impr-10q_20150930.htm

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.

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 November 3, 2015, there were 25,006,037 shares of the registrant’s common stock outstanding.

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:

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.

	September 30,			December 31,
(in thousands, except share amounts)	2015			2014
Assets
Current assets:
Cash and cash equivalents	$	51,925		$	78,524
Accounts receivable, net of allowances		26,594			25,335
Prepaid expenses and other current assets		4,819			3,516
Total current assets		83,338			107,375
Property and equipment, net		8,109			7,640
Goodwill		13,819			1,560
Intangible assets, net		5,131			1,499
Other assets		898			105
Total assets	$	111,295		$	118,179
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	5,402		$	2,498
Accrued expenses and other current liabilities		9,343			10,565
Current portion of capital lease obligations and long-term debt		481			625
Current portion of other long-term liabilities		240			288
Current portion of deferred revenue		36,265			33,120
Current portion of contingent purchase price liability		525			152
Total current liabilities		52,256			47,248
Deferred revenue, net of current portion		5,043			4,021
Deferred tax liability		694			-
Capital lease obligations, long-term debt and royalty obligations, net of current portion		279			619
Other long-term liabilities, net of current portion		1,826			1,535
Contingent purchase price liability, net of current portion		178			480
Total liabilities		60,276			53,903
Commitments and contingencies (Note 10)
Stockholders' equity:
Undesignated preferred stock, $0.001 par value, 20,000,000 shares authorized; none issued at September 30, 2015 and December 31, 2014		—			—
Common stock, $0.001 par value, 250,000,000 shares authorized at September 30, 2015 and December 31, 2014; 24,958,464 and 23,742,467 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively		25			24
Additional paid-in capital		178,003			171,903
Accumulated other comprehensive loss		(119	)		(100	)
Accumulated deficit		(126,890	)		(107,551	)
Total stockholders' equity		51,019			64,276
Total liabilities and stockholders' equity	$	111,295		$	118,179

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands, except per share data)	2015			2014			2015			2014
Revenue
Product	$	15,800		$	14,133		$	45,017		$	35,632
Maintenance and services		13,482			11,145			39,869			32,320
Total revenue		29,282			25,278			84,886			67,952
Cost of revenue
Product		4,442			4,287			11,954			8,922
Maintenance and services		5,458			4,353			15,681			12,946
Total cost of revenue		9,900			8,640			27,635			21,868
Gross profit		19,382			16,638			57,251			46,084
Operating expenses
Research and development		8,496			6,425			23,207			19,252
Sales and marketing		12,959			11,129			37,976			32,764
General and administrative		4,886			3,162			14,055			8,486
Total operating expenses		26,341			20,716			75,238			60,502
Loss from operations		(6,959	)		(4,078	)		(17,987	)		(14,418	)
Other income (expense)
Foreign currency exchange gain (loss)		(170	)		(279	)		(482	)		(406	)
Interest and other income (expense), net		(10	)		(65	)		(31	)		(130	)
Loss before income taxes		(7,139	)		(4,422	)		(18,500	)		(14,954	)
Income taxes		75			32			839			119
Net loss		(7,214	)		(4,454	)		(19,339	)		(15,073	)
Accretion of redeemable convertible preferred stock		—			—			—			(2,442	)
Net loss attributable to common stockholders	$	(7,214	)	$	(4,454	)	$	(19,339	)	$	(17,515	)
Net loss per share attributable to common stockholders
Basic and diluted	$	(0.29	)	$	(0.19	)	$	(0.80	)	$	(1.64	)
Weighted average common shares outstanding used in computing net loss per share attributable to common stockholders
Basic and diluted		24,654			23,706			24,225			10,654

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

	Common stock							Accumulated
	par value					Additional		other
	$0.001					paid-in		comprehensive			Accumulated
(in thousands)	Shares		Amount			capital		loss			deficit			Total
Balance - January 1, 2015		23,742	$	24		$	171,903	$	(100	)	$	(107,551	)	$	64,276
Exercise of common stock options		1,111		1			1,886								1,887
Stock-based compensation expense							2,996								2,996
Employee stock purchase plan		104		1			1,218								1,219
Common stock grants		1		(1	)										(1	)
Net loss												(19,339	)		(19,339	)
Other comprehensive loss									(19	)					(19	)
Balance - September 30, 2015		24,958	$	25		$	178,003	$	(119	)	$	(126,890	)	$	51,019

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

	Nine Months Ended September 30,
(in thousands)	2015			2014
Cash flows from operating activities:
Net loss	$	(19,339	)	$	(15,073	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		2,711			2,241
Provision for doubtful accounts		(2	)		90
Stock-based compensation		2,996			1,126
Loss on disposal of fixed assets		16			66
Change in value of contingent purchase price liability		71			(448	)
Deferred income taxes		694			—
Changes in operating assets and liabilities:
Accounts receivable		4,192			380
Prepaid expenses and other current assets		(2,072	)		(856	)
Deferred revenue		2,115			3,977
Accounts payable		2,662			(723	)
Accrued expenses and other current liabilities		(1,805	)		(201	)
Other liabilities		243			12
Net cash used in operating activities		(7,518	)		(9,409	)
Cash flows from investing activities:
Purchases of property and equipment		(1,791	)		(2,723	)
Purchases of intangible assets		(852	)		—
Acquisition of business		(18,955	)		—
Net cash used in investing activities		(21,598	)		(2,723	)
Cash flows from financing activities:
Proceeds from initial public offering, net of underwriting discounts and commissions		—			80,213
Deferred offering costs		—			(3,287	)
Repayments for capital lease obligations, long-term debt and other		(483	)		(497	)
Proceeds from employee stock purchase plan		1,219			—
Proceeds from exercise of stock options		1,824			448
Net cash provided by financing activities		2,560			76,877
Effect of exchange rates on cash and cash equivalents		(43	)		8
Net (decrease) increase in cash and cash equivalents		(26,599	)		64,753
Cash and cash equivalents, beginning of period		78,524			13,284
Cash and cash equivalents, end of period	$	51,925		$	78,037
Supplemental disclosures of non-cash investing and financing activities:
Equipment purchases under capital leases	$	—		$	714
Property and equipment purchases included in accounts payable and accrued expenses	$	837		$	223
Deferred offering costs included in accounts payable, accrued expenses, and other current liabilities	$	—		$	118
Conversion of preferred stock to common stock	$	—		$	94,049
Accretion of preferred stock	$	—		$	2,442

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

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.

On June 30, 2014, the Company completed its initial public offering (“IPO”) and is listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “IMPR.”

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, 2014. The consolidated balance sheet at December 31, 2014 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 2014 Annual Report on Form 10-K filed with the SEC on March 11, 2015.

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 September 30, 2015, the result of operations for the three and nine months ended September 30, 2015 and 2014 and cash flows for the nine months ended September 30, 2015 and 2014. Operating results for the nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015, 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., and its wholly owned subsidiaries Imprivata UK Limited and Imprivata Australia Pty. Ltd., as well as two branch offices. All intercompany balances and transactions have been eliminated in consolidation. In the first quarter of 2015, the Company closed its Netherlands branch office.

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

When preparing financial statements in conformity with GAAP, we must 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.

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.

The Company has not made any significant changes, other than the policy noted below regarding research and development and software development costs, 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, 2014 included in its 2014 Annual Report on Form 10-K filed with the SEC on March 11, 2015. See Note 2 in the 2014 Annual Report on Form 10-K for information about these critical accounting policies as well as a description of the “Summary of significant accounting policies.”

Research and development expenses consist primarily of salary and related expenses for the Company’s research and development staff, including benefits, bonuses and stock-based compensation; the cost of certain third-party contractor costs; and allocated overhead. Expenditures for research and development are expensed as incurred.

Costs associated with the development of computer software for external sale are expensed prior to the establishment of technological feasibility of the software and capitalized thereafter until commercial release of the software. The Company has not historically incurred significant development costs after the establishment of technological feasibility, and as a result, no software development costs have been capitalized to date.

Costs incurred during the application development stage of internal-use software projects, such as those used in the Company’s product offerings, are capitalized in accordance with the accounting guidance for costs of computer software developed for internal use. Capitalized costs include external consulting fees and payroll and payroll-related costs for employees in the Company’s research and development groups who are directly associated with, and who devote time to, the Company’s internal-use software projects during the application development stage. Capitalization begins when the planning stage is complete and the Company commits resources to the software project. Capitalization ceases when the software has been tested and is ready for its intended use. Amortization of the asset commences when the software is complete and placed in service. The Company assesses the useful life of internal-use software once the development is complete and amortizes the completed costs on a straight line basis. Costs incurred during the planning, training and post-implementation stages of the software development life-cycle are expensed as incurred. Costs related to upgrades and enhancements of existing internal-use software that increase the functionality of the software are also capitalized.

In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-16 “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” The ASU eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. The new guidance requires that the cumulative impact of a measurement-period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for any interim and annual financial statements that have not yet been made available for issuance. The Company has elected early adoption of this guidance, effective in the third quarter ended September 30, 2015. During the three and nine months ended September 30, 2015, the Company recorded a measurement period adjustment which resulted in an immaterial impact. See note 3 for additional information.

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 update could impact the timing and amounts of revenue recognized. The Company is currently evaluating the effect that implementation of this update will have on the Company’s consolidated financial statements upon adoption.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” (Topic 330). ASU 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 April 2015, the FASB issued an ASU No. 2015-03, “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” requiring debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt, consistent with debt discounts. The accounting standard update will be effective for the Company for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years on a retrospective basis, with early adoption permitted. The accounting standard update is a change in balance sheet presentation only and is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, “Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

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 less $120,000 of working capital adjustments, for total cash consideration paid of $19.0 million.

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 may pay up to $5.0 million of potential additional earn-out consideration to the selling equity-holders, which will be determined based upon the achievement of certain sales targets over the two-year period following the transaction, 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 and nine month ended September 30, 2015, the Company has not recorded compensation expense associated with the earn-out consideration based on the probability of achieving sales targets.

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.

During the three and nine months ended September 30, 2015, $0 and $709,000, respectively, of acquisition-related costs were incurred due to the HT Systems acquisition, which are included in general and administrative expenses in the consolidated statement of operations.

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:

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 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.

The fair value estimates for the assets acquired and liabilities assumed were based upon preliminary calculations and valuations, and the Company’s estimates and assumptions for the acquisition are subject to change as the Company obtains additional information during the measurement periods, up to one year from the acquisition date.

During the three months ended September 30, 2015, the Company recorded the following measurement period adjustments:

These measurement period adjustments resulted in a $947,000 decrease in the amount of goodwill reported in the consolidated balance sheet at September 30, 2015. As a result of the increase in deferred revenue, the Company would have recorded an additional $24,000 in maintenance revenue during the three months ended June 30, 2015.

As of September 30, 2015, the purchase accounting adjustments are preliminary and not yet finalized as the Company continues to evaluate the acquiree’s contractual obligations related to deferred revenues and unbilled receivables.

The consolidated financial statements include the operating results of HT Systems from the date of acquisition. The following unaudited pro forma results of operations have been presented as if the HT Systems acquisition occurred on January 1, 2014:

This information is based on historical results of operations, adjusted for the allocations of purchase price and other acquisition accounting adjustments, and is not necessarily indicative of what the Company’s results would have been had it operated the businesses since January 1, 2014.

For the three and nine months ended September 30, 2015, the Company’s consolidated revenue includes revenues from HT Systems of $712,000 and $883,000, respectively. Due to the continued integration of the combined business, it is impractical to determine the earnings of HT Systems beyond the measure of revenue.

As of September 30, 2015, the Company has $2.2 million of unbilled receivables primarily due to the acquisition of HT Systems, of which $1.3 million is included in total trade accounts receivable and $874,000 is included in other assets in the consolidated balance sheets for the long-term portion of the commitment.

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.

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.

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 September 30, 2015
							Total
(in thousands)	Level 1		Level 2		Level 3		carrying value
Assets
Cash equivalents:
Money market funds	$	5,689	$	-	$	-	$	5,689
Certificates of deposit		-		97		-		97
Liabilities
Contingent consideration		-		-		703		703

	Fair value measurements at December 31, 2014
							Total
(in thousands)	Level 1		Level 2		Level 3		carrying value
Assets
Cash equivalents:
Money market funds	$	33,184	$	-	$	-	$	33,184
Certificates of deposit		-		97		-		97
Liabilities
Contingent consideration		-		-		632		632

There were no fair value measurements on a non-recurring basis as of December 31, 2014. During the six months ended June 30, 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.

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 December 31, 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:

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

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.

On April 30, 2015, the Company acquired the following intangible assets as a result of its acquisition of HT Systems:

During the three and nine months ended September 30, 2015, the Company recorded $131,000 and $218,000, respectively, of amortization expense of purchased intangible assets. Amortization expense of $109,000 and $196,000 was recorded in the cost of revenues for the three and nine months ended September 30, 2015, respectively. Amortization expense of $22,000 was recorded in general and administrative expenses for the three and nine months ended September 30, 2015.

The estimated future amortization of purchased intangible assets, acquired in the acquisition of HT Systems, as of September 30, 2015 are as follows:

On June 3, 2015, the Company acquired three patents with an aggregate purchase price of $437,000, which includes $37,000 of legal fees and $36,364 of brokers fees associated with the procurement of the patents. The patents will be amortized on a straight-line basis over 9 years. During the three and nine months ended September 30, 2015, the Company recorded $12,000 and $16,000 of amortization expense to general and administrative expenses in the consolidated statement of operations.

The estimated future amortization of three patents purchased as of September 30, 2015 are as follows:

During the three months ended September 30, 2015, the Company recorded $415,000 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. For additional information regarding the Company’s accounting policy for capitalizing internally developed software costs, see Note 2.

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

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:

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

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”). In February 2014, the Company modified the revolving credit agreement that had expired in October 2013 and extended the maturity date to February 2015. In February 2015, the Company amended its revolving credit facility to extend the maturity through April 2015. In April 2015, the Company further 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 September 30, 2015 and December 31, 2014, there was no outstanding balance under the revolving credit facility.

On January 16, 2015, the Company amended its lease agreement for its corporate headquarters in Lexington, Massachusetts to lease approximately 21,000 of additional square footage. The amendment increased the total square footage leased to approximately 93,000 and extended the term through December 2021. The additional rent expense is approximately $7.9 million and the landlord has agreed to contribute approximately $735,000 towards leasehold improvements.

On April 30, 2015, the Company assumed a lease for approximately 3,500 square feet with a term expiring on March 31, 2016 as a result of its acquisition of HT Systems. The leased property is located in Tampa, Florida and is between HT Systems and a separate entity owned by the selling equity-holders of HT Systems. The remaining lease payments are $30,000.

The Company is not presently a party to any litigation that it believes might have a material adverse effect on its business operations or financial statements.

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 September 30, 2015 and December 31, 2014, 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 these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible, and no related reserves were established.

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:

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 replaces 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 nine months ended September 30, 2015, the Company granted 1,669,050 options to purchase common stock at a weighted average exercise price of $13.81.

During the nine months ended September 30, 2015, the Company granted 15,306 restricted stock awards at a fair market value of $14.70. The restricted stock awards vest quarterly over a one-year period.

At September 30, 2015, there were 1,935,861 shares available for future grant under the 2014 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 1^st and September 1^st of each year.

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 September 30, 2015, there were 581,064 shares available for future grant under the ESPP.

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 September 30, 2015 and December 31, 2014, a total of 26,250 and 40,202 shares of unvested stock options exercised were subject to repurchase at an aggregate price of $121,800 and $184,000, 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 September 30, 2015 and 2014, 4,375 and 5,626 stock options associated with the early exercise vested, respectively. During the nine months ended September 30, 2015 and 2014, 13,952 and 16,878 stock options associated with the early exercise vested, respectively.

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:

The assumptions used to estimate the fair value of the rights to acquire stock under the ESPP during the initial offering period ending on February 28, 2015 were as follows:

The assumptions used to estimate the fair value of the rights to acquire stock under the ESPP during the offering beginning on March 1, 2015 were as follows:

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:

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, 2014, the Company’s valuation allowance related to income taxes was approximately $27.5 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.

During the preparation of the Company’s financial statements for the three months ended June 30, 2015, the Company identified an error in its accounting for deferred income taxes in prior periods related to the Company’s deferred income tax accounting for its 2011 acquisition of Validus. Specifically, the Company should have, but did not, record deferred income tax expense in connection with post acquisition adjustments made to the contingent consideration recorded in connection with the acquisition. The Company has corrected this error by recording an out of period adjustment for the cumulative amount of deferred tax expense associated with these adjustments totaling $535,000, in its quarter ended June 30, 2015 financial statements. Had these tax amounts been recorded timely the Company would have recorded a reduction of tax expense of $5,700 and $13,500 in the three and six month interim periods ended June 30, 2015. During the three and nine months ended September 30, 2015 the Company recorded a reduction of tax expense of $10,900 and $24,400 as a result of the post-acquisition adjustments made to the contingent consideration during the periods presented.

During the three months and nine months ended September 30, 2015, the Company recorded U.S. tax expense of $10,000 and $183,000, 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 September 30, 2015 and December 31, 2014, 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 September 30, 2015 and December 31, 2014, the Company had no accrued interest or penalties related to uncertain tax positions.

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 redeemable convertible preferred stock, 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.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands, except per share data)	2015			2014			2015			2014
Numerator:
Net loss	$	(7,214	)	$	(4,454	)	$	(19,339	)	$	(15,073	)
Accretion of preferred stock		—			—			—			(2,442	)
Net loss attributable to common stockholders	$	(7,214	)	$	(4,454	)	$	(19,339	)	$	(17,515	)
Denominator:
Weighted average common shares outstanding used in computing basic and diluted net loss per common share		24,654			23,706			24,225			10,654
Net loss per share, basic and diluted	$	(0.29	)	$	(0.19	)	$	(0.80	)	$	(1.64	)

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:

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.

No customers or resellers accounted for 10% or more of revenues for the three and nine months ended September 30, 2015. One customer accounted for 10% or more of revenues during the three months ended September 30, 2014. No customer or reseller accounted for 10% or more of revenues during the nine months ended September 30, 2014.

No customers or resellers accounted for 10% or more of accounts receivable at September 30, 2015 and December 31, 2014, respectively.

The Company does not have any off-balance sheet arrangements and did not have any such arrangements during the nine months ended September 30, 2015 and the year ended December 31, 2014.

The Company completed its acquisition of HT Systems on April 30, 2015. The Company may pay up to $5.0 million of potential additional earn-out consideration to the selling equity-holders, which will be determined based upon the achievement of certain sales targets over the two-year period following the transaction. 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 has become employees of the Company effective upon close of the acquisition. 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 nine months ended September 30, 2015.

The Company leases office space, located in 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, 2016. The Company made rental payments totaling $15,000 and $25,000 during the three and nine months ended September 30, 2015, respectively.

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, 2014 filed with the SEC on March 11, 2015. 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.

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.

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.

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.

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 the Company’s 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 $433,000 and $490,000 of costs associated with the offering during the three and nine months ended September 30, 2015, respectively.

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 net of $120,000 of working capital adjustments, for total cash consideration of $19.0 million, plus up to $5.0 million based on achieving certain sales targets over the two-year period following the transaction.

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, 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:

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands, except per share amounts)	2015			2014			2015			2014
GAAP net loss	$	(7,214	)	$	(4,454	)	$	(19,339	)	$	(15,073	)
Adjustments to reconcile to Adjusted EBITDA:
Income tax expense		75			32			839			119
Depreciation and amortization		1,027			783			2,711			2,241
Other expense, net		180			344			513			536
Stock-based compensation		1,215			461			2,996			1,126
Change in fair value of contingent liability		21			16			71			(448	)
Acquisition costs		—			—			709			—
Shelf registration and offering costs		433			—			490			—
Adjusted EBITDA	$	(4,263	)	$	(2,818	)	$	(11,010	)	$	(11,499	)

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 September 30, 2015 and December 31, 2014, we had backlog of $42.7 million and $39.3 million, respectively. Of the $42.7 million in backlog as of September 30, 2015, approximately $15.4 million, which includes approximately $10.0 million of maintenance, is expected to be recognized as revenue during the remainder of the year ended December 31, 2015. Additionally, $18.3 million of maintenance revenue is expected to be recognized over the five year period subsequent to the year ended December 31, 2015. 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.

Our financial statements are prepared in conformity with U.S. GAAP. We will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. 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 of our audited consolidated financial statements for the year ended December 31, 2014 included in our Annual Report on Form 10-K filed with the SEC on March 11, 2015 for information about these critical accounting policies as well as a description of the “Summary of significant accounting policies.”

In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-16 “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” The ASU eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. The new guidance requires that the cumulative impact of a measurement-period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for any interim and annual financial statements that have not yet been made available for issuance. We have elected early adoption of this guidance, effective in the third quarter ended September 30, 2015. During the three and nine months ended September 30, 2015, the Company recorded a measurement period adjustment which resulted in an immaterial impact. See note 3 for additional information.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) (ASU 2014-09). ASU 2014-09 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. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers—Deferral of the Effective Date,” that defers by one year the effective date of ASU 2014-09, “Revenue from Contracts with Customers.” 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 update could impact the timing and amounts of revenue recognized. We are currently evaluating the effect that implementation of this update will have on the Company’s consolidated financial statements upon adoption.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” (Topic 330). ASU 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. We do not believe the adoption of this guidance will have a material impact to the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, “Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. We anticipate that the adoption of this ASU will not have a material impact on its consolidated financial statements.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share data)	2015			2014			2015			2014
Revenue
Product	$	15,800		$	14,133		$	45,017		$	35,632
Maintenance and services		13,482			11,145			39,869			32,320
Total revenue		29,282			25,278			84,886			67,952
Cost of revenue
Product		4,442			4,287			11,954			8,922
Maintenance and services		5,458			4,353			15,681			12,946
Total cost of revenue		9,900			8,640			27,635			21,868
Gross profit		19,382			16,638			57,251			46,084
Operating expenses
Research and development		8,496			6,425			23,207			19,252
Sales and marketing		12,959			11,129			37,976			32,764
General and administrative		4,886			3,162			14,055			8,486
Total operating expenses		26,341			20,716			75,238			60,502
Loss from operations		(6,959	)		(4,078	)		(17,987	)		(14,418	)
Other income (expense)
Foreign currency exchange loss		(170	)		(279	)		(482	)		(406	)
Interest and other income expense (net)		(10	)		(65	)		(31	)		(130	)
Loss before income taxes		(7,139	)		(4,422	)		(18,500	)		(14,954	)
Income taxes		75			32			839			119
Net loss	$	(7,214	)	$	(4,454	)	$	(19,339	)	$	(15,073	)

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, 2014 included in our Annual Report on Form 10-K filed with the SEC for “Summary of significant accounting policies—Revenue recognition” for more information.

	Three Months Ended											Nine Months Ended
	September 30,						Period-to-Period					September 30,						Period-to-Period
	2015			2014			Change					2015			2014			Change
(dollars in thousands)	Amount			Amount			$		%			Amount			Amount			$		%
Revenue
Product revenue	$	15,800		$	14,133		$	1,667		11.8	%	$	45,017		$	35,632		$	9,385		26.3	%
Percentage of revenue		54.0	%		55.9	%							53.0	%		52.4	%
Maintenance and service revenue		13,482			11,145			2,337		21.0	%		39,869			32,320			7,549		23.4	%
Percentage of revenue		46.0	%		44.1	%							47.0	%		47.6	%
Total Revenue	$	29,282		$	25,278		$	4,004		15.8	%	$	84,886		$	67,952		$	16,934		24.9	%

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 and fingerprint readers. Following our acquisition of HT Systems, we expect that hardware sales will also include the sale of palm vein biometric readers associated with our Imprivata PatientSecure solution. We expect that sales of our Imprivata Confirm ID, Imprivata Cortext, and Imprivata PatientSecure solutions will begin to contribute to our results in the near term.

Product revenue increased by $1.7 million, or 12%, during the three months ended September 30, 2015, as compared to the three months ended September 30, 2014. The increase was driven primarily by an increase of $1.9 million in sales to new customers, $1.8 million of which relates to healthcare customers. New sales to non-healthcare customers increased by $150,000. Sales of additional products into our existing customer base decreased by $320,000 during the three months ended September 30, 2015 as compared to the three months ended September 30, 2014. Sales to existing healthcare customers increased by $125,000, which was offset by a decrease in sales to existing non-healthcare customers by $445,000. Although our sales to new non-healthcare customers increased during the three months ended September 30, 2015, overall sales to non-healthcare customers represented a smaller portion of our business and we expect sales to non-healthcare customers to decline as a percentage of our total product revenue in future periods. In addition, during the three months ended September 30, 2015, we experienced delays in our larger sales of our Imprivata OneSign solution to healthcare customers due to our customers’ implementation schedules and their available IT resources. In addition, we experienced delays in sales of our Imprivata OneSign solution to smaller hospitals due to industry consolidation concerns among our existing and potential customers, and the transition by our customers to new ICD-10 codes used for diagnosis and billing purposes, which were required to be updated by October 1, 2015.

Product revenue increased by $9.4 million, or 26%, during the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014. The increase was driven primarily by an increase of $7.4 million in sales of additional products into our existing customer base, $8.1 million of which relate to healthcare customers, which was offset by a $695,000 decrease in sales to non-healthcare customers. Sales to new customers increased by approximately $2.0 million over the same period. Sales to new healthcare customers increased by $1.1 million during the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014. Sales to new non-healthcare customers increased $935,000 for the same period. Although our sales to non-healthcare customers increased during the nine months ended September 30, 2015, sales to non-healthcare customers represent a smaller portion of our business. As a percentage of product revenue, sales to non-healthcare customers has decreased from 14% to 12% from the nine months ended September 30, 2014 to the nine months ended September 30, 2015 and we expect sales to non-healthcare customers to decline as a percentage of our total product revenue in future periods. In addition, during the nine months ended September 30, 2015, we experienced delays in our larger sales of our Imprivata OneSign solution to healthcare customers due to our customers’ implementation schedules and their available IT resources. In addition, we experienced delays in sales of our Imprivata OneSign solution to smaller hospitals due to industry consolidation concerns among our existing and potential customers, and the transition by our customers to new ICD-10 codes used for diagnosis and billing purposes, which were required to be updated by October 1, 2015.

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. Professional services revenue consists primarily of fees associated with the implementation of our software and training services, and represented between 9% and 11% of our revenues for the three and nine month ended September 30, 2015 and 2014. 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.

Maintenance and service revenue increased by $2.3 million, or 21%, during the three months ended September 30, 2015, as compared to the three months ended September 30, 2014. The increase was driven by increased maintenance revenue of $1.9 million resulting

from our larger installed base of users. In addition, professional services increased by $420,000 over the same period due to the increased sales of our products, which resulted in new professional services related to implementation and training.

Maintenance and service revenue increased by $7.5 million, or 23%, during the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014. The increase was driven by increased maintenance revenue of $5.7 million resulting from our larger installed base of users. In addition, professional services increased by $1.8 million over the same period due to the increased sales of our products, which resulted in new professional services related to implementation and training.

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

	Three Months Ended											Nine Months Ended
	September 30,						Period-to-Period					September 30,						Period-to-Period
	2015			2014			Change					2015			2014			Change
(dollars in thousands)	Amount			Amount			$ / #		%			Amount			Amount			$ / #		%
Cost of revenue
Product	$	4,442		$	4,287		$	155		3.6	%	$	11,954		$	8,922		$	3,032		34.0	%
Product gross margin		71.9	%		69.7	%							73.4	%		75.0	%
Maintenance and services		5,458			4,353			1,105		25.4	%		15,681			12,946			2,735		21.1	%
Maintenance and service gross margin		59.5	%		60.9	%							60.7	%		59.9	%
Total cost of revenue	$	9,900		$	8,640		$	1,260		14.6	%	$	27,635		$	21,868		$	5,767		26.4	%
Total gross margin		66.2	%		65.8	%							67.4	%		67.8	%
Headcount		108			90			18		20.0	%	108				90			18		20.0	%

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.

Cost of product revenue increased by $155,000, or 4%, during the three months ended September 30, 2015, as compared to the three months ended September 30, 2014. The increase is primarily attributable to the increase in amortization expense of purchased intangible assets of $109,000, as a result of the Company’s acquisition of HT Systems in the second quarter of 2015. Product gross margin increased due to increased higher-margin software sales with lower-margin device sales remaining relatively consistent period over period.

Cost of product revenue increased by $3.0 million, or 34%, during the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014. The increase was primarily attributable to the increase in sales of proximity cards and fingerprint devices during the first six months of 2015, as compared to the first six months of 2014 and increase attributable to the increase in amortization expense of purchased intangible assets of $109,000 during the nine months ended September 30, 2015, as a result of the Company’s acquisition of HT Systems. Product gross margin decreased as a result of 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.

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.

Cost of maintenance and services revenue increased by $1.1 million, or 25%, during the three months ended September 30, 2015, as compared to the three months ended September 30, 2014. The increase was primarily due to increase of $900,000 in payroll and related costs as a result of the increase in the number of employees. The timing of the recognition of expenses for new hires may vary within the periods presented and is not indicative of any trend. The increase in the number of employees also resulted in an increase in travel and related costs of $148,000.

Cost of maintenance and services revenue increased by $2.7 million, or 21%, during the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014. The increase was primarily attributable to an increase of $2.7 million in payroll and related costs as a result of increased investment in our support and services. In addition, the increase in the number of employees hired also resulted in an increase in travel-related costs of $446,000. These increases were partially offset by a $534,000 decrease in consulting expense as we reduce our use of third party consultants for support and services. The timing of the recognition of expenses for new hires may vary within the periods presented and is not indicative of any trend.

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 $17.1 million, or 65%, and $13.6 million, or 66%, of our total operating expenses for the three months ended September 30, 2015 and 2014, respectively. During the nine months ended September 30, 2015 and 2014, personnel costs were $47.9 million, or 64%, and $38.5 million, or 64%, respectively, of our total operating expenses. 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.

	Three Months Ended											Nine Months Ended
	September 30,						Period-to-Period					September 30,						Period-to-Period
	2015			2014			Change					2015			2014			Change
(dollars in thousands)	Amount			Amount			$ / #		%			Amount			Amount			$ / #		%
Operating expenses
Research and development	$	8,496		$	6,425		$	2,071		32.2	%	$	23,207		$	19,252		$	3,955		20.5	%
Percentage of revenue		29.0	%		25.4	%							27.3	%		28.3	%
Sales and marketing		12,959			11,129			1,830		16.4	%		37,976			32,764			5,212		15.9	%
Percentage of revenue		44.3	%		44.0	%							44.7	%		48.2	%
General and administrative		4,886			3,162			1,724		54.5	%		14,055			8,486			5,569		65.6	%
Percentage of revenue		16.7	%		12.5	%							16.6	%		12.5	%
Total operating expenses	$	26,341		$	20,716		$	5,625		27.2	%	$	75,238		$	60,502		$	14,736		24.4	%
Percentage of revenue		90.0	%		82.0	%							88.6	%		89.0	%
Headcount
Research and development		121			92			29		31.5	%		121			92			29		31.5	%
Sales and marketing		156			134			22		16.4	%		156			134			22		16.4	%
General and administrative		44			37			7		18.9	%		44			37			7		18.9	%
Information technology		15			13			2		15.4	%		15			13			2		15.4	%
Total		336			276			60		21.7	%		336			276			60		21.7	%

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.

Research and development expenses increased by $2.1 million, or 32%, during the three months ended September 30, 2015, as compared to the three months ended September 30, 2014. The increase was primarily driven by increased payroll and related expenses of $1.6 million, as a result of large increase in the number of employees by the addition of 29 employees, during the three months ended September 30, 2015, as compared to the three months ended September 30, 2014. The timing of the recognition of expenses for new hires may vary within the periods presented and is not indicative of any trend. In addition, hiring costs increased by $127,000 and facility costs, which are allocated based on headcount, increased by $180,000. Consulting costs increased in the United States for product development and release projects, but were partially offset by a decrease in use of third-party developers located in Ukraine and Argentina resulting in net increase of $59,000 in consulting expense.

Research and development expenses increased by $4.0 million, or 21%, during the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014. The increase was primarily driven by increased payroll and related costs of $3.9 million for the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014. The increase in payroll and related costs was primarily due to large increase in the number of employees during the nine months ended September 30, 2015, as compared to the same period in 2014. The timing of the recognition of expenses for new hires may vary within the periods presented and is not indicative of any trend. In addition, hiring costs increased by $99,000, facility costs, which are allocated based on headcount, increased by $284,000. The increases were partially offset by decrease in consulting expenses of $204,000 for our third-party developers located in Ukraine and Argentina as a result of the timing of our projects related to our product development and release cycle.

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.

Sales and marketing expenses increased by $1.8 million, or 16%, during the three months ended September 30, 2015 as compared to the three months ended September 30, 2014. The increase was attributable to increased spending on sales-related costs of $1.2 million and marketing and business-development related costs of $608,000 as we continue to invest in building our brand as well as our sales force. During the quarter, sales and marketing increased the number of employees by 22 during the three months ended September 30, 2015 compared to September 30, 2014. The resulting increase in sales-related costs was primarily due to increased payroll and related costs of $594,000, which includes commissions, increased consulting costs of $218,000 and an increase of $246,000 related to a company sales event. In addition, the increase in marketing and business-development related costs were attributable to increased payroll and related costs of $444,000 and increased marketing and promotion costs of $240,000.

Sales and marketing expenses increased by $5.2 million, or 16%, during the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014. The increase was attributable to an increase in spending on sales related costs of $3.0 million and marketing and business-development related costs of $2.2 million as we continued to invest in building our brand as well as our sales force. Sales and marketing increased the number of employees by 22 during the nine months ended September 30, 2015 compared to September 30, 2014. The resulting increase in sales-related costs was primarily due to increased payroll and related costs of $1.9 million, which includes commissions due to our increased headcount, increase of $490,000 related to the Company’s sales events, increased consulting costs of $350,000 and increased hiring costs of $91,000. The increase in marketing and business-development related costs were primarily due to increased payroll and related expenses of $1.8 million and increased marketing and promotion expenses of $559,000.

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, 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 continue to increase in absolute dollars as a result of being a public company, although they may fluctuate as a percentage of revenue. We expect additional general and administrative expenses to include increased personnel costs, insurance costs, costs required to comply with the regulatory requirements of the SEC, as well as costs associated with enhancing our internal controls and accounting systems.

General and administrative expenses increased by $1.7 million, or 54%, during the three months ended September 30, 2015 as compared to the three months ended September 30, 2014. The increase was primarily due to increased payroll and related costs of $757,000 due to our increased headcount and $346,000 of costs associated with payroll taxes for exercises of non-qualified stock options. Consulting and professional fees increased $710,000, of which $433,000 were costs associated with our shelf registration and stock offering of secondary shares of our common stock during the three months ended September 30, 2015.

General and administrative expenses increased by $5.6 million, or 66%, during the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014. The increase was driven primarily by increased payroll and related costs of $1.7 million as a result of our increased headcount, as well as the items noted above. The increased insurance expense of $349,000 as a result of changes in our insurance coverage due to becoming a public company in June 2014, increased expenses for corporate events of $460,000 and increased facility costs of $171,000 as a result of our increased leased square footage for our corporate headquarters. Professional fees and consulting services increased $2.1 million, primarily due to transaction costs related to our acquisition of HT Systems of $709,000 and $490,000 of costs associated with shelf registration and stock offering of secondary shares of our common stock during the three months ended September 30, 2015. We recorded a fair value revaluation expense of $71,000 of our contingent liability as compared to a reduction of expense of $448,000 during the nine months ended September 30, 2014.

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											Nine Months Ended
	September 30,						Period-to-Period					September 30,						Period-to-Period
	2015			2014			Change					2015			2014			Change
(dollars in thousands)	Amount			Amount			$		%			Amount			Amount			$			%
Foreign currency exchange gain (loss)	$	(170	)	$	(279	)	$	109		-39.1	%		(482	)		(406	)	$	(76	)		18.7	%
Percentage of revenue		-0.6	%		-1.1	%							-0.6	%		-0.6	%
Interest and other income (expense), net		(10	)		(65	)		55		-84.6	%		(31	)		(130	)		99			-76.2	%
Percentage of revenue		0.0	%		-0.3	%							0.0	%		-0.2	%
Total other income (expense)	$	(180	)	$	(344	)	$	164		-47.7	%	$	(513	)	$	(536	)	$	23			-4.3	%

Other income increased by $164,000 during the three months ended September 30, 2015 as compared to three months ended September 30, 2014. The increase was primarily driven by foreign exchange losses recognized during the three months ended September 30, 2015, as compared to the three months ended September 30, 2014.

Other income increased by $23,000 during the nine months ended September 30, 2015 as compared to nine months ended September 30, 2014. The increase was primarily driven by decrease in loss recognized on disposal of asset during the nine months ended September 30, 2015. This increase was partially offset by foreign exchange losses. The Company recognized foreign exchange losses during the three months ended March 31, 2015 partially offset by foreign exchange gains recognized during the three months ended June 30, 2015 and September 30, 2015 due to a minor weakening of the U.S. dollar against the Euro and Pound Sterling. We have cash and accounts receivable denominated in the Euro and Pound Sterling as a result of our European operations.

	Three Months Ended											Nine Months Ended
	September 30,						Period-to-Period					September 30,						Period-to-Period
	2015			2014			Change					2015			2014			Change
(dollars in thousands)	Amount			Amount			$		%			Amount			Amount			$		%
Income taxes	$	75		$	32		$	43		134.4	%		839			119		$	720		605.0	%
Percentage of revenue		0.3	%		0.1	%							1.0	%		0.2	%

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 $183,000 of deferred tax expense associated with long term deferred tax liabilities related to tax basis in acquired goodwill and a tax expense of $145,000 on earnings of certain foreign subsidiaries and to a lesser extent state income taxes.

During the three months ended June 30, 2015, we corrected an error by recording a $535,000 out of period adjustment for the cumulative amount of deferred tax expense associated with post-acquisition adjustments made to our Validus contingent consideration. We also recorded a reduction to income tax expense of $25,000 for the nine months ended September 30, 2015. See Note 13 “Income Taxes” for additional details on these adjustments.

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.

As of September 30, 2015, we had $51.9 million of cash and cash equivalents, of which $905,000 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. As of December 31, 2014, all expenses incurred in connection with the IPO have been paid.

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.

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.

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

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 nine months ended September 30, 2015 was primarily due to a net loss of $19.3 million adjusted for $6.5 million of non-cash expenses that included $2.7 million of depreciation and amortization, $3.0 million in stock-based compensation, deferred income taxes of $694,000, a loss on disposal of fixed assets of $16,000, and an increase of $71,000 due to increase in the fair value of the contingent purchase price liability. Net increase in working capital amounted to $5.3 million attributable to decreases in accounts receivable of $4.2 million, an increase in accounts payable of $2.7 million, an increase in deferred revenue of $2.1 million, and an increase in other liabilities of $243,000. These increases were partially offset by a decrease in accrued expenses of $1.8 million, and an increase in prepaid expenses and other current assets of $2.1 million.

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.

During the nine months ended September 30, 2015, our cash expenditures related to investing activities were acquisition of HT Systems for $19.0 million, purchase of three patents for $437,000, expenditures for internally developed software of $415,000, and purchase of property and equipment for $1.8 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.

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 nine months ended September 30, 2015, cash provided by financing activities primarily consisted of $1.2 million proceeds from the Company’s employee stock purchase plan and $1.8 million of proceeds from the exercise of stock options, partially offset by $483,000 in payments in connection with our debt, capital leases, and royalty obligations.

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 $1.8 million and $2.7 million for the nine months ended September 30, 2015 and 2014, respectively.

We expect our 2015 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.

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, 2014 included in our Annual Report on Form 10-K filed with the SEC on March 11, 2015, except for the following: during the three months ended March 31, 2015, we amended our lease agreement for our corporate headquarters to lease approximately 21,000 of additional square footage. The amendment increased the total square footage leased to approximately 93,000 and extended the term through December 2021. The additional rent expense is approximately $7.9 million over the revised extended term and the landlord has agreed to contribute approximately $735,000 towards leasehold improvements.

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.

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.

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 September 30, 2015, our foreign accounts receivable balances were primarily denominated in the Euro, British Pound Sterling and the Australian Dollar.

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 September 30, 2015, our foreign currency exchange gain or loss would have fluctuated by $696,000.

At September 30, 2015, we had cash and cash equivalents of $51.9 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.

At September 30, 2015, we had a 2.5 year term loan with a fixed interest rate of 6.5%, associated with the purchase of licenses and associated maintenance with an outstanding balance of $122,000. Changes in interest rates would not have a significant impact on our outstanding borrowing.

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.

Our management, with the participation of our Chief Executive Officer, our principal executive officer, and our Chief Financial Officer, our principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2015, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such date.

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

From time to time, we may be involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters which arise in the ordinary course of business. We are not currently involved in any material legal proceedings.

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” 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.

Those risk factors below denoted with a “*” are newly added or have been materially updated from our Quarterly Report on Form 10-Q filed with the SEC on July 31, 2015.

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 $19.3 million net loss for the nine months ended September 30, 2015. As of September 30, 2015, we had an accumulated deficit of $126.9 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.

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 assess the impact of 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.

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 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 nine months ended September 30, 2015 and 2014, 8%, and 11%, 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 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. (formerly DigitalPersona, 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 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 $97.0 million for the year ended December 31, 2014. During this period, we significantly expanded our operations and increased the number of our employees from 105 at December 31, 2008 to 444 at September 30, 2015. 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:

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 quarter is derived from the recognition of deferred revenue relating to software maintenance contracts

entered into during previous quarters. In each of the years ended December 31, 2014, 2013, 2012, 2011 and the nine months ended September 30, 2015, 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:

We believe our primary competitor in the healthcare industry in which our Imprivata OneSign solution competes is Caradigm USA LLC, a joint venture of General Electric Company and Microsoft Corporation. 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.

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.

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:

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:

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:

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 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. 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 SMS 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 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. For instance, we have self-certified adherence to the U.S. Department of Commerce’s Safe Harbor Privacy Principles and compliance with the U.S.-EU and U.S.-Swiss Safe Harbor Frameworks as agreed to and set forth by the U.S. Department of Commerce, and the European Union and Switzerland, or the Data Privacy Safe Harbor. The Data Privacy Safe Harbor, which established a means for legitimating the transfer of PHI by U.S. companies doing business in Europe from the European Economic Area to the U.S, is no longer deemed to be a valid method of compliance with restrictions regarding the transfer of data outside of the European Economic Area, as a result of an opinion by the European Union Court of Justice on October 6, 2015. 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.

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.

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 (Internet System for Tracking Over-Prescribing) law mandates that all patient medications be prescribed electronically. The deadline for prescribers to comply with I-STOP is 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 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 that are coordinated with our corporate headquarters in the Boston, Massachusetts area and our Santa Cruz, California, San Francisco, California and Tampa, Florida offices. Any disruption to our internal communications, whether caused by a natural disaster or by man-made problems, such as power disruptions, in the Boston, Massachusetts, Santa Cruz, California, San Francisco, California or Tampa, Florida areas 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:

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 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.

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:

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 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.

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.

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 November 3, 2015, 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:

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.

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

There are 24,996,195 shares of our common stock outstanding, based on the number of shares outstanding as of September 30, 2015. An aggregate of 1,935,861 shares of our common stock are reserved for future issuance under our stock option plans, and 581,064 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 41.8% of our common stock outstanding, based on the number of shares outstanding as of September 30, 2015. 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.

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 will, to some extent, depend 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:

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.

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:

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.

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. At December 31, 2014, all expenses incurred in connection with the offering have been paid.

During the nine months ended September 30, 2015, we used a total of $24.9 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, $415,000 related to expenditures for internally developed software and $4.4 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).

During the preparation of our consolidated financial statements for the three months ended June 30, 2015, we identified an error in our accounting for deferred income taxes in prior periods related to our deferred income tax accounting for our 2011 acquisition of Validus. Specifically, we should have, but did not, record deferred income tax expense in connection with post acquisition adjustments made to the contingent consideration recorded in connection with the acquisition. We have corrected this error by recording an out of period adjustment for the cumulative amount of deferred tax expense associated with these adjustments totaling $535,000 in its three months ended June 30, 2015 financial results. Had these tax amounts been recorded timely, we would have recorded additional tax expense of $75,000, $322,000, and $138,000 in the years ended December 31, 2012, 2013, and 2014, respectively.

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.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Large accelerated filer	¨		Accelerated filer	¨

Non-accelerated filer	x	(Do not check if a smaller reporting company)	Smaller reporting company	¨

	PART I

Item 1.	Financial Statements (Unaudited)	4

	Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014	4

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014	5

	Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2015 and 2014	6

	Condensed Consolidated Statement of Stockholders’ Equity as of September 30, 2015	7

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014	8

	Notes to Condensed Consolidated Financial Statements (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

	Overview	23

	Critical Accounting Estimates	25

	Results of Operations	27

	Liquidity and Capital Resources	33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	36

	PART II

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3.	Defaults Upon Senior Securities	54

Item 4.	Mine Safety Disclosures	54

Item 5.	Other Information	54

Item 6.	Exhibits	54

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands, except per share data)	2015			2014			2015			2014
Pro forma revenue	$	29,282		$	26,738		$	86,073		$	72,725
Pro forma operating expenses		26,341			21,981			76,735			63,401
Pro forma net loss		(7,214	)		(4,410	)		(19,882	)		(13,851	)
Pro forma net loss per share basic and diluted	$	(0.29	)	$	(0.19	)	$	(0.82	)	$	(1.53	)

	September 30,			December 31,
(in thousands)	2015			2014
Trade accounts receivable ⁽¹⁾	$	25,696		$	25,615
Unbilled receivables ⁽²⁾		1,255			80
Total trade accounts receivable		26,951			25,695
Allowance for doubtful accounts		(158	)		(161	)
Allowance for sales returns		(199	)		(199	)
Total allowance		(357	)		(360	)
Trade accounts receivable, net	$	26,594		$	25,335

			Useful lives
(in thousands)	Amount		(in years)
Technology	$	2,199	7
Trade name		252	4
Non-compete agreement		437	5
Customer contracts and relationships		403	7
	$	3,291

(in thousands)	Amount
2015 (remaining 3 months)	$	130
2016		522
2017		522
2018		522
2019		480
Thereafter		897
	$	3,073

	Foreign
	Currency			Affected line item in the
	Translation			statement where net
(in thousands)	Adjustments			income is presented
Balance at January 1, 2014		(145	)
Other comprehensive loss		(100	)
Amounts reclassified from accumulated other comprehensive income:
Closure of foreign branch		145		Other income (expense)
Net current-period other comprehensive loss		45
Balance at December 31, 2014		(100	)
Other comprehensive loss		15
Amounts reclassified from accumulated other comprehensive income:
Closure of foreign branch		(34	)	Other income (expense)
Net current-period other comprehensive loss		(19	)
Balance at September 30, 2015	$	(119	)

Risk-free interest rate(1)	0.08	%
Expected life (years)(2)	0.68
Expected dividend yield(3)	—	%
Expected volatility of underlying stock(4)	40	%

Risk-free interest rate(1)	0.07	%
Expected life (years)(2)	0.50
Expected dividend yield(3)	—	%
Expected volatility of underlying stock(4)	55	%

	Three and Nine Months Ended
	September 30,
(in thousands)	2015		2014
Options to purchase common stock		4,201		3,631
Common stock subject to repurchase		38		46
Total		4,239		3,677

	IMPRIVATA, INC.

DATED: November 6, 2015	By:	/s/ Jeff Kalowski
		Chief Financial Officer
		Principal Financial Officer and Duly Authorized Signatory

Exhibit No		Description

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 nine months ended September 30, 2015, 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).