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 September 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 November 5, 2015, there were approximately 30,613,000 shares of the registrant’s Common Stock outstanding.

GUIDANCE SOFTWARE, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED September 30, 2015

Table of Contents

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets at September 30, 2015 and December 31, 2014	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 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)

	September 30, 2015			December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	18,001		$	18,355
Restricted cash	—			153
Trade receivables, net of allowance for doubtful accounts of $333 and $634, respectively	20,076			20,255
Inventory	2,485			2,684
Prepaid expenses and other current assets	4,629			5,054
Total current assets	45,191			46,501
Long-term assets:
Property and equipment, net	14,299			14,558
Intangible assets, net	6,505			7,766
Goodwill	14,632			14,632
Other assets	1,890			2,370
Total long-term assets	37,326			39,326
Total assets	$	82,517		$	85,827
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,370		$	5,919
Accrued liabilities	10,667			8,407
Capital lease obligations	70			67
Deferred revenues	39,322			39,128
Total current liabilities	53,429			53,521
Long-term liabilities:
Deferred rent	7,153			7,661
Other long-term liabilities	587			645
Deferred revenues	7,530			6,232
Deferred tax liabilities	653			584
Total long-term liabilities	15,923			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; 32,068,000 and 31,155,000 shares issued, respectively; and 30,289,000 and 29,376,000 shares outstanding, respectively	26			25
Additional paid-in capital	117,060			110,265
Treasury stock, at cost, 1,779,000 and 1,779,000 shares, respectively	(11,479		)	(11,479		)
Accumulated deficit	(92,442		)	(81,627		)
Total stockholders’ equity	13,165			17,184
Total liabilities and stockholders’ equity	$	82,517		$	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 September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Revenues:
Product revenue	$	7,759		$	9,458		$	23,093		$	25,207
Services revenue	9,041			8,171			26,487			25,595
Maintenance revenue	10,023			10,218			29,796			29,606
Total revenues	26,823			27,847			79,376			80,408
Cost of revenues (excluding amortization and depreciation, shown below):
Cost of product revenue	2,520			2,497			6,556			6,135
Cost of services revenue	6,011			6,222			18,512			19,156
Cost of maintenance revenue	601			540			1,781			1,618
Total cost of revenues (excluding amortization and depreciation, shown below)	9,132			9,259			26,849			26,909
Operating expenses:
Selling and marketing	9,156			9,898			28,357			29,695
Research and development	5,281			5,289			15,690			17,915
General and administrative	5,078			4,134			14,262			12,354
Depreciation and amortization	1,574			1,811			4,811			5,652
Total operating expenses	21,089			21,132			63,120			65,616
Operating loss	(3,398		)	(2,544		)	(10,593		)	(12,117		)
Other income and expense:
Interest income	3			5			8			10
Interest expense	(3		)	(2		)	(7		)	(8		)
Gain on sale of domain name	—			—			—			630
Other income, net	4			6			21			31
Total other income and expense	4			9			22			663
Loss before income taxes	(3,394		)	(2,535		)	(10,571		)	(11,454		)
Income tax provision	77			51			244			211
Net loss	$	(3,471	)	$	(2,586	)	$	(10,815	)	$	(11,665	)
Net loss per share:
Basic	$	(0.12	)	$	(0.10	)	$	(0.39	)	$	(0.44	)
Diluted	$	(0.12	)	$	(0.10	)	$	(0.39	)	$	(0.44	)
Weighted average number of shares used in per share calculation:
Basic	28,197			26,977			27,864			26,703
Diluted	28,197			26,977			27,864			26,703

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)

	Nine Months Ended September 30,
	2015			2014
Operating Activities:
Net loss	$	(10,815	)	$	(11,665	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	4,811			5,652
Recovery of bad debt	(200		)	—
Share-based compensation	5,109			5,406
Gain on sale of domain name	—			(630		)
Deferred taxes	69			69
Loss on disposal of assets	14			84
Changes in operating assets and liabilities:
Restricted cash	153			(415		)
Trade receivables	379			(4,524		)
Inventory	199			(570		)
Prepaid expenses and other assets	905			(545		)
Accounts payable	(2,417		)	354
Accrued liabilities	1,752			162
Deferred revenues	1,492			2,936
Net cash provided by (used in) operating activities	1,451			(3,686		)
Investing Activities:
Purchase of property and equipment	(3,429		)	(1,522		)
Net cash used in investing activities	(3,429		)	(1,522		)
Financing Activities:
Proceeds from the exercise of stock options	1,687			1,067
Principal payments on capital lease obligations and other obligations	(63		)	(166		)
Net cash provided by financing activities	1,624			901
Net decrease in cash and cash equivalents	(354		)	(4,307		)
Cash and cash equivalents, beginning of period	18,355			19,919
Cash and cash equivalents, end of period	$	18,001		$	15,612
Non-cash investing and financing activities:
Purchase of equipment included in accounts payable and accrued expenses	$	98		$	161

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

5

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 as well as 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 September 30, 2015 and the condensed consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014 and cash flows for the nine months ended September 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 September 30, 2015, our results of operations for the three and nine months ended September 30, 2015 and 2014 and our cash flows for the nine months ended September 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 nine months period ended September 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, 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.

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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 Accounting Standards Codification (“ASC”) 350 - Intangibles — Goodwill and Other.  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 Accounting Standards Update (“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 September 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 $17.5 million as of September 30, 2015.  At September 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 SaaS, which we collectively refer to as services revenue.  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 ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendment to 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, 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: When we either enter into contracts or receive written purchase orders issued by a customer that legally bind us and the customer.

·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.

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·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 subscriptions. 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.

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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 the International Accounting Standards Board (“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.

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 September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Basic loss per common share:
Numerator:
Net loss	$	(3,471	)	$	(2,586	)	$	(10,815	)	$	(11,665	)
Net income allocated to participating securities	—			—			—			—
Net loss allocated to common stockholders	$	(3,471	)	$	(2,586	)	$	(10,815	)	$	(11,665	)
Denominator:
Basic weighted average shares outstanding	28,197			26,977			27,864			26,703
Net loss per basic common share	$	(0.12	)	$	(0.10	)	$	(0.39	)	$	(0.44	)
Diluted loss per common share:
Numerator:
Net loss	$	(3,471	)	$	(2,586	)	$	(10,815	)	$	(11,665	)
Net income allocated to participating securities	—			—			—			—
Net loss allocated to common stockholders	$	(3,471	)	$	(2,586	)	$	(10,815	)	$	(11,665	)
Denominator:
Basic weighted average shares outstanding	28,197			26,977			27,864			26,703
Effect of dilutive share-based awards	—			—			—			—
Diluted weighted average shares outstanding	28,197			26,977			27,864			26,703
Net loss per diluted common share	$	(0.12	)	$	(0.10	)	$	(0.39	)	$	(0.44	)

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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 918,000 and 1,920,000 shares for the three and nine months ended September 30, 2015, respectively, and 2,739,000 and 1,977,000 shares for the three and nine months ended September 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 September 30, 2015 and December 31, 2014 (in thousands):

	September 30, 2015		December 31, 2014
Inventory:
Components	$	951	$	1,121
Finished goods	1,534		1,563
Total inventory	$	2,485	$	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 September 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 $1.3 million, and $0.5 million and $1.7 million for the three and nine months ended September 30, 2015, and 2014, respectively. The following table summarizes cumulative amortization expense related to intangible assets subject to amortization as of September 30, 2015 and December 31, 2014 (in thousands):

	September 30, 2015							December 31, 2014
	Gross Costs		Accumulated Amortization			Net		Gross Costs		Accumulated Amortization			Net
Core technology	$	5,800	$	(3,016	)	$	2,784	$	5,800	$	(2,430	)	$	3,370
Existing and developed technology	2,300		(2,300		)	—		2,300		(2,300		)	—
Customer relationships	6,475		(3,638		)	2,837		6,475		(3,143		)	3,332
Trade names	2,100		(1,272		)	828		2,100		(1,122		)	978
Covenant not-to-compete	200		(144		)	56		200		(114		)	86
Total	$	16,875	$	(10,370	)	$	6,505	$	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	$	391
2016	1,499
2017	1,399
2018	1,392
2019	816
Thereafter	1,008
Total amortization expense	$	6,505

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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.  The Equipment Line and the Equipment Advance expired on August 25, 2015.

As of September 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 September 30, 2015, approximately 3,852,000 shares were available for grant as options or nonvested share awards under the Guidance Software, Inc. Second Amended and Restated 2004 Equity Incentive Plan (the “Plan”).

Stock Options

The terms of the options granted under the Plan are determined at the time of grant, and generally vest 25% annually over a four-year service period and typically must be exercised within 10 years from the date of grant.  A summary of stock option activity follows:

	Number of 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	537,000		$	6.03
Exercised	(371,000	)	$	4.55
Forfeited or expired	(258,000	)	$	10.32
Outstanding, September 30, 2015	1,323,000		$	8.10	6.0	$	214,000
Exercisable, September 30, 2015	635,589		$	10.37	2.2	$	140,000

We define in-the-money options at September 30, 2015 as options that had exercise prices that were lower than the $6.02 fair market value of our common stock at that date.  The aggregate intrinsic value of options outstanding at September 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 709,000 shares that were in-the-money at that date, 129,000 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	881,000		6.17
Vested	(506,000	)	8.93
Forfeited	(339,000	)	8.17
Outstanding, September 30, 2015	2,095,000		$	7.57

The total grant date fair value of shares vested under such grants during the nine months ended September 30, 2015 was $4,516,000.

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:

	September 30, 2015
Risk-free interest rate	1.8		%
Dividend yield	—		%
Expected life (years)	5.65
Volatility	42.78		%
Weighted average grant date fair value	$	4.08

There were no stock options granted during the three and nine months ended, September 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 September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Stock option awards	$	110	$	—	$	231	$	21
Restricted stock awards	1,604		1,825		4,878		5,385
Share-based compensation expense	$	1,714	$	1,825	$	5,109	$	5,406

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As of September 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 3.5 years.  Approximately $11.9 million of total unrecognized share-based compensation cost related to restricted stock awards is expected to be recognized over a weighted-average period of 2.5 years.  For awards outstanding at September 30, 2015, we expect to record approximately $0.1 million and $1.6 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 September 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 September 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 nine months ended September 30, 2015 of $77,000 and $244,000 as compared to $51,000 and $211,000 for the same periods in 2014.  Our income tax provision for the three and nine months ended September 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.

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The following table sets forth, by level within the fair value hierarchy, financial assets that are accounted for at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 (in thousands):

	Fair Value Measurements at September 30, 2015
	Total		Level 1		Level 2		Level 3
Assets:
U.S. Treasury Securities	$	2,008	$	2,008	$	—	$	—
Money market accounts	4,287		4,287		—		—
Total assets	$	6,295	$	6,295	$	—	$	—

	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

Effective July 7, 2015, we entered into a renewal of our Office Lease Agreement (the “UK Lease”) to lease approximately 8,000 rentable square feet of an office building located in Slough, United Kingdom, which is primarily used as a training center.  The UK Lease commences on January 9, 2016 and expires in January 8, 2021, with an option to exit the lease on January 9, 2019.  The total annual rent under the UK Lease is approximately $267,000.

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.  Total annual rent under the Pasadena Lease ranges from approximately $2.5 million for the first year to approximately $3.4 million for the final year of the lease.  The expansion increases the annual 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 space 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, we 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.

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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 September 30, 2015
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	7,759	$	1,790	$	5,259	$	1,992	$	10,023	$	26,823
Cost of revenues	2,520		952		3,644		1,415		601		9,132
Segment profit	$	5,239	$	838	$	1,615	$	577	$	9,422	17,691
Total operating expenses											21,089
Operating loss											$	(3,398	)
	Three Months Ended September 30, 2014
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	9,458	$	1,677	$	4,228	$	2,266	$	10,218	$	27,847
Cost of revenues	2,497		1,128		3,713		1,381		540		9,259
Segment profit	$	6,961	$	549	$	515	$	885	$	9,678	18,588
Total operating expenses											21,132
Operating loss											$	(2,544	)
	Nine Months Ended September 30, 2015
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	23,093	$	4,894	$	15,052	$	6,541	$	29,796	$	79,376
Cost of revenues	6,556		2,902		11,334		4,276		1,781		26,849
Segment profit	$	16,537	$	1,992	$	3,718	$	2,265	$	28,015	52,527
Total operating expenses											63,120
Operating loss											$	(10,593	)

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	Nine Months Ended September 30, 2014
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	25,207	$	5,899	$	13,169	$	6,527	$	29,606	$	80,408
Cost of revenues	6,135		3,580		11,176		4,400		1,618		26,909
Segment profit	$	19,072	$	2,319	$	1,993	$	2,127	$	27,988	53,499
Total operating expenses											65,616
Operating loss											$	(12,117	)

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Revenues
United States	$	20,919	$	21,589	$	60,876	$	62,586
Europe	3,700		3,665		10,875		10,425
Asia	1,153		1,462		4,004		4,013
Other	1,051		1,131		3,621		3,384
	$	26,823	$	27,847	$	79,376	$	80,408

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 SaaS 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.

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·Law enforcement agency budgets. We sell our EnCase® Forensic products and training services primarily to law enforcement agencies.  Because of the limited nature of law enforcement budgets, funds are typically initially allocated toward solving issues perceived to be the most pressing.  Sales of our products could be impacted by changes in the budgets of law enforcement agencies or in the relative priority assigned to digital law enforcement investigations.

·Prevalence and impact of hacking incidents and spread of malicious software. The increasing sophistication of hacking attacks on government and private networks and the global spread of malicious software, such as viruses, worms and rootkits, have increased the focus of corporations and large government organizations on digital investigations and other aspects of network security, which has, in turn, increased demand for our products.  Future changes in the number and severity of such attacks or the spread of malicious software could have an effect on the demand for our products.

·Seasonality in revenues. We experience seasonality in our revenues, with the third and fourth quarters typically having the highest revenues for the year.  We believe that this seasonality results primarily from our customers’ budgeting cycles. The federal 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 nine months ended September 30, 2015 and 2014, respectively, expressed as a percentage of total revenues:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Revenues:
Product revenue	28.9	%	34.0	%	29.1	%	31.4	%
Services revenue	33.7		29.3		33.4		31.8
Maintenance revenue	37.4		36.7		37.5		36.8
Total revenues	100.0		100.0		100.0		100.0
Cost of revenues:
Cost of product revenue	9.4		9.0		8.3		7.6
Cost of services revenue	22.4		22.4		23.3		23.9
Cost of maintenance revenue	2.2		1.9		2.2		2.0
Total cost of revenues	34.0		33.3		33.8		33.5
Gross profit	66.0		66.7		66.2		66.5
Operating expenses:
Selling and marketing	34.1		35.5		35.7		36.9
Research and development	19.7		19.0		19.8		22.3
General and administrative	18.9		14.8		18.0		15.4
Depreciation and amortization	5.9		6.5		6.1		7.0
Total operating expenses	78.6		75.8		79.6		81.6
Operating loss	(12.6	)%	(9.1	)%	(13.4	)%	(15.1	)%
Other income and expense:
Interest income	—		—		—		—
Interest expense	—		—		—		—
Gain on sale of domain name	—		—		—		0.8
Other income, net	—		—		—		—
Total other income and expense	—		—		—		0.8
Loss before income taxes	(12.6	)%	(9.1	)%	(13.4	)%	(14.3	)%
Income tax provision	0.3		0.2		0.3		0.3
Net loss	(12.9	)%	(9.3	)%	(13.7	)%	(14.6	)%

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Non-cash Share Based Compensation Data (1):
Cost of product revenue	$	26	$	28	$	87	$	101
Cost of services revenue	281		356		849		1,043
Cost of maintenance revenue	37		39		119		111
Selling and marketing	352		384		1,113		1,296
Research and development	397		495		1,211		1,376
General and administrative	621		523		1,730		1,479
Total non-cash share based compensation	$	1,714	$	1,825	$	5,109	$	5,406

(1)Non-cash share-based compensation recorded in the three and nine month periods ended September 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 Nine Months Ended September 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 September 30,					Nine Months Ended September 30,
(Dollars in thousands)	2015		Change %	2014		2015		Change %	2014
Product revenue	$	7,759	(18)%	$	9,458	$	23,093	(8)%	$	25,207
Services revenue:
Professional services	5,259		24%	4,228		15,052		14%	13,169
Training	1,992		(12)%	2,266		6,541		—%	6,527
Subscription	1,790		7%	1,677		4,894		(17)%	5,899
Total services revenue	9,041		11%	8,171		26,487		3%	25,595
Maintenance revenue	10,023		(2)%	10,218		29,796		1%	29,606
Total revenues	$	26,823	(4)%	$	27,847	$	79,376	(1)%	$	80,408

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.

Product revenues decreased by $1.7 million, or 18%, from $9.5 million to $7.8 million, and decreased by $2.1 million, or 8%, from $25.2 million to $23.1 million for the three and nine months ended September 30, 2015, respectively, as compared with the same periods in 2014.

The decrease in product revenues for the three months ended September 30, 2015 compared to the same period in 2014 was primarily due to a $1.3 million decrease in Enterprise software revenue and a $0.4 million decrease in sales of our Forensic appliances.  The decrease in product revenues for the nine months ended September 30, 2015 compared to the same period in 2014 was primarily due to a $1.4 million decrease in Enterprise software revenue and a $0.9 million decrease in Forensic software, partially offset by a $0.2 million increase in sales of our Forensic appliances.

The decrease in enterprise revenue for the three and nine months ended September 30, 2015 compared to the same period in 2014 was primarily the result of the timing of our transition to a more channel-focused sales model for our Enterprise products.  Forensic appliance sales decreased during the three months ended September 30, 2015 compared to the same period in 2014 primarily due to increased customer demand in the third quarter of 2014 as a result of new product releases.  Forensic appliance sales increased during the nine months ended September 30, 2015 compared to the same period in prior year due to additional new product releases in the second quarter of 2015.  Forensic software sales decreased for the nine months ended September 30, 2015 as compared to the same period in 2014 primarily due to weakness in government spending during the first six months of 2015.

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 revenue increased $0.8 million, or 11%, from $8.2 million to $9.0 million, and increased $0.9 million, or 3%, from $25.6 million to $26.5 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014.

The increase for the three months ended September 30, 2015 compared to the same period in 2014 is primarily related to a $1.0 million increase in our professional services revenue due to increased case work and incident response work, partially offset by $0.3 million decrease in training revenues related to a decrease in the number of training seats sold in the quarter as compared to the same period in prior year.

The increase for the nine months ended September 30, 2015 compared to the same period in 2014 is primarily related to a $1.9 million increase in our professional services revenue due to increased case work and incident response work, partially offset by $1.0 million decrease in subscription revenue due to reductions in single-case law firm engagements.

Maintenance Revenue

Maintenance revenue is 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 revenue decreased by $0.2 million, or 2%, from $10.2 million to $10.0 million, and increased by $0.2 million, or 1%, from $29.6 million to $29.8 million for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014.

The decrease in maintenance revenue for the three month period ended September 30, 2015 compared to the same period in 2014 was primarily a result of the timing of contracts renewed during the quarter.  The increase in maintenance revenue for the nine month period ended September 30, 2015 as compared to the same period 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 nine months ended September 30, 2015 primarily due to the addition of new Enterprise customers.

Cost of Revenues

	Three Months Ended September 30,							Nine Months Ended September 30,
(Dollars in thousands)	2015			Change %	2014			2015			Change %	2014
Cost of product revenue	$	2,520		1%	$	2,497		$	6,556		7%	$	6,135
Cost of services revenue:
Cost of professional services	3,644			(2)%	3,713			11,334			1%	11,176
Cost of training	1,415			2%	1,381			4,276			(3)%	4,400
Cost of subscription	952			(16)%	1,128			2,902			(19)%	3,580
Total cost of services revenue	6,011			(3)%	6,222			18,512			(3)%	19,156
Cost of maintenance revenue	601			11%	540			1,781			10%	1,618
Total cost of revenues	9,132			(1)%	9,259			26,849			—%	26,909
Share-based compensation included above:
Cost of product revenue	$	26			$	28		$	87			$	101
Cost of services revenue	$	281			$	356		$	849			$	1,043
Cost of maintenance revenue	$	37			$	39		$	119			$	111
Gross Margin Percentage
Products	67.5		%		73.6		%	71.6		%		75.7		%
Services	33.5		%		23.9		%	30.1		%		25.2		%
Maintenance	94.0		%		94.7		%	94.0		%		94.5		%
Total	66.0		%		66.8		%	66.2		%		66.5		%

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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.

Cost of product revenue remained flat at $2.5 million and increased $0.5 million, or 7%, from $6.1 million to $6.6 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014.  The increase for the nine months ended September 30, 2015 as compared to the same period in 2014 was primarily due to a $0.4 million increase in appliance costs.

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 $6.2 million to $6.0 million, and $0.7 million, or 3%, from $19.2 million to $18.5 million, for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014.

The decrease in the cost of services revenue for the three months ended September 30, 2015 compared to the same period in 2014 was primarily due to a $0.1 million decrease, or 16%, from $1.1 million to $1.0 million in the cost of subscription revenue.  The decrease in the cost of subscription revenue is primarily related to a $0.1 million decrease in software maintenance due to the consolidation of servers into our new data center.

The decrease in the cost of services revenue for the nine months ended September 30, 2015 compared to the same period in 2014 was primarily due to a $0.7 million decrease, or 19%, from $3.6 million to $2.9 million in the cost of subscription revenue and a $0.1 million decrease, or 3%, from $4.4 million to $4.3 million in the cost of training revenue, partially offset by an increase of $0.1 million, or 1%, from $11.2 million to $11.3 million in the cost of professional services revenue.

The decrease in the cost of subscription revenue for the nine months ended September 30, 2015 compared to the same period in 2014 was primarily related to a $0.5 million decrease in compensation and employee-related costs associated with a reduction in headcount that occurred in the last quarter of 2014, as well as a $0.2 million decrease in rent expense due to the relocation of our data center to a less expensive location in the second quarter of 2014.

The decrease in the cost of training revenue for the nine months ended September 30, 2015 compared to the same period in 2014 was primarily related to a $45,000 reduction in realignment expense and a $30,000 decrease in compensation and employee-related costs associated with a reduction in headcount that occurred in 2014 that did not reoccur during 2015.

The increase in the cost of professional services revenue for the nine months ended September 30, 2015 compared to the same period in 2014 was primarily related to a $0.3 million increase in compensation and employee related costs associated with increased case work and incident response work, partially offset by a $0.1 million decrease related to realignment expense recorded in the third 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 11%, from $0.5 million to $0.6 million, and increased $0.2 million, or 10%, from $1.6 million to $1.8 million for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014.  The increase for the three and nine months ended September 30, 2015 compared to the same periods in 2014 was primarily related to an increase in compensation and employee-related costs due to annual merit increases and an increase in headcount.

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Operating Expenses

	Three Months Ended							Nine Months Ended
	September 30,							September 30,
(Dollars in thousands)	2015			Change %	2014			2015			Change %	2014
Selling and marketing expenses	$	9,156		(7)%	$	9,898		$	28,357		(5)%	$	29,695
Research and development expenses	$	5,281		—%	$	5,289		$	15,690		(12)%	$	17,915
General and administrative expenses	$	5,078		23%	$	4,134		$	14,262		15%	$	12,354
Depreciation and amortization expenses	$	1,574		(13)%	$	1,811		$	4,811		(15)%	$	5,652
Share-based compensation included above:
Selling and marketing expenses	$	352			$	384		$	1,113			$	1,296
Research and development expenses	$	397			$	495		$	1,211			$	1,376
General and administrative expenses	$	621			$	523		$	1,730			$	1,479
As a percentage of revenues:
Selling and marketing expenses	34.1		%		35.5		%	35.7		%		36.9		%
Research and development expenses	19.7		%		19.0		%	19.8		%		22.3		%
General and administrative expenses	18.9		%		14.8		%	18.0		%		15.4		%
Depreciation and amortization expenses	5.9		%		6.5		%	6.1		%		7.0		%

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 decreased $0.7 million, or 7%, from $9.9 million to $9.2 million, and decreased $1.3 million, or 5%, from $29.7 million to $28.4 million for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014.

The decrease for the three months ended September 30, 2015 compared to the same period in 2014 was primarily due to a $0.9 million decrease in sales commissions due to lower product revenue during the quarter, offset by a $0.3 million increase in compensation and other employee-related costs due to a focused investment in our selling and marketing leadership.

The decrease for the nine months ended September 30, 2015 compared to the same period in 2014 was primarily due to a $0.8 million decrease in sales commissions due to lower product revenue and $0.5 million of realignment expense that was recorded during the third quarter of the prior year that did not occur during 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 remained flat at $5.3 million, and decreased $2.2 million, or 12%, from $17.9 million to $15.7 million for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014.

The decrease for the nine months ended September 30, 2015 compared to the same period in 2014 was related to a $1.6 million decrease in compensation costs and other employee-related expenses due to headcount reductions and a decrease of $0.8 million related to realignment expense recorded in 2014 that did not reoccur in 2015, partially offset by a $0.1 million increase in software maintenance due to increased usage of enterprise licenses.

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.

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General and administrative expenses increased $1.0 million, or 23%, from $4.1 million to $5.1 million, and increased $1.9 million, or 15%, from $12.4 million to $14.3 million for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014.

The increase in general and administrative expenses for the three months ended September 30, 2015 compared to the same period in 2014 was primarily attributable to a $0.6 million increase in compensation and employee-related costs due to merit increases that occurred during the second quarter of 2015 and a $0.3 million increase in realignment expense associated with a reduction in headcount.

The increase in general and administrative expenses for the nine months ended September 30, 2015 compared to the same period in 2014 was primarily attributable to a $1.5 million increase in compensation and employee-related costs due to merit increases that occurred during the second quarter of 2015 and the recruiting and hiring of our new CEO and a $0.4 million increase in legal fees associated with our ongoing patent infringement case.

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 $0.2 million, or 13%, from $1.8 million to $1.6 million, and $0.9 million, or 15%, from $5.7 million to $4.8 million for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014.

The decrease in depreciation and amortization expenses was primarily due to a $0.1 million and a $0.4 million reduction in depreciation on fixed assets for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014 due to certain assets being fully depreciated and a $0.1 million and a $0.4 million decrease in amortization for the three and nine months ended September 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 that did not reoccur for the same periods in 2015.

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 nine months ended September 30, 2014, we recorded a gain on sale of a domain name of $0.6 million.  There was no gain on sale of a domain name for the same period in 2015.

Income Tax Provision

We recorded an income tax provision for the three and nine months ended September 30, 2015 of $77,000 and $244,000, respectively, as compared to $51,000 and $211,000, 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 nine months ended September 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 September 30, 2015, we had $18.0 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.

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 $1.5 million for the nine months ended September 30, 2015 as compared to net cash used in operating activities of $3.7 million for the same period in 2014.  The change in cash provided by (used in) operating activities was primarily a result of a $0.4 million increase in trade receivables during the nine months ended September 30, 2015 compared to a decrease of $4.5 million for the same period in 2014, a $1.8 million increase in accrued liabilities during the nine months ended September 30, 2015 compared to an increase of $0.2 million for the same period in 2014, a $0.9 million increase in prepaids and other assets during the nine months ended September 30, 2015 compared to a decrease of $0.5 million for the same period in 2014, partially offset by a $2.4 million decrease in accounts payable for the nine months ended September 30, 2015 compared to an increase of $0.4 million for the same period in 2014, and a $1.5 million increase in deferred revenues during the nine months ended September 30, 2015 compared to an increase of $2.9 million for the same period in 2014.

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Net cash used in investing activities was $3.4 million for the nine months ended September 30, 2015 compared to $1.5 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 purchased during the nine months ended September 30, 2015.

Net cash provided by financing activities was $1.6 million for the nine months ended September 30, 2015 compared to $0.9 million for the same period in 2014.  The increase in cash provided by financing activities was due to $1.7 million in proceeds from the exercise of stock options for the nine months ended September 30, 2015 compared to $1.1 million for the same period in 2014, and $63,000 in principal payments made on capital leases and other obligations compared to $166,000 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.  Any 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. The Equipment Line and the Equipment Advance expired on August 25, 2015.

As of September 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.

Contractual Obligations and Commitments

Effective July 7, 2015, we entered into a renewal of our Office Lease Agreement (the “UK Lease”) to lease approximately 8,000 rentable square feet of an office building located in Slough, United Kingdom, which is used primarily as a training center.  The UK Lease commences on January 9, 2016 and expires in January 8, 2021, with an option to exit the lease on January 9, 2019.  The total annual rent under the UK Lease is approximately $267,000.

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.  Total annual rent under the Pasadena Lease ranges from approximately $2.5 million for the first year to approximately $3.4 million for the final year of the lease.  The expansion increases the annual 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.

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 space 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.

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During the year ended December 31, 2014, we 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 September 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 September 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 September 30, 2015, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the nine months ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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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.

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.

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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
10.39	Renewal of UK Lease, effective July 7, 2015, by and among Guidance Software, Inc.
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.

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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: November 6, 2015

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EX-10.39

Exhibit 10.39

Dated 7 July 2015

(1)ELQ UK PROPERTIES LTD

- and -

(2)GUIDANCE SOFTWARE, INC.

COUNTERPART

LEASE RELATING TO FIFTH FLOOR (SOUTH

AND NORTH) THAMES CENTRAL, HATFIELD

ROAD, SLOUGH

Mishcon de Reya

Summit House

12 Red Lion Square

London WCIR 4QD

Tel: 020 7440 7000

Fax: 020 7404 5982

Ref: NK/42928.90

E-mail: nicholas.kirby@mishcon.com

TABLE OF CONTENTS

No.	Heading	Page
1.	MAIN DEFINITIONS	4
2.	OTHER DEFINITIONS AND INTERPRETATION	4
3.	BACKGROUND	9
4.	DEMISE AND RENT	10
5.	TENANT’S COVENANTS	10
6.	LANDLORD’S COVENANTS	10
7.	FORFEITURE	10
8.	MISCELLANEOUS	12
9.	VOID IF ORIGINAL LEASE DETERMINES	13
10.	EXCLUSION OF LANDLORD AND TENANT ACT 1954	14
11.	TENANT’S BREAK CLAUSE	14
12.	GOVERNING LAW AND JURISDICTION	14
13.	EXECUTION	15
SCHEDULE 1 - THE PREMISES		16
SCHEDULE 2		17
	PART A - RIGHTS GRANTED IN COMMON	17
	PART B - EXCLUSIVE RIGHT	18
SCHEDULE 3		19
	PART A - EXCEPTIONS AND RESERVATIONS	19
	PART B - TITLE MATTERS	19
SCHEDULE 4 - INSURANCE		21
SCHEDULE 5 - TENANT’S COVENANTS		25
SCHEDULE 6 - LANDLORD’S COVENANTS		37
SCHEDULE 7 - SERVICES AND SERVICE CHARGE		39
SCHEDULE 8 - REGULATIONS		45

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LR1	Date of lease	:	7 July 2015
LR2.	Title number(s)	:	LR2.1 Landlord’s title number(s)
			BK272505, BK159084 and BK259553
		:	LR2.2 Other title numbers
			BK397342 and BK417385
LR3.	Parties to this lease	:	Landlord
			ELQ UK PROPERTIES LTD (company reg. no. 08773913) whose registered office is at Peterborough Court, 133 Fleet Street, London EC4A 2BB
		:	Tenant
			GUIDANCE SOFTWARE, INC. a company incorporated under the laws of the State of California and registered at Companies House as a foreign company with registered number FC023582 whose registered office is at 215 North Marengo Avenue, Pasadena, California 91101 United States of America
LR4.	Property	:	In the case of a conflict between this clause and the remainder of this lease then, for the purposes of registration, this clause shall prevail.
			The property known as Fifth Floor North and South Thames Central, Hatfield Road, Slough as is shown edged red on the attached plans as more particularly described in Schedule 1
LR5.	Prescribed statements etc.	:	None
LR6.	Term for which the Property is leased	:	5 years commencing on 9 January 2016
LR7.	Premium	:	None
LR8.	Prohibitions or restrictions on disposing of this lease	:	This lease contains a provision that prohibits or restricts dispositions.
LR9.	Rights of acquisition etc.	:	LR9.1 Tenant’s contractual rights to

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			renew this lease, to acquire the reversion or another lease of the Property, or to acquire an interest in other land
			None
		:	LR9.2 Tenant’s covenant to (or offer to) surrender this lease
			None
		:	LR9.3 Landlord’s contractual rights to acquire this lease
			None
LR10.	Restrictive covenants given in this Lease by the Landlord in respect of land other than the Property	:	None
LR11.	Easements	:	LR11.1 Easements granted by this lease for the benefit of the Property
			See Schedule 2
		:	LR11.2 Easements granted or reserved by this lease over the Property for the benefit of other property
			See Schedule 3
LR12.	Estate rentcharge burdening the Property	:	None
LR13.	Application for standard form of restriction	:	None
A.	Basic Rent	:	£171,318.50 a year exclusive of Value Added Tax
B.	Rent Commencement Date	:	6 months from the Term Commencement Date
C.	Term Commencement Date	:	9 January 2016
D.	Original Leases	:	a) the lease of the north side of the Property dated 9 January 2006 made between (1) TR Property Investment Trust Limited and (2) Guidance Software Inc (together with any deeds or documents supplemental to it)

2

			including a deed of variation dated on the same date as this Lease by which the north side of the Property was demised to the Tenant
			b) the lease dated 2 May 2006 made between (1) TR Property Investment Trust PLC and (2) Guidance Software Inc (together with any deeds or documents supplemental to it) including a deed of variation dated on the same date as this Lease by which the south side of the Property was demised to the Tenant
E.	Original Leases Expiry Date	:	8 January 2016
F.	Original Licence for Alterations	:	the licences dated
			a) 9 January 2006 relating to Part 5th Floor (North Suite) made between (1) TR Property Investment Trust plc and (2) the Tenant;
			b) 20 July 2006 relating to Part 5th Floor (North Suite) made between (1) TR Property Investment Trust plc and (2) the Tenant;
			c) 20 July 2006 relating to Part 5th Floor (North Suite) made between (1) TR Property Investment Trust plc and (2) the Tenant; and
			and any other licences for alterations granted during the term of the Original Leases
G.	Permitted Use	:	Use as high class offices
H.	Interest Rate	:	Three per cent (3%) above the Base Rate
I.	Tenant’s Break Date	:	9 January 2019

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THIS LEASE is dated 7 July 2015 between the parties named below as (1) the Landlord and (2) the Tenant

1.MAIN DEFINITIONS

1.1The expressions Landlord, Tenant, Premises and Term have the meanings given to them in clauses LR3, LR4 and LR6.

1.2The expressions Rent, Rent Commencement Date, Term Commencement Date, Original Leases, Original Leases Expiry Date, Original Licence for Alterations, Permitted Use and Interest Rate have the meanings given to them in clauses A to G.

2.OTHER DEFINITIONS AND INTERPRETATION

In this Lease unless the context otherwise requires the following expressions shall have the following meanings:

2.1Additional Services means the Services listed in paragraph 2 of Schedule 7 as from time to time altered (if at all) under clause 8.8

2.2Authorised Guarantee Agreement means an authorised guarantee agreement for the purposes of section 16 Landlord and Tenant (Covenants) Act 1995 made in respect of this Lease such agreement to be in accordance with the provisions of such section 16 and subject thereto to be in such terms as the Landlord may reasonably require

2.3Authority means any statutory public local or other authority or any court of law or any government department or any of them or any of their duly authorised officers

2.4Base Rate means the base lending rate from time to time of Lloyds Bank pic on such other bank being a member of the committee of London and Scottish Bankers as the Landlord may from time to time nominate or if that base lending rate cannot be ascertained then such other rate as the Landlord may reasonably specify

2.5Basic Services means the Services listed in paragraph 1 of Schedule 7 as from time to time altered (if at all) under clause 8.8

2.6Break Date means the date or dates described as the Break Date in the Prescribed Clauses

2.7Building means the building and external areas now known as Thames Central (formerly called New Century House) (and of which the Premises forms part) for the purpose of identification only shown edged in red on the Site Plan as the same are registered at the Land Registry under title numbers BK272505, BK 159084 and BK259553 and any or every part of that building and everything attached to it or used for its benefit

2.8Canopy Area means that part of the Premises coloured blue on the Premises Plan

2.9Canopy Licence means a licence dated 12 May 1999 made between Slough Borough Council (1) and Edward Goodwin (2) the benefit of which is now vested in the Landlord

2.10Car Park means the part of the Building from time to time set aside by the Landlord for the parking of vehicles

2.11Car Park Plan means the attached plan marked as such

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2.12Common Parts means all parts of the Building from time to time provided for the common use of more than one of the tenants or occupiers of the Building and their visitors including without limitation any of the following which fall within this definition: vehicular and pedestrian accesses passages stairways circulation areas lifts escalators landscaped areas loading bays fire escapes toilet facilities storage areas refuse collection and disposal areas and parking areas

2.13Conduits means sewers drains pipes wires cables ducts gutters fibres and any other medium for the passage or transmission of soil water gas electricity air smoke light information or other matters and includes where relevant ancillary equipment and structures

2.14Connected Person means any person, firm or company which is connected with the Tenant for the purposes of section 839 Income and Corporation Taxes Act 1988

2.15Consent means an approval permission authority licence or other relevant form of approval given by the Landlord in writing

2.16Determination means the end of the Term however that occurs

2.17Enactment means:

2.17.1any Act of Parliament and

2.17.2any European Community legislation or decree or other supranational legislation or decree having effect as law in the United Kingdom

and references (whether specific or general) to any Enactment include any statutory modification or re-enactment of it for the time being in force and any order instrument plan regulation permission or direction made or issued under it or under any Enactment replaced by it or deriving validity from it

2.18Estimated Service Charge means the Landlord’s fair and reasonable estimate of the Service Charge which will be payable by the Tenant during a Service Charge Period

2.19Group Company means any company of which the Tenant is a Subsidiary or which has the same Holding Company as the Tenant where Subsidiary and Holding Company have the meanings given to them by section 736 Companies Act 1985

2.20Hazardous Material means any substance known to be harmful to human health or the environment and for that reason subject to statutory controls on production use storage or disposal

2.21Insurance Charge means the Percentage of the cost to the Landlord of effecting and maintaining the Insurance Policies including where relevant the cost of assessing any insured amounts

2.22Insurance Policies means the insurance policy or policies maintained by the Landlord or any Superior Landlord in respect of the Building covering damage by Insured Risks Loss of Rent public liability and other matters

2.23Insured Risks means subject to paragraph 1.3 of Schedule 4 fire storm tempest lightning explosion earthquake riot civil commotion malicious damage impact flood bursting or overflowing of water tanks burst pipes discharge from sprinklers aircraft and other aerial

5

devices or articles dropped from them (other than war risks) and such other risks as the Landlord or any Superior Landlord may from time to time require to be covered

2.24Insurers means the reputable underwriters or reputable insurance office with whom the Insurance Policies are effected

2.25Interest Rate means the rate described as the Interest Rate in the Prescribed Clauses

2.26Landlord includes the immediate reversioner to this Lease from time to time

2.27Lease means this lease and includes where relevant any deed of variation licence Consent or other document supplemental to or associated with this Lease

2.28Legal Obligation means any obligation from time to time created by any Enactment or Authority which relates to the Building or its use and includes without limitation obligations imposed as a condition of any Necessary Consents

2.29Lettable Area means a part of the Building designed or intended for letting or exclusive occupation (except in connection with the management of the Building) the boundaries of any Lettable Area being determined in the same manner as the boundaries of the Premises under Schedule I whether or not it has actually been let by the Landlord

2.30Loss of Rent means loss of all Basic Rent or other income from the Building due to damage or destruction by any of the Insured Risks for a period of three years having regard to potential increases in that income as a result of lettings rent reviews or other matters which may occur

2.31Managing Agent means any party from time to time appointed by the Landlord to manage the Building (who may be an employee of the Landlord)

2.32Necessary Consents means planning permission and all other consents licences permissions and approvals whether of a public or private nature which shall be relevant in the context

2.33Outgoings means all rates taxes charges duties assessments impositions and outgoings of any sort which are at any time during the Term payable whether by the owner or occupier of property and includes charges for electricity gas water sewerage telecommunications and other services rendered to or consumed by the relevant property but excludes tax payable by the Landlord on the receipt of the Basic Rent or (other than output VAT) on any dealings with its reversion to this Lease and input VAT suffered by the Landlord in respect of the Building

2.34Permitted Part means such part of the Property as is capable of separate independent beneficial occupation as approved by the Landlord (such approval not to be unreasonably withheld or delayed)

2.35Percentage means a fair and reasonable proportion as determined by the Landlord (acting reasonably) but which in the absence of special circumstances will be substantially the same as the proportion which the net internal area of the Premises bears to the net internal area of all the Lettable Areas at the relevant time

2.36Permissions means those permissions issued by Slough Borough Council under application reference P/024114/010 (dated 14 February 1994) and application reference P/024114/011 (dated 27 April 1998)

6

2.37Permitted Use means the use described in the Prescribed Clauses as the Permitted Use

2.38Plant means the plant equipment and machinery from time to time in or on the Building including without limitation lifts hoists generators and equipment for air-conditioning ventilation heating cooling fire alarm fire prevention or fire control communication and security

2.39Policy means the Norwich Union Latent Defects Policy No 24050308FSD issued by CGU Insurance pic on 12 May 2005 to TR Property Investment Trust Plc and relating to the Building

2.40Policy Cover Period means the period defined in the Policy as “the Period of Insurance”

2.41Premises means the property briefly described in the Prescribed Clauses and more particularly described in Schedule 1 being part of the Building and all additions and improvements made to it and references to the Premises shall include reference to any part of them

2.42Premises Plan means the attached plan marked as such

2.43President means the President from time to time of the Royal Institution of Chartered Surveyors or any person authorised at the relevant time to act on his behalf

2.44Quarter Days means 25 March 24 June 29 September and 25 December in each year

2.45Rear Access Road means that part of the rear access road immediately to the north of the Building as is presently comprised in Land Registry title number BK397342 and shown edged red on the title plan to BK397342 a copy of which is attached hereto and marked “Rear Access Road Plan”

2.46Rear Access Road Plan means the attached plan marked as such

2.47Regulations means the Regulations in Schedule 8 and any others from time to time made by the Landlord in addition to or in substitution for those regulations which the Landlord reasonably considers appropriate having regard to the principles of good estate management and which are notified to the Tenant in writing

2.48Rent means all sums reserved as rent by this Lease

2.49Rent Commencement Date means the date described as the Rent Commencement Date in the Prescribed Clauses

2.50Reserve Fund means the fund (if any) from time to time established under Schedule 7 to meet the cost of Reserve Fund Works which are expected to be required in the future

2.51Reserve Fund Works means the works of repair maintenance and decoration of the Retained Property and the renewal or replacement of the Plant

2.52Retained Property means all parts of the Building except for the Premises and the other Lettable Areas and includes without limitation the Common Parts the Conduits the foundations roof exterior and structure of the Building the Plant (except where part of the Premises or any Lettable Area) any external areas of the Building and any parts of the Building used for the management of the Building or the provision of services to it

7

2.53Section 106 Agreement means those three section 106 Agreements identified as such and listed in Part B of Schedule 3

2.54Service Charge means the Percentage of the Total Service Costs in any Service Charge Period

2.55Service Charge Account Date means 29 September - 28 September in each year of the Term or such other date or dates in each year of the Term as the Landlord may by written notice to the Tenant stipulate

2.56Service Charge Period means the period from and excluding one Service Charge Account Date up to and including the next Service Charge Account Date

2.57Service Charge Statement means the statement to be provided to the Tenant under paragraph 4 of Schedule 7

2.58Service Costs means the costs set out in paragraph 3 of Schedule 7

2.59Services means the Basic Services and the Additional Services

2.60Sign includes any sign hoarding showcase signboard bill plate fascia poster or advertisement

2.61Signboard means a common signboard to be provided by the Landlord in the common entrance hall of the Building

2.62Site Plan means the attached plan marked as such

2.63Superior Landlord means any party having an interest in the Premises in reversion to the Superior Lease

2.64Superior Lease means any lease under which the Landlord may from time to time hold the Building and includes any leases in reversion to that lease

2.65Tenant includes its successors in title

2.66Term means the term described as the Term in the Prescribed Clauses

2.67Term Commencement Date means the date described as the Term Commencement Date in the Prescribed Clauses

2.68Total Service Costs means the total of the Service Costs in any Service Charge Period

2.69Title Matters means the matters set out in Part B of Schedule 3

2.70Uninsured Risk means any risk against which the Landlord has actually insurance cover is obtainable on normal commercial terms in the London Insurance market today but which in the future ceases to be so obtainable other than by reason of the occupation by the Tenant or any undertenant or anyone else claiming an interest under any of them and/or use of the Property but an Insured Risk does not become an Uninsured Risk for the purposes of this Lease by reason only of:

2.70.1normal exclusion provisions in relation to a level of excess liability; or

2.70.2rejection by the insurer of liability, or some part of it, due to any act or default by either the Tenant or the Landlord.

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2.71VAT means Value Added Tax and any future tax of a like nature

2.72In this Lease unless the context otherwise requires:

2.72.1words importing any gender include every gender

2.72.2words importing or references to the singular number only include the plural number and vice versa

2.72.3words importing persons include firms companies and corporations and vice versa

2.72.4references to numbered clauses and schedules are references to the relevant clause in or schedule to this Lease

2.72.5reference in any schedule to numbered paragraphs are references to the numbered paragraphs of that schedule

2.72.6where any obligation is undertaken by two or more persons jointly they shall be jointly and severally liable in respect of that obligation

2.72.7any obligation on any party not to do or omit to do anything shall include an obligation not to allow or suffer that thing to be done or omitted to be done by any undertenant of that party of by any employee servant agent invitee or licensee of that party or its undertenant

2.72.8where the Landlord or the Tenant covenant to do something they shall be deemed to fulfil that obligation if they procure that it is done

2.72.9the headings to the clauses schedules and paragraphs shall not affect the interpretation

2.72.10any sum payable by one party to the other shall be exclusive of VAT which shall where it is chargeable be paid in addition to the sum in question at the time when the sum in question is due to be paid and the charging party shall be required to produce a VAT invoice for the paying party as soon as reasonably practicable thereafter

2.72.11an obligation in this Lease on the part of the Tenant to pay or indemnify the Landlord against any cost or expense shall include an obligation to pay and indemnify the Landlord against any VAT incurred in relation to the cost or expense in question except where the VAT is available for set-off by the Landlord as input tax

2.72.12the expression “tenant covenants” has the meaning given to it by Landlord and Tenant (Covenants) Act 1995

2.73The parties to this Lease do not intend that any of its terms will be enforceable by virtue of Contracts (Rights of Third Parties) Act 1999

3.BACKGROUND

3.1The reversion immediately expectant on the term of the Original Leases is now vested in the Landlord.

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3.2The Original Leases remains vested in the Tenant.

3.3The parties wish to enter into a further lease of the Property with the Term to take effect following the expiry of the Original Leases on similar terms and conditions to those contained in the Original Leases except as modified in this Lease.

4.DEMISE AND RENT

4.1The Landlord demises the Premises to the Tenant together with the rights set out in Schedule 2 except and reserving to the Landlord the rights set out in Part A of Schedule 3 subject to the Title Matters to hold them to the Tenant for the Term paying during the Term by way of rent:

4.1.1up to but excluding the Rent Commencement Date a peppercorn (if demanded) and from and including the Rent Commencement Date the Basic Rent which shall be paid yearly and proportionately for any part of a year by equal quarterly instalments in advance on the Quarter Days the first payment to be made on the Rent Commencement Date in respect of the period from and including the Rent Commencement Date to the next Quarter Day after the Rent Commencement Date and

4.1.2the Insurance Charge which shall be paid as stated in paragraph 3 of Schedule 4 and

4.1.3the Service Charge which shall be paid as stated in Schedule 7 and

4.1.4any other sums which may become due from the Tenant to the Landlord under the provisions of this Lease

4.2The Landlord’s right title and interest in that part of the Premises referred to as the Canopy Area is limited to those rights granted under the Canopy Licence. The demise of the Premises to the Tenant for the Term pursuant to clause 4.1 of this Lease shall in relation to the Canopy Area alone be limited to the grant of a sub-licence of the Landlord’s said right title and interest in the Canopy Area for the duration of the Term

5.TENANT’S COVENANTS

The Tenant covenants with the Landlord to observe and perform the covenants set out in Schedule 5 and those on its part contained in Schedule 4

6.LANDLORD’S COVENANTS

The Landlord covenants with the Tenant to observe and perform the covenants set out in Schedule 6 and those on its part contained in Schedule 4

7.FORFEITURE

7.1Without prejudice to any other rights of the Landlord if:

7.1.1the whole or part of the Rent remains unpaid twenty-one days after becoming due (whether demanded or not) or

7.1.2any of the Tenant’s covenants in this Lease are not performed or observed or

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7.1.3the Tenant or any guarantor of the Tenant’s obligations under this Lease:

(a)enters into any composition or arrangement with its creditors generally or any class of its creditors or

(b)is the subject of any judgment or order made against it which is not complied with within seven days or is the subject of any execution distress sequestration or other process levied upon or enforced against any part of its undertaking property assets or revenue

7.1.4the Tenant or any guarantor of the Tenant’s obligations under this Lease being a company

(a)is the subject of an order made or a resolution passed or analogous proceedings taken for winding up such company (save for the purpose of and followed within four months by an amalgamation or reconstruction which does not involve or arise out of insolvency or give rise to a reduction in capital and which is on terms previously approved by the Landlord) or

(b)an encumbrancer takes possession or exercises or attempts to exercise any power of sale or a receiver is appointed of the whole or any part of the undertaking property assets or revenues of such company or

(c)is the subject of an administration order or the giving of notice of intention to appoint an administrator or the filing at court of the prescribed documents in connection with the appointment of an administrator or

(d)stops payment or its directors take steps to declare a moratorium or becomes or is deemed to be insolvent or unable to pay its debts within the meaning of section 123 Insolvency Act 1986

7.1.5the Tenant or any guarantor of the Tenant’s obligations under this Lease being an individual

(a)is the subject of a bankruptcy order or

(b)is the subject of an order or appointment under section 253 or section 273 or section 286 Insolvency Act 1986 or

(c)is unable to pay his debts within the meaning of sections 267 and 268 Insolvency Act 1986

7.1.6any event occurs or proceedings are taken with respect to the Tenant or any guarantor of the Tenant’s obligations under this Lease in any jurisdiction to which it is subject which has an effect equivalent or similar to any of the events mentioned in clause 7.1.3

then and in any of such cases the Landlord may at any time (and notwithstanding the waiver of any previous right of re-entry) re-enter the Premises whereupon this Lease shall absolutely determine but without prejudice to any right of action of the Landlord in respect of any previous breach by the Tenant of this Lease

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8.MISCELLANEOUS

8.1Except to the extent that compensation may be payable by law notwithstanding any agreement to the contrary neither the Tenant nor any undertenant or any occupier of the Premises at any time shall be entitled to any compensation under any Enactment upon Determination or upon leaving the Premises

8.2Except to the extent that the Landlord may be liable under its the covenants in Schedule 6 or by law notwithstanding any agreement to the contrary the Landlord shall not be liable in any way to the Tenant or any undertenant or any servant agent licensee or invitee of the Tenant or any undertenant by reason of:

8.2.1any act neglect default or omission of any of the tenants or owners or occupiers of any adjoining or neighbouring premises (whether within the Building or not) or of any representative or employee of the Landlord (unless acting within the scope of the express authority of the Landlord) or

8.2.2the defective working stoppage or breakage of or leakage or overflow from any Conduit or any of the Plant or

8.2.3the obstruction by others of the Common Parts or the areas over which rights are granted by this Lease including the Rear Access Road

8.3The Landlord shall be entitled to make such alterations to the Common Parts as are reasonably necessary or are in the interests of good estate management or to alter renew or replace any Plant and to obstruct the Common Parts while doing so but shall in so doing ensure that reasonable access to the Premises or reasonable alternative access to the Premises is always available and the rights of the Tenant as set out in this Lease shall (if a new access is being created in substitution for the former) attach to the new access mutatis mutandis

8.4Nothing in this Lease shall imply or warrant that the Premises may lawfully be used for the Permitted Use and the Tenant acknowledges and admits that no such representation or warranty has ever been made by or on behalf of the Landlord

8.5The Landlord and the Tenant shall not be liable to each other for breach of any covenant in this Lease to the extent that its performance or observance becomes impossible or illegal

8.6The Landlord shall incur no liability to the Tenant or any undertenant or any predecessor in title of either of them by reason of any approval given to or inspection made of any drawings plans specifications or works prepared or carried out by or on behalf of any such party nor shall any such approval or inspection in any way relieve the Tenant from its obligations under this Lease

8.7In the interests of security the Landlord:

8.7.1may require anyone entering or leaving the Building to identify themselves and the party in the Building whom they are visiting and to record this information and their arrival and departure times in a book or other form of record kept for the purpose

8.7.2may prevent anyone entering the Building for the purpose of visiting the Premises unless that person has a key to the Premises or is authorised by the Tenant or any other permitted occupier of the Premises

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8.7.3may require the Tenant or permitted occupier of the Premises to escort any person visiting them from the security or reception desk to the Premises (and back again when that person leaves)

8.7.4may prevent anyone removing any items from the Building unless that person is authorised to do so by the Landlord or any tenant or permitted occupier of the Building

and in this regard:

(a)the rights of access and egress granted in Schedule 2 are subject to this clause and

(b)any authorisation required by this clause must be produced to the person requiring it or confirmed by a written or oral (or telephoned) statement from the person giving it

8.8The Landlord may add to vary or discontinue any of the Services where the Landlord considers it appropriate to do so having regard to the principles of good estate management Provided that variations shall (unless reasonably necessary for reasons outside of the Landlord’s control) not prevent (in the reasonable opinion of the Landlord) the Tenant from beneficial use and occupation of the Premises

8.9The Landlord shall not be liable in any way to the Tenant or any undertenant or any servant agent licensee or invitee of the Tenant or any undertenant by reason of the temporary stopping up or restriction of access across the Rear Access Road during works of repair maintenance and renewal to the same or by reason of any upgrading or renewal works carried out in anticipation of the Rear Access Road becoming a highway maintainable at the public expense Provided that the Landlord will use its reasonable endeavours to ensure that reasonable vehicular access to the Building is maintained during such works and where such works to the Rear Access Road prevent vehicular access to the Building provide reasonable alternative car parking arrangements reasonably proximate to the Building Provided Further that the Landlord shall have no liability in relation to or in connection with the Rear Access Road at all after it has become a highway maintainable at the public expense

8.10The Tenant shall not be or become entitled to any easement right quasi-easement or quasi-right save as expressly set out in Schedule 2

8.11This Lease does not pass to the Tenant the benefit of or the right to enforce any covenants which now benefit or which may in the future benefit the reversion to this Lease, and the Landlord shall be entitled in its sole discretion to waive, vary or release any such covenants

8.12Section 196 Law of Property Act 1925 (as amended by the Recorded Delivery Service Act 1962) shall apply to all notices which may need to be served under this Lease

8.13This Lease is a new tenancy for the purposes of the Landlord and Tenant (Covenants) Act 1995

9.VOID IF ORIGINAL LEASE DETERMINES

If the term of years granted by either the Original Leases is determined for any reason (other than by effluxion of time) this Lease shall become void.

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10.EXCLUSION OF LANDLORD AND TENANT ACT 1954

10.1The Landlord served a notice on the Tenant as required by section 38(A)(3)(a) of the Landlord and Tenant Act 1954 (“the 1954 Act”) and which applies to the tenancy created by this Lease before this Lease was entered into;

10.2The Tenant or a person duly authorised by the Tenant to do so made a statutory declaration dated 29 July 2015 in accordance with the requirements of section 38(A)(3)(b) of the 1954 Act;

10.3The parties agree that the provisions of sections 24 to 28 of the 1954 Act are excluded in relation to the tenancy created by this Lease.

11.TENANT’S BREAK CLAUSE

11.1If the Tenant wishes to determine this Lease on the Tenant’s Break Date and the Tenant gives to the Landlord notice in writing to that effect such notice to be received by the Landlord not later than six months before the Tenant’s Break Date (as to which time shall be of the essence) and if on the Tenant’s Break Date:

11.1.1there are no arrears of the Basic Rent; and

11.1.2the Tenant delivers up possession of the Property free from occupation by any third parties and without any subsisting underleases

then this Lease shall determine and the Term shall end on the Tenant’s Break Date but without prejudice to the rights and remedies of the Landlord in respect of any antecedent breach non-observance or non-performance of any of the Tenant’s covenants or the conditions contained in this Lease.

11.2The conditions in this clause 11 are for the benefit of the Landlord. If such notice is given but any such condition is not satisfied the Landlord may in its absolute discretion elect that such notice shall nevertheless have effect (without prejudice to any other rights of the Landlord).

11.3If this Lease ends on the Break Date, the Landlord is to repay to the Tenant within ten working days after the Break Date any part of the Basic Rent that has been paid by the Tenant in advance under the Lease that relates to the period after (but not including) the Break Date.

12.GOVERNING LAW AND JURISDICTION

12.1This Lease shall be governed by and construed in accordance with English Law.

12.2The parties irrevocably submit to the non-exclusive jurisdiction of the English Courts to settle any disputes which may arise out of or in connection with this Lease and waive any objection to any legal action or proceedings in any such court on the grounds of venue or on the grounds that the action or proceedings have been brought in an inconvenient or inappropriate forum.

12.3The bringing of any legal action or proceedings in any jurisdiction shall not preclude the Landlord from bringing any such legal action or proceedings in any other jurisdiction.

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12.4The Tenant appoints Eversheds LLP or such other firm of solicitors in England as may be notified in writing to the Landlord as its agents to accept the service of all proceedings on its behalf.

13.EXECUTION

This Lease has been executed by the parties to it as a deed and is delivered on the date described as the Date in the Prescribed Clauses

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SCHEDULE I -THE PREMISES

That Lettable Area on the fifth floor of the Building which is shown edged red on the Premises Plan and extends from the upper side of the floor slab immediately below that Lettable Area to the underside of the floor slab immediately above that Lettable Area excluding:

(a)the walls bounding that Lettable Area other than those walls (if any) indicated as party walls on the Premises Plan and

(b)all load-bearing walls and pillars within that Lettable Area and

(c)all structural floor slabs within that Lettable Area and

(d)all Conduits and Plant within that Lettable Area which do not serve that Lettable Area exclusively

(e)the window frames fitted into the external elevations and/or the main internal atrium of the Building together with the glass in such window frames

but including:

(a)the plaster and other finishes on the inner sides of the walls bounding that Lettable Area and on all faces of all load-bearing walls and pillars wholly within that Lettable Area and

(b)all ceilings and other finishes applied to the floor slab immediately above that Lettable Area and to any floor slab within that Lettable Area and

(c)all floors floor screeds and other finishes applied to the floor slab immediately below that Lettable Area and to any floor slab within that Lettable Area and

(d)all doors of that Lettable Area together with the frames glass and furniture of them and

(e)the whole of all non-load-bearing walls or partitions wholly within that Lettable Area and the internal window frames within such walls or partitions and the glass in any such internal windows

(f)one half in thickness of all walls (if any) bounding that Lettable Area and indicated as party walls on the Premises Plan and

(g)all Conduits and Plant within that Lettable Area and which serve that Lettable Area exclusively

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SCHEDULE 2

PART A - RIGHTS GRANTED IN COMMON

1.The right in common with the Landlord and all others for the time being authorised by the Landlord or otherwise entitled for the Tenant and any permitted undertenant or permitted occupier of the Premises:

1.1at all times to connect to and use all Conduits and Plant from time to time serving the Premises or provided for the benefit of the Premises for (in relation to the Conduits) the passage of surface water and sewage from and water gas electricity telecommunications and other services to and from the Premises subject to the other rights granted in this Part A without any right of access to areas outside the Premises for this purpose

1.2at all times together with its respective servants agents and visitors to pass and repass over the Common Parts and otherwise to use the Common Parts for the purpose for which they are designed

1.3of subjacent and lateral support and protection for the Premises from the remainder of the Building as presently enjoyed

1.4to pass and repass (in common with all persons authorised by the Landlord and his predecessors and successors in title) together with its respective servants agents and visitors with or without vehicles and for all purposes connected with the Tenant’s use and enjoyment of the Premises but not for any other purpose over and along the Rear Access Road until it is taken over as a highway maintainable at the public expense

1.5in case of emergency only together with its respective servants agents and visitors to use such accessways within the Building as may be allocated from time to time by the Landlord

1.6to display on the Signboard the Tenant’s name in the Tenant’s house-style

1.7to enter upon adjoining or neighbouring parts of the Building at all reasonable times and (except in case of emergency) upon reasonable notice and prior appointment with the Landlord and (as the case may require) with the tenants and occupiers thereof (subject to compliance with any other conditions restrictions and provisions affecting the exercise of such rights notified to the Tenant) for the purpose of connecting into inspecting maintaining cleansing repairing renewing and replacing such of the Conduits and all connections thereto as exclusively serve the Premises provided that the Tenant in exercising such rights shall do so as expeditiously as possible with all due diligence causing as little damage and inconvenience as possible and not interfere with the Building and forthwith make good to the satisfaction in all respects of the Landlord and the tenants and occupiers of the Building or the owners of any other property and any Plant relating thereto (as the case may require) affected thereby all damage or disturbance thereby occasioned

2.To place and retain:

2.1air conditioning plant and machinery at the Building; and

2.2satellite dishes;

together with connecting apparatus and conduits with the existing risers of the Building of such size, number and in such location as the Landlord shall approve (such approval not to be unreasonably withheld or delayed) subject to the Tenant keeping such equipment in

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good repair, complying with all legislation and it not causing a nuisance to other occupiers of the Building and neighbouring property and provided that the Landlord shall have the right at any time during the Term to relocate such designated area subject to:

2.2.1the Landlord giving to the Tenant not less than three months’ prior written notice of its intention to relocate the designated area;

2.2.2the relocated area:

(a)being as reasonably commodious to the tenant as the area designated prior to the relocation;

(b)not being materially smaller than the area prior to the relocation;

(c)being adequate so as to ensure a continuity of supply from the Tenant’s plant, machinery and equipment not materially less than the supply prior to the relocation and reasonably adequate for the Tenant’s use of the Premises.

PART B - EXCLUSIVE RIGHT

The exclusive right for the Tenant and any permitted undertenant or permitted occupier of the Premises together with its respective servants agents and visitors to park not more than fourteen private motor cars on the parking spaces shown numbered 1 and 2 and 46-57 on the Car Park Plan (the Initial Parking Spaces) or such other fourteen parking spaces within the Car Park as the Landlord may from time to time by written notice to the Tenant reasonably designate (for reasons of good estate management) in substitution for the Initial Parking Spaces

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SCHEDULE 3

PART A - EXCEPTIONS AND RESERVATIONS

1.The rights for the Landlord and all others from time to time authorised by the Landlord of otherwise entitled and without any liability to pay compensation:

1.1to carry out works to the Building or to any other property and to use them in whatever manner may be desired and to consent to others doing so whether or not in each case the access of light and air to the Premises or any other amenity from time to time enjoyed by them shall be affected in any way (save for the rights specifically granted by Schedule 2)

1.2to connect to and use all Conduits and Plant within or forming part of the Premises

1.3at all reasonable times and upon reasonable prior written notice to the Tenant (except in emergency when no notice need be given and entry may be at any time) to enter and remain on the Premises with or without tools appliances scaffolding and materials for the purposes of:

1.3.1installing inspecting repairing renewing reinstalling cleaning maintaining removing or connecting up to any Conduits or Plant or

1.3.2inspecting cleaning altering repairing maintaining renewing demolishing or rebuilding the remainder of the Building or any adjoining or adjacent premises or any other things used in common or

1.3.3carrying out works under paragraphs 3.7 or 9.4 of Schedule 5

1.3.4complying with the Landlord’s obligations under this Lease or with any other Legal Obligation of the Landlord

the person entering causing as little damage and inconvenience as reasonably possible and making good at its expense any damage caused to the Premises by such entry to the reasonable satisfaction of the Tenant

PART B - TITLE MATTERS

All rights of light and air and all easements rights covenants and other matters contained or referred to in the Property and Charges Registers of Title Numbers BK272505 BK159084 BK259553 BK397342 and BK417385 (or such title number(s) allocated to the aforesaid numbers if merged or amalgamated) and in the following documents:

Date	Document	Parties
12 May 1999	Licence to erect canopy	Slough Borough Council (1) and Edward Goodwin (2)
12 May 1999	Licence for landscaping	Slough Borough (1) Edward Goodwin (2)
12 May 1999	Licence to construct foundations underneath	Slough Borough Council (1) Edward Goodwin (2)

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Date	Document	Parties
	highway
26 August 1964	Agreement	London & Provincial Shop Centres (Holdings) Limited (1) The Mayor Aldermen & Burgesses of the Borough of Slough (2)
13 May 1976	Letter Agreement	Glowcorn Limited and Brandorpark Limited (1) and London & Provincial Shop Centres (Holdings) Limited (2) relating to 284 High Street Slough
30 August 1977	Agreement	London & Provincial Shop Centres (Holdings) Limited (1) Slough Borough Council (2)
13 July 1976	Section 52 Agreement	London & Provincial Shop Centres (Holdings) Limited (1) Glowcorn Limited (2) Brandorpark Limited (3) and Slough Borough Council (4)
10 May 1990	Section 52 Agreement	Slough Borough Council (1) Hill Samuel Life Assurance Limited (2)
7 December 1992	Section 106 Agreement	Slough Borough Council (1) Edward Richard Goodwin Christabel Sheila Scott-Balls and Rosalind Anne Goodwin (2) The Allied Trust Bank Limited (3)
23 December 1993	Section 106 Agreement	Slough Borough Council (1) Edward Richard Goodwin Christabel Sheila Scott-Balls and Rosalind Anne Goodwin (2) The Allied Trust Bank Limited (3)
1 April 1998	Section 106 Agreement	Slough Borough Council (1) Edward Richard Goodwin Christabel Sheila Scott-Balls and Rosalind Anne Goodwin (2) The Investec Bank (UK) Limited (3)

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SCHEDULE 4 - INSURANCE

1.LANDLORD’S INSURANCE OBLIGATIONS

1.1The Landlord shall effect and maintain the following insurances with Insurers in respect of the Building:

1.1.1Insurance against damage or destruction by the Insured Risks in a sum equal to the full reinstatement cost of the Building including:

(a)the cost of demolition shoring up and site clearance

(b)all architects’ surveyors’ and other professional fees and incidental expenses in connection with reinstatement

(c)any tax on those amounts to the extent applicable

1.1.2Third party and public liability insurance

1.1.3Insurance against liability under the defective premises act 1972 (and any other enactment in respect of which the landlord requires insurance)

1.2The Landlord may but shall not be obliged to insure against Loss of Rent

1.3The Landlord shall not be obliged to insure under paragraph 1.1 if and to the extent that:

1.3.1Insurance is not available in the London insurance market or

1.3.2Any normal excess exclusion or limitation imposed by Insurers applies or

1.3.3The Insurance Policies have become void or voidable by reason of any act neglect or default of the Tenant or any undertenant or any predecessor in title of either of them or any employee servant agent licensee or invitee of any of them

1.3.4And to the extent that any risk which would otherwise be an Insured Risk is not actually insured against as a result of any of the above matters, it shall not be treated as an Insured Risk

1.4The Landlord will upon request from time to time produce to the Tenant a copy or full details of the Insurance Policies and evidence that they are in force

1.5The Landlord will notify the Tenant in writing of any change in the Insurance Policies from time to time which is material to the Tenant

1.6If the Landlord receives any commissions or other benefits for effecting or maintaining insurance under this Lease it shall not be obliged to pass the benefit of them on to the Tenant

1.7If the Landlord is itself an insurance company it may self-insure in which case it shall be deemed to be doing so at its usual rates and on its usual terms for insuring a third party

2.REINSTATEMENT

2.1If the Building is destroyed or damaged by the Insured Risks then the Landlord will use all reasonable endeavours to obtain all Necessary Consents required to reinstate the Building

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and if these are obtained the Landlord will apply the insurance moneys received under the Insurance Policy maintained under paragraph 1.1.1 and all moneys received from the Tenant under paragraph 5 and any other contributors in reinstating the Building with all reasonable speed and will (save where the sums are insufficient as a result of a breach of the Tenant of paragraph 3.4.6) make up the shortfall out of its own resources

2.2The Building (except for the Premises) need not be reinstated under paragraph 2.1 to the same state appearance or layout as before but following any reinstatement the Premises shall be no less commodious and enjoy substantially the same rights and amenities as before

3.TENANT’S INSURANCE OBLIGATIONS

3.1The Tenant shall pay to the Landlord within 7 days of demand the Insurance Charge credit being given to the Tenant for any payments on account made by the Tenant

3.2The Tenant shall pay to the Landlord within 7 days of demand being made by the Landlord within one month before any Insurance Policies are due to be effected or renewed the Landlord’s reasonable estimate of the Insurance Charge and any repayment which may become due from the Landlord to the Tenant shall be made forthwith upon the actual Insurance Charge becoming known

3.3The Tenant shall pay to the Landlord on demand the Percentage of any normal excess which the Landlord is required to bear under any Insurance Policy

3.4The Tenant shall:

3.4.1not do or fail to do anything which causes any of the Insurance Policies to be void or voidable or increase the premiums payable under them

3.4.2not insure or maintain insurance of the Building or the Premises against any of the Insured Risks (save to the extent that the Landlord has failed to do so)

3.4.3notify the Landlord of the incidence of any Insured Risk or any other matter which ought reasonably to be notified to the Insurers

3.4.4pay on demand the whole of any increase in any premium arising from a breach of paragraph 3.4.1

3.4.5comply with all the conditions of the Insurance Policies and all requirements of the Insurers notified to the Tenant in writing

3.4.6notify the Landlord in writing of the value of any alterations additions or improvements which the Tenant or any undertenant proposes to make before those works are commenced

4.RENT CESSER

4.1If the Building is damaged or destroyed by any of the Insured Risks such that the Premises are unfit for occupation and use or incapable of reasonable access then (unless paragraph 5 applies) the Basic Rent and the Service Charge or a fair proportion of them according to the nature and extent of the damage in question shall be suspended until the earlier of:

4.1.1the date three years after the date of such damage or destruction and

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4.1.2the date on which the Premises are again fit for occupation and use and capable of reasonable access

4.2If payment of rent is suspended pursuant to clause 4.1, the Landlord is to repay to the Tenant, within ten working days after the date on which the rent is suspended, any part of the Basic Rent that has been paid by the Tenant in respect of the period from and including the date on which the rent is suspended.

5.VITIATION OF INSURANCE

5.1If the insurance money under any of the Insurance Policies is wholly or partly irrecoverable (or where paragraph 1.7 applies if such money would under the Landlord’s usual terms of insurance be wholly or partly irrecoverable) by reason of any act neglect or default of the Tenant or any undertenant or any predecessor in title of either of them or any employee servant agent licensee or invitee of any of them or where the sum insured is inadequate as a result of a breach by the Tenant of paragraph 3.4.6 then the Tenant will pay to the Landlord the irrecoverable amount or the amount of such shortfall as the case may be

5.2Subject to paragraph 5.4 payment under paragraph 5.1 shall be made on the later of 5 days after the date of demand by the Landlord and the date on which such insurance money (or the relevant part of it) would have been claimable under the Insurance Policies had they not been wholly or partly vitiated

5.3In addition to any sum payable under paragraph 5.1 the Tenant shall pay interest at the Interest Rate on the relevant sum from the date on which that sum is due to the date of payment

5.4The Tenant will if required by the Landlord in writing make the payment due under paragraph 5.1 before the Landlord becomes obliged under paragraph 2.1 to endeavour to obtain all Necessary Consents for reinstatement or to begin reinstatement

6.DETERMINATION

6.1If the Building is destroyed or damaged by any of the Insured Risks such that the Premises are unfit for occupation and use or incapable of reasonable access and if the Premises are not made fit for occupation and use or capable of reasonable access within three years after that destruction or damage occurs then either the Landlord or the Tenant may by written notice to the other served at any time after that date (but before the Premises are again fit for occupation and use) determine this Lease and if such notice is served:

6.1.1this Lease shall forthwith determine but the Determination shall be without prejudice to any right of action of either party in respect of any previous breach of this Lease by the other or to any obligation of the Tenant under paragraphs 3.3 or 5 (and any sums payable under those paragraphs shall be paid on Determination if they have not already become payable) and

6.1.2all moneys payable under the Insurance Policies or by the Tenant under paragraphs 3.3 or 5 shall be paid to and belong to the Landlord absolutely

7.UNINSURED RISKS

7.1In the event that the Building or any part of it is damaged or destroyed by an Uninsured Risk so that the Premises or a substantial part of it is inaccessible or unfit for occupation or use:

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7.1.1the Basic Rent and the Service Charge or a fair proportion of them according to the nature and the extent of the damage sustained (the amount of such proportion in case of dispute to be determined by the Surveyor acting as an expert and not as an arbitrator) shall be suspended and cease to be payable as from the date on which the destruction or damage occurred until the damage shall have been made good so that the Property is again accessible and fit for occupation and use;

7.1.2at any time after the date on which the damage or destruction occurred the Landlord may (but is not obliged to) either:

(a)give the Tenant a written notice that the Landlord will be irrevocably bound to rebuild and reinstate the Building at its own cost in accordance with paragraph 7.2 of this Lease, or

(b)give the Tenant a written notice immediately determining this Lease (but no such notice shall be given after the Property has been rendered accessible and fit for occupation and use pursuant to paragraph 7.2).

7.2

7.2.1if the Landlord gives the Tenant a notice under paragraph 7.1.2(a), then the damage shall be deemed to have been caused by an Insured Risk, the insurance monies shall be deemed to have been paid to the Landlord, and the provisions of paragraph 2 and 6 (excluding 6.1.2) shall apply save that all dates and periods referenced to the date of damage shall instead be referenced to the date of the notice and the period of three years in paragraph 6 shall be replaced with a period of four years.

7.2.2if the Landlord gives the Tenant notice under paragraph 7.1.2(b), such notice shall be without prejudice to any claim by either party in respect of any antecedent breach of covenant by the other.

7.3In the event that the whole or part of the Building is damaged or destroyed by an Uninsured Risk so that the Premises or a substantial part of it is inaccessible and/or unfit for occupation or use and the Landlord fails to give the Tenant any notice under paragraph 7.1.2 within 12 months of the damage or destruction occurring then the Tenant may immediately (but in any event not later than three months after the expiry of that period and as to which time is of the essence) give the Landlord a written notice determining this Lease with immediate effect (such notice being without prejudice to any claim by either party in respect of any antecedent breach of covenant by the other) but no such notice shall be given after the Property has been rendered accessible and fit for occupation and use.

8.ARBITRATION

8.1Any dispute under paragraphs 4, 5 or 6 shall be determined by a sole arbitrator to be agreed upon by the Landlord and the Tenant or in default of agreement to be nominated at the request of either of them or both of them jointly by the President and in either case in accordance with the Arbitration Act 1996

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SCHEDULE 5 - TENANT’S COVENANTS

1.TO PAY RENT

1.1To pay the Rent at the times and in the manner required by this Lease to such address as the Landlord may from time to time require notified to the Tenant in writing and without deduction (save as required by any enactment) or set-off whether legal or equitable and if any deduction has to be made to account for it to the appropriate Authority

1.2To pay the Basic Rent by banker’s standing order if required by the Landlord provided that for so long as the Tenant under this Lease is Guidance Software Inc. or a Group Company or a Connected Person of the same the Landlord shall accept payment by cheque alone

1.3If the Basic Rent or any part of it is not paid within 7 days of the date on which it is due or if any other part of the Rent is not paid within seven days after becoming due (whether or not demanded except where a demand is required by this Lease) the sum in question shall carry interest at the Interest Rate for the period from the date on which it became due until the date of actual payment and that interest shall be paid by the Tenant on demand

1.4If the Landlord refuses to accept Rent because an event referred to in clause 7.1 has occurred and the Landlord does not wish to waive its rights under that clause then such unpaid Rent shall nevertheless bear interest under paragraph 1.3 until the date the Rent in question is accepted

2.TO PAY OUTGOINGS

2.1To pay and discharge all Outgoings relating to the Premises at the times when they become due

2.2If at any time the Premises are not separately assessed for any Outgoings the Tenant shall pay to the Landlord on demand a fair and reasonable proportion of any assessment which includes the Premises

2.3Not without Consent (which shall not be unreasonably withheld or delayed)to make any claim for relief in respect of any Outgoings where to do so might prejudice the Landlord’s own actual or potential entitlement to relief then or in the future

2.4Not without Consent (which shall not be unreasonably withheld or delayed) to agree with the relevant Authority any rating or other assessment in respect of the Premises and to consult with (and have due regard to the representations of) the Landlord in the negotiations for any such assessment or any appeal against any such assessment

3.REPAIR AND DECORATION

3.1To repair the Premises and to keep them in good repair and condition provided that:

3.1.1nothing in this Lease shall oblige the Tenant to remedy a latent defect in the Premises which is:

(a)also a latent defect in the Retained Property; and

(b)for which the Landlord is entitled to make a claim under the Policy (whether or not the Landlord makes such a claim)

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(a Defect)

3.1.2the Landlord shall use all reasonable endeavours to remedy any Defect within the Premises of which the Tenant notifies it in writing within the Policy Period (save where the Policy has been vitiated by any act or default of the Tenant or any undertenant or their respective agents or visitors) and

3.1.3where damage or destruction to the Premises by a Defect renders the Premises unfit for occupation and use or incapable of reasonable access the Premises shall be deemed, for the purposes of paragraph 6 of Schedule 4 to this Lease, to have been damaged by an Insured Risk

3.2To replace any Landlord’s fixtures and fittings in the Premises that are beyond reasonable economic repair at any time during the Term or at Determination with new ones of a like quality and nature

3.3To keep the Premises painted or otherwise decorated to a high standard and to redecorate them to a high standard at intervals of not more than three years and also during the last year prior to or at the termination of the Term (having on the last occasion first obtained Consent to the colour scheme which Consent shall not be unreasonably withheld or delayed)

3.4Paragraphs 3.1, 3.2 and 3.3 shall not apply to the extent that any lack of repair or decoration is caused by damage by an Insured Risk (unless paragraph 5 of Schedule 4 applies)

3.5To keep the Premises in a clean and tidy condition

3.6To clean:

3.6.1the inside of the glass of all windows comprised in the Premises; and

3.6.2the inside of the glass of all windows in the walls (including the curtain wall comprising the front elevation to the Building) bounding the Premises

as often as shall be reasonably necessary but in any event at least once in every three months

3.7If the Tenant is in breach of this paragraph 3 then in addition to any other rights which the Landlord may have:

3.7.1the Landlord may serve on the Tenant written notice specifying the breach in question and

3.7.2the Tenant shall as soon as practicable after receipt of that notice and in any event within two months (or sooner in emergency) commence and proceed with all due speed to remedy the breach and

3.7.3if the Tenant fails to comply with paragraph 3.7.2 the Landlord may enter the Premises and carry out the relevant work and all proper and reasonable costs incurred by the Landlord in so doing shall be a debt from the Tenant to the Landlord which the Tenant shall pay within 7 days of demand with interest on them at the Interest Rate from the date of demand to the date of payment

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3.8The Tenant shall give written notice to the Landlord immediately on becoming aware of:

3.8.1any damage to or destruction of the Building or

3.8.2any defect or want of repair in the Building (including without limitation any relevant defect within the meaning of section 4 Defective Premises Act 1972) which the Landlord is liable to repair under this Lease

3.9Any covenants given by the Tenant to repair, decorate and yield up the Property are to be construed as if they had been given at the date of the Original Leases.

3.10All provisions relating to alterations in the Original Licences for Alterations and the Original Leases including any obligations to reinstate, will apply to this Lease as if any obligations to reinstate any alterations will apply at the end or sooner determination of the Term.

4.YIELDING UP ON DETERMINATION

4.1On Determination the Tenant shall yield up the Premises to the Landlord with vacant possession in a state of repair condition and decoration which is consistent with the proper performance of the Tenant’s covenants in this Lease

4.2If on Determination the Tenant leaves any fixtures fittings or other items in the Premises the Landlord may treat them as having been abandoned and may remove destroy or dispose of them as the Landlord wishes and the Tenant shall pay on demand to the Landlord any proper costs incurred in connection with such disposal

4.3Immediately before Determination if and to the extent required by the Landlord the Tenant shall reinstate all alterations additions or improvements made to the Premises at any time during the Term (or pursuant to any agreement for lease made before the start of the Term) and where this involves the disconnection of Plant or Conduits the Tenant shall ensure that the disconnection is carried out properly and safely and that the Plant and Conduits are suitably sealed off or capped and left in a safe condition so as not to interfere with the continued functioning of the Plant or use of the Conduits elsewhere in the Building

4.4The Tenant shall make good any damage caused in complying with paragraph 4.3 and shall carry out all relevant works (including the making good of damage) to the reasonable satisfaction of the Landlord

4.5The Tenant shall at its own expense undertake such remediation clean up and restoration works are necessary to ensure to the reasonable satisfaction of the Landlord that on Determination the Premises are free from contamination caused by the Tenant or any undertenant or any predecessor in title of either of them or any employee servant agent or invitee of any of them

4.6As soon as practicable on Determination the Tenant shall make an application to close the registered title of this Lease and shall ensure that any requisitions raised by HM Land Registry in connection with that application are dealt with within the prescribed time frames set by HM Land Registry and that the Landlord is informed of progress and completion of the application

4.7On Determination the Tenant shall hand to the Landlord all records in its possession relating to any review or assessment or plan prepared pursuant to regulation 4 of Control of Asbestos Regulations 2002

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5.USE

5.1The Tenant shall not use the Premises for any purpose except the Permitted Use

5.2For so long as the Tenant under this Lease is Guidance Software Inc. a Group Company or a Connected Person of the same the meaning given to the term Permitted Use in the Prescribed Clauses shall be amended by the addition of the words “and ancillary training classrooms if required”

5.3The Tenant shall not use the Premises for any purpose or activity which is illegal immoral noisy noxious dangerous or offensive or which causes a nuisance to or damage or annoyance to the Landlord or any other tenant of the Building

5.4The Tenant shall not use the Premises for the purpose or residing or sleeping nor for any sale by auction nor as a betting office

5.5The Tenant shall not enter into any covenant in favour of any person (other than the Landlord) nor require a covenant from any person the effect of which is to restrict the use of the Premises further than it is already restricted by this Lease

6.ALTERATIONS

6.1The Tenant shall make no alteration addition or improvement to the Premises or the Building whether structural or otherwise except as expressly permitted under paragraph 6.2 or 6.3

6.2The Tenant may carry out alterations additions or improvements to the Premises which are wholly within the Premises and which do not affect any part of the exterior or structure of the Building and which do not interfere with or affect the Services or the heating, sprinkler or air conditioning systems or other Conduits within the Building where:

6.2.1the Tenant has submitted to the Landlord detailed plans and specifications showing the works and

6.2.2the Tenant has given to the Landlord such covenants relating to the carrying out of the works as the Landlord may reasonably require and

6.2.3the Tenant has obtained Consent to the works (which shall not be unreasonably withheld or delayed)

6.3Notwithstanding paragraph 6.2 the Tenant may carry out the erection or removal of internal non-structural demountable partitioning which does not affect any part of the exterior or structure of the Building and which does not interfere with or affect the Services or the heating sprinkler or air conditioning systems or other Conduits within the Building without firstly obtaining Landlord’s Consent provided:

6.3.1The Tenant submits to the Landlord detailed plans and specifications showing the executed alterations within eight weeks of completing the works

6.3.2The works of alterations are carried out with materials of suitable good quality in a proper and workmanlike manner and in compliance with all statutory requirements and consents

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6.3.3The Tenant reinstates the Premises at the Determination of the Term to the condition in which the same were prior to the making of the alterations and makes good any damage caused to the Premises by any such reinstatement or removal

6.4If the Tenant is a provider of services within Disability Discrimination Act 1995 it may with Consent (which should not be unreasonably withheld or delayed) carry out alterations additions or improvements to the Premises which are necessary in order to comply with section 27 of Disability Discrimination Act 1995 and any Consent may be made subject to conditions which it is reasonable to impose but subject at all times to any statutory requirements

7.SIGNS

7.1The Tenant shall not fix or display in or on the Premises any Sign which can be seen from outside the Premises without first obtaining Consent

7.2The Landlord shall not unreasonably withhold or delay Consent under paragraph 7.1 to the Tenant placing on the entrance door to the Premises a non-illuminated non-moving Sign specifying the name of the Tenant or any permitted undertenant or occupier and the business carried on at the Premises

8.DEALINGS WITH THE PREMISES

8.1Unless expressly permitted under paragraph 8.8 or by a Consent granted under paragraphs 8.2, 8.3 or 8.4 the Tenant shall not assign underlet charge part with or share possession or occupation of all or any part of the Premises nor hold the Premises on trust for any other person

8.2The Landlord shall not unreasonably withhold or delay Consent to a legal charge of the whole of the Premises

8.3The Landlord shall not unreasonably withhold or delay Consent to an assignment of the whole of the Premises but the Landlord and the Tenant agree for the purposes of section 19(1A) Landlord and Tenant Act 1927 (and without limiting the Landlord’s ability to withhold Consent where it is otherwise reasonable to do so or to impose other reasonable conditions) that the Landlord may withhold that Consent unless the following conditions are satisfied:

8.3.1the prospective assignee is not a Group Company or a Connected Person (provided that this condition shall not apply for so long as Guidance Software Inc. (registered at Companies House as a foreign company with registered number FC023582) is the Tenant under this Lease, provided that the financial standing of the proposed assignee is not (in the opinion of the Landlord acting reasonably) equivalent to or better than the financial standing of Guidance Software Inc. (registered at Companies House as a foreign company with registered number FC023582) when assessed together with any guarantor of the ssame (other than pursuant to an authorised guarantee agreement)); and

8.3.2the prospective assignee is a company incorporated in England and Wales or anywhere in the European Union and

8.3.3in the reasonable opinion of the Landlord the prospective assignee is and will continue to be of sufficient financial standing to enable it to comply with the Tenant’s covenants in this Lease and

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8.3.4in the reasonable opinion of the Landlord the assignment to the proposed assignee will not have an adverse effect on the value of and would not otherwise adversely affect the Landlord’s reversion to the Premises and

8.3.5if reasonably required, the Tenant (and any former Tenant who by virtue of there having been an “excluded assignment” as defined in Section 11 of the Landlord and Tenant (Covenants) Act 1995 has not been released from the Tenant’s covenants in this Lease) enters into an Authorised Guarantee Agreement with the Landlord

8.3.6if the Landlord reasonably requires, up to a maximum of 2 guarantors acceptable to the Landlord acting reasonably has guaranteed to the Landlord the due performance of the prospective assignee’s obligations in such form as the Landlord may reasonably require and

8.3.7if the Landlord reasonably requires, any security for the Tenant’s obligations under this Lease which the Landlord holds immediately before the assignment is continued or renewed in each case on such terms as the Landlord may reasonably require in respect of the Tenant’s liability under the Authorised Guarantee Agreement referred to in paragraph 8.3.5 (but this paragraph shall not apply to any Authorised Guarantee Agreement entered into by a former Tenant or by any guarantor of a former Tenant) and

8.3.8any sum properly due from the Tenant to the Landlord under this Lease is paid and any other material subsisting breach of the Tenant’s covenants in this Lease is remedied

8.4The Landlord shall not unreasonably withhold Consent to an underletting of the whole or a Permitted Part of the Premises where all of the following conditions are satisfied:

8.4.1the prospective undertenant has covenanted with the Landlord that until it assigns the underlease with Consent as required by the underlease it will observe and perform the Tenant’s covenants and obligations in this Lease (except the covenant to pay Rent and in the case of an underletting of part insofar only as such covenants affect the underlet premises) and the undertenant’s covenants and obligations in the underlease

8.4.2if the Landlord reasonably requires a guarantor or guarantors acceptable to the Landlord has guaranteed the due performance by the undertenant of its above covenant in terms as the Landlord may reasonably require and

8.4.3no fine or premium is taken for the grant of the underlease and

8.4.4the basic rent payable under the underlease is not less than the open market rent reasonably obtainable for the Premises so let and

8.4.5any rent free period or other financial inducements given to the undertenant are no greater than is usual at the time in all the circumstances and

8.4.6the underlease contains a provision prohibiting assignment until the prospective assignee covenants with the Landlord under this Lease in the terms of paragraph 8.4.1

8.4.7the form of the underlease has been approved in writing by the Landlord (approval not to be unreasonably withheld or delayed where the provisions of it are

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consistent with the provisions of this Lease (where relevant so far as appropriate to the Permitted Part)

8.4.8the underlease shall be contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954 and the Tenant shall not grant the underlease until it has correctly served on the undertenant the notice required by section 38A(3)(a) of the Landlord and Tenant Act 1954 and received a statutory declaration in accordance with section 38A(3)(b) of the Landlord and Tenant Act 1954 or such other requirements and processes in compliance with any future statute or legislation which supersedes it

and no subletting of a Permitted Part shall result in the division of the Premises into more than 4 occupancies (being 2 underleases of each of the North and South units).

8.5The Tenant shall:

8.5.1enforce against any undertenant the provisions of any underlease and shall not waive them and

8.5.2not (without Consent which shall not be unreasonably withheld or delayed) vary the terms of any underlease or

8.6The Tenant shall not require or permit any rent reserved by any underlease to be commuted or to be paid more than one quarter in advance or to be reduced

8.7Any Consent granted under this paragraph 8 shall (unless it expressly states otherwise) only be valid if the dealing to which it relates is completed within three months after the date of the Consent

8.8The Tenant may (after giving written notice to the Landlord detailing the name/the Group Company; and its relationship with the Tenant) share occupation of the Premises with any Group Company on condition that the sharing shall not create any relationship of landlord and tenant and that on any occupier ceasing to be a Group Company the occupation shall immediately cease or be otherwise documented in accordance with this paragraph 8

8.9Within twenty one days after any dealing with or transmission or devolution of the Premises or any interest in it (whether or not specifically referred to in this paragraph 8) the Tenant shall give to the Landlord’s solicitors at that time notice in duplicate specifying the basic particulars of the matter in question and at the same time supply a certified copy of any instrument making or evidencing it and pay those solicitors a registration fee of £25 or such higher sum as shall be reasonable at the time (but no greater than £35)

8.10From time to time on demand during the Term the Tenant shall provide the Landlord with particulars of all derivative interests of or in the Premises including particulars of rents rent reviews and service and maintenance charges payable in respect of them and copies of any relevant documents and the identity of the occupiers of the Premises

8.11The Tenant shall as soon as practicable following completion of any dealing with or transmission or devolution of the Premises or any interest in it which is registrable at HM Land Registry:

8.11.1apply to register it (or use reasonable endeavours to procure that the relevant person so applies) and

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8.11.2deal with any requisition raised by HM Land Registry in connection with any application to register promptly and

8.11.3on completion of the registration send to the Landlord official copies of its title showing the completed registration

9.LEGAL OBLIGATIONS AND NECESSARY CONSENTS

9.1The Tenant shall comply with all Legal Obligations relating to the Premises (save that the Tenant shall not be in breach of this covenant in respect of any breaches of the Planning Permissions relating to the construction and development of the Building as exist prior to the date on which the Tenant takes occupation under this Lease

9.2Where the Tenant receives from an Authority any formal notice relating to the Premises or the Building (whether or not the notice is of a Legal Obligation) it shall as soon as reasonably practicable send a copy to the Landlord and if requested by the Landlord make or join in making such objections representations or appeals in respect of it as the Landlord may reasonably require (except those which are to the detriment of the business of the Tenant or any permitted occupier of the Premises or are otherwise in the reasonable opinion of the Tenant detrimental to the Tenant or the permitted occupier of the Premises)

9.3Where any Legal Obligation requires the carrying out of works to the Premises the Tenant shall (if and to the extent required by this Lease) apply for Consent and any Necessary Consents to carry out the works and after obtaining them the Tenant shall carry out the works to the reasonable satisfaction of the Landlord

9.4Where the Legal Obligation requires the carrying out of works both on the Premises and the Retained Property the Landlord may carry out those works after written notice is given to the Tenant (and may refuse Consent to the Tenant to carry out the part of them which affects the Premises) and the Tenant shall pay to the Landlord on demand the fair and reasonable proportion of the cost of those works which relate to the Premises PROVIDED that the works shall be carried out to the reasonable satisfaction of the Tenant, as little inconvenience as reasonably practicable is caused to the Tenant in carrying out the works and any damage caused to the Premises is made good to the reasonable satisfaction of the Tenant and a fair and reasonable proportion of any incidental fees and expenses

9.5Before doing anything at the Premises which requires any Necessary Consents (and whether or not the Landlord shall have issued its Consent to that thing under the other provisions of this Lease) the Tenant shall:

9.5.1obtain all Necessary Consents for the purpose and

9.5.2produce copies of all Necessary Consents to the Landlord and

9.5.3obtain the approval of the Landlord (which shall not be unreasonably withheld or delayed) to the Necessary Consents and the implementation of them

PROVIDED that the Tenant shall not without Consent make or alter any application for any Necessary Consent

9.6Where any Necessary Consent implemented by the Tenant or any undertenant or permitted occupier of the Premises requires works to be carried out by a date subsequent.

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to Determination the Tenant shall use all reasonable endeavours to ensure that those works are completed before Determination

9.7If and when called upon to do so the Tenant shall produce to the Landlord all plans documents and other evidence which the Landlord may require in order to satisfy itself that this paragraph 9 has been complied with

9.8Without prejudice to the generality of this paragraph 9 in respect of any works carried out by or on behalf of the Tenant or any undertenant or other occupier of the Premises (including any works of reinstatement which may be carried out after Determination) to which the Construction (Design and Management) Regulations 1994 (the Regulations) apply the Tenant shall:

9.8.1comply in all respects with the Regulations

9.8.2act as the client in respect of those works and serve a declaration to that effect on the Health and Safety Executive pursuant to Regulation 4 of the Regulations and give a copy to the Landlord

9.8.3provide on request to the Landlord copies of the whole or any part of the Health and Safety file maintained pursuant to the Regulations and hand that file to the Landlord on Determination

9.8.4obtain such copyright licences as are necessary to enable the Tenant to comply with this paragraph 9.8 and to allow the Landlord and persons authorised by it without cost to take further copies of the Health and Safety file

10.CONDUITS AND PLANT

10.1The Tenant shall not use the Conduits or the Plant:

10.1.1for any purpose other than that for which they are designed or

10.1.2so as to exceed the capacity for which they are designed (having regard where relevant to the fact that such use is to be shared with other occupiers of the Building) and of which the Tenant has been made aware

10.2The Tenant will keep reasonably clean and reasonably free from obstruction all Conduits in the Premises

11.OVERLOADING AND DAMAGE

11.1The Tenant shall not knowingly overload any part of the Premises or the Building

11.2The Tenant shall not install in the Premises any machinery other than normal light and quiet office machinery

11.3The Tenant shall not damage or obstruct any part of the Building or any accesses to it

11.4The Tenant shall maintain to the reasonable satisfaction of the Landlord and to the satisfaction of the Insurers adequate fire prevention apparatus upon the Premises and shall from time to time remove from the Premises all waste and inflammable material

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11.5The Tenant shall not exhibit or place any articles of any kind outside the Premises or transact any business except inside the Premises (save as permitted in this Lease)

11.6The Tenant shall not keep produce or use any Hazardous Material on the Premises without Consent PROVIDED THAT the Tenant may handle, store and use products containing d minimus quantities of Hazardous Material (such as cleaning supplies, toners for the copiers, paints, paint remover and the like) on the Premises reasonably necessary for the Tenant’s business and for general office purposes without the need to obtain Consent

11.7Any request by the Tenant for Consent under paragraph 11.6 shall be in writing and shall be accompanied by

11.7.1all information reasonably required to demonstrate to the reasonable satisfaction of the Landlord that any such Hazardous Material is reasonably necessary to the business of the Tenant and will be kept produced or used in such manner as to comply with all Legal Obligations applicable to such Hazardous Material and to prevent Environmental Damage

11.7.2all reasonably relevant information regarding compliance with any relevant Legal Obligations (such information to include without limitation copies of applications for Necessary Consents relating to any manufacturing processes waste treatments recycling storage or disposal practices)

11.8The Tenant shall forthwith notify the Landlord in writing of any material change in the facts and circumstances assumed or reported in any application for or granting of Consent or any Necessary Consent relating to any Hazardous Material kept produced or used on the Premises

12.RIGHTS AND EASEMENTS

12.1The Tenant shall not grant to any third party any rights of any nature over the Premises (except as permitted under paragraph 8)

12.2The Tenant shall preserve all easements and rights currently enjoyed by the Premises and in particular (without limitation) will not materially obstruct any of the windows of the Premises

12.3The Tenant shall not do or omit to do anything whereby any right of prescription may arise against the Landlord

12.4The Tenant shall not obstruct the Common Parts in the exercise of the right granted by paragraph 1.2 of the Schedule 2

13.REGULATIONS

13.1The Tenant shall comply with the Regulations and shall procure that all occupiers of and visitors to the Premises comply with them

14.ENTRY BY LANDLORD

14.1Upon reasonable prior written notice and at all reasonable times (except in emergency when no notice need be given) the Tenant shall permit the Landlord and those authorised by it at all times to enter (and remain unobstructed on) the Premises for the purpose of:

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14.1.1exercising the rights reserved by Schedule 3 or

14.1.2inspecting the Premises for any purpose in connection with this Lease or

14.1.3making surveys or drawings of the Premises or

14.1.4erecting a notice board stating that the Premises are to let or for sale in a sensible location (which the Tenant shall not remove interfere with or obscure) or

14.1.5complying with any of the Landlord’s obligations under this Lease or with any other Legal Obligation of the Landlord or

14.1.6carrying out works which are the responsibility of the Tenant under this Lease but which the Tenant has failed to do

14.2The Tenant shall keep the Landlord informed of the names and telephone numbers of at least two persons who have keys to the Premises

15.COSTS

15.1The Tenant shall pay to the Landlord within 7 days of written demand on a full indemnity basis all costs expenses losses and liabilities incurred by the Landlord as a result of or in connection with:

15.1.1any breach by the Tenant of any of its covenants or obligations in this Lease and/or the enforcement or attempted enforcement of those covenants and obligations by the Landlord

15.1.2any application for Consent under this Lease whether or not that Consent is refused or the application is withdrawn

15.1.3the preparation and service of any notice under section 146 or 147 Law of Property Act 1925 notwithstanding that forfeiture may be avoided otherwise than by relief granted by the Court

15.1.4the preparation and service of any notice under paragraph 3.7 or any schedule of dilapidations served during the Term or within three months after Determination

16.LOSS OF GUARANTOR

16.1If any party who has guaranteed to the Landlord the Tenant’s obligations contained in this Lease dies or is the subject of any of the events referred to in clauses 7.1.3, 7.1.5 and 7.1.6 then within 14 days after the event the Tenant shall give notice of it to the Landlord and if so required by the Landlord at the expense of the Tenant the Tenant shall within twenty eight days after that event procure a further guarantee in the same terms from a party acceptable to the Landlord

17.TITLE MATTERS

17.1The Tenant shall observe and perform all covenants in respect of the Premises arising from the Title Matters so far as they affect the Premises and are still subsisting

18.REGISTRATION

18.1The Tenant shall

35

18.1.1as soon as reasonably practicable following the grant of this Lease apply to register this Lease at the Land Registry

18.1.2ensure that any requisitions raised by the Land Registry in connection with that application are dealt with promptly and

18.1.3within one month of completion of the registration send the Landlord official copies of its title

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SCHEDULE 6 - LANDLORD’S COVENANTS

1.QUIET ENJOYMENT

1.1If the Tenant observes and performs the Tenant’s covenants and obligations in this Lease the Tenant may peaceably hold and enjoy the Premises during the Term without any lawful interruption or disturbance from or by the Landlord or any person claiming through under or in trust for the Landlord

2.PROVISION OF SERVICES

2.1The Landlord shall provide the Basic Services and such of the Additional Services as the Landlord from time to time acting reasonably and in the interests of good estate management considers appropriate

2.2Notwithstanding paragraph 2.1 the Landlord shall not be obliged to provide the Services where:

2.2.1it is prevented from doing so by circumstances beyond its control including without limitation breakdown damage the need for inspection or repair shortage of fuel equipment or materials and inclement weather or

2.2.2the Service cannot reasonably be provided as a result of works of alteration inspection or repair or any other works being carried out at the Building which are reasonably necessary and in the interests of good estate management or

2.2.3any Rent is in arrear

but in the circumstances set out in paragraphs 2.2.1 or 2.2.2 the Landlord shall restore the Service as soon as reasonably practicable and shall use all reasonable endeavours to minimise any disruption to the Tenant

3.

3.1By way of indemnity only to observe and perform the obligations on the part of “the Owner” contained within the Section 106 Agreements and to keep the Tenant indemnified from and against all costs claims demands and liabilities arising from any enforcement action taken by Slough Borough Council against the Tenant for breach non performance or non-observance thereof

3.2The Landlord agrees to waive the prohibition on set-off contained at paragraph 1.1 to Schedule 5 of this Lease solely and exclusively in relation to costs claims demands and liabilities incurred by the Tenant resulting directly from any enforcement action taken by Slough Borough Council against the Tenant for breach non performance or non observance by the Landlord of the obligations on the part of “the Owner” contained within the Section 106 Agreement and in respect of which breaches the Landlord has failed to indemnify the Tenant pursuant to its obligations under paragraph 3.1 of this Schedule

4.

4.1The Landlord will at the written request of the Tenant and subject to the Landlord receiving an indemnity from the Tenant in a form and substance satisfactory to the Landlord (acting reasonably) in respect of any proper costs losses or expenses incurred by the Landlord in or in connection with any such claim (including any deductible) take reasonable

37

steps to pursue reasonable claims under the Policy within the Policy Cover Period relating to latent defects in the Premises of which the Tenant has notified the Landlord in writing and in respect of which the Landlord is properly entitled to claim damages under the Policy

4.2Subject to paragraph 4.3 the Landlord will apply any amounts actually received by the Landlord pursuant to a claim under the Policy made under paragraph 4.1:

4.2.1firstly in paying or reimbursing the Landlord’s costs losses or expenses save to the extent that the Landlord has previously recovered them from the Tenant; and

4.2.2secondly in paying or reimbursing the Tenant for its costs and expenses incurred in complying with its repairing covenant under paragraph 3 of Schedule 5 of this Lease in relation to disrepair to the Premises attributable to such a latent defect covered under the Policy.

4.3The Landlord shall:

4.3.1have no liability under paragraph 4.2 to pay or reimburse the Tenant any amounts over and above those actually received (following the deduction of any excess or deductible applicable to the Policy) by the Landlord pursuant to a claim on the Policy made under paragraph 4.1 and after the deductions referred to in paragraph

4.3.2have no further liability to the Tenant under this Lease in relation to costs losses damages and expenses resulting from any latent defects in the Premises

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SCHEDULE 7 - SERVICES AND SERVICE CHARGE

1.BASIC SERVICES

1.1The Basic Services are:

1.1.1the repair decoration inspection testing maintenance and renewal of the Retained Property

1.1.2the cleaning of the Common Parts and the exterior of the Building including the exterior of all windows as often as is reasonably required

1.1.3the provision of lighting to the Common Parts when reasonably required

1.1.4the provision of heating to the Building when reasonably required between the hours of 0600 and 2100 on Monday to Friday (inclusive) to such temperature as shall be required in order to satisfy the requirements of any statute which applies to the Building

1.1.5the provision of air-conditioning to the Building (including for the avoidance of doubt air-conditioning to the Premises) between the hours of 0600 and 2100 on Monday to Friday (inclusive) to such temperature as shall be required in order to satisfy the requirements of any statute which applies to the Building but so that the temperature shall not exceed 25°C

1.1.6the provision of hot and cold water to any hot or cold taps in the Common Parts

1.1.7the provision of towels soap and other requisites to any toilets in the Common Parts

1.1.8the provision and operation in the Common Parts of such fire prevention fire fighting and fire alarm equipment and signs as may be required by any Authority or by the Insurers

1.1.9the provision and operation of the Signboard

1.1.10the provision of refuse bins and the operation of a refuse collection service for the Building

1.1.11the provision of reasonable and customary security including provision and operation of a security patrol and/or security observation system and/or other security equipment for the Building including alarm system

1.1.12the maintenance of the grounds of the Building including keeping all landscaping stocked and tended

1.1.13taking reasonable steps to pursue reasonable claims under the Policy within the Policy Cover Period relating to latent defects in the Retained Property in respect of which the Landlord is properly and reasonably entitled to claim damages under the Policy

2.ADDITIONAL SERVICES

2.1The Additional Services are:

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2.1.1the carpeting furnishing and equipping of the Common Parts

2.1.2the provision and operation of any Plant not included within the Basic Services

2.1.3the provision either permanently or at times which the Landlord reasonably considers appropriate in the interests of good estate management of pictures floral displays flags decorative lights and other decorations in the Common Parts

2.1.4the provision and maintenance of appropriate or useful Signs or notices in the Common Parts or visible from the Common Parts or from outside the Building

2.1.5keeping planted areas within the beds located on the public highway immediately in front of the entrance steps to the Building stocked and tended

2.1.6the provision of any other services which the Landlord from time to time reasonably considers appropriate having regard to the principles of good estate management

3.SERVICE COSTS

3.1The Service Costs are all costs and expenses properly incurred by the Landlord in the operation and management of the Building and the provision of services to it including without limitation:

3.1.1the cost of providing the Services;

3.1.2the cost of providing to the Retained Property any service which had it been provided to the Common Parts could have constituted one of the Services

3.1.3the cost of all fuel or other energy sources for the Plant and/or the Retained Property

3.1.4any costs which the Landlord may be required to pay to other parties in respect of the Title Matters (except for rent under any Superior Lease) or as a contribution to the cost of the Services or to the repair decoration inspecting testing maintenance or renewal of any areas or structures used in common with other parties

3.1.5the Outgoings of the Retained Property and any other property used exclusively in connection with the provision of the Services

3.1.6the cost of preparing submitting and settling any insurance claims relating to the Building

3.1.7the cost of employing or retaining the Managing Agents for the Building

3.1.8the cost of employing or retaining staff to provide the Services including all incidental expenditure relating to that employment which without limitation shall include expenditure on pensions insurance health welfare industrial training levies redundancy clothing tools machinery equipment and vehicles which in each case the Landlord reasonably considers are required for the proper performance by the staff in question of their duties

40

3.1.9the cost of complying with making representations against or otherwise contesting the incidence of any Legal Obligation or prospective Legal Obligation which will or may affect the Building

3.1.10without prejudice to paragraph 3.1.9 the cost of complying with the Control of Asbestos Regulations 2002 in relation to any parts of the Building for which the Landlord is liable under regulation 4 thereof

3.1.11the cost of repairing maintaining and renewing the Rear Access Road, until such time as the same is highway maintainable at the public expense Provided that this head of costs shall not extend to include the costs of procuring the adoption of the Rear Access Road by the local authority (including roadworks and improvements professional fees construction expenses and legal agreements which, in each case, are required in connection with procuring such adoption)

3.1.12the cost of leasing any item required in connection with the Services

3.1.13the cost of enforcing the Regulations against occupiers of the Building

3.1.14the cost of calculating the Service Charge for each tenant and the preparation and issue of certificates accounts and audits in respect of the Service Charge

3.1.15all professional charges fees and expenses payable by the Landlord in respect of any of the Services or the Service Costs

3.1.16during any period for which the Landlord does not employ an independent Managing Agent to manage the Building a reasonable sum retainable by the Landlord equal to the charges which a firm of surveyors based in central London might reasonably be expected to make for managing the Building

3.1.17all VAT payable by the Landlord in respect of the Service Costs insofar as it is not recoverable by the Landlord as an input

3.1.18The proper costs of pursuing and enforcing any claim and taking or defending any proceedings which the Landlord may make in exercise of its duties referred to in paragraph 1.1.13 including without limitation any deductible or excess payable under the Policy

4.CALCULATION AND PAYMENT OF SERVICE CHARGE

4.1On the grant hereof the Tenant will pay to the Landlord such sum as represents the Landlord’s fair and reasonable estimate of the Service Charge due in respect of the interval between the grant and the next following Service Charge Account Date and in making that estimate the Landlord shall have regard to the Service Costs (so far as ascertained) for the Service Charge Period in which this Lease is granted

4.2The Landlord will notify the Tenant in writing before or during any Service Charge Period of the Estimated Service Charge payable by the Tenant during that Service Charge Period

4.3The Tenant shall pay the Estimated Service Charge by four equal quarterly instalments on the Quarter Days

4.4The Landlord may revise the Estimated Service Charge having reasonable regard to the anticipated Total Service Costs for the relevant Service Charge Period and the Tenant shall

41

pay to the Landlord any additional Estimated Service Charge which may become due as a result within fourteen days of demand

4.5As soon as reasonably practicable after each Service Charge Account Date the Landlord will supply the Tenant with a Service Charge Statement showing:

4.5.1the Total Service Costs for the Service Charge Period and

4.5.2the Service Charge for the Service Charge Period

4.6If the Service Charge exceeds the Estimated Service Charge the Tenant shall pay the excess to the Landlord within fourteen days of receipt of the Service Charge Statement

4.7If the Service Charge is less than the Estimated Service Charge then the shortfall shall be set off against any other moneys due from the Tenant to the Landlord under this Lease and any balance shall be credited against the next payment of Estimated Service Charge or (following Determination) paid to the Tenant within 7 working days

4.8For a period of three months after delivery of the Service Charge Statement the Landlord will make available any receipts or invoices evidencing expenditure of the Total Service Costs for inspection by the Tenant at the offices of the Landlord or the Managing Agent during normal business hours by appointment

4.9The Service Charge Statement shall (in the absence of manifest error) be conclusive

4.10The provisions of this Schedule shall remain in force until after the end of the Service Charge Period in which Determination occurs but

4.10.1any Service Charge payable under paragraph 4.6 shall be apportioned by reference to a daily rate for the Total Service Costs for that Service Charge Period and

4.10.2any Service Charge which is to be refunded under paragraph 4.7 shall be apportioned by reference to a daily rate for the Total Service Costs for that Service Charge Period

5.RESERVE FUND

5.1The Landlord may but shall not be obliged to operate a Reserve Fund and if the Landlord does so this paragraph 5 shall govern its operation.

5.2The Landlord shall hold the Reserve Fund on trust for those parties from time to time to be liable to pay the cost of the Reserve Fund Works

5.3The cost of any Reserve Fund Works shall be paid from the Reserve Fund and only if and to the extent that the Reserve Fund is insufficient may that cost be charged as a Service Cost

5.4The Landlord shall place the Reserve Fund on deposit at interest and all interest earned (less the cost of maintaining the deposit account and less tax) shall be added to the Reserve Fund

5.5The power of appointing a new trustee of the trust referred to in paragraph 5.2 is vested in the Landlord

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5.6The trust of the Reserve Fund shall be wound up and the Reserve Fund shall be distributed to the beneficiaries at the time on the date on which the Landlord designates

6.EXCLUSIONS FROM THE SERVICE CHARGE AND SERVICE COSTS

6.1Costs of observing and performing outstanding obligations under the Section 106 Agreements attaching to the Building

6.2The Tenant shall not be liable (either directly or in the Service Charge) for the costs (or any part thereof) (notwithstanding any covenant on the part of the Tenant contained in this Lease which might apart from this clause be construed to the contrary) of remedying, cleaning up, taking steps to prevent recurrence (whether in compliance with any remediation notice served on either the Landlord or the Tenant (or any party deriving title through them) pursuant to the Environment Protection Act 1990 or otherwise) of any historic contamination or pollution existing on or under the Premises or the Building or Car Park prior to the date of this Lease

7.SERVICE CHARGE CREDIT

If the Landlord recovers monies in exercise of its duties referred to in paragraph 1.1.13 representing expenditure which has been or which would otherwise fall to be included in the Service Costs the Landlord will set off or credit such monies against the Service Costs accordingly

8.SERVICE CHARGE CAP

8.1Service Charge Review Date means the 9 January 2016 and every anniversary of that date

8.2The Service Charge for each Service Charge Period shall not exceed £104,462.50 (exclusive of VAT) (the Service Charge Cap) subject to increase in accordance with the RPI Index as provided in this paragraph 8

8.3For each subsequent relevant Service Charge year throughout the Term, the Service Charge Cap shall be the greater of:

(i)the Service Charge Cap for the previous relevant Service Charge year; and

(ii)the amount ascertained by applying the following formula:-

where:-

K — is £104,462.50;

L — is the last index figure of the Index published immediately before the relevant Service Charge Review Date; and

M — is the index figure of the Index published immediately before the date of this Lease.

43

8.4If the final Service Charge year is less than a full year, then the Service Charge Cap for that year shall be apportioned on a daily basis for the period from the start of that relevant year until the end of the Term.

8.5If there is any material change after the date of this Lease in the reference base used to compile the Index, the figure taken to be shown in the Index after such change shall be the figure which would have been shown in the Index if the reference base current at the date of this Lease had been retained.

8.6If it becomes impossible by reason of any change after the date of this Lease in the methods used to compile the Index or for any other reason whatsoever to calculate the revised Service Charge by reference to the Index, or if any dispute or question whatsoever arises between the Landlord and the Tenant with respect to the amount of the Service Charge or with respect to the construction or effect of this clause, then the determination of the Service Charge or other matter at issue shall be determined by a single arbitrator appointed by the President for the time being of the Royal Institution of Chartered Surveyors who shall have full power to determine on such dates as he shall deem apposite what would have been the change in the Index had it continued on the basis current at the date of this Lease and given the information assumed to be available for the operation of this clause or (if that determination shall also be impossible) shall determine a reasonable revised Service Charge having regard to the purposes and intent of the provisions in the Lease for the capping of the Service Charge.

44

SCHEDULE 8 - REGULATIONS

1.Delivery and despatch of goods mail and other items to the Premises and access for workmen and materials shall only take place through the service areas in the Common Parts and through the service entrances lifts stairs and corridors (if any)

2.Where vehicles are allowed into any service area in the Building for the purpose of loading or unloading they shall only be allowed at such times as the Landlord may specify and the Landlord may also specify a maximum time during which any vehicle may remain there and may remove or immobilise any vehicles not complying with this regulation

3.All refuse shall be kept in suitable containers and shall be made available for collection by the Landlord at the times specified by the Landlord

4.No sound from loudspeakers or other artificially generated noise which can be heard outside the Premises shall be created within the Premises

5.The Tenant shall maintain to the reasonable satisfaction of the Landlord and to the satisfaction of the Insurers adequate fire prevention apparatus upon the Premises and shall from time to time remove from the Premises all waste and inflammable material

6.The Tenant shall not light or maintain open fires in the Building

7.The Premises are to be locked or otherwise secured when not in use

8.The Tenant shall not halt park on or obstruct any part of the Rear Access Road or permit any of the same

9.The Tenant shall not obstruct or permit the obstruction of the vehicular entrance from the Rear Access Road to the Car Park

10.The Building is a non-smoking environment and the Tenant shall not smoke nor permit smoking in the Building

45

SIGNED as a deed on behalf of	Signature
GUIDANCE SOFTWARE, INC., a
company incorporated in the United States
of America by	/s/ Barry Plaga
Barry Plaga
and
Mark E. Harrington	Signature
being persons who, in accordance with the
laws of that territory, are acting under the
authority of the company	/s/ Mark E. Harrington
		Legal Approved
		Guidance Software, Inc.
		Date:	6/26/15	Initial:	MH

46

EXECUTED as a deed by ELQ UK	Signature
PROPERTIES LTD acting by a director in the
presence of:	/s/ [ILLEGIBLE]
	Director
Witness signature	/s/ Lyndsey Butler
Name (in BLOCK CAPITALS)	LYNDSEY BUTLER
Address	MISHCON DE REYA, SUMMIT HOUSE
	12 REDLION SQ, LONDON WCIR QD.

47

Dated 7 July 2015

(1)ELQ UK PROPERTIES LTD

- and -

(2)GUIDANCE SOFTWARE, INC.

DEED OF VARIATION SUPPLEMENTAL TO A

REVERSIONARY LEASE OF FIFTH FLOOR

THAMES CENTRAL, HATFIELD ROAD, SLOUGH

Mishcon de Reya

Summit House

12 Red Lion Square

London WCIR 4QD

Tel: 020 7440 7000

Fax: 020 7404 5982

Ref: NK/42928.90

E-mail: nicholas.kirby@mishcon.com

TABLE OF CONTENTS

No.	Heading	Page
1.	DEFINITIONS AND INTERPRETATION	1
2.	BACKGROUND	2
3.	VARIATION	2
4.	CONTINUATION OF LEASE	3
5.	REGISTRATION AT LAND REGISTRY	3

i

THIS DEED OF VARIATION dated 7 July 2015 is made between (1) the Landlord and (2) the Tenant

1.DEFINITIONS AND INTERPRETATION

1.1In this deed the following definitions apply:

Landlord:ELQ UK PROPERTIES LTD (company reg. no. 08773913) whose registered office is at Peterborough Court, 133 Fleet Street, London EC4A 2BB

Tenant:GUIDANCE SOFTWARE, INC. a company incorporated under the laws of the State of California and registered at Companies House as a foreign company with registered number FC023582 whose registered office is at 215 North Marengo Avenue, Pasadena, California 91101 United States of America

Leases:a) the lease of the north side of the Property dated 9 January 2006 made between (I) TR Property Investment Trust Limited and (2) Guidance Software Inc (together with any deeds or documents supplemental to it) including a deed of variation dated on the same date as this Lease by which the north side of the Property was demised to the Tenant

b) the lease dated 2 May 2006 made between (I) T R Property Investment Trust PLC and (2) Guidance Software Inc (together with any deeds or documents supplemental to it) including a deed of variation dated on the same date as this Lease by which the south side of the Property was demised to the Tenant

1

Rent Deposit Deeds:the rent deposit deeds dated relating to the Leases of the Property made between (1) T R Property Investment Trust PLC and (2) Guidance Software Inc

Property:the property demised by the Leases briefly known as Fifth Floor North and South Thames Central, Hatfield Road, Slough

1.2The expression “the Landlord” includes the person or persons for the time being entitled to the reversion immediately expectant upon the term of the Lease.

1.3The expression “the Tenant” means the person (however described in the lease) in whom the Lease is vested from time to time.

1.4The singular includes the plural and vice versa, person includes corporation, the neuter includes the masculine and the feminine, and a covenant by a party which comprise two or more persons shall be joint and several.

1.5Clause headings do not affect the interpretation of this deed.

1.6The parties to this deed do not intend any of its terms to be enforceable by a third party (as defined in section 1 of the Contracts (Rights of Third Parties) Act 1999).

2.BACKGROUND

2.1This deed is supplemental to the Leases which are registered with title number BK403986 and BK406168 at the Land Registry.

2.2The Landlord is entitled to the reversion immediately expectant on the unexpired residue of the term of the Lease the reversion being registered under title number BK272505, BK159084 BK259553 BK397342 and BK417385 at the Land Registry.

2.3The Lease is vested in the Tenant.

2.4The parties to this deed wish to vary the terms of the Lease in the following manner.

3.VARIATION

3.1The Lease is varied with immediate effect as follows:

3.1.1A new definition is added to the Leases:

“Reversionary Lease means the lease of the Property dated 7 July 2015 and made between (1) the Landlord (2) the Tenant”

3.1.2A new paragraph 8.12 of Schedule 6 is added to each of the Leases:

“On a lawful assignment by the Tenant of this Lease in accordance with the provisions of this Lease the Tenant shall simultaneously assign the Reversionary Lease to the same assignee (to the intent that during the term of this Lease, the Reversionary Lease and this Lease shall always be vested in the same person).”

2

4.RENT DEPOSIT DEEDS

The Tenant acknowledges that the reversionary lease (“Reversionary Lease”) of the Property dated 7 July 2015 and made between (I) the Landlord (2) the Tenant in respect of the Property shall be a document supplemental to the Lease and the definition of Lease in the Rent Deposit Deeds shall, following the date of this deed, be read as if it included specific reference to the Reversionary Lease

5.CONTINUATION OF LEASE

The Lease continues fully effective subject to the variations in this deed.

6.REGISTRATION AT LAND REGISTRY

Where the Lease is registered at the Land Registry the Tenant will:

6.1take all steps necessary to procure that this deed is noted at the Land Registry against the Tenant’s title and against the Landlord’s registered reversionary title as soon as reasonably possible; and

6.2deliver to the Landlord within ten days of completion of such application, official copy entries of the Tenant’s title.

The parties have executed and delivered this document as a deed on the date stated at the beginning of it.

3

EXECUTED as a deed by ELQ UK	Signature
PROPERTIES LTD acting by a director
in the presence of:	/s/ [ILLEGIBLE]
	Director
Witness signature	/s/ Lyndsey Butler
Name (in BLOCK CAPITALS)	LYNDSEY BUTLER
Address	MISHCON DEREYA, SUMMIT HOUSE
	12 REDLION SQ, LONDON, WCIR 4QD.
SIGNED as a deed on behalf of	Signature
GUIDANCE SOFTWARE, INC., a
company incorporated in the United States	/s/ Barry Plaga
of America by
Barry Plaga
and
Mark E. Harrington
being persons who, in accordance with the	Signature
laws of that territory, are acting under the
authority of the company	/s/ Mark E. Harrington
		Legal Approved
		Guidance Software, Inc.
		Date:	6/26/15		Initial:	MH

4

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: November 6, 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: November 6, 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 September 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: November 6, 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 September 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: November 6, 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.

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Segment Information (Details 2) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Segment Information
Revenues	$ 26,823	$ 27,847	$ 79,376	$ 80,408
United States
Segment Information
Revenues	20,919	21,589	60,876	62,586
Europe
Segment Information
Revenues	3,700	3,665	10,875	10,425
Asia
Segment Information
Revenues	1,153	1,462	4,004	4,013
Other
Segment Information
Revenues	$ 1,051	$ 1,131	$ 3,621	$ 3,384

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Employee Benefit Plans (Details) - USD ($)	3 Months Ended	9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2015	Sep. 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
Granted (in shares)	0	537,000	0
Exercised (in shares)		(371,000)
Forfeited or expired (in shares)		(258,000)
Outstanding at the end of the period (in shares)		1,323,000		1,415,000
Exercisable at the end of the period (in shares)		635,589
Weighted Average Exercise Price
Outstanding at the beginning of the period (in dollars per share)		$ 8.36
Granted (in dollars per share)		6.03
Exercised (in dollars per share)		4.55
Forfeited or expired (in dollars per share)		10.32
Outstanding at the end of the period (in dollars per share)		8.10		$ 8.36
Exercisable at the end of the period (in dollars per share)		$ 10.37
Weighted Average Remaining Contractual Term
Outstanding in years		6 years		2 years 9 months 18 days
Exercisable at the end of the period		2 years 2 months 12 days
Aggregate Intrinsic Value
Outstanding at the beginning of the period		$ 1,589,000
Outstanding at the end of the period		214,000		$ 1,589,000
Exercisable at the end of the period		$ 140,000
Additional disclosures
Fair market value of common stock used to define in-the-money options (in dollars per share)		$ 6.02
Number of in-the-money options used to calculate the aggregate intrinsic value of options (in shares)		709,000
Number of in-the-money options exercisable (in shares)		129,000
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)		881,000
Vested and issued (in shares)		(506,000)
Forfeited (in shares)		(339,000)
Outstanding at the end of the period (in shares)		2,095,000		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)		6.17
Vested (in dollars per share)		8.93
Forfeited (in dollars per share)		8.17
Outstanding at the end of the period (in dollars per share)		$ 7.57		$ 8.60
Total grant date fair value of shares vested		$ 4,516,000
Plan
Equity Incentive Plan
Number of shares available for grant		3,852,000

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Summary of Significant Accounting Policies (Details 2) - Cash and cash equivalents - Concentration of credit risk	Sep. 30, 2015 USD ($)
Concentrations of Credit Risk
Uninsured cash balances	$ 17,500,000
Maximum
Concentrations of Credit Risk
Cash balances insured by the Federal Deposit Insurance Corporation	$ 250,000

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Commitments and Contingencies (Details)	9 Months Ended	12 Months Ended
	Sep. 30, 2015 USD ($)	Dec. 31, 2014 USD ($) item	Jul. 07, 2015 USD ($) ft²	Mar. 31, 2015 USD ($) ft²	Jul. 03, 2014 USD ($) ft²	Apr. 01, 2014 USD ($)	May. 20, 2011 item
Office Lease Agreement
Contractual Obligations, Commitments and Contingencies
Rentable area of office (in square feet) | ft²			8,000	3,600	6,000
Annual rent			$ 267,000
Office Lease Agreement | Minimum
Contractual Obligations, Commitments and Contingencies
Annual rent				$ 2,500,000	$ 295,000
Annual base rent				110,000
Office Lease Agreement | Maximum
Contractual Obligations, Commitments and Contingencies
Annual rent				3,400,000	$ 332,000
Annual base rent				$ 140,000
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
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
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

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Inventory

9 Months Ended

Sep. 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 September 30, 2015 and December 31, 2014 (in thousands):

	September 30, 2015		December 31, 2014
Inventory:
Components	$	951	$	1,121
Finished goods	1,534		1,563
Total inventory	$	2,485	$	2,684

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Goodwill and Other Intangibles (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Goodwill and indefinite-lived intangible assets
Impairment charges related to goodwill and indefinite-lived intangible assets			$ 0
Amortization expense	$ 400,000	$ 500,000	$ 1,300,000	$ 1,700,000

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Inventory (Details) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Inventory
Components	$ 951	$ 1,121
Finished goods	1,534	1,563
Total inventory	$ 2,485	$ 2,684

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Goodwill and Other Intangibles (Details 2) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Goodwill and Other Intangibles
Gross Costs	$ 16,875	$ 16,875
Accumulated Amortization	(10,370)	(9,109)
Total amortization Expense	6,505	7,766
Core technology
Goodwill and Other Intangibles
Gross Costs	5,800	5,800
Accumulated Amortization	(3,016)	(2,430)
Total amortization Expense	2,784	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	(3,638)	(3,143)
Total amortization Expense	2,837	3,332
Trade names
Goodwill and Other Intangibles
Gross Costs	2,100	2,100
Accumulated Amortization	(1,272)	(1,122)
Total amortization Expense	828	978
Covenant not-to-compete
Goodwill and Other Intangibles
Gross Costs	200	200
Accumulated Amortization	(144)	(114)
Total amortization Expense	$ 56	$ 86

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Goodwill and Other Intangibles (Details 3) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Estimated remaining amortization expense
2015	$ 391
2016	1,499
2017	1,399
2018	1,392
2019	816
Thereafter	1,008
Total amortization Expense	$ 6,505	$ 7,766

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Net Loss Per Share

9 Months Ended

Sep. 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 September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Basic loss per common share:
Numerator:
Net loss	$	(3,471	)	$	(2,586	)	$	(10,815	)	$	(11,665	)
Net income allocated to participating securities	—			—			—			—
Net loss allocated to common stockholders	$	(3,471	)	$	(2,586	)	$	(10,815	)	$	(11,665	)
Denominator:
Basic weighted average shares outstanding	28,197			26,977			27,864			26,703
Net loss per basic common share	$	(0.12	)	$	(0.10	)	$	(0.39	)	$	(0.44	)
Diluted loss per common share:
Numerator:
Net loss	$	(3,471	)	$	(2,586	)	$	(10,815	)	$	(11,665	)
Net income allocated to participating securities	—			—			—			—
Net loss allocated to common stockholders	$	(3,471	)	$	(2,586	)	$	(10,815	)	$	(11,665	)
Denominator:
Basic weighted average shares outstanding	28,197			26,977			27,864			26,703
Effect of dilutive share-based awards	—			—			—			—
Diluted weighted average shares outstanding	28,197			26,977			27,864			26,703
Net loss per diluted common share	$	(0.12	)	$	(0.10	)	$	(0.39	)	$	(0.44	)

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 918,000 and 1,920,000 shares for the three and nine months ended September 30, 2015, respectively, and 2,739,000 and 1,977,000 shares for the three and nine months ended September 30, 2014, respectively.

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Debt Obligations (Details) $ in Millions			9 Months Ended
	Feb. 25, 2015 USD ($)	Aug. 29, 2014 USD ($)	Sep. 30, 2015 USD ($)
Revolver
Debt Obligations
Term		3 years
Maximum borrowing capacity		$ 10.0
Maximum principal amount permitted to be outstanding that has been borrowed (as a percent)		75.00%
Commitment fee			$ 0.2
Letter of credit outstanding			1.3
Remaining borrowing capacity			$ 8.5
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
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
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

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CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Current assets:
Cash and cash equivalents	$ 18,001	$ 18,355
Restricted cash		153
Trade receivables, net of allowance for doubtful accounts of $333 and $634, respectively	20,076	20,255
Inventory	2,485	2,684
Prepaid expenses and other current assets	4,629	5,054
Total current assets	45,191	46,501
Long-term assets:
Property and equipment, net	14,299	14,558
Intangible assets, net	6,505	7,766
Goodwill	14,632	14,632
Other assets	1,890	2,370
Total long-term assets	37,326	39,326
Total assets	82,517	85,827
Current liabilities:
Accounts payable	3,370	5,919
Accrued liabilities	10,667	8,407
Capital lease obligations	70	67
Deferred revenues	39,322	39,128
Total current liabilities	53,429	53,521
Long-term liabilities:
Deferred rent	7,153	7,661
Other long-term liabilities	587	645
Deferred revenues	7,530	6,232
Deferred tax liabilities	653	584
Total long-term liabilities	$ 15,923	$ 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; 32,068,000 and 31,155,000 shares issued, respectively; and 30,289,000 and 29,376,000 shares outstanding, respectively	$ 26	$ 25
Additional paid-in capital	117,060	110,265
Treasury stock, at cost, 1,779,000 and 1,779,000 shares, respectively	(11,479)	(11,479)
Accumulated deficit	(92,442)	(81,627)
Total stockholders' equity	13,165	17,184
Total liabilities and stockholders' equity	$ 82,517	$ 85,827

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Description of the Business

9 Months Ended

Sep. 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 as well as 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 ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Income Taxes
Carrying value of net deferred tax assets	$ 0		$ 0
Liability for uncertain tax positions	1,000		$ 1,000
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	$ 77	$ 51	$ 244	$ 211
U.S. statutory tax rate (as a percent)			34.00%

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2015

Fair Value Measurements

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

The following table sets forth, by level within the fair value hierarchy, financial assets that are accounted for at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 (in thousands):

	Fair Value Measurements at September 30, 2015
	Total		Level 1		Level 2		Level 3
Assets:
U.S. Treasury Securities	$	2,008	$	2,008	$	—	$	—
Money market accounts	4,287		4,287		—		—
Total assets	$	6,295	$	6,295	$	—	$	—

	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	Sep. 30, 2015	Dec. 31, 2014
Assets:
Total assets		$ 6,286
U.S. Treasury Securities
Assets:
Total assets		2,006
Money market accounts
Assets:
Total assets		4,280
Total
Assets:
Total assets	$ 6,295
Total | U.S. Treasury Securities
Assets:
Total assets	2,008
Total | Money market accounts
Assets:
Total assets	4,287
Level 1
Assets:
Total assets	6,295	6,286
Level 1 | U.S. Treasury Securities
Assets:
Total assets	2,008	2,006
Level 1 | Money market accounts
Assets:
Total assets	$ 4,287	$ 4,280

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Summary of Significant Accounting Policies (Details)	9 Months Ended
	Sep. 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

9 Months Ended

Sep. 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 September 30, 2015 and the condensed consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014 and cash flows for the nine months ended September 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 September 30, 2015, our results of operations for the three and nine months ended September 30, 2015 and 2014 and our cash flows for the nine months ended September 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 nine months period ended September 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, 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 Accounting Standards Codification (“ASC”) 350 - Intangibles — Goodwill and Other.  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 Accounting Standards Update (“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 September 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 $17.5 million as of September 30, 2015.  At September 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 SaaS, which we collectively refer to as services revenue.  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 ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendment to 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, 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: When we either enter into contracts or receive written purchase orders issued by a customer that legally bind us and the customer.

· 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 subscriptions. 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 the International Accounting Standards Board (“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.

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
CONDENSED CONSOLIDATED BALANCE SHEETS
Trade receivables, allowance for doubtful accounts (in dollars)	$ 333	$ 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	32,068,000	31,155,000
Common stock, shares outstanding	30,289,000	29,376,000
Treasury stock, shares	1,779,000	1,779,000

XML

Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2015

Summary of Significant Accounting Policies

Basis of Presentation

Basis of Presentation

The accompanying condensed consolidated balance sheets as of September 30, 2015 and the condensed consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014 and cash flows for the nine months ended September 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 September 30, 2015, our results of operations for the three and nine months ended September 30, 2015 and 2014 and our cash flows for the nine months ended September 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 nine months period ended September 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, 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 Accounting Standards Codification (“ASC”) 350 - Intangibles — Goodwill and Other.  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 Accounting Standards Update (“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 September 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 $17.5 million as of September 30, 2015.  At September 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 SaaS, which we collectively refer to as services revenue.  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 ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendment to 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, 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: When we either enter into contracts or receive written purchase orders issued by a customer that legally bind us and the customer.

· 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 subscriptions. 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 the International Accounting Standards Board (“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.

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2015	Nov. 05, 2015
Document and Entity Information
Entity Registrant Name	Guidance Software, Inc.
Entity Central Index Key	0001375557
Document Type	10-Q
Document Period End Date	Sep. 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		30,613,000
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q3

XML

Net Loss Per Share (Tables)

9 Months Ended

Sep. 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 September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Basic loss per common share:
Numerator:
Net loss	$	(3,471	)	$	(2,586	)	$	(10,815	)	$	(11,665	)
Net income allocated to participating securities	—			—			—			—
Net loss allocated to common stockholders	$	(3,471	)	$	(2,586	)	$	(10,815	)	$	(11,665	)
Denominator:
Basic weighted average shares outstanding	28,197			26,977			27,864			26,703
Net loss per basic common share	$	(0.12	)	$	(0.10	)	$	(0.39	)	$	(0.44	)
Diluted loss per common share:
Numerator:
Net loss	$	(3,471	)	$	(2,586	)	$	(10,815	)	$	(11,665	)
Net income allocated to participating securities	—			—			—			—
Net loss allocated to common stockholders	$	(3,471	)	$	(2,586	)	$	(10,815	)	$	(11,665	)
Denominator:
Basic weighted average shares outstanding	28,197			26,977			27,864			26,703
Effect of dilutive share-based awards	—			—			—			—
Diluted weighted average shares outstanding	28,197			26,977			27,864			26,703
Net loss per diluted common share	$	(0.12	)	$	(0.10	)	$	(0.39	)	$	(0.44	)

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Revenues:
Product revenue	$ 7,759	$ 9,458	$ 23,093	$ 25,207
Services revenue	9,041	8,171	26,487	25,595
Maintenance revenue	10,023	10,218	29,796	29,606
Total revenues	26,823	27,847	79,376	80,408
Cost of revenues (excluding amortization and depreciation, shown below):
Cost of product revenue	2,520	2,497	6,556	6,135
Cost of services revenue	6,011	6,222	18,512	19,156
Cost of maintenance revenue	601	540	1,781	1,618
Total cost of revenues (excluding amortization and depreciation, shown below)	9,132	9,259	26,849	26,909
Operating expenses:
Selling and marketing	9,156	9,898	28,357	29,695
Research and development	5,281	5,289	15,690	17,915
General and administrative	5,078	4,134	14,262	12,354
Depreciation and amortization	1,574	1,811	4,811	5,652
Total operating expenses	21,089	21,132	63,120	65,616
Operating loss	(3,398)	(2,544)	(10,593)	(12,117)
Other income and expense:
Interest income	3	5	8	10
Interest expense	(3)	(2)	(7)	(8)
Gain on sale of domain name				630
Other income, net	4	6	21	31
Total other income and expense	4	9	22	663
Loss before income taxes	(3,394)	(2,535)	(10,571)	(11,454)
Income tax provision	77	51	244	211
Net loss	$ (3,471)	$ (2,586)	$ (10,815)	$ (11,665)
Net loss per share:
Basic (in dollars per share)	$ (0.12)	$ (0.10)	$ (0.39)	$ (0.44)
Diluted (in dollars per share)	$ (0.12)	$ (0.10)	$ (0.39)	$ (0.44)
Weighted average number of shares used in per share calculation:
Basic (in share)	28,197	26,977	27,864	26,703
Diluted (in share)	28,197	26,977	27,864	26,703

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Employee Benefit Plans

9 Months Ended

Sep. 30, 2015

Employee Benefit Plans

Employee Benefit Plans

Note 7. Employee Benefit Plans

At September 30, 2015, approximately 3,852,000 shares were available for grant as options or nonvested share awards under the Guidance Software, Inc. Second Amended and Restated 2004 Equity Incentive Plan (the “Plan”).

Stock Options

The terms of the options granted under the Plan are determined at the time of grant, and generally vest 25% annually over a four-year service period and typically must be exercised within 10 years from the date of grant.  A summary of stock option activity follows:

	Number of 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	537,000		$	6.03
Exercised	(371,000	)	$	4.55
Forfeited or expired	(258,000	)	$	10.32
Outstanding, September 30, 2015	1,323,000		$	8.10	6.0	$	214,000
Exercisable, September 30, 2015	635,589		$	10.37	2.2	$	140,000

We define in-the-money options at September 30, 2015 as options that had exercise prices that were lower than the $6.02 fair market value of our common stock at that date.  The aggregate intrinsic value of options outstanding at September 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 709,000 shares that were in-the-money at that date, 129,000 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	881,000		6.17
Vested	(506,000	)	8.93
Forfeited	(339,000	)	8.17
Outstanding, September 30, 2015	2,095,000		$	7.57

The total grant date fair value of shares vested under such grants during the nine months ended September 30, 2015 was $4,516,000.

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:

	September 30, 2015
Risk-free interest rate	1.8		%
Dividend yield	—		%
Expected life (years)	5.65
Volatility	42.78		%
Weighted average grant date fair value	$	4.08

There were no stock options granted during the three and nine months ended, September 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 September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Stock option awards	$	110	$	—	$	231	$	21
Restricted stock awards	1,604		1,825		4,878		5,385
Share-based compensation expense	$	1,714	$	1,825	$	5,109	$	5,406

As of September 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 3.5 years.  Approximately $11.9 million of total unrecognized share-based compensation cost related to restricted stock awards is expected to be recognized over a weighted-average period of 2.5 years.  For awards outstanding at September 30, 2015, we expect to record approximately $0.1 million and $1.6 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

9 Months Ended

Sep. 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. The Equipment Line and the Equipment Advance expired on August 25, 2015.

As of September 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)

9 Months Ended

Sep. 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 September 30, 2015
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	7,759	$	1,790	$	5,259	$	1,992	$	10,023	$	26,823
Cost of revenues	2,520		952		3,644		1,415		601		9,132
Segment profit	$	5,239	$	838	$	1,615	$	577	$	9,422	17,691
Total operating expenses											21,089
Operating loss											$	(3,398	)
	Three Months Ended September 30, 2014
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	9,458	$	1,677	$	4,228	$	2,266	$	10,218	$	27,847
Cost of revenues	2,497		1,128		3,713		1,381		540		9,259
Segment profit	$	6,961	$	549	$	515	$	885	$	9,678	18,588
Total operating expenses											21,132
Operating loss											$	(2,544	)
	Nine Months Ended September 30, 2015
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	23,093	$	4,894	$	15,052	$	6,541	$	29,796	$	79,376
Cost of revenues	6,556		2,902		11,334		4,276		1,781		26,849
Segment profit	$	16,537	$	1,992	$	3,718	$	2,265	$	28,015	52,527
Total operating expenses											63,120
Operating loss											$	(10,593	)

	Nine Months Ended September 30, 2014
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	25,207	$	5,899	$	13,169	$	6,527	$	29,606	$	80,408
Cost of revenues	6,135		3,580		11,176		4,400		1,618		26,909
Segment profit	$	19,072	$	2,319	$	1,993	$	2,127	$	27,988	53,499
Total operating expenses											65,616
Operating loss											$	(12,117	)

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 September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Revenues
United States	$	20,919	$	21,589	$	60,876	$	62,586
Europe	3,700		3,665		10,875		10,425
Asia	1,153		1,462		4,004		4,013
Other	1,051		1,131		3,621		3,384
	$	26,823	$	27,847	$	79,376	$	80,408

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Inventory (Tables)

9 Months Ended

Sep. 30, 2015

Inventory

Schedule of inventory by major classes

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

	September 30, 2015		December 31, 2014
Inventory:
Components	$	951	$	1,121
Finished goods	1,534		1,563
Total inventory	$	2,485	$	2,684

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2015

Commitments and Contingencies

Commitments and Contingencies

Note 10. Commitments and Contingencies

Office Leases

Effective July 7, 2015, we entered into a renewal of our Office Lease Agreement (the “UK Lease”) to lease approximately 8,000 rentable square feet of an office building located in Slough, United Kingdom, which is primarily used as a training center.  The UK Lease commences on January 9, 2016 and expires in January 8, 2021, with an option to exit the lease on January 9, 2019.  The total annual rent under the UK Lease is approximately $267,000.

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.  Total annual rent under the Pasadena Lease ranges from approximately $2.5 million for the first year to approximately $3.4 million for the final year of the lease.  The expansion increases the annual 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 space 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, we 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

9 Months Ended

Sep. 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 September 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 September 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 nine months ended September 30, 2015 of $77,000 and $244,000 as compared to $51,000 and $211,000 for the same periods in 2014.  Our income tax provision for the three and nine months ended September 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

9 Months Ended

Sep. 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 that are accounted for at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 (in thousands):

	Fair Value Measurements at September 30, 2015
	Total		Level 1		Level 2		Level 3
Assets:
U.S. Treasury Securities	$	2,008	$	2,008	$	—	$	—
Money market accounts	4,287		4,287		—		—
Total assets	$	6,295	$	6,295	$	—	$	—

	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

9 Months Ended

Sep. 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 September 30, 2015
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	7,759	$	1,790	$	5,259	$	1,992	$	10,023	$	26,823
Cost of revenues	2,520		952		3,644		1,415		601		9,132
Segment profit	$	5,239	$	838	$	1,615	$	577	$	9,422	17,691
Total operating expenses											21,089
Operating loss											$	(3,398	)
	Three Months Ended September 30, 2014
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	9,458	$	1,677	$	4,228	$	2,266	$	10,218	$	27,847
Cost of revenues	2,497		1,128		3,713		1,381		540		9,259
Segment profit	$	6,961	$	549	$	515	$	885	$	9,678	18,588
Total operating expenses											21,132
Operating loss											$	(2,544	)
	Nine Months Ended September 30, 2015
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	23,093	$	4,894	$	15,052	$	6,541	$	29,796	$	79,376
Cost of revenues	6,556		2,902		11,334		4,276		1,781		26,849
Segment profit	$	16,537	$	1,992	$	3,718	$	2,265	$	28,015	52,527
Total operating expenses											63,120
Operating loss											$	(10,593	)

	Nine Months Ended September 30, 2014
	Products		Subscription		Professional services		Training		Maintenance		Total
Revenues	$	25,207	$	5,899	$	13,169	$	6,527	$	29,606	$	80,408
Cost of revenues	6,135		3,580		11,176		4,400		1,618		26,909
Segment profit	$	19,072	$	2,319	$	1,993	$	2,127	$	27,988	53,499
Total operating expenses											65,616
Operating loss											$	(12,117	)

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Revenues
United States	$	20,919	$	21,589	$	60,876	$	62,586
Europe	3,700		3,665		10,875		10,425
Asia	1,153		1,462		4,004		4,013
Other	1,051		1,131		3,621		3,384
	$	26,823	$	27,847	$	79,376	$	80,408

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Employee Benefit Plans (Details 2) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Additional disclosures
Share-based compensation expense	$ 1,714	$ 1,825	$ 5,109	$ 5,406
Weighted average assumptions
Risk-free interest rate (as a percent)			1.80%
Dividend yield (as a percent)			0.00%
Expected life			5 years 7 months 24 days
Volatility (as a percent)			42.78%
Weighted average grant date fair value (in dollars per share)			$ 4.08
Stock options
Additional disclosures
Granted (in shares)		0	537,000	0
Share-based compensation expense	110		$ 231	$ 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 6 months
Share-based compensation cost expected to be recorded for the remainder of the fiscal year	100		$ 100
Restricted stock awards
Additional disclosures
Share-based compensation expense	1,604	$ 1,825	4,878	$ 5,385
Total unrecognized share-based compensation cost related to stock awards	11,900		$ 11,900
Weighted-average period over which unrecognized compensation cost is expected to be recognized			2 years 6 months
Share-based compensation cost expected to be recorded for the remainder of the fiscal year	$ 1,600		$ 1,600

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Employee Benefit Plans (Tables)

9 Months Ended

Sep. 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	537,000		$	6.03
Exercised	(371,000	)	$	4.55
Forfeited or expired	(258,000	)	$	10.32
Outstanding, September 30, 2015	1,323,000		$	8.10	6.0	$	214,000
Exercisable, September 30, 2015	635,589		$	10.37	2.2	$	140,000

Schedule of restricted stock awards activity

	Number of Shares		Weighted Average Fair Value
Outstanding, December 31, 2014	2,059,000		$	8.60
Granted	881,000		6.17
Vested	(506,000	)	8.93
Forfeited	(339,000	)	8.17
Outstanding, September 30, 2015	2,095,000		$	7.57

Schedule of weighted average assumptions used in valuation of awards

	September 30, 2015
Risk-free interest rate	1.8		%
Dividend yield	—		%
Expected life (years)	5.65
Volatility	42.78		%
Weighted average grant date fair value	$	4.08

Schedule of share-based compensation expense

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Stock option awards	$	110	$	—	$	231	$	21
Restricted stock awards	1,604		1,825		4,878		5,385
Share-based compensation expense	$	1,714	$	1,825	$	5,109	$	5,406

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Summary of Significant Accounting Policies (Details 3)	9 Months Ended
	Sep. 30, 2015 USD ($)
Summary of Significant Accounting Policies
New Revenue Recognition standard impact	$ 0
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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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Operating Activities:
Net loss	$ (10,815)	$ (11,665)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	4,811	5,652
Recovery of bad debt	(200)
Share-based compensation	5,109	5,406
Gain on sale of domain name		(630)
Deferred taxes	69	69
Loss on disposal of assets	14	84
Changes in operating assets and liabilities:
Restricted cash	153	(415)
Trade receivables	379	(4,524)
Inventory	199	(570)
Prepaid expenses and other assets	905	(545)
Accounts payable	(2,417)	354
Accrued liabilities	1,752	162
Deferred revenues	1,492	2,936
Net cash provided by (used in) operating activities	1,451	(3,686)
Investing Activities:
Purchase of property and equipment	(3,429)	(1,522)
Net cash used in investing activities	(3,429)	(1,522)
Financing Activities:
Proceeds from the exercise of stock options	1,687	1,067
Principal payments on capital lease obligations and other obligations	(63)	(166)
Net cash provided by financing activities	1,624	901
Net decrease in cash and cash equivalents	(354)	(4,307)
Cash and cash equivalents, beginning of period	18,355	19,919
Cash and cash equivalents, end of period	18,001	15,612
Non-cash investing and financing activities:
Purchase of equipment included in accounts payable and accrued expenses	$ 98	$ 161

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Goodwill and Other Intangibles

9 Months Ended

Sep. 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 September 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 $1.3 million, and $0.5 million and $1.7 million for the three and nine months ended September 30, 2015, and 2014, respectively. The following table summarizes cumulative amortization expense related to intangible assets subject to amortization as of September 30, 2015 and December 31, 2014 (in thousands):

	September 30, 2015							December 31, 2014
	Gross Costs		Accumulated Amortization			Net		Gross Costs		Accumulated Amortization			Net
Core technology	$	5,800	$	(3,016	)	$	2,784	$	5,800	$	(2,430	)	$	3,370
Existing and developed technology	2,300		(2,300		)	—		2,300		(2,300		)	—
Customer relationships	6,475		(3,638		)	2,837		6,475		(3,143		)	3,332
Trade names	2,100		(1,272		)	828		2,100		(1,122		)	978
Covenant not-to-compete	200		(144		)	56		200		(114		)	86
Total	$	16,875	$	(10,370	)	$	6,505	$	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	$	391
2016	1,499
2017	1,399
2018	1,392
2019	816
Thereafter	1,008
Total amortization expense	$	6,505

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Net Loss Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Numerator:
Net loss	$ (3,471)	$ (2,586)	$ (10,815)	$ (11,665)
Net loss allocated to common stockholders	$ (3,471)	$ (2,586)	$ (10,815)	$ (11,665)
Denominator:
Basic weighted average shares outstanding	28,197,000	26,977,000	27,864,000	26,703,000
Net loss per basic common share (in dollars per share)	$ (0.12)	$ (0.10)	$ (0.39)	$ (0.44)
Numerator:
Net loss	$ (3,471)	$ (2,586)	$ (10,815)	$ (11,665)
Net loss allocated to common stockholders	$ (3,471)	$ (2,586)	$ (10,815)	$ (11,665)
Denominator:
Basic weighted average shares outstanding	28,197,000	26,977,000	27,864,000	26,703,000
Diluted weighted average shares outstanding	28,197,000	26,977,000	27,864,000	26,703,000
Net loss per diluted common share (in dollars per share)	$ (0.12)	$ (0.10)	$ (0.39)	$ (0.44)
Number of stock options and restricted stock awards excluded from calculation of diluted net loss per share (in shares)	918,000	2,739,000	1,920,000	1,977,000

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Segment Information (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)	Sep. 30, 2015 USD ($) item	Sep. 30, 2014 USD ($)
Segment Information
Number of operating segments | item			5
Segment Information
Revenues	$ 26,823	$ 27,847	$ 79,376	$ 80,408
Cost of revenues	9,132	9,259	26,849	26,909
Segment profit	17,691	18,588	52,527	53,499
Total operating expenses	21,089	21,132	63,120	65,616
Operating loss	(3,398)	(2,544)	(10,593)	(12,117)
Products
Segment Information
Revenues	7,759	9,458	23,093	25,207
Cost of revenues	2,520	2,497	6,556	6,135
Segment profit	5,239	6,961	16,537	19,072
Subscription
Segment Information
Revenues	1,790	1,677	4,894	5,899
Cost of revenues	952	1,128	2,902	3,580
Segment profit	838	549	1,992	2,319
Professional services
Segment Information
Revenues	5,259	4,228	15,052	13,169
Cost of revenues	3,644	3,713	11,334	11,176
Segment profit	1,615	515	3,718	1,993
Training
Segment Information
Revenues	1,992	2,266	6,541	6,527
Cost of revenues	1,415	1,381	4,276	4,400
Segment profit	577	885	2,265	2,127
Maintenance
Segment Information
Revenues	10,023	10,218	29,796	29,606
Cost of revenues	601	540	1,781	1,618
Segment profit	$ 9,422	$ 9,678	$ 28,015	$ 27,988

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Goodwill and Other Intangibles (Tables)

9 Months Ended

Sep. 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 September 30, 2015 and December 31, 2014 (in thousands):

	September 30, 2015							December 31, 2014
	Gross Costs		Accumulated Amortization			Net		Gross Costs		Accumulated Amortization			Net
Core technology	$	5,800	$	(3,016	)	$	2,784	$	5,800	$	(2,430	)	$	3,370
Existing and developed technology	2,300		(2,300		)	—		2,300		(2,300		)	—
Customer relationships	6,475		(3,638		)	2,837		6,475		(3,143		)	3,332
Trade names	2,100		(1,272		)	828		2,100		(1,122		)	978
Covenant not-to-compete	200		(144		)	56		200		(114		)	86
Total	$	16,875	$	(10,370	)	$	6,505	$	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	$	391
2016	1,499
2017	1,399
2018	1,392
2019	816
Thereafter	1,008
Total amortization expense	$	6,505