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Article by DailyStocks_admin    (03-05-13 11:32 PM)

Description

Guidance Software,Inc. 10% Owner LLC RGM Capital bought 26,105 shares on 3-01-2013 at $ 9.84

BUSINESS OVERVIEW

Guidance Software, Inc. is the leading global provider of digital investigative solutions. Our EnCase ® platform provides an investigative infrastructure that enables our customers to search, collect, and analyze electronically stored information in order to address human resources matters, litigation matters, allegations of fraud, suspicious network endpoint activity and defend their organization’s data assets.

EnCase ® Enterprise provides organizations with in-depth visibility into laptops, desktops, and file servers in order to conduct internal investigations and to quickly determine the root cause of suspicious network activity. EnCase Enterprise is used in a wide variety of circumstances, including investigations of allegations of fraud or misconduct, intellectual property theft, and corporate policy compliance. In addition, EnCase Enterprise serves as a platform on which more powerful electronic discovery (“e-discovery”) and cybersecurity products, described below, are built.

EnCase ® eDiscovery is our enterprise-wide e-discovery solution addressing the end-to-end e-discovery needs of corporations and government agencies. Following the acquisition of CaseCentral in February 2012, the e-discovery product portfolio spans from legal hold to identification, collection, preservation, processing, first pass review, and early case assessment (“ECA”) review and production capabilities. The integrated offering deploys software intelligently, delivering the legal hold, identification, collection, preservation, and processing functions on-premise, at the customer site — close to the sources of data and the data custodians — and the ECA, review and production functions as SaaS in the Cloud, so that geographically dispersed inside and outside counsel can efficiently review collected documents without needing any special equipment or software other than a web browser and internet connectivity.

EnCase ® Cybersecurity provides crucial IT security functionality to enterprises and government agencies through its incident response and sensitive data discovery capabilities. The incident response capabilities provide organizations that have received an alert of suspicious network behavior with forensic-level visibility of the relevant endpoint data, valuable information from memory, and the ability to search the enterprise for identical or similar threats. These capabilities enable an organization to remediate any malicious code or processes running on the affected computers and to return the network to a trusted state. The sensitive data discovery capabilities enable organizations to rapidly identify IT assets (servers, desktops, laptops, etc.) holding sensitive data (such as credit card numbers, social security numbers, patient health information, and other personally identifiable information) in violation of legally mandated regulations, industry standards, and corporate policies. Further, they allow an organization to quickly remediate any identified violations and thereby improve compliance.


EnCase ® Forensic, the industry-standard computer investigation solution, enables forensic practitioners to conduct efficient, forensically sound digital data collection and investigations. The EnCase Forensic solution lets examiners acquire data from a wide variety of devices, unearth potential evidence with disk level forensic analysis, and craft comprehensive reports on their findings, all while maintaining the integrity of the evidence.



Our Tableau ™ product family of forensic hardware products including forensic duplicators, multiple write blockers and other hardware, complements our industry-leading software to fulfill the needs of the computer forensic community.

The widespread reliance on digital business processes and the explosive growth in the volume of electronic data have resulted in exposure to electronic data-related risks and created the need to properly conduct digital investigations . The global adoption of local area networks, wide area networks, e-mail and the Internet have increased communications within and between organizations and have created the ability to generate, store, share and distribute massive amounts of electronic information instantaneously without regard to physical location. While the adoption and reliance on these technologies has significantly increased productivity and lowered the cost of doing business for Global 2000 companies, government agencies and other organizations, it has also exposed organizations to many increasing areas of risk associated with the continued proliferation of electronic data. Organizations now are increasingly faced with the need to recover and analyze vast amounts of electronic data quickly and efficiently through processes we refer to as digital investigations. Digital investigations are conducted to address various electronic data-related needs, including:


• searching, collecting and processing litigation-related data, or responding to discovery requests for electronic data, or “e-discovery” requests, where a company must conduct a thorough yet timely review of electronic data in order to produce electronic documents or other digital evidence in connection with a particular civil or administrative proceeding;



• responding to regulatory data requests, where an organization must efficiently and rapidly produce electronic documents and digital evidence in connection with a project under regulatory review in a manner acceptable to the regulators;



• addressing corporate policy violations, such as intellectual property theft, employee fraud and employee policy violations, all of which must be investigated rapidly, described in a detailed, complete and comprehensible report of the incident and mitigated and remedied across an enterprise network as necessary, all while minimizing business interruption; and



• responding to IT security attacks or breaches, where an organization must expeditiously and unobtrusively determine which systems or files were affected, the nature of the attack and how to remediate the issue quickly before any further damage occurs.



Traditional digital investigations involve internal investigators or third-party consultants manually searching through multitudes of electronic data in an attempt to discover traces or “fingerprints” of electronic data-related incidents. Such investigators or third-party consultants typically use software applications, utilities or processes, such as taking the affected servers, desktops and laptops off-line, so that they can remove, image or copy the hard drives, manually extract the data in question on each affected computer and save the affected files to another hard drive for processing and analysis by consultants or other third-party experts. These traditional digital investigations suffer from several distinct problems in that they are costly and time-consuming, they require significant expertise to conduct across complex enterprise network environments, they may not adequately combat attempts to conceal data, they often result in unwanted exposure of sensitive materials and disrupt business, and they are difficult to conduct in a forensically sound manner. Establishing a comprehensive digital investigative software platform can help organizations address the inadequacies of traditional digital investigations and cost-effectively mitigate the risk of electronic data-related threats.



We complement our product offerings with a comprehensive array of professional and training services including technical support and maintenance services to help our customers implement our solutions, conduct investigations and train their IT and legal professionals to effectively and efficiently use our products. Our products are used by a wide variety of industries and some of the world’s best known technology, financial and insurance services, defense, energy, pharmaceutical, manufacturing, healthcare and retail companies. Our EnCase Enterprise customer base currently includes more than sixty-five percent of the Fortune 100 and more than forty percent of the Fortune 500, and we have sold our EnCase Forensic software to more than 1,000 enterprises and government and law enforcement agencies worldwide.



For the fiscal year ended December 31, 2012, we reported total revenues of $129.5 million, employed approximately 475 employees and conducted business in over 65 countries. We were incorporated in California in November 1997 and reincorporated in Delaware in December 2006.



Our Internet address is http://www.guidancesoftware.com. The following filings are posted to our Investor Relations web site, located at http://investors.guidancesoftware.com as soon as reasonably practical after submission to the United States (U.S.) Securities and Exchange Commission (SEC): annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, the proxy statements related to our most recent annual stockholders’ meetings and any amendments to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings are available free of charge on our Investor Relations web site. The contents of these web sites are not intended to be incorporated by reference into this report or in any other report or document we file and any reference to these web sites are intended to be inactive textual references only.



Business Strategy



Our business strategy is to develop and support superior solutions that enable corporate, government and law enforcement organizations to conduct thorough and effective computer investigations of any kind, including intellectual property theft, incident response, compliance auditing and responding to e-discovery requests, all while maintaining the forensic integrity of the data. A key driver behind this strategy is the development and introduction of new products and improvements to our existing products. Our goal is to develop more powerful, user friendly and affordable products without compromising on our technological commitment. We are focused on gaining more EnCase ® Enterprise customers, and then offering them higher-value products, such as En c ase eDiscovery and En c ase Cybersecurity, that automate and enhance functionality in the enterprise forensics, e-discovery, and cybersecurity spheres. In addition, we are focused on continuing our leadership in computer forensics technology with innovative software and hardware for a complete forensic framework.



Our Products and Services



Our products and services give our customers the ability to conduct comprehensive, cost-effective and precise digital investigations. Our EnCase ® Enterprise software provides the foundation to build an enterprise investigation infrastructure. Furthermore, we believe our EnCase Forensic software is the industry standard for searching, collecting, preserving, analyzing and authenticating electronic computer forensic data for use in criminal and civil court proceedings. Our forensic software and hardware products address the complete forensic process. We also offer a comprehensive array of investigative services and training to help our customers manage their internal digital investigations and learn how to effectively and efficiently use our software.



EnCase ® Enterprise



EnCase Enterprise provides an investigative platform that enables an organization to search, collect, preserve and analyze data on the servers, desktops and laptops across the network. EnCase Enterprise enables organizations to respond to electronic discovery requests and conduct internal investigations, including those related to human resources or those focused on compliance or fraud. Companies can also collect and preserve data in response to regulator requests or for civil litigation matters.



EnCase Enterprise serves as the platform for an enterprise investigative infrastructure, to which additional products can be added to enhance and automate the search, collection, preservation and analysis of data in order to accomplish specific business tasks such as: responding to electronic discovery requests; performing proactive, enterprise-wide data audits for sensitive information, including personally identifiable information, classified data, and intellectual property; and responding to and remediating network threats or intrusions. These products, which can be added to perform the functions above, include EnCase eDiscovery, and EnCase Cybersecurity.



EnCase ® eDiscovery

EnCase eDiscovery is our enterprise-wide e-discovery solution addressing the end-to-end e-discovery needs of corporations and government agencies. Following the acquisition of CaseCentral in February 2012, the e-discovery product portfolio spans from legal hold to identification, collection, preservation, processing, first pass review, and early case assessment (“ECA”), review and production capabilities. Using a distributed, enterprise-wide scalable architecture, it collects and processes only potentially relevant data, and it preserves evidence and metadata in the court-validated EnCase Evidence File format to ensure complete chain of custody from the moment the legal hold is issued until documents are produced to the opposing party. EnCase eDiscovery tracks activity at every step of the e-discovery process so that the status of projects can be viewed, audited, and communicated to others. The ECA, review and production capabilities are available on a SaaS-basis and are performed in the Cloud, so that geographically dispersed inside and outside counsel can efficiently review collected documents without needing any special equipment or software other than a web browser and internet connectivity



Once the initial search has been conducted and the information has been collected, EnCase eDiscovery culls and processes the data to further reduce the volume of irrelevant or duplicate information. The solution distributes processing in an organized fashion so that several dozen machines can process terabytes of data without disrupting business and degrading network performance. The collected and processed data can then seamlessly be uploaded onto the available attorney review and production platform to complete the e-discovery process.



The integrated review and production platform is designed to overcome the disadvantages of traditional approaches to e-discovery review and production by:



• Providing real time visibility and management oversight of the end-to-end e-discovery process;

• Leveraging a unique multi-matter architecture that eliminates duplication of effort across cases and enabling e-discovery teams to re-use previous work product such as document coding and tagging or collected ESI; and,

• Delivering a comprehensive e-discovery product that seamlessly uploads document sets and their associated metadata and attorney work product to a centralized legal repository.



EnCase eDiscovery offers:


• A comprehensive, integrated e-discovery solution that exceeds corporate requirements for security, oversight, risk management, and compliance;

• The fastest and most comprehensive collection and processing e-discovery product;

• Both early and continuous case assessment, enabling legal teams to quickly obtain necessary facts at any time from pre-through post-collection phases;



• The ability to use secure, scalable, cloud review and production capabilities while keeping collection and preservation close to data and its custodians;

• Unparalleled search and identification capabilities for electronically stored information (ESI) across multiple digital platforms and devices; and

• De-duplication across cases and comparison of current cases to previous matters to ensure that documents withheld in one matter are never produced in another.


CEO BACKGROUND

ELECTION OF DIRECTORS
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" ALL NOMINEES

Our Board of Directors currently consists of seven members. Effective May 9, 2012, our Board has fixed the number of members, at six. The directors are elected at each annual meeting of stockholders and serve until the next annual meeting of stockholders and until their successors have been duly elected and qualified. The nominees for election by the stockholders are Shawn McCreight, Victor Limongelli, Jeff Lawrence, Kathleen O'Neil, Stephen Richards and Robert van Schoonenberg. All nominees are current directors of the Company.


Vote Required and Board Recommendation

To elect directors to our Board of Directors, our Bylaws require a vote of the majority of shares present in person or represented by proxy at the Annual Meeting (at which a quorum is present) and entitled to vote on the election of directors, unless there are more nominees for director than there are open directorships, in which case our Bylaws require a vote of the plurality of shares present in person or represented by proxy at the Annual Meeting (at which a quorum is present) and entitled to vote on the election of directors. Abstentions and broker non-votes will not have any effect on the outcome of this proposal. In tabulating the voting results for the election of directors, only "FOR" and "AGAINST" votes are counted. If no contrary indication is made, proxies in the accompanying form are to be voted for our Board of Directors' nominees or, in the event any of such nominees is not a candidate or is unable to serve as a director at the time of the election (which is not currently expected), for any nominee who shall be designated by our Board of Directors to fill such vacancy.

The affirmative vote of a majority of the votes cast at the meeting, at which a quorum is present, either in person or by proxy, is required to approve this Proposal. Unless marked otherwise, proxies received will be voted "FOR" each nominee listed above.


Our Board of Directors

The information set forth below as to the nominees for director has been furnished to us by the nominees:

Shawn McCreight founded Guidance Software, Inc. in November 1997 and has served as Chairman of the Board of Directors since its inception. From January 2003 to the present, he has served as Chairman and Chief Technology Officer. Prior to January 2003, he served as Founder and Chief Executive Officer. Mr. McCreight received an A.B. in Physics from the University of California at Berkeley. We believe Mr. McCreight's qualifications to sit on our Board include his extensive experience in the designing and developing of software programs and applications, including the original development of our EnCase® software and his management and industry experience which includes acting as our Chairman since the inception of the Company and our Chief Technology Officer since 2003.

Victor Limongelli has served as Director and Chief Executive Officer since December 2007. From July 2005 to the present, he has also served as President. He served as Corporate Secretary from August 2005 until December 2007. Prior to his appointment as President, Mr. Limongelli held a number of executive positions with Guidance Software, Inc., including, Vice President of Professional Services and General Counsel from August 2004 to July 2005, and General Counsel from May 2003 to August 2004. Mr. Limongelli received an A.B. from Dartmouth College and a J.D. from Columbia University. We believe Mr. Limongelli's qualifications to sit on our Board include his over seventeen years of legal and business experience including over six years as our President.

Jeff Lawrence has served as a member of the Board of Directors for Guidance Software, Inc. since April 2008. He is co-founder of the Common Grant Application, founder of Clivia Systems, and founder and Trustee of The Lawrence Foundation. Formerly, Mr. Lawrence served as CTO of the Network Communications Group of Intel Corporation (NASDAQ:INTC) and, previously, he was co-founder and former President & CEO of Trillium Digital Systems, prior to its acquisition by Intel Corporation in 2000. Mr. Lawrence has a B.S. in Electrical Engineering from UCLA and is a co-recipient of the Greater Los Angeles Entrepreneur of the Year award and the UCLA School of Engineering's Professional Achievement award. We believe that Mr. Lawrence's qualifications to sit on our Board include his years of software industry experience and his corporate management experience as CEO of a software company.

Kathleen O'Neil has served as a member of the Board of Directors for Guidance Software, Inc. since December 2005 and has served as our Lead Independent Director since February 2007. She is currently the President and Chief Executive Officer for Liberty Street Advisors, LLC, where she has served since October 2001. Prior to joining Liberty Street Advisors, LLC, from January 2001 to September 2001, she served as General Manager of Global Financial Markets Infrastructure for IBM. From 1976 to 2000, Ms. O'Neil held a number of executive positions with the Federal Reserve Bank of New York. Ms. O'Neil has served on the Board of Directors of BMC Software (NASDAQ:BMC) since 2002, the Board of Directors of MetLife Bank since 2004 and the Board of Directors of the Motley Fool Independence Fund as of March 2009. Ms. O'Neil received a B.S. in Economics from John Carroll University, and received an M.B.A. from Wharton Graduate School of the University of Pennsylvania. We believe Ms. O'Neil's qualifications to sit on our Board include her expertise in finance, risk management, strategy development and corporate governance and her experience as a board member of other public companies.

Stephen Richards has served as a member of the Board of Directors since February 2008 and, he previously served as a member of the Board from January 2006 until November 2006. He served as Chief Financial Officer of McAfee, Inc., from April 2001 until his retirement in December 2004. He also concurrently served as Chief Operating Officer from November 2001 to December 2004. Prior to that, he was Chief Online Trading Officer of E*TRADE Group, Inc. (NASDAQ:ETFC). His previous roles at E*TRADE also included: Senior Vice President, Corporate Development and New Ventures, Senior Vice President of Finance, Chief Financial Officer and Treasurer. Prior to E*TRADE, he was Managing Director and Chief Financial Officer of Correspondent Clearing at Bear Stearns & Companies, Inc., Vice President/Deputy Controller of Becker Paribas, and First Vice President/Controller of Jefferies and Company, Inc. Mr. Richards is a Certified Public Accountant and a current member of the Board of Directors of Cray Inc. (NASDAQ:CRAY). During the period of 1999-2009, he served on the Board of Directors of Tradestation Group. He received a B.A. from the University of California at Davis and a M.B.A. in Finance from the University of California at Los Angeles. We believe Mr. Richards qualifications to sit on our Board include his corporate management experience serving as an officer at other public companies and his years of providing financial and strategic expertise to public and private companies.

Robert G. van Schoonenberg has served as a member of the Board of Directors since February 2008. He is the Former Executive Vice President, Chief Legal Officer and Secretary of the Board of Avery Dennison Corporation (NYSE:AVY). He also served as Secretary and General Counsel at Avery Dennison for over 28 years. He is also Chairman and Chief Executive Officer of BayPoint Capital Partners, LLC, Co-Managing Partner, AmeriCap Partners, LLC, as well as a member of the Board of Directors of Ryland Group, Inc.( NYSE:RYL). During the period of 2008-2011, he served on the Board of Directors of Altair Nanotechnologies, Inc. (NASDAQ:ALTI). Mr. van Schoonenberg received his J.D. degree from University of Michigan School of Law, his M.B.A. from the University of Wisconsin at Madison and his undergraduate degree from Marquette University. Mr. van Schoonenberg also serves on the Board of Trustees for Southwestern University School of Law. We believe Mr. van Schoonenberg's qualifications to sit on our Board include his twenty-eight years of corporate management and corporate governance experience as an officer of a large global public company and his experience as a board member of other public and private companies.

Shawn McCreight, Victor Limongelli, Jeff Lawrence, Kathleen O'Neil, Stephen Richards and Robert van Schoonenberg are each party to the Company's form of Indemnification Agreement.


Board Committees and Meetings

During the fiscal year ended December 31, 2011, the Board of Directors held ten meetings. The Board of Directors has established three standing committees: an Audit Committee, a Compensation Committee, and a Nominating and Governance Committee. Kathleen O'Neil is our Lead Independent Director.

The current members of our Audit Committee are Stephen Richards, Kathleen O'Neil and Robert van Schoonenberg. Mr. Richards serves as the Chair of our Audit Committee. We believe that Mr. Richards, Ms. O'Neil and Mr. van Schoonenberg each qualify as Audit Committee financial experts, as defined in the rules of the Securities and Exchange Commission ("SEC"). The Audit Committee oversees our corporate accounting and financial reporting process and the audits of our financial statements. It evaluates the independent registered public accountants' qualifications, independence and performance, determines the engagement of the independent registered public accountants, approves the retention of the independent registered public accountants to perform any proposed permissible non-audit services, monitors the rotation of partners of the independent registered public accountants on our engagement team as required by law, reviews our critical accounting policies and estimates, and discusses with management and the independent registered public accountants the results of the annual audit and the reviews of our quarterly financial statements. The Audit Committee reviews and evaluates, at least annually, the performance of the Audit Committee and its members, including compliance with its charter. The Audit Committee held eight meetings during the fiscal year ended December 31, 2011. All members of the Audit Committee are independent (as independence is defined in the NASDAQ Listing Rules). The Audit Committee acts pursuant to a written charter.

The current members of our Compensation Committee are Robert van Schoonenberg, Marshall Geller, Jeff Lawrence and Stephen Richards, each of whom is a "non-employee director" within the meaning of Rule 16b-3 under the Exchange Act and an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Mr. van Schoonenberg is the current chair of our Compensation Committee. The Compensation Committee has sole authority to determine our CEO's compensation, and reviews and approves all compensation for all directors and for the executive officers, including any employment agreement, change in control arrangement, or severance arrangement for each executive officer. The Compensation Committee also administers the issuance of stock options and other awards under our stock plans. The Compensation Committee reviews and evaluates, at least annually, the performance of the compensation committee and its members, including compliance with its charter. The Compensation Committee held five meetings during the fiscal year ended December 31, 2011. All members of the Compensation Committee are independent (as independence is defined in the NASDAQ Listing Rules). The Compensation Committee acts pursuant to a written charter.

The current members of our Nominating and Governance Committee, referred to henceforth as the "Nominating Committee," are Kathleen O'Neil, Robert van Schoonenberg, Jeff Lawrence and Marshall Geller. Ms. O'Neil is the current chair of the Nominating Committee. The Nominating Committee identifies prospective board candidates, recommends nominees for election to our Board of Directors and provides oversight in the evaluation of our Board of Directors. The Nominating Committee reviews and evaluates, at least annually, the performance of the Nominating Committee and its members, including compliance with its charter and oversees the evaluation process of the Board and its committees. The Nominating Committee held five meetings during the fiscal year ended December 31, 2011. All members of the Nominating Committee are independent (as independence is defined in the NASDAQ Listing Rules). The Nominating Committee acts pursuant to a written charter.

MANAGEMENT DISCUSSION FROM LATEST 10K

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 Annual Report on Form 10-K. 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 under “Risk Factors” or in other parts of this Annual Report on Form 10-K.



Overview



We develop and provide the leading software and hardware solutions for digital investigations, including EnCase ® Enterprise, a network-enabled product primarily for corporations and government agencies, and EnCase ® Forensic, a desktop-based product primarily for law enforcement agencies and digital investigators.



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 products 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 average transaction size. In May 2010, we added a family of data acquisition forensic hardware products including forensic duplicators, multiple write blockers and other hardware through our acquisition of Tableau, LLC (“Tableau”). In February 2012, we added cloud-based document review and production software-as-a-service for corporations and law firms through our acquisition of CaseCentral, Inc. (“CaseCentral”) We anticipate that sales of our EnCase Enterprise products and related services, in particular our EnCase eDiscovery and EnCase Cybersecurity solutions, sales of our forensic hardware products and sales of subscriptions for cloud-based document review and production SAAS will comprise a substantial portion of our future revenues.



Important Factors Affecting Our Results of Operations



There are a number of trends that may affect our business and our industry. We have identified factors that we expect to play an important role in our future growth and profitability. 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 a substantial capital expenditure by our customers. Budgets for information technology-related capital expenditures at corporations and all levels of government organizations are typically cyclical in nature, with generally higher budgets in times of improving economic conditions and lower budgets in times of economic slowdowns.

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



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



• Seasonality in revenues. We experience seasonality in our revenues, with the third and fourth quarters typically having the highest revenues for the year. We believe that this seasonality results primarily from our customers’ budgeting cycles. The federal government 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 period unpredictable for a significant portion of that period. We expect that this seasonality within particular years and unpredictability within particular quarterly periods will continue for the foreseeable future.



• Amount of commercial litigation. Because commercial litigation often involves e-discovery, an increase in commercial litigation could increase demand for our products and services, while a decrease in commercial litigation could decrease demand.



Summary of Results of Operations



Our total revenue for the year ended December 31, 2012 was $129.5 million, an increase of $24.9 million, or 24%, from 2011. Product revenue was $56.1 million for the year ended December 31, 2012, an increase of $3.8 million, or 7%, from 2011. Subscription revenue was $9.2 million for the year ended December 31, 2012, compared to none in 2011. Services and maintenance revenue was $64.2 million for the year ended December 31, 2012, an increase of $11.9 million, or 23%, from 2011. The increase in our total revenue for the year ended December 31, 2012 compared to 2011 was primarily due to sales of our new subscription based products due to our acquisition of CaseCentral in February 2012, increased services and maintenance revenue as a result of sustained increases in our installed product base and high annual renewals by our customers, and growth in the enterprise software market which lead to increased sales of our EnCase ® Enterprise family of products.



Our net loss for the year ended December 31, 2012 was $2.0 million, or $0.08 per share, compared to a net loss of $1.6 million, or $0.07 per share, for 2011. Our profitability is primarily dependent upon revenue from the sale of our products. Cost of revenues for the year ended December 31, 2012 was $36.4 million, an increase of $8.0 million, or 28%, from 2011. The increase was primarily the result of increased sales of subscription based products and professional services. Profitability is also affected by the costs and expenses associated with developing, selling and marketing our products. Operating expenses for the year ended December 31, 2012 were $94.8 million, an increase of $17.1 million, or 22%, from 2011, due primarily to increases in selling and marketing expenses, general and administrative expenses and research and development costs.



Sources of Revenue



Our software product sales transactions typically include the following elements: (i) a software license fee paid for the use of our products under a perpetual license term, or for a specific term; (ii) an arrangement for first-year support and maintenance, which includes unspecified software updates, upgrades and post-contract support; (iii) and professional services for installation, implementation, consulting and training. With our acquisition of CaseCentral in February 2012, we began to generate revenue from cloud-based document review and production software sold as subscription services. We derive the majority of our revenue from sales of our software products. We sell our software products and services primarily through our direct sales force and in some cases we utilize resellers. We sell our hardware products primarily through resellers.


Product Revenues



We generate product revenues principally from two product categories: Enterprise products and Forensic products. Our Enterprise products include perpetual licenses and Pay-Per-Use fees related to our EnCase ® Enterprise, eDiscovery, and EnCase ® Cybersecurity. Our Forensic products include revenue related to EnCase ® Forensic, EnCase ® Portable, and forensic hardware sales. Our Forensic products also include our Premium License Support Program (“PLSP”) product, which was sold on a subscription basis for a term of one or three years; sales of PLSP ended in June 2011 when we introduced EnCase ® Forensic v7. During the first two quarters of each fiscal year, we typically experience our lowest levels of product sales due to the seasonal budgetary cycles of our customers. The third quarter is typically the strongest quarter for sales to our federal government customers. Typically, sales to our corporate customers are highest in the fourth quarter.



Product revenues increased by $3.8 million, or 7%, from $52.3 million for the year ended December 31, 2012 from 2011. The increase was primarily due to increases in Enterprise product revenues and Forensic hardware revenues, partially offset by lower Forensic software revenues. Enterprise product revenues increased by $5.1 million, or 21%, from $24.8 million for the year ended December 31, 2012 from 2011, primarily due to an increase in the number of new EnCase® Enterprise customers resulting from additional functionality made available in our Enterprise products and an increase in sales to existing customers. During the year ended December 31, 2012 we added 358 new EnCase® Enterprise customers, as compared to 285 for the year ended December 31, 2011. During 2012, 74% of Enterprise product revenues were the result of sales to existing customers, compared to 61% in 2011. Forensic hardware revenue increased by $3.7 million, or 44%, from $8.4 million for the year ended December 31, 2012 from 2011, primarily due to increased sales of new versions of our hardware products that were made available during the year. The increases in Enterprise product revenues and Forensic hardware revenues were offset by a decrease in Forensic software revenues of $5.4 million, or 28%, from $19.0 million for the year ended December 31, 2012 from 2011. The decrease in Forensic software revenues was due to the initial release of the latest version of our EnCase® Forensic product in June 2011, which generated increased demand for that product in 2011 as compared to 2012.



Product revenues increased by $8.4 million, or 19%, from $43.9 million for the year ended December 31, 2011 from 2010, primarily due to a $6.3 million, or 30%, increase in Forensic product revenues. The increase in Forensic product revenues was due to a $3.1 million, or 19%, increase in forensic software revenues and a $3.2 million, or 62%, increase in forensic hardware revenues. The increase in forensic software revenues was primarily due to increased sales volume of the latest version of our EnCase ® Forensic software product released in June 2011. The increase in forensic hardware revenues was primarily due to the inclusion of a full twelve months of sales in 2011 of the forensic hardware products that we acquired through our acquisition of Tableau in May 2010 as compared to our forensic hardware revenues in 2010, which included only approximately eight months of such sales. Enterprise product revenues increased $2.1 million, or 9%, for the year ended December 31, 2011 from 2010. This increase was primarily attributable to increased sales to our customers resulting from additional functionality made available in our Enterprise products during the year.



Subscription Revenues



With our acquisition of CaseCentral in February 2012, we began to generate revenue from cloud-based document review and production software sold as subscription services. Subscription service customers have the right to access our cloud-based document review and production software; however, they may not take possession of the software at any time during the term of the agreement. In general, we recognize revenue for subscriptions on a straight-line basis over the contract period commencing on the date the subscription is made available to the customer. Usage-based fees, which are determined monthly, are recognized when incurred.



Subscription revenues were $9.2 million for the year ended December 31, 2012, compared with none in 2011. We started to earn revenue from cloud-based document review and production software products in February 2012 as a result of our acquisition of CaseCentral.



Services and Maintenance Revenues



Services and maintenance revenues increased $11.9 million, or 23%, from $52.3 million for the year ended December 31, 2012, from 2011. Services revenues increased $5.1 million, or 23% from $22.8 million, for the year ended December 31, 2012, from 2011, primarily due to an increase of $3.0 million in professional services revenues related to our acquisition of CaseCentral in February 2012 and a $2.1 million increase in training revenue. The increase in training revenue was primarily due to increased demand for training courses related to new product releases. Maintenance revenues increased $6.8 million, or 23%, from $29.5 million for the year ended December 31, 2012, from 2011 primarily as a result of sustained increases in our installed product base and high annual renewal rates by customers desiring continuing maintenance support on our products. In 2012 our installed product base increased primarily through the addition of 358 new EnCase Enterprise customers and sales of 106 new EnCase e-Discovery and EnCase Cybersecurity modules to existing EnCase Enterprise customers. Services and maintenance revenues increased $4.3 million, or 9%, from $48.0 million for the year ended December 31, 2011, from 2010. Services revenues increased $0.4 million, or 3%, for the year ended December 31, 2011, from 2010, primarily due to revenue from certain significant one-time consulting engagements performed during the first six months of 2011. Maintenance revenues increased $3.9 million, or 15%, from $25.6 million for the year ended December 31, 2011, from 2010, primarily as a result of sustained increases in our installed product base and high annual renewal rates by customers desiring continuing maintenance support on our products. In 2011 our installed product base increased primarily through the addition of 285 new EnCase Enterprise customers and sales of 106 new EnCase e-Discovery and EnCase Cybersecurity modules to existing EnCase Enterprise customers.

Cost of Product Revenues



Cost of product revenues consists principally of the cost of producing our software products, the cost of manufacturing our hardware products and product distribution costs, including the cost of compact discs, packaging, shipping, customs duties, and, to a lesser extent, compensation and related overhead expenses. While these costs are primarily variable with respect to sales volumes, they remain low in relation to the revenue generated and result in higher gross margins than our services and training businesses. Our gross margins can be affected by product mix, as our enterprise products are generally higher margin products than our forensic products, which include software and hardware.



Cost of product revenues increased by $2.0 million, or 34%, from $6.0 million for the year ended December 31, 2012, from 2011. The increase was primarily a result of an increase in forensic hardware product revenues. Product gross margin decreased slightly to 85.8% in 2012 from 88.6% in 2011 primarily due to a $3.7 million increase in sales of forensic hardware products to $12.1 million, or 21.6% of product sales. Forensic hardware sales have lower gross margins than our software products.



Cost of product revenues increased by $1.0 million, or 21%, from $4.9 million, for the year ended December 31, 2011, from 2010. The increase was primarily a result of an increase in forensic hardware product revenues due to our acquisition of certain of the assets of Tableau in May 2010. Product gross margin decreased slightly to 88.6% in 2011 from 88.8% in 2010 primarily due to a $3.2 million increase in sales of forensic hardware products to $8.4 million, or 16.1% of product revenues. Forensic hardware sales have lower gross margins than our software products.



Cost of Subscription Revenues



The cost of subscription revenues consists principally of employee compensation costs, including share-based compensation and related overhead, software maintenance paid to third party vendors, and SaaS hosting infrastructure costs. The cost of subscription revenue was $3.7 million for the year ended December 31, 2012, compared with none in 2011, as the cloud-based document review and production software products did not become a part of our product mix until the completion of our acquisition of CaseCentral in February 2012.



Cost of Services and Maintenance Revenues



The cost of services and maintenance revenues are largely comprised of employee compensation costs, including share-based compensation, and related overhead, travel and facilities costs. The cost of maintenance revenue is primarily outsourced, but also includes employee compensation cost for customer technical support and related overhead costs.


The cost of services and maintenance revenues increased $2.3 million, or 10%, from $22.5 million for the year ended December 31, 2012, from 2011. The increase in the cost of services and maintenance revenues for the year ended December 31, 2012 from 2011 was due primarily to an increase in costs added as a result of the acquisition of CaseCentral in February 2012. We added 10 employees to cost of services and maintenance from the CaseCentral acquisition. Services and maintenance gross margin was 61.4% in 2012, compared to 57.0% in 2011. The higher services and maintenance gross margin for the year ended December 31, 2012, from 2011, was a result of higher gross margins on our services revenue due the addition of higher-margin services through our acquisition of CaseCentral.



The cost of services and maintenance revenues increased $2.6 million, or 13%, from $19.9 million for the year ended December 31, 2011, from 2010. The increase in the cost of services and maintenance revenues in 2011 from 2010 was due primarily to increases in compensation and related expenses, associated with higher revenues and higher utilization rates in our professional services organization, as well as an increase in third-party consultants on certain engagements. Third-party consultants, which are generally more expensive than our own professional services consultants, are used mostly when the demand for our own consultants exceeds our internal capacity.



Services and maintenance gross margin was 57.0% in 2011, compared to 58.6% in 2010. The lower services and maintenance gross margin in 2011 was primarily a result of lower margins on services revenue in 2011, compared to 2010, which was primarily due to an increase in the number of third-party consultants used on certain professional engagements.



Selling and Marketing Expenses



Selling and marketing expenses consist primarily of personnel costs and costs related to our sales force and marketing staff. Selling and marketing expenses also include expenses relating to advertising, brand building, marketing promotions and trade show events (net of amounts received from sponsors and participants), product management, and travel and allocated overhead.



Selling and marketing expenses increased $5.3 million, or 14%, from $37.0 million for the year ended December 31, 2012, from 2011. Approximately $3.7 million of the increase was due to higher compensation costs and other employee-related expenses associated with increased product revenues, while approximately $1.6 million of the increase was due to higher compensation and other employee-related expenses due to an increase in headcount in connection with the acquisition of CaseCentral in February 2012.



Selling and marketing expenses increased $1.0 million, or 3%, from $35.9 million for the year ended December 31, 2011, from 2010. The increase was primarily due to higher compensation costs and related expenses associated with increased product revenues.



Research and Development Expenses



Research and development expenses consist primarily of compensation, including share-based compensation and related overhead expenses. In order to develop new product offerings, continue developing existing products and improve quality assurance, and incorporate personnel to support our new cloud-based subscription offerings we increased the number of research and development personnel that we employed during 2012 compared to 2011 and 2010.



Research and development expenses increased $5.6 million, or 30%, from $18.9 million for the year ended December 31, 2012, from 2011. Approximately $3.6 million of the increase was due to compensation and other employee-related expenses increasing due to an increase in headcount in connection with the acquisition of CaseCentral in February of 2012. Approximately $2.0 million of the increase was due to higher compensation costs and other employee-related expenses associated with increased headcount due to the number of products in development.



MANAGEMENT DISCUSSION FOR LATEST QUARTER

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, 2011 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 EnCase ® Enterprise in 2002, the release of EnCase ® eDiscovery in 2005 and the release of EnCase ® Information Assurance in 2006 (which was replaced by EnCase ® Cybersecurity in 2009), which expanded our customer base into corporate enterprises and federal government agencies. In May 2010, we added a family of data acquisition forensic hardware products including forensic duplicators, multiple write blockers and other hardware through our acquisition of Tableau. In February 2012, we added cloud-based document review and production software-as-a-service for corporations and law firms through our acquisition of CaseCentral.



We develop and provide leading software and hardware solutions for digital investigations, including EnCase ® Enterprise, a network-enabled product primarily for large corporations and government agencies, and EnCase ® Forensic, a desktop-based product primarily for law enforcement agencies. We anticipate that sales of subscriptions for our cloud-based review and production software, our EnCase ® Enterprise products and related services, in particular our EnCase ® eDiscovery and EnCase ® Cybersecurity solutions, and the sales of our forensic hardware products, will comprise a substantial portion of our future revenues.



Factors Affecting Our Results of Operations



There are a number of trends that may affect our business and our industry. Some of these trends or other factors include:



• Legislative and regulatory developments. Our digital investigation solutions allow law enforcement agencies, government organizations and corporations to conduct investigations within the legal and regulatory framework. Historically, the implementation of new laws and regulations surrounding digital investigations has helped create demand for our products. Future changes in applicable laws or regulations could enhance or detract from the desirability of our products.



• Information technology budgets. Deployment of our solutions may require substantial capital expenditures by our customers. Budgets for information technology-related capital expenditures at corporations and all levels of government organizations are typically cyclical in nature, with generally higher budgets in times of improving economic conditions and lower budgets in times of economic slowdowns.



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



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



• Seasonality in revenues. We experience seasonality in our revenues, with the third and fourth quarters typically having the highest revenues for the year. We believe that this seasonality results primarily from our customers’ budgeting cycles. The federal 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 in our revenues and unpredictability of our revenues within particular quarterly periods will continue for the foreseeable future.

• Amount of commercial litigation. Because commercial litigation often involves eDiscovery, an increase in commercial litigation could increase demand for our products and services, while a decrease in commercial litigation could decrease demand.



Critical Accounting Policies and Estimates



In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in “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, 2011 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. There have no significant changes in those critical accounting policies and estimates during the three and nine months ended September 30, 2012 other than the addition to revenue recognition mentioned below.



With the acquisition of CaseCentral in February 2012, we now also generate revenue from cloud-based document review and production software-as-a-service where customers have the right to access our document review management software via the web; however, they may not take possession of the software at any time during the term of the agreement. In general, we recognize revenue for subscriptions on a straight-line basis over the contractual contract period commencing on the date the subscription is made available to the customer. Usage-based fees, which are determined monthly, are recognized when incurred.



When subscription services and usage-based fee arrangements involve multiple elements that qualify as separate units of accounting, we allocate arrangement consideration in multiple deliverable revenue arrangements at the inception of an arrangement to all deliverables based on the relative selling price method in accordance with the selling price hierarchy, which includes: 1) vendor-specific objective evidence of fair value (“VSOE”), if available, 2) third-party evidence (“TPE”) if VSOE is not available; or 3) best estimate of selling price (“BESP”) if neither VSOE nor TPE is available.



• VSOE . We determine VSOE based on its historical pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for these services fall within a reasonably narrow pricing range.



• TPE . When VSOE cannot be established for deliverables in a multiple element arrangement, we apply judgment with respect to whether we can establish a selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from our peers and our offerings contain a significant level of differentiation such that comparable pricing of services with similar functionality has not been able to be obtained. Furthermore, we have been unable to reliably determine selling prices of similar competitive services on a stand-alone basis. As a result, we have not been able to establish selling prices based on TPE.



• BESP . When VSOE or TPE is unable to be established, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the service was sold on a stand-alone basis. We determine BESP for deliverables by considering multiple factors including but not limited to prices we charge for similar offerings, market conditions, competitive landscape and pricing practices.



We have not established VSOE or TPE for our subscription services or usage-based fee arrangements and therefore we use BESP to allocate the selling price to subscription services and usage-based fee deliverables.



Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2012 and 2011



Sources of Revenues



Our software product sales transactions typically include the following elements: (i) a software license fee paid for the use of our products under a perpetual license term, or for a specific term; (ii) an arrangement for first-year support and maintenance, which includes unspecified software updates, upgrades and post-contract support; (iii) and professional services for installation, implementation, consulting and training. With our acquisition of CaseCentral in February 2012, we began to generate revenue from cloud-based document review and production software sold as subscription services. We derive the majority of our revenue from sales of our software products. We sell our software products and services primarily through our direct sales force and in some cases we utilize resellers. We sell our hardware products primarily through resellers.

Product Revenues



We generate product revenues principally from two product categories: Enterprise products and Forensic products. Our Enterprise products include perpetual licenses and Pay-Per-Use fees related to our EnCase ® Enterprise, eDiscovery, Legal Hold, EnCase ® Cybersecurity and OEM add-on products. Our Forensic products include revenue related to EnCase ® Forensic, EnCase ® Portable, and forensic hardware sales. Our Forensic products also include our Premium License Support Program (“PLSP”) product, which was sold on a subscription basis for a term of one or three years; sales of PLSP ended in June 2011 when we introduced EnCase ® Forensic v7. During the first two quarters of each fiscal year, we typically experience our lowest levels of product sales due to the seasonal budgetary cycles of our customers. The third quarter is typically the strongest quarter for sales to our federal government customers. Typically, sales to our corporate customers are highest in the fourth quarter.



Product revenues increased by $2.6 million, or 17%, from $14.8 to $17.4 million and by $4.4 million, or 12%, from $35.6 million to $39.9 million for the three and nine months ended September 30, 2012, respectively, as compared with the same periods in 2011. The increases in product revenues for the three months and nine months ended September 30, 2012 were primarily due to increased demand for our EnCase ® Enterprise products and an increase in sales of our hardware products.



Subscription Revenue



With our acquisition of CaseCentral in February 2012, we began to generate revenue from cloud-based document review and production software sold as subscription services. Subscription service customers have the right to access our cloud-based document review and production software; however, they may not take possession of the software at any time during the term of the agreement. In general, we recognize revenue for subscriptions on a straight-line basis over the contract period commencing on the date the subscription is made available to the customer. Usage-based fees, that are determined monthly, are recognized when incurred.



Subscription revenue was $2.6 million and $6.7 million for the three and nine months ended September 30, 2012, respectively, compared with none in the same periods in 2011. We started to earn revenue from cloud-based document review and production software products in February 2012 as a result of our acquisition of CaseCentral.



Services and Maintenance Revenues



Services and maintenance revenues increased by $3.7 million, or 29%, from $12.4 million to $16.1 million and $7.4 million, or 19%, from $39.2 million to $46.6 million for the three and nine months ended September 30, 2012, respectively, as compared with the same periods in 2011.



Services revenues increased $2.2 million, or 46%, from $4.8 million to $7.1 million and $2.1 million, or 12%, from $17.6 million to $19.7 million for the three and nine months ended September 30, 2012, respectively, as compared with the same periods in 2011. The increase for the three and nine months ended September 30, 2012 was primarily due to an increase in professional services revenues due to our acquisition of CaseCentral in February 2012 and an increase in training revenue as a result of higher demand for training classes related to new product releases that occurred in 2011 and early 2012.

Maintenance revenues increased $1.4 million, or 19%, from $7.6 million to $9.0 million and $5.3 million, or 25%, from $21.6 million to $26.9 million for the three and nine months ended September 30, 2012, respectively, as compared with the same periods in 2011. The increases were primarily a result of sustained increases in our installed product base and high annual renewal rates by customers desiring continuing maintenance support on our products.


Cost of Product Revenues



Cost of product revenues consists principally of the cost of producing our software products, the cost of manufacturing our hardware products and product distribution costs, including the cost of compact discs, packaging, shipping, customs duties, and, to a lesser extent, compensation and related overhead expenses. While these costs are primarily variable with respect to sales volumes, they remain low in relation to the revenue generated and result in higher gross margins than our services and training businesses. Our gross margins can be affected by product mix, as our enterprise products are generally higher margin products than our forensic products, which include software and hardware.



Cost of product revenues increased $0.8 million or 53%, from $1.4 million to $2.2 million, and $1.4 million, or 33%, from $4.3 million to $5.8 million, for the three and nine months ended September 30, 2012, respectively, compared with the same periods in 2011. The increases were primarily a result of higher sales of our forensic hardware products.



Product revenue gross margin for the three and nine months ended September 30, 2012 decreased to 87.3% and 85.5%, respectively, compared to 90.3% and 87.8% for the same periods in 2011. The decreases in gross margin percentage were primarily due to an increase in sales of forensic hardware products, which have lower margins.



Cost of Subscription Revenue



The cost of subscription revenue consists principally of employee compensation costs, including share-based compensation and related overhead, software maintenance paid to third party vendors, and SaaS hosting infrastructure costs. The cost of subscription revenue was $1.0 million and $2.9 million, for the three and nine months ended September 30, 2012, respectively, compared with none in the same periods in 2011, as the cloud-based document review and production software products did not become a part of our product mix until the completion of our acquisition of CaseCentral in February 2012.



Cost of Services and Maintenance Revenues



The cost of services and maintenance revenues are largely comprised of employee compensation costs, including share-based compensation, and related overhead, travel and facilities costs. The cost of maintenance revenue is primarily outsourced, but also includes employee compensation cost for customer technical support and related overhead costs.

Total cost of services and maintenance revenue increased $1.2 million, or 22%, from $5.4 million to $6.5 million, for the three months ended September 30, 2012 and $0.8 million, or 5%, from $17.3 million to $18.1 million for the nine months ended September 30, 2012, respectively, as compared with the same periods in 2011. The increase for the three months ended September 30, 2012 was primarily due to the increase in cost of services revenue of $1.4 million, or 29%, from $4.8 million to $6.1 million. This increase was primarily due to an increase in services costs due to the acquisition of CaseCentral in February 2012. The increase in cost of services revenue of $1.2 million, or 8%, from $15.4 million to $16.6 million for the nine months ended September 30, 2012 was primarily due to higher compensation costs associated with higher revenues and by an increase in costs due to the acquisition of CaseCentral in February 2012. Services and maintenance gross margin for the three and nine months ended September 30, 2012 increased to 59.4% and 61.2%, respectively, compared to 56.8% and 55.9% for the same periods in 2011. The increases in gross margin were primarily a result of higher gross margins on our services revenue due to an increase in utilization rates during the periods.

Selling and Marketing Expenses



Selling and marketing expenses consist primarily of personnel costs and costs related to our sales force and marketing staff. Selling and marketing expenses also include expenses relating to advertising, brand building, marketing promotions and trade show events (net of amounts received from sponsors and participants), product management, and travel and allocated overhead.



Selling and marketing expenses increased $2.0 million, or 20%, from $9.8 million to $11.8 million, and $3.7 million, or 14%, from $26.6 million to $30.3 million, for the three and nine months ended September 30, 2012, respectively, as compared with the same periods in 2011. The increases in selling and marketing expenses for the three and nine months ended September 30, 2012 were driven primarily by an increase in headcount and related expenses as a result of the acquisition of CaseCentral in February 2012 as well as an increase in commission expense due to an increase in revenues during the periods.

Research and Development Expenses



Research and development expenses consist primarily of compensation, including share-based compensation and related overhead expenses. In order to develop new product offerings, continue developing existing products and improve quality assurance, and incorporate personnel to support our new cloud-based subscription offerings we increased the number of research and development personnel that we employ at September 30, 2012 compared to the same period in the prior year.



Research and development expenses increased $1.6 million, or 34%, from $4.6 million to $6.2 million, and $3.6 million, or 25%, from $14.2 million to $17.8 million, for the three and nine months ended September 30, 2012, respectively, as compared with the same periods in 2011. The higher expenses were driven primarily by an increase in headcount and related expenses, as a result of the acquisition of CaseCentral in February 2012.

General and Administrative Expenses



General and administrative expenses consist of personnel and related costs for accounting, legal, information systems, human resources and other administrative functions. In addition, general and administrative expenses include professional service fees, bad debt expense, and other corporate expenses and related overhead.



General and administrative expenses increased $1.2 million, or 29%, from $4.1 million to $5.4 million, and $4.5 million, or 37%, from $12.2 million to $16.7 million for the three and nine months ended September 30, 2012, respectively, as compared with the same periods in 2011. The increase in general and administrative expenses for the three months ended September 30, 2012 was primarily attributable to increased headcount and related expenses incurred in connection with the acquisition of CaseCentral in February 2012 and an increase in legal expenses related to a patent infringement complaint filed in 2011. The increase for the nine months ended September 30, 2012, was primarily attributable to $2.4 million in costs related to the CaseCentral acquisition, legal fees related to a patent infringement complaint filed in 2011 and increased headcount and related expenses incurred in connection with the acquisition of CaseCentral partially offset by a charge in the first quarter of 2011 of $1.3 million related to certain state sales tax obligations including related interest and penalties.



Depreciation and Amortization Expenses



Depreciation and amortization expenses consist of depreciation and amortization of our leasehold improvements, furniture, computer hardware and software, and intangible assets. Depreciation and amortization expenses increased $0.4 million, or 29%, from $1.4 million to $1.7 million, and $1.5 million, or 37%, from $3.9 million to $5.3 million for the three and nine months ended September 30, 2012, respectively, as compared with the same period in 2011, primarily as a result of the amortization of intangibles assets and depreciation expense as a result of the acquisition of CaseCentral in February 2012.



Other Income and Expense



Total other income and expense consists of interest earned on cash balances, interest expense paid and other miscellaneous income and expense items. For the three months ended September 30, 2012 we recorded expense of $9,000 as compared with income of $20,000 for the same period in 2011. For the nine months ended September 30, 2012 we recorded expense of $10,000 as compared with income of $39,000 for the same period in 2011. The changes in both the three and nine months ended September 30, 2012 were primarily due to an increase in interest expense attributable to equipment leases related to the acquisition of CaseCentral in February, 2012.



Income Tax Provision



The Company recorded an income tax provision for the three and nine months ended September 30, 2012 of $22,000 and $231,000, respectively, as compared with the income tax provisions of $25,000 and $179,000 during the same periods in 2011. The income tax provision is based on our estimated effective annual tax rate and taxable income (loss) for the respective years. Our estimated effective tax rate was 6.3%, and 4.8% for nine months ended September 30, 2012 and 2011, respectively, which differs from the U.S. statutory rate of 34% primarily due to research and development credits, offset by the tax impact of certain share-based compensation charges that are not deductible for tax purposes, and the impact of providing a valuation allowance against deferred tax assets.



Liquidity and Capital Resources



We have largely financed our operations from the cash flow generated from the sale of our products and services. As of September 30, 2012, we had $30.0 million in cash and cash equivalents. On February 21, 2012, we acquired CaseCentral, a privately held a provider of cloud-based document review and production software for approximately $25.6 million, consisting of $9.6 million in cash (net of $1.4 million in cash acquired), $9.5 million in Company common stock and contingent consideration with an acquisition date fair value of $5.1 million. Depending on CaseCentral’s SaaS revenue over the three 12-month periods starting April 1, 2012, we may be required to pay up to a maximum of $33.0 million in cash to CaseCentral’s former shareholders with respect to those periods. We incurred $2.0 million in acquisition-related costs. The transaction closed on February 21, 2012 and the results of operations of CaseCentral have been included in the Company’s condensed consolidated financial statements subsequent to that date. We believe that our cash flow from operations and our cash and cash equivalents are sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months.



Changes in Cash Flow



We generate cash from operating activities primarily from cash collections related to the sale of our products and services. Net cash provided by operating activities was $4.6 million for the nine months ended September 30, 2012 as compared with $1.6 million for the same period in 2011. The increase in net cash provided by operating activities for the nine months ended September 30, 2012 was primarily a result of a decrease in trade receivables of $3.1 million for the nine months ended September 30, 2012, compared to an increase of $5.8 million for the same period in 2011, and depreciation and amortization of $5.3 million for the nine months ended September 30, 2012 compared to $3.9 million for the same period in 2011, partially offset by a decrease in deferred revenues of $2.1 million for the nine months ended September 30, 2012 compared to an increase of $2.5 million for the same period in 2011 and a decrease in accrued liabilities of $1.3 million for the nine months ended September 30, 2012 compared to an increase of $1.2 million for the same period in 2011.



CONF CALL

Rasmus van der colff - Former Chief Accounting Officer, Vice President and Corporate Controller

Thank you, Ashley. Good afternoon, everyone, and thank you for joining us today to discuss Guidance Software's fourth quarter and full year 2012 results. With me today are Guidance's President and CEO, Victor Limongelli; and Chief Financial Officer, Barry Plaga. We would like to remind everyone that during today's conference call, management will make certain forward-looking statements regarding the future operations, opportunities or financial performance of Guidance Software within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those to be discussed. Please refer to the risk factors and other disclosures contained in the company's most recent reports on Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission for a more detailed discussion of the factors which could affect results to differ materially.

The forward-looking statements made in today's conference call are based on information available as of today, February 7, 2013, and Guidance assumes no obligation to update such statements to reflect events or circumstances after today's date.

Additionally, unless otherwise noted, we will discuss non-GAAP results during today's call. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in today's press release and on our website.

Lastly, before we begin, I would like to remind everyone that today's call is also available via webcast on the Internet through our Investor Relations website, and a replay will be available on the site.

With that, I would now like to turn the call over to Victor Limongelli, our President and CEO. Victor, please go ahead.
Victor T. Limongelli - Chief Executive Officer, President and Director

Thanks, Rasmus. Good afternoon, everyone. We had a great fourth quarter with record revenue of $36.7 million, up 23% year-over-year; and net income of $0.17 per share, a new quarterly record for the company. We also saw a strong cash generation, as well as record deferred revenues. Looking ahead, we are very optimistic about the business, and we believe the company is stronger and better positioned than ever before.

We have continued to execute on our EnCase Everywhere strategy, as we added a record 129 new customers on the EnCase Enterprise platform in Q4, up 32% from last year. For 2012 as a whole, we added 358 new customers on the EnCase Enterprise platform, which is 25% higher than in 2011. We now have over 40% of the Fortune 500 on the EnCase Enterprise platform.

Upsell or repeat business with our existing customers is an important driver for growth. As we add customers on our EnCase Enterprise platform, they become potential customers for the products that we build on top of that platform, namely EnCase eDiscovery and EnCase Cybersecurity, with a third product to be added later this year, as well as potential customers of our training, professional services and hosted review offerings.

In addition to the great results with new customers on the EnCase Enterprise platform, we also had excellent results for the products built on that platform, with 32 new customers in the quarter. Of that number, we gained 20 new customers for EnCase Cybersecurity, and we see a growing opportunity in the IT security market, both here in the U.S. and abroad.

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