We recognize maintenance revenue ratably over the applicable maintenance period.  We determine the amount of maintenance revenue to be allocated 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.

Revenue Recognition for Multiple-Element Arrangements — Software Products and Software-Related Services (Software Arrangements)

We often enter into arrangements with customers that purchase both software products and software-related services from us at the same time, or within close proximity of one another (referred to as software-related multiple-element arrangements).  Such software-related multiple-element arrangements may include the sale of our software products, software maintenance services, which include license updates and product support, consulting/implementation services and training whereby the software license delivery is followed by the subsequent delivery of the other elements.  For those software-related multiple-element arrangements, we have applied the residual method to determine the amount of software license revenues to be recognized pursuant to ASC 985-605.  Under the residual method, if VSOE exists for the undelivered elements, this amount is deferred with the remaining, or residual, portion of the arrangement consideration recognized upon delivery of the software license, provided all other revenue recognition criteria are met.

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Revenue Recognition for Hardware and Subscription Revenues (Nonsoftware Elements)

Hardware product revenue. Revenue 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 services revenue.  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 revenue 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.

Revenue Recognition for Multiple-Element Arrangements — Hardware, Subscription, and Nonsoftware-Related Services (Nonsoftware Arrangements)

We enter into arrangements with customers that purchase both nonsoftware-related subscription services and nonsoftware-related services, such as consulting services, at the same time or within close proximity of one another (referred to as nonsoftware multiple-element arrangements).  Each element within a nonsoftware multiple-element arrangement is accounted for as a separate unit of accounting provided the following criteria are met: the delivered products or services have value to the customer on a standalone basis; and for an arrangement that includes a general right of return relative to the delivered products or services, delivery or performance of the undelivered product or service is considered probable and is substantially controlled by us.  We consider a deliverable to have standalone value if the product or service is sold separately by us or another vendor, or could be resold by the customer.  Further, our revenue arrangements generally do not include a general right of return relative to the delivered products. Where the aforementioned criteria for a separate unit of accounting are not met, the deliverable is combined with the undelivered element and treated as a single unit of accounting for the purposes of allocation of the arrangement consideration and revenue recognition.  For those units of accounting that include more than one deliverable but are treated as a single unit of accounting, we generally recognize revenues ratably over the delivery period.  For the purposes of revenue classification of the elements that are accounted for as a single unit of accounting, we allocate revenue to the respective revenue line items within our consolidated statements of operations based on a rational and consistent methodology utilizing our best estimate of relative selling prices of such elements.

For our nonsoftware multiple-element arrangements, we allocate revenue to each element based on a selling price hierarchy at the arrangement’s inception.  The selling price for each element is based upon the following selling price hierarchy: VSOE, if available; third party evidence (“TPE”) if VSOE is not available; or best estimate of selling price (“BESP”) if neither VSOE nor TPE are available.  A description as to how we determine VSOE, TPE and BESP is provided below:

· 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 cannot 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.

Revenue Recognition for Multiple-Element Arrangements — Arrangements with Software and Nonsoftware Elements

We also enter into multiple-element arrangements that may include a combination of our various software-related and nonsoftware-related products and services.  In such arrangements, we first allocate the total arrangement consideration based on the relative selling prices to the software group of elements as a whole and to the nonsoftware group of elements.  We then further allocate consideration allocated to the software group and nonsoftware group to the respective elements within that group following the guidance in ASC 985-605, ASC 605-25, and our policies described above.  After the arrangement consideration has been allocated to the elements, we recognize revenue for each respective element in the arrangement as described above.

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Recently Issued Accounting Pronouncements

In May 2014, the FASB and IASB jointly issued ASU No. 2014-09, Revenue from Contracts with Customers, which supercedes the revenue recognition requirements in ASC 605 Revenue Recognition.  ASU 2014-09 is a comprehensive new revenue recognition standard that will supercede nearly all existing revenue recognition guidance under US GAAP.  The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.  In doing so, companies will need to use more judgment and make more estimates than under current authoritative guidance.  These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.  The standard was originally effective beginning after December 15, 2016, and early adoption was not permitted under US GAAP.  However, on July 9, 2015, the FASB approved to defer the effective date of ASU 2014-09 by one year, beginning after December 15, 2017, with an option to adopt as of the original effective date, beginning after December 15, 2016.  We are currently evaluating the financial statement impact of the new standard.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about our ability to continue as a going concern, and if so, to provide related footnote disclosures. The standard is effective for annual and interim reporting periods ending after December 15, 2016.  We are currently evaluating this new standard and expect it to have no impact on our financial position and results of operations.

Realignment Expense

As a result of reducing headcount during the three and six months ended June 30, 2014, we incurred approximately $0.4 million and $1.6 million, respectively, in severance and related expenses in cost of services revenues, selling and marketing, research and development and general administrative expenses.

Note 3. Net Loss Per Share

Basic net loss per common share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the reporting period.  Diluted net 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 loss per share (in thousands, except per share amounts):

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Basic loss per common share:
Numerator:
Net loss	$	(3,531	)	$	(2,935	)	$	(7,344	)	$	(9,079	)
Net income allocated to participating securities	—			—			—			—
Net loss allocated to common stockholders	$	(3,531	)	$	(2,935	)	$	(7,344	)	$	(9,079	)
Denominator:
Basic weighted average shares outstanding	27,999			26,789			27,143			26,599
Net loss per basic common share	$	(0.13	)	$	(0.11	)	$	(0.27	)	$	(0.34	)
Diluted loss per common share:
Numerator:
Net loss	$	(3,531	)	$	(2,935	)	$	(7,344	)	$	(9,079	)
Net income allocated to participating securities	—			—			—			—
Net loss allocated to common stockholders	$	(3,531	)	$	(2,935	)	$	(7,344	)	$	(9,079	)
Denominator:
Basic weighted average shares outstanding	27,999			26,789			27,143			26,599
Effect of dilutive share-based awards	—			—			—			—
Diluted weighted average shares outstanding	27,999			26,789			27,143			26,599
Net loss per diluted common share	$	(0.13	)	$	(0.11	)	$	(0.27	)	$	(0.34	)

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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 1,969,000 and 1,934,000 shares for the three and six months ended June 30, 2015, respectively, and 2,062,000 and 1,838,000 shares for the three and six months ended June 30, 2014, respectively.

Note 4. 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, 2015 and December 31, 2014 (in thousands):

	June 30, 2015		December 31, 2014
Inventory:
Components	$	1,100	$	1,121
Finished goods	1,401		1,563
Total inventory	$	2,501	$	2,684

Note 5. Goodwill and Other Intangibles

We evaluate goodwill and indefinite-lived intangible assets for impairment on an annual basis, or more frequently if circumstances indicate impairment may have occurred, and there have been no impairment charges related to such assets through June 30, 2015.  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 and professional services segments will not be deductible for tax purposes.

Intangible assets are amortized on a straight-line basis over their estimated useful lives, with the exception of customer relationships, which are amortized on a double-declining basis.  Amortization expense for intangible assets with finite lives was $0.4 million and $0.9 million, and $0.5 million and $1.1 million for the three and six months ended June 30, 2015, and 2014, respectively. The following table summarizes cumulative amortization expense related to intangible assets subject to amortization as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015							December 31, 2014
	Gross Costs		Accumulated Amortization			Net		Gross Costs		Accumulated Amortization			Net
Core technology	$	5,800	$	(2,820	)	$	2,980	$	5,800	$	(2,430	)	$	3,370
Existing and developed technology	2,300		(2,300		)	—		2,300		(2,300		)	—
Customer relationships	6,475		(3,490		)	2,985		6,475		(3,143		)	3,332
Trade names	2,100		(1,227		)	873		2,100		(1,122		)	978
Covenant not-to-compete	200		(134		)	66		200		(114		)	86
Total	$	16,875	$	(9,971	)	$	6,904	$	16,875	$	(9,109	)	$	7,766

The following table summarizes the estimated remaining amortization expense through 2019 and thereafter (in thousands):

Year ending	Amortization Expense
2015	$	790
2016	1,499
2017	1,399
2018	1,392
2019	816
Thereafter	1,008
Total amortization expense	$	6,904

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Note 6. Debt Obligations

On August 29, 2014, we entered into a three year, Senior Secured Revolving Line of Credit (“Revolver”) with a bank.  The maximum principal amount that may be outstanding at any given time under the Revolver, which includes up to $3.0 million of standby letters of credit, is $10.0 million.  Any borrowings under the Revolver would be secured by substantially all of our assets, as well as pledges of capital stock.  The Revolver requires that, if we suffer an event of default or have borrowed more than 75% of the maximum principal amount permitted to be outstanding, we maintain an Adjusted Quick Ratio of at least 1.15 to 1.0.  If the Adjusted Quick Ratio falls below 1.5 to 1.0, any collections received by the bank on behalf of the Company will be applied to outstanding loan balances before being remitted to the Company’s operating account.  The Adjusted Quick Ratio is calculated by dividing Quick Assets (cash less restricted cash plus accounts receivable) by current liabilities (current liabilities plus outstanding standby letter of credit less the current portion of deferred revenue).  Borrowings under the Revolver bear interest at a floating rate ranging from 1.25% to 3.25% above the Prime Rate depending on the Company’s Adjusted Quick Ratio.  We are obligated to pay a commitment fee of $0.2 million over the three year term of the Revolver. All principal, interest and any other fees will be due and payable in full on or prior to August 29, 2017.

On February 25, 2015, we entered into an amendment (“Amendment”) to the Revolver.  The Amendment allows for advances (each, an “Equipment Advance”) from the bank to be used solely for eligible equipment purchases.  Eligible equipment includes (a) general purpose equipment, computer equipment, office equipment, furnishings, subject to certain limitations, (b) computer software and transferable software licenses, and (c) other equipment.  The maximum advance (“Equipment Line”) equals $2.2 million and an Equipment Advance must be paid over a period of thirty-six months after it has been issued.  The principal amount outstanding for each Equipment Advance shall accrue interest at an annual rate, based on the Adjusted Quick Ratio, ranging from 1.25% - 3.25% above the Prime Rate, and shall be paid monthly. Amount drawn on the Equipment Line reduces the available amount under the Revolver. To date we have not drawn on the Equipment Line.

As of June 30, 2015, we were in compliance with all the covenants of the Revolver.  We had letters of credit outstanding against the Revolver in the amount of $1.3 million, resulting in the maximum available borrowing under the Revolver to be $8.5 million.  Availability is calculated as 80% of eligible accounts receivable, with a maximum of $10.0 million.  To date we have not borrowed under the Revolver.

Note 7. Employee Benefit Plans

At June 30, 2015, approximately 3,691,000 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”), which includes an additional 3,000,000 shares that were approved for issuance at our annual shareholders meeting on May 13, 2015.

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 Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding, December 31, 2014	1,415,000		$	8.36	2.8	$	1,589,000
Granted	528,000		$	5.85
Exercised	(369,000	)	$	4.54
Forfeited or expired	(194,000	)	$	10.38
Outstanding, June 30, 2015	1,380,000		$	8.18	6.0	$	2,271,000
Exercisable, June 30, 2015	702,000		$	10.33	2.3	$	561,000

We define in-the-money options at June 30, 2015 as options that had exercise prices that were lower than the $8.47 fair market value of our common stock at that date.  The aggregate intrinsic value of options outstanding at June 30, 2015 is calculated as the difference between the exercise price of the underlying options and the fair market value of our common stock for the 854,000 shares that were in-the-money at that date, 176,000 of which were exercisable.

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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 Shares		Weighted Average Fair Value
Outstanding, December 31, 2014	2,059,000		$	8.60
Granted	841,000		6.00
Vested	(474,000	)	8.97
Forfeited	(192,000	)	8.66
Outstanding, June 30, 2015	2,234,000		$	7.54

The total grant date fair value of shares vested under such grants during the six months ended June 30, 2015 was $4,249,000.

Share-Based Compensation

We account for share-based compensation in accordance with Compensation-Stock Compensation (ASC 718).  Compensation expense for stock options is recognized using the Black-Scholes option pricing model to determine the grant date fair value of share-based payments and recognize that cost, net of an estimated forfeiture rate, as compensation expense on a straight-line basis over the vesting period. Stock awards generally vest 25% annually over a four-year service period.  The determination of the grant date fair value of share-based awards using that model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the estimated number of years that we expect employees to hold their stock options (the option “expected term”) and our expected stock price volatility, risk-free interest rates and dividends to be paid on our stock over that term.

The fair values of stock options granted under the Second Amended and Restated Plan were estimated at the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions:

	June 30, 2015
Risk-free interest rate	1.7		%
Dividend yield	—		%
Expected life (years)	5.85
Volatility	42.32		%
Weighted average grant date fair value	$	2.49

There were no stock options granted during the three and six months ended, June 30, 2014.

When historical data is available and relevant, the expected term of options granted is determined by calculating the average term from historical stock option exercise experience.  The volatility of our common stock is estimated at the date of grant based on the volatility of our publicly traded common stock over the expected term of the options granted.  The volatility is calculated based on the adjusted close price each day from a composite index. The risk-free interest rate used in option valuation is based on the implied yield in effect at the time of each option grant, based on US Treasury zero-coupon issues with equivalent expected terms. We use a dividend yield of zero in the Black-Scholes model, as we have no expectation we will pay any cash dividends on our common stock in the foreseeable future. Compensation-Stock Compensation (ASC 718) also requires that we estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. Quarterly changes in the estimated forfeiture rate can potentially have a significant effect on reported share-based compensation, as the cumulative effect of adjusting the forfeiture rate for all expense amortization after the grant date is recognized in the period the forfeiture estimate is changed.

The following table summarizes the share-based compensation expense we recorded (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Stock option awards	$	82	$	3	$	121	$	21
Restricted stock awards	1,647		1,848		3,274		3,560
Share-based compensation expense	$	1,729	$	1,851	$	3,395	$	3,581

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As of June 30, 2015, approximately $1.6 million of total unrecognized share-based compensation related to stock options is expected to be recognized over a weighted-average period of 3.8 years.  Approximately $14.2 million of total unrecognized share-based compensation cost related to restricted stock awards is expected to be recognized over a weighted-average period of 2.6 years.  For awards outstanding at June 30, 2015, we expect to record approximately $0.2 million and $3.5 million in share-based compensation for the remainder of the fiscal year ending in 2015 related to stock options and restricted stock awards, respectively.

Note 8. 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, 2015, we have recorded a valuation allowance against our net deferred tax assets resulting in a carrying value of zero.

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, 2015, our liability for uncertain tax positions was $1.0 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.  Due to the net operating loss carryforwards, the Company’s U.S. federal and state returns are generally open to examination by the Internal Revenue Service and state jurisdictions when such net operating losses are utilized.  Most foreign jurisdictions have statute of limitations that range from three to six years.

We recorded an income tax provision for the three and six months ended June 30, 2015 of $96,000 and $167,000 as compared to $82,000 and $160,000 for the same periods in 2014.  Our income tax provision for the three and six months ended June 30, 2015 and 2014 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 and development credits and deferred tax assets.

Note 9. 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.  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.  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, 2015 and December 31, 2014 (in thousands):

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	Fair Value Measurements at June 30, 2015
	Total		Level 1		Level 2		Level 3
Assets:
U.S. Treasury Securities	$	2,006	$	2,006	$	—	$	—
Money market accounts	4,285		4,285		—		—
Total assets	$	6,291	$	6,291	$	—	$	—
	Fair Value Measurements at December 31, 2014
	Total		Level 1		Level 2		Level 3
Assets:
U.S. Treasury Securities	$	2,006	$	2,006	$	—	$	—
Money market accounts	$	4,280	4,280		$	—	$	—
Total assets	$	6,286	$	6,286	$	—	$	—

Note 10. Commitments and Contingencies

Office Leases

On March 31, 2015, we amended our Office Lease Agreement (the “Pasadena Lease”) dated July 26, 2012 to expand our headquarters by approximately 3,600 rentable square feet.  The amendment commences on June 1, 2016 and the Pasadena Lease expires on May 31, 2024.  The expansion increases the base rent by a range of approximately $110,000 for the first year to approximately $140,000 for the final year.

On July 3, 2014, we entered into an Office Lease Agreement (the “San Francisco Lease”) to lease approximately 6,000 rentable square feet of an office building located in San Francisco, California.  The office building is the new location of our San Francisco office.  The San Francisco Lease commenced on December 1, 2014 and expires in December 31, 2019.  The total annual rent under the San Francisco Lease ranges from approximately $295,000 for the first year to approximately $332,000 for the final year.

Data Center Lease

Effective April 1, 2014, we entered into a Colocation Lease Agreement (the “Colocation Lease”) to rent space in a building located in Chandler, Arizona.  The Colocation Lease expires on June 30, 2018.  The Colocation Lease will serve as our new data center, replacing our former San Francisco location obtained in the Case Central acquisition.  Rent is based on power allocation and ranges from approximately $236,000 for the first year to approximately $265,000 for the final year.

Third-party Software Licenses

During the year ended December 31, 2014, the Company entered into a $1.5 million third-party software license agreement authorizing the Company to integrate software as a component of its products through March 2018.  The agreement also provides for maintenance and support over a three-year period, which may be renewed by the Company at the expiration of the three-year period ending March 2018.  The $1.5 million is payable in three annual installments of $492,000, with the final installment being paid in November 2016.  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 MyKey’s 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.

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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 alleged the Company had infringed related to MyKey’s data removal patent.  In August 2012, the parties completed a 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 Company’s importation into the United States and sale of the products at issue.  This Order effectively ended the ITC proceeding in the Company’s favor.

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, 2013, the Company filed its Answer and Counterclaim.  MyKey filed a petition to consolidate a number of related cases, including the case against the Company in the Central District of California, into a Multi-District Litigation (“MDL”) proceeding.  On August 16, 2013, the MDL panel approved the petition and assigned the MDL consolidated cases to the judge who is also presiding over the individual case against the Company.  The MDL case will dispose of certain issues common to the consolidated cases, such as the validity of patents being asserted against the joint defendants.  On May 23, 2014, the parties completed a Markman hearing related to claim construction of the patents at issue.

On March 26, 2014, MyKey also filed a complaint against the United States of America alleging that the United States had infringed U.S. Patents No. 6,813,682, 7,159,086 and 7,228,379 by or through its acceptance, receipt and/or use of write blocker products, data duplication products and data removal products.  The complaint alleges that such products were supplied to the government by the Company and certain of its co-defendants in the MDL proceeding.  No damages amount is stated in the complaint.  The government could assert a claim for indemnification against the Company but has not done so yet.  Although a financial loss is reasonably possible, the Company is unable to estimate the range of potential loss at this time.

On October 16, 2014, MyKey filed a Notice of Status on Claim Construction Issues in the MDL action in which it acknowledged that MyKey will not be able to prove that the Company’s data duplication products infringed U.S. Patent 7,159,086.  In the same filing, MyKey acknowledged that certain claims of United States Patent 6,813,682 are invalid and therefore cannot be infringed by any product. On July 8, 2015, the judge in the Central District Court of California denied the motions of the Company and other defendants for summary judgment on the validity of the patents remaining in the case.

We intend to defend the remaining MyKey matters 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 financial 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 their services in their role as a director or officer.

Note 11. 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:

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·Products segment—Includes EnCase® Enterprise, EnCase® Cybersecurity, EnCase® Analytics, EnCase® eDiscovery, EnCase® Forensic, EnCase® Portable, Premium License Support Program and hardware sales.

·Subscription segment—Includes subscription services for cloud-based document review and production software.

·Professional services segment—Performs consulting services and implementations.

·Training segment—Provides training classes by which we train our customers to effectively and efficiently use our software products.

·Maintenance segment—Includes maintenance related services.

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, 2015
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	8,280	$	1,552	$	5,333	$	2,379	$	10,005	$	27,549
Cost of revenues	2,293		928		3,914		1,443		690		9,268
Segment profit	$	5,987	$	624	$	1,419	$	936	$	9,315	18,281
Total operating expenses											21,726
Operating loss											$	(3,445	)
	Three Months Ended June 30, 2014
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	8,888	$	1,845	$	4,290	$	2,331	$	9,826	$	27,180
Cost of revenues	1,888		1,319		3,742		1,445		565		8,959
Segment profit	$	7,000	$	526	$	548	$	886	$	9,261	18,221
Total operating expenses											21,711
Operating loss											$	(3,490	)
	Six Months Ended June 30, 2015
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	15,334	$	3,105	$	9,793	$	4,548	$	19,773	$	52,553
Cost of revenues	4,036		1,950		7,690		2,861		1,180		17,717
Segment profit	$	11,298	$	1,155	$	2,103	$	1,687	$	18,593	34,836
Total operating expenses											42,031
Operating loss											$	(7,195	)
	Six Months Ended June 30, 2014
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	15,749	$	4,222	$	8,941	$	4,261	$	19,388	$	52,561
Cost of revenues	3,638		2,452		7,463		3,019		1,078		17,650
Segment profit	$	12,111	$	1,770	$	1,478	$	1,242	$	18,310	34,911
Total operating expenses											44,484
Operating loss											$	(9,573	)

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Revenues, classified by the major geographic areas in which we operate, are as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Revenues
United States	$	20,910	$	21,326	$	39,957	$	40,997
Europe	3,664		3,198		7,175		6,761
Asia	1,676		1,562		2,851		2,550
Other	1,299		1,094		2,570		2,253
	$	27,549	$	27,180	$	52,553	$	52,561

Item 2.  Management’s 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, 2014 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 revenue as a result of the release of our EnCase® Enterprise product in late 2002, which expanded our customer base into corporate enterprises and federal government agencies.  In addition, the releases of our EnCase® eDiscovery solution in late 2005 and EnCase® Information Assurance solution in late 2006 (which was replaced by our EnCase® Cybersecurity solution in 2009) have increased our revenues.  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 for corporations and law firms through our acquisition of CaseCentral, Inc. (“CaseCentral”).  In September 2013, we introduced EnCase® Analytics, a security intelligence solution that exposes threats that evade detection using insights from endpoint data.  We anticipate that sales of our EnCase Enterprise products and related services, in particular our EnCase eDiscovery and EnCase Cybersecurity solutions, and 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.

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·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 government’s 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 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 “Management’s 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, 2014 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates.

In May 2014, the FASB and IASB jointly issued ASU No. 2014-09 Revenue from Contracts with Customers, which supercedes the revenue recognition requirements in ASC 605 Revenue Recognition.  ASU 2014-09 is a comprehensive new revenue recognition standard that will supercede nearly all existing revenue recognition guidance under US GAAP.  The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.  In doing so, companies will need to use more judgment and make more estimates than under current authoritative guidance.  These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.  The standard was originally effective beginning after December 15, 2016, and early adoption was not permitted under US GAAP.  However, on July 9, 2015, the FASB approved to defer the effective date of ASU 2014-09 by one year, beginning after December 15, 2017, with an option to adopt as of the original effective date, beginning after December 15, 2016.  We are currently evaluating the financial statement impact of the new standard.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of' Uncertainties about an Entitv's Ability to Continue as a Going Concern. This standard sets forth management's responsibility to evaluate, each reporting period, whether there is substantial doubt about our ability to continue as a going concern, and if so, to provide related footnote disclosures.  The standard is effective for annual and interim reporting periods ending after December 15, 2016. We are currently evaluating this new standard and expect it to have no impact on our financial position and results of operations.

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Results of Operations

The following table sets forth our results of operations for the three and six months ended June 30, 2015 and 2014, respectively, expressed as a percentage of total revenues:

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Revenues:
Product revenue	30.1	%	32.7	%	29.2	%	30.0	%
Services revenue	33.6		31.1		33.2		33.1
Maintenance revenue	36.3		36.2		37.6		36.9
Total revenues	100.0		100.0		100.0		100.0
Cost of revenues:
Cost of product revenue	8.3		6.9		7.7		6.9
Cost of services revenue	22.8		24.0		23.8		24.6
Cost of maintenance revenue	2.5		2.1		2.2		2.1
Total cost of revenues	33.6		33.0		33.7		33.6
Gross profit	66.4		67.0		66.3		66.4
Operating expenses:
Selling and marketing	37.2		35.8		36.5		37.7
Research and development	19.0		22.6		19.8		24.0
General and administrative	16.9		14.5		17.5		15.6
Depreciation and amortization	5.8		6.9		6.2		7.3
Total operating expenses	78.9		79.8		80.0		84.6
Operating loss	(12.5	)%	(12.8	)%	(13.7	)%	(18.2	)%
Other income and expense:
Interest income	—		—		—		—
Interest expense	—		—		—		—
Gain on sale of domain name	—		2.3		—		1.2
Other income, net	—		—		—		—
Total other income and expense	—		2.3		—		1.2
Loss before income taxes	(12.5	)%	(10.5	)%	(13.7	)%	(17.0	)%
Income tax provision	0.3		0.3		0.3		0.3
Net loss	(12.8	)%	(10.8	)%	(14.0	)%	(17.3	)%

The following table sets forth share-based compensation expense recorded in each of the respective periods (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Non-cash Share Based Compensation Data (1):
Cost of product revenue	$	29	$	33	$	61	$	72
Cost of services revenue	281		354		568		688
Cost of maintenance revenue	40		37		82		72
Selling and marketing	406		519		761		912
Research and development	376		418		814		880
General and administrative	597		490		1,109		957
Total non-cash share based compensation	$	1,729	$	1,851	$	3,395	$	3,581

(1)Non-cash share-based compensation recorded in the three and six month periods ended June 30, 2015 and 2014 relates to stock options and restricted share awards granted to employees measured under the fair value method.  See Note 7 to the condensed consolidated financial statements.

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Comparison of Results of Operations for the Three and Six Months Ended June 30, 2015 and 2014

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.  We also 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 increasingly through resellers.  We sell our hardware products primarily through resellers.

	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2015		Change %	2014		2015		Change %	2014
Product revenue	$	8,280	(7)%	$	8,888	$	15,334	(3)%	$	15,749
Services revenue:
Professional services	5,333		24%	4,290		9,793		10%	8,941
Training	2,379		2%	2,331		4,548		7%	4,261
Subscription	1,552		(16)%	1,845		3,105		(26)%	4,222
Total services revenue	9,264		9%	8,466		17,446		—%	17,424
Maintenance revenue	10,005		2%	9,826		19,773		2%	19,388
Total revenues	$	27,549	1%	$	27,180	$	52,553	—%	$	52,561

Product Revenues

We generate product revenue principally from two product categories: Enterprise and Forensic products.  Our Enterprise products include perpetual licenses and are related to our EnCase® Enterprise, Cybersecurity, Analytics and eDiscovery products. Our Forensic products include revenues related to EnCase® Forensic, EnCase® Portable, and forensic appliance 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.

Product revenues decreased by $0.6 million, or 7%, from $8.9 million to $8.3 million, and decreased by $0.4 million, or 3%, from $15.7 million to $15.3 million for the three and six months ended June 30, 2015, respectively, as compared with the same periods in 2014.

The decrease in product revenues for the three months ended June 30, 2015 as compared to the same period in 2014 was primarily due to a $0.9 million decrease in Enterprise software revenue and a $0.4 million decrease in Forensic software revenue, partially offset by a $0.7 million increase in sales of our forensic appliances.  The decrease in product revenues for the six months ended June 30, 2015 as compared to the same period in 2014 was primarily due to a $0.8 million decrease in forensic software revenue and a $0.2 million decrease in Enterprise software revenue, partially offset by a $0.6 million increase in sales of our Forensic appliances.  Forensic software sales were down primarily due to the continued weakness in government spending; however, Forensic appliance sales increased due to new products released during June 2015.

During the three months ended June 30, 2015, we added 78 new EnCase® Enterprise customers, as compared to 141 for the comparable period in the prior year.  During the six months ended June 30, 2015, we added 198 new EnCase® Enterprise customers, as compared to 302 for the comparable period in the prior year.

Services Revenue

We generate services revenue from professional services, training and subscription services.  Professional services provides various consulting services to our clients, including e-discovery, network security incident response, civil/criminal digital investigation, implementation services, as well as a software advisory program.  Our training services educate students in computer forensics principles and the use of our EnCase software products and methodology.  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.  We generate subscription revenue principally from two types of customers: corporate or large enterprise customers who typically use our cloud-based software to host multiple legal cases on an ongoing basis, and law firm customers, who typically use our cloud-based software to host single cases.

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Services revenues increased $0.8 million, or 9%, from $8.5 million to $9.3 million, and remained essentially flat at $17.4 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. The increase for the three months ended June 30, 2015, is primarily related to a $1.0 million increase in our professional services revenue due to increased case work and incident response work, as well as increased professional services rates during the quarter, partially offset by $0.3 million decrease in our subscription revenue due to reductions in single-case law firm engagements as compared to the same periods in the prior year.  The increase in training revenues is related to an increase in passports and training classes sold to new Enterprise customers obtained since the change in our pricing strategy during the second quarter of 2014.

Maintenance Revenues

Maintenance revenues are generated from customers who purchase software maintenance services with each new product license for on-premise products.  Software maintenance includes software updates and upgrades, telephone and e-mail support, as well as self-service on our website.

Maintenance revenues increased by $0.2 million, or 2%, from $9.8 million to $10.0 million, and increased by $0.4 million, or 2%, from $19.4 million to $19.8 million for the three and six months ended June 30, 2015, respectively, as compared to the same periods in 2014.

The increase in maintenance revenues for both the three and six month periods ended June 30, 2015 as compared to the same periods in 2014 was primarily a result of sustained increases in our installed product base and customers desiring continuing maintenance support on our products.  Our installed product base increased during the six months ended June 30, 2015 primarily due to the addition of 198 new Encase Enterprise customers and sales of 48 new EnCase Cybersecurity, 16 new EnCase Analytics, and 37 new EnCase eDiscovery modules to EnCase Enterprise customers.

Cost of Revenues

	Three Months Ended June 30,							Six Months Ended June 30,
(Dollars in thousands)	2015			Change %	2014			2015			Change %	2014
Cost of product revenue	$	2,293		21%	$	1,888		$	4,036		11%	$	3,638
Cost of services revenue:
Cost of professional services	3,914			5%	3,742			7,690			3%	7,463
Cost of training	1,443			—%	1,445			2,861			(5)%	3,019
Cost of subscription	928			(30)%	1,319			1,950			(20)%	2,452
Total cost of services revenue	6,285			(3)%	6,506			12,501			(3)%	12,934
Cost of maintenance revenue	690			22%	565			1,180			9%	1,078
Total cost of revenues	9,268			3%	8,959			17,717			—%	17,650
Share-based compensation included above:
Cost of product revenue	$	29			$	33		$	61			$	72
Cost of services revenue	$	281			$	354		$	568			$	688
Cost of maintenance revenue	$	40			$	37		$	82			$	72
Gross Margin Percentage
Products	72.3		%		78.8		%	73.7		%		76.9		%
Services	32.2		%		23.2		%	28.3		%		25.8		%
Maintenance	93.1		%		94.2		%	94.0		%		94.4		%
Total	66.4		%		67.0		%	66.3		%		66.4		%

Cost of Product Revenue

Cost of product revenue 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.

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Cost of product revenue increased $0.4 million, or 21%, from $1.9 million to $2.3 million, and $0.4 million, or 11%, from $3.6 million to $4.0 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014.  The increase for the three and six months ended June 30, 2015 as compared to the same periods in 2014 was primarily due to a $0.5 million increase in certain appliance costs primarily related to increased sales of our new Forensic appliance products which launched in June 2015, offset by a $0.1 million reduction in various costs of goods sold.

Cost of Services Revenue

Cost of services revenue consists principally of employee compensation costs, including share-based compensation and related overhead, travel, facilities cost, software maintenance paid to third party vendors, and SaaS hosting infrastructure costs associated with professional services, training, and subscription services.  The cost of services revenue decreased $0.2 million, or 3%, from $6.5 million to $6.3 million, and $0.4 million, or 3%, from $12.9 million to $12.5 million, for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014.

The decrease in cost of services revenue for the three months ended June 30, 2015 was primarily due to a $0.4 million decrease, or 30%, from $1.3 million to $0.9 million in cost of subscription revenue, partially offset by an increase of $0.2 million, or 5%, from $3.7 million to $3.9 million in cost of professional services revenue.  Cost of training revenue remained essentially flat at $1.4 million for the three months ended June 30, 2015.

The decrease in cost of services revenue for the six months ended June 30, 2015 was primarily due to a $0.5 million decrease, or 20%, from $2.5 million to $2.0 million in cost of subscription revenue and a $0.2 million decrease, or 5%, from $3.0 million to $2.9 million in cost of training revenue, partially offset by an increase of $0.2 million, or 3%, from $7.5 million to $7.7 million in cost of professional services revenue.

The decrease in cost of subscription revenue is primarily related to a $0.2 million and a $0.4 million decrease in compensation and employee-related costs for the three and six months ended June 30, 2015, respectively, associated with a reduction in headcount in cost of subscription revenue that occurred in the latter half of 2014, as well as a $0.1 million decrease in rent expense for both the three and six months ended June 30, 2015 due to the relocation of our data center to a less expensive location in the second quarter of 2014.

The increase in the cost of professional services revenue is primarily related to a $0.2 million and a $0.3 million increase in compensation and employee related costs for the three and six months ended June 30, 2015, associated with increased case work and incident response work, partially offset by a $0.1 million decrease for the six months ended June 30, 2015 related to realignment expense recorded in second quarter of 2014 that did not reoccur in 2015.

The decrease in the cost of training revenue for the six months ended June 30, 2015 was primarily related to $0.1 million related to realignment expense recorded in second quarter of 2014 that did not reoccur in 2015.

Cost of Maintenance Revenue

Cost of maintenance revenue is primarily outsourced, but also includes employee compensation cost for customer technical support and related overhead costs.

Total cost of maintenance revenue increased $0.1 million, or 22%, from $0.6 million to $0.7 million, and increased $0.1 million, or 9%, from $1.1 million to $1.2 million for the three and six months ended June 30, 2015, respectively, as compared to the same periods in 2014.  The increase for the three and six months ended June 30, 2015 is primarily related to an increase in compensation and employee-related, as well as an increase in indirect allocated costs in line with the increase in maintenance revenue derived from our installed product base.

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Operating Expenses

	Three Months Ended							Six Months Ended
	June 30,							June 30,
(Dollars in thousands)	2015			Change %	2014			2015			Change %	2014
Selling and marketing expenses	$	10,257		5%	$	9,732		$	19,201		(3)%	$	19,797
Research and development expenses	$	5,244		(15)%	$	6,154		$	10,409		(18)%	$	12,626
General and administrative expenses	$	4,629		17%	$	3,958		$	9,184		12%	$	8,220
Depreciation and amortization expenses	$	1,596		(15)%	$	1,867		$	3,237		(16)%	$	3,841
Share-based compensation included above:
Selling and marketing expenses	$	406			$	519		$	761			$	912
Research and development expenses	$	376			$	418		$	814			$	880
General and administrative expenses	$	597			$	490		$	1,109			$	957
As a percentage of revenues:
Selling and marketing expenses	37.2		%		35.8		%	36.5		%		37.7		%
Research and development expenses	19.0		%		22.6		%	19.8		%		24.0		%
General and administrative expenses	16.8		%		14.6		%	17.5		%		15.6		%
Depreciation and amortization expenses	5.8		%		6.9		%	6.2		%		7.3		%

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 $0.5 million, or 5%, from $9.7 million to $10.3 million, and decreased $0.6 million, or 3%, from $19.8 million to $19.2 million for the three and six months ended June 30, 2015, respectively, as compared to the same periods in 2014.

The increase for the three months ended June 30, 2015 was primarily due to a $0.2 million increase in compensation and other employee-related costs due to a focused investment in our selling and marketing leadership and higher sales commission, as well as a $0.3 million increase in costs associated with our annual marketing event that occurred in May 2015.

The decrease for the six months ended June 30, 2015 was primarily due to $0.5 million of realignment expense that was recorded during the second quarter of the prior year that did not occur during 2015, a decrease of $0.1 million in regional tradeshows and a $0.1 million decrease in advertising, partially offset by a $0.4 million increase in costs associated with our annual marketing event that occurred in May 2015.

Research and Development Expenses

Research and development expenses consist primarily of compensation, including share-based compensation and related overhead expenses.

Research and development expenses decreased $0.9 million, or 15%, from $6.2 million to $5.2 million, and decreased $2.2 million, or 18%, from $12.6 million to $10.4 million for the three and six months ended June 30, 2015, respectively, as compared to the same periods in 2014.

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The decrease for the three and six months ended June 30, 2015 is primarily related to a $0.5 million and a $1.4 million decrease in compensation costs, respectively and other employee-related expenses primarily due to headcount reductions and a decrease of $0.4 million and $0.8 million, respectively related to realignment expense recorded in the second quarter of 2014 that did not reoccur in 2015.

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 increased $0.7 million, or 17%, from $4.0 million to $4.6 million, and increased $1.0 million, or 12%, from $8.2 million to $9.2 million for the three and six months ended June 30, 2015, respectively, as compared to the same periods in 2014.

The increase in general and administrative expenses for the three months ended June 30, 2015, was primarily attributable to a $0.5 million increase in compensation and employee-related costs due to the recruiting and hiring of our new CEO and higher compensation costs, a $0.3 million increase in legal fees associated with a patent infringement case, partially offset by a $0.2 million decrease in rent expense related to the move to a less expensive property in San Francisco and the elimination of a lease in New York.

The increase in general and administrative expenses for the six months ended June 30, 2015, was primarily attributable to a $0.9 million increase in compensation and employee-related costs due to the recruiting and hiring of our new CEO and higher compensation costs, a $0.3 million increase in legal fees associated with a patent infringement case, partially offset by a $0.1 million decrease in rent expense related to the move to a less expensive property in San Francisco and the elimination of a lease in New York, and a $0.1 million decrease related to realignment expense recorded in 2014.

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 decreased $0.3 million, or 15%, from $1.9 million to $1.6 million, and decreased $0.6 million, or 16%, from $3.8 million to $3.2 million for the three and six months ended June 30, 2015, respectively, as compared to the same periods in 2014.

The decrease in depreciation and amortization expenses was primarily due to a $0.2 million and a $0.3 million reduction in depreciation on fixed assets for the three and six months ended June 30, 2015, respectively, as compared to the same periods in 2014 due to certain assets being fully depreciated for the three and six months ended June 30, 2015, as compared to prior year, and a $0.1 million and a $0.3 million decrease in amortization for the three and six months ended June 30, 2015, respectively, as compared to the same periods in 2014, related to the review of the viability of certain acquired technology in the first quarter of 2014, resulting in the acceleration of the amortized life of some of our acquired technology.

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 and six months ended June 30, 2014, we recorded a gain on a barter transaction of $0.6 million, related to the sale of a domain name.  There was no gain on a barter transaction for the same periods in 2015.

Income Tax Provision

We recorded an income tax provision for the three and six months ended June 30, 2015 of $96,000 and $167,000, respectively, as compared to $82,000 and $160,000, respectively for the same periods in 2014.  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, 2015 and 2014 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 and 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, 2015, we had $21.0 million in cash and cash equivalents.  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 twelve months.

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Changes in Cash Flow

We generate cash from operating activities from cash collections related to the sale of our products and services. Net cash provided by operating activities was $4.1 million for the six months ended June 30, 2015 as compared to net cash used in operating activities of $0.6 million for the same period in 2014.  The change in cash provided by operating activities was primarily a result of the net loss of $7.3 million for the six months ended June 30, 2015 compared to the net loss of $9.1 million for the same period in 2014, a $2.1 million increase in accrued liabilities during the six months ended June 30, 2015 compared to a decrease of $0.5 million for the same period in 2014, a $1.6 million increase in deferred revenues during the six months ended June 30, 2015 compared to a decrease of $0.8 million for the same period in 2014, partially offset by a decrease in accounts payable of $2.3 million during the six months ended June 30, 2015 as compared to a decrease of $0.2 million for the same period in 2014, a decrease in trade receivable of $2.9 million during the six months ended June 30, 2015 as compared to a decrease of $4.5 million for the same period in 2014.

Net cash used in investing activities was $3.0 million for the six months ended June 30, 2015, as compared to $1.3 million for the same period in 2014.  The increase in cash used in investing activities was primarily due to the purchase of property and equipment related to new servers and technology equipment during the six months ended June 30, 2015, that did not occur during the same period in 2014.

Net cash provided by financing activities was $1.6 million for the six months ended June 30, 2015, as compared to net $0.8 million for the same period in 2014.  The change in financing activities was primarily due to an increase of $1.7 million in proceeds from the exercise of stock options for the six months ended June 30, 2015 compared to an increase of $0.9 million for the same period in 2014, and a decrease of $42,000 in principal payments made on capital leases and other obligations, as compared to a decrease of $124,000 in principal payments in the same period in 2014.

On August 29, 2014, we entered into a three year, Senior Secured Revolving Line of Credit (“Revolver”) with a bank.  The maximum principal amount that may be outstanding at any given time under the Revolver, which includes up to $3.0 million of standby letters of credit, is $10.0 million.  Any borrowings under the Revolver would be collateralized by substantially all of our assets, as well as pledges of capital stock.  The Revolver requires that, if we suffer an event of default or have borrowed more than 75% of the maximum principal amount permitted to be outstanding, we maintain an Adjusted Quick Ratio of at least 1.15 to 1.0.  If the Adjusted Quick Ratio falls below 1.5 to 1.0, any collections received by the bank on behalf of the Company will be applied to outstanding loan balances before being remitted to the Company’s operating account.  The Adjusted Quick Ratio is calculated by dividing Quick Assets (cash less restricted cash plus accounts receivable) by current liabilities (current liabilities plus outstanding standby letter of credit less the current portion of deferred revenue).  Borrowings under the Revolver bear interest at a floating rate ranging from 1.25% to 3.25% above the Prime Rate depending on the Company’s Adjusted Quick Ratio.  We are obligated to pay a commitment fee of $0.2 million over the three year term of the Revolver. All principal, interest and any other fees will be due and payable in full on or prior to August 29, 2017.

On February 25, 2015, we entered into an amendment (“Amendment”) to the Revolver.  The Amendment is for advances (each, an “Equipment Advance”) from the bank to be used solely for eligible equipment purchases.  Eligible equipment includes (a) general purpose equipment, computer equipment, office equipment, furnishings, subject to certain limitations; (b) computer software and transferable software licenses; and (c) other equipment.  The maximum advance (“Equipment Line”) is $2.2 million and each Equipment Advance must be paid thirty-six months after it has been issued.  The principal amount outstanding for each Equipment Advance shall accrue interest at an annual rate, based on the Adjusted Quick Ratio, ranging from 1.25% to 3.25% above the Prime Rate, and shall be paid monthly. Any amount drawn on the Equipment Line reduces the available amount under the Revolver. To date we have not drawn on the Equipment Line.

As of June 30, 2015, we were in compliance with all the covenants of the Revolver.  We had letters of credit outstanding against the Revolver in the amount of $1.3 million, resulting in the maximum available borrowing under the Revolver to be $8.5 million.  Availability is calculated as 80% of eligible accounts receivable, with a maximum of $10.0 million.  To date we have not borrowed under the Revolver.

27

Contractual Obligations and Commitments

On March 31, 2015, we amended our Office Lease Agreement (the “Pasadena Lease”) dated July 26, 2012 to expand our headquarters by approximately 3,600 rentable square feet.  The amendment commences on June 1, 2016 and the Pasadena Lease expires on May 31, 2024.  The expansion increases the base rent from a range of approximately $110,000 for the first year to approximately $140,000 for the final year.

On July 3, 2014, we entered into an Office Lease Agreement (the “San Francisco Lease”) to lease approximately 6,000 rentable square feet of an office building located in San Francisco, California.  The office building is the new location of our San Francisco office.  The San Francisco Lease commenced on December 1, 2014 and expires in December 31, 2019.  The total annual rent under the San Francisco Lease ranges from approximately $295,000 for the first year to approximately $332,000 for the final year.

Effective April 1, 2014, we entered into a Colocation Lease Agreement (the “Colocation Lease”) to rent space in a building located in Chandler, Arizona.  The Colocation Lease expires on June 30, 2018.  The Colocation Lease will serve as our new data center, replacing our former San Francisco location obtained in the Case Central acquisition.  Rent is based on power allocation and ranges from approximately $236,000 for the first year to approximately $265,000 for the final year.

During the year ended December 31, 2014, the Company entered into a $1.5 million third-party software license agreement authorizing the Company to integrate software as a component of its products through March 2018.  The agreement also provides for maintenance and support over a three-year period, which may be renewed by the Company at the expiration of the three-year period ending March 2018.  The $1.5 million is payable in three annual installments of $492,000, with the final installment being paid in November 2016.  The license, maintenance and remaining liability have been recorded on the accompanying Condensed Consolidated Balance Sheets.

Off-Balance Sheet Arrangements

At June 30, 2015, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the SEC’s 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, 2015, 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 SEC’s 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, 2015, our disclosure controls and procedures were effective.

28

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, 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

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 MyKey’s 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 alleged the Company had infringed related to MyKey’s data removal patent.  In August 2012, the parties completed a 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 Company’s importation into the United States and sale of the products at issue.  This Order effectively ended the ITC proceeding in the Company’s favor.

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, 2013, the Company filed its Answer and Counterclaim.  MyKey filed a petition to consolidate a number of related cases, including the case against the Company in the Central District of California, into a Multi-District Litigation (“MDL”) proceeding.  On August 16, 2013, the MDL panel approved the petition and assigned the MDL consolidated cases to the judge who is also presiding over the individual case against the Company.  The MDL case will dispose of certain issues common to the consolidated cases, such as the validity of patents being asserted against the joint defendants.  On May 23, 2014, the parties completed a Markman hearing related to claim construction of the patents at issue.

On March 26, 2014, MyKey also filed a complaint against the United States of America by alleging that the United States had infringed U.S. Patents No. 6,813,682, 7,159,086 and 7,228,379 by or through its acceptance, receipt and/or use of write blocker products, data duplication products and data removal products.  The complaint alleges that such products were supplied to the government by Guidance and certain of its co-defendants in the MDL proceeding.  No damages amount is stated in the complaint.  The government could assert a claim for indemnification against Guidance but has not done so yet.  Although a financial loss is reasonably possible, the Company is unable to estimate the range of potential loss at this time.

On October 16, 2014, MyKey filed a Notice of Status on Claim Construction Issues in the MDL action in which it acknowledged that MyKey will not be able to prove that the Company’s data duplication products infringed U.S. Patent 7,159,086.  In the same filing, MyKey acknowledged that certain claims of United States Patent 6,813,682 are invalid and therefore cannot be infringed by any product.  On July 8, 2015, the judge in the Central District Court of California denied the motions of the Company and other defendants for summary judgment on the validity of the patents remaining in the case.

We intend to defend the remaining MyKey matters 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 financial 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.

29

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.

Item 1A.Risk Factors

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, 2014, filed with the U.S. Securities and Exchange Commission on February 24, 2015.

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

There have been no material changes to the Unregistered Sales of Equity Securities and Use of Processed as presented in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the U.S. Securities and Exchange Commission on February 24, 2015.

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.

Item 5.Other Information

No information is required in response to this item.

Item 6.Exhibits

Exhibit Number	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.

30

SIGNATURE

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 and Operating Officer
	(Principal Financial Officer)

Dated: August 5, 2015

31

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Patrick Dennis, 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 registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting.

Date: August 5, 2015	/s/ Patrick Dennis
	Patrick Dennis
	President and Chief Executive Officer

EX-31.2

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 registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting.

Date: August 5, 2015	/s/ Barry J. Plaga
	Barry J. Plaga
	Chief Financial and Operating Officer

EX-32.1

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, 2015 (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 5, 2015	/s/ Patrick Dennis
	Patrick Dennis
	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.

EX-32.2

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, 2015 (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 5, 2015	/s/ Barry J. Plaga
	Barry J. Plaga
	Chief Financial and Operating 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.

XML

Segment Information (Details 2) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Segment Information
Revenues	$ 27,549	$ 27,180	$ 52,553	$ 52,561
United States
Segment Information
Revenues	20,910	21,326	39,957	40,997
Europe
Segment Information
Revenues	3,664	3,198	7,175	6,761
Asia
Segment Information
Revenues	1,676	1,562	2,851	2,550
Other
Segment Information
Revenues	$ 1,299	$ 1,094	$ 2,570	$ 2,253

XML

Employee Benefit Plans (Details) - USD ($)		3 Months Ended	6 Months Ended		12 Months Ended
	May. 13, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014	Dec. 31, 2014
Stock options
Equity Incentive Plan
Annual vesting percentage of shares granted under the Plan			25.00%
Vesting period			4 years
Maximum period for exercise of shares			10 years
Number of Options
Outstanding at the beginning of the period (in shares)			1,415,000
Exercised (in shares)			(369,000)
Forfeited or expired (in shares)			(194,000)
Outstanding at the end of the period (in shares)			1,380,000		1,415,000
Granted (in shares)		0	528,000	0
Exercisable at the end of the period (in shares)			702,000
Weighted Average Exercise Price
Outstanding at the beginning of the period (in dollars per share)			$ 8.36
Exercised (in dollars per share)			4.54
Forfeited or expired (in dollars per share)			10.38
Outstanding at the end of the period (in dollars per share)			8.18		$ 8.36
Granted (in dollars per share)			5.85
Exercisable at the end of the period (in dollars per share)			$ 10.33
Weighted Average Remaining Contractual Term
SharebasedCompensationArrangementBySharebasedPaymentAwardOptionsOutstandingWeightedAverageRemainingContractualTerm2			6 years		2 years 9 months 18 days
SharebasedCompensationArrangementBySharebasedPaymentAwardOptionsOutstandingWeightedAverageRemainingContractualTerm2			6 years		2 years 9 months 18 days
Exercisable at the end of the period			2 years 3 months 18 days
Aggregate Intrinsic Value
Outstanding at the beginning of the period			$ 1,589,000
Outstanding at the end of the period			2,271,000		$ 1,589,000
Exercisable at the end of the period			$ 561,000
Additional disclosures
Fair market value of common stock used to define in-the-money options (in dollars per share)			$ 8.47
Number of in-the-money options used to calculate the aggregate intrinsic value of options (in shares)			854,000
Number of in-the-money options exercisable (in shares)			176,000
Options expected to vest
Weighted Average Remaining Contractual Term			3 years 9 months 18 days
Restricted stock awards
Equity Incentive Plan
Annual vesting percentage of shares granted under the Plan			25.00%
Vesting period			4 years
Number of Shares
Outstanding at the beginning of the period (in shares)			2,059,000
Granted (in shares)			841,000
Vested and issued (in shares)			(474,000)
Forfeited (in shares)			(192,000)
Outstanding at the end of the period (in shares)			2,234,000		2,059,000
Weighted Average Fair Value
Outstanding at the beginning of the period (in dollars per share)			$ 8.60
Granted (in dollars per share)			6.00
Vested (in dollars per share)			8.97
Forfeited (in dollars per share)			8.66
Outstanding at the end of the period (in dollars per share)			$ 7.54		$ 8.60
Total grant date fair value of shares vested			$ 4,249,000
Plan
Equity Incentive Plan
Number of shares available for grant			3,691,000
Number of additional shares approved for issuance	3,000,000

XML

Summary of Significant Accounting Policies (Details 3) - Cash and cash equivalents - Concentration of credit risk	Jun. 30, 2015 USD ($)
Concentrations of Credit Risk
Uninsured cash balances	$ 20,500,000
Maximum
Concentrations of Credit Risk
Cash balances insured by the Federal Deposit Insurance Corporation	$ 250,000

XML

Commitments and Contingencies (Details)	6 Months Ended	12 Months Ended
	Jun. 30, 2015 USD ($)	Dec. 31, 2014 USD ($) item	Mar. 31, 2015 USD ($) ft²	Jul. 03, 2014 USD ($) ft²	Apr. 01, 2014 USD ($)	May. 20, 2011 item
Minimum
Contractual Obligations, Commitments and Contingencies
Annual rent			$ 110,000
Maximum
Contractual Obligations, Commitments and Contingencies
Annual rent			$ 140,000
Software license agreement
Contractual Obligations, Commitments and Contingencies
Number of Annual installments | item		3
Payment to be made over the license term		$ 1,500,000
Quarterly installments		$ 492,000
Maintenance and support agreement
Contractual Obligations, Commitments and Contingencies
Agreement term		3 years
Office Lease Agreement
Contractual Obligations, Commitments and Contingencies
Rentable area of office (in square feet) | ft²			3,600	6,000
Office Lease Agreement | Minimum
Contractual Obligations, Commitments and Contingencies
Annual rent				$ 295,000
Office Lease Agreement | Maximum
Contractual Obligations, Commitments and Contingencies
Annual rent				$ 332,000
Colocation Lease Agreement | Minimum
Contractual Obligations, Commitments and Contingencies
Annual rent					$ 236,000
Colocation Lease Agreement | Maximum
Contractual Obligations, Commitments and Contingencies
Annual rent					$ 265,000
Patent infringement complaint
Contractual Obligations, Commitments and Contingencies
Number of patents for which infringement is alleged | item						3
Damages amount stated in the Complaint	$ 0

XML

Inventory

6 Months Ended

Jun. 30, 2015

Inventory

Inventory

Note 4. 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, 2015 and December 31, 2014 (in thousands):

	June 30, 2015		December 31, 2014
Inventory:
Components	$	1,100	$	1,121
Finished goods	1,401		1,563
Total inventory	$	2,501	$	2,684

XML

Goodwill and Other Intangibles (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Goodwill and Other Intangibles
Amortization expense	$ 400,000	$ 500,000	$ 900,000	$ 1,100,000
Goodwill and indefinite-lived intangible assets
Impairment charges related to goodwill and indefinite-lived intangible assets			$ 0

XML

Inventory (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Inventory
Components	$ 1,100	$ 1,121
Finished goods	1,401	1,563
Total inventory	$ 2,501	$ 2,684

XML

Goodwill and Other Intangibles (Details 2) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Goodwill and Other Intangibles
Gross Costs	$ 16,875	$ 16,875
Accumulated Amortization	(9,971)	(9,109)
Total amortization Expense	6,904	7,766
Core technology
Goodwill and Other Intangibles
Gross Costs	5,800	5,800
Accumulated Amortization	(2,820)	(2,430)
Total amortization Expense	2,980	3,370
Existing and developed technology
Goodwill and Other Intangibles
Gross Costs	2,300	2,300
Accumulated Amortization	(2,300)	(2,300)
Customer relationships
Goodwill and Other Intangibles
Gross Costs	6,475	6,475
Accumulated Amortization	(3,490)	(3,143)
Total amortization Expense	2,985	3,332
Trade names
Goodwill and Other Intangibles
Gross Costs	2,100	2,100
Accumulated Amortization	(1,227)	(1,122)
Total amortization Expense	873	978
Covenant not-to-compete
Goodwill and Other Intangibles
Gross Costs	200	200
Accumulated Amortization	(134)	(114)
Total amortization Expense	$ 66	$ 86

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Goodwill and Other Intangibles (Details 3) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Estimated remaining amortization expense
2015	$ 790
2016	1,499
2017	1,399
2018	1,392
2019	816
Thereafter	1,008
Total amortization Expense	$ 6,904	$ 7,766

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Net Loss Per Share

6 Months Ended

Jun. 30, 2015

Net Loss Per Share

Net Loss Per Share

Note 3. Net Loss Per Share

Basic net loss per common share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the reporting period.  Diluted net 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 loss per share (in thousands, except per share amounts):

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Basic loss per common share:
Numerator:
Net loss	$	(3,531	)	$	(2,935	)	$	(7,344	)	$	(9,079	)
Net income allocated to participating securities	—			—			—			—
Net loss allocated to common stockholders	$	(3,531	)	$	(2,935	)	$	(7,344	)	$	(9,079	)
Denominator:
Basic weighted average shares outstanding	27,999			26,789			27,143			26,599
Net loss per basic common share	$	(0.13	)	$	(0.11	)	$	(0.27	)	$	(0.34	)
Diluted loss per common share:
Numerator:
Net loss	$	(3,531	)	$	(2,935	)	$	(7,344	)	$	(9,079	)
Net income allocated to participating securities	—			—			—			—
Net loss allocated to common stockholders	$	(3,531	)	$	(2,935	)	$	(7,344	)	$	(9,079	)
Denominator:
Basic weighted average shares outstanding	27,999			26,789			27,143			26,599
Effect of dilutive share-based awards	—			—			—			—
Diluted weighted average shares outstanding	27,999			26,789			27,143			26,599
Net loss per diluted common share	$	(0.13	)	$	(0.11	)	$	(0.27	)	$	(0.34	)

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 1,969,000 and 1,934,000 shares for the three and six months ended June 30, 2015, respectively, and 2,062,000 and 1,838,000 shares for the three and six months ended June 30, 2014, respectively.

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Debt Obligations (Details) $ in Millions			6 Months Ended
	Feb. 25, 2015 USD ($)	Aug. 29, 2014 USD ($)	Jun. 30, 2015 USD ($)
Loan Agreement | Minimum
Debt Obligations
Adjusted Quick Ratio below which collections will be applied to outstanding loan	1.25
Loan Agreement | Maximum
Debt Obligations
Adjusted Quick Ratio below which collections will be applied to outstanding loan	3.25
Loans
Debt Obligations
Maximum borrowing capacity		$ 3.0
Revolver
Debt Obligations
Term		3 years
Maximum borrowing capacity		$ 10.0
Letter of credit outstanding			$ 1.3
Maximum principal amount permitted to be outstanding that has been borrowed (as a percent)		75.00%
Commitment fee			$ 0.2
Percentage of eligible accounts receivable for calculation of availability of borrowings			80.00%
Maximum value for calculation of accounts receivable available borrowing capacity			$ 10.0
Remaining borrowing capacity			$ 8.5
Revolver | Minimum
Debt Obligations
Basis spread on variable rate (as a percent)			1.25%
Adjusted Quick Ratio below which collections will be applied to outstanding loan		1.5
Required Adjusted Quick Ratio		1.15
Revolver | Maximum
Debt Obligations
Basis spread on variable rate (as a percent)			3.25%
Equipment Line
Debt Obligations
Term	36 months
Maximum borrowing capacity	$ 2.2

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CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Current assets:
Cash and cash equivalents	$ 21,029	$ 18,355
Restricted cash		153
Trade receivables, net of allowance for doubtful accounts of $541 and $634,	17,314	20,255
Inventory	2,501	2,684
Prepaid expenses and other current assets	5,099	5,054
Total current assets	45,943	46,501
Long-term assets:
Property and equipment, net	15,215	14,558
Intangible assets, net	6,904	7,766
Goodwill	14,632	14,632
Other assets	2,236	2,370
Total long-term assets	38,987	39,326
Total assets	84,930	85,827
Current liabilities:
Accounts payable	3,548	5,919
Accrued liabilities	10,826	8,407
Capital lease obligations	73	67
Deferred revenues	39,079	39,128
Total current liabilities	53,526	53,521
Long-term liabilities:
Deferred rent	7,344	7,661
Other long-term liabilities	655	645
Deferred revenues	7,863	6,232
Deferred tax liabilities	630	584
Total long-term liabilities	$ 16,492	$ 15,122
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, $0.001 par value: 10,000,000 shares authorized; no shares issued or outstanding
Common stock, $0.001 par value; 100,000,000 shares authorized; 32,174,000 and 31,155,000 shares issued, respectively; and 30,394,000 and 29,376,000 shares outstanding, respectively	$ 26	$ 25
Additional paid-in capital	115,336	110,265
Treasury stock, at cost, 1,779,000 and 1,779,000 shares, respectively	(11,479)	(11,479)
Accumulated deficit	(88,971)	(81,627)
Total stockholders' equity	14,912	17,184
Total liabilities and stockholders' equity	$ 84,930	$ 85,827

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Description of the Business

6 Months Ended

Jun. 30, 2015

Description of the Business

Description of the Business

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,” “our,” 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 to defend and secure their organization’s 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® 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® Analytics, a security intelligence product designed to derive insights from the data generated by endpoint activity.  EnCase Analytics leverages kernel-level access for endpoint data collection providing a repository of the most reliable data for insights into undetected risks and threats.  Through its interactive visual interface, EnCase Analytics exposes suspicious patterns, commonalities, and anomalies, to proactively identify threats and minimize damage;

EnCase® eDiscovery, which automates the search, collection, preservation and processing of electronically stored information for litigation and compliance purposes;

EnCase® eDiscovery Review, a cloud-based document review and production software-as-a-service (“SaaS”) for corporations and law firms;

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;

EnCase® Portable, a triage and collection solution, delivered on a USB device, that allows forensic professionals and non-experts to quickly and easily triage and collect digital evidence in a forensically sound and court proven manner;

EnCase® App Central, an online marketplace that allows development and investigation professionals the opportunity to share and discover the latest apps that complement the Company’s EnCase solutions; and

Tableau ™, a family of data acquisition forensic hardware products, including forensic duplicators, multiple write blockers and other hardware.

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.

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Income Taxes (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Income Taxes
Carrying value of net deferred tax assets	$ 0		$ 0
Liability for uncertain tax positions	1,000,000		$ 1,000,000
Lower range of statute of limitations of foreign jurisdictions			3 years
Higher range of statute of limitations of foreign jurisdictions			6 years
Income tax provision	$ 96,000	$ 82,000	$ 167,000	$ 160,000
U.S. statutory tax rate (as a percent)			34.00%

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Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2015

Fair Value Measurements

Schedule of financial assets and liabilities accounted for at fair value on a recurring basis

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, 2015 and December 31, 2014 (in thousands):

	Fair Value Measurements at June 30, 2015
	Total		Level 1		Level 2		Level 3
Assets:
U.S. Treasury Securities	$	2,006	$	2,006	$	—	$	—
Money market accounts	4,285		4,285		—		—
Total assets	$	6,291	$	6,291	$	—	$	—

	Fair Value Measurements at December 31, 2014
	Total		Level 1		Level 2		Level 3
Assets:
U.S. Treasury Securities	$	2,006	$	2,006	$	—	$	—
Money market accounts	$	4,280	4,280		$	—	$	—
Total assets	$	6,286	$	6,286	$	—	$	—

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Fair Value Measurements (Details). - Recurring - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Total
Assets:
Total assets	$ 6,291	$ 6,286
Total | U.S. Treasury Securities
Assets:
Total assets	2,006	2,006
Total | Money market accounts
Assets:
Total assets	4,285	4,280
Level 1
Assets:
Total assets	6,291	6,286
Level 1 | U.S. Treasury Securities
Assets:
Total assets	2,006	2,006
Level 1 | Money market accounts
Assets:
Total assets	$ 4,285	$ 4,280

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Summary of Significant Accounting Policies (Details)	6 Months Ended
	Jun. 30, 2015
Trade Receivables
Minimum number of days after which receivables are considered past due	30 days

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2015

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, 2015 and the condensed consolidated statements of operations for the three and six months ended June 30, 2015 and 2014 and cash flows for the six months ended June 30, 2015 and 2014 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, 2014, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 24, 2015.

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, 2014 and include all normal and recurring adjustments necessary for the fair presentation of our financial position as of June 30, 2015, our results of operations for the three and six months ended June 30, 2015 and 2014 and our cash flows for the six months ended June 30, 2015 and 2014.  The condensed consolidated balance sheet as of December 31, 2014 has been derived from the December 31, 2014 audited financial statements.  The operating results for the three and six months period ended June 30, 2015 are not necessarily indicative of the results that will be achieved for the full fiscal year or for future periods.

The condensed consolidated financial statements include the accounts of Guidance and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Reclassification of Revenues and Expenses

We have reclassified certain revenues and expenses to conform to the current period’s presentation for all periods presented in our condensed consolidated statements of operations.  Services revenue now includes professional services, training, and subscription revenues.  Similarly, cost of services revenue includes cost of professional services revenue, cost of training revenue, and cost of subscription revenue.

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 disclosures.  On an ongoing basis, we evaluate these estimates, including those related to revenue recognition, share-based compensation, bad debts, income taxes, contingent consideration, commitments, impairment considerations, 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 and credit history, and taking into account 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.

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

We account for our goodwill and indefinite-lived intangible assets in accordance with Intangibles — Goodwill and Other (ASC 350).  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.  We performed a quantitative assessment for our goodwill and indefinite-lived assets as of October 1, 2014, and determined they were not impaired.

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, 2015, 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 $20.5 million as of June 30, 2015.  At June 30, 2015 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 our EnCase® Enterprise and EnCase® Forensic software products.  Our Enterprise products include perpetual licenses and are related to our EnCase® Enterprise, EnCase® Cybersecurity, and eDiscovery products.  Our Forensic products include revenues related to EnCase® Forensic, EnCase® Portable, and forensic hardware sales.  Revenue associated with the sale of software licenses and revenue associated with forensic hardware sales are referred to as product revenue.  Revenues are generated from training courses 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, as well as subscription revenues associated with cloud-based document review and production software-as-a-service, 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), Revenue Recognition - Software 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 revenue between product, subscription, services and maintenance revenues, as well as the amount of deferred revenue to be recognized in each accounting period.

Revenue Recognition Criteria: In general, we recognize revenue when the following criteria have been met:

· 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 persuasive evidence of an arrangement.

· Delivery: We deem delivery of products to have occurred when the title and risk of ownership have passed to the buyer. Services revenues are considered delivered as they are performed.

· 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 with respect to transactions with extended payment terms, or as refund rights lapse with respect to transactions containing such provisions, 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 the customer will pay amounts under the arrangement as payments become due.

We report our revenues in three categories: product revenue, services revenue, and maintenance revenue. Product revenue includes revenues from software products and hardware products. Services revenue includes revenue from professional services, training, and subscription revenues. Maintenance revenue includes maintenance revenue associated with our hardware and software products. Accounting treatment for each category of revenue and our most significant contract structures is further described below.

Revenue Recognition for Software Products and Software-Related Services (Software Elements)

Software product revenue.  The timing of software product revenue recognition is dependent on the nature of the product sold or the structure of the license.

EnCase® Enterprise Solutions and EnCase® Forensic Solutions: Revenue associated with these arrangements, exclusive of amounts allocated to maintenance and other undelivered elements, for which we have vendor-specific objective evidence of fair value (“VSOE”), is recognized upon delivery, provided that all other criteria for revenue recognition have been met.  Revenue associated with term licenses are recognized ratably over the term of the license because we have not established VSOE for post-contract customer support in term license arrangements.

Services revenue. The majority of our consulting and implementation services are performed under per hour, or fixed fee arrangements.  Revenue from such services is recognized as the services are provided or upon expiration of the contractual service period.

Training revenue is 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, revenue is recognized ratably over the annual period.

Maintenance revenue. Maintenance revenue includes technical support and software updates on a when-and-if-available basis.  We recognize maintenance revenue ratably over the applicable maintenance period.  We determine the amount of maintenance revenue to be allocated 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.

Revenue Recognition for Multiple-Element Arrangements — Software Products and Software-Related Services (Software Arrangements)

We often enter into arrangements with customers that purchase both software products and software-related services from us at the same time, or within close proximity of one another (referred to as software-related multiple-element arrangements).  Such software-related multiple-element arrangements may include the sale of our software products, software maintenance services, which include license updates and product support, consulting/implementation services and training whereby the software license delivery is followed by the subsequent delivery of the other elements.  For those software-related multiple-element arrangements, we have applied the residual method to determine the amount of software license revenues to be recognized pursuant to ASC 985-605.  Under the residual method, if VSOE exists for the undelivered elements, this amount is deferred with the remaining, or residual, portion of the arrangement consideration recognized upon delivery of the software license, provided all other revenue recognition criteria are met.

Revenue Recognition for Hardware and Subscription Revenues (Nonsoftware Elements)

Hardware product revenue. Revenue 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 services revenue.  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 revenue 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.

Revenue Recognition for Multiple-Element Arrangements — Hardware, Subscription, and Nonsoftware-Related Services (Nonsoftware Arrangements)

We enter into arrangements with customers that purchase both nonsoftware-related subscription services and nonsoftware-related services, such as consulting services, at the same time or within close proximity of one another (referred to as nonsoftware multiple-element arrangements).  Each element within a nonsoftware multiple-element arrangement is accounted for as a separate unit of accounting provided the following criteria are met: the delivered products or services have value to the customer on a standalone basis; and for an arrangement that includes a general right of return relative to the delivered products or services, delivery or performance of the undelivered product or service is considered probable and is substantially controlled by us.  We consider a deliverable to have standalone value if the product or service is sold separately by us or another vendor, or could be resold by the customer.  Further, our revenue arrangements generally do not include a general right of return relative to the delivered products. Where the aforementioned criteria for a separate unit of accounting are not met, the deliverable is combined with the undelivered element and treated as a single unit of accounting for the purposes of allocation of the arrangement consideration and revenue recognition.  For those units of accounting that include more than one deliverable but are treated as a single unit of accounting, we generally recognize revenues ratably over the delivery period.  For the purposes of revenue classification of the elements that are accounted for as a single unit of accounting, we allocate revenue to the respective revenue line items within our consolidated statements of operations based on a rational and consistent methodology utilizing our best estimate of relative selling prices of such elements.

For our nonsoftware multiple-element arrangements, we allocate revenue to each element based on a selling price hierarchy at the arrangement’s inception.  The selling price for each element is based upon the following selling price hierarchy: VSOE, if available; third party evidence (“TPE”) if VSOE is not available; or best estimate of selling price (“BESP”) if neither VSOE nor TPE are available.  A description as to how we determine VSOE, TPE and BESP is provided below:

· 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 cannot 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.

Revenue Recognition for Multiple-Element Arrangements — Arrangements with Software and Nonsoftware Elements

We also enter into multiple-element arrangements that may include a combination of our various software-related and nonsoftware-related products and services.  In such arrangements, we first allocate the total arrangement consideration based on the relative selling prices to the software group of elements as a whole and to the nonsoftware group of elements.  We then further allocate consideration allocated to the software group and nonsoftware group to the respective elements within that group following the guidance in ASC 985-605, ASC 605-25, and our policies described above.  After the arrangement consideration has been allocated to the elements, we recognize revenue for each respective element in the arrangement as described above.

Recently Issued Accounting Pronouncements

In May 2014, the FASB and IASB jointly issued ASU No. 2014-09, Revenue from Contracts with Customers, which supercedes the revenue recognition requirements in ASC 605 Revenue Recognition.  ASU 2014-09 is a comprehensive new revenue recognition standard that will supercede nearly all existing revenue recognition guidance under US GAAP.  The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.  In doing so, companies will need to use more judgment and make more estimates than under current authoritative guidance.  These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.  The standard was originally effective beginning after December 15, 2016, and early adoption was not permitted under US GAAP.  However, on July 9, 2015, the FASB approved to defer the effective date of ASU 2014-09 by one year, beginning after December 15, 2017, with an option to adopt as of the original effective date, beginning after December 15, 2016.  We are currently evaluating the financial statement impact of the new standard.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about our ability to continue as a going concern, and if so, to provide related footnote disclosures. The standard is effective for annual and interim reporting periods ending after December 15, 2016.  We are currently evaluating this new standard and expect it to have no impact on our financial position and results of operations.

Realignment Expense

As a result of reducing headcount during the three and six months ended June 30, 2014, we incurred approximately $0.4 million and $1.6 million, respectively, in severance and related expenses in cost of services revenues, selling and marketing, research and development and general administrative expenses.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
CONSOLIDATED BALANCE SHEETS
Trade receivables, allowance for doubtful accounts (in dollars)	$ 541	$ 634
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	32,174,000	31,155,000
Common stock, shares outstanding	30,394,000	29,376,000
Treasury stock, shares	1,779,000	1,779,000

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2015

Summary of Significant Accounting Policies

Basis of Presentation

Basis of Presentation

The accompanying condensed consolidated balance sheets as of June 30, 2015 and the condensed consolidated statements of operations for the three and six months ended June 30, 2015 and 2014 and cash flows for the six months ended June 30, 2015 and 2014 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, 2014, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 24, 2015.

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, 2014 and include all normal and recurring adjustments necessary for the fair presentation of our financial position as of June 30, 2015, our results of operations for the three and six months ended June 30, 2015 and 2014 and our cash flows for the six months ended June 30, 2015 and 2014.  The condensed consolidated balance sheet as of December 31, 2014 has been derived from the December 31, 2014 audited financial statements.  The operating results for the three and six months period ended June 30, 2015 are not necessarily indicative of the results that will be achieved for the full fiscal year or for future periods.

The condensed consolidated financial statements include the accounts of Guidance and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Reclassification of Revenues and Expenses

Reclassification of Revenues and Expenses

We have reclassified certain revenues and expenses to conform to the current period’s presentation for all periods presented in our condensed consolidated statements of operations.  Services revenue now includes professional services, training, and subscription revenues.  Similarly, cost of services revenue includes cost of professional services revenue, cost of training revenue, and cost of subscription revenue.

Use of Estimates and Assumptions

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 disclosures.  On an ongoing basis, we evaluate these estimates, including those related to revenue recognition, share-based compensation, bad debts, income taxes, contingent consideration, commitments, impairment considerations, 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

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

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

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 and credit history, and taking into account 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

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.

Amortization of Intangible Assets with Finite Lives

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 and Indefinite-Lived Intangibles

We account for our goodwill and indefinite-lived intangible assets in accordance with Intangibles — Goodwill and Other (ASC 350).  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.  We performed a quantitative assessment for our goodwill and indefinite-lived assets as of October 1, 2014, and determined they were not impaired.

Concentrations of Credit Risk

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, 2015, 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 $20.5 million as of June 30, 2015.  At June 30, 2015 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

Revenue Recognition

We generate revenues principally from the sale of our EnCase® Enterprise and EnCase® Forensic software products.  Our Enterprise products include perpetual licenses and are related to our EnCase® Enterprise, EnCase® Cybersecurity, and eDiscovery products.  Our Forensic products include revenues related to EnCase® Forensic, EnCase® Portable, and forensic hardware sales.  Revenue associated with the sale of software licenses and revenue associated with forensic hardware sales are referred to as product revenue.  Revenues are generated from training courses 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, as well as subscription revenues associated with cloud-based document review and production software-as-a-service, 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), Revenue Recognition - Software 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 revenue between product, subscription, services and maintenance revenues, as well as the amount of deferred revenue to be recognized in each accounting period.

Revenue Recognition Criteria: In general, we recognize revenue when the following criteria have been met:

· 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 persuasive evidence of an arrangement.

· Delivery: We deem delivery of products to have occurred when the title and risk of ownership have passed to the buyer. Services revenues are considered delivered as they are performed.

· 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 with respect to transactions with extended payment terms, or as refund rights lapse with respect to transactions containing such provisions, 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 the customer will pay amounts under the arrangement as payments become due.

We report our revenues in three categories: product revenue, services revenue, and maintenance revenue. Product revenue includes revenues from software products and hardware products. Services revenue includes revenue from professional services, training, and subscription revenues. Maintenance revenue includes maintenance revenue associated with our hardware and software products. Accounting treatment for each category of revenue and our most significant contract structures is further described below.

Revenue Recognition for Software Products and Software-Related Services (Software Elements)

Software product revenue.  The timing of software product revenue recognition is dependent on the nature of the product sold or the structure of the license.

EnCase® Enterprise Solutions and EnCase® Forensic Solutions: Revenue associated with these arrangements, exclusive of amounts allocated to maintenance and other undelivered elements, for which we have vendor-specific objective evidence of fair value (“VSOE”), is recognized upon delivery, provided that all other criteria for revenue recognition have been met.  Revenue associated with term licenses are recognized ratably over the term of the license because we have not established VSOE for post-contract customer support in term license arrangements.

Services revenue. The majority of our consulting and implementation services are performed under per hour, or fixed fee arrangements.  Revenue from such services is recognized as the services are provided or upon expiration of the contractual service period.

Training revenue is 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, revenue is recognized ratably over the annual period.

Maintenance revenue. Maintenance revenue includes technical support and software updates on a when-and-if-available basis.  We recognize maintenance revenue ratably over the applicable maintenance period.  We determine the amount of maintenance revenue to be allocated 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.

Revenue Recognition for Multiple-Element Arrangements — Software Products and Software-Related Services (Software Arrangements)

We often enter into arrangements with customers that purchase both software products and software-related services from us at the same time, or within close proximity of one another (referred to as software-related multiple-element arrangements).  Such software-related multiple-element arrangements may include the sale of our software products, software maintenance services, which include license updates and product support, consulting/implementation services and training whereby the software license delivery is followed by the subsequent delivery of the other elements.  For those software-related multiple-element arrangements, we have applied the residual method to determine the amount of software license revenues to be recognized pursuant to ASC 985-605.  Under the residual method, if VSOE exists for the undelivered elements, this amount is deferred with the remaining, or residual, portion of the arrangement consideration recognized upon delivery of the software license, provided all other revenue recognition criteria are met.

Revenue Recognition for Hardware and Subscription Revenues (Nonsoftware Elements)

Hardware product revenue. Revenue 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 services revenue.  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 revenue 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.

Revenue Recognition for Multiple-Element Arrangements — Hardware, Subscription, and Nonsoftware-Related Services (Nonsoftware Arrangements)

We enter into arrangements with customers that purchase both nonsoftware-related subscription services and nonsoftware-related services, such as consulting services, at the same time or within close proximity of one another (referred to as nonsoftware multiple-element arrangements).  Each element within a nonsoftware multiple-element arrangement is accounted for as a separate unit of accounting provided the following criteria are met: the delivered products or services have value to the customer on a standalone basis; and for an arrangement that includes a general right of return relative to the delivered products or services, delivery or performance of the undelivered product or service is considered probable and is substantially controlled by us.  We consider a deliverable to have standalone value if the product or service is sold separately by us or another vendor, or could be resold by the customer.  Further, our revenue arrangements generally do not include a general right of return relative to the delivered products. Where the aforementioned criteria for a separate unit of accounting are not met, the deliverable is combined with the undelivered element and treated as a single unit of accounting for the purposes of allocation of the arrangement consideration and revenue recognition.  For those units of accounting that include more than one deliverable but are treated as a single unit of accounting, we generally recognize revenues ratably over the delivery period.  For the purposes of revenue classification of the elements that are accounted for as a single unit of accounting, we allocate revenue to the respective revenue line items within our consolidated statements of operations based on a rational and consistent methodology utilizing our best estimate of relative selling prices of such elements.

For our nonsoftware multiple-element arrangements, we allocate revenue to each element based on a selling price hierarchy at the arrangement’s inception.  The selling price for each element is based upon the following selling price hierarchy: VSOE, if available; third party evidence (“TPE”) if VSOE is not available; or best estimate of selling price (“BESP”) if neither VSOE nor TPE are available.  A description as to how we determine VSOE, TPE and BESP is provided below:

· 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 cannot 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.

Revenue Recognition for Multiple-Element Arrangements — Arrangements with Software and Nonsoftware Elements

We also enter into multiple-element arrangements that may include a combination of our various software-related and nonsoftware-related products and services.  In such arrangements, we first allocate the total arrangement consideration based on the relative selling prices to the software group of elements as a whole and to the nonsoftware group of elements.  We then further allocate consideration allocated to the software group and nonsoftware group to the respective elements within that group following the guidance in ASC 985-605, ASC 605-25, and our policies described above.  After the arrangement consideration has been allocated to the elements, we recognize revenue for each respective element in the arrangement as described above.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

In May 2014, the FASB and IASB jointly issued ASU No. 2014-09, Revenue from Contracts with Customers, which supercedes the revenue recognition requirements in ASC 605 Revenue Recognition.  ASU 2014-09 is a comprehensive new revenue recognition standard that will supercede nearly all existing revenue recognition guidance under US GAAP.  The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.  In doing so, companies will need to use more judgment and make more estimates than under current authoritative guidance.  These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.  The standard was originally effective beginning after December 15, 2016, and early adoption was not permitted under US GAAP.  However, on July 9, 2015, the FASB approved to defer the effective date of ASU 2014-09 by one year, beginning after December 15, 2017, with an option to adopt as of the original effective date, beginning after December 15, 2016.  We are currently evaluating the financial statement impact of the new standard.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about our ability to continue as a going concern, and if so, to provide related footnote disclosures. The standard is effective for annual and interim reporting periods ending after December 15, 2016.  We are currently evaluating this new standard and expect it to have no impact on our financial position and results of operations.

Realignment Expense

Realignment Expense

As a result of reducing headcount during the three and six months ended June 30, 2014, we incurred approximately $0.4 million and $1.6 million, respectively, in severance and related expenses in cost of services revenues, selling and marketing, research and development and general administrative expenses.

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Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2015	Jul. 31, 2015
Document and Entity Information
Entity Registrant Name	Guidance Software, Inc.
Entity Central Index Key	0001375557
Document Type	10-Q
Document Period End Date	Jun. 30, 2015
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		30,341,000
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q2

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Net Loss Per Share (Tables)

6 Months Ended

Jun. 30, 2015

Net Loss Per Share

Schedule of computation of basic and diluted net loss per share

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Basic loss per common share:
Numerator:
Net loss	$	(3,531	)	$	(2,935	)	$	(7,344	)	$	(9,079	)
Net income allocated to participating securities	—			—			—			—
Net loss allocated to common stockholders	$	(3,531	)	$	(2,935	)	$	(7,344	)	$	(9,079	)
Denominator:
Basic weighted average shares outstanding	27,999			26,789			27,143			26,599
Net loss per basic common share	$	(0.13	)	$	(0.11	)	$	(0.27	)	$	(0.34	)
Diluted loss per common share:
Numerator:
Net loss	$	(3,531	)	$	(2,935	)	$	(7,344	)	$	(9,079	)
Net income allocated to participating securities	—			—			—			—
Net loss allocated to common stockholders	$	(3,531	)	$	(2,935	)	$	(7,344	)	$	(9,079	)
Denominator:
Basic weighted average shares outstanding	27,999			26,789			27,143			26,599
Effect of dilutive share-based awards	—			—			—			—
Diluted weighted average shares outstanding	27,999			26,789			27,143			26,599
Net loss per diluted common share	$	(0.13	)	$	(0.11	)	$	(0.27	)	$	(0.34	)

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) shares in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Revenues:
Product revenue	$ 8,280,000	$ 8,888,000	$ 15,334,000	$ 15,749,000
Services revenue	9,264,000	8,466,000	17,446,000	17,424,000
Maintenance revenue	10,005,000	9,826,000	19,773,000	19,388,000
Total revenues	27,549,000	27,180,000	52,553,000	52,561,000
Cost of revenues (excluding amortization and depreciation, shown below):
Cost of product revenue	2,293,000	1,888,000	4,036,000	3,638,000
Cost of services revenue	6,285,000	6,506,000	12,501,000	12,934,000
Cost of maintenance revenue	690,000	565,000	1,180,000	1,078,000
Total cost of revenues (excluding amortization and depreciation, shown below)	9,268,000	8,959,000	17,717,000	17,650,000
Operating expenses:
Selling and marketing	10,257,000	9,732,000	19,201,000	19,797,000
Research and development	5,244,000	6,154,000	10,409,000	12,626,000
General and administrative	4,629,000	3,958,000	9,184,000	8,220,000
Depreciation and amortization	1,596,000	1,867,000	3,237,000	3,841,000
Total operating expenses	21,726,000	21,711,000	42,031,000	44,484,000
Operating loss	(3,445,000)	(3,490,000)	(7,195,000)	(9,573,000)
Other income and expense:
Interest income	2,000	5,000	5,000	6,000
Interest expense	(2,000)	(3,000)	(5,000)	(7,000)
Gain on sale of domain name		630,000		630,000
Other income, net	10,000	5,000	18,000	25,000
Total other income and expense	10,000	637,000	18,000	654,000
Loss before income taxes	(3,435,000)	(2,853,000)	(7,177,000)	(8,919,000)
Income tax provision	96,000	82,000	167,000	160,000
Net loss	$ (3,531,000)	$ (2,935,000)	$ (7,344,000)	$ (9,079,000)
Net loss per share calculation:
Net loss per common share - basic (in dollars per share)	$ (0.13)	$ (0.11)	$ (0.27)	$ (0.34)
Net loss per common share - diluted (in dollars per share)	$ (0.13)	$ (0.11)	$ (0.27)	$ (0.34)
Weighted average number of shares used in per share calculation:
Shares used in the calculation of net loss per common share- basic	27,999	26,789	27,143	26,599
Diluted weighted average shares outstanding	27,999	26,789	27,143	26,599

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Employee Benefit Plans

6 Months Ended

Jun. 30, 2015

Employee Benefit Plans

Employee Benefit Plans

Note 7. Employee Benefit Plans

At June 30, 2015, approximately 3,691,000 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”), which includes an additional 3,000,000 shares that were approved for issuance at our annual shareholders meeting on May 13, 2015.

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 Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding, December 31, 2014	1,415,000		$	8.36	2.8	$	1,589,000
Granted	528,000		$	5.85
Exercised	(369,000	)	$	4.54
Forfeited or expired	(194,000	)	$	10.38
Outstanding, June 30, 2015	1,380,000		$	8.18	6.0	$	2,271,000
Exercisable, June 30, 2015	702,000		$	10.33	2.3	$	561,000

We define in-the-money options at June 30, 2015 as options that had exercise prices that were lower than the $8.47 fair market value of our common stock at that date.  The aggregate intrinsic value of options outstanding at June 30, 2015 is calculated as the difference between the exercise price of the underlying options and the fair market value of our common stock for the 854,000 shares that were in-the-money at that date, 176,000 of which 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 Shares		Weighted Average Fair Value
Outstanding, December 31, 2014	2,059,000		$	8.60
Granted	841,000		6.00
Vested	(474,000	)	8.97
Forfeited	(192,000	)	8.66
Outstanding, June 30, 2015	2,234,000		$	7.54

The total grant date fair value of shares vested under such grants during the six months ended June 30, 2015 was $4,249,000.

Share-Based Compensation

We account for share-based compensation in accordance with Compensation-Stock Compensation (ASC 718).  Compensation expense for stock options is recognized using the Black-Scholes option pricing model to determine the grant date fair value of share-based payments and recognize that cost, net of an estimated forfeiture rate, as compensation expense on a straight-line basis over the vesting period. Stock awards generally vest 25% annually over a four-year service period.  The determination of the grant date fair value of share-based awards using that model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the estimated number of years that we expect employees to hold their stock options (the option “expected term”) and our expected stock price volatility, risk-free interest rates and dividends to be paid on our stock over that term.

The fair values of stock options granted under the Second Amended and Restated Plan were estimated at the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions:

	June 30, 2015
Risk-free interest rate	1.7		%
Dividend yield	—		%
Expected life (years)	5.85
Volatility	42.32		%
Weighted average grant date fair value	$	2.49

There were no stock options granted during the three and six months ended, June 30, 2014.

When historical data is available and relevant, the expected term of options granted is determined by calculating the average term from historical stock option exercise experience.  The volatility of our common stock is estimated at the date of grant based on the volatility of our publicly traded common stock over the expected term of the options granted.  The volatility is calculated based on the adjusted close price each day from a composite index. The risk-free interest rate used in option valuation is based on the implied yield in effect at the time of each option grant, based on US Treasury zero-coupon issues with equivalent expected terms. We use a dividend yield of zero in the Black-Scholes model, as we have no expectation we will pay any cash dividends on our common stock in the foreseeable future. Compensation-Stock Compensation (ASC 718) also requires that we estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. Quarterly changes in the estimated forfeiture rate can potentially have a significant effect on reported share-based compensation, as the cumulative effect of adjusting the forfeiture rate for all expense amortization after the grant date is recognized in the period the forfeiture estimate is changed.

The following table summarizes the share-based compensation expense we recorded (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Stock option awards	$	82	$	3	$	121	$	21
Restricted stock awards	1,647		1,848		3,274		3,560
Share-based compensation expense	$	1,729	$	1,851	$	3,395	$	3,581

As of June 30, 2015, approximately $1.6 million of total unrecognized share-based compensation related to stock options is expected to be recognized over a weighted-average period of 3.8 years.  Approximately $14.2 million of total unrecognized share-based compensation cost related to restricted stock awards is expected to be recognized over a weighted-average period of 2.6 years.  For awards outstanding at June 30, 2015, we expect to record approximately $0.2 million and $3.5 million in share-based compensation for the remainder of the fiscal year ending in 2015 related to stock options and restricted stock awards, respectively.

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Debt Obligations

6 Months Ended

Jun. 30, 2015

Debt Obligations

Debt Obligations

Note 6. Debt Obligations

On August 29, 2014, we entered into a three year, Senior Secured Revolving Line of Credit (“Revolver”) with a bank.  The maximum principal amount that may be outstanding at any given time under the Revolver, which includes up to $3.0 million of standby letters of credit, is $10.0 million.  Any borrowings under the Revolver would be secured by substantially all of our assets, as well as pledges of capital stock.  The Revolver requires that, if we suffer an event of default or have borrowed more than 75% of the maximum principal amount permitted to be outstanding, we maintain an Adjusted Quick Ratio of at least 1.15 to 1.0.  If the Adjusted Quick Ratio falls below 1.5 to 1.0, any collections received by the bank on behalf of the Company will be applied to outstanding loan balances before being remitted to the Company’s operating account.  The Adjusted Quick Ratio is calculated by dividing Quick Assets (cash less restricted cash plus accounts receivable) by current liabilities (current liabilities plus outstanding standby letter of credit less the current portion of deferred revenue).  Borrowings under the Revolver bear interest at a floating rate ranging from 1.25% to 3.25% above the Prime Rate depending on the Company’s Adjusted Quick Ratio.  We are obligated to pay a commitment fee of $0.2 million over the three year term of the Revolver. All principal, interest and any other fees will be due and payable in full on or prior to August 29, 2017.

On February 25, 2015, we entered into an amendment (“Amendment”) to the Revolver.  The Amendment allows for advances (each, an “Equipment Advance”) from the bank to be used solely for eligible equipment purchases.  Eligible equipment includes (a) general purpose equipment, computer equipment, office equipment, furnishings, subject to certain limitations, (b) computer software and transferable software licenses, and (c) other equipment.  The maximum advance (“Equipment Line”) equals $2.2 million and an Equipment Advance must be paid over a period of thirty-six months after it has been issued.  The principal amount outstanding for each Equipment Advance shall accrue interest at an annual rate, based on the Adjusted Quick Ratio, ranging from 1.25% - 3.25% above the Prime Rate, and shall be paid monthly. Amount drawn on the Equipment Line reduces the available amount under the Revolver. To date we have not drawn on the Equipment Line.

As of June 30, 2015, we were in compliance with all the covenants of the Revolver.  We had letters of credit outstanding against the Revolver in the amount of $1.3 million, resulting in the maximum available borrowing under the Revolver to be $8.5 million.  Availability is calculated as 80% of eligible accounts receivable, with a maximum of $10.0 million.  To date we have not borrowed under the Revolver.

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Segment Information (Tables)

6 Months Ended

Jun. 30, 2015

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):

	Three Months Ended June 30, 2015
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	8,280	$	1,552	$	5,333	$	2,379	$	10,005	$	27,549
Cost of revenues	2,293		928		3,914		1,443		690		9,268
Segment profit	$	5,987	$	624	$	1,419	$	936	$	9,315	18,281
Total operating expenses											21,726
Operating loss											$	(3,445	)

	Three Months Ended June 30, 2014
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	8,888	$	1,845	$	4,290	$	2,331	$	9,826	$	27,180
Cost of revenues	1,888		1,319		3,742		1,445		565		8,959
Segment profit	$	7,000	$	526	$	548	$	886	$	9,261	18,221
Total operating expenses											21,711
Operating loss											$	(3,490	)

	Six Months Ended June 30, 2015
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	15,334	$	3,105	$	9,793	$	4,548	$	19,773	$	52,553
Cost of revenues	4,036		1,950		7,690		2,861		1,180		17,717
Segment profit	$	11,298	$	1,155	$	2,103	$	1,687	$	18,593	34,836
Total operating expenses											42,031
Operating loss											$	(7,195	)

	Six Months Ended June 30, 2014
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	15,749	$	4,222	$	8,941	$	4,261	$	19,388	$	52,561
Cost of revenues	3,638		2,452		7,463		3,019		1,078		17,650
Segment profit	$	12,111	$	1,770	$	1,478	$	1,242	$	18,310	34,911
Total operating expenses											44,484
Operating loss											$	(9,573	)

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):

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Revenues
United States	$	20,910	$	21,326	$	39,957	$	40,997
Europe	3,664		3,198		7,175		6,761
Asia	1,676		1,562		2,851		2,550
Other	1,299		1,094		2,570		2,253
	$	27,549	$	27,180	$	52,553	$	52,561

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Inventory (Tables)

6 Months Ended

Jun. 30, 2015

Inventory

Schedule of inventory by major classes

The following table sets forth, by major classes, inventory as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015		December 31, 2014
Inventory:
Components	$	1,100	$	1,121
Finished goods	1,401		1,563
Total inventory	$	2,501	$	2,684

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2015

Commitments and Contingencies

Commitments and Contingencies

Note 10. Commitments and Contingencies

Office Leases

On March 31, 2015, we amended our Office Lease Agreement (the “Pasadena Lease”) dated July 26, 2012 to expand our headquarters by approximately 3,600 rentable square feet.  The amendment commences on June 1, 2016 and the Pasadena Lease expires on May 31, 2024.  The expansion increases the base rent by a range of approximately $110,000 for the first year to approximately $140,000 for the final year.

On July 3, 2014, we entered into an Office Lease Agreement (the “San Francisco Lease”) to lease approximately 6,000 rentable square feet of an office building located in San Francisco, California.  The office building is the new location of our San Francisco office.  The San Francisco Lease commenced on December 1, 2014 and expires in December 31, 2019.  The total annual rent under the San Francisco Lease ranges from approximately $295,000 for the first year to approximately $332,000 for the final year.

Data Center Lease

Effective April 1, 2014, we entered into a Colocation Lease Agreement (the “Colocation Lease”) to rent space in a building located in Chandler, Arizona.  The Colocation Lease expires on June 30, 2018.  The Colocation Lease will serve as our new data center, replacing our former San Francisco location obtained in the Case Central acquisition.  Rent is based on power allocation and ranges from approximately $236,000 for the first year to approximately $265,000 for the final year.

Third-party Software Licenses

During the year ended December 31, 2014, the Company entered into a $1.5 million third-party software license agreement authorizing the Company to integrate software as a component of its products through March 2018.  The agreement also provides for maintenance and support over a three-year period, which may be renewed by the Company at the expiration of the three-year period ending March 2018.  The $1.5 million is payable in three annual installments of $492,000, with the final installment being paid in November 2016.  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 MyKey’s 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 alleged the Company had infringed related to MyKey’s data removal patent.  In August 2012, the parties completed a 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 Company’s importation into the United States and sale of the products at issue.  This Order effectively ended the ITC proceeding in the Company’s favor.

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, 2013, the Company filed its Answer and Counterclaim.  MyKey filed a petition to consolidate a number of related cases, including the case against the Company in the Central District of California, into a Multi-District Litigation (“MDL”) proceeding.  On August 16, 2013, the MDL panel approved the petition and assigned the MDL consolidated cases to the judge who is also presiding over the individual case against the Company.  The MDL case will dispose of certain issues common to the consolidated cases, such as the validity of patents being asserted against the joint defendants.  On May 23, 2014, the parties completed a Markman hearing related to claim construction of the patents at issue.

On March 26, 2014, MyKey also filed a complaint against the United States of America alleging that the United States had infringed U.S. Patents No. 6,813,682, 7,159,086 and 7,228,379 by or through its acceptance, receipt and/or use of write blocker products, data duplication products and data removal products.  The complaint alleges that such products were supplied to the government by the Company and certain of its co-defendants in the MDL proceeding.  No damages amount is stated in the complaint.  The government could assert a claim for indemnification against the Company but has not done so yet.  Although a financial loss is reasonably possible, the Company is unable to estimate the range of potential loss at this time.

On October 16, 2014, MyKey filed a Notice of Status on Claim Construction Issues in the MDL action in which it acknowledged that MyKey will not be able to prove that the Company’s data duplication products infringed U.S. Patent 7,159,086.  In the same filing, MyKey acknowledged that certain claims of United States Patent 6,813,682 are invalid and therefore cannot be infringed by any product. On July 8, 2015, the judge in the Central District Court of California denied the motions of the Company and other defendants for summary judgment on the validity of the patents remaining in the case.

We intend to defend the remaining MyKey matters 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 financial 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 their services in their role as a director or officer.

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Income Taxes

6 Months Ended

Jun. 30, 2015

Income Taxes

Income Taxes

Note 8. 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, 2015, we have recorded a valuation allowance against our net deferred tax assets resulting in a carrying value of zero.

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, 2015, our liability for uncertain tax positions was $1.0 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.  Due to the net operating loss carryforwards, the Company’s U.S. federal and state returns are generally open to examination by the Internal Revenue Service and state jurisdictions when such net operating losses are utilized.  Most foreign jurisdictions have statute of limitations that range from three to six years.

We recorded an income tax provision for the three and six months ended June 30, 2015 of $96,000 and $167,000 as compared to $82,000 and $160,000 for the same periods in 2014.  Our income tax provision for the three and six months ended June 30, 2015 and 2014 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 and development credits and deferred tax assets.

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Fair Value Measurements

6 Months Ended

Jun. 30, 2015

Fair Value Measurements

Fair Value Measurements

Note 9. 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.  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.  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, 2015 and December 31, 2014 (in thousands):

	Fair Value Measurements at June 30, 2015
	Total		Level 1		Level 2		Level 3
Assets:
U.S. Treasury Securities	$	2,006	$	2,006	$	—	$	—
Money market accounts	4,285		4,285		—		—
Total assets	$	6,291	$	6,291	$	—	$	—

	Fair Value Measurements at December 31, 2014
	Total		Level 1		Level 2		Level 3
Assets:
U.S. Treasury Securities	$	2,006	$	2,006	$	—	$	—
Money market accounts	$	4,280	4,280		$	—	$	—
Total assets	$	6,286	$	6,286	$	—	$	—

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Segment Information

6 Months Ended

Jun. 30, 2015

Segment Information

Segment Information

Note 11. 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 segment—Includes EnCase® Enterprise, EnCase® Cybersecurity, EnCase® Analytics, EnCase® eDiscovery, EnCase® Forensic, EnCase® Portable, Premium License Support Program and hardware sales.

· Subscription segment—Includes subscription services for cloud-based document review and production software.

· Professional services segment—Performs consulting services and implementations.

· Training segment—Provides training classes by which we train our customers to effectively and efficiently use our software products.

· Maintenance segment—Includes maintenance related services.

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, 2015
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	8,280	$	1,552	$	5,333	$	2,379	$	10,005	$	27,549
Cost of revenues	2,293		928		3,914		1,443		690		9,268
Segment profit	$	5,987	$	624	$	1,419	$	936	$	9,315	18,281
Total operating expenses											21,726
Operating loss											$	(3,445	)

	Three Months Ended June 30, 2014
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	8,888	$	1,845	$	4,290	$	2,331	$	9,826	$	27,180
Cost of revenues	1,888		1,319		3,742		1,445		565		8,959
Segment profit	$	7,000	$	526	$	548	$	886	$	9,261	18,221
Total operating expenses											21,711
Operating loss											$	(3,490	)

	Six Months Ended June 30, 2015
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	15,334	$	3,105	$	9,793	$	4,548	$	19,773	$	52,553
Cost of revenues	4,036		1,950		7,690		2,861		1,180		17,717
Segment profit	$	11,298	$	1,155	$	2,103	$	1,687	$	18,593	34,836
Total operating expenses											42,031
Operating loss											$	(7,195	)

	Six Months Ended June 30, 2014
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	15,749	$	4,222	$	8,941	$	4,261	$	19,388	$	52,561
Cost of revenues	3,638		2,452		7,463		3,019		1,078		17,650
Segment profit	$	12,111	$	1,770	$	1,478	$	1,242	$	18,310	34,911
Total operating expenses											44,484
Operating loss											$	(9,573	)

Revenues, classified by the major geographic areas in which we operate, are as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Revenues
United States	$	20,910	$	21,326	$	39,957	$	40,997
Europe	3,664		3,198		7,175		6,761
Asia	1,676		1,562		2,851		2,550
Other	1,299		1,094		2,570		2,253
	$	27,549	$	27,180	$	52,553	$	52,561

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Employee Benefit Plans (Details 2) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Additional disclosures
Share-based compensation expense	$ 1,729	$ 1,851	$ 3,395	$ 3,581
Share-based compensation cost expected to be recorded for the remainder of the fiscal year	200		$ 200
Weighted average assumptions
Dividend yield (as a percent)			0.00%
Risk-free interest rate (as a percent)			1.70%
Expected life			5 years 10 months 6 days
Volatility (as a percent)			42.32%
Weighted average grant date fair value (in dollars per share)			$ 2.49
Stock options
Additional disclosures
Share-based compensation expense	82	$ 3	$ 121	$ 21
Total unrecognized share-based compensation cost related to stock options	1,600		$ 1,600
Weighted-average period over which unrecognized compensation cost is expected to be recognized			4 years
Weighted Average Remaining Contractual Term			3 years 9 months 18 days
Granted (in shares)		0	528,000	0
Restricted stock awards
Additional disclosures
Share-based compensation expense	1,647	$ 1,848	$ 3,274	$ 3,560
Weighted-average period over which unrecognized compensation cost is expected to be recognized			2 years 7 months 6 days
Total unrecognized share-based compensation cost related to stock awards	14,200		$ 14,200
Share-based compensation cost expected to be recorded for the remainder of the fiscal year	$ 3,500		$ 3,500

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Employee Benefit Plans (Tables)

6 Months Ended

Jun. 30, 2015

Employee Benefit Plans

Schedule of stock option activity

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding, December 31, 2014	1,415,000		$	8.36	2.8	$	1,589,000
Granted	528,000		$	5.85
Exercised	(369,000	)	$	4.54
Forfeited or expired	(194,000	)	$	10.38
Outstanding, June 30, 2015	1,380,000		$	8.18	6.0	$	2,271,000
Exercisable, June 30, 2015	702,000		$	10.33	2.3	$	561,000

Schedule of restricted stock awards activity

	Number of Shares		Weighted Average Fair Value
Outstanding, December 31, 2014	2,059,000		$	8.60
Granted	841,000		6.00
Vested	(474,000	)	8.97
Forfeited	(192,000	)	8.66
Outstanding, June 30, 2015	2,234,000		$	7.54

Schedule of weighted average assumptions used in valuation of awards

	June 30, 2015
Risk-free interest rate	1.7		%
Dividend yield	—		%
Expected life (years)	5.85
Volatility	42.32		%
Weighted average grant date fair value	$	2.49

Schedule of share-based compensation expense

The following table summarizes the share-based compensation expense we recorded (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Stock option awards	$	82	$	3	$	121	$	21
Restricted stock awards	1,647		1,848		3,274		3,560
Share-based compensation expense	$	1,729	$	1,851	$	3,395	$	3,581

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Summary of Significant Accounting Policies (Details 4) - USD ($)	3 Months Ended	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Summary of Significant Accounting Policies
New Revenue Recognition standard impact		$ 0
Realignment Expense
Severance and related expenses	$ 400,000		$ 1,600,000
Minimum
Summary of Significant Accounting Policies
Period of maintenance of proprietary products		1 year
Maximum
Summary of Significant Accounting Policies
Period of maintenance of proprietary products		3 years

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
Operating Activities:
Net loss	$ (7,344)	$ (9,079)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	3,237	3,841
Share-based compensation	3,395	3,581
Gain on sale of domain name		(630)
Deferred taxes	46	46
Loss on disposal of assets	12	84
Changes in operating assets and liabilities:
Restricted cash	153
Trade receivables	2,941	4,452
Inventory	183	(123)
Prepaid expenses and other assets	88	(1,220)
Accounts payable	(2,341)	(208)
Accrued liabilities	2,102	(544)
Deferred revenues	1,582	(849)
Net cash provided by (used in) operating activities	4,054	(649)
Investing Activities:
Purchase of property and equipment	(3,015)	(1,296)
Net cash used in investing activities	(3,015)	(1,296)
Financing Activities:
Proceeds from the exercise of stock options	1,677	908
Principal payments on capital lease obligations and other obligations	(42)	(124)
Net cash provided by financing activities	1,635	784
Net increase (decrease) in cash and cash equivalents	2,674	(1,161)
Cash and cash equivalents, beginning of period	18,355	19,919
Cash and cash equivalents, end of period	21,029	18,758
Non-cash investing and financing activities:
Purchase of equipment included in accounts payable and accrued expenses	$ 269	$ 95

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Goodwill and Other Intangibles

6 Months Ended

Jun. 30, 2015

Goodwill and Other Intangibles

Goodwill and Other Intangibles

Note 5. Goodwill and Other Intangibles

We evaluate goodwill and indefinite-lived intangible assets for impairment on an annual basis, or more frequently if circumstances indicate impairment may have occurred, and there have been no impairment charges related to such assets through June 30, 2015.  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 and professional services segments will not be deductible for tax purposes.

Intangible assets are amortized on a straight-line basis over their estimated useful lives, with the exception of customer relationships, which are amortized on a double-declining basis.  Amortization expense for intangible assets with finite lives was $0.4 million and $0.9 million, and $0.5 million and $1.1 million for the three and six months ended June 30, 2015, and 2014, respectively. The following table summarizes cumulative amortization expense related to intangible assets subject to amortization as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015							December 31, 2014
	Gross Costs		Accumulated Amortization			Net		Gross Costs		Accumulated Amortization			Net
Core technology	$	5,800	$	(2,820	)	$	2,980	$	5,800	$	(2,430	)	$	3,370
Existing and developed technology	2,300		(2,300		)	—		2,300		(2,300		)	—
Customer relationships	6,475		(3,490		)	2,985		6,475		(3,143		)	3,332
Trade names	2,100		(1,227		)	873		2,100		(1,122		)	978
Covenant not-to-compete	200		(134		)	66		200		(114		)	86
Total	$	16,875	$	(9,971	)	$	6,904	$	16,875	$	(9,109	)	$	7,766

The following table summarizes the estimated remaining amortization expense through 2019 and thereafter (in thousands):

Year ending	Amortization Expense
2015	$	790
2016	1,499
2017	1,399
2018	1,392
2019	816
Thereafter	1,008
Total amortization expense	$	6,904

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Net Loss Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Numerator:
Net loss	$ (3,531)	$ (2,935)	$ (7,344)	$ (9,079)
Net loss allocated to common stockholders	$ (3,531)	$ (2,935)	$ (7,344)	$ (9,079)
Denominator:
Basic weighted average shares outstanding	27,999,000	26,789,000	27,143,000	26,599,000
Net loss per basic common share (in dollars per share)	$ (0.13)	$ (0.11)	$ (0.27)	$ (0.34)
Numerator:
Net loss	$ (3,531)	$ (2,935)	$ (7,344)	$ (9,079)
Net loss allocated to common stockholders	$ (3,531)	$ (2,935)	$ (7,344)	$ (9,079)
Denominator:
Basic weighted average shares outstanding	27,999,000	26,789,000	27,143,000	26,599,000
Diluted weighted average shares outstanding	27,999,000	26,789,000	27,143,000	26,599,000
Net loss per diluted common share (in dollars per share)	$ (0.13)	$ (0.11)	$ (0.27)	$ (0.34)
Number of stock options and restricted stock awards excluded from calculation of diluted net loss per share (in shares)	1,969,000	2,062,000	1,934,000	1,838,000

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Segment Information (Details) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015 USD ($)	Jun. 30, 2014 USD ($)	Jun. 30, 2015 USD ($) item	Jun. 30, 2014 USD ($)
Segment Information
Number of operating segments | item			5
Segment Information
Revenues	$ 27,549	$ 27,180	$ 52,553	$ 52,561
Cost of revenues	9,268	8,959	17,717	17,650
Segment profit	18,281	18,221	34,836	34,911
Total operating expenses	21,726	21,711	42,031	44,484
Operating loss	(3,445)	(3,490)	(7,195)	(9,573)
Products
Segment Information
Revenues	8,280	8,888	15,334	15,749
Cost of revenues	2,293	1,888	4,036	3,638
Segment profit	5,987	7,000	11,298	12,111
Subscription
Segment Information
Revenues	1,552	1,845	3,105	4,222
Cost of revenues	928	1,319	1,950	2,452
Segment profit	624	526	1,155	1,770
Professional services
Segment Information
Revenues	5,333	4,290	9,793	8,941
Cost of revenues	3,914	3,742	7,690	7,463
Segment profit	1,419	548	2,103	1,478
Training
Segment Information
Revenues	2,379	2,331	4,548	4,261
Cost of revenues	1,443	1,445	2,861	3,019
Segment profit	936	886	1,687	1,242
Maintenance
Segment Information
Revenues	10,005	9,826	19,773	19,388
Cost of revenues	690	565	1,180	1,078
Segment profit	$ 9,315	$ 9,261	$ 18,593	$ 18,310

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Goodwill and Other Intangibles (Tables)

6 Months Ended

Jun. 30, 2015

Goodwill and Other Intangibles

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, 2015 and December 31, 2014 (in thousands):

	June 30, 2015							December 31, 2014
	Gross Costs		Accumulated Amortization			Net		Gross Costs		Accumulated Amortization			Net
Core technology	$	5,800	$	(2,820	)	$	2,980	$	5,800	$	(2,430	)	$	3,370
Existing and developed technology	2,300		(2,300		)	—		2,300		(2,300		)	—
Customer relationships	6,475		(3,490		)	2,985		6,475		(3,143		)	3,332
Trade names	2,100		(1,227		)	873		2,100		(1,122		)	978
Covenant not-to-compete	200		(134		)	66		200		(114		)	86
Total	$	16,875	$	(9,971	)	$	6,904	$	16,875	$	(9,109	)	$	7,766

Schedule of estimated remaining amortization expense

The following table summarizes the estimated remaining amortization expense through 2019 and thereafter (in thousands):

Year ending	Amortization Expense
2015	$	790
2016	1,499
2017	1,399
2018	1,392
2019	816
Thereafter	1,008
Total amortization expense	$	6,904