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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended June 30, 2016

Or

¨

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

For the transition period from                      to                   

Commission file number 001-36516

 

IMPRIVATA, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

04-3560178

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

10 Maguire Road

Lexington, Massachusetts 02421

(Address of principal executive offices, including zip code)

(781) 674-2700

(Registrant’s telephone number, including area code)

 

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  ¨.

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨.

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

¨

 

Accelerated filer

x

 

 

 

 

 

Non-accelerated filer

¨

  (Do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No   x

As of July 26, 2016, there were 25,573,159 shares of the registrant’s common stock outstanding.

 

 

 

 

 


 

Table of Contents

 

 

 

PART I

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2016 and 2015

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity as of June 30, 2016

 

7

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2016 and 2015

 

8

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

9

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

 

 

 

 

 

 

Overview

 

21

 

 

 

 

 

 

 

Critical Accounting Estimates

 

23

 

 

 

 

 

 

 

Results of Operations

 

25

 

 

 

 

 

 

 

Liquidity and Capital Resources

 

31

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

33

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

34

 

 

 

 

 

Item 1A.

 

Risk Factors

 

34

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

52

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

52

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

52

 

 

 

 

 

Item 5.

 

Other Information

 

53

 

 

 

 

 

Item 6.

 

Exhibits

 

53

2


 

Special note regarding forward-looking statements and industry data

This Quarterly Report on Form 10-Q, including the information incorporated by reference herein, contains, in addition to historical information, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

These forward-looking statements are based on our current expectations, assumptions, estimates and projections regarding our business and industry, and we do not undertake an obligation to update our forward-looking statements to reflect future events or circumstances. We may, in some cases, use words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

the size and growth of the potential markets for our products and our ability to serve those markets;

 

the rate and degree of market acceptance of our products;

 

our expectations regarding our products’ performance;

 

the accuracy of our estimates regarding expenses, revenues and capital requirements;

 

regulatory developments in the United States and foreign countries;

 

the success of our sales and marketing capabilities;

 

the success of competing products that are or become available;

 

our ability to obtain additional financing if needed;

 

our ability to obtain and maintain intellectual property protection for our proprietary assets; and

 

the loss of key technology or management personnel.

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Part II, Item 1A. Risk factors” and elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

3


 

PART 1

Item 1.

Financial Statements.

Imprivata, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

As of June 30,

 

 

As of December 31,

 

(in thousands, except share amounts)

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

46,996

 

 

$

51,712

 

Accounts receivable, net of allowances

 

 

33,429

 

 

 

36,629

 

Prepaid expenses and other current assets

 

 

4,549

 

 

 

4,431

 

Total current assets

 

 

84,974

 

 

 

92,772

 

Property and equipment, net

 

 

8,154

 

 

 

7,901

 

Goodwill

 

 

11,885

 

 

 

14,380

 

Intangible assets, net

 

 

6,862

 

 

 

5,681

 

Other assets

 

 

1,022

 

 

 

23

 

Total assets

 

$

112,897

 

 

$

120,757

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,728

 

 

$

6,997

 

Accrued expenses and other current liabilities

 

 

11,152

 

 

 

11,567

 

Current portion of capital lease obligations and long-term debt

 

 

320

 

 

 

442

 

Current portion of other long-term liabilities

 

 

303

 

 

 

240

 

Current portion of deferred revenue

 

 

44,832

 

 

 

43,929

 

Current portion of contingent purchase price liability

 

 

458

 

 

 

818

 

Total current liabilities

 

 

64,793

 

 

 

63,993

 

Deferred revenue, net of current portion

 

 

4,747

 

 

 

5,430

 

Deferred tax liability

 

 

907

 

 

 

662

 

Capital lease obligations, long-term debt and royalty obligations, net of current portion

 

 

62

 

 

 

209

 

Other long-term liabilities, net of current portion

 

 

2,059

 

 

 

1,850

 

Total liabilities

 

 

72,568

 

 

 

72,144

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Undesignated preferred stock, $0.001 par value, 20,000,000 shares authorized;

   none issued at June 30, 2016 and December 31, 2015

 

 

 

 

 

 

Common stock, $0.001 par value, 250,000,000 shares authorized at June 30, 2016

   and December 31, 2015; 25,365,572 and 25,041,643 shares were issued and

   outstanding at June 30, 2016 and December 31, 2015, respectively

 

 

25

 

 

 

25

 

Additional paid-in capital

 

 

183,994

 

 

 

179,357

 

Accumulated other comprehensive loss

 

 

(183

)

 

 

(151

)

Accumulated deficit

 

 

(143,507

)

 

 

(130,618

)

Total stockholders’ equity

 

 

40,329

 

 

 

48,613

 

Total liabilities and stockholders’ equity

 

$

112,897

 

 

$

120,757

 

 

 

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

 

 

4


 

Imprivata, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(in thousands, except per share data)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

19,855

 

 

$

16,305

 

 

$

35,833

 

 

$

29,218

 

Maintenance and services

 

 

16,243

 

 

 

13,663

 

 

 

31,786

 

 

 

26,386

 

Total revenue

 

 

36,098

 

 

 

29,968

 

 

 

67,619

 

 

 

55,604

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

6,628

 

 

 

4,088

 

 

 

11,320

 

 

 

7,511

 

Maintenance and services

 

 

5,453

 

 

 

5,296

 

 

 

10,723

 

 

 

10,223

 

Total cost of revenue

 

 

12,081

 

 

 

9,384

 

 

 

22,043

 

 

 

17,734

 

Gross profit

 

 

24,017

 

 

 

20,584

 

 

 

45,576

 

 

 

37,870

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

9,533

 

 

 

7,840

 

 

 

18,221

 

 

 

14,711

 

Sales and marketing

 

 

14,923

 

 

 

12,999

 

 

 

29,144

 

 

 

25,018

 

General and administrative

 

 

5,328

 

 

 

4,590

 

 

 

10,754

 

 

 

9,170

 

Total operating expenses

 

 

29,784

 

 

 

25,429

 

 

 

58,119

 

 

 

48,899

 

Loss from operations

 

 

(5,767

)

 

 

(4,845

)

 

 

(12,543

)

 

 

(11,029

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency exchange (loss) gain

 

 

(282

)

 

 

150

 

 

 

(31

)

 

 

(312

)

Interest and other income (expense), net

 

 

(2

)

 

 

(4

)

 

 

(11

)

 

 

(20

)

Loss before income taxes

 

 

(6,051

)

 

 

(4,699

)

 

 

(12,585

)

 

 

(11,361

)

Income taxes

 

 

164

 

 

 

727

 

 

 

304

 

 

 

764

 

Net loss

 

$

(6,215

)

 

$

(5,426

)

 

$

(12,889

)

 

$

(12,125

)

Net loss per share attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.25

)

 

$

(0.22

)

 

$

(0.51

)

 

$

(0.51

)

Weighted average common shares outstanding used in computing

   net loss per share attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

25,316

 

 

 

24,144

 

 

 

25,218

 

 

 

24,007

 

 

 

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

 

 

5


 

Imprivata, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(in thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net loss

 

$

(6,215

)

 

$

(5,426

)

 

$

(12,889

)

 

$

(12,125

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(22

)

 

 

51

 

 

 

(32

)

 

 

7

 

Comprehensive loss

 

$

(6,237

)

 

$

(5,375

)

 

$

(12,921

)

 

$

(12,118

)

 

 

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

 

 

6


 

Imprivata, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

 

 

Common stock

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

par value

 

 

Additional

 

 

other

 

 

 

 

 

 

 

 

 

 

 

$0.001

 

 

paid-in

 

 

comprehensive

 

 

Accumulated

 

 

 

 

 

(in thousands)

 

Shares

 

 

Amount

 

 

capital

 

 

loss

 

 

deficit

 

 

Total

 

Balance as of January 1, 2016

 

 

25,042

 

 

$

25

 

 

$

179,357

 

 

$

(151

)

 

$

(130,618

)

 

$

48,613

 

Exercise of common stock options

 

 

258

 

 

 

-

 

 

 

769

 

 

 

 

 

 

 

 

 

 

 

769

 

Stock-based compensation expense

 

 

-

 

 

 

 

 

 

 

3,219

 

 

 

 

 

 

 

 

 

 

 

3,219

 

Employee stock purchase plan

 

 

66

 

 

 

-

 

 

 

649

 

 

 

 

 

 

 

 

 

 

 

649

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,889

)

 

 

(12,889

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32

)

 

 

 

 

 

 

(32

)

Balance as of June 30, 2016

 

 

25,366

 

 

$

25

 

 

$

183,994

 

 

$

(183

)

 

$

(143,507

)

 

$

40,329

 

 

 

 

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

 

 

7


 

Imprivata, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Six Months Ended June 30,

 

(in thousands)

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(12,889

)

 

$

(12,125

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

1,978

 

 

 

1,684

 

Provision for doubtful accounts

 

 

130

 

 

 

(19

)

Provision for excess inventory

 

 

355

 

 

 

 

Stock-based compensation

 

 

3,219

 

 

 

1,781

 

Loss on disposal of fixed assets

 

 

16

 

 

 

14

 

Change in value of contingent purchase price liability

 

 

(146

)

 

 

50

 

Deferred income taxes

 

 

246

 

 

 

694

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,970

 

 

 

4,479

 

Prepaid expenses and other current assets

 

 

(538

)

 

 

(616

)

Other assets

 

 

(995

)

 

 

 

Deferred revenue

 

 

950

 

 

 

604

 

Accounts payable

 

 

547

 

 

 

1,028

 

Accrued expenses and other current liabilities

 

 

(613

)

 

 

(2,955

)

Other liabilities

 

 

270

 

 

 

279

 

Net cash used in operating activities

 

 

(2,500

)

 

 

(5,102

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,531

)

 

 

(644

)

Purchases of intangible assets

 

 

(1,536

)

 

 

(437

)

Acquisition of business

 

 

-

 

 

 

(18,886

)

Net cash used in investing activities

 

 

(3,067

)

 

 

(19,967

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payment of contingent liability

 

 

(214

)

 

 

 

Repayments for capital lease obligations, long-term debt and other

 

 

(265

)

 

 

(322

)

Proceeds from employee stock purchase plan

 

 

649

 

 

 

684

 

Proceeds from exercise of stock options

 

 

727

 

 

 

853

 

Net cash provided by financing activities

 

 

897

 

 

 

1,215

 

Effect of exchange rates on cash and cash equivalents

 

 

(46

)

 

 

3

 

Net decrease in cash and cash equivalents

 

 

(4,716

)

 

 

(23,851

)

Cash and cash equivalents, beginning of year

 

 

51,712

 

 

 

78,524

 

Cash and cash equivalents, end of year

 

$

46,996

 

 

$

54,673

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment purchases included in accounts

   payable and accrued expenses

 

$

258

 

 

$

445

 

Intangible asset purchases included in accounts payable

   and accrued expenses

 

$

115

 

 

$

 

 

 

 

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

 

 

8


 

Imprivata, Inc.

Notes to condensed consolidated financial statements

(Unaudited)

 

1. Organization and business

(a) Description of business

Imprivata, Inc. (the “Company”) is a leading provider of IT security and identity solutions to the healthcare industry that help providers securely and efficiently access, communicate and transact patient information. The Company’s security and identity solutions provide authentication management, fast access to patient information, secure communications and positive patient identification to address critical security and compliance challenges faced by hospitals and other healthcare organizations, while improving provider productivity and the patient experience. The Company believes that its solutions save clinicians significant time to focus on patient care, increase their productivity and satisfaction, and help healthcare organizations comply with complex privacy and security regulations.

The Company was incorporated in the State of Delaware in May 2001. The Company completed its initial public offering (“IPO”) on June 30, 2014 and is listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “IMPR.”

(b) Basis of presentation and principles of consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial reporting and as required under the rules and regulations of the United States Securities and Exchange Commission (“SEC”), and on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the fiscal year ended December 31, 2015. The consolidated balance sheet at December 31, 2015 has been derived from the audited financial statements at that date, but does not include all of the disclosures required by U.S. GAAP. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s 2015 Annual Report on Form 10-K filed with the SEC on March 2, 2016.

In the opinion of Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to fairly present the financial position at June 30, 2016, the result of operations for the three and six months ended June 30, 2016 and 2015, cash flows for the six months ended June 30, 2016 and 2015 and stockholders’ equity for the six months ended June 30, 2016. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016, for any other interim period or for any other future year.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Imprivata Securities Corporation and Imprivata International, Inc., Imprivata UK Limited and Imprivata Australia Pty. Ltd., as well as two branch offices. All intercompany balances and transactions have been eliminated in consolidation.  

Management believes the Company has sufficient cash and availability under its letter of credit to sustain operations through at least the next 12 months.

(c) Use of estimates

When preparing financial statements in conformity with U.S. GAAP, we make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material.

(d) Foreign currency

The foreign subsidiaries and branches use the local currency as the functional currency. The Company translates the assets and liabilities of its foreign operations into U.S. dollars based on the rates of exchange in effect as of the balance sheet date. Revenues and expenses are translated into U.S. dollars using average exchange rates for each period. The resulting adjustments from the translation process are included in accumulated other comprehensive loss in the accompanying consolidated balance sheets.

Certain transactions of the Company are settled in foreign currency, and are thus translated to U.S. dollars at the rate of exchange in effect at the end of each month. Gains (losses) resulting from the translation are included in foreign exchange gains (losses) in the accompanying consolidated statements of operations.

 

 

9


 

2. Summary of significant accounting policies

The Company has not made any significant changes in the application of its significant accounting policies as described in Note 2 of its audited consolidated financial statements for the year ended December 31, 2015 included in its 2015 Annual Report on Form 10-K filed with the SEC on March 2, 2015. See “Note 2. Summary of significant accounting policies” in the 2015 Annual Report on Form 10-K for information about these critical accounting policies.

 

Recent accounting guidance

Accounting standards or updates not yet effective

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016 and May 2016 within ASU 2015-04, ASU 2016-08, ASU 2016-10 and ASU 2016-12, respectively (ASU 2014-09, ASU 2015-04, ASU 2016-08, ASU 2016-10 and ASU 2016-12 collectively, Topic 606). Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance is effective for public companies with annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. This guidance could impact the timing and amounts of revenue recognized. The Company is currently evaluating the effect that implementation of this guidance and any amendments will have on the Company’s consolidated financial statements upon adoption. Any changes to the guidance resulting from the proposed amendments could change the Company’s assessment of the impact that adoption might have on the Company’s consolidated financial statements and could impact the Company’s decision on whether or not to early adopt.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory,” (Topic 330). ASU No. 2015-11 requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out and the retail inventory method are not impacted by the new guidance. This guidance will be effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those years. Prospective application is required. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company measures inventory using first-in, first out method and anticipates adopting this guidance. The Company does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.  

In February 2016, the FASB issued its new lease accounting standard ASU No. 2016-02, “Leases,” (Topic 842).  ASU No. 2016-02 requires lessees to recognize virtually all leases on the balance sheet, by recording a right-of-use asset and lease liability. This guidance will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption of the guidance is permitted upon issuance of ASU No. 2016-02. This guidance requires modified retrospective transition, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption. The Company is evaluating the impact this guidance will have on its consolidated financial statements upon adoption.

In March 2016, the FASB issued ASU No. 2016-09, “Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The ASU simplifies the accounting for the taxes related to stock based compensation, including adjustments to how excess tax benefits should be classified. This guidance will be effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company is evaluating the impact this guidance will have on its consolidated financial statements upon adoption.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This guidance that changes the impairment model for most financial assets and certain other instruments. The guidance will replace current “incurred loss” approach with an “expected credit loss” impairment model and will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases, and off-balance-sheet credit exposures.  This guidance requires applying provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.  The standard is effective for annual periods beginning after December 15, 2019, and interim periods therein.  Early adoption is permitted for all entities for annual periods beginning after December 1, 2018 and interim periods therein. The Company is evaluating the impact this guidance will have on its consolidated financial statements upon adoption.

10


 

3. Business combination

HT Systems, LLC Acquisition

On April 30, 2015, the Company acquired 100% of the equity of HT Systems, LLC. (“HT Systems”), a provider of palm-vein based biometric patient identification systems, to enter into the positive patient identification market for a purchase price of $19.1 million. The Company incurred acquisition-related costs of $709,000, which were included in general and administrative expenses in the consolidated statement of operations during 2015.

The acquisition of HT Systems and its PatientSecure biometric patient identification technology supports the Company’s long-term vision to be the leading provider of healthcare IT security solutions that increase provider productivity, enable patient engagement, and improve patient safety.

The Company has contingent obligations to pay up to $5.0 million of potential additional earn-out consideration to the selling equity-holders of HT Systems, which will be determined based upon the achievement of certain sales targets over the two-year period following the closing of the transaction on April 30, 2015, provided, that the selling equity-holders remain employees of the Company when the earn-out consideration becomes payable. The earn-out consideration will be recognized in the Company’s consolidated financial statements as compensation expense as earned. For the three months ended June 30, 2016, the Company recorded $182,000 in compensation expense associated with the earn-out consideration based on the probability of achieving sales targets. The Company did not record compensation expense for the three and six months ended June 30, 2015.

In addition, the Company will pay up to $1.9 million in retention-based payments to the selling equity-holders payable in cash two years from the closing date of April 30, 2015, contingent upon continued employment as of the payment date. Additional retention-based payments of $341,000, payable in cash, are payable to other employees 8 to 20 months following the date of acquisition, contingent upon their continued employment on the payment dates. The retention-based payments will be recognized in the Company’s consolidated statements of operations as compensation expense over the employment period.

Purchase Price Allocation

Under the acquisition method of accounting, the Company allocated the purchase price to the identifiable assets and liabilities based on their estimated fair value, which was determined by management using the best information available as of the date of the acquisition (Level 3 inputs). The allocation of the HT Systems purchase consideration to the identifiable assets acquired and liabilities assumed was as follows:

 

 

 

 

 

 

 

Useful lives

(dollars in thousands)

 

Amount

 

 

(in years)

Assets:

 

 

 

 

 

 

Accounts and unbilled receivables

 

$

7,195

 

 

 

Prepaid expenses and other current assets

 

 

20

 

 

 

Property and equipment

 

 

59

 

 

3

Intangible assets

 

 

3,291

 

 

4 to 7

Liabilities assumed:

 

 

 

 

 

 

Accrued expenses

 

 

(85

)

 

 

Deferred revenue

 

 

(1,730

)

 

 

Net assets acquired

 

 

8,750

 

 

 

Goodwill

 

 

10,325

 

 

 

Total fair value consideration

 

$

19,075

 

 

 

 

Methodologies used in valuing the intangible assets include, but are not limited to the relief from royalty method and multi-period excess earnings method. The excess of the purchase price over the total net identifiable assets has been recorded as goodwill, which includes synergies expected from the expanded service capabilities and the value of the assembled work force in accordance with U.S. GAAP. The Company made an election under Internal Revenue Code section 338 to treat the acquisition of the stock as an asset purchase. As a result, the Company will be entitled to corporate level tax deductions associated with the fair market value of net tangible assets, intangible assets, and goodwill.

 

11


 

4. Fair value measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

(a) Fair value hierarchy

The accounting guidance for fair value measurement requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

(b) Assets and liabilities measured at fair value on a recurring basis

The Company’s cash equivalents primarily consist of money market funds recorded at cost, which approximates fair value based on quoted prices for assets traded in active markets. The contingent consideration liabilities are recorded at fair value determined using a probability weighted discounted cash flow model primarily based upon future revenue and sales projections.

The following table sets forth the Company’s assets and liabilities which are measured at fair value on a recurring basis by level within the fair value hierarchy:

 

 

 

Fair value measurements at June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

carrying value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

978

 

 

$

 

 

$

 

 

$

978

 

Certificates of deposit

 

 

 

 

 

97

 

 

 

 

 

 

97

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

 

 

 

 

 

 

 

458

 

 

 

458

 

 

 

 

Fair value measurements at December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

carrying value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

2,689

 

 

$

 

 

$

 

 

$

2,689

 

Certificates of deposit

 

 

 

 

 

97

 

 

 

 

 

 

97

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

 

 

 

 

 

 

 

818

 

 

 

818

 

 

(c) Assets and liabilities measured on a non-recurring basis

There were no fair value measurements on a non-recurring basis during the three and six months ended June 30, 2016. In April 2015, the Company completed an acquisition of HT Systems. Under the acquisition method of accounting, the Company allocated the purchase price to the identifiable assets and liabilities based on their estimated fair values which are level 3 inputs. Refer to “Note 3. Business combination” for additional information.

12


 

(d) Level 3 fair value measurements

Contingent consideration

The contingent liability associated with the acquisition of Validus is based on an earn-out capped at $9.8 million to be paid based on revenue generated using the respective purchased intellectual properties.

The Company re-measures the fair value of the contingent liability at each balance sheet date based on the present value of forecasted revenues through June 30, 2016. The changes in the fair value are primarily due to the difference in actual revenue earned to date versus the initial projections and revisions to the timing and amount of forecasted future revenues.

The resulting forecasted revenues are then discounted using a rate that reflects the uncertainty surrounding the expected outcomes, which the Company believes is appropriate and representative of a market participant assumption.

The following table presents a reconciliation of the contingent liability measured at fair value using significant unobservable inputs, and the revaluation amount recorded in the Company’s consolidated statements of operations as a result of the change in fair value:  

 

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2016

 

 

2015

 

Beginning balance as of January 1st

 

$

818

 

 

$

632

 

Revaluation recognized in general and administrative

   expenses in the corresponding statements of operations

 

 

(146

)

 

 

197

 

Cash payment on the contingent liability

 

 

(214

)

 

 

(11

)

Ending balance

 

$

458

 

 

$

818

 

 

This following table presents the significant unobservable inputs used in the valuation of the contingent liability:

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Discount Rate

 

 

17%

 

 

 

17%

 

 

(e) Other financial instruments

The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents (which are comprised primarily of deposit accounts), accounts receivable, prepaid expenses, other current assets, accounts payable, and accrued expenses approximate fair value due to their short-term maturities.  

 

5. Trade accounts receivable, net of allowances

 

The following table presents the Company’s trade accounts receivable, net:

 

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2016

 

 

2015

 

Trade accounts receivable(1)

 

$

32,198

 

 

$

35,815

 

Unbilled receivables(2)

 

 

1,718

 

 

 

1,171

 

Total trade accounts receivable

 

 

33,916

 

 

 

36,986

 

Allowance for doubtful accounts

 

 

(288

)

 

 

(158

)

Allowance for sales returns

 

 

(199

)

 

 

(199

)

Total allowance

 

 

(487

)

 

 

(357

)

Trade accounts receivable, net

 

$

33,429

 

 

$

36,629

 

 

 

(1)

Trade accounts receivables represent amounts due from customers when the Company has invoiced for product, maintenance and/or professional services and it has not yet received payment.

 

(2)

Unbilled receivables represent amounts due from customers when the Company has delivered the goods and services, but the Company has not invoiced the customer due to the contractual terms of the arrangement.

 

As of June 30, 2016 and December 31, 2015, the Company had $1.7 million and $1.2 million, respectively, unbilled receivables presented in Accounts receivable, net of allowances in the consolidated balance sheets. The unbilled receivables are primarily related to contracts acquired in the acquisition of HT Systems. As of June 30, 2016, $995,000 of these unbilled receivables are long term commitments and are presented in Other assets in the condensed consolidated balance sheets.

 

13


 

6. Inventory

Inventories are stated at the lower of cost or market and consist principally of purchased materials consisting of appliances and devices and included in other current assets. Cost is determined using the first-in, first-out method for devices, with the specific identification method used for appliances.  

 

The components of inventories are as follows:

 

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2016

 

 

2015

 

Finished goods

 

 

541

 

 

$

1,051

 

Raw materials

 

 

17

 

 

 

146

 

Total

 

$

558

 

 

$

1,197

 

 

When recorded, inventory reserves are intended to reduce the carrying value of inventories to their net realizable value. The Company establishes inventory reserves when conditions exist that indicate inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for the Company’s products or market conditions. The Company regularly evaluates the ability to realize the value of inventories based on a combination of factors including the following: forecasted sales or usage, estimated product end of life dates, estimated current and future market value and new product introductions. During the three and six months ended June 30, 2016, the Company recorded $265,000 and $412,000, respectively, for excess and obsolete inventories. The Company recorded immaterial charges for excess and obsolete inventories for the year ended December 31, 2015.

 

7. Intangible assets

Internally-developed software costs

As of June 30, 2016 and December 31, 2015, the Company recorded $2.9 million and $1.2 million, respectively, of costs associated with an internally developed software project for one of its existing product offerings. The costs, which primarily consist of third party developer expenses, are included in Intangible assets in the consolidated balance sheets. This product is currently being developed and as of June 30, 2016, no amortization has been recorded.

 

8. Accrued expenses and other current liabilities

The following table presents the details of the Company’s accrued expenses and other current liabilities:

  

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2016

 

 

2015

 

Accrued payroll and related

 

$

6,522

 

 

$

8,212

 

Accrued taxes(1)

 

 

1,030

 

 

 

933

 

Other accrued expenses

 

 

3,600

 

 

 

2,422

 

 

 

$

11,152

 

 

$

11,567

 

 

 

(1)

Accrued taxes consist of accruals for foreign and state taxes, sales and use taxes, value added taxes due in foreign jurisdictions and franchise taxes.

 

9. Warranty obligations

The Company maintains an allowance for warranty obligations that may be incurred under its limited warranty. Factors that affect the Company’s allowance for warranty obligations include the number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and the cost per claim to satisfy the Company’s warranty obligation.

The following table presents the details of the Company’s allowance for warranty obligations:

 

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2016

 

 

2015

 

Beginning balance

 

$

40

 

 

$

40

 

Provision for estimated claims

 

 

6

 

 

 

44

 

Adjustment to estimate

 

 

 

 

 

 

Settlement of claims

 

 

(6

)

 

 

(44

)

Ending balance

 

$

40

 

 

$

40

 

14


 

 

The warranty obligations are included in accrued expenses and other current liabilities in the consolidated balance sheets presented.

 

 

10. Debt

Bank credit facility

The Company has a revolving credit facility with a bank pursuant to a Loan and Security Agreement dated January 30, 2009 (the “Revolving Credit Facility”). The Revolving Credit Facility expires in April 2017. In April 2016, the Company amended its revolving credit facility to extend the maturity through April 2017. In April 2015, the Company amended its revolving credit facility to extend the maturity through April 2016 and increased the borrowing limit from $10.0 million to $15.0 million based primarily on accounts receivable, and is subject to certain financial covenants requiring the Company to maintain minimum levels of liquidity. Outstanding borrowings accrue interest at the Wall Street Journal published prime rate plus 0.75%. Substantially all of the assets of the Company are pledged as collateral.

At June 30, 2016 and December 31, 2015, there were no outstanding borrowings under the revolving credit facility.

 

11. Commitments and contingencies

(a) Operating lease obligations

The Company’s principal headquarters is located in Lexington, Massachusetts. The Company currently leases approximately 99,000 square feet of office space under a lease expiring in 2021.

The Company leases offices for research and development in San Francisco, California. The Company currently leases approximately 5,029 square feet of office space under a lease expiring in June 2023. The remaining lease payments are $2.9 million. 

The Company leases approximately 3,500 square feet of office space located in Tampa, Florida as a result of its acquisition of HT Systems. The lease agreement is between HT Systems and a separate entity owned by the selling equity-holders of HT Systems and expires on expires on March 31, 2017.  The remaining lease payments are $46,000.

(b) Litigation

On February 2, 2016, a complaint was filed in the United States District Court for the District of Massachusetts captioned Coyer v. Imprivata, Inc., et al, Case 1:16-cv-10160-LTS (D. Mass.), on behalf of a putative class of Imprivata stockholders, naming as defendants the Company, Mr. Omar Hussain, the Company’s President and Chief Executive Officer, and Mr. Jeffrey Kalowski, the Company’s Chief Financial Officer, as well as certain investors who sold shares of the Company’s common stock in an offering in August 2015.  The complaint, brought on behalf of all persons who purchased the Company’s common stock between July 30, 2015 and November 2, 2015, generally alleges that the Company and the named officers made false and/or misleading statements about the demand for the Company’s IT security solutions and sales trends and failed to disclose facts about its business, operations and performance.  The complaint brings causes of action for violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, as amended, against the Company and the two named officers, as well as for “control person” liability under Section 20(a) of the Securities Exchange Act of 1933, as amended, against the officers and the non-Company defendants.  The complaint seeks unspecified monetary damages and unspecified costs and fees.

 

The Company believes that the likelihood of an unfavorable judgment arising from this matter is remote based on the information currently available. The Company does not believe the ultimate resolution of the legal matter referred to above will have a material adverse effect on the Company’s net income, financial condition or liquidity in a future period. However, given the inherent unpredictability of litigation and the fact that this litigation is still in its early stages, the Company is unable to predict with certainty the outcome of this litigation or reasonably estimate a possible loss or range of loss associated with this litigation at this time.

(c) Indemnifications

As permitted under Delaware law, the Company’s Certificate of Incorporation and By Laws provide that the Company indemnify its stockholders, officers, directors, and partners, and each person controlling the stock held for certain events or occurrences that happen by reason of the relationship with or position held at the Company. The Company’s agreements with customers generally require the Company to indemnify the customer against claims in which the Company’s products infringe third-party patents, copyrights, or trademarks, and indemnify against product liability matters.

As of June 30, 2016 and December 31, 2015, the Company had not experienced any material losses related to these indemnification obligations, and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to

15


 

these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible, and no related reserves were established.   

 

12. Accumulated other comprehensive loss

The following table presents the changes in accumulated other comprehensive loss before taxes, as the tax effect is not material to the consolidated financial statements:

 

 

Foreign Currency

 

 

Affected line item in the

 

 

Translation

 

 

statement where net

(in thousands)

 

Adjustments

 

 

income is presented

Balance as of January 1, 2015

 

$

(100

)

 

 

Other comprehensive loss

 

 

(17

)

 

 

Amounts reclassified from accumulated other comprehensive income:

 

 

 

 

 

 

Closure of foreign branch

 

 

(34

)

 

Other income (expense)

Net current-period other comprehensive loss

 

 

(51

)

 

 

Balance as of December 31, 2015

 

 

(151

)

 

 

Other comprehensive loss

 

 

15

 

 

 

Amounts reclassified from accumulated other comprehensive income:

 

 

 

 

 

 

Closure of foreign branch

 

 

(47

)

 

Other income (expense)

Net current-period other comprehensive loss

 

 

(32

)

 

 

Balance as of June 30, 2016

 

$

(183

)

 

 

 

 

13. Stock award plans and stock based compensation

(a) Equity incentive plan

In May 2014, the Company’s 2014 Stock Option and Incentive Plan (“2014 Plan”), was adopted by the Company’s board of directors and approved by its stockholders and became effective in June 2014. The 2014 Plan replaced the Amended and Restated 2002 Stock Option and Incentive Plan (“2002 Plan”) as the Company’s board of directors has determined not to make additional awards under the 2002 Plan. The 2014 Plan allows the compensation committee to make equity-based incentive awards to the Company’s officers, employees, directors and other key persons (including consultants).

Stock options expire no later than 10 years from the date of grant and generally vest over a period of four years. At the discretion of the Board of Directors, certain option grants may be immediately exercisable but subject to a right to repurchase, at cost, pursuant to the vesting schedule of the individual grant.

During the six months ended June 30, 2016, the Company granted 1,917,750 options to purchase common stock at a weighted average exercise price of $11.63.

At June 30, 2016, there were 1,401,315 shares available for future grant under the 2014 Plan.

(b) Employee stock purchase plan

In May 2014, the Company’s board of directors adopted and its stockholders approved the Employee Stock Purchase Plan (“ESPP”). Each employee who is a participant in the ESPP may purchase shares by authorizing payroll deductions of his or her base compensation during an offering period. Unless the participating employee has previously withdrawn from the offering, his or her accumulated payroll deductions will be used to purchase ordinary shares on the last business day of the offering period at a price equal to 85% of the fair market value of the common stock on the first business day or the last business day of the offering period, whichever is lower. All offering periods will be for six months and begin on March 1st and September 1st of each year.

At February 29, 2016, the Company issued 66,179 shares of common stock at a purchase price of $9.81. At February 27, 2015, the Company issued 58,793 shares of common stock at a purchase price of $11.64. At August 31, 2015, the Company issued 45,969 shares of common stock at a purchase price of $11.63.

At June 30, 2016, there were 765,596 shares available for future grant under the ESPP.

16


 

(c) Early exercise of stock options

The Company issues stock option agreements to Company executives and members of the Board of Directors, which may permit options to be exercised at any time. The Company may also include an early exercise provision for incentive stock option agreements at its discretion. The unvested shares of common stock exercised are subject to the Company’s right to repurchase at the original exercise price upon termination of employment or other relationship.

At June 30, 2016 and December 31, 2015, a total of 13,125 and 21,875 shares of unvested stock options exercised were subject to repurchase at an aggregate price of $60,834 and $102,000, respectively. These amounts are recorded as accrued and other current liabilities in the Company’s consolidated balance sheets and will be reclassified to equity as the Company’s repurchase right lapses.

During the three months ended June 30, 2016 and 2015, 4,375 and 4,375 stock options associated with the early exercise vested, respectively. During the six months ended June 30, 2016 and 2015, 8,750 and 9,577 stock options associated with the early exercise vested, respectively.

(d) Valuation of share-based compensation

The Company utilizes the Black-Scholes option-pricing model to estimate the fair value of stock options awarded to employees and rights to acquire stock under the ESPP, which requires several key assumptions to be made.

Weighted average assumptions related to stock options used to apply this model were as follows:

 

 

 

Three Months ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Risk-free interest rate(1)

 

1.39% - 1.74%

 

 

 

1.77

%

 

1.39% - 1.74%

 

 

 

1.77

%

Expected life (years)(2)

 

 

6.02

 

 

 

6.02

 

 

 

6.02

 

 

 

6.02

 

Expected dividend yield(3)

 

 

%

 

 

%

 

 

%

 

 

%

Expected volatility of underlying stock(4)

 

45% - 48%

 

 

 

47

%

 

45% - 48%

 

 

 

47

%

 

The assumptions used to estimate the fair value of the rights to acquire stock under the ESPP during the offering periods are presented below:

 

 

 

March 1, 2016

to

August 31, 2016

 

 

September 1, 2015

to

February 29, 2016

 

 

March 1, 2015

to

August 31, 2015

 

 

June 25, 2014

to

February 28, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate(1)

 

 

0.50

%

 

 

0.26

%

 

 

0.07

%

 

 

0.08

%

Expected life (years)(5)

 

 

0.50

 

 

 

0.50

 

 

 

0.50

 

 

 

0.68

 

Expected dividend yield(3)

 

 

%

 

 

%

 

 

%

 

 

%

Expected volatility of underlying stock(4)

 

 

72

%

 

 

40

%

 

 

55

%

 

 

40

%

 

 

(1)

Risk-free interest rate—the yield on zero-coupon U.S. Treasury securities with maturities similar to the expected term of the award being valued is used as the risk-free interest rate.

 

(2)

Expected life—the expected term for stock options granted based on a review of the period that the Company’s stock option awards are expected to be outstanding and is calculated using the simplified method, which represents the average of the contractual term of the options and the weighted-average vesting period of the options. The Company uses the simplified method because it does not have sufficient historical option exercise data to provide a reasonable basis upon which to estimate the expected term.

 

(3)

Expected dividend yield—the expected dividend yield was not considered in the option pricing formula since the Company has not declared dividends and does not expect to pay dividends in the foreseeable future.

 

(4)

Expected volatility—the Company is responsible for estimating volatility. The Company has limited trading history as a public company and does not have relevant historical data to develop its volatility assumptions. Therefore, the Company used a weighted average of its volatility and analyzed the volatility of several public peer companies to support the assumptions used in its calculations for the three and six months ended June 30, 2016.

 

(5)

Expected life-ESPP—the expected life of ESPP is 6 months based on the term of offering period. Offerings are each March 1 and September 1 of each year.

17


 

(e) Summary of share-based compensation expense

The Company uses the straight-line attribution method to recognize expense for stock-based awards such that the expense associated with awards is evenly recognized throughout the period.

Stock-based compensation included in costs and operating expenses related to the awards of stock options and the employee stock purchase plan are as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(in thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Cost of maintenance and professional services

 

$

160

 

 

$

102

 

 

$

289

 

 

$

162

 

Research and development

 

 

421

 

 

 

326

 

 

 

767

 

 

 

549

 

Sales and marketing

 

 

540

 

 

 

253

 

 

 

881

 

 

 

468

 

General and administrative

 

 

741

 

 

 

399

 

 

 

1,282

 

 

 

602

 

Total

 

$

1,862

 

 

$

1,080

 

 

$

3,219

 

 

$

1,781

 

 

 

14. Income taxes

The Company operates in several tax jurisdictions and are subject to taxes in each country or jurisdiction in which it conducts business. Earnings from its activities outside of the United States are subject to local country income tax and may be subject to U.S. income tax. To date, the Company has incurred cumulative net losses and maintain a full valuation allowance on its net deferred tax assets. Therefore, the Company has not recorded any U.S. federal tax provisions for its earnings to date and its effective tax rate differs from statutory rates. The Company’s tax expense for earnings primarily relates to foreign income taxes, mainly from its international operations, and to a lesser extent, state income tax provisions.

As of December 31, 2015, the Company’s valuation allowance related to income taxes was approximately $36.0 million. The Company is in a three year cumulative loss position in the United States. As a result, the Company maintains a full valuation allowance to reduce the carrying value of the related deferred tax assets to zero. The Company will continue to maintain a full valuation allowance for such tax assets until sustainable future levels of profitability are evident. The Company does not consider deferred tax liabilities related to indefinite lived assets to be sources of income, which can support the realizability of deferred tax assets, and has provided for tax expense and a corresponding deferred tax liability associated with these naked credits.

Income tax expense related to tax deductible goodwill

During the three and six months ended June 30, 2016, the Company recorded U.S. tax expense of $141,000 and $256,000, respectively, which is primarily related to the tax expense associated with indefinite lived deferred tax liabilities related to tax basis in acquired goodwill. The Company does not consider deferred tax liabilities related to indefinite lived assets to be sources of income which can support the realizability of deferred tax assets, and has provided for tax expense and a corresponding deferred tax liability associated with these indefinite lived deferred tax liabilities.

As of June 30, 2016 and December 31, 2015, the Company had no uncertain positions or unrecorded liabilities for uncertain tax positions.

Interest and penalty charges, if any, related to uncertain tax positions would be classified as income tax expense in the accompanying consolidated statements of operations. As of June 30, 2016 and December 31, 2015, the Company had no accrued interest or penalties related to uncertain tax positions.

 

15. Computation of net loss per share

The Company calculates basic and diluted net loss per common share by dividing the net loss adjusted for the accretion on the redeemable convertible preferred stock by the weighted average number of common shares outstanding during the period. The Company has excluded all potentially dilutive shares, which include warrant for common stock, common stock subject to repurchase and outstanding common stock options, from the weighted average number of common shares outstanding as their inclusion in the computation for all periods would be anti-dilutive due to net losses. The Company’s redeemable convertible preferred stock are participating securities as defined under the authoritative guidance, but are excluded from the earnings per share calculation as they do not have an obligation to share or fund in the Company’s net losses.

18


 

The components of net loss per share are as follows:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands, except per share data)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(6,215

)

 

$

(5,426

)

 

$

(12,889

)

 

$

(12,125

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding used in

   computing basic and diluted net loss per common share

 

 

25,316

 

 

 

24,144

 

 

 

25,218

 

 

 

24,007

 

Net loss per share, basic and diluted

 

$

(0.25

)

 

$

(0.22

)

 

$

(0.51

)

 

$

(0.51

)

 

The following common stock equivalents were excluded from the computation of diluted net loss per share attributable to common stockholders because they had an antidilutive impact:

 

 

 

 

 

 

 

Three and Six Months Ended

 

 

 

 

 

June 30,

 

(in thousands)

 

 

 

 

 

2016

 

 

2015

 

Options to purchase common stock

 

 

 

 

 

 

5,647

 

 

 

4,757

 

Common stock subject to repurchase

 

 

 

 

 

 

39

 

 

 

31

 

Total

 

 

 

 

 

$

5,686

 

 

$

4,788

 

 

 

16. Concentration of risk and off-balance sheet risk

Financial instruments that subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains substantially all of its cash and cash equivalents in institutional money market mutual funds. The fund provides daily liquidity and invests in a portfolio of short-term money market instruments. To manage accounts receivable credit risk, the Company continuously evaluates the creditworthiness of its customers and resellers and maintains allowances for potential credit losses.

For the three and six months ended June 30, 2016, one reseller accounted for 18% and 20% of revenues, respectively; no other reseller  or customer accounted for more than 10% of revenues.  For the three and six months ended June 30, 2015, no customer or reseller accounted for more than 10% of revenues.

At June 30, 2016, one reseller accounted for 18% of accounts receivable; no other reseller or customer accounted for more than 10% of the accounts receivable. At December 31, 2015, one reseller accounted for 12% of accounts receivable; no other reseller or customer accounted for more than 10% of accounts receivable.  

The Company does not have any off-balance sheet arrangements and did not have any such arrangements during the six months ended June 30, 2016 and the year ended December 31, 2015.  

 

17. Related Party Transactions

The Company completed its acquisition of HT Systems on April 30, 2015. The Company has contingent obligations to pay up to $5.0 million of potential additional earn-out consideration to the selling equity-holders of HT Systems, which will be determined based upon the achievement of certain sales targets over the two-year period following the closing of the transaction on April 30, 2015. The earn-out consideration will be paid to each of the selling equity-holders of HT Systems, based on their equity ownership of HT Systems prior to the acquisition, provided that such selling equity-holder remains an employee of the Company at the time the earn-out becomes payable. Each of the selling equity-holder became employees of the Company upon the closing of the acquisition on April 30, 2015. One selling equity-holder is a member of the Company’s executive management team, but is not a director, executive officer or five percent holder of the Company’s equity securities. No payments associated with the earn-out have been made during the three and six months ended June 30, 2016.

The Company leases office space, located in Tampa, Florida, under an operating lease agreement with a separate entity owned by the selling equity-holders of HT Systems. The lease is at a market rate with a one year term expiring on March 31, 2017. The Company made rental payments totaling $15,000 and $30,000 during the three and six months ended June 30, 2016, respectively. The Company made rental payments totaling $10,000 during the three and six months ended June 30, 2015.

 

 

19


 

18. Subsequent Event

On July 13, 2016, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Project Brady Holdings, LLC (“Parent”) and Project Brady Merger Sub, Inc., a wholly-owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (“Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. Parent and Merger Sub were formed by an affiliate of private equity investment firm Thoma Bravo, LLC (“Thoma Bravo”). Pursuant to the Merger Agreement, at the effective time of the Merger, each share of common stock, par value $0.001 per share, of the Company (the “Company Common Stock”) issued and outstanding (other than dissenting shares or shares owned by Parent or Merger Sub) will be cancelled and automatically converted into the right to receive cash in an amount equal to $19.25, without interest thereon (the “Per Share Price”). Consummation of the Merger, which is currently expected to close in the third quarter of 2016, is subject to customary closing conditions, including, without limitation, the absence of certain legal impediments, the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and approval by the affirmative vote of the holders of a majority of the outstanding shares of Company common stock as of the record date to be established for the special stockholders meeting to approve the transaction, voting as a single class. Upon the termination of the Merger Agreement, under specified circumstances, the Company will be required to pay Parent a termination fee of $13.6 million.

The foregoing description of the Merger Agreement is only a summary, does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is attached as Exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on July 13, 2016 and is incorporated herein by reference.

 

20


 

`Item 2.

Management’s discussion and analysis of financial condition and results of operations 

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements, the related notes, and other financial information included elsewhere in this Quarterly Report, and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 2, 2016. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Part II, Item 1A. Risk factors” section of this Quarterly Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

Overview

We are a leading provider of IT security and identity solutions to the healthcare industry that help providers securely and efficiently access, communicate and transact patient information. Our security and identity solutions provide authentication management, fast access to patient information, secure communications and positive patient identification to address critical security and compliance challenges faced by hospitals and other healthcare organizations, while improving provider productivity and the patient experience. We believe our solutions save clinicians significant time to focus on patient care, increase their productivity and satisfaction, and help healthcare organizations comply with complex privacy and security regulations. Our solutions can be installed on workstations and other application access points throughout a healthcare organization and once deployed become a critical part of the customer’s security and identity infrastructure. As a result, we believe that our security and identity products are some of the most widely-used technology solutions by our customers’ physicians, nurses, and other clinicians.

With the widespread adoption of healthcare information technology systems and increasing security and privacy regulations, demand for our solutions has grown, which has driven growth in our revenue. Our revenue growth is derived from both sales to new customers as well as add-on sales to our existing customer base. Consistent with our healthcare focused strategy, our healthcare customers, including large integrated healthcare systems, academic medical centers and small- and medium-sized independent healthcare facilities, accounted for the growth in sales to new customers. Many of our customers continue to add licensed users and purchase additional products and services from us after the initial sale.

Many other industries face security and productivity challenges similar to those in healthcare. Although healthcare is our primary focus, we sell to non-healthcare organizations, including financial services, the public sector and other industries. Sales to non-healthcare customers may vary from quarter to quarter as a result of our focus on healthcare customers; however, we anticipate that sales to non-healthcare customers will comprise a smaller portion of our business in the future as sales to healthcare customers increase.

We have focused on growing our business to pursue the significant market opportunity we see for our products and services, and we plan to continue to invest in building for growth. As a result, we expect to incur significant operating costs relating to our research and development initiatives for our new and existing solutions and products, and for expansion of our sales and marketing operations as we add additional sales personnel, increase our marketing efforts and expand into new geographical markets. We also expect to increase our general and administrative expenses to support our growth.

Merger Agreement

On July 13, 2016, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Project Brady Holdings, LLC (“Parent”) and Project Brady Merger Sub, Inc., a wholly-owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (“Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. Parent and Merger Sub were formed by an affiliate of private equity investment firm Thoma Bravo, LLC (“Thoma Bravo”). Pursuant to the Merger Agreement, at the effective time of the Merger, each share of common stock, par value $0.001 per share, of the Company (the “Company Common Stock”) issued and outstanding (other than dissenting shares or shares owned by Parent or Merger Sub) will be cancelled and automatically converted into the right to receive cash in an amount equal to $19.25, without interest thereon (the “Per Share Price”). Consummation of the Merger, which is currently expected to close in the third quarter of 2016, is subject to customary closing conditions, including, without limitation, the absence of certain legal impediments, the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and approval by the affirmative vote of the holders of a majority of the outstanding shares of Company common stock as of the record date to be established for the special stockholders meeting to approve the transaction, voting as a single class.  Upon the termination of the Merger Agreement, under specified circumstances, the Company will be required to pay Parent a termination fee of $13.6 million.

21


 

The foregoing description of the Merger Agreement is only a summary, does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which was filed as Exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on July 13, 2016 and is incorporated herein by reference.

Initial Public Offering

On June 30, 2014, we completed our IPO, in which we sold 5,750,000 shares of common stock, including 750,000 shares sold pursuant to the underwriters’ option to purchase additional shares, at an offering price of $15.00 per share. All outstanding shares of redeemable convertible preferred stock converted to 13,970,934 shares of common stock at the closing of the IPO. Our shares are traded on the NYSE under the symbol “IMPR.” We received proceeds from the IPO of $80.2 million, net of underwriting discounts and commissions, but before offering expenses of approximately $3.4 million. These offering expenses have been recorded as a reduction of the proceeds received.

Shelf Registration

On July 1, 2015, we filed an S-3 registration statement as part of a “shelf” registration process. Under this shelf registration process, certain of our stockholders, who we refer to as the selling stockholders, may, from time to time, offer and sell up to 13,395,230 shares of our common stock that were issued and outstanding prior to the date of the registration statement. The selling stockholders are former holders of our preferred stock originally acquired through several private placements prior to its initial public offering. All of such shares of preferred stock were converted into shares of our common stock in connection with our initial public offering.

On August 11, 2015, we closed on the sale of 5.3 million shares of common stock by our existing stockholders. We did not receive any of the proceeds from the sale of the shares. We incurred $490,000 of costs associated with the offering.    

Acquisition of HT Systems

On April 30, 2015, we acquired 100% of the equity of HT Systems, a provider of palm-vein based biometric patient identification systems, to enter into the positive patient identification market for a purchase price of $19.1 million. We have contingent obligations to pay up to $5.0 million of potential additional earn-out consideration to the selling equity-holders of HT Systems, which will be determined based upon the achievement of certain sales targets over the two-year period following the closing of the transaction on April 30, 2015.

 

Adjusted EBITDA

We believe that the presentation of Adjusted EBITDA, a non-GAAP financial measure, provides investors with additional information about our financial results. Adjusted EBITDA is an important supplemental measure used by our board of directors and management to evaluate our operating performance from period to period on a consistent basis and as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations.

We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization adjusted for foreign currency gains (losses), stock based-compensation, as well as adjustments such as acquisition costs, merger related costs, shelf registration costs, and the impact of the fair value revaluation on our contingent liability.

Adjusted EBITDA is not in accordance with, or an alternative to, measures prepared in accordance with U.S. GAAP. In addition, this non-GAAP measure is not based on any comprehensive set of accounting rules or principles. As a non-GAAP measure, Adjusted EBITDA has limitations in that it does not reflect all of the amounts associated with our results of operations as determined in accordance with U.S. GAAP. In particular:

 

Adjusted EBITDA does not reflect the amounts we paid in taxes or other components of our tax provision;

 

Adjusted EBITDA does not include depreciation expense from fixed assets or amortization expense from acquired intangible assets;

 

Adjusted EBITDA does not reflect other (expense) income which include interest income we earn on cash and cash equivalents; interest expense, or the cash requirements necessary to service interest or principal payments, on our debt and capital leases; and the gains or losses on foreign currency transactions;

 

Adjusted EBITDA does not include the impact of stock-based compensation;

 

Adjusted EBITDA does not include the change in value of our contingent liability related to the acquisition of assets from Validus Medical Systems, as described in the Notes to consolidated financial statements;

 

Adjusted EBITDA does not include shelf registration and offering costs;

22


 

 

Adjusted EBITDA does not include transaction costs associated with business acquisitions;  

 

Adjusted EBITDA does not include merger related costs;

 

Adjusted EBITDA does not include legal costs associated with shareholder litigation;

 

Others may calculate Adjusted EBITDA differently than we do and these calculations may not be comparable to our Adjusted EBITDA metric; and

 

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures including net income (loss) and our financial results presented in accordance with U.S. GAAP.

The following table provides a reconciliation of net loss to Adjusted EBITDA for each of the periods indicated:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands, except per share amounts)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

GAAP net loss

 

$

(6,215

)

 

$

(5,426

)

 

$

(12,889

)

 

$

(12,125

)

Adjustments to reconcile to Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

164

 

 

 

727

 

 

 

304

 

 

 

764

 

Depreciation and amortization

 

 

997

 

 

 

905

 

 

 

1,978

 

 

 

1,684

 

Other (expense) income, net

 

 

284

 

 

 

(146

)

 

 

42

 

 

 

332

 

Stock-based compensation

 

 

1,862

 

 

 

1,080

 

 

 

3,219

 

 

 

1,781

 

Change in fair value of contingent liability

 

 

(45

)

 

 

29

 

 

 

(146

)

 

 

50

 

Shareholder litigation costs

 

 

161

 

 

 

 

 

 

194

 

 

 

 

Acquisition costs

 

 

 

 

 

546

 

 

 

 

 

 

709

 

Merger related costs

 

 

583

 

 

 

 

 

 

625

 

 

 

 

Shelf registration and offering costs

 

 

 

 

 

57

 

 

 

 

 

 

57

 

Adjusted EBITDA

 

$

(2,209

)

 

$

(2,228

)

 

$

(6,673

)

 

$

(6,748

)

 

Backlog

Our backlog consists of the total future value of our committed customer purchases, whether billed or unbilled. Backlog includes products, software maintenance and professional services which we have billed or been paid for in advance, and are included in deferred revenue on our balance sheet, as well as committed customer purchases where we have not invoiced or fulfilled the order as of the last day of the applicable period and which are not reflected on our balance sheet. We generally complete the unfulfilled committed customer product purchases by shipment in the next fiscal quarter and recognize revenue upon such shipment. We recognize any maintenance and services revenue related to unfulfilled committed customer purchases in subsequent periods in accordance with our revenue recognition policies. As of June 30, 2016 and December 31, 2015, we had backlog of $54.7 million and $51.8 million, respectively. Of the $54.7 million in backlog as of June 30, 2016, approximately $35.6 million, which includes approximately $21.3 million of maintenance, is expected to be recognized as revenue during the year ended December 31, 2016. Additionally, $12.2 million of maintenance revenue is expected to be recognized over the five year period subsequent to the year ended December 31, 2016. Revenue in any period is a function of new purchases during the period, the timing of fulfillment of customer orders, maintenance renewals and revenue recognized from backlog. Therefore, backlog viewed in isolation may not be indicative of future performance. Our presentation of backlog may differ from that of other companies in our industry.

Critical accounting estimates

Our financial statements are prepared in conformity with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. To the extent that there are material differences between our estimates and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. See “Note 2. Summary of significant accounting policies” included in our audited consolidated financial statements for the year ended December 31, 2015 included in our Annual Report on Form 10-K filed with the SEC on March 2, 2016 for information about these critical accounting policies.

23


 

Recent accounting guidance

Accounting standards or updates not yet effective

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016 and May 2016 within ASU 2015-04, ASU 2016-08, ASU 2016-10 and ASU 2016-12, respectively (ASU 2014-09, ASU 2015-04, ASU 2016-08, ASU 2016-10 and ASU 2016-12 collectively, Topic 606). Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance is effective for public companies with annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. This guidance could impact the timing and amounts of revenue recognized. We are currently evaluating the effect that implementation of this guidance and any amendments will have on our consolidated financial statements upon adoption. Any changes to the guidance resulting from the proposed amendments could change our assessment of the impact that adoption might have on our consolidated financial statements and could impact our decision on whether or not to early adopt.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory,” (Topic 330). ASU No. 2015-11 requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out and the retail inventory method are not impacted by the new guidance. This guidance will be effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those years. Prospective application is required. Early adoption is permitted as of the beginning of an interim or annual reporting period. We measure inventory using first-in, first out method and anticipates adopting this guidance. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.  

In February 2016, the FASB issued its new lease accounting standard ASU No. 2016-02, “Leases,” (Topic 842).  ASU No. 2016-02 requires lessees to recognize virtually all leases on the balance sheet, by recording a right-of-use asset and lease liability. This guidance will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption of the guidance is permitted upon issuance of ASU No. 2016-02. This guidance requires modified retrospective transition, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption. We are evaluating the impact this guidance will have on our consolidated financial statements upon adoption.

In March 2016, the FASB issued ASU No. 2016-09, “Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The ASU simplifies the accounting for the taxes related to stock based compensation, including adjustments to how excess tax benefits should be classified. This guidance will be effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. We are evaluating the impact this guidance will have on its consolidated financial statements upon adoption.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This guidance that changes the impairment model for most financial assets and certain other instruments. The guidance will replace current “incurred loss” approach with an “expected credit loss” impairment model and will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases, and off-balance-sheet credit exposures.  This guidance requires applying provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.  The standard is effective for annual periods beginning after December 15, 2019, and interim periods therein.  Early adoption is permitted for all entities for annual periods beginning after December 1, 2018 and interim periods therein. We are evaluating the impact this guidance will have on its consolidated financial statements upon adoption.

  

24


 

Results of operations

The following table sets forth our consolidated statements of operations data for each of the periods presented.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(in thousands, except per share data)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

19,855

 

 

$

16,305

 

 

$

35,833

 

 

$

29,218

 

Maintenance and services

 

 

16,243

 

 

 

13,663

 

 

 

31,786

 

 

 

26,386

 

Total revenue

 

 

36,098

 

 

 

29,968

 

 

 

67,619

 

 

 

55,604

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

6,628

 

 

 

4,088

 

 

 

11,320

 

 

 

7,511

 

Maintenance and services

 

 

5,453

 

 

 

5,296

 

 

 

10,723

 

 

 

10,223

 

Total cost of revenue

 

 

12,081

 

 

 

9,384

 

 

 

22,043

 

 

 

17,734

 

Gross profit

 

 

24,017

 

 

 

20,584

 

 

 

45,576

 

 

 

37,870

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

9,533

 

 

 

7,840

 

 

 

18,221

 

 

 

14,711

 

Sales and marketing

 

 

14,923

 

 

 

12,999

 

 

 

29,144

 

 

 

25,018

 

General and administrative

 

 

5,328

 

 

 

4,590

 

 

 

10,754

 

 

 

9,170

 

Total operating expenses

 

 

29,784

 

 

 

25,429

 

 

 

58,119

 

 

 

48,899

 

Loss from operations

 

 

(5,767

)

 

 

(4,845

)

 

 

(12,543

)

 

 

(11,029

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency exchange (loss) gain

 

 

(282

)

 

 

150

 

 

 

(31

)

 

 

(312

)

Interest and other income (expense), net

 

 

(2

)

 

 

(4

)

 

 

(11

)

 

 

(20

)

Loss before income taxes

 

 

(6,051

)

 

 

(4,699

)

 

 

(12,585

)

 

 

(11,361

)

Income taxes

 

 

164

 

 

 

727

 

 

 

304

 

 

 

764

 

Net loss

 

$

(6,215

)

 

$

(5,426

)

 

$

(12,889

)

 

$

(12,125

)

 

Revenue

Product revenue is generally recognized upon shipment of the software license key or hardware. Software, subscription and maintenance revenues are recognized ratably over their respective subscription and maintenance period. Revenue from our professional service arrangements is recognized as the services are performed. Training revenue is recognized when the training is completed. See our audited consolidated financial statements for the year ended December 31, 2015 included in “Note 2. Summary of significant accounting policies-Revenue recognition” of our Annual Report on Form 10-K filed with the SEC for more information.

The following table sets forth our revenues for each of the periods presented.

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Period-to-Period

 

 

June 30,

 

 

Period-to-Period

 

 

 

2016

 

 

2015

 

 

Change

 

 

2016

 

 

2015

 

 

Change

 

(dollars in thousands)

 

Amount

 

 

Amount

 

 

$

 

 

%

 

 

Amount

 

 

Amount

 

 

$

 

 

%

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

19,855

 

 

 

16,305

 

 

$

3,550

 

 

 

21.8

%

 

$

35,833

 

 

$

29,218

 

 

$

6,615

 

 

 

22.6

%

Percentage of revenue

 

 

55.0

%

 

 

54.4

%

 

 

 

 

 

 

 

 

 

 

53.0

%

 

 

52.5

%

 

 

 

 

 

 

 

 

Maintenance and service revenue

 

 

16,243

 

 

 

13,663

 

 

 

2,580

 

 

 

18.9

%

 

 

31,786

 

 

 

26,386

 

 

 

5,400

 

 

 

20.5

%

Percentage of revenue

 

 

45.0

%

 

 

45.6

%

 

 

 

 

 

 

 

 

 

 

47.0

%

 

 

47.5

%

 

 

 

 

 

 

 

 

Total Revenue

 

$

36,098

 

 

$

29,968

 

 

$

6,130

 

 

 

20.5

%

 

$

67,619

 

 

$

55,604

 

 

$

12,015

 

 

 

21.6

%

 

Product revenue

We derive our product revenue from the sales of both software and hardware. We derive substantially all of our software revenue from the sale of perpetual licenses for our Imprivata OneSign solution. Our license sales are generally priced on a per user basis, but are sometimes licensed on an enterprise-wide basis with an unlimited number of users. From time to time, we also derive software revenue from licenses sold on a term license basis. The software is delivered pre-loaded on a hardware server or as a software only solution that provides the same functionality as the software delivered on the pre-loaded server. Hardware sales also include the sale of devices such as proximity card readers, fingerprint readers and palm-vein biometric readers.

25


 

Comparison of three months ended June 30, 2016 and 2015

Product revenue increased by $3.6 million, or 22%, during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. The increase was driven primarily by an increase of approximately $2.3 million in sales to new healthcare and non-healthcare customers. Sales to new healthcare customers increased by $3.3 million during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015 and our sales to non-healthcare decreased by $944,000 during the three months ended June 30, 2016. Sales of additional products into our existing healthcare and non-healthcare customer base increased by approximately $1.2 million over the same period. The sales of additional products to healthcare customers increased by $1.3 million. This increase in sales was offset by a decrease of $120,000 in sales to non-healthcare customers We continue to focus on the healthcare industry, we believe the composition of non-healthcare customers may vary on a quarterly basis and is not indicative of any trend.

Comparison of six months ended June 30, 2016 and 2015

Product revenue increased by $6.6 million, or 23%, during the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The increase was driven primarily by an increase of approximately $4.1 million in sales to new healthcare and non-healthcare customers. Sales to new healthcare customers increased by $5.1 million during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015 and our sales to non-healthcare decreased by $952,000 during the three months ended June 30, 2016.  Sales of additional products into our existing healthcare and non-healthcare customer base increased by approximately $2.5 million over the same period. The sales of additional products to healthcare customers increased by $2.8 million. This increase in sales was offset by a decrease of $283,000 in sales to non-healthcare customers. We continue to focus on the healthcare industry, we believe the composition of non-healthcare customers may vary on a quarterly basis and is not indicative of any trend.

Maintenance and service revenue

Maintenance and services revenue is generated from maintenance and technical support associated with our software as well as professional services, which include implementation and training. Maintenance is typically invoiced annually in advance, recorded as deferred revenue and recognized ratably over the maintenance period. The professional services revenue consists primarily of fees associated with the implementation of our software and training services, and represented 10% and 11% of our revenues for the three months ended June 30, 2016 and 2015, respectively. Our professional service arrangements are generally billed on a time and materials basis and revenue is recognized as the services are performed. Training is generally billed as a fixed fee and revenue is recognized when the training is completed.

Comparison of three months ended June 30, 2016 and 2015

Maintenance and service revenue increased by $2.6 million, or 19%, during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. The increase was driven by increased maintenance revenue of $2.4 million resulting from our larger installed base of users. In addition, professional services increased by $153,000 over the same period due to the increased sales of our products, which resulted in new professional services related to implementation and training.  

Comparison of six months ended June 30, 2016 and 2015

Maintenance and service revenue increased by $5.4 million, or 21%, during the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The increase was driven by increased maintenance revenue of $5.0 million resulting from our larger installed base of users. In addition, professional services increased by $365,000 over the same period due to the increased sales of our products, which resulted in new professional services related to implementation and training.  

26


 

Cost of revenue

The following table sets forth our cost of revenues for each of the periods presented.

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Period-to-Period

 

 

June 30,

 

 

Period-to-Period

 

 

 

2016

 

 

2015

 

 

Change

 

 

2016

 

 

2015

 

 

Change

 

(dollars in thousands)

 

Amount

 

 

Amount

 

 

$ / #

 

 

%

 

 

Amount

 

 

Amount

 

 

$ / #

 

 

%

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

6,628

 

 

$

4,088

 

 

$

2,540

 

 

 

62.1

%

 

$

11,320

 

 

$

7,511

 

 

$

3,809

 

 

 

50.7

%

Product gross margin

 

 

66.6

%

 

 

74.9

%

 

 

 

 

 

 

 

 

 

 

68.4

%

 

 

74.3

%

 

 

 

 

 

 

 

 

Maintenance and services

 

 

5,453

 

 

 

5,296

 

 

 

157

 

 

 

3.0

%

 

 

10,723

 

 

 

10,223

 

 

 

500

 

 

 

4.9

%

Maintenance and service gross margin

 

 

66.4

%

 

 

61.2

%

 

 

 

 

 

 

 

 

 

 

66.3

%

 

 

61.3

%

 

 

 

 

 

 

 

 

Total cost of revenue

 

$

12,081

 

 

$

9,384

 

 

$

2,697

 

 

 

28.7

%

 

$

22,043

 

 

$

17,734

 

 

$

4,309

 

 

 

24.3

%

Total gross margin

 

 

66.5

%

 

 

68.7

%

 

 

 

 

 

 

 

 

 

 

67.4

%

 

 

68.1

%

 

 

 

 

 

 

 

 

Headcount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

105

 

 

 

105

 

 

 

-

 

 

 

0.0

%

 

 

105

 

 

 

105

 

 

 

-

 

 

 

0.0

%

 

Cost of product revenue

Cost of product consists primarily of costs of physical appliances, palm-vein biometric readers, proximity cards and fingerprint readers. Additional product costs include third party software license costs, duties and freight, and amortization expense related to intangible assets acquired.

Comparison of three months ended June 30, 2016 and 2015

Cost of product revenue increased by $2.5 million, or 62%, during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. The increase was primarily attributable to the increase in sales of proximity card and fingerprint devices. Product gross margin decreased due to unfavorable changes in the mix between higher-margin software and lower margin device sales.  Device revenues as a percentage of total product revenues can fluctuate and, as a result, we expect product gross margins to vary depending on the mix of device revenues to total product revenues can fluctuate and, as a result, we expect product gross margins to vary depending on the mix of device revenues to total product revenues.

Comparison of six months ended June 30, 2016 and 2015

Cost of product revenue increased by $3.8 million, or 51%, during the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The increase was primarily attributable to the increase in sales of proximity card and fingerprint devices. Product gross margin decreased due to unfavorable changes in the mix between higher-margin software and lower margin device sales.  Device revenues as a percentage of total product revenues can fluctuate and, as a result, we expect product gross margins to vary depending on the mix of device revenues to total product revenues can fluctuate and, as a result, we expect product gross margins to vary depending on the mix of device revenues to total product revenues.

Cost of maintenance and service revenue

Cost of maintenance and services consists primarily of costs related to our support and professional services personnel, including employee wages and benefits, bonuses, stock compensation and travel expense. These costs also include depreciation and overhead related to facilities and information technology used to provide these services.

Comparison of three months ended June 30, 2016 and 2015

Cost of maintenance and services revenue increased by $157,000, or 3%, during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. The slight increase was primarily due to increased facilities and IT costs of $138,000. The facilities and IT allocation costs per person increased due to increased rent, payroll and related costs as well as increased expenses for computer and software as well as maintenance costs. However, maintenance and services revenue gross margin increased to 66% during the six months ended June 30, 2016 as compared to 61% during the three months ended June 30, 2015. With the continued growth in our revenue, we gain economies of scale which reduces our costs as a percentage of total revenue.

27


 

Comparison of six months ended June 30, 2016 and 2015

Cost of maintenance and services revenue increased by $500,000, or 5%, during the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The increase was primarily due to increase in payroll and related costs of $340,000, and facilities and IT costs of $344,000. The facilities and IT allocation costs per person increase due to increased rent, payroll and related costs as well as increased expenses for computer and software as well as maintenance costs. The increase was partially offset by a decrease in travel costs of $109,000. However, maintenance and services revenue gross margin increased to 66% during the six months ended June 30, 2016 as compared to 61% during the six months ended June 30, 2015. With the continued growth in our revenue, we gain economies of scale which reduces our costs as a percentage of total revenue.

Operating expenses

Our operating expenses consist primarily of personnel costs, including salaries, commissions, bonuses, share-based compensation and related benefits and taxes, costs related to the design and development of new products and enhancement of existing products, marketing programs, consulting, travel, and depreciation expenses. Personnel costs are our largest expense, representing $19.5 million, or 66%, and $16.0 million, or 63%, of our total operating expenses for the three months ended June 30, 2016 and 2015, respectively.  Personnel costs represented $37.3 million, or 64%, and $30.7 million, or 63%, of our total operating expenses during the six months ended June 30, 2016 and 2015, respectively. We allocate overhead such as our information technology expenses, including personnel costs, and facility expenses based on headcount. Due to our headcount growth, we have increased the leased square footage for our corporate headquarters in Lexington, Massachusetts and our capital expenditures for leasehold improvements and information technology equipment.

The following table sets forth our operating expenses.

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Period-to-Period

 

 

June 30,

 

 

Period-to-Period

 

 

 

2016

 

 

2015

 

 

Change

 

 

2016

 

 

2015

 

 

Change

 

(dollars in thousands)

 

Amount

 

 

Amount

 

 

$ / #

 

 

%

 

 

Amount

 

 

Amount

 

 

$ / #

 

 

%

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

9,533

 

 

$

7,840

 

 

$

1,693

 

 

 

21.6

%

 

$

18,221

 

 

$

14,711

 

 

$

3,510

 

 

 

23.9

%

Percentage of revenue

 

 

26.4

%

 

 

26.2

%

 

 

 

 

 

 

 

 

 

 

26.9

%

 

 

26.5

%

 

 

 

 

 

 

 

 

Sales and marketing

 

 

14,923

 

 

 

12,999

 

 

 

1,924

 

 

 

14.8

%

 

 

29,144

 

 

 

25,018

 

 

 

4,126

 

 

 

16.5

%

Percentage of revenue

 

 

41.3

%

 

 

43.4

%

 

 

 

 

 

 

 

 

 

 

43.1

%

 

 

45.0

%

 

 

 

 

 

 

 

 

General and administrative

 

 

5,328

 

 

 

4,590

 

 

 

738

 

 

 

16.1

%

 

 

10,754

 

 

 

9,170

 

 

 

1,584

 

 

 

17.3

%

Percentage of revenue

 

 

14.8

%

 

 

15.3

%

 

 

 

 

 

 

 

 

 

 

15.9

%

 

 

16.5

%

 

 

 

 

 

 

 

 

Total operating expenses

 

$

29,784

 

 

$

25,429

 

 

$

4,355

 

 

 

17.1

%

 

$

58,119

 

 

$

48,899

 

 

$

9,220

 

 

 

18.9

%

Percentage of revenue

 

 

82.5

%

 

 

84.9

%

 

 

 

 

 

 

 

 

 

 

86.0

%

 

 

87.9

%

 

 

 

 

 

 

 

 

Headcount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

131

 

 

 

117

 

 

 

14

 

 

 

12.0

%

 

 

131

 

 

 

117

 

 

 

14

 

 

 

12.0

%

Sales and marketing

 

 

168

 

 

 

154

 

 

 

14

 

 

 

9.1

%

 

 

168

 

 

 

154

 

 

 

14

 

 

 

9.1

%

General and administrative

 

 

46

 

 

 

40

 

 

 

6

 

 

 

15.0

%

 

 

46

 

 

 

40

 

 

 

6

 

 

 

15.0

%

Information technology

 

 

21

 

 

 

13

 

 

 

8

 

 

 

61.5

%

 

 

21

 

 

 

13

 

 

 

8

 

 

 

61.5

%

Total

 

 

366

 

 

 

324

 

 

 

42

 

 

 

13.0

%

 

 

366

 

 

 

324

 

 

 

42

 

 

 

13.0

%

 

Research and development

Research and development expenses consist of costs for our research and development personnel, including salaries, benefits, bonuses and stock-based compensation, the cost of certain third-party contractors, including off-shore development, travel expense and allocated overhead. Research and development costs are expensed as they are incurred.

We intend to continue to develop additional products and functionality for our existing solutions as well as develop new solutions for the healthcare market and expect research and development costs to continue to increase in absolute dollars, although they may fluctuate as a percentage of revenue.

Comparison of three months ended June 30, 2016 and 2015

Research and development expenses increased by $1.7 million, or 22%, during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015.  The increase was primarily due to increased payroll and related costs of $711,000 due to increase in headcount, increase in consulting expenses of $416,000 related to our third-party developers. We also had increases in

28


 

hiring and related costs of $109,000 and facilities and IT costs of $259,000, which are allocated based on headcount. The timing for new hires may vary within the quarter and is not indicative of any trend. 

Comparison of six months ended June 30, 2016 and 2015

Research and development expenses increased by $3.5 million, or 24%, during the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The increase was primarily due to increased payroll and related costs of $1.7 million and hiring costs of $227,000 due to increase in headcount. The timing for new hires may vary within the quarter and is not indicative of any trend. In addition, consulting expenses increased by $616,000, facilities and IT cost by $579,000 and telecommunication cost by $174,000.

Sales and marketing

Sales and marketing expenses consist of costs for our sales and marketing personnel, including salaries, benefits, bonuses, stock-based compensation and sales commissions, costs of marketing and promotional events, corporate communications, online marketing, product marketing and management and other brand-building activities, travel expense and allocated overhead. Sales commissions are generally earned and recorded as expense when the customer order has been received, which may precede recognition of the associated revenue. We expect sales and marketing expenses to increase in absolute dollars as we expand our business both domestically and internationally, although they may fluctuate as a percentage of revenue.

Comparison of three months ended June 30, 2016 and 2015

Sales and marketing expenses increased by $1.9 million, or 15 %, during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015.  The increase was primarily due to increase in spending on sales related costs of $1.3 million and marketing and business-development related costs of $608,000. The increase in sales related costs was primarily due to increased payroll and related costs of $968,000, commission expense of $311,000, and facilities and IT costs of $143,000. The timing for new hires may vary within the quarter and is not indicative of any trend. The increase in marketing and business-development related cost was primarily related to increase in payroll and related costs of $696,000 due to increase in headcount, and facilities and IT costs of $103,000. These increases were partially offset by a decrease in marketing and promotion costs of $350,000 which was primarily driven by costs associated with the Healthcare Information and Management System Society trade show that occurred in the first quarter of 2016 as compared to the second quarter of 2015.

Comparison of six months ended June 30, 2016 and 2015

Sales and marketing expenses increased by $4.1 million, or 17%, during the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The increase was primarily due to increase in spending on sales related costs of $2.4 million and marketing and business-development related costs of $1.7 million. The increase in sales related costs was primarily due to increased payroll and related costs of $1.8 million, commission expense of $343,000 and facilities and IT costs of $299,000. The timing for new hires may vary within the quarter and is not indicative of any trend. These increases were partially offset by a decrease in travel expenses of $226,000. The increase in marketing and business-development related cost was primarily related to increase in payroll and related costs of $889,000, marketing and promotion costs of $437,000 and facilities and IT cost of $185,000.

General and administrative

General and administrative expenses consist primarily of costs for administrative, finance, legal and human resource personnel, including salaries, benefits, bonuses and stock-based compensation, professional fees associated with legal matters and costs required to comply with the regulatory requirements of the SEC, as well as costs associated with enhancing our internal controls and accounting systems, insurance premiums, other corporate expenses and allocated overhead. General and administrative expenses also include costs associated with business acquisitions, transaction costs associated with offerings of our common stock and the re-valuing of our contingent liability associated with any earn-out we may be required to pay in connection with the Validus acquisition. We measure the liability at each balance sheet date based on revenue earned to date from the acquired Validus product (now our Imprivata Cortext solution) and our projections of revenues from sales of Imprivata Cortext. We expect our general and administrative expenses to remain consistent with the current year presented.

Comparison of three months ended June 30, 2016 and 2015

General and administrative expenses increased by $738,000, or 16%, during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. The increase was primarily due to increased share-based compensation expense of $329,000, as a result of our increased headcount. Our professional fees increased by $380,000, primarily due to merger related costs. These increases were partially offset by a decrease in consulting costs of $283,000.

29


 

Comparison of six months ended June 30, 2016 and 2015

General and administrative expenses increased by $1.6 million, or 17%, during the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The increase was primarily due to an increase in payroll and related costs of $1.0 million, of which $663,000 is share-based compensation, as a result of increased headcount.  The timing for new hires may vary within the quarter and is not indicative of any trend. Professional fees increased $340,000, primarily due to merger related costs, and facilities and IT costs increased by $205,000. These increases were partially offset by a decrease in consulting costs of $210,000.  

Other income (expense)

Other income (expense) primarily consists of foreign exchange gains (losses), interest income and interest expense. Foreign exchange gains (losses) relate to transactions denominated in currencies other than the functional currency. Interest income represents interest received on our cash and cash equivalents. Interest expense is associated with our capital leases and term loans.

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Period-to-Period

 

 

June 30,

 

 

Period-to-Period

 

 

 

2016

 

 

2015

 

 

Change

 

 

2016

 

 

2015

 

 

Change

 

(dollars in thousands)

 

Amount

 

 

Amount

 

 

$

 

 

%

 

 

Amount

 

 

Amount

 

 

$

 

 

%

 

Foreign currency exchange gain (loss)

 

$

(282

)

 

$

150

 

 

$

(432

)

 

 

(288.0

)%

 

$

(31

)

 

$

(312

)

 

$

281

 

 

 

90.1

%

Percentage of revenue

 

 

(0.8

)%

 

 

0.5

%

 

 

 

 

 

 

 

 

 

 

(0.0

)%

 

 

(0.6

)%

 

 

 

 

 

 

 

 

Interest and other income (expense), net

 

 

(2

)

 

 

(4

)

 

 

2

 

 

 

50.0

%

 

 

(11

)

 

 

(20

)

 

 

9

 

 

 

45.0

%

Percentage of revenue

 

 

(0.0

)%

 

 

(0.0

)%

 

 

 

 

 

 

 

 

 

 

(0.0

)%

 

 

(0.0

)%

 

 

 

 

 

 

 

 

Total other income (expense)

 

$

(284

)

 

$

146

 

 

$

(430

)

 

 

(294.5

)%

 

$

(42

)

 

$

(332

)

 

$

290

 

 

 

87.3

%

 

Comparison of three months ended June 30, 2016 and 2015

Other expense increased by $430,000, during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015 primarily due to an increase in foreign exchange losses compared to foreign exchange gains during the three months ended June 30, 2015. The increase was primarily driven by the weakening of the Pound Sterling and Euro against the US Dollar as the Company has cash and accounts receivable denominated in Pound Sterling and Euro as result of our European operations.  

Comparison of six months ended June 30, 2016 and 2015

Other expenses decreased by $290,000, during the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The decrease was primarily driven by losses recognized during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015.    

Income tax expense

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Period-to-Period

 

 

June 30,

 

 

Period-to-Period

 

 

 

2016

 

 

2015

 

 

Change

 

 

2016

 

 

2015

 

 

Change

 

(dollars in thousands)

 

Amount

 

 

Amount

 

 

$

 

 

%

 

 

Amount

 

 

Amount

 

 

$

 

 

%

 

Income taxes

 

$

164

 

 

$

727

 

 

$

(563

)

 

 

(77.4

)%

 

$

304

 

 

$

764

 

 

$

(460

)

 

 

(60.2

)%

Percentage of revenue

 

 

0.5

%

 

 

2.4

%

 

 

 

 

 

 

 

 

 

 

0.4

%

 

 

1.4

%

 

 

 

 

 

 

 

 

 

Comparison of three and six months ended June 30, 2016 and 2015

We operate in several tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business. Earnings from our activities outside of the United States are subject to local country income tax and in some circumstances are subject to U.S. income tax. To date, we have incurred cumulative U.S. operating losses and maintain a full valuation allowance on our net deferred tax assets. Therefore, we have not recorded any U.S. tax provision associated with income from operations and our effective tax rate differs from the U.S. statutory rate.

Our tax expense recorded primarily relates to $246,000 of deferred tax expense associated with long term deferred tax liabilities related to tax basis in acquired goodwill and a tax expense of $58,000 on earnings of certain foreign subsidiaries and to a lesser extent state income taxes.

30


 

Liquidity and capital resources

Resources

To date, we have financed our operations primarily through the sale of equity securities, including private placements of preferred stock, and net cash proceeds from our IPO, as well as cash from operating activities.

Cash and cash equivalents

As of June 30, 2016, we had $47.0 million of cash and cash equivalents, of which $982,000 was held in our foreign subsidiaries. Our cash is invested in money market funds or in cash deposit accounts, and is held for working capital purposes. We do not enter into investments for trading or speculative purposes.

On June 30, 2014, we completed our IPO, in which we sold 5,750,000 shares of common stock, including 750,000 shares sold pursuant to the underwriters’ option to purchase additional shares, at an offering price of $15.00 per share. We received proceeds from the IPO of $80.2 million, net of underwriting discounts and commissions, but before offering expenses of approximately $3.4 million.

On April 30, 2015, we used approximately $19.0 million in cash to acquire HT Systems, a provider of palm-vein based biometric patient identification systems, in order to enter into the positive patient identification market.

On August 11, 2015, we closed on the sale of 5.3 million shares of common stock by our existing stockholders. We did not receive any of the proceeds from the sale of the shares. We incurred $490,000 of costs associated with the offering.  

We believe our cash and cash equivalents, $15.0 million revolving credit agreement and cash flows from operations will be sufficient to meet our working capital and capital expenditure requirements for at least 12 months. The Revolving Credit Facility expires in April 2017.

Our net cash flows from operating, investing and financing activities for the years indicated in the table below were as follows:

 

 

 

Six Months Ended June 30,

 

(in thousands)

 

2016

 

 

2015

 

Net cash used in provided by operating activities

 

$

(2,500

)

 

$

(5,102

)

Net cash used in investing activities

 

 

(3,067

)

 

 

(19,967

)

Net cash provided by financing activities

 

 

897

 

 

 

1,215

 

Effect of exchange rates on cash and cash equivalents

 

 

(46

)

 

 

3

 

Net decrease in cash and cash equivalents

 

$

(4,716

)

 

$

(23,851

)

 

Net cash used in operating activities

Cash provided by operating activities consists of significant components of the statement of operations adjusted for changes in various working capital items including accounts receivable, prepaid expenses, accounts payable, and deferred revenue. Cash provided by operating activities is influenced by the investment we make in personnel and infrastructure costs necessary to support the anticipated growth of the business, the increase in the sales of software licenses and renewal of software maintenance contracts as well as the timing of customer payments

Our cash used in operating activities during the six months ended June 30, 2016 was primarily due to a net loss of $12.9 million adjusted for $5.8 million of non-cash expenses that included $2.0 million of depreciation and amortization, $3.2 million in stock-based compensation, an increase in deferred tax liability of $246,000, a provision for doubtful accounts of $130,000, a provision for excess inventory of $355,000, a loss on disposal of fixed assets of $16,000 and a decrease of $146,000 due to the reduction to the fair value of the contingent purchase price liability. Net increase in working capital amounted to $4.6 million attributable to decreases in accounts receivable of $5.0 million, an increase in deferred revenue of $950,000, an increase in other liabilities of $270,000 and an increase in accounts payable of $547,000. These increases were partially offset by a decrease in accrued expenses of $613,000, an increase in prepaid expenses and other current assets of $538,000 and noncurrent other assets of $995,000.

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Net cash used in investing activities

Our primary investing activities have consisted of capital expenditures to purchase computer equipment and furniture and fixtures as well as leasehold improvements to our company headquarters necessary to support the expansion of our infrastructure and workforce. As our business grows, we expect our capital expenditures and our investment activity to continue to increase.

For the six months ended June 30, 2016, cash used in investing activities consisted of expenditures for development of internal use software of $1.5 million and purchases of property and equipment for $1.5 million, which was primarily driven by the increase in leasehold improvements, computer equipment and furnishings for our corporate headquarters, as well as increases in computer equipment for our increased headcount.

Net cash provided by financing activities

Our primary financing activities have consisted of proceeds from the exercise of stock options as well as proceeds from and payments on equipment debt obligations entered into to finance equipment leases and purchased software costs.

For the six months ended June 30, 2016, cash provided by financing activities primarily consisted of $649,000 proceeds from our employee stock purchase plan and $727,000 of proceeds from the exercise of stock options, partially offset by $265,000 of payments in connection with our debt, capital leases and royalty obligations and $214,000 of payments of contingent liability.

Requirements

Capital expenditures

We have made capital expenditures primarily for leasehold improvements and furniture and fixtures related to the expansion of our corporate headquarters, as well as information technology equipment to support our increased headcount, product enhancement and development and our overall growth. Our capital expenditures totaled $1.5 million and $644,000 for the six months ended June 30, 2016 and 2015, respectively.

We expect our 2016 capital expenditures to be consistent with previous periods presented, with expenditures primarily related to, equipment to support product development, facility expansions and other general purposes to support our growth.

Contractual obligations and commitments

There have been no other significant changes in contractual obligations from those disclosed in the audited consolidated financial statements for the year ended December 31, 2015 included in our Annual Report on Form 10-K filed with the SEC on March 2, 2016.

Off-balance sheet arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

 

Item 3.

Quantitative and qualitative disclosures about market risk

We have operations both within the United States and internationally which expose us to market risk. These risks are primarily the result of fluctuation in foreign exchange rates and interest rates, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. We do not use derivative instruments to mitigate the impact of our market risk exposures.

Foreign currency exchange risk

We have foreign currency risks related to our cash, accounts receivable, revenue and operating expenses denominated in currencies other than the U.S. dollar.

We maintain foreign cash accounts denominated in the Euro and British Pound Sterling, to fund our foreign operations and collect foreign accounts receivables. We generally invoice our customers in the currencies of the countries in which the customer is located. At June 30, 2016, our foreign accounts receivable balances were primarily denominated in the Euro, British Pound Sterling, Swiss Franc, Canadian Dollar and the Australian Dollar.

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Our customer contracts are generally denominated in the currencies of the countries in which the customer is located which exposes us to risk associated with sales made in foreign currencies. Our historical revenue has been denominated in U.S. dollars, the Euro and British Pound Sterling. The functional currency for our foreign operations is denominated in the local currency and as a result operating expenses related to our foreign locations are impacted by fluctuations in foreign currency exchange rates. Increases and decreases in our foreign denominated revenue due to fluctuations in foreign currency exchange rates are somewhat offset by the currency fluctuations in our operating expenses that are denominated in foreign currencies.

If the foreign currency exchange rates fluctuated by 10% as of June 30, 2016, our foreign currency exchange gain or loss would have fluctuated by $685,000.

Interest rate risk

At June 30, 2016, we had cash and cash equivalents of $47.0 million. We maintain substantially all of our cash equivalents in an institutional money market mutual fund. The fund provides daily liquidity and invests in a portfolio of short-term money market instruments issued by the U.S. government. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

We have carried out an evaluation under the supervision of, and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2016.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

33


 

PART II

Item 1.

Legal Proceedings

On February 2, 2016, a complaint was filed in the United States District Court for the District of Massachusetts captioned Coyer v. Imprivata, Inc., et al, Case 1:16-cv-10160-LTS (D. Mass.), on behalf of a putative class of our stockholders, naming us as a defendant as well as Mr. Omar Hussain, our President and Chief Executive Officer, and Mr. Jeffrey Kalowski, our Chief Financial Officer, as well as certain investors who sold shares of our common stock in an offering in August 2015.  The complaint, brought on behalf of all persons who purchased our common stock between July 30, 2015 and November 2, 2015, generally alleges that we and the named officers made false and/or misleading statements about the demand for our IT security solutions and sales trends and failed to disclose facts about our business, operations and performance.  The complaint brings causes of action for violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, as amended, against us and the two named officers, as well as for “control person” liability under Section 20(a) of the Securities Exchange Act of 1933, as amended, against the officers and the non-Company defendants.  The complaint seeks unspecified monetary damages and unspecified costs and fees.

We believe that the likelihood of an unfavorable judgment arising from this matter is remote based on the information currently available. We do not believe the ultimate resolution of the legal matter referred to above will have a material adverse effect on our net income, financial condition or liquidity in a future period. However, given the inherent unpredictability of litigation and the fact that this litigation is still in its early stages, we are unable to predict with certainty the outcome of this litigation or reasonably estimate a possible loss or range of loss associated with this litigation at this time.

Item 1A.

Risk Factors

These are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q. Because of the these factors, as well as other variables affecting our operating results, past financial performance should not be considered as a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. These risks are not the only ones facing us. Please also see “Special note regarding forward-looking statements and industry data” earlier in this Quarterly Report on Form 10-Q. The following discussion highlights certain risks which may affect future operating results. These are the risks and uncertainties we believe are most important for our existing and potential stockholders to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.

Risks related to our business and industry

 

If the Merger contemplated by the Merger Agreement does not occur, it could have a material adverse effect on our business, results of operations, financial condition and stock price.

 

Completion of the proposed Merger is subject to the satisfaction of various conditions, including the receipt of approvals from our shareholders and from government or regulatory agencies. There is no assurance that all of the various conditions will be satisfied, or that the Merger will be completed on the proposed terms, within the expected timeframe, or at all.

 

The proposed Merger gives rise to inherent risks that include:

 

·

pending shareholder litigation could prevent or delay the Merger or otherwise negatively impact our business and operations;

 

·

if the Merger is not completed, the share price of our common stock will change to the extent that the current market price of our stock reflects an assumption that the Merger will be completed;

 

·

the amount of the cash payment to be paid under the Merger agreement is fixed and will not be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or results of operations or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock;

 

·

legal or regulatory proceedings, including regulatory approvals from various domestic and foreign governmental entities (including any conditions, limitations or restrictions placed on these approvals) and the risk that one or more governmental entities may delay or deny approval, or other matters that affect the timing or ability to complete the transaction as contemplated;

 

·

the possibility of disruption to our business, including increased costs and diversion of management time and resources;

 

·

difficulties maintaining business and operational relationships, including relationships with customers, suppliers, and other business partners;

34


 

 

·

the inability to pursue alternative business opportunities or make changes to our business pending the completion of the proposed Merger; 

 

·

the requirement to pay a termination fee of $13.6 million if we terminate the Merger Agreement under certain circumstances; and

 

·

developments beyond our control including, but not limited to, changes in domestic or global economic conditions that may affect the timing or success of the proposed Merger.

We have a history of losses, we expect to continue to incur losses and we may not be profitable in the future.

We incurred a $12.9 million net loss for the six months ended June 30, 2016. As of June 30, 2016, we had an accumulated deficit of $143.5 million and we expect to continue to incur operating and net losses for the foreseeable future. Our ability to be profitable in the future depends upon continued demand for our authentication, access management and secure communication solutions for the healthcare industry. In addition, our profitability will be affected by, among other things, our ability to develop and commercialize new solutions and products for those solutions, and our ability to enhance existing solutions and products. Further market adoption of our solutions, including increased penetration within our existing customers, depends upon our ability to address security concerns in the healthcare setting, improve clinical workflows related to the utilization of healthcare information technology systems, and increase clinician productivity. We expect to incur significant operating costs relating to our research and development initiatives for our new and existing solutions and products, and for our expansion of our sales and marketing operations as we add additional sales personnel and increase our marketing efforts. Furthermore, we may incur significant losses in the future for a number of reasons, including the other risks described in this Quarterly Report on Form 10-Q, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown events. As a result, we cannot assure you that we will be able achieve or sustain profitability in the future.

We depend on sales of our Imprivata OneSign solution in the healthcare industry for a substantial portion of our revenue, and any decrease in its sales would have a material adverse effect on our business, financial condition and results of operations.

A substantial portion of our revenue to date has been derived from sales to the healthcare industry of Imprivata OneSign, our authentication and access solution. We anticipate that sales of our Imprivata OneSign solution to the healthcare industry will continue to represent a substantial portion of our revenue for the foreseeable future. Any decrease in revenue from sales of this solution would have a material adverse effect on our business. Healthcare organizations are currently facing significant budget constraints, increasing demands resulting from a growing number of patients, and impediments to obtaining third-party reimbursements and patient payments for their services. Although healthcare organizations are currently allocating funds for capital and infrastructure improvements to benefit from governmental initiatives, they may not choose to prioritize or implement authentication or access management solutions as part of those efforts at this time, or at all, due to financial and resource constraints. Even if clinicians determine that our Imprivata OneSign solution provides benefits over their existing authentication and access management solutions, their healthcare organizations may not have, or may not be willing to spend, the resources necessary to purchase, install and maintain information technology systems, adopt our Imprivata OneSign solution, add licensed users in other departments or purchase additional products and services from us.

In addition, our healthcare customers have been experiencing consolidation in response to developments generally affecting the healthcare industry. As a result, we may lose existing or potential healthcare customers for our solutions. If our existing customers combine with other healthcare organizations that are not our customers, they may reduce or discontinue their purchases of our solutions. In addition, the combined organizations may have greater leverage in negotiating terms with us, and we may be forced to accept terms that are less favorable to us.

We do not anticipate that sales of our solutions, including Imprivata OneSign, in non-healthcare industries will represent a significant portion of our revenue for the foreseeable future. Additionally, while we expect our Imprivata Confirm ID, Imprivata Cortext and Imprivata PatientSecure solutions will begin contributing to our results in the near future, we will continue to rely on sales of Imprivata OneSign for a substantial portion of our revenue. As a result, decreased revenue from sales of our Imprivata OneSign solution in the healthcare industry would have a material adverse effect on our business, financial condition and results of operations.

We may not be able to attract new customers and retain and increase sales to our existing customers, which could have a material adverse effect on our business, financial condition and results of operations.

Our success and growth strategy depends in part upon the purchase of our authentication, access management and secure communication solutions by new customers. Our sales and marketing efforts seek to demonstrate to potential new customers that our solutions improve security, streamline clinician workflow and increase productivity, enhance the value of existing investments in healthcare information technology, and help ensure compliance with complex privacy and security regulations. If we are not able to persuade new customers that our solutions provide these benefits, or if we fail to generate sufficient sales leads through our marketing programs, then we will not be able to attract new customers, which would have a material adverse effect on our business, financial condition and results of operations.

35


 

In most cases, our customers initially license our solutions for a limited number of departments within a healthcare organization. After the initial sale, our customers frequently add licensed users in other departments, functional groups and sites and buy additional products and services over time. Factors that may affect our ability to retain and increase sales to our existing customers include the quality of our customer service, training and technology, as well as our ability to successfully develop and introduce new solutions and products. Additionally, our customers may stop using our solutions or may not renew agreements for services, including software maintenance, for reasons entirely out of our control, such as a reduction in their budgets. If our efforts to satisfy our existing customers are not successful, we may not be able to retain them or sell additional functionality to them, which could have a material adverse effect on our business, financial condition and results of operations.

If we fail to successfully develop and introduce new solutions and products for existing solutions, our business, financial condition and results of operations could be adversely affected.

Our success depends, in part, upon our ability to anticipate industry evolution and introduce or acquire new solutions and products to keep pace with technological developments and market requirements both within our industry and in related industries. However, we may not be able to develop, introduce, acquire and integrate new solutions and products in response to our customers’ changing requirements in a timely manner or on a cost-effective basis, or that sufficiently differentiate us from competing solutions such that customers choose to purchase our solutions. For example, healthcare organizations may shift their existing information technology infrastructure from on-site services to cloud-based services, which may not be compatible with our solutions, requiring us to develop new products or to re-engineer our existing products. In addition, healthcare organizations may adopt mobile applications more quickly than we have anticipated, requiring us to accelerate the development of mobile versions of our solutions. If any of our competitors implement new technologies before we are able to implement them or better anticipates the innovation opportunities in related industries, those competitors may be able to provide more effective or more cost-effective solutions than ours. In addition, we may experience technical problems and additional costs as we introduce new solutions, deploy future iterations of our solutions and integrate new solutions with existing customer systems and workflows. If any of these problems were to arise, our business, financial condition and results of operations could be adversely affected.

Developments in the healthcare industry or regulatory environment could adversely affect our business.

Our growth strategy is focused on the healthcare industry and a substantial portion of our revenue is derived from the healthcare industry. This industry is highly regulated and is subject to changing political, legislative, regulatory and other influences. Developments generally affecting the healthcare industry, including new regulations or new interpretations of existing regulations, such as reductions in funding, changes in pricing for healthcare services or impediments to third-party reimbursement for healthcare costs, may cause deterioration in the financial or business condition of our customers and cause them to reduce their spending on information technology. As a result, these developments could adversely affect our business.

In March 2010, comprehensive healthcare reform legislation was enacted in the United States through the Patient Protection and Affordable Health Care for America Act and the Health Care and Education Reconciliation Act. This law has increased health insurance coverage through individual and employer mandates, subsidies offered to lower income individuals, tax credits available to smaller employers and broadening of Medicaid eligibility, and to affect third-party reimbursement levels for healthcare organizations. We cannot predict what effect federal healthcare reform or any future legislation or regulation, or healthcare initiatives, if any, implemented at the state level, will have on us or our healthcare customers.

In addition, our healthcare customers’ expectations regarding pending or potential industry developments may also affect their budgeting processes and spending plans with respect to our solutions. The healthcare industry has changed significantly in recent years and we expect that significant changes will continue to occur. However, the timing and impact of developments in the healthcare industry are difficult to predict. For instance, our healthcare customers were required to transition to using ICD-10 diagnosis and billing codes, which were time consuming and costly to implement. As our healthcare customers are implementing ICD-10, some of our healthcare customers, particularly those at smaller hospitals, have delayed their other IT spending plans. We cannot assure you that the markets for our solutions will continue to exist at current levels or that we will have adequate technical, financial and marketing resources to react to changes in those markets.

Seasonal variations in the purchasing patterns of our customers may lead to fluctuations in our operating results and financial condition.

We have experienced and expect to continue to experience seasonal variations in the timing of customers’ purchases of our solutions. Many customers make purchasing decisions based on their fiscal year budgets, which typically coincide with the calendar year and result in increased purchasing in the fourth quarter of the year. Because many of our expenses remain relatively fixed throughout the year, the seasonality of our business requires us to manage our working capital carefully over the course of the year. If we fail to manage our working capital effectively or do not accurately predict customer demand in the fourth quarter of the year, our operating results and financial condition may fluctuate.

36


 

Our sales cycles for new customers can be lengthy and unpredictable, which may cause our revenue and operating results to fluctuate significantly.

Our sales cycles for new customers can be lengthy and unpredictable. Our sales efforts involve educating our customers about the use and benefits of our authentication, access management and secure communication solutions, including demonstrating the potential of our solutions in improving security, streamlining clinician workflow and increasing productivity. Potential customers may undertake a significant evaluation process to assess their existing healthcare information technology infrastructure, as well as our solutions. This assessment can result in a lengthy and unpredictable sales cycle. In addition, purchases of our solutions are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will produce any sales. In addition, cancellation of any implementation after it has begun might result in lost time, effort, and expenses invested in the cancelled implementation process and lost opportunity for implementing paying customers in that same period of time. These factors may contribute to significant fluctuations in our revenue and operating results.

Our revenue and operating results have fluctuated, and are likely to continue to fluctuate, which may make our quarterly results difficult to predict, cause us to miss analyst expectations and cause the price of our common stock to decline.

Our revenue and operating results may be difficult to predict, even in the near term, and are likely to fluctuate as a result of a variety of factors, many of which are outside of our control. Comparisons of our revenue and operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. Each of the following factors, among others, could cause our revenue and operating results to fluctuate from quarter to quarter:

 

the financial health of our healthcare customers and budgetary constraints on their ability to purchase security and productivity information technology solutions;

 

changes in the regulatory environment affecting our healthcare customers, including impediments to their ability to obtain third-party reimbursement for their services;

 

our ability to develop and introduce new solutions and products and enhance existing solutions that achieve market acceptance;

 

the procurement and deployment cycles of our healthcare customers and the length of our sales cycles;

 

our ability to forecast demand and manage lead times for the manufacture of hardware used in our solutions;

 

the mix of our product and service revenue and pricing, including discounts by us or our competitors; and

 

the timing of when orders are received, fulfilled and revenue is recognized.

The resulting variability and unpredictability could result in our failure to meet our operating plan or the expectations of investors or analysts for any period. If we fail to meet such expectations for these or other reasons, the market price of our common stock may decline.

If we are unable to maintain successful relationships with our channel partners and technology alliance partners, our ability to market, sell and distribute our solutions will be limited and our business, financial condition and results of operations could be adversely affected.

In addition to our direct sales force, we rely on our sales partners, consisting of our channel partners and technology alliance partners, to sell our solutions. We derive a substantial portion of our revenue from sales of our products and services through our sales partners, and we expect that sales through sales partners will continue to be a significant percentage of our revenue. For the six months ended June 30, 2016 and 2015, 20% and 8%, respectively, of our total revenues were derived from our largest sales partner.

Our agreements with our sales partners are generally non-exclusive, meaning our sales partners may offer their customers products and services from several different companies, including products and services that compete with ours. We depend on channel partners to supplement our direct sales organization within the United States and internationally. If our channel partners do not effectively market and sell our products and services, choose to use greater efforts to market and sell their own products and services or those of our competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our products and services may be adversely affected. Our channel partners may cease marketing our products and services with limited or no notice and with little or no penalty, and they have no obligation to renew their agreements with us on commercially reasonable terms, or at all. The loss of a substantial number of our channel partners, our possible inability to replace them, or the failure to recruit additional channel partners could materially and adversely affect our results of operations. New channel partners require extensive training and may take several months or more to achieve productivity for us. Our channel partner structure could also subject us to lawsuits or reputational harm if, for example, a channel partner misrepresents the functionality of our platform to customers or violates applicable laws or our corporate policies applicable to the partner. We work with our technology alliance partners to design go-to-market strategies that combine our solutions with products or services provided by our technology alliance partners. The loss of a technology

37


 

alliance partner may mean that certain of our solutions that were designed to interoperate with the products or services provided by the technology alliance partner may no longer function as intended and require substantial re-engineering or the development of new solutions and products. 

Our ability to generate revenue in the future will depend in part on our success in maintaining effective working relationships with our sales partners, in expanding our indirect sales channel, in training our channel partners to independently sell and deploy our solutions and in continuing to integrate our solutions with the products and services offered by our technology alliance partners. If we are unable to maintain our relationships with these sales partners, our business, financial condition and results of operations could be adversely affected.

We depend on sole source suppliers and a contract manufacturer for hardware components of our solutions. If we are unable to source our components from them or effectively forecast our customer demand to properly manage our inventory, our business and operating results could be adversely affected.

We depend on sole source suppliers for hardware components of our solutions. We rely upon Cross Match Technologies, Inc. as the only provider of our fingerprint readers used in our Imprivata OneSign solution, which we purchase from Avnet, Inc. on a purchase order basis. We do not have the benefit of a long-term supply agreement or supply commitment. We currently purchase all of our proximity cards used in our Imprivata OneSign solution from RF IDeas, Inc., or RF IDeas. We believe alternative sources of proximity cards are available. We rely on Fujitsu Computer Products of America, Inc., or Fujitsu, as the only provider of our palm-vein readers used in our Imprivata PatientSecure solution. In addition, we depend on a contract manufacturer to produce certain other hardware components for our solutions. Our agreements with RF IDeas, Fujitsu and our contract manufacturer renew automatically on an annual basis. These agreements do not contain supply commitments. As a result, we cannot assure you that our suppliers and contract manufacturer will be able to meet our requirements, which could adversely affect our business and operating results.

Any of these suppliers or contract manufacturer could cease production of our components, experience capacity constraints, material shortages, work stoppages, financial difficulties, cost increases or other reductions or disruptions in output, cease operations or be acquired by, or enter into exclusive arrangements with, a competitor. These suppliers and contract manufacturer typically rely on purchase orders rather than long-term contracts with their suppliers. As a result, even if available, an affected supplier or contract manufacturer may not be able to secure sufficient materials at reasonable prices or of acceptable quality to build our components in a timely manner, forcing us to seek components from alternative sources, which may not have the required specifications, or be available in time to meet demand or on commercially reasonable terms, if at all.

We also place orders with our suppliers and contract manufacturer for our inventory based on forecasts of customer demand. Our forecasts are based on multiple assumptions, each of which may introduce errors into our estimates affecting our ability to meet our customers’ demands for our solutions or manage our inventory effectively. We may also be forced to redesign our solutions if a component becomes unavailable in order to incorporate a component from an alternative source, which may increase the cost of providing our solutions. Any of these circumstances could cause interruptions or delays in the delivery of our solutions to our customers, and could adversely affect our business and operating results.

Our use of third-party off-shore development providers could have a material adverse effect on our business, financial condition and results of operations.

Since 2006, we have relied upon a third-party development provider in Lviv, Ukraine to assist with software development, quality assurance, testing and automation to reduce costs and to meet our customers’ needs in a timely manner. These services are performed pursuant to statements of work under a master services agreement. The development provider may terminate its agreement with us without cause with 60 days’ notice, unless a statement of work is in progress. While they have been dependable in the past, we have less control over the development provider’s performance than if it was comprised of our employees or if the development provider was located in the United States. As a result, we are subject to the risk that the development provider will not perform as anticipated. Furthermore, in recent periods, Ukraine has experienced military action, civil unrest and political and economic uncertainties. The evolving economic, political and social developments in Ukraine may materially and adversely affect the operations of the development provider in ways beyond their control and may constrain our ability to assert or defend our contractual or other legal rights relating to our relationship with the development provider and its handling of our intellectual property.

Since June of 2014, we have also relied upon a third-party developer in Buenos Aires, Argentina to assist with software development, quality assurance, testing and automation to reduce costs and to meet our customers’ needs in a timely manner. These services are performed pursuant to statements of work under a master services agreement. The development provider may terminate its agreement with us without cause with 30 days’ notice, unless a statement of work is in progress. We have less control over the development provider’s performance than if it was comprised of our employees or if the development provider were located in the United States.

If we are unable to rely upon either of these development providers for the reasons stated above or for other reasons, we may be required to shift development projects to our employees or to one or more other independent contractors. As a result, we may face

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increased costs and delays in our ability to introduce new solutions or products or provide services. These risks could have a material adverse effect on our business, financial condition and results of operations. 

If we are not able to manage our growth effectively, or if our business does not grow as we expect, our operating results will be adversely affected.

We have experienced significant revenue growth in recent periods. For example, our revenue increased from $22.0 million for the year ended December 31, 2009 to $119.1 million for the year ended December 31, 2015. During this period, we significantly expanded our operations and increased the number of our employees from 105 at December 31, 2008 to 471 at June 30, 2016. Our rapid growth has placed, and will continue to place, a significant strain on our management systems, infrastructure and other resources. We plan to hire additional direct sales and marketing personnel domestically and internationally, increase our investment in research and development and acquire complementary businesses, technologies or assets. Our future operating results depend to a large extent on our ability to successfully implement these plans and manage our anticipated expansion. To do so successfully we must, among other things:

 

manage our expenses in line with our operating plans and current business environment;

 

maintain and enhance our operational, financial and management controls, reporting systems and procedures;

 

develop and deliver new solutions and enhancements to existing solutions efficiently and reliably;

 

manage operations in multiple locations and time zones; and

 

integrate acquired businesses, technologies or assets.

We expect to incur costs associated with the investments made to support our growth before the anticipated benefits or the returns are realized, if at all. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new solutions or enhancements to existing solutions. We may also fail to satisfy customer requirements, maintain quality, execute our business plan or respond to competitive pressures, which could adversely affect our operating results.

Changes in renewal rates in our software maintenance contracts may not be immediately reflected in our operating results.

We generally recognize revenue from our software maintenance contracts ratably over the contract term. A portion of the maintenance revenue we report in each year is derived from the recognition of deferred revenue relating to software maintenance contracts entered into during previous years. In each of the years ended December 31, 2015, 2014, and 2013, and the six months ended June 30, 2016, we retained greater than 90% of the aggregate dollar amount of our software maintenance contracts up for renewal. Consequently, a decline in renewed software maintenance by our customers in any one quarter may not be immediately reflected in our revenue for that quarter. Such a decline, however, will adversely affect our revenue in future quarters. Accordingly, the effect of significant downturns in our rate of renewals may not be fully reflected in our operating results until future periods.

We primarily operate in the rapidly evolving and highly competitive healthcare market, and if we fail to effectively respond to competitive pressures, our business, financial condition and operating results could be adversely affected.

The market for security and productivity information technology solutions within the healthcare market is highly fragmented, consisting of a significant number of vendors that is rapidly changing. Competition in our market is primarily based on:

 

brand awareness and reputation;

 

breadth of our solutions set and ease of implementation, use and management;

 

breadth of product distribution;

 

strategic relationships and ability to integrate with software and device vendors; and

 

product innovation and ability to meet customer needs.

We believe our primary competitor in the healthcare industry in which our Imprivata OneSign solution competes is Caradigm USA LLC, a wholly owned affiliate of GE Healthcare. We expect competition to intensify in the future with existing competitors and market entrants. Our competitors in the healthcare market for authentication and access management solutions include large, multinational companies with significantly more resources to dedicate to product development and sales and marketing. These companies may have existing relationships within healthcare organizations, which may enhance their ability to gain a foothold in our market. Customers may prefer to purchase a more highly integrated or bundled solution from a single provider or an existing supplier rather than a separate supplier, regardless of performance or features. Increased competition may result in additional pricing pressure, reduced profit margins, higher sales and marketing expenses, lower revenue and the loss of market share, which could adversely affect our business, financial condition and operating results.

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Our Imprivata Cortext solution competes in the market for secure communications in the healthcare market. Our Imprivata Confirm ID solution competes in the market for electronic prescribing of controlled substances. Our Imprivata PatientSecure solution competes in the market for biometric positive patient identification in the healthcare market. These markets are highly fragmented, consisting of a large number of rapidly changing vendors. We believe our primary competitor in secure communications in the healthcare market is TigerText. We expect competition to intensify in the future with existing competitors and market entrants in each of the markets in which our Imprivata Cortext, Imprivata Confirm ID and Imprivata PatientSecure solutions compete. As in the healthcare market for authentication and access management solutions, competitors in these markets include large, multinational companies with significantly more resources to dedicate to product development and sales and marketing.

Industry consolidation or new market entrants may result in increased competitive pressure, which could result in the loss of customers or a reduction in revenue.

Some of our competitors have made or may make acquisitions or may enter into partnerships or other strategic relationships to offer more comprehensive services than they individually had offered or achieve greater economies of scale. We expect these trends to continue as companies attempt to strengthen or maintain their market positions. For example, potential entrants not currently considered to be our competitors, such as providers of electronic health record systems, may enter our market by acquiring or developing their own access or authentication management solutions. In addition, providers of authentication and access management solutions, such as CA, Inc., International Business Machines Corporation, Oracle Corporation and Novell, Inc., may enter the healthcare market. Such potential entrants, if they enter the healthcare market for authentication and access management solutions, may have competitive advantages over us, such as greater name recognition, longer operating histories, more varied services and larger marketing budgets, as well as greater financial, technical and other resources. The companies resulting from combinations or that expand or vertically integrate their business to include the authentication and access management market that we address may create more compelling service offerings and may offer greater pricing flexibility than we can or may engage in business practices that make it more difficult for us to compete effectively, including on the basis of price, sales and marketing programs, technology or service functionality. These pressures could result in a substantial loss of our customers, which may have a material adverse effect on our business, financial condition and operating results.

Our success depends upon our ability to attract, integrate and retain key personnel, and our failure to do so could adversely affect our ability to grow our business.

Our success depends, in part, on the services of our senior management and other key personnel, and our ability to continue to attract, integrate and retain highly skilled personnel, particularly in engineering, sales and marketing. Competition for highly skilled personnel is intense. If we fail to attract, integrate and retain key personnel, our ability to grow our business could be adversely affected.

The members of our senior management and other key personnel are at-will employees, and may terminate their employment at any time without notice. If they terminate their employment, we may not be able to find qualified individuals to replace them on a timely basis or at all and our senior management may need to divert their attention from other aspects of our business. Former employees may also become employees of a competitor. We may also have to pay additional compensation to attract and retain key personnel. We also anticipate hiring additional engineering, marketing and sales, and services personnel to grow our business. Often, significant amounts of time and resources are required to recruit and train these personnel. We may incur significant costs to attract, integrate and retain them, and we may lose them to a competitor or another company before we realize the benefit of our investments in them.

Our current executive officers are critical to our success and the loss of any of these individuals, or other key personnel, could harm our business and brand image.

We are heavily dependent upon the contributions, talent and leadership of our current executive officers. The loss of any executive officers or the inability to attract or retain qualified executive officers could delay the development and introduction of, and harm our ability to sell our products and damage our brand, which could have a material adverse effect on our results of operations. On May 27, 2016, Thomas Brigiotta, our Senior Vice President, Worldwide Sales, announced that he was resigning from this position effective August 5, 2016. We have not yet named a new Senior Vice President, Worldwide Sales, and cannot assure that we will find a qualified replacement in a timely manner. We cannot be certain that this change in management, operating without a Senior Vice President, Worldwide Sales after August 5, 2016 and until we find a qualified replacement, or any additional change that may come as we select a new Senior Vice President, Worldwide Sales, will not negatively affect our business and operations. Our future success also depends on our ability to attract and retain additional qualified design and marketing personnel. We face significant competition for these individuals worldwide and we may not be able to attract or retain these employees. Any failure to attract and retain qualified personnel could harm our business and brand image.

 

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If we do not achieve the anticipated strategic or financial benefits from our acquisitions, or if we cannot successfully integrate them, our business and operating results could be adversely affected.

On April 30, 2015, we acquired our Imprivata PatientSecure solution when we consummated the acquisition of HT Systems, LLC. In the future we may acquire additional businesses, technologies or assets that we believe to be complementary or strategic. We may not achieve the anticipated strategic or financial benefits, or be successful in integrating HT Systems, LLC or other acquired businesses, technologies or assets. If we cannot effectively integrate newly-acquired technologies and solutions and successfully market and sell these new product offerings, we may not achieve market acceptance for, or significant revenue from, these new technologies and solutions.

Integrating newly-acquired businesses, technologies and assets could strain our resources, could be expensive and time consuming, and might not be successful. If we acquire or invest in additional businesses, technologies or assets, we will be further exposed, to a number of risks, including that we may:

 

experience technical issues as we integrate acquired businesses, technologies or assets into our existing solutions;

 

encounter difficulties leveraging our existing sales and marketing organizations, and sales channels, to increase our revenue from acquired businesses, technologies or assets;

 

find that the acquiree’s customers choose not to do business with us;

 

find that the acquisition does not further our business strategy, that we overpaid for the acquisition or that the economic conditions underlying our acquisition decision have changed;

 

have difficulty retaining the key personnel of acquired businesses;

 

suffer disruption to our ongoing business and diversion of our management’s attention as a result of the negotiation of any acquisition as well as related transition or integration issues and the challenges of managing geographically or culturally diverse enterprises; and

 

experience unforeseen and significant problems or liabilities associated with quality, technology and legal contingencies relating to the acquisition, such as intellectual property or employment matters.

In addition, from time to time we may enter into negotiations for acquisitions that are not ultimately consummated. These negotiations could result in significant diversion of management time, as well as substantial out-of-pocket costs. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash. To the extent we issue shares of capital stock or other rights to purchase capital stock, including options and warrants, the ownership of existing stockholders would be diluted. In addition, acquisitions may result in the incurrence of debt, contingent liabilities, write-offs or other unanticipated costs, events or circumstances, any of which adversely affect our business and operating results.

The software and hardware contained in our solutions are complex and may contain undetected errors that could have a material adverse effect on our business, financial condition and operating results.

Our solutions incorporate complex technology, are used in a variety of healthcare settings and must interoperate with many different types of complex devices and information technology systems. While we test our solutions for defects and errors prior to release, we or our customers may not discover a defect or error until after we have deployed our solutions and our customers have commenced general use of the solution. If we cannot successfully integrate our authentication, access management and secure communication solutions with health information systems as needed or if any hardware or software of these health information systems contains any defect or error, then our solutions may not perform as designed, or may exhibit a defect or error.

Any defects or errors in, or which are attributed to, our solutions, could result in:

 

delayed market acceptance of our affected solutions;

 

loss of customers or inability to attract new customers;

 

diversion of engineering or other resources for remedying the defect or error;

 

damage to our brand and reputation;

 

increased service and warranty costs;

 

legal actions by our customers or third parties, including product liability claims; and

 

penalties imposed by regulatory authorities.

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Our solutions are utilized by clinicians in the course of providing patient care. It is possible that our healthcare customers may allege we are responsible for harm to patients or clinicians due to defects in, the malfunction of, the characteristics of, or the use of, our solutions. In addition, because our customers rely on our solutions to access health records and to prevent unauthorized access to protected health information, or PHI, a malfunction or design defect in one or more of our products could result in legal or warranty claims against us for damages resulting from security breaches. Although our customer agreements contain disclaimers of liability that are intended to reduce or eliminate our potential liability, we could be required to spend significant amounts of management time and resources to defend ourselves against product liability, tort, warranty or other claims. Additionally, the possible publicity associated with any such claim, whether or not decided against us, could adversely affect our reputation. If any such claims were to prevail, we could be forced to pay damages or stop distributing our solutions. Even if potential claims do not result in liability to us, investigating and defending against these claims could be expensive and time consuming and could divert management’s attention away from our business. We maintain general liability insurance coverage, including coverage for errors and omissions; however, this coverage may not be sufficient to cover large claims against us or otherwise continue to be available on acceptable terms. Further, the insurer could attempt to disclaim coverage as to any particular claim. Such circumstances could have a material adverse effect on our business, financial condition and results of operations.

The market for biometric technology is still developing. There can be no assurance that Imprivata PatientSecure solution will be successful.

The market for Imprivata PatientSecure, our positive patient identification solution using biometric technology, is still developing. The evolution of this market may result in the development of different technologies and industry standards that are not compatible with our current solutions, products or technologies. Several organizations set standards for biometrics to be used in identification and documentation. Although we believe that our biometric technologies comply with existing standards, these standards may change and any standards adopted could prove disadvantageous to or incompatible with our business model and current or future solutions, products and services. If the biometrics industry adopts standards or a platform different from the one we use in our solution, then our competitive position would be adversely affected.

Although the recent appearance of biometric readers on popular consumer products, such as smartphones, has increased interest in biometrics as a means of identifying individuals, the market for biometric technology remains a developing and evolving market. Acceptance of biometrics as an alternative to traditional methods of identifying patients depends upon a number of factors including: the performance and reliability of biometric solutions; costs involved in adopting and integrating biometric solutions; public perception regarding privacy concerns; and potential privacy legislation. For these reasons, we are uncertain whether our biometric technology will gain widespread acceptance in the healthcare market. Even if there is significant demand, there can be no assurance that our solution will achieve market acceptance or be successful.

Our international operations subject us, and may increasingly subject us in the future, to operational, financial, economic and political risks abroad, which could have a material adverse effect on our business, financial condition and results of operations.

Although we currently derive a relatively small portion of our revenue from customers outside of the United States, a key element of our growth strategy is to expand internationally. Our international expansion efforts might not be successful in creating demand for our products and services or in effectively selling our solutions in the international markets we enter. In addition, we will face risks in doing business internationally that could adversely affect our business, including:

 

difficulties integrating our solutions with information technology systems and processes with which we do not have experience;

 

political and economic instability in, or foreign conflicts that involve or affect, the countries where we operate and sell our solutions;

 

difficulties in staffing and managing personnel and sales partners;

 

the need to comply with a wide variety of foreign laws and regulations, including privacy and security regulations, requirements for export controls for encryption technology, employment laws, changes in tax laws and tax audits by government agencies;

 

competitors who are more familiar with local markets;

 

challenges associated with delivering services, training and documentation in foreign languages;

 

difficulties in collecting accounts receivable and longer accounts receivable payment cycles; and

 

limited or unfavorable intellectual property protection in some countries.

In addition, as we continue to expand our international operations, we have become more exposed to the effects of fluctuations in currency exchange rates. We incur expenses for employee compensation and other operating expenses at our international locations and accept payment from customers in the local currency. Since we conduct business in currencies other than the U.S. dollar but report

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our operating results in U.S. dollars, we have exposure to fluctuations in currency exchange rates. We do not currently hedge against the risks associated with currency fluctuations but may do so in the future. 

Any of these factors could harm our existing international business and operations, and have a material adverse effect on our business, financial condition and results of operations.

Risks posed by sales to foreign government-operated healthcare organizations could have a material adverse effect on our revenues and operating results.

We expect to continue to derive a substantial portion of our international revenues from foreign government-operated healthcare organizations. Sales to governmental entities present risks in addition to those involved in sales to commercial customers, including potential disruption due to changes in appropriation and spending patterns, delays in budget approvals and exposure to penalties in the event of violations of the Foreign Corrupt Practices Act or other anti-bribery laws. General political and economic conditions, which we cannot accurately predict, directly and indirectly may affect the quantity and allocation of expenditures by governmental entities. In addition, obtaining government contracts may involve long purchase and payment cycles, competitive bidding, qualification requirements, delays or changes in funding, budgetary constraints, political agendas, extensive specification development and price negotiations and milestone requirements. In general, each governmental entity also maintains its own rules and regulations with which we must comply and which can vary significantly among departments. These factors may result in cutbacks or re-allocations in the budget or losses of government sales, which could have a material adverse effect on our revenues and operating results.

If we fail to offer services that are satisfactory to our customers, our ability to sell our solutions will be adversely affected.

Our ability to sell our solutions is dependent upon our ability to provide high-quality services and support. Our services team assists our customers with their clinical workflow design, authentication and access management solution configuration, training and project management during the pre-deployment and deployment stages. Once our solutions are deployed within a customer’s facility, the customer typically depends on our services team to help resolve technical issues, assist in optimizing the use of our solutions and facilitate adoption of new functionality. For instance, a substantial proportion of our customers in the United States rely on our Imprivata OneSign solution as a means to access their electronic health record, or EHR, systems that they implement to meet regulatory standards for adoption, or “meaningful use,” of EHR technologies. If our solutions do not adequately facilitate our customers’ attainment of meaningful use requirements as defined by the relevant regulatory authorities and interpreted by our customers, or if deployment of our solutions is unsatisfactory, we may incur significant costs to attain and sustain customer satisfaction. As we hire new services personnel, we may inadvertently hire underperforming people who will have to be replaced, or fail to effectively train such employees. If we do not effectively assist our customers in deploying our solutions, succeed in helping our customers resolve technical and other post-deployment issues, or provide effective ongoing services, our ability to expand the use of our solutions with existing customers and to sell our solutions to new customers will be harmed. In addition, the failure of channel partners to provide high-quality services in markets outside of the United States could adversely affect sales of our solutions internationally.

We face potential liability related to the privacy and security of protected health information accessed or collected through our solutions.

Our customers who use our Imprivata OneSign solution handle, access or store PHI, in the ordinary course of their business. In the United States, the manner in which these customers manage PHI is subject to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH Act, the health data privacy, security and breach notification regulations issued pursuant to these statutes, in addition to state privacy, security and breach notification laws and regulations applicable to such health information. These customers rely on our Imprivata OneSign solution as a tool to facilitate their compliance with applicable health data privacy and security standards. Specifically, HIPAA-covered health care providers are required to implement technical data security safeguards, certain of which are supported by Imprivata OneSign. The failure of our Imprivata OneSign solution to perform an essential function for which it was designed could result in a breach of our obligations under our customer contracts, which could result in monetary damages, adverse publicity, and have an adverse impact on our business.

We also directly handle, access or store PHI in connection with our commercial solutions, such as our Imprivata Cortext solution, which is a secure, cloud-based communication platform that provides healthcare organizations and healthcare providers with secure texting and messaging capabilities. Although we are transmitting and storing PHI in encrypted format for such customers, and do not, in the ordinary course of our business, require access to such PHI, we are deemed to be a “business associate” of such customers and as such are directly subject to certain HIPAA and HITECH Act requirements as well as contractual obligations that may be imposed by our customers pursuant to their HIPAA and HITECH Act requirements. These statutes, regulations and contractual obligations impose numerous requirements regarding the use and disclosure of PHI. Our failure to effectively implement the required or addressable health data privacy and security safeguards and breach notification procedures, our failure to accurately anticipate the application or interpretation of these statutes, regulations and contractual obligations as we develop our solutions or an allegation that

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defects in our products have resulted in noncompliance by our customers could result in a breach of our contractual obligations to our customers, or create material civil and/or criminal liability for us, which could result in adverse publicity and have a material adverse effect on our business. 

In addition to complying with applicable U.S. law, the use and disclosure of PHI is subject to regulation in other jurisdictions in which we do business or may do business in the future. Those jurisdictions may attempt to apply such laws extraterritorially or through treaties or other arrangements with U.S. governmental entities. In particular, the European Union Directive 95/46/EC (the “Directive”) governs the processing and export from the European Economic Area (“EEA”) of personal data of persons in the EEA (“Personal Data”) to countries outside the EEA such as the United States.  These limitations are particularly restrictive for “sensitive” data, which includes health information.  We have self-certified adherence to the Safe Harbor Privacy Principles, a framework for the lawful export of personal data from the EEA to the US, as agreed to and set forth by the U.S. Department of Commerce and the European Union.  However, as a result of an opinion issued by the European Union Court of Justice (the EU’s highest court, the “ECJ”) on October 6, 2015, Safe Harbor is no longer deemed to be a valid method of export from the EU to the United States.

 

On July 12, 2016 the United States and the EU reached agreement on a successor framework to the Safe Harbor, the EU-U.S. “Privacy Shield.”  Privacy Shield is designed to heighten protections for transferring EU residents’ Personal Data to the U.S.  Although Privacy Shield continues to rely on the concept of enforceable self-certification to assure adequate protection, it imposes significantly greater obligations on organizations and their vendors than those that existed under Safe Harbor.  During negotiation of Privacy Shield, several organs of EU government criticized the original proposal.  Although some changes were made in adopting the final Privacy Shield framework, many of these criticisms were not accommodated.  It seems highly likely that Privacy Shield will soon be challenged judicially, and in due course will be scrutinized by the ECJ.  It is impossible to predict the outcome of that ECJ decision, and it is likely that many months will pass before any definitive guidance is provided.  We believe that Privacy Shield will remain a valid basis for export from the EEA to the US at least until that time.

 

We are monitoring the evolution of the requirements for compliance, which may impact our ability to offer certain of our solutions to customers outside of the United States in the future. Alternatively, we may find it necessary to establish systems in the EEA to facilitate compliance, which may involve additional expense and may cause us to divert resources from other aspects of our business, all of which may adversely affect our business.  

Although we work to comply with the federal, state and foreign laws and regulations, industry standards and other legal obligations that apply to us, we might unintentionally violate such laws, such laws may be modified and new laws may be enacted in the future which may increase the chance that we violate them. Any such developments, or developments stemming from enactment or modification of other laws, or the failure by us to comply with their requirements or to accurately anticipate the application or interpretation of these laws, could discourage us from offering certain of our solutions, such as Imprivata Cortext, to customers outside of the United States, and could create material liability to us, result in adverse publicity and adversely affect our business. A finding that we have failed to comply with applicable laws and regulations regarding the collection, use and disclosure of PHI could create liability for us, result in adverse publicity and materially adversely affect our business.

In addition, the costs of compliance with, and the other burdens imposed by, these and other laws or regulatory actions may prevent us from selling our solutions or increase the costs associated with selling our solutions, and may affect our ability to invest in or jointly develop solutions in the United States and in foreign jurisdictions. Further, we cannot assure you that our privacy and security policies and practices will be found sufficient to protect us from liability or adverse publicity relating to the privacy and security of PHI.

Fluctuating economic conditions could have a material adverse effect on our business, financial condition and results of operations.

Our revenue depends significantly on general economic conditions and the demand for our authentication, access management and secure communication solutions in the healthcare market. Our healthcare customers may experience declining revenues from the decreased utilization of healthcare services and diminishing margins due to impediments in obtaining third-party reimbursement and patient payments. These factors may result in constrained spending on such solutions. General economic weakness may also lead to longer collection cycles for payments due from our customers, an increase in customer bad debt, restructuring initiatives and associated expenses, and impairment of investments. Uncertainty about future economic conditions also makes it difficult to forecast operating results and to make decisions about future investments. Such factors could make it difficult to accurately forecast our sales and operating results and could adversely affect our ability to provide accurate forecasts to our suppliers and contract manufacturer and manage our supplier and contract manufacturer relationships and other expenses. Economic weakness faced by us or our customers, failure of our customers and markets to recover from such weakness, customer financial difficulties, and reductions in spending on information technology products and services could have a material adverse effect on demand for our solutions and consequently on our business, financial condition and results of operations.

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The market size estimates we have provided publicly may prove to be inaccurate and may not be indicative of our future growth.

Because of rapid and significant technological changes in the market for security and productivity IT in the healthcare industry, it is difficult to predict the size of the market and the rate at which the market for our solutions and services will grow or be accepted. While the estimates of the total available market we have provided publicly are made in good faith and are based on assumptions and estimates we believe to be reasonable, these estimates may not prove to be accurate. This is particularly the case with respect to estimating the size of the international component of the market.

Our Imprivata Cortext solution uses a third-party data service provider for web hosting services. Any operational delay or failure of our Imprivata Cortext solution could expose us to litigation, harm our relationships with customers and have a material adverse effect on our brand and our business.

Our Imprivata Cortext solution utilizes a cloud-based third-party data service provider for web hosting services. We exercise limited control over this third-party data service provider, which increases our vulnerability with respect to the technology and information services it provides. In addition, if we are unable to renew the agreement with the third-party data service provider on commercially reasonable terms, we may be required to transfer our services to new data service providers and we may incur significant costs and possible service interruption in connection with doing so. Our Imprivata Cortext solution provides communication and information to assist healthcare organizations. Any operational delay or failure of our Imprivata Cortext solution might result in the disruption of patient care and could harm our relationships with customers, expose us to litigation or have a material adverse effect on our brand and our business.

We anticipate that sales of our Imprivata Confirm ID solution will be driven primarily by legislation requiring that prescriptions be sent electronically. Failure or delay in the enactment of such laws could cause sales of our Imprivata Confirm ID to be adversely affected.

Our Imprivata Confirm ID solution simplifies healthcare providers’ compliance with laws requiring electronic prescriptions of controlled substances, or EPCS, and helps healthcare providers address workflow inefficiencies and the potential for fraud associated with paper-based prescriptions. Consequently, we anticipate that sales of Imprivata Confirm ID will be driven primarily by state and federal mandates requiring that prescriptions be sent electronically. For example, New York’s I-STOP law mandates that all patient medications be prescribed electronically. The deadline for prescribers to comply with I-STOP was March 27, 2016. If other states fail to enact legislation requiring that prescriptions be sent electronically or if existing requirements for electronic prescriptions are scaled-back, our ability to sell Imprivata Confirm ID solution may be adversely affected.

The mix of revenue from sales of our subscription-based products and our perpetual software products may result in revenue fluctuations, which may make our quarterly results difficult to predict, cause us to miss analyst expectations, and cause the price of our common stock to decline.

The timing of revenue recognition for our products licensed on a perpetual basis will differ in the event our customers elect to purchase both perpetual and subscription-based products together. Revenue for our perpetual software products is generally recognized upon shipment. If our perpetual software products are sold in a multiple element arrangement with subscription-based products, the revenue associated with the perpetual license will likely be recognized over the period of the subscription to the extent we are unable to determine the vendor specific objective evidence of fair value of undelivered software products. As a result, our revenue and operating results may be difficult to predict, and are likely to fluctuate based on factors, many of which are outside of our control. The resulting variability and unpredictability could result in our failure to meet the expectations of investors or analysts for any period, which could cause the price of our common stock to decline.

If we are required to collect sales and use or similar foreign taxes in additional jurisdictions, we might be subject to liability for past sales and our future sales may decrease.

We might lose sales or incur significant expenses if states or foreign jurisdictions successfully impose broader guidelines on state sales and use or similar foreign taxes. A successful assertion by one or more states or foreign jurisdictions requiring us to collect sales or other taxes on the licensing of our solutions or sale of our services could result in substantial tax liabilities for past transactions and otherwise harm our business. Each state or foreign jurisdiction has different rules and regulations governing sales and use or similar foreign taxes, and these rules and regulations are subject to varying complex interpretations that change over time. We review these rules and regulations periodically and, when we believe we are subject to sales and use or similar foreign taxes in a particular state or foreign jurisdiction, engage tax authorities in order to determine how to comply with their rules and regulations. We cannot assure you that we will not be subject to sales and use or similar taxes or related penalties for past sales in states or foreign jurisdictions where we currently believe no such taxes are required.

Vendors of solutions and services, like us, are typically held responsible by taxing authorities for the collection and payment of any applicable sales and similar taxes. If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our services, we might be liable for past taxes in addition to taxes going forward. Liability for past taxes might also include

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substantial interest and penalty charges. Our customer contracts typically provide that our customers must pay all applicable sales and similar taxes. Nevertheless, our customers might be reluctant to pay back taxes and might refuse responsibility for interest or penalties associated with those taxes. If we are required to collect and pay back taxes and the associated interest and penalties, and if our clients fail or refuse to reimburse us for all or a portion of these amounts, we will incur unplanned expenses that may be substantial. 

Moreover, imposition of such taxes on us going forward will effectively increase the cost of our solutions and services to our customers and might adversely affect our ability to retain existing customers or to gain new customers in the areas in which such taxes are imposed.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. If we undergo an ownership change, our ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we attain profitability.

Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by man-made problems such as power disruptions or terrorism.

A significant natural disaster, such as an earthquake, fire or a flood, occurring at our headquarters, our other facilities or where our contract manufacturer or its suppliers are located, could harm our business, operating results and financial condition. In addition, acts of terrorism could cause disruptions in our business, the businesses of our customers and suppliers, or the economy as a whole. We also rely on information technology systems to communicate among our workforce located worldwide, and in particular, our senior management, general and administrative, and research and development activities, which are coordinated with our corporate headquarters in the Boston, Massachusetts area and our Santa Cruz, California, San Francisco, California, Tampa, Florida and Uxbridge, United Kingdom offices. Any disruption to our internal communications, whether caused by a natural disaster or by man-made problems, such as power disruptions, could delay our research and development efforts, cause delays or cancellations of customer orders or delay deployment of our solutions, which could have a material adverse effect on our business, operating results and financial condition.

Our loan agreement contains operating and financial covenants that may restrict our business and financing activities.

We are party to a loan and security agreement relating to a revolving line of credit facility with Silicon Valley Bank. Borrowings under this loan and security agreement are secured by substantially all of our assets. Our loan and security agreement restricts our ability to:

 

incur additional indebtedness;

 

redeem subordinated indebtedness;

 

create liens on our assets;

 

enter into transactions with affiliates;

 

make investments;

 

sell assets;

 

make material changes in our business or management;

 

pay dividends, other than dividends paid solely in shares of our common stock, or make distributions on and, in certain cases, repurchase our stock; or

 

consolidate or merge with other entities.

In addition, our revolving line of credit requires us to maintain specified adjusted quick ratio tests. The operating and financial restrictions and covenants in the loan and security agreement governing our revolving line of credit, as well as any future financing agreements that we may enter into, may restrict our ability to finance our operations, engage in business activities or expand or fully pursue our business strategies. Our ability to comply with these covenants may be affected by events beyond our control, and we may not be able to meet those covenants. A breach of any of these covenants could result in a default under the loan and security

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agreement, which could cause all of the outstanding indebtedness under the facility to become immediately due and payable and terminate all commitments to extend further credit. 

If we are unable to generate sufficient cash available to repay our debt obligations when they become due and payable, either when they mature or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively impact our ability to continue as a going concern.

Risks related to our intellectual property

If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.

Our success depends, in part, on our ability to protect our proprietary technology. We seek to protect our proprietary technology through patent, copyright, trade secret and trademark laws in the United States and similar laws in other countries. We also seek to protect our proprietary technology through licensing agreements, nondisclosure agreements and other contractual provisions. These protections may not be available in all cases or may be inadequate to prevent our competitors from copying, reverse engineering or otherwise obtaining and using our technology, proprietary rights or solutions in an unauthorized manner. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. In addition, third parties may seek to challenge, invalidate or circumvent our patents, trademarks, copyrights and trade secrets, or applications for any of the foregoing. Our competitors may independently develop technologies that are substantially equivalent, or superior, to our technology or design around our proprietary rights. In each case, our ability to compete could be significantly impaired.

To prevent unauthorized use of our intellectual property rights, it may be necessary to prosecute actions for infringement or misappropriation of our proprietary rights. Any such action could result in significant costs and diversion of our resources and management’s attention, and there can be no assurance that we will be successful in such action. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing or misappropriating our intellectual property. While we plan to continue to seek to protect our intellectual property with, among other things, patent protection, there can be no assurance that:

 

current or future U.S. or foreign patent applications will be approved;

 

our issued patents will adequately protect our intellectual property and not be held invalid or unenforceable if challenged by third parties;

 

we will succeed in protecting our technology adequately in all key jurisdictions in which we or our competitors operate; and

 

others will not design around any patents that may be issued to us.

Our failure to obtain patents sufficiently broad to cover our technology and possible workarounds, or the invalidation of our patents, or our inability adequately to protect our intellectual property, may weaken our competitive position and harm our business and operating results. We might be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may harm our business, operating results and financial condition.

Agreements we have with our employees, consultants and independent contractors may not afford adequate protection for our trade secrets, confidential information and other proprietary information.

In addition to patent protection, we also rely on copyright and trademark protection, trade secrets, know-how, continuing technological innovation and licensing opportunities. In an effort to maintain the confidentiality and ownership of our trade secrets and proprietary information, we require our employees, consultants and independent contractors to execute confidentiality and proprietary information agreements. However, these agreements may not provide us with adequate protection against improper use or disclosure of confidential information and available remedies in the event of unauthorized use or disclosure may not be adequate. The failure by employees, consultants or independent contractors to maintain the secrecy of our confidential information may compromise or prevent our ability to maintain trade secrets or obtain needed or meaningful patent protection. In some situations, our confidentiality and proprietary information agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or independent contractors have prior employment or consulting relationships. Although we require our employees, consultants and independent contractors to maintain the confidentiality of all proprietary information of their previous employers, these individuals, or we, may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. Finally, others may independently develop substantially equivalent proprietary information and techniques or gain access

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to our trade secrets. Our failure or inability to protect our proprietary information and techniques may inhibit or limit our ability to compete effectively, or exclude certain competitors from the market. 

We may not be able to obtain or maintain necessary licenses of third-party technology on commercially reasonable terms, or at all, which could delay product sales and development and have a material adverse effect on product quality and our ability to compete.

We have incorporated third-party licensed technology into certain of our solutions. We anticipate that we are also likely to need to license additional technology from third parties in connection with the development of new solutions or enhancements in the future.

Third-party licenses may not be available to us on commercially reasonable terms, or at all. The inability to retain any third-party licenses required in our current solutions or to obtain any new third-party licenses to develop new solutions and products could require us to obtain substitute technology of lower quality or performance standards or at greater cost, and delay or prevent us from introducing these solutions or products, any of which could have a material adverse effect on product quality and our ability to compete.

Claims of intellectual property infringement could harm our business.

Vigorous protection and pursuit of intellectual property rights has resulted in protracted and expensive litigation for many companies in our industry. Although claims of this kind have not materially affected our business to date, there can be no assurance such claims will not arise in the future. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, or require us to enter into royalty or licensing agreements, any of which could harm our business and operating results.

Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and we cannot be certain that we will be successful in defending ourselves against intellectual property claims. In addition, we may not be able to effectively utilize our intellectual property portfolio to assert defenses or counterclaims in response to patent infringement claims or litigation brought against us by third parties. Further, litigation may involve patent holding companies or other adverse patent owners who have no relevant products and against whom our potential patents may provide little or no deterrence.

Many potential litigants have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. Furthermore, a successful claimant could secure a judgment that requires us to pay substantial damages or prevents us from distributing certain solutions or performing certain services. We might also be required to seek a license and pay royalties for the use of such intellectual property, which may not be available on commercially acceptable terms or at all. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful.

Our use of open source and non-commercial software components could impose risks and limitations on our ability to commercialize our solutions.

Our solutions contain software modules licensed under open source and other types of non-commercial licenses. We also may incorporate open source and other licensed software into our solutions in the future. Use and distribution of such software may entail greater risks than use of third-party commercial software, as licenses of these types generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some of these licenses require the release of our proprietary source code to the public if we combine our proprietary software with open source software in certain manners. This could allow competitors to create similar products with lower development effort and time and ultimately result in a loss of sales for us.

The terms of many open source and other non-commercial licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our solutions. In such event, in order to continue offering our solutions, we could be required to seek licenses from alternative licensors, which may not be available on a commercially reasonable basis or at all, to re-engineer our solutions or to discontinue the sale of our solutions in the event we cannot obtain a license or re-engineer our solutions on a timely basis, any of which could harm our business and operating results. In addition, if an owner of licensed software were to allege that we had not complied with the conditions of the corresponding license agreement, we could incur significant legal costs defending ourselves against such allegations. In the event such claims were successful, we could be subject to significant damages, be required to disclose our source code, or be enjoined from the distribution of our solutions.

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Risks related to our common stock

We and certain of our executive officers and directors have been named as defendants in a purported securities class action lawsuit, which could cause us to incur substantial costs and divert management's attention, financial resources and other company assets.

In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. This risk is especially relevant for us because technology companies have experienced significant stock price volatility in recent years.  On February 2, 2016, we and certain of our executive officers and directors were named as defendants in a purported securities class action lawsuit.  The complaint, brought on behalf of all persons who purchased our common stock between July 30, 2015 and November 2, 2015, generally alleges that we and such executive officers made false and/or misleading statements about the demand for our IT security solutions and sales trends and failed to disclose facts about our business, operations and performance.  Although we believe this action has no merit and intend to defend it vigorously, this lawsuit and any future lawsuits to which we may become a party are subject to inherent uncertainties and may be expensive and time-consuming to investigate, defend and resolve, and it may divert our management's attention and financial and other resources. The outcome of any litigation is necessarily uncertain, and we could be forced to expend significant resources in the defense of this and other suits, and we may not prevail. Any litigation to which we are a party may result in an onerous or unfavorable judgment that may not be reversed upon appeal or in payments of substantial monetary damages or fines, or we may decide to settle this or other lawsuits on similarly unfavorable terms, any of which could adversely affect our business, financial condition, results of operations or stock price.  See Part II, Item 1. "Legal Proceedings" below for additional information regarding the class action.

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future, and the success of an investment in shares of our common stock will depend upon future appreciation in its value, if any. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders purchased their shares.

Our stock price has been and may continue to be volatile, which may affect the value of your investment.

The market price of shares of our common stock has been, and may continue to be, volatile.  From June 25, 2014 through July 26, 2016, our stock price has traded at prices as low as $9.00 per share and as high as $21.63 per share. The market price of our common stock could continue to fluctuate as a result of many risks listed in this section, and others beyond our control, including:

 

our operating performance and the operating performance of similar companies;

 

the overall performance of the equity markets;

 

announcements by us or our competitors of new products, commercial relationships or acquisitions;

 

threatened or actual litigation;

 

changes in laws or regulations relating to the healthcare industry;

 

any major change in our board of directors or management;

 

publication of research reports or news stories about us, our competitors, or our industry, or positive or negative recommendations or withdrawal of research coverage by securities analysts;

 

large volumes of sales of our shares of common stock by existing stockholders; and

 

general political and economic conditions.

In addition, the stock market in general, and the market for technology companies serving the healthcare industry in particular, has at times experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. While we cannot predict the individual effect that these factors may have on the market price of our common stock, these factors, either individually or in the aggregate, could result in significant volatility in our stock price during any given period of time, and this may make it difficult for you to resell the common stock when you want or at prices you find attractive.

Moreover, securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources, and harm our business, operating results and financial condition.

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Future sales of shares of our common stock by existing stockholders could depress the market price of our common stock.

There are 25,404,522 shares of our common stock outstanding, based on the number of shares outstanding as of June 30, 2016. An aggregate of 1,401,315 shares of our common stock are reserved for future issuance under our stock option plans, and 765,596 shares of our common stock are reserved for future issuance under our ESPP. These shares can be freely sold in the public market upon issuance. In addition, on July 1, 2015, we filed a shelf registration statement on Form S-3 to register the sale of up to 13,395,230 shares of our common stock held by our existing stockholders. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock.  

The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.

Our executive officers, directors, current 5% or greater stockholders and entities affiliated with any of them, together beneficially own 30.2% of our common stock outstanding, based on the number of shares outstanding as of June 30, 2016. These stockholders, if they act together, will have significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and may take actions that may not be in the best interests of our other stockholders. This concentration of ownership could also limit stockholders’ ability to influence corporate matters. Accordingly, corporate actions might be taken even if other stockholders oppose them, or may not be taken even if other stockholders view them as in the best interests of our stockholders. This concentration of ownership may have the effect of delaying or preventing a change of control of our company, may make the approval of certain transactions difficult or impossible without the support of these stockholders and might adversely affect the market price of our common stock.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company.” We will remain an emerging growth company until the earliest of: the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of that fiscal year, the end of the fiscal year in which we have total annual gross revenue of $1 billion or more during such fiscal year, the date on which we issue more than $1 billion in non-convertible debt securities in a three-year period, or the last day of the fiscal year following the fifth anniversary of our initial public offering.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We are taking advantage of exemptions from various other requirements that are available to emerging growth companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved, and exemptions from the requirements of auditor attestation reports on the effectiveness of our internal control over financial reporting. We cannot predict whether investors will find our common stock less attractive to the extent we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We are subject to financial and other reporting and corporate governance requirements that may be difficult for us to satisfy. Corporate governance and public disclosure regulations may result in additional expenses and continuing uncertainty.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the rules and regulations of the New York Stock Exchange, which will impose significant compliance obligations upon us, particularly after we are no longer an emerging growth company. These obligations will require a commitment of additional resources and divert our senior management’s time and attention from our day-to-day operations. We may not be successful in complying with these obligations, and compliance with these obligations will be time-consuming and expensive.

The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing the costly process of implementing and testing our systems to report our results as a public company, to continue to manage our growth and to implement internal controls. We are and will continue to be required to implement and maintain various other control and business systems related to our equity, finance, treasury, information technology, other recordkeeping systems and other operations. As a result of this implementation and maintenance, management’s attention may be diverted from other business concerns, which could adversely affect our business.

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Beginning with our Annual Report on Form 10-K for the year ended December 31, 2015, we must comply with Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404. Pursuant to Section 404, we are required to furnish a report by our management on our internal control over financial reporting. To achieve compliance with Section 404 within the prescribed period, we will conduct a process each year to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we dedicate internal resources, engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our consolidated financial statements.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

If securities or industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable research or reports about our business, our stock price and trading volume could decline.

The trading market for our common stock depends, to some extent, on the research and reports that securities or industry analysts publish about us and our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our common stock or change their opinion of our common stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

Our charter documents and Delaware law could discourage, delay or prevent a change of control of our company or change in our management that stockholders consider favorable and cause our stock price to decline.

Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws and Delaware law could discourage, delay or prevent a change of control of our company or change in our management that the stockholders of our company consider favorable. These provisions:

 

authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares and to discourage a takeover attempt;

 

prohibit stockholder action by written consent, requiring all stockholder actions to be taken at a meeting of stockholders;

 

establish advance notice procedures for nominating candidates to our board of directors or proposing matters that can be acted upon by stockholders at stockholder meetings;

 

limit the ability of our stockholders to call special meetings of stockholders;

 

prohibit stockholders from cumulating their votes for the election of directors;

 

permit newly-created directorships resulting from an increase in the authorized number of directors or vacancies on our board of directors to be filled only by majority vote of our remaining directors, even if less than a quorum is then in office;

 

provide that our board of directors is expressly authorized to make, alter or repeal our amended and restated bylaws;

 

establish a classified board of directors so that not all members of our board are elected at one time;

 

provide that our directors may be removed only for “cause” and only with the approval of the holders of at least 75% of our outstanding stock; and

 

require super-majority voting to amend certain provisions in our amended and restated certificate of incorporation and amended and restated bylaws.

Section 203 of the Delaware General Corporation Law, which will apply to us, may also discourage, delay or prevent a change of control of our company.

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We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders.

We may need additional financing to execute on our current or future business strategies, including to:

 

hire additional personnel;

 

develop new or enhance existing products and services;

 

expand our operating infrastructure;

 

acquire businesses or technologies; or

 

otherwise respond to competitive pressures.

If we incur additional funds through debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business activities. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms when we desire them, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our products and services, or otherwise respond to competitive pressures would be significantly limited. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders.

Item  2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Recent Sales of unregistered securities

None.

Use of proceeds

On June 30, 2014, we closed our IPO of 5,750,000 shares of common stock, including 750,000 shares of common stock sold pursuant to the underwriters’ option to purchase additional shares, at a public offering price of $15.00 per share, for aggregate gross proceeds to us of $86.3 million. All of the shares issued and sold in the IPO were registered under the Securities Act of 1933 pursuant to a registration statement on Form S-1 (File No. 333-194921), which was declared effective by the SEC on June 24, 2014. Following the sale of the shares in connection with the closing of our IPO, the offering terminated. The managing underwriters for the offering were J.P. Morgan and Piper Jaffray.

The net offering proceeds to us, after deducting underwriting discounts totaling approximately $6.0 million and offering expenses totaling approximately $3.4 million, were approximately $76.8 million. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates.

During the year ended December 31, 2015, we used a total of $25.1 million of our offering proceeds, of which $19.7 million related to our acquisition of HT Systems completed on April 30, 2015, $437,000 related to our purchase of patents, $1.1 million related to expenditures for internally developed software, and $3.9 million was used for working capital purposes.  

During the six months ended June 30, 2016, we used a total of $4.7 million of our offering proceeds, of which, $1.5 million was related to expenditures for internally developed software and $3.2 million was used for working capital purposes. There has been no material change in the use of proceeds from our IPO as described in our prospectus filed with the SEC pursuant to Rule 424(b)(4).

Item  3.

Defaults Upon Senior Securities.

None.

Item  4.

Mine Safety Disclosures.

Not Applicable.

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Item  5.

Other Information. 

None.

Item 6.

Exhibits.

The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

IMPRIVATA, INC.

 

 

 

 

DATED:  August 2, 2016

 

By:

/s/ Jeff Kalowski

 

 

 

Chief Financial Officer

 

 

 

Principal Financial Officer and Duly Authorized Signatory

 

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Exhibit Index

 

Exhibit

No

 

Description

 

 

 

    2.1

 

Agreement and Plan of Merger, dated as of July 13, 2016, by and among Imprivata, Inc., Project Brady Merger Sub, Inc. and Project Brady Holdings, LLC (incorporated by reference to Exhibit 2.1 filed with the Company’s Current Report on Form 8-K, filed with the SEC on July 13, 2016).

 

    3.1

 

Amended and Restated Certificate of Incorporation of the Company, effective June 30, 2014 (incorporated by reference to Exhibit 3.2 of the Company’s Amendment No. 1 to Registration Statement on Form S-1, filed on June 11, 2014).

 

 

 

    3.2

 

Amended and Restated Bylaws of the Company, effective June 30, 2014 (incorporated by reference to Exhibit 3.4 to the Company’s Amendment No. 1 to Registration Statement on Form S-1, filed on June 11, 2014).

 

 

 

    4.1

 

Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 to the Company’s Amendment No. 1 to Registration Statement on Form S-1, filed on June 11, 2014.

 

 

 

    31.1

 

Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) or 15(d)-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

    31.2

 

Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) or 15(d)-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

    32.1**

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

    101***

 

The following materials from the Company’s Form 10-Q for the three and six months ended June 30, 2016, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Loss, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements (Unaudited).

 

 

 

 

**

The certification furnished in Exhibit 32.1 hereto is deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the Registrant specifically incorporates it by reference.

***

Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.

 

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