10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2016

Or

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

For the transition period from to

Commission file number 001-36516

IMPRIVATA, INC.

(Exact name of registrant as specified in its charter)

Delaware	04-3560178
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

10 Maguire Road

Lexington, Massachusetts 02421

(Address of principal executive offices, including zip code)

(781) 674-2700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

As of April 29, 2016, there were 25,327,530 shares of the registrant’s common stock outstanding.

Table of Contents

	PART I
Item 1.	Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015	4
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015	5
	Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2016 and 2015	6
	Condensed Consolidated Statement of Stockholders’ Equity as of March 31, 2016	7
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
	Overview	21
	Critical Accounting Estimates	23
	Results of Operations	25
	Liquidity and Capital Resources	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
	PART II
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	50
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	51
Item 6.	Exhibits	51

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Special note regarding forward-looking statements and industry data

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

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

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

• the rate and degree of market acceptance of our products;

• our expectations regarding our products’ performance;

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

• regulatory developments in the United States and foreign countries;

• the success of our sales and marketing capabilities;

• the success of competing products that are or become available;

• our ability to obtain additional financing if needed;

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

• the loss of key technology or management personnel.

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

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PART 1

Item 1. Financial Statements.

Imprivata, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

	As of March 31,			As of December 31,
(in thousands, except share amounts)	2016			2015
Assets
Current assets:
Cash and cash equivalents	$	49,328		$	51,712
Accounts receivable, net of allowances		30,080			36,629
Prepaid expenses and other current assets		5,002			4,431
Total current assets		84,410			92,772
Property and equipment, net		7,979			7,901
Goodwill		11,885			14,380
Intangible assets, net		6,333			5,681
Other assets		1,346			23
Total assets	$	111,953		$	120,757
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	7,188		$	6,997
Accrued expenses and other current liabilities		8,282			11,567
Current portion of capital lease obligations and long-term debt		395			442
Current portion of other long-term liabilities		240			240
Current portion of deferred revenue		43,218			43,929
Current portion of contingent purchase price liability		611			818
Total current liabilities		59,934			63,993
Deferred revenue, net of current portion		4,916			5,430
Deferred tax liability		771			662
Capital lease obligations, long-term debt and royalty obligations, net of current portion		119			209
Other long-term liabilities, net of current portion		1,817			1,850
Total liabilities		67,557			72,144
Commitments and contingencies (Note 11)
Stockholders' equity:
Undesignated preferred stock, $0.001 par value, 20,000,000 shares authorized;    none issued at March 31, 2016 and December 31, 2015		—			—
Common stock, $0.001 par value, 250,000,000 shares authorized at March 31, 2016    and December 31, 2015; 25,243,884 and 25,041,643 shares were issued and    outstanding at March 31, 2016 and December 31, 2015, respectively		25			25
Additional paid-in capital		181,824			179,357
Accumulated other comprehensive loss		(161	)		(151	)
Accumulated deficit		(137,292	)		(130,618	)
Total stockholders’ equity		44,396			48,613
Total liabilities and stockholders’ equity	$	111,953		$	120,757

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

4

Imprivata, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended
	March 31,
(in thousands, except per share data)	2016			2015
Revenue
Product	$	15,978		$	12,913
Maintenance and services		15,543			12,723
Total revenue		31,521			25,636
Cost of revenue
Product		4,692			3,423
Maintenance and services		5,270			4,927
Total cost of revenue		9,962			8,350
Gross profit		21,559			17,286
Operating expenses
Research and development		8,688			6,872
Sales and marketing		14,221			12,018
General and administrative		5,426			4,580
Total operating expenses		28,335			23,470
Loss from operations		(6,776	)		(6,184	)
Other income (expense)
Foreign currency exchange (loss) gain		251			(462	)
Interest and other income (expense), net		(9	)		(16	)
Loss before income taxes		(6,534	)		(6,662	)
Income taxes		140			37
Net loss	$	(6,674	)	$	(6,699	)
Net loss per share attributable to common stockholders
Basic and diluted	$	(0.27	)	$	(0.28	)
Weighted average common shares outstanding used in computing    net loss per share attributable to common stockholders
Basic and diluted		25,120			23,868

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

5

Imprivata, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

	March 31,
(in thousands)	2016			2015
Net loss	$	(6,674	)	$	(6,699	)
Other comprehensive loss:
Foreign currency translation adjustments		(10	)		(45	)
Comprehensive loss	$	(6,684	)	$	(6,744	)

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

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Imprivata, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

	Common stock						Accumulated
	par value				Additional		other
	$0.001				paid-in		comprehensive			Accumulated
(in thousands)	Shares		Amount		capital		loss			deficit			Total
Balance as of January 1, 2016		25,042	$	25	$	179,357	$	(151	)	$	(130,618	)	$	48,613
Exercise of common stock options		136		-		461								461
Stock-based compensation expense		-				1,357								1,357
Employee stock purchase plan		66		-		649								649
Net loss											(6,674	)		(6,674	)
Other comprehensive loss								(10	)					(10	)
Balance as of  March 31, 2016		25,244	$	25	$	181,824	$	(161	)	$	(137,292	)	$	44,396

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

7

Imprivata, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
(in thousands)	2016			2015
Cash flows from operating activities:
Net loss	$	(6,674	)	$	(6,699	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		981			780
Provision for doubtful accounts		104			—
Provision for excess inventory		90			—
Stock-based compensation		1,357			701
Loss on disposal of fixed assets		16			14
Change in value of contingent purchase price liability		(101	)		21
Deferred income taxes		110			—
Changes in operating assets and liabilities:
Accounts receivable		8,344			6,262
Prepaid expenses and other current assets		(1,997	)		(857	)
Deferred revenue		(495	)		(35	)
Accounts payable		77			412
Accrued expenses and other current liabilities		(3,382	)		(4,145	)
Other liabilities		(34	)		5
Net cash used in operating activities		(1,604	)		(3,541	)
Cash flows from investing activities:
Purchases of property and equipment		(807	)		(371	)
Purchases of intangible assets		(792	)		—
Net cash used in investing activities		(1,599	)		(371	)
Cash flows from financing activities:
Payment of contingent liability		(106	)		—
Repayments for capital lease obligations, long-term debt and other		(135	)		(180	)
Proceeds from employee stock purchase plan		649			684
Proceeds from exercise of stock options		428			330
Net cash provided by financing activities		836			834
Effect of exchange rates on cash and cash equivalents		(17	)		(69	)
Net decrease in cash and cash equivalents		(2,384	)		(3,147	)
Cash and cash equivalents, beginning of year		51,712			78,524
Cash and cash equivalents, end of year	$	49,328		$	75,377
Supplemental disclosures of non-cash investing and financing activities:
Property and equipment purchases included in accounts    payable and accrued expenses	$	35		$	99
Intangible asset purchases included in accrued expenses	$	95		$	—

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

8

Imprivata, Inc.

Notes to condensed consolidated financial statements

(Unaudited)

1. Organization and business

(a) Description of business

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

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

(b) Basis of presentation and principles of consolidation

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

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

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Imprivata Securities Corporation and Imprivata International, Inc., 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.  

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

(c) Use of estimates

When preparing financial statements in conformity with U.S. GAAP, we 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.

(d) Foreign currency

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

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

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2. Summary of significant accounting policies

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

Recent accounting guidance

Recently adopted accounting updates

In April 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“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 became 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 did not have an impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU No. 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 No.2015-05 became effective for interim and annual reporting periods beginning after December 15, 2015. The Company’s adoption of this guidance had an immaterial impact on its consolidated financial statements.

Accounting standards or updates not yet effective

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) (ASU 2014-09). ASU No. 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 No. 2015-14, “Revenue from Contracts with Customers—Deferral of the Effective Date,” that defers by one year the effective date of ASU No. 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 guidance could impact the timing and amounts of revenue recognized. In 2015, the FASB proposed amendments and clarifications to various aspects of the guidance. These amendments were proposed in three FASB exposure drafts. The Company is currently evaluating the effect that implementation of this guidance and any amendments will have on the Company’s consolidated financial statements upon adoption. Any changes to the guidance resulting from the proposed amendments could change the Company’s assessment of the impact that adoption might have on the Company’s consolidated financial statements and could impact the Company’s decision on whether or not to early adopt.

In March 2016, the FASB issue ASU No. 2016-08, “Revenue from contracts with customers (Topic 606): Principal versus Agent Consideration.”  This guidance clarifies the implementation guidance related to principal versus agent consideration.  It provides illustrative examples to assist in the application of principal versus agent revenue recognition in the context of the new revenue.  This guidance’s effective date and transition requirements are the same as those of the new revenue standard which 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. The Company is evaluating the effect this guidance will have on the Company’s consolidated financial statements upon adoption.

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

10

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

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

3. Business combination

HT Systems, LLC Acquisition

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

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

The Company has contingent obligations to pay up to $5.0 million of potential additional earn-out consideration to the selling equity-holders of HT Systems, which will be determined based upon the achievement of certain sales targets over the two-year period following the closing of the transaction on April 30, 2015, provided, that the selling equity-holders remain employees of the Company when the earn-out consideration becomes payable. The earn-out consideration will be recognized in the Company’s consolidated financial statements as compensation expense as earned. For the three months ended March 31, 2016, the Company did not record 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.

Purchase Price Allocation

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

				Useful lives
(dollars in thousands)	Amount			(in years)
Assets:
Accounts and unbilled receivables	$	7,195
Prepaid expenses and other current assets		20
Property and equipment		59		3
Intangible assets		3,291		4 to 7
Liabilities assumed:
Accrued expenses		(85	)
Deferred revenue		(1,730	)
Net assets acquired		8,750
Goodwill		10,325
Total fair value consideration	$	19,075

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

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 March 31, 2016, the Company finalized the valuation of the assets and liabilities acquired and  recorded the following measurement period adjustments:

• a $120,000 working capital adjustment to the balance sheet as a result of increasing the pre-acquisition unbilled receivables not previously recorded in the acquiree’s opening balance sheet;

• a $34,000 decrease to trade accounts receivable to the balance sheet as a result of writing off pre-acquisition receivables deemed to be uncollectible;

• a $14,000 decrease to prepaid expense to the balance sheet as a result of the decision to not move forward with a project; and

• a decrease in the fair value of deferred revenue acquired by $730,000, due to the refinement of the valuation estimates for deferred revenue and a $1.9 million increase to unbilled receivables as a result of reviewing the contractual billing obligations of the acquired customers for goods and services delivered in pre-acquisition periods.

These measurement period adjustments resulted in a $2.5 million decrease in the amount of goodwill reported in the consolidated balance sheet at March 31, 2016.

4. Fair value measurements

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

(a) Fair value hierarchy

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

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

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

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

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

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

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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 March 31, 2016
							Total
(in thousands)	Level 1		Level 2		Level 3		carrying value
Assets
Cash equivalents:
Money market funds	$	2,690	$	—	$	—	$	2,690
Certificates of deposit		—		97		—		97
Liabilities
Contingent consideration		—		—		611		611

	Fair value measurements at December 31, 2015
							Total
(in thousands)	Level 1		Level 2		Level 3		carrying value
Assets
Cash equivalents:
Money market funds	$	2,689	$	—	$	—	$	2,689
Certificates of deposit		—		97		—		97
Liabilities
Contingent consideration		—		—		818		818

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

There were no fair value measurements on a non-recurring basis during the three months ended March 31, 2016. In April 2015, the Company completed an acquisition of HT Systems. Under the acquisition method of accounting, the Company allocated the purchase price to the identifiable assets and liabilities based on their estimated fair values which are level 3 inputs. Refer to “Note 3. Business combination” for additional information.

(d) Level 3 fair value measurements

Contingent consideration

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

The Company re-measures the fair value of the contingent liability at each balance sheet date based on the present value of forecasted revenues through March 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:  

	March 31,			December 31,
(in thousands)	2016			2015
Beginning balance as of January 1st	$	818		$	632
Revaluation recognized in general and administrative    expenses in the corresponding statements of operations		(101	)		197
Cash payment on the contingent liability		(106	)		(11	)
Ending balance	$	611		$	818

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

	March 31,		December 31,
	2016		2015
Discount Rate		17%		17%

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(e) Other financial instruments

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

5. Trade accounts receivable, net of allowances

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

	March 31,			December 31,
(in thousands)	2016			2015
Trade accounts receivable(1)	$	28,875		$	35,815
Unbilled receivables(2)		1,667			1,171
Total trade accounts receivable		30,542			36,986
Allowance for doubtful accounts		(263	)		(158	)
Allowance for sales returns		(199	)		(199	)
Total allowance		(462	)		(357	)
Trade accounts receivable, net	$	30,080		$	36,629

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

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

As of March 31, 2016 and December 31, 2015, the Company had $1.7 million and $1.2 million unbilled receivables presented in Accounts receivable, net of allowances in the consolidated balance sheets. The unbilled receivables are primarily related to contracts acquired in the acquisition of HT Systems. As of March 31, 2016, $1.3 million of these unbilled receivables are long term commitments and are presented in Other assets in the condensed consolidated balance sheets.

6. Inventory

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

The components of inventories are as follows:

	March 31,		December 31,
(in thousands)	2016		2015
Finished goods	$	932	$	1,051
Raw materials		146		146
Total	$	1,078	$	1,197

When recorded, inventory reserves are intended to reduce the carrying value of inventories to their net realizable value. The Company establishes inventory reserves when conditions exist that indicate inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for the Company’s products or market conditions. The Company regularly evaluates the ability to realize the value of inventories based on a combination of factors including the following: forecasted sales or usage, estimated product end of life dates, estimated current and future market value and new product introductions. The Company recorded immaterial charges for excess and obsolete inventories for the year ended December 31, 2015. During the three months ended March 31, 2016, the Company recorded a $147,000 for excess and obsolete inventories.

7. Intangible assets

Internally-developed software costs

As of March 31, 2016 and December 31, 2015, the Company recorded $2.1 million and $1.2 million, respectively, of costs associated with an internally developed software project for one of its existing product offerings. The costs, which primarily consist of third party developer expenses, are included in Intangible assets in the consolidated balance sheets.

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8. Accrued expenses and other current liabilities

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

	March 31,		December 31,
(in thousands)	2016		2015
Accrued payroll and related	$	4,449	$	8,212
Accrued taxes(1)		707		933
Other accrued expenses		3,126		2,422
	$	8,282	$	11,567

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

9. Warranty obligations

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

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

	March 31,			December 31,
(in thousands)	2016			2015
Beginning balance	$	40		$	40
Provision for estimated claims		5			44
Adjustment to estimate		—			—
Settlement of claims		(5	)		(44	)
Ending balance	$	40		$	40

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

10. Debt

Bank credit facility

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

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

11. Commitments and contingencies

(a) Operating lease obligations

The Company’s principal headquarters is located in Lexington, Massachusetts. The Company currently leases approximately 93,000 square feet of office space under a lease expiring in 2021. In addition, the Company amended its lease agreement in 2015 to lease additional 6,338 square feet of office space to its headquarters beginning January 2017 and expiring in 2021.

The Company leases offices for research and development in San Francisco, California. During the first quarter of 2016, the Company entered into a new agreement to lease approximately 5,000 square feet of office space. The lease term begins in June 2016 and expires in June 2023. The rent expense totals approximately $2.9 million.

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

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entity owned by the selling equity-holders of HT Systems. The remaining lease payments are $61,000. In October 2015, the Company extended the lease term through March 31, 2017.

(b) Litigation

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

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

(c) Indemnifications

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

As of March 31, 2016 and December 31, 2015, the Company had not experienced any material losses related to these indemnification obligations, and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible, and no related reserves were established.  

12. Accumulated other comprehensive loss

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

	ForeignCurrency			Affectedline item in the
	Translation			statement where net
(in thousands)	Adjustments			income is presented
Balance as of January 1, 2015	$	(100	)
Other comprehensive loss		(17	)
Amounts reclassified from accumulated other comprehensive income:
Closure of foreign branch		(34	)	Other income (expense)
Net current-period other comprehensive loss		(51	)
Balance as of December 31, 2015		(151	)
Other comprehensive loss		(10	)
Balance as of March 31, 2016	$	(161	)

13. Stock award plans and stock based compensation

(a) Equity incentive plan

In May 2014, the Company’s 2014 Stock Option and Incentive Plan (“2014 Plan”), was adopted by the Company’s board of directors and approved by its stockholders and became effective in June 2014. The 2014 Plan replaced the Amended and Restated 2002 Stock Option and Incentive Plan (“2002 Plan”) as the Company’s board of directors has determined not to make additional awards under the

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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 three months ended March 31, 2016, the Company granted 1,782,000 options to purchase common stock at a weighted average exercise price of $11.55.

At March 31, 2016, there were 1,449,178 shares available for future grant under the 2014 Plan.

(b) Employee stock purchase plan

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

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

At March 31, 2016, there were 765,596 shares available for future grant under the ESPP.

(c) Early exercise of stock options

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

At March 31, 2016 and December 31, 2015, a total of 17,500 and 21,875 shares of unvested stock options exercised were subject to repurchase at an aggregate price of $81,200 and $102,000, respectively. These amounts are recorded as accrued and other current liabilities in the Company’s consolidated balance sheets and will be reclassified to equity as the Company’s repurchase right lapses.

During the three months ended March 31, 2016 and 2015, 4,375 and 5,202 stock options associated with the early exercise vested, respectively.

(d) Valuation of share-based compensation

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

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

	Three Months ended
	March 31,
	2016			2015
Risk-free interest rate(1)	1.39% - 1.74%				1.77	%
Expected life (years)(2)		6.02			6.02
Expected dividend yield(3)		—	%		—	%
Expected volatility of underlying stock(4)	45% - 48%				47	%

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

	March 1, 2016 to August 31, 2016			September 1, 2015 to February 29, 2016			March 1, 2015 to August 31, 2015			June 25, 2014 to February 28, 2015
Risk-free interest rate(1)		0.50	%		0.26	%		0.07	%		0.08	%
Expected life (years)(5)		0.50			0.50			0.50			0.68
Expected dividend yield(3)		—	%		—	%		—	%		—	%
Expected volatility of underlying stock(4)		72	%		40	%		55	%		40	%

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:

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

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

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

(4) Expected volatility—the Company is responsible for estimating volatility. The Company has limited trading history as a public company and does not have relevant historical data to develop its volatility assumptions. Therefore, the Company used a weighted average of its volatility and analyzed the volatility of several public peer companies to support the assumptions used in its calculations for the three months ended March 31, 2016.

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

(e) Summary of share-based compensation expense

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

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

	Three Months ended
	March 31,
(in thousands)	2016		2015
Cost of maintenance and professional services	$	129	$	60
Research and development		345		223
Sales and marketing		341		216
General and administrative		542		202
Total	$	1,357	$	701

14. Income taxes

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

As of December 31, 2015, the Company’s valuation allowance related to income taxes was approximately $36.0 million. The Company is in a three year cumulative loss position in the United States. As a result, the Company maintains a full valuation allowance to reduce the carrying value of the related deferred tax assets to zero. The Company will continue to maintain a full

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valuation allowance for such tax assets until sustainable future levels of profitability are evident. The Company does not consider deferred tax liabilities related to indefinite lived assets to be sources of income, which can support the realizability of deferred tax assets, and has provided for tax expense and a corresponding deferred tax liability associated with these naked credits.

Income tax expense related to tax deductible goodwill

During the three months ended March 31, 2016, the Company recorded U.S. tax expense of $110,000, 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 March 31, 2016 and December 31, 2015, the Company had no uncertain positions or unrecorded liabilities for uncertain tax positions.

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

15. Computation of net loss per share

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

The components of net loss per share are as follows:

	Three Months Ended March 31,
(in thousands, except per share data)	2016			2015
Numerator:
Net loss	$	(6,674	)	$	(6,699	)
Denominator:
Weighted average common shares outstanding used in    computing basic and diluted net loss per common share		25,120			23,868
Net loss per share, basic and diluted	$	(0.27	)	$	(0.28	)

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

	Three Months Ended March 31,
(in thousands)	2016		2015
Options to purchase common stock		5,714		4,951
Common stock subject to repurchase		21		35
Total		5,735		4,986

16. Concentration of risk and off-balance sheet risk

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

For the three months ended March 31, 2016, one reseller accounted for 21% of revenues; no other reseller or customer accounted for more than 10% of revenues.  For the three months ended March 31, 2015, no customer or reseller accounted for more than 10% of revenues.

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At March 31, 2016, one reseller accounted for 23% of accounts receivable; no other reseller or customer accounted for more than 10% of the accounts receivable. At December 31, 2015, one reseller accounted for 12% of accounts receivable; no other reseller or customer accounted for more than 10% of accounts receivable.  

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

17. Related Party Transactions

The Company completed its acquisition of HT Systems on April 30, 2015. The Company has contingent obligations to pay up to $5.0 million of potential additional earn-out consideration to the selling equity-holders of HT Systems, which will be determined based upon the achievement of certain sales targets over the two-year period following the closing of the transaction on April 30, 2015. The earn-out consideration will be paid to each of the selling equity-holders of HT Systems, based on their equity ownership of HT Systems prior to the acquisition, provided that such selling equity-holder remains an employee of the Company at the time the earn-out becomes payable. Each of the selling equity-holder became employees of the Company upon the closing of the acquisition on April 30, 2015. One selling equity-holder is a member of the Company’s executive management team, but is not a director, executive officer or five percent holder of the Company’s equity securities. No payments associated with the earn-out have been made during the three months ended March 31, 2016.

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, 2017. The Company made rental payments totaling $15,000 and $0 during the three months ended March 31, 2016, and 2015, respectively.

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Item 2. Management’s discussion and analysis of financial condition and results of operations 

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

Overview

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

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

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

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

Initial Public Offering

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

Shelf Registration

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

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

Acquisition of HT Systems

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

Adjusted EBITDA

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

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

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

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

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

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

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

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

• Adjusted EBITDA does not include shelf registration and offering costs;

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

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

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

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

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

	Three Months Ended March 31,
(in thousands, except per share amounts)	2016			2015
GAAP net loss	$	(6,674	)	$	(6,699	)
Adjustments to reconcile to Adjusted EBITDA:
Income tax expense		140			37
Depreciation and amortization		981			780
Other (expense) income, net		(242	)		478
Stock-based compensation		1,357			701
Change in fair value of contingent liability		(101	)		21
Shareholder litigation costs		33			—
Acquisition costs		—			163
Adjusted EBITDA	$	(4,506	)	$	(4,519	)

Backlog

Our backlog consists of the total future value of our committed customer purchases, whether billed or unbilled. Backlog includes products, software maintenance and professional services which we have billed or been paid for in advance, and are included in deferred revenue on our balance sheet, as well as committed customer purchases where we have not invoiced or fulfilled the order as of the last day of the applicable period and which are not reflected on our balance sheet. We generally complete the unfulfilled committed customer product purchases by shipment in the next fiscal quarter and recognize revenue upon such shipment. We recognize any maintenance and services revenue related to unfulfilled committed customer purchases in subsequent periods in accordance with our revenue recognition policies. As of March 31, 2016 and December 31, 2015, we had backlog of $51.9 million and $51.8 million, respectively. Of the $51.9 million in backlog as of March 31, 2016, approximately $42.0 million, which includes approximately $27.3 million of maintenance, is expected to be recognized as revenue during the year ended December 31, 2016. Additionally, $6.2 million of maintenance revenue is expected to be recognized over the five year period subsequent to the year ended December 31, 2016. Revenue in any period is a function of new purchases during the period, the timing of fulfillment of customer orders, maintenance renewals and revenue recognized from backlog. Therefore, backlog viewed in isolation may not be indicative of future performance. Our presentation of backlog may differ from that of other companies in our industry.

Critical accounting estimates

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

Recent accounting guidance

Recently adopted accounting updates

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 became effective for us 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 did not have an impact on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 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 No. 2015-05

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became effective for interim and annual reporting periods beginning after December 15, 2015. Our adoption of this guidance had an immaterial impact on our consolidated financial statements.

Accounting standards or updates not yet effective

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) (ASU 2014-09). ASU No. 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 No. 2015-14, “Revenue from Contracts with Customers—Deferral of the Effective Date,” that defers by one year the effective date of ASU No. 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 guidance could impact the timing and amounts of revenue recognized. In 2015, the FASB proposed amendments and clarifications to various aspects of the guidance. These amendments were proposed in three FASB exposure drafts. We are currently evaluating the effect that implementation of this guidance and any amendments will have on our consolidated financial statements upon adoption. Any changes to the guidance resulting from the proposed amendments could change our assessment of the impact that adoption might have on our consolidated financial statements and could impact our decision on whether or not to early adopt.  

In March 2016, the FASB issue ASU No. 2016-08, “Revenue from contracts with customers (Topic 606): Principal versus Agent Consideration.”  This guidance clarifies the implementation guidance related to principal versus agent consideration.  It provides illustrative examples to assist in the application of principal versus agent revenue recognition in the context of the new revenue.  This guidance’s effective date and transition requirements are the same as those of the new revenue standard which 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. We are evaluating the effect this guidance will have on our consolidated financial statements upon adoption.

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

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

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

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Results of operations

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

	Three Months Ended
	March 31,
(in thousands, except per share data)	2016			2015
Revenue
Product	$	15,978		$	12,913
Maintenance and services		15,543			12,723
Total revenue		31,521			25,636
Cost of revenue
Product		4,692			3,423
Maintenance and services		5,270			4,927
Total cost of revenue		9,962			8,350
Gross profit		21,559			17,286
Operating expenses
Research and development		8,688			6,872
Sales and marketing		14,221			12,018
General and administrative		5,426			4,580
Total operating expenses		28,335			23,470
Loss from operations		(6,776	)		(6,184	)
Other income (expense)
Foreign currency exchange loss		251			(462	)
Interest and other income expense (net)		(9	)		(16	)
Loss before income taxes		(6,534	)		(6,662	)
Income taxes		140			37
Net loss	$	(6,674	)	$	(6,699	)

Revenue

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

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

	Three Months Ended
	March 31,						Period-to-Period
	2016			2015			Change
(dollars in thousands)	Amount			Amount			$		%
Revenue
Product revenue	$	15,978			12,913		$	3,065		23.7	%
Percentage of revenue		50.7	%		50.4	%
Maintenance and service revenue		15,543			12,723			2,820		22.2	%
Percentage of revenue		49.3	%		49.6	%
Total Revenue	$	31,521		$	25,636		$	5,885		23.0	%

Product revenue

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

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Comparison of three months ended March 31, 2016 and 2015

Product revenue increased by $3.1 million, or 24%, during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. The increase was driven primarily by an increase of approximately $1.3 million in sales of additional products into our existing healthcare and non-healthcare customer base. The sales of additional products to healthcare customers increased by $1.4 million. This increase in sales was offset by a decrease of $163,000 in sales to non-healthcare customers. Sales to new healthcare and non-healthcare customers increased by approximately $1.8 million over the same period. Sales to new healthcare customers increased by $1.8 million during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015 and our sales to non-healthcare customers remained relatively constant during the three months ended March 31, 2016. We continue to focus on the healthcare industry, we believe the composition of non-healthcare customers may vary on a quarterly basis and is not indicative of any trend.

Maintenance and service revenue

Maintenance and services revenue is generated from maintenance and technical support associated with our software as well as professional services, which include implementation and training. Maintenance is typically invoiced annually in advance, recorded as deferred revenue and recognized ratably over the maintenance period. The professional services revenue consists primarily of fees associated with the implementation of our software and training services, and represented 12% of our revenues for the three months ended March 31, 2016 and 2015. Our professional service arrangements are generally billed on a time and materials basis and revenue is recognized as the services are performed. Training is generally billed as a fixed fee and revenue is recognized when the training is completed.

Comparison of three months ended March 31, 2016 and 2015

Maintenance and service revenue increased by $2.8 million, or 22%, during the three months ended March 31, 2016, as compared to the three months ended March 31, 2015. The increase was driven by increased maintenance revenue of $2.3 million resulting from our larger installed base of users. In addition, professional services increased by $446,000 over the same period due to the increased sales of our products, which resulted in new professional services related to implementation and training.  

Cost of revenue

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

	Three Months Ended
	March 31,						Period-to-Period
	2016			2015			Change
(dollars in thousands)	Amount			Amount			$ / #		%
Cost of revenue
Product	$	4,692		$	3,423		$	1,269		37.1	%
Product gross margin		70.6	%		73.5	%
Maintenance and services		5,270			4,927			343		7.0	%
Maintenance and service gross margin		66.1	%		61.3	%
Total cost of revenue	$	9,962		$	8,350		$	1,612		19.3	%
Total gross margin		68.4	%		67.4	%
Headcount
Cost of revenue		105			99			6		6.1	%

Cost of product revenue

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

Comparison of three months ended March 31, 2016 and 2015

Cost of product revenue increased by $1.3 million, or 37%, during the three months ended March 31, 2016, as compared to the three months ended March 31, 2015. The increase was primarily attributable to the increase in sales of proximity card and fingerprint devices. Product gross margin decreased due to unfavorable changes in the mix between higher-margin software and lower margin device sales.  Device revenues as a percentage of total product revenues can fluctuate and, as a result, we expect product gross margins to vary depending on the mix of device revenues to total product revenues can fluctuate and, as a result, we expect product gross margins to vary depending on the mix of device revenues to total product revenues.

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Cost of maintenance and service revenue

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

Comparison of three months ended March 31, 2016 and 2015

Cost of maintenance and services revenue increased by $343,000, or 7%, during the three months ended March 31, 2016, as compared to the three months ended March 31, 2015. The increase was primarily due to the increase in payroll and related costs of $292,000 and facilities and IT costs of $206,000 as a result of increased headcount. The timing for new hires may vary within the quarter and is not indicative of any trend. The increase was partially offset by decrease in travel and entertainment of $69,000 and a decrease in consulting costs of $60,000 as a result of our increase in employees.However, maintenance and services revenue gross margin increased to 66% during the three months ended March 31, 2016 compared to 61% during the three months ended March 31, 2015.

Operating expenses

Our operating expenses consist primarily of personnel costs, including salaries, commissions, bonuses, share-based compensation and related benefits and taxes, costs related to the design and development of new products and enhancement of existing products, marketing programs, consulting, travel, and depreciation expenses. Personnel costs are our largest expense, representing $17.8 million, or 63%, and $14.7 million, or 63%, of our total operating expenses for the three months ended March 31, 2016 and 2015, respectively. We allocate overhead such as our information technology expenses, including personnel costs, and facility expenses based on headcount. Due to our headcount growth, we have increased the leased square footage for our corporate headquarters in Lexington, Massachusetts and our capital expenditures for leasehold improvements and information technology equipment.

The following table sets forth our operating expenses.

	Three Months Ended
	March 31,						Period-to-Period
	2016			2015			Change
(dollars in thousands)	Amount			Amount			$ / #		%
Operating expenses
Research and development	$	8,688		$	6,872		$	1,816		26.4	%
Percentage of revenue		27.6	%		26.8	%
Sales and marketing		14,221			12,018			2,203		18.3	%
Percentage of revenue		45.1	%		46.9	%
General and administrative		5,426			4,580			846		18.5	%
Percentage of revenue		17.2	%		17.9	%
Total operating expenses	$	28,335		$	23,470		$	4,865		20.7	%
Percentage of revenue		89.9	%		91.6	%
Headcount
Research and development		130			103			27		26.2	%
Sales and marketing		154			146			8		5.5	%
General and administrative		46			41			5		12.2	%
Information technology		20			14			6		42.9	%
Total		350			304			46		15.1	%

Research and development

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

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

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Comparison of three months ended March 31, 2016 and 2015

Research and development expenses increased by $1.8 million, or 26%, during the three months ended March 31, 2016, as compared to the three months ended March 31, 2015.  The increase was primarily due to increased payroll and related costs of $1.0 million due to our larger employee base, increase in consulting expenses of $200,000 related to our third-party developers. We also had increases in hiring and related costs of $117,000 and facilities and IT costs of $320,000, which are allocated based on headcount. The timing for new hires may vary within the quarter and is not indicative of any trend.

Sales and marketing

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

Comparison of three months ended March 31, 2016 and 2015

Sales and marketing expenses increased by $2.2 million, or 18%, during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015.  The increase was primarily due to increase in spending on sales related costs of $1.1 million and marketing and business-development related costs of $1.1 million. The increase in sales related costs was primarily due to increased payroll and related costs of $703,000, commission expense of $194,000, and facilities and IT costs of $156,000, which are allocated based upon headcount. The timing for new hires may vary within the quarter and is not indicative of any trend. The increase in marketing and business-development related cost was primarily related to increase in payroll and related costs of $187,000 and marketing and promotion costs of $767,000, which was primarily driven by costs associated with the Healthcare Information and Management System Society trade show that occurred in the first quarter of 2016 as compared to the second quarter of 2015.

General and administrative

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

Comparison of three months ended March 31, 2016 and 2015

General and administrative expenses increased by $846,000, or 19%, during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. The increase was primarily due to increase in payroll, bonus and related costs of $712,000 as a result of our increased headcount. Included in the increase for payroll and related costs are increases of $340,000 for share-based compensation expense. The timing for new hires may vary within the quarter and is not indicative of any trend.  

Other income (expense)

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

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	Three Months Ended
	March 31,						Period-to-Period
	2016			2015			Change
(dollars in thousands)	Amount			Amount			$		%
Foreign currency exchange gain (loss)	$	251		$	(462	)	$	713		(154.3	)%
Percentage of revenue		0.8	%		(1.8	)%
Interest and other income (expense), net		(9	)		(16	)		7		(43.8	)%
Percentage of revenue		0.0	%		(0.1	)%
Total other income (expense)	$	242		$	(478	)	$	720		(150.6	)%

Comparison of three months ended March 31, 2016 and 2015

Other income increased by $720,000 during the three months ended March 31, 2016, as compared to the three months ended March 31, 2015 primarily due to an increase in foreign exchange gains compared to foreign exchange losses during the three months ended March 31, 2015.  

Income tax expense

	Three Months Ended
	March 31,						Period-to-Period
	2016			2015			Change
(dollars in thousands)	Amount			Amount			$		%
Income taxes	$	140		$	37		$	103		278.4	%
Percentage of revenue		0.4	%		0.1	%

Comparison of three months ended March 31, 2016 and 2015

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

Our tax expense recorded primarily relates to $110,000 of deferred tax expense associated with long term deferred tax liabilities related to tax basis in acquired goodwill and a tax expense of $30,000 on earnings of certain foreign subsidiaries and to a lesser extent state income taxes.

Liquidity and capital resources

Resources

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

Cash and cash equivalents

As of March 31, 2016, we had $49.3 million of cash and cash equivalents, of which $461,000 was held in our foreign subsidiaries. Our cash is invested in money market funds or in cash deposit accounts, and is held for working capital purposes. We do not enter into investments for trading or speculative purposes.

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

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

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

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

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

	Three Months Ended March 31,
(in thousands)	2016			2015
Net cash used in operating activities	$	(1,604	)	$	(3,541	)
Net cash used in investing activities		(1,599	)		(371	)
Net cash provided by financing activities		836			834
Effect of exchange rates on cash and cash equivalents		(17	)		(69	)
Net decrease in cash and cash equivalents	$	(2,384	)	$	(3,147	)

Net cash used in operating activities

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

Our cash used in operating activities during the three months ended March 31, 2016 was primarily due to a net loss of $6.7 million adjusted for $2.6 million of non-cash expenses that included $981,000 of depreciation and amortization, $1.4 million in stock-based compensation, an increase in deferred tax liability of $110,000, a provision for doubtful accounts of $104,000, a provision for excess inventory of $90,000, a loss on disposal of fixed assets of $16,000 and a decrease of $101,000 due to the reduction to the fair value of the contingent purchase price liability. Net increase in working capital amounted to $2.5 million attributable to decreases in accounts receivable of $8.3 million and an increase in accounts payable of $77,000. These increases were partially offset by a decrease in accrued expenses of $3.4 million, an increase in prepaid expenses and other current assets of $2.0 million and a decrease in deferred revenue of $495,000.

Net cash used in investing activities

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

For the three months ended March 31, 2016, cash used in investing activities consisted of expenditures for development of internal use software of $792,000 and purchases of property and equipment for $807,000, which was primarily driven by the increase in leasehold improvements, computer equipment and furnishings for our corporate headquarters, as well as increases in computer equipment for our increased headcount.

Net cash provided by financing activities

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

For the three months ended March 31, 2016, cash provided by financing activities primarily consisted of $649,000 proceeds from our employee stock purchase plan and $428,000 of proceeds from the exercise of stock options, partially offset by $135,000 of payments in connection with our debt, capital leases and royalty obligations and $106,000 of payments of contingent liability.

Requirements

Capital expenditures

We have made capital expenditures primarily for leasehold improvements and furniture and fixtures related to the expansion of our corporate headquarters, as well as information technology equipment to support our increased headcount, product enhancement and development and our overall growth. Our capital expenditures totaled $1.6 million and $371,000 for the three months ended March 31, 2016 and 2015, respectively.

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

Contractual obligations and commitments

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

Off-balance sheet arrangements

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

Item 3. Quantitative and qualitative disclosures about market risk

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

Foreign currency exchange risk

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

We maintain foreign cash accounts denominated in the Euro and British Pound Sterling, to fund our foreign operations and collect foreign accounts receivables. We generally invoice our customers in the currencies of the countries in which the customer is located. At March 31, 2016, our foreign accounts receivable balances were primarily denominated in the Euro, British Pound Sterling, Swiss Franc, Canadian Dollar 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 March 31, 2016, our foreign currency exchange gain or loss would have fluctuated by $945,000.

Interest rate risk

At March 31, 2016, we had cash and cash equivalents of $49.3 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 March 31, 2016, 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 $41,000. Changes in interest rates would not have a significant impact on our outstanding borrowing.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), refers to controls and procedures that are designed to ensure that information required to be

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disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

We have carried out an evaluation under the supervision of, and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2016.

Changes in Internal Control over Financial Reporting

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

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PART II

Item 1. Legal Proceedings

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

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

Item 1A. Risk Factors

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

Risks related to our business and industry

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 $6.7 million net loss for the three months ended March 31, 2016. As of March 31, 2016, we had an accumulated deficit of $137.3 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

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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,

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such as reductions in funding, changes in pricing for healthcare services or impediments to third-party reimbursement for healthcare costs, may cause deterioration in the financial or business condition of our customers and cause them to reduce their spending on information technology. As a result, these developments could adversely affect our business.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In addition to our direct sales force, we rely on our sales partners, consisting of our channel partners and technology alliance partners, to sell our solutions. We derive a substantial portion of our revenue from sales of our products and services through our sales partners, and we expect that sales through sales partners will continue to be a significant percentage of our revenue. For the three months ended March 31, 2016 and 2015, 21% and 8%, respectively, of our total revenues were derived from our largest sales partner.

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

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

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

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

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

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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 $119.1 million for the year ended December 31, 2015. During this period, we significantly expanded our operations and increased the number of our employees from 105 at December 31, 2008 to 455 at March 31, 2016. Our rapid growth has placed, and will continue to place, a significant strain on our management systems, infrastructure and other resources. We plan to hire additional direct sales and marketing personnel domestically and internationally, increase our investment in research and development and acquire complementary businesses, technologies or assets. Our future operating results depend to a large extent on our ability to successfully implement these plans and manage our anticipated expansion. To do so successfully we must, among other things:

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

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

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

• manage operations in multiple locations and time zones; and

• integrate acquired businesses, technologies or assets.

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

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

We generally recognize revenue from our software maintenance contracts ratably over the contract term. A portion of the maintenance revenue we report in each year is derived from the recognition of deferred revenue relating to software maintenance contracts entered into during previous years. In each of the years ended December 31, 2015, 2014, and 2013, and the three months ended March 31,

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2016, we retained greater than 90% of the aggregate dollar amount of our software maintenance contracts up for renewal. Consequently, a decline in renewed software maintenance by our customers in any one quarter may not be immediately reflected in our revenue for that quarter. Such a decline, however, will adversely affect our revenue in future quarters. Accordingly, the effect of significant downturns in our rate of renewals may not be fully reflected in our operating results until future periods.

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

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

• brand awareness and reputation;

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

• breadth of product distribution;

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

• product innovation and ability to meet customer needs.

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

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.

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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:

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

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

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

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

• have difficulty retaining the key personnel of acquired businesses;

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

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

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

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

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

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

• delayed market acceptance of our affected solutions;

• loss of customers or inability to attract new customers;

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

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• damage to our brand and reputation; 

• increased service and warranty costs;

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

• penalties imposed by regulatory authorities.

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

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

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

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

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

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

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

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

• difficulties in staffing and managing personnel and sales partners;

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

• competitors who are more familiar with local markets;

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

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

• limited or unfavorable intellectual property protection in some countries.

In addition, as we continue to expand our international operations, we have become more exposed to the effects of fluctuations in currency exchange rates. We incur expenses for employee compensation and other operating expenses at our international locations and accept payment from customers in the local currency. Since we conduct business in currencies other than the U.S. dollar but report our operating results in U.S. dollars, we have exposure to fluctuations in currency exchange rates. We do not currently hedge against the risks associated with currency fluctuations but may do so in the future.

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

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

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

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

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

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

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

We also directly handle, access or store PHI in connection with our commercial solutions, such as our Imprivata Cortext solution, which is a secure, cloud-based communication platform that provides healthcare organizations and healthcare providers with secure texting and messaging capabilities. Although we are transmitting and storing PHI in encrypted format for such customers, and do not,

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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, the European Union Directive 95/46/EC (the “Directive”) governs the processing and free movement of personal data of protected individuals, including “sensitive” data (“Personal Data”), to countries outside the European Economic Area (the “EEA”) that have not been found to ensure an adequate level of protection of such Personal Data, such as the United States. We have self-certified adherence to the U.S. Department of Commerce’s Safe Harbor Privacy Principles as agreed to and set forth by the U.S. Department of Commerce and the European Union.  However, as a result of an opinion issued by the European Union Court of Justice (the “ECJ”) on October 6, 2015, the EU-U.S. Safe Harbor Framework was no longer deemed to be a valid method of compliance with requirements of the Directive governing the transfer of Personal Data to countries such as the United States.

It was recently announced that the United States and the EEA reached agreement on a successor framework to the Safe Harbor, to be referred to as the EU-U.S. “Privacy Shield.”  The Privacy Shield is designed to heighten protections for transferring EU residents’ Personal Data to the U.S. Although the Privacy Shield continues to rely on the concept of enforceable self-certification to assure adequate protection, it imposes significantly greater obligations on organizations and their vendors than those that existed under the Safe Harbor framework. However, on April 13, 2016, the Article 29 Working Party declined to endorse the Privacy Shield as presently drafted. Therefore, the likelihood and timing of the potential adoption of the Privacy Shield, and any of its specific requirements, remains unclear. We are monitoring the evolution of the requirements for compliance, which may impact our ability to offer certain of our solutions to customers outside of the United States in the future. Alternatively, we may find it necessary to establish systems in the EEA to facilitate compliance, which may involve additional expense and may cause us to divert resources from other aspects of our business, all of which may adversely affect our business.

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

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

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

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

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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 law mandates that all patient medications be prescribed electronically. The deadline for prescribers to comply with I-STOP was March 27, 2016. If other states fail to enact legislation requiring that prescriptions be sent electronically or if existing requirements for electronic prescriptions are scaled-back, our ability to sell Imprivata Confirm ID solution may be adversely affected.

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

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

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

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

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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, which are coordinated with our corporate headquarters in the Boston, Massachusetts area and our Santa Cruz, California, San Francisco, California, Tampa, Florida and Uxbridge, United Kingdom offices. Any disruption to our internal communications, whether caused by a natural disaster or by man-made problems, such as power disruptions, could delay our research and development efforts, cause delays or cancellations of customer orders or delay deployment of our solutions, which could have a material adverse effect on our business, operating results and financial condition.

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

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

• incur additional indebtedness;

• redeem subordinated indebtedness;

• create liens on our assets;

• enter into transactions with affiliates;

• make investments;

• sell assets;

• make material changes in our business or management;

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

• consolidate or merge with other entities.

In addition, our revolving line of credit requires us to maintain specified adjusted quick ratio tests. The operating and financial restrictions and covenants in the loan and security agreement governing our revolving line of credit, as well as any future financing agreements that we may enter into, may restrict our ability to finance our operations, engage in business activities or expand or fully

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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.

Risks related to our intellectual property

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

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

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

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

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

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

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

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

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

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

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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.

Claims of intellectual property infringement could harm our business.

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

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

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

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

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

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

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Risks related to our common stock

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

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

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

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

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

The market price of shares of our common stock has been, and may continue to be, volatile.  From June 25, 2014 through April 29, 2016, our stock price has traded at prices as low as $9.00 per share and as high as $21.63 per share. The market price of our common stock could continue to fluctuate as a result of many risks listed in this section, and others beyond our control, including:

• our operating performance and the operating performance of similar companies;

• the overall performance of the equity markets;

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

• threatened or actual litigation;

• changes in laws or regulations relating to the healthcare industry;

• any major change in our board of directors or management;

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

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

• general political and economic conditions.

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

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

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

There are 25,265,212 shares of our common stock outstanding, based on the number of shares outstanding as of March 31, 2016. An aggregate of 1,449,178 shares of our common stock are reserved for future issuance under our stock option plans, and 765,596 shares of our common stock are reserved for future issuance under our ESPP. These shares can be freely sold in the public market upon issuance. In addition, on July 1, 2015, we filed a shelf registration statement on Form S-3 to register the sale of up to 13,395,230 shares of our common stock held by our existing stockholders. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock.

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

Our executive officers, directors, current 5% or greater stockholders and entities affiliated with any of them, together beneficially own 40.1% of our common stock outstanding, based on the number of shares outstanding as of March 31, 2016. These stockholders, if they act together, will have significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and may take actions that may not be in the best interests of our other stockholders. This concentration of ownership could also limit stockholders’ ability to influence corporate matters. Accordingly, corporate actions might be taken even if other stockholders oppose them, or may not be taken even if other stockholders view them as in the best interests of our stockholders. This concentration of ownership may have the effect of delaying or preventing a change of control of our company, may make the approval of certain transactions difficult or impossible without the support of these stockholders and might adversely affect the market price of our common stock.

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

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

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

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

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

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

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

48

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

49

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

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

• hire additional personnel;

• develop new or enhance existing products and services;

• expand our operating infrastructure;

• acquire businesses or technologies; or

• otherwise respond to competitive pressures.

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

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

Recent Sales of unregistered securities

None.

Use of proceeds

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

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

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

During the three months ended March 31, 2016, we used a total of $2.4 million of our offering proceeds, of which, $792,000 related to expenditures for internally developed software and $1.6 million was used for working capital purposes. There has been no material change in the use of proceeds from our IPO as described in our prospectus filed with the SEC pursuant to Rule 424(b)(4).

Item  3. Defaults Upon Senior Securities.

None.

Item  4. Mine Safety Disclosures.

Not Applicable.

50

Item  5. Other Information. 

None.

Item 6. Exhibits.

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

51

SIGNATURES

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

	IMPRIVATA, INC.
DATED:  May 6, 2016	By:	/s/ Jeff Kalowski
		Chief Financial Officer
		Principal Financial Officer and Duly Authorized Signatory

52

Exhibit Index

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.
10.1	Seventh Loan Modification Agreement to the Loan and Security Agreement by and between the Registrant and Silicon Valley Bank on April 20, 2016.
10.2	Office Lease Agreement by and between the Registrant and BOP 685 Market LLC on March 31, 2016.
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 months ended March 31, 2016, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Loss, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements (Unaudited).

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

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

53

EX-10.1

Exhibit 10.1

SEVENTH LOAN MODIFICATION AGREEMENT

This Seventh Loan Modification Agreement (this “Loan Modification Agreement”) is entered into as of       4/20       , 2016, by and between SILICON VALLEY BANK, a California corporation, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at 275 Grove Street, Suite 2-200, Newton, Massachusetts 02466 (“Bank”) and IMPRIVATA, INC., a Delaware corporation, with its chief executive office located at 10 Maguire Road, Lexington, Massachusetts 02421 (“Borrower”).

1.      DESCRIPTION OF EXISTING INDEBTEDNESS AND OBLIGATIONS. Among other indebtedness and obligations which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a loan arrangement dated as of January 30, 2009, evidenced by, among other documents, a certain Loan and Security Agreement dated as of January 30, 2009, between Borrower and Bank, as amended by a First Loan Modification and Reinstatement Agreement dated as of April 26, 2010, as further amended by a Second Loan Modification Agreement dated as of May 24, 2011, and as further amended by a certain Third Loan Modification and Reinstatement Agreement dated as of December 12, 2012, as further modified by a certain Fourth Loan Modification and Reinstatement Agreement dated as of February 27, 2014 (the “Fourth Loan Modification”), as further amended by a certain Fifth Loan Modification Agreement dated as of February 19, 2015, and as further amended by a certain Sixth Loan Modification Agreement dated as of April 28, 2015 (as amended, the “Loan Agreement”). Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement.

2.      DESCRIPTION OF COLLATERAL. Repayment of the Obligations is secured by the Collateral as described in the Loan Agreement (together with any other collateral security granted to Bank, the “Security Documents”). Hereinafter, the Security Documents, together with all other documents evidencing or securing the Obligations shall be referred to as the “Existing Loan Documents”.

3.      DESCRIPTION OF CHANGE IN TERMS.

A. Modification to Loan Agreement. Effective as of April 25, 2016, the Loan Agreement shall be amended by deleting the following definition, appearing in Section 13.1 thereof:

“          “Revolving Line Maturity Date” is April 25, 2016.”

and inserting in lieu thereof the following:

“          “Revolving Line Maturity Date” is April 24, 2017.”

4.      FEES AND EXPENSES. Borrower shall pay to Bank a modification fee equal to Sixty Thousand Dollars ($60,000.00), which fee shall be due on the date hereof and shall be deemed fully earned as of the date hereof. Borrower shall also reimburse Bank for all legal fees and expenses incurred in connection with this amendment to the Existing Loan Documents.

5.      RATIFICATION OF PERFECTION CERTIFICATE. Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and disclosures contained in a certain Perfection Certificate dated as of December 12, 2012, and acknowledges, confirms and agrees that the disclosures and information Borrower provided to Bank in such Perfection Certificate have not changed, as of the date hereof except as set forth on Schedule 3 to the Fourth Loan Modification.

6.      CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.

7.      RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Obligations.

8.      NO DEFENSES OF BORROWER. Borrower hereby acknowledges and agrees that Borrower has no offsets, defenses, claims, or counterclaims against Bank with respect to the Obligations, or otherwise, and that if Borrower now has, or ever did have, any offsets, defenses, claims, or counterclaims against Bank, whether known or unknown, at law or in equity, all of them are hereby expressly WAIVED and Borrower hereby RELEASES Bank from any liability thereunder.

1

9.      CONT1NUING VALIDITY. Borrower understands and agrees that in modifying the existing Obligations, Bank is relying upon Borrower’s representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank’s agreement to modifications to the existing Obligations pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Obligations. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Obligations. It is the intention of Bank and Borrower to retain as liable parties all makers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker will be released by virtue of this Loan Modification Agreement.

10.    COUNTERSIGNATURE. This Loan Modification Agreement shall become effective only when it shall have been executed by Borrower and Bank.

[The remainder of this page is intentionally left blank]

2

This Loan Modification Agreement is executed as a sealed instrument under the laws of the Commonwealth of Massachusetts as of the date first written above.

BORROWER:		BANK:
IMPRIVATA, INC.		SILICON VALLEY BANK
By:	/s/ Jeff Kalowski	By:	/s/ Frank Groccia
Name:	Jeff Kalowski	Name:	Frank Groccia
Title:	CFO	Title:	Vice President

SVB›Silicon Valley Bank

A Member of SVB Financial Group

SECRETARY’S CORPORATE BORROWING CERTIFICATE

BORROWER:	Imprivata, Inc.	DATE:	4/20	, 2016
BANK:	Silicon Valley Bank

I hereby certify as follows, as of the date set forth above:

1.   I am the Secretary of Borrower.

2.   Borrower’s exact legal name is set forth above. Borrower is a corporation duly organized, existing and in good standing under the laws of the State of Delaware.

3.   Except as set forth on Exhibit A, the Fifth Amended and Restated Certificate of Incorporation delivered by Borrower to Bank in connection with the Sixth Loan Modification Agreement dated as of April 28, 2015 has not been amended, annulled, rescinded, revoked or supplemented, and remains in full force and effect as of the date hereof.

4.   Except as set forth on Exhibit B, the Amended and Restated By-Laws delivered by Borrower to Bank in connection with the Sixth Loan Modification Agreement dated as of April 28, 2015 have not been amended, annulled, rescinded, revoked or supplemented, and remain in full force and effect as of the date hereof.

5.   The persons named below are now and have been duly qualified and acting officers of Borrower, duly elected to the office as set forth opposite their respective names and the signatures set forth opposite their respective names and offices are their respective genuine signatures:

Name	Title	Signature
Jeff Kalowski	CFO	/s/ Jeff Kalowski
Kevin Johnson	VP & Corp. Controller	/s/ Kevin Johnson
James Hall	VP, Finance	/s/ James Hall

6.   The following resolutions were duly and validly adopted by Borrower’s Board of Directors at a duly held meeting of such directors (or pursuant to a unanimous written consent or other authorized corporate action). Such resolutions are in full force and effect as of the date hereof and have not been in any way modified, repealed, rescinded, amended or revoked, and Bank may rely on them until Bank receives written notice of revocation of same from Borrower.

BE IT RESOLVED, that any one (1) of the above named officers or employees of Borrower, acting for and on behalf of Borrower, are authorized and empowered:

Borrow Money. To borrow from time to time from Silicon Valley Bank (“Bank”), on such terms as may be agreed upon between the officers of Borrower and Bank, such sum or sums of money as in their judgment should be borrowed.

Execute Loan Documents. To execute and deliver to Bank the loan documents of Borrower at such rates of interest and on such terms as may be agreed upon, evidencing the sums of money so borrowed or any indebtedness of Borrower to Bank, and also to execute and deliver to Bank one or more renewals, extensions, modifications, refinancing, consolidations, or substitutions for one or more of the loan documents, or any portion of the loan documents.

-1-

Grant Security. To grant a security interest to Bank in any of Borrower’s assets, which security interest shall secure all of Borrower’s obligations to Bank.

Negotiate Items. To draw, endorse, and discount with Bank all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to Borrower or in which Borrower may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of Borrower with Bank, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable.

Letters of Credit. To execute letter of credit applications and other related documents pertaining to Bank’s issuance of letters of credit.

Foreign Exchange Contracts. To execute and deliver foreign exchange contracts, either spot or forward, from time to time, in such amount as, in the judgment of the officer or officers herein authorized.

Issue Warrants. To issue warrants to purchase Borrower’s capital stock, for such class, series and number, and on such terms, as an officer of Borrower shall deem appropriate. Upon such issuance the requisite number of shares of Borrower’s capital stock will be automatically reserved for the exercise of such warrants to purchase stock.

Further Acts. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements, including agreements waiving the right to a trial by jury, as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these resolutions.

BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these resolutions shall remain in full force and effect and Bank may rely on these resolutions until written notice of their revocation shall have been delivered to and received by Bank. Any such notice shall not affect any of Borrower’s agreements or commitments in effect at the time notice is given.

-2-

IN WITNESS WHEREOF, I have executed this Secretary’s Corporate Borrowing Certificate on behalf of Borrower in my capacity as Secretary as of the    20^th day of    April   , 2016.

CERTIFIED TO AND ATTESTED BY:
By:	/s/ John Milton
Name:	John Milton
Title:	Secretary

* If the Secretary executing above is designated by the resolutions set forth above as one of the authorized signing officers, this Secretary’s Corporate Borrowing Certificate must also be signed by a second authorized officer or director of Borrower.

I, the                   CFO                   of Borrower, hereby certify as to paragraphs I through 6 above, as of the date set forth above.

                                 [print title]

By:	/s/ Jeff Kalowski
Name:	Jeff Kalowski
Title:	CFO

-3-

SILICON VALLEY BANK

INVOICE FOR LOAN CHARGES

BORROWER:	IMPRIVATA, INC.
LOAN OFFICER:	Mr. Frank Groccia
DATE:		, 2016

Modification Fee	$ 60,000.00
TOTAL FEES DUE	$ 60,000.00

Please indicate method of payment:

{    } A check for the total amount is attached.

{    } Debit DDA _____________ for the total amount.

{    } Loan proceeds

[signature page follows]

IMPRIVATA, INC.
By:	/s/ Jeff Kalowski
Name:	Jeff Kalowski
Title:	CFO
SILICON VALLEY BANK
By:
Name:
Title:

1965982.1

EX-10.2

Exhibit 10.2

Brookfield

Imprivata, Inc.

Monadnock Building

685 Market Street

Table of Contents

1.	BASIC LEASE PROVISIONS	1
2.	PROJECT	2
3.	TERM	4
4.	RENT	5
5.	USE & OCCUPANCY	7
6.	SERVICES & UTILITIES	8
7.	REPAIRS	10
8.	ALTERATIONS	10
9.	INSURANCE	12
10.	DAMAGE OR DESTRUCTION	13
11.	INDEMNITY	14
12.	CONDEMNATION	14
13.	TENANT TRANSFERS	15
14.	LANDLORD TRANSFERS	16
15.	DEFAULT AND REMEDIES	17
16.	LETTER OF CREDIT; FINANCIAL STATEMENTS	19
17.	MISCELLANEOUS	20
18.	BROKERS	22
19.	TENANT’S SECURITY SYSTEM	22

List of Exhibits

EXHIBIT A – LOCATION OF PREMISES

EXHIBIT B – RULES & REGULATIONS

EXHIBIT C – NOTICE OF LEASE TERM

EXHIBIT D – WORK LETTER

i

Index of Defined Terms

A		L
Additional Construction Allowance	D-4	Land		3
Additional Insured	13	Landlord		1
Additional Rent	5	Landlord Delay		D-2
Affiliates	15	Landlord’s Compliance Work		D-1
Alterations	11	Landlord’s Contractor		D-3
Amortization Rate	7	Landlord’s Representative		D-1
As-Built Drawings	D-3	Landlord’s Security System		24
B		Landlord’s Work		D-1
Bank	20	Late Charge		8
Base Building	3	LC Amount		1
Base Rent	1	LC Expiration Date		21
Base year	1	Lease		1
Bid Summary	D-3	Leasehold Improvements		3
Billing Address	2	Letter of Credit		20
Brokers	2	Liability Limit		2
Building	1	M
Building Standard	4	Mandated Expenses	.	6
Building Structure	3	Mechanical Systems		3
Business Hours	2	Month		4
C		N
Change Order	D-2	NLT		4
Claims	15	Notice Addresses		1
Commencement Date	4	P
Common Areas	3	Permitted Transferee		16
Comparison year	5	Premises		1
Construction Allowance	2	Project		3
Construction Drawings	D-2	Q
Construction Schedule	D-1	Quality Expenses		6
Cost-Saving Expenses	6	R
D		REIT		II
Dale	1	Relocation Notice		22
Default	19	Renovations		12
Default Rate	20	Rent		7
Design Problem	11	Repair Estimate		14
E		Replacement Premises		22
Encumbrance	18	Retention		D-3
Estimated Additional Rent	7	RSF		4
Expenses	5	S
Expiration Date	4	Scheduled Commencement Date		1
F		Scheduled Term		1
Force Majeure	20	Service Provider		11
Force Majeure Delay	D-2	Space Plans		D-2
H		Standard Services		9
Hazardous Materials	8	Substantially Complete		D-5
Holdover	4	Successor Landlord		18
Holidays	2	T
HVAC	9	Taking		16
I		Taxes		5
Interruption Estimate	14	Telecommunication Services		10
		Tenant		1

ii

Tenant Delay	D-1	Transferee	16
Tenant’s Architect	D-2	U
Tenant’s Personal Property	4	Untenantable	14
Tenant’s Personnel	D-3	Use	1
Tenant’s Representative.	D-1	USF	4
Tenant’s Security System	24	W
Tenants Share	1	Work Costs	D-4
Tenant’s Wiring	10	Y
Tenant’s Work	D-3	Year	4
Term	4
Transfer	16

iii

Lease

Landlord and Tenant enter into this Lease (“Lease”) as of the Date on the following terms, covenants, conditions; and provisions:

1. BASIC LEASE PROVISIONS

1.1	Basic Lease Definitions.	In this Lease, the following defined terms have the meanings indicated.
(a)	Date:	March 31, 2016
(b)	Landlord:	BOP 685 Market LLC, a Delaware limited liability company.
(c)	Tenant:	Imprivata, Inc., a Delaware corporation
(d)	Building:	685 Market Street, San Francisco, California, deemed to contain:
		203,161 RSF
(e)	Premises:	Suite 500 (identified on Exhibit A), located in the Building and deemed to contain:
		5,029 RSF
(f)	Use:	General administrative non-governmental office use consistent with that of a first-class office building.
(g)	Scheduled Term:	85 Months
(h)	Scheduled	June 1, 2016.
	Commencement Date:
(i)	Base Rent:	The following amounts, payable in accordance with Article 4:

Period	Annual Rate	Annual Base Rent	Monthly Base Rent
Months 1 to 12	$75.00	$377,175.00	$31,431.25
Months 13 to 24	$77.25	$388,490.28	$32,374.19
Months 25 to 36	$79.57	$400,157.52	$33,346.46
Months 37 to 48	$81.96	$412,176.84	$34,348.07
Months 49 to 60	$84.42	$424,548.24	$35,379.02
Months 61 to 72	$86.95	$437,271.60	$36,439.30
Months 73 to·84	$89.56	$450,397.20	$37,533.10
Month 85	$92.25	$463,925.28	$38,660.44

Notwithstanding the foregoing, and provided that Tenant is not then in Default of this Lease (with all applicable notices having been given and cure periods having expired), Landlord will excuse Tenant from the payment of Base Rent, only, otherwise payable during Month 1 of the initial Term.

(j)	Tenant’s Share:	2.48%
(k)	Base Year:	The calendar year 2016
(l)	LC Amount:	$270,623.08. Such LC Amount shall be periodically subject to reduction and subject to conversion in accordance with Article 16 of this Lease.
(m)	Notice Address:	For each party, the following address(es):

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To Landlord	To Tenant
BOP 685 Market, LLC	Imprivata, Inc.
685 Market Street, Suite 520	10 Maguire Rd.
San Francisco, California 94105	Lexington, MA 02421
Attn: General Manager	Attn: Kelliann McCabe
with a copy to:
Brookfield Properties Management
601 S. Figueroa Street, Suite 2200
Los Angeles, California 90017
Attn: VP, Regional Counsel

(n) Billing Address: For each party, the following address:

For Landlord		For Tenant
Via U.S. Mail		Imprivata, Inc.
BOP 685 Market LLC		10 Maguire Rd.
PO Box 62905		Lexington, MA 02421
Baltimore, MD 21264-2905		Attn: Kelliann McCabe
		Email: payables@imprivata.com
Via Overnight Courier
BOP 685 Market LLC
Box# 62905
1800 Washington Boulevard
Baltimore, MD 21230
Via Electronic Transfer
Bank:	Manufacturers & Traders
	Trust Co.
Acct. Name:	BOP 685 Market LLC
Acct. No.:	9859352131
ABA No.:	022000046
Ref:	Invoice #

(o)	Brokers:	Brookfield Properties Management (CA) Inc. and Jones Lang LaSalle Brokerage Inc. (for Landlord); and T3 Advisors (for Tenant).
(p)	Liability Limit	A minimum combined single limit of liability of at least $1,000,000 per occurrence and a general aggregate limit of at least $2,000,000, and in addition, excess liability insurance on a following form basis, with overall limits of at least $5,000,000.
(q)	Construction Allowance:	$377,175.00 (i.e., $75.00 per RSF of the Premises) for the payment of Work Costs in accordance with the Work Letter attached to this Lease as Exhibit D.
		.
(r)	Business Hours:	From 7:00 a.m. to 6:00 p.m., Monday through Friday, except for the days observed for: New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day and, at Landlord’s discretion, other locally or nationally recognized holidays that are observed by other buildings of comparable class in the locale of the Building (“Holidays”).

2. PROJECT

2.1 Project. The Land, Building, and Common Areas (as defined in §1 and below) are collectively referred to as the “Project.” As of the Date, the Project is commonly known as “The Monadnock Building.”

2.2 Land. “Land” means the real property on which the Building and Common Areas are located, including casements and other rights that benefit or encumber the real property. Landlord’s interest in the Land may be in fee or a leasehold. The Land may be expanded or reduced after the Date.

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2.3 Base Building. “Base Building” means the Building Structure and Mechanical Systems, collectively, defined as follows:

(a) Building Structure. “Building Structure” means the structural components in the Building, including foundations, floor and ceiling slabs, roofs, exterior walls, exterior glass and mullions, columns, beams, shafts, and emergency stairwells. The Building Structure excludes the Leasehold Improvements (and similar improvements to other premises) and the Mechanical Systems.

(b) Mechanical Systems. “Mechanical Systems” means the mechanical, electronic, physical or informational systems generally serving the Building or Common Areas, including the sprinkler, plumbing, heating, ventilating, air conditioning, lighting, communications, security, drainage, sewage, waste disposal, vertical transportation, and fire/life safety systems.

2.4 Common Areas. Tenant will have a non-exclusive right to use the Common Areas subject to the terms of this Lease. “Common Areas” means those interior and exterior common and public areas on the Land (and appurtenant easements) and in the Building designated by Landlord for the non-exclusive use by Tenant in common with Landlord, other tenants and occupants, and their employees, agents and invitees.

2.5 Premises. Landlord leases to Tenant the Premises subject to the terms of this Lease. Except as provided elsewhere in this Lease, by taking possession of the Premises Tenant accepts the Premises in its “as is” condition and with all faults, and the Premises is deemed in good order, condition, and repair. The Premises includes the Leasehold Improvements and excludes certain areas, facilities and systems, as follows:

(a) Leasehold Improvements. “Leasehold Improvements” means all non-structural improvements in the Premises or exclusively serving the Premises, and any structural improvements to the Building made to accommodate Tenant’s particular use of the Premises. The Leasehold Improvements may exist in the Premises as of the Date, or be installed by Landlord or Tenant under this Lease at the cost of either party. The Leasehold Improvements include: (1) interior walls and partitions (including those surrounding structural columns entirely or partly within the Premises); (2) the interior one-half of walls that separate the Premises from adjacent areas designated for leasing; (3) the interior drywall on exterior structural walls, and walls that separate the Premises from the Common Areas; (4) stairways and stairwells connecting parts of the Premises on different floors, except those required for emergency exiting; (5) the frames, casements, doors, windows and openings installed in or on the improvements described in the foregoing clauses (1) through (4), or that provide entry/exit to/from the Premises; (6) all hardware, fixtures, cabinetry, railings, paneling, woodwork and finishes in the Premises or that are installed in or on the improvements described in the foregoing clauses (1) through (5); (7) if any part of the Premises is on the ground floor, the ground floor exterior windows (including mullions, frames and glass); (8) integrated ceiling systems (including grid, panels and lighting); (9) carpeting and other floor finishes; (10) kitchen, rest room, laboratory or other similar facilities that exclusively serve the Premises (including plumbing fixtures, toilets, sinks and built-in appliances); and (11) the sprinkler, plumbing, heating, ventilating, air conditioning, electrical, metering, lighting, communications, security, drainage, sewage, waste disposal, vertical transportation, fire/life safety, and other mechanical, electronic, physical or informational systems that exclusively serve the Premises, including the parts of each system that are connected to the Mechanical Systems from the common point of distribution for each system to and throughout the Premises. The Leasehold Improvements exclude Tenant’s Personal Property (defined below).

(b) Exclusions from the Premises. The Premises does not include: (1) any areas above the finished ceiling or integrated ceiling systems, or below the finished floor coverings that are not part of the Leasehold Improvements, (2) janitor’s closets, (3) stairways and stairwells to be used for emergency exiting or as Common Areas, (4) rooms for Mechanical Systems or connection of telecommunication equipment, (5) vertical transportation shafts, (6) vertical or horizontal shafts, risers, chases, flues or ducts, and (7) any casements or rights to natural light, air or view.

2.6 Building Standard. “Building Standard” means the minimum or exclusive type, brand, quality or quantity of materials Landlord designates for use in the Building from time to time.

2.7 Tenant’s Personal Property. “Tenant’s Personal Property” means those trade fixtures, furnishings, equipment, work product, inventory, stock-in-trade and other personal property of Tenant that are not permanently affixed to the Project in a way that they become a part of the Project and will not, if removed, cause material damage to the Premises.

2.8 Area. “RSF” means rentable square feet or rentable square foot, as the context may require. “USF” means usable square feet or usable square foot, as the context may require.

2.9 Access Inspection Status. Pursuant to Section 1938 of the California Civil Code, Landlord hereby advises Tenant that the Premises, as delivered to Tenant, the Building and Project have not undergone an inspection by a Certified Access Specialist (“CASp”).

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3. TERM  

3.1 Term. “Term” means the period that begins on the Commencement Date and ends on the Expiration Date, subject to renewal, extension, or earlier termination as may be further provided in this Lease. “Month” means a full calendar month of the Term. “Year” means a full calendar year in which all or a part of the Term occurs.

(a) Commencement Date. “Commencement Date” means that date which is the earlier of:

(1) The date that Tenant first conducts business in any part of the Premises; or

(2) The date that Landlord tenders the Premises to Tenant with Landlord’s Work substantially complete or that earlier date that Landlord would have tendered possession of the Premises to Tenant with Landlord’s Work substantially complete but for Tenant Delay (as defined in the Work Letter attached to this Lease as Exhibit D).

(b) Expiration Date. “Expiration Date” means the date that is the Scheduled Term (plus that many additional days required for the Expiration Date to be the last day of a Month) after the Commencement Date.

(c) Early Occupancy. Except as set forth in the Work Letter, Tenant may not enter the Premises for any purpose until Landlord tenders the Premises to Tenant. If Tenant conducts business in any part of the Premises before the Scheduled Commencement Date, Tenant will pay Base Rent for that period at the rate for the first Month that Base Rent is due, without discount or excuse.

(d) Late Occupancy. If Landlord fails to tender possession of the Premises to Tenant by the Scheduled Commencement Date, Landlord will not be in default of this Lease, but Tenant shall have no obligation to pay Rent until the Commencement Date where such delay is not the result of a Tenant Delay.

(e) Confirmation of Term. Landlord shall notify Tenant of the Commencement Date using a Notice of Lease Term (“NLT”) in the form attached to this Lease as Exhibit C. Unless Tenant reasonably objects, Tenant shall execute and deliver to Landlord the NLT within 10 business days after its receipt, but Tenant’s failure to do so will not reduce Tenant’s obligations or Landlord’s rights under this Lease.

3.2 Holdover. If Tenant keeps possession of the Premises after the Expiration Date (or earlier termination of this Lease) without Landlord’s prior written consent (a “Holdover”), which may be withheld in its sole discretion, then in addition to the remedies available elsewhere under this Lease or by law, Tenant will be a tenant-at-sufferance and must comply with all of Tenant’s obligations under this Lease (including the payment of Additional Rent), except that for each Month of Holdover Tenant will pay 150% of the Base Rent payable for the last Month of the Term (or that would have been payable but for abatement or excuse), without prorating for any partial Month of Holdover, plus Additional Rent for such period. Tenant shall indemnify and defend Landlord from and against all claims and damages, both consequential and direct, that Landlord suffers due to Tenant’s failure to return possession of the Premises to Landlord at the end of the Term. Landlord’s deposit of Tenant’s Holdover payment will not constitute Landlord’s consent to a Holdover, or create or renew any tenancy.

3.3 Condition on Expiration.

(a) Return of the Premises. At the end of the Term, Tenant will return possession of the Premises to Landlord vacant, free of Tenant’s Personal Property, in broom-clean condition, and with all Leasehold Improvements in in the condition delivered to Tenant (excepting ordinary wear and tear and casualty), except that Landlord may require Tenant, by notice at least 10 days before the expiration of the Term, to remove (and restore the Premises damaged by removal):

(1) All Tenant’s Wiring; and

(2) Any item of Leasehold Improvements or Alterations (other than Tenant’s Wiring) if either:

(A) When Landlord consented to the installation of the improvement, Landlord reserved Landlord’s right to have Tenant remove the improvement at the end of the Term; or

(B) Tenant failed to obtain Landlord’s written consent under §8.1(a) for an item of Alterations to become part of the Premises.

(b) Correction by Landlord. If Tenant fails to return possession of the Premises to Landlord in the condition required under (a), then Tenant shall reimburse Landlord for the costs incurred by Landlord to put the Premises in the condition required under (a), plus Landlord’s standard administration fee.

(c) Abandoned Property. Tenant’s Personal Property left behind in the Premises after the end of the Term will be considered abandoned and Landlord may move, store, retain, or dispose of these items at Tenant’s cost, including Landlord’s standard administration fee.

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4. RENT  

4.1 Base Rent. Tenant shall prepay 1 Month’s installment of Base Rent (without any abatement) by the Date (i.e., $31,431.25), to be applied against Base Rent first due under this Lease. During the Term, Tenant shall pay all other Base Rent in advance, in equal Monthly installments, on the 1^st of each Month. Base Rent for any partial Month will be prorated based on a 30-day month.

4.2 Additional Rent. Tenant’s obligation to pay Taxes and Expenses under this §4.2 is referred to in this Lease as “Additional Rent.”

(a) Taxes. For each full or partial Year after the Base Year in which the Term occurs (each, a “Comparison Year”), Tenant shall pay as in the manner described below the Tenant’s Share of the amount that Taxes for the Comparison Year exceed Taxes for Ute Base Year. “Taxes” means the total costs incurred by Landlord for: (1) real and personal property taxes and assessments (including ad valorem and special assessments) levied on the Project and Landlord’s personal property used in connection with the Project; (2) taxes on rents or other income derived from the Building; (3) capital and place-of-business taxes; (4) taxes, assessments or fees in lieu of the taxes described in the foregoing clauses (1) through (3); and (5) the reasonable costs incurred to reduce the taxes described in the foregoing clauses (1) through (4). Taxes excludes net income taxes, documentary transfer taxes and taxes paid by Tenant under §4.3 (and any other tenant of the Building with a similar lease obligation).

(b) Expenses. For each Comparison Year, Tenant shall pay in the manner described below the Tenant’s Share of the amount that Expenses for the Comparison Year exceed Expenses for the Base Year. “Expenses” means the total costs incurred by Landlord to operate, manage, administer, equip, secure, protect, repair, replace, refurbish, clean, maintain, decorate and inspect the Project, including a fee to manage the Project of 3% of the gross revenue of the Project. Expenses that vary with occupancy will be calculated as if the Building is 100% occupied and operating, with all utilities and services being provided to all tenants.

(1) Expenses include:

(A) Standard Services provided under §6.1;

(B) Repairs and maintenance performed under §7.2;

(C) Insurance maintained under §9.2 {including deductibles paid; provided, however, any deductibles in excess of $100,000 shall be amortized over a term of 10 years at an annual interest rate equal to the Amortization Rate (defined below), and the amortized costs thereof, but not in excess of $1.00 per RSF of the Building shall be included in Expenses in any Year);

(D) Wages, salaries, and benefits of personnel of Landlord or its Affiliates to the extent they render services to the Project (including, without limitation, property accounting, technical services, and information technology services);

(E) Costs of operating the Project management office (including reasonable rent);

(F) Amortization installments of costs that are required to be capitalized and are incurred:

(i) To comply with insurance requirements or laws enacted after the Commencement Date (“Mandated Expenses”);

(ii) With the reasonable expectation of reducing Expenses or the rate of increase in Expenses (“Cost-Saving Expenses”); or

(iii) That are reasonably calculated to improve or maintain the safety or health of Project occupants (“Quality Expenses”).

(2) Expenses exclude:

(A) Taxes;

(B) Mortgage payments (principal and interest), and ground lease rent;

(C) Commissions, advertising costs, attorney’s fees, and costs of improvements in connection with leasing space in the Building;

(D) Costs reimbursed by insurance proceeds;

(E) Depreciation;

(F) Except for the costs identified in §4.2(b)(1)(F), costs required to be capitalized according to sound real estate accounting and management principles, consistently applied;

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(G) Collection costs and legal fees paid in disputes with tenants;  

(H) Costs to maintain and operate the entity that is Landlord (as opposed to operation and maintenance of the Project);

(I) In the Base Year, only, installments of costs amortized under subsection (c)(1) and (c)(2) of this §4.2, unless such costs are included in Expenses in Lease Years subsequent to the Base Year,

(J) The costs of utilities and services:

(i) Set forth in subsections (4) and (9) of §6.l (a) that are provided to the Premises and to other tenanted premises in the Building, regardless of whether such Standard Services are subject to direct payment by Tenant or such other tenants of the Building pursuant to §6.2 or any similar lease provision; and

(ii) Otherwise reimbursed by Tenant pursuant to §6.3, or by other tenants of the Building pursuant to any similar provision of their respective leases (and not as part of Additional Rent, or any similar lease provision for the sharing of Building costs);

(K) Costs incurred by Landlord to comply with notices of violation of applicable Jaws, including the Americans With Disabilities Act, as amended, when such notices are for conditions existing prior to the Commencement Date that would have been a violation of applicable laws existing as of the Commencement Date; and

(L) Penalties, fines, and associated legal expenses incurred by Landlord due to the violation by Landlord or any other tenant of the Building (other than Tenant) of applicable laws

(c) Amortization and Accounting Principles.

(1) Each item of Mandated Expenses and Quality Expenses will be fully amortized in equal annual installments, with interest on the principal balance at Amortization Rate, over the number of years that Landlord projects the item of Expenses will be productive for its intended use, without replacement, but properly repaired and maintained.

(2) Each item of Cost-Saving Expenses will be fully amortized in equal annual installments, with interest on the principal balance at the Amortization Rate, over the number of years that Landlord reasonably estimates for the present value of the projected savings in Expenses (discounted at the Amortization Rate) to equal the cost.

(3) Any item of Expenses of significant cost that is not required to be capitalized but is unexpected or does not typically recur may, in Landlord’s discretion, be amortized in equal annual installments, with interest on the principal balance at the Amortization Rate, over a number of years determined by Landlord.

(4) “Amortization Rate” means the greater of (A) prime rate of Citibank, N.A. (or a comparable financial institution selected by Landlord) in effect as of the last day of the year in which the costs were incurred, plus 3%, or (B) the actual cost incurred by Landlord for financing.

(5) Landlord may allocate Expenses and Taxes for the Project to various components of the Project on an equitable basis, or as required by any reciprocal easement agreement or common interest association agreement affecting the Project.

(6) Subject to the specific provisions of this Article 4, Landlord will use sound real estate accounting and management principles, consistently applied, to determine Additional Rent.

(d) Estimates. Landlord will reasonably estimate Additional Rent for each Comparison Year (“Estimated Additional Rent”). During each Comparison Year, Tenant will pay the Estimated Additional Rent in advance, in equal Monthly installments, on the first day of each Month of the Comparison Year. Landlord may reasonably revise the Estimated Additional Rent during a Comparison Year and the Monthly installments of Estimated Additional Rent for the remainder of the Comparison Year will be increased or decreased accordingly. Until Landlord provides Tenant with the Estimated Additional Rent for a Comparison Year, Tenant will continue to pay the Estimated Additional Rent for the prior Comparison Year.

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(e) Settlement. As soon as practical after the end of each Comparison Year, Landlord will give Tenant a statement of the actual Additional Rent for the Comparison Year. Additional Rent for any partial Comparison Year will be prorated based on a 365-day calendar year. The statement of Additional Rent is conclusive, binds Tenant, and Tenant waives all rights to contest the statement, except for items of Additional Rent to which Tenant objects by notice to Landlord given within 90 days after receipt of Landlord’s statement; however, Tenant’s objection will not relieve Tenant from its obligation to pay Additional Rent pending resolution of any objection. If the Additional Rent exceeds the Estimated Additional Rent for the Comparison Year, then Tenant shall pay the underpayment to Landlord in a lump sum as Rent within 30 days after receipt of Landlord’s statement of Additional Rent. If the Estimated Additional Rent exceeds the Additional Rent for the Comparison Year, then Landlord shall credit the overpayment against Rent next due or refund such amount to Tenant concurrently with the delivery of such statement if the Lease is to terminate with the same Year as the final calculation of the Additional Rent for the Comparison Year. 

4.3 Tenant’s Taxes. Upon demand, Tenant will reimburse Landlord for taxes paid by Landlord, other than net income taxes, on (a) Tenant’s Personal Property, (b) Rent, (c) Tenant’s occupancy of the Premises, or (d) this Lease. If Tenant cannot lawfully reimburse Landlord for these taxes, then the Base Rent will be increased to yield to Landlord the same amount after these taxes were imposed as Landlord would have received before these taxes were imposed.

4.4 Terms of Payment. “Rent” means all amounts payable by Tenant under this Lease and the exhibits, including Base Rent and Additional Rent. If a time for payment of an item of Rent is not specified in this Lease, then Tenant will pay Rent within 30 days after receipt of Landlord’s statement or invoice. Unless otherwise provided in this Lease, Tenant shall pay Rent without notice, demand, deduction, abatement, or setoff, in lawful U.S. currency, at Landlord’s Billing Address. Landlord will send invoices payable by Tenant to Tenant’s Billing Address; however, neither Landlord’s failure to send an invoice nor Tenant’s failure to receive an invoice for Base Rent (and installments of Estimated Additional Rent) will relieve Tenant of its obligation to timely pay Base Rent (and installments of Estimated Additional Rent). Any partial payment of Rent by Tenant will be considered a payment on account. No endorsement or statement on any Rent check or any letter accompanying Rent will be deemed an accord and satisfaction, affect Landlord’s right to collect the full Rent due, or require Landlord to apply any payment to any Rent other than Rent earliest due. No payment by Tenant to Landlord will be deemed to extend the Term or render any notice, pending suit or judgment ineffective. By notice to the other, each party may change its Billing Address.

4.5 Late Payment. If Landlord does not receive all or part of any item of Rent when due, then Tenant shall pay Landlord 5% of the overdue Rent, plus interest on the unpaid Rent at the Default Rate from the date due until paid (collectively, a “Late Charge”) as Rent. Tenant agrees that the Late Charge is not a penalty, and will compensate Landlord for costs not contemplated under this Lease that are impracticable or extremely difficult to fix. Landlord’s acceptance of a Late Charge does not waive any applicable Tenant’s Default. Notwithstanding the foregoing, Landlord will waive a Late Charge otherwise due from Tenant if:

(a) Tenant notifies Landlord in writing of Tenant’s claim for waiver of the Late Charge within 30 days after Tenant’s receipt of Landlord’s invoice for the Late Charge;

(b) Tenant has neither incurred a Late Charge nor received a waiver of a Late Charge in the 12 consecutive Months before the due date of the late payment;

(c) Tenant is not in Default; and

(d) Tenant has paid Landlord the overdue amount.

5. USE & OCCUPANCY

5.1 Use. Tenant shall use and occupy the Premises only for the Use. Landlord does not represent or warrant that the Project is suitable for the conduct of Tenant’s particular business.

5.2 Compliance with Laws and Directives.

(a) Tenant’s Compliance. Subject to the remaining terms of this Lease, Tenant shall comply at Tenant’s expense with all laws and reasonable directives of Landlord’s insurers concerning:

(1) The Leasehold Improvements and Alterations,

(2) Tenant’s use or occupancy of the Premises,

(3) Tenant’s employer/employee obligations,

(4) A condition created by Tenant, its Affiliates or their contractors or invitees,

(5) Tenant’s failure to comply with this Lease,

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(6) The negligence of Tenant or its Affiliates or contractors, or  

(7) Any chemical wastes, contaminants, pollutants or substances that are hazardous, toxic, infectious, flammable or dangerous, or regulated by any local, state or federal statute, rule, regulation or ordinance for the protection of health or the environment (“Hazardous Materials”) that are introduced to the Project, handled or disposed, by Tenant or its Affiliates, or any of their contractors; provided, however, that this Section 5.2(a) shall not require Tenant to correct construction defects in Landlord’s Work or effectuate capital improvements or repairs (other than with respect to the Leasehold Improvements and/or Tenant’s Alterations).

(b) Landlord’s Compliance. The cost of Landlord’s compliance with laws or directives of Landlord’s insurers concerning the Project, other than those that are Tenant’s obligation under subsection (a), will be included in Expenses to the extent allowed under §4.2.

5.3 Occupancy. Tenant shall not interfere with Building services or other tenants’ rights to quietly enjoy their respective premises or the Common Areas. Tenant shall not make or continue a nuisance, including any objectionable odor, noise, fire hazard, vibration, or wireless or electromagnetic transmission. Tenant will not maintain any Leasehold Improvements or use the Premises in a way that increases the cost of insurance required under §9.2, or requires insurance in addition to the coverage required under §9.2.

5.4 OFAC Certification. Tenant represents that: (a) Tenant is not now and has never been listed or named as a Blocked Person, or (b) Tenant is not now and has never been acting directly or indirectly for, or on behalf of, any Blocked Person. “Blocked Person” means any person, group, entity or nation designated by the United States Treasury Department as a terrorist or a “Specially Designated National and Blocked Person,” or that is a banned or blocked person, entity, nation under any law, order, rule or regulation that is enforced or administered by the Office of Foreign Assets Control.

6. SERVICES & UTILITIES

6.1 Standard Services.

(a) Standard Services Defined. “Standard Services” means:

(1) Condenser water for the operation of heating, ventilation and air-conditioning (“HVAC”) equipment serving the Premises during Business Hours, to the extent reasonably required to comfortably use and occupy the Premises.

(2) HVAC during Business hours to the extent reasonably required to comfortably use and occupy the interior Common Areas;

(3) Tempered water from the public utility for use in Common Areas rest rooms, and for use in customary kitchen facilities that may be in the Premises;

(4) Subject to §6.2, janitorial services to the Premises and interior Common Areas 5 days a week, except Holidays, to the extent customarily provided in office buildings in the San Francisco financial district and SOMA submarkets which are comparable in quality, location and prestige to the Building;

(5) Access to the Premises (by at least 1 passenger elevator if not on the ground floor) 24 hours a day, 365 days per year;

(6) Replacement of, and Labor to replace, fluorescent tubes and ballasts in Building Standard light fixtures in the Premises and in the Common Areas;

(7) Building access control services;

(8) Electricity from Landlord’s selected provider(s) for Common Areas lighting; and

(9) Subject to §6.2, electricity from Landlord’s selected provider(s) for the provision of the following in and to the Premises:

(A) Lighting,

(B) Convenience outlets for the operation of customary office equipment, and

(C) The operation of HVAC equipment;

provided, however, that the connected load for the uses under subsections (A) and (B) will not exceed 6 watts per USF of the Premises.

(b) Standard Services Provided. During the Term, Landlord will provide the Standard Services to Tenant subject to Tenant’s obligations under §6.2. Except for those costs directly paid by Tenant pursuant to §6.2, the cost of the Standard Services

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will be included in Expenses. Landlord is not responsible for any inability to provide Standard Services due to either: a concentration of personnel or equipment in the Premises in excess of that customary for the general administrative office use; or Tenant’s use of equipment in the Premises that is not customary office equipment or has special cooling requirements.  

6.2 Direct Charge for Electricity and Janitorial Services. Tenant will pay as Rent the costs incurred by Landlord to provide those Standard Services set forth in subsections (4) and (9) of §6.1(a) subject to the following:

(a) Tenant’s total consumption of electricity in the Premises, including lighting, convenience outlets, and HVAC units, will be separately metered with Building Standard meters to be installed and maintained at Tenant’s cost and expense (and which will constitute part of the Leasehold Improvements and may be included as a Work Cost pursuant to the Work Letter). Landlord may, but will not be required to, install an energy management and billing system to read such meters and determine the cost incurred by Landlord of Tenant’s electrical usage (which system will be part of the Mechanical System) based upon any or all of the following, as applicable: (i) the actual cost per kilowatt to which Landlord is subject to charge by the utility providing service to the Building, as determined by Landlord’s energy management and billing system.

(b) The charge to Tenant for janitorial services provided to Tenant as a part of Standard Services will be the product of (i) the USF of the Premises, and (ii) the cost per USF of janitorial services provided to tenanted premises of the Building as part of Standard Services (as opposed to costs incurred with respect to the Common Areas, which will be included in Expenses).

6.3 Additional Services. Landlord will provide utilities and services in excess of the Standard Services subject to the following:

(a) HVAC. If Tenant requests condenser water for HVAC service to the Premises during non-Business Hours, Tenant will pay as Rent Landlord’s scheduled rate for this service.

(b) Lighting. Landlord may elect to furnish non-Building Standard lamps, bulbs, ballasts, and starters that are part of the Leasehold improvements for purchase by Tenant at Landlord’s cost, plus Landlord’s standard administration fee. Landlord will install such items at Landlord’s scheduled rate for this service.

(c) Other Utilities and Services. Tenant will pay as Rent the actual cost of utilities or services (other than those directly charged pursuant to §6.2, or delineated in subsections (a) and (b) of this §6.1) either used by Tenant or provided at Tenant’s request in excess of that provided as part of the Standard Services, plus Landlord’s standard administration fee. Tenant’s excess consumption may be estimated by Landlord unless either Landlord requires or Tenant elects to install Building Standard meters to measure Tenant’s consumption.

(d) Additional Systems and Metering. Landlord may require Tenant, at Tenant’s expense, to upgrade or modify existing Mechanical Systems serving the Premises or the Leasehold Improvements to the extent necessary to meet Tenant’s excess requirements, including installation of Building Standard meters in addition to those meters required under §6.2(a) to measure the same.

6.4 Telecommunication Services. Tenant will contract directly with third party providers and will be solely responsible for paying for all telephone, data transmission, video and other telecommunication services (“Telecommunication Services”) subject to the following:

(a) Providers. Each Telecommunication Services provider that does not already provide service to the Building shall be subject to Landlord’s approval, which Landlord may withhold in Landlord’s sole discretion. Without liability to Tenant, the license of any Telecommunication Services provider servicing the Building may be terminated under the terms of the license, or not renewed upon the expiration of the license.

(b) Tenant’s Wiring. Landlord may, in its sole discretion, designate the location of all wires, cables, fibers, equipment, and connections (“Tenant’s Wiring”) for Tenant’s Telecommunication Services, restrict and control access to telephone cabinets and rooms. Tenant may not use or access the Base Building, Common Areas or roof for Tenant’s Wiring without Landlord’s prior written consent, which Landlord may withhold in Landlord’s sole discretion. Tenant’s Wiring will be subject to removal in accordance with §3.3.

(c) No Beneficiaries. This §6.4 is solely for Tenant’s benefit, and no one else shall be considered a beneficiary of these provisions.

6.5 Special Circumstances. Without breaching this Lease or creating any liability on the part of Landlord, Landlord may interrupt, limit or discontinue any utility or services Landlord provides under this Article 6 under any of the following circumstances: (a) without notice, in an emergency; (b) with reasonable notice, to comply with laws; (c) with reasonable notice, to conform to

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voluntary government or industry guidelines; (d) with reasonable advance notice, to repair and maintain the Project under §7.2 (including scheduled annual Building-wide shutdowns; or (e) with reasonable notice, to modify, perform Renovations or improve the Project under §8.2. If as a result of any interruption, limitation or discontinuance of any utility or services under clause (c), (d) or (e) of this §6.5, the Premises are Untenantable (as defined in §10.1(a)) and Tenant does not actually use all or part of the Premises as a result thereof, then Tenant’s Rent will be abated to the same extent as if Untenantable due to damage or destruction, in the manner of and subject to the provisions of §10.2.

6.6 REIT Compliance. If Landlord or any affiliate of Landlord has elected to qualify as a real estate investment trust (“REIT”), any service required or permitted to be performed by Landlord pursuant to this Lease, the charge or cost of which may be treated as impermissible tenant service income under the laws governing a REIT, may be performed by an independent contractor of Landlord, Landlord’s property manager, or a taxable REIT subsidiary that is affiliated with either Landlord or Landlord’s property manager (each, a “Service Provider”). If Tenant is subject to a charge under this Lease for any such service, then at Landlord’s direction Tenant will pay the charge for such service either to Landlord for further payment to the Service Provider or directly to the Service Provider and, in either case (a) Landlord will credit such payment against any charge for such service made by Landlord to Tenant under this Lease, and (b) Tenant’s payment of the Service Provider will not relieve Landlord from any obligation under the Lease concerning the provisions of such services.

7. REPAIRS

7.1 Tenant’s Repairs. Except as provided in Articles 10 and 12 and subject to Article 11, during the Term Tenant shall, at Tenant’s cost, repair, maintain and replace, if necessary, the Leasehold Improvements and keep the Premises in the condition delivered to Tenant, subject to ordinary wear and tear and casualty. Tenant’s work under this §7.l must be (a) approved by Landlord before commencement, (b) supervised by Landlord at Tenant’s cost, if Landlord so reasonably requires, (c) performed in compliance with laws and Building rules and regulations, and (d) performed lien free and in a first-class manner with materials of at least Building Standard.

7.2 Landlord’s Repairs. Except as provided in Articles 10 and 12, during the Term Landlord shall repair, maintain and replace, if necessary, all parts of the Project that are not Tenant’s responsibility under §7.1, or any other tenant’s responsibility under their respective lease, and otherwise keep the Project in good order and condition according to the standards prevailing for comparable office buildings in the area in which the Building is located. Except in an emergency, Landlord will use commercially reasonable efforts to avoid disrupting the Use of the Premises in performing Landlord’s duties under this §7.2; however, Landlord will not be required to employ premium labor to perform any of Landlord’s duties under this §7.2. Tenant may not repair or maintain the Project on Landlord’s behalf or offset any Rent for any repair or maintenance of the Project that is undertaken by Tenant.

8. ALTERATIONS

8.1 Alterations by Tenant. “Alterations” means any modifications, additions, or improvements to the Premises or Leasehold Improvements made by Tenant during the Term, including modifications to the Base Building or Common Areas required by law as a condition of performing the work. Alterations do not include work performed under a Work Letter that is part of this Lease. Alterations are made at Tenant’s sole cost and expense, subject to the following:

(a) Consent Required. All Alterations that cost in excess of $20,000.00 or require a building permit from the applicable governmental agency shall require Landlord’s prior written consent; and if Landlord’s consent is not required pursuant to foregoing, then Tenant must submit written notice to Landlord of any such Alteration no less than 10 business days prior to the commencement of such Alteration. If a Design Problem exists, Landlord may withhold its consent in Landlord’s sole discretion; otherwise, Landlord will not unreasonably withhold, condition or delay its consent. Unless Tenant at the time of installation obtains Landlord’s prior written consent to remove the Alterations, then such Alterations will become part of the Premises to be tendered to Landlord on termination of the Lease. Landlord may require Tenant to remove Alterations and restore the Premises under §3.3 upon termination of this Lease if the Alterations are not customary Alterations for the Use and, if consent is required, Landlord requires such removal as a condition of Landlord’s consent.

(b) Design Problem Defined. “Design Problem” means a condition that results, or will result, from work proposed, being performed or that has been completed that either:

(1) Does not comply with laws;

(2) Does not meet or exceed the Building Standard;

(3) Exceeds the capacity, adversely affects, is incompatible with, or impairs Landlord’s ability to maintain, operate, alter, modify, or improve the Base Building;

(4) Affects the exterior appearance of the Building or Common Areas;

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(5) Violates any agreement affecting the Project;  

(6) Costs more to demolish than Building Standard improvements;

(7) Violates any insurance regulations or standards for a fire-resistive office building;

(8) Locates any equipment, Tenant’s Wiring or Tenant’s Personal Property on the roof of the Building, in Common Areas or in telecommunication or electrical closets, except for connections of Tenant’s Wiring to service provided by Telecommunications Services providers; or

(9) Causes a “work of visual art” (as defined in the Visual Artists Rights Act of 1990) to be incorporated into or made a part of the Building.

(c) Performance of Alterations. Alterations shall be performed by Tenant in a good and workman-like manner according to plans and specifications approved by Landlord, if applicable. All Alterations shall comply with law and insurance requirements. Landlord’s designated contractors must perform Alterations affecting the Base Building or Mechanical Systems; and, all other work will be performed by qualified contractors that meet Landlord’s insurance requirements and are otherwise approved by Landlord. Promptly after completing Alterations, if applicable, Tenant will deliver to Landlord “as-built” CADD plans, proof of payment, a copy of the recorded notice of completion, and all unconditional lien releases.

(d) Bonding. If requested by Landlord, before commencing Alterations requiring consent Tenant shall at Tenant’s cost obtain bonds, or deposit with Landlord other security acceptable to Landlord for the payment and completion of the Alterations. These bonds or other security shall be in form and amount acceptable to Landlord.

(e) Alterations Fee. Tenant shall pay Landlord as Rent 3% of the total construction costs of the Alterations that are not cosmetic Alterations to cover review of Tenant’s plans and construction coordination by Landlord’s employees. In addition, Tenant shall reimburse Landlord for the actual cost that Landlord reasonably incurs to have engineers, architects, or other professional consultants review Tenant’s plans and work in progress, or inspect the completed Alterations.

8.2 Renovations. Landlord may modify, renovate, or improve the Project, including the granting of rights to other tenants to modify, renovate, or improve their respective premises and Common Areas serving their premises (“Renovations”) as Landlord deems appropriate; provided, that Renovations may not materially adversely impair Tenant’s access to the Premises from the Common Areas on a permanent basis and Landlord shall use commercially reasonable efforts to avoid disrupting Tenant’s Use of the Premises during Business Hours. Renovations may include demolishing or removing improvements, erecting scaffolding or other necessary structures, screening, limiting access to portions of the Project (or all of the Project, if required for safety reasons), and performing work that creates noise, dust, or debris. Provided that Landlord uses commercially reasonable efforts not to interfere with the conduct of business in the Premises for the Use during Business Hours, the performance of Renovations will not constitute a constructive eviction. Except as expressly provided elsewhere in this Lease, Renovations will not entitle Tenant to any abatement of Rent or damages for interference with Tenant’s business or the loss of use of any or all of the Premises. Landlord shall use commercially reasonable efforts to do the work permitted pursuant to this Section in a manner that will minimize, to the extent commercially practicable, the disruption of Tenant’s business in the Premises.

8.3 Liens and Disputes. With respect to Alterations undertaken by Tenant, Tenant will keep title to the Land and Building free of any liens concerning the Leasehold Improvements (other than with respect to Landlord’s Work pursuant to the Work Letter), Alterations, or Tenant’s Personal Property, and will promptly take whatever action is required to have any of these liens released and removed of record (including, as necessary, posting a bond or other deposit). To the extent legally permitted, each contract and subcontract for Alterations will provide that no lien attaches to or may be claimed against the Project. Tenant will indemnify Landlord for costs that Landlord reasonably incurs because of Tenant’s violation of this §8.3.

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9. INSURANCE  

9.1 Tenant’s Insurance.

(a) Tenant’s Coverage. Before taking possession of the Premises for any purpose (including construction of Tenant Improvements, if any) and during the Term, Tenant will provide and keep in force the following coverage:

(1) Commercial general liability insurance insuring Tenant’s use and occupancy of the Premises and use of the Common Areas, and covering personal and bodily injury, death, and damage to others’ property of not less than the Liability Limit. Each of these policies shall include cross liability and severability of interests clauses, and be written on an occurrence, and not claims-made, basis. Each of these policies shall name Landlord, the Building property manager, each secured lender, and any other party reasonably designated by Landlord as an additional insured (“Additional Insured”).

(2) All risk property insurance (including standard extended coverage endorsement perils, leakage from fire protective devices, and other water damage) covering the full replacement cost of the Leasehold improvements and Tenant’s Personal Property. Each of these policies shall name Landlord and each Additional Insured an additional insured to the extent of their interest in the Leasehold Improvements. Each of these policies shall include a provision or endorsement in which the insurer waives its right of subrogation against Landlord and each Additional Insured.

(3) Insurance covering the perils described in (2) for Tenant’s loss of income or insurable gross profits with a limit not less than Tenant’s annual Rent. Each of these policies shall include a provision or endorsement in which the insurer waives its right of subrogation against Landlord and each Additional Insured.

(4) If any boiler or machinery is operated in the Premises, boiler and machinery insurance.

(5) Insurance required by law, including workers’ compensation insurance.

(6) Employers liability insurance with limits not less than $1 million.

(7) Commercial automobile liability insurance covering all owned, hired, and non-owned vehicles with a combined single limit of not less than $1 million for each accident or person.

(8) Insurance covering the Leasehold Improvements and Tenant’s Personal Property against loss or damage due to earthquake or difference in condition; provided, however, that Tenant may elect to self-insure this coverage. If Tenant does not elect to self-insure this coverage, then each of these policies shall name Landlord and each Additional Insured an additional insured to the extent of their interest in the Leasehold Improvements.

(b) Insurers and Terms. Each policy required under (a) shall be written with insurance companies that are licensed to do business in the state in which the Building is located and have a rating of not less than A and a Financial Size Class of at least VIII by A.M. Best Company. The proceeds of policies providing coverage under subsection (a)(2) of this §9.1 will be payable to Landlord, Tenant and each Encumbrance holder as their interests may appear. Tenant will cooperate with Landlord in collecting any insurance proceeds that may be due in the event of loss, and Tenant will execute and deliver to Landlord proofs of loss and any other instruments that Landlord may require to recover such insurance proceeds.

(c) Proof of Insurance. At least 10 days prior to the Commencement Date, and throughout the Term, Tenant will provide Landlord with certificates of insurance establishing that the coverage required under subsection (a) is in effect. Tenant will provide replacement certificates before any policy expires that the expiring policy has been renewed or replaced.

9.2 Landlord’s Insurance.

(a) Landlord’s Coverage. During the Term, Landlord will provide and keep in force the following coverage:

(1) Commercial general liability insurance.

(2) All risk insurance (including standard extended coverage endorsement perils, leakage from fire protective devices, and other water damage) covering the Project improvements (excepting the Leasehold Improvements to be insured by Tenant). Each of these policies shall include a provision or endorsement in which the insurer waives its right of subrogation against Tenant.

(3) Insurance covering the perils described in (2) for Landlord’s loss of rental income or insurable gross profits. Each of these policies shall include a provision or endorsement in which the insurer waives its right of subrogation against Tenant.

(4) Boiler and machinery insurance.

(5) Other insurance that Landlord elects to maintain.

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(b) Terms. Each of the policies required under (a) will have those limits, deductibles, retentions and other terms that Landlord prudently determines.  

10. DAMAGE OR DESTRUCTION

10.1 Damage and Repair. If all or any part of the Project is damaged by fire or other casualty, then the parties will proceed as follows:

(a) Landlord’s Estimates. Landlord will assess the damage to the Project (but not the Leasehold Improvements) and notify Tenant of Landlord’s reasonable estimate of the time required to substantially complete repairs and restoration of the Project (“Repair Estimate”) within 30 days after the date of the casualty. Landlord will also estimate the time that all or a portion of the Premises will be Untenantable (“Interruption Estimate”) within 30 days after the date of the casualty. “Untenantable” means that the Premises are not reasonably accessible or are unfit for the Use. Within 30 days after the later of the casualty, issuance of the Repair Estimate, issuance of the Interruption Estimate, or receipt of any denial of coverage or reservation of rights from Landlord’s insurer, each party may terminate the Lease by written notice to the other on the following conditions:

(1) Landlord may elect to terminate this Lease if either:

(A) The Repair Estimate exceeds 180 days, or

(B) The damage or destruction occurs in the last 12 Months of the Term and the Repair Estimate exceeds 20% of the remaining Term; or

(C) The repair and restoration is not fully covered by insurance maintained or required to be maintained by Landlord (subject only to those deductibles or retentions Landlord elected to maintain) or Landlord’s insurer denies coverage.

(2) Tenant may elect to terminate this Lease if either (i) the Interruption Estimate exceeds 180 days, or (ii) the damage or destruction occurs in the last 12 Months of the Term and the Interruption Estimate exceeds 20% of the remaining Term.

(b) Repairs. If neither party terminates the Lease under (a), then the Lease shall remain in full force and effect and the parties will proceed as follows:

(1) Landlord will repair and restore the Project (but not Leasehold Improvements) to the condition existing prior to such damage, except for modifications required by law. Landlord will perform such work reasonably promptly, subject to delay for loss adjustment, delay caused by Tenant and Force Majeure.

(2) Tenant will repair and restore the Leasehold Improvements reasonably promptly to the condition existing prior to such damage, but not less than then current Building Standards, except for modifications required by law.

(3) Tenant may not terminate this Lease if the actual time to perform the repairs and restoration exceeds the Repair Estimate, or the actual interruption exceeds the Interruption Estimate. Notwithstanding the foregoing, if(A)either the actual time to perform the repairs and restoration to the Base Building and Leasehold Improvements exceeds the Repair Estimate by more than 60 days, or the actual interruption exceeds the Interruption Estimate by more than 60 days (each such period to be extended by any delay caused by Tenant), and (B) the total time which the Premises will be Untenantable will exceed 180 days, then Tenant may terminate this Lease upon 30 days’ prior written notice to Landlord; provided, however, that if the repairs and restoration are completed within said 30 day period, then this Lease will not be so terminated and will continue in full force and effect.

10.2 Rent Abatement. If as a result of the damage or destruction under §10.1 all or any part of the Premises becomes Untenantable and Tenant does not actually use the Untenantable part of the Premises, then Tenant’s Base Rent and Additional Rent for the Untenantable part of the Premises that Tenant does not actually use will be abated until the Untenantable part of the Premises becomes tenantable; however, Tenant will not be entitled to abatement of Base Rent and Additional Rent after that date (a) Landlord repairs and restores the Project to the extent necessary for Tenant to reasonably access and use the Premises for the Use, and (b) repair and restoration of the Leasehold Improvements would have been substantially complete if Tenant had performed its obligations under §10.1 (b )(2) diligently and in coordination with Landlord’s work. Tenant’s sole remedies against Landlord for damage or destruction of any part of the Project is abatement of Base Rent and Additional Rent under this §10.2 and/or termination of the Lease as provided in §10.1, and Landlord will not be liable to Tenant for any other amount, including damages to Tenant’s Personal Property, consequential damages, actual or constructive eviction, or abatement of any other item of Rent.

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11. INDEMNITY  

11.1 Claims. “Claims” means any and all liabilities, losses, claims, demands, damages or expenses that are suffered or incurred by a party, including attorneys’ fees reasonably incurred by that party in the defense or enforcement of the rights of that party.

11.2 Landlord’s Waivers and Tenant’s Indemnity.

(a) Landlord’s Waivers. Landlord waives any Claims against Tenant and its Affiliates for perils insured or required to be insured by Landlord under subsections (2) and (3) of §9.2(a), except to the extent caused by the willful misconduct of Tenant or its Affiliates but in no case will Tenant be liable for any special or consequential damages (including interruption of business, loss of income, or loss of opportunity).

(b) Tenant’s Indemnity. Unless waived by Landlord under (a), Tenant will indemnify and defend Landlord and its Affiliates and hold each of them harmless from and against Claims arising from:

(1) Any accident or occurrence in the Premises, except to the extent caused by Landlord’s or its Affiliates’ or contractors’ negligent or willful misconduct;

(2) Tenant’s or its Affiliates’ or its contractors’ negligence or willful misconduct; or

(3) Any claim for commission or other compensation by any person other than the Brokers for services rendered to Tenant in procuring this Lease.

11.3 Tenant’s Waivers and Landlord’s Indemnity,

(a) Tenant’s Waivers. Tenant waives any Claims against Landlord and its Affiliates for:

(1) Any peril insured or required to be insured by Tenant under subsections (2), (3) and (8) of §9.1(a), except to the extent caused by the willful misconduct of Landlord or its Affiliates, but in no case will Landlord be liable for any special or consequential damages (including interruption of business, loss of income, or loss of opportunity); or

(2) Damage caused by any public utility, public work, other tenants or occupants of the Project, or persons other than Landlord or its Affiliates or contractors; or

(b) Landlord’s Indemnity. Unless waived by Tenant under (a), Landlord will indemnify and defend Tenant and its Affiliates and hold each of them harmless from and against Claims arising from:

(1) Landlord’s or its Affiliates’ or contractors’ negligence or willful misconduct; or

(2) Any claim for commission or other compensation by any person other than the Brokers for services rendered to Landlord in procuring this Lease.

11.4 Affiliates Defined. “Affiliates” means with respect to a party (a) that party’s partners, co-members and joint venturers, (b) each corporation or other entity that is a parent or subsidiary of that party, (c) each corporation or other entity that is controlled by or under common control of a parent of such party, and (d) the directors, officers, employees and agents of that party and each person or entity described in subsections (a) through (c) of this §11.4.

11.5 Survival of Waivers and Indemnities. Landlord’s and Tenant’s waivers and indemnities under §11.2 and §11.3 will survive the expiration or early termination of this Lease.

12. CONDEMNATION

12.1 Taking. “Taking” means acquiring of all or part of the Project for any public or quasi-public use by exercise of a right of eminent domain or under any other law, or any sale in lieu thereof. If a Taking occurs:

(a) Total Taking. If because of a Taking substantially all of the Premises is untenantable for substantially all of the remaining Term, then the Lease terminates on the date of the Taking.

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(b) Partial Taking. If a Taking does not cause the Lease to be terminated under (a), then Landlord will restore (and alter, as necessary) the Premises to be tenantable, unless the Lease is terminated by either Landlord or Tenant under the following circumstances:  

(1) Landlord may terminate the Lease upon 60 days prior written notice to Tenant if Landlord reasonably determines that it is uneconomical to restore or alter the Premises to be tenantable.

(2) Tenant may terminate the Lease upon 60 days prior written notice to Landlord if the Taking causes more than 20% of the Premises to be Untenantable for the remainder of the Term and Tenant cannot reasonably operate Tenant business for the Use in the remaining Premises.

(c) If the Lease is not terminated under (a) or (b), the Rent payable by Tenant will be reduced for the term of the Taking based upon the RSF Premises rendered Untenantable by the Taking and that Tenant does not actually use.

12.2 Awards. Landlord is entitled to the entire award for any claim for a taking of any interest in this Lease or the Project, without deduction or offset for Tenant’s estate or interest; however, Tenant may make a claim for relocation expenses and damages to Tenant’s Personal Property and business to the extent that Tenant’s claim does not reduce Landlord’s award.

13. TENANT TRANSFERS

13.1 Terms Defined.

(a) Transfer Defined. “Transfer” means any:

(1) Sublease of all or part of the Premises, or assignment, mortgage, hypothecation or other conveyance of an interest in this Lease;

(2) Use of the Premises by anyone other than Tenant with Tenant’s consent;

(3) Transfer of 51 % or more of Tenant’s assets, shares (excepting shares transferred in the normal course of public trading), membership interests, partnership interests or other ownership interests; or

(4) Transfer of control of Tenant, subject to §13.3.(a) herein below.

(b) Transferee Defined. “Transferee” means a party to whom a Transfer is proposed to be made or actually made in accordance with the provisions of this Lease.

13.2 Prohibited Transfers. Tenant may not enter into a Transfer or other agreement to use or occupy the Premises that provides for rent or other compensation based in whole or in part on the net income or profits from the business operated in the Premises. Tenant may not enter into a Transfer if the proposed Transferee is directly or indirectly related to the Landlord under §856, et seq. of the Internal Revenue Code of 1986 (as amended). Any such Transfers shall be considered null, void and of no force or effect.

13.3 Consent Not Required. Tenant may effect a Transfer to a Permitted Transferee (defined below) without Landlord’s prior consent and without application of §13.5, below, but with notice to Landlord given not later than the Permitted Transferee’s occupancy. “Permitted Transferee” means any person or entity that:

(a) Either (1) controls, is controlled by, or is under common control with Tenant (for purposes hereof, “control” shall mean ownership of not less than 50% of all of the voting stock or legal and equitable interest in the entity in question), (2) results from the merger or consolidation of Tenant, or (3) acquires all or substantially all of the stock and/or assets of Tenant as a going concern;

(b) Has a tangible net worth immediately following the Transfer not less than Tenant’s tangible net worth preceding the Transfer;

(e) Will not, by occupying the Premises, cause Landlord to breach any other lease or other agreement affecting the Project; and

(d) Is not named or listed as a Blocked Person.

13.4 Consent Required. Each proposed Transfer, other than any Transfer prohibited under § 13.2 or permitted under § 13.3, requires Landlord’s prior consent, in which case the parties will proceed as follows:

(a) Tenant’s Notice. Tenant shall notify Landlord at least 30 days prior to the proposed Transfer of the name and address of the proposed Transferee and the proposed use of the Premises, and include in the notice the Transfer documents and copies of the proposed Transferee’s balance sheet and income statement for the most recent complete fiscal year.

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(b) Landlord’s Rights. Within 30 days after receipt of Tenant’s complete notice, Landlord may either:  

(1) If the proposed Transfer is either an assignment of this Lease a sublease of all of the Premises or any part of the Premises that will be separately demised and have its own entrance from the Common Areas and for substantially all of the remaining Term of the Lease, terminate this Lease as of the proposed Transfer date; provided, however, that there shall be no termination if Tenant rescinds its request within 5 days after receipt of Landlord’s election to terminate; or

(2) Consent or deny consent to the proposed Transfer, provided that consent will not be unreasonably withheld if:

(A) The proposed Transferee, in Landlord’s reasonable opinion, has the financial capacity to meet its obligations under the proposed Transfer;

(B) The proposed use is consistent with the Use and will not cause Landlord to be in breach of any lease or other agreement affecting the Project;

(C) The proposed Transferee is typical of tenants that directly lease premises in first-class office buildings;

(D) The proposed Transferee is not an existing tenant or an Affiliate of an existing tenant, or a party with which Landlord is actively negotiating to lease space in the Building (or has, in the last 6 months, been actively negotiating to lease), unless Landlord does not have space in the Building to accommodate such tenant, Affiliate or party;

(E) The proposed Transferee is not an agency of any government, a medical facility, or an entity with sovereign immunity;

(F) Tenant is not in Default under this Lease;

(G) The proposed Transferee is not named or listed as a Blocked Person; and

(c) Compelling Consent. If Landlord does not consent to a Transfer, Tenant’s sole remedy against Landlord will be an action for specific performance or declaratory relief, and Tenant may not terminate this Lease or seek monetary damages.

13.5 Payments to Landlord. Tenant will pay Landlord 50% of Transfer receipts that exceed Tenant’s Rent (on a per square foot basis); after Tenant is reimbursed for Tenant’s reasonable and customary out-of-pocket costs incurred in the Transfer, including attorneys’ fees, cost of improvements (or construction allowances) provided to the Transferee, Alterations, and broker commissions. Tenant shall pay Landlord a $500 review fee for each proposed Transfer requiring Landlord’s consent, excepting those in which Landlord exercises its rights under subsection (1) of §13.4(b).

13.6 Effect of Transfers. No Transfer releases Tenant or any guarantor of this Lease from any Lease obligation. Landlord’s acceptance of a payment from any person or entity other than Tenant that occupies the Premises does not waive Tenant’s obligations under this Article 13. If Tenant is in Default of this Lease, then Landlord may (a) proceed against Tenant without exhausting any remedies against any Transferee, and (b) by written notice to a Transferee, require such Transferee to pay directly to Landlord all consideration payable by Transferee to Tenant under the Transfer (which Landlord will apply against Tenant’s obligations under this Lease). Termination of this Lease for any reason will not result in a merger of the Lease and any sublease, each of which will be deemed terminated concurrently with this Lease unless Landlord elects by notice to a subtenant to assume their sublease, in which case the subtenant shall attorn to Landlord under the executory terms of the sublease.

14. LANDLORD TRANSFERS

14.1 Landlord’s Transfer. Landlord’s right to transfer any interest in the Project or this Lease is not limited by this Lease. Upon any such transfer, Tenant will attorn to Landlord’s transferee and Landlord will be released from liability under this Lease, except for any Lease obligations accruing before the transfer that are not assumed by the transferee.

14.2 Subordination. This Lease is, and will at all times be, subject and subordinate to each ground lease, mortgage, deed to secure debt or deed of trust now or later encumbering the Building, including each renewal, modification, supplement, amendment, consolidation or replacement thereof (each, an “Encumbrance”). At Landlord’s request, Tenant will, without charge, promptly execute, acknowledge, and deliver to Landlord (or, at Landlord’s request, the Encumbrance holder) any instrument reasonably necessary to evidence this subordination Notwithstanding the foregoing, each Encumbrance holder may unilaterally elect to subordinate its Encumbrance to this Lease.

14.3 Attornment. Tenant will automatically attorn to any transferee of Landlord’s interest in the Project that succeeds Landlord by reason of a termination, foreclosure, or enforcement proceeding of an Encumbrance, or by delivery of a deed in lieu of any

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foreclosure or proceeding (a “Successor Landlord”). In this event, the Lease will continue in full force and effect as a direct lease between the Successor Landlord and Tenant on all of the terms of this Lease, except that the Successor Landlord shall not be:

(a) Liable for any obligation of Landlord under this Lease, or be subject to any counterclaim, defense or offset accruing before Successor Landlord succeeds to Landlord’s interest;

(b) Bound by any modification or amendment of this Lease made without Successor Landlord’s consent,

(c) Bound by any prepayment of more than one month’s Rent;

(d) Obligated to return any security deposit or Letter of Credit (as applicable) not paid over to Successor Landlord, or

(e) Obligated to perform any improvements to the Premises (or provide an allowance therefor).

Upon Successor Landlord’s request, Tenant will, without charge, promptly (i) execute, acknowledge, and deliver to Successor Landlord any instrument reasonably necessary required to evidence such attornment, and/or (ii) enter into a new lease with Successor Landlord on the same terms and conditions of this Lease that are applicable to the remainder of the Term.

14.4 Estoppel Certificate. Within 10 days after receipt of Landlord’s written request, Tenant (and each guarantor of the Lease and transferee of an interest in the Lease, including subtenants) will execute, acknowledge and deliver to Landlord a certificate upon which Landlord and each existing or prospective Encumbrance holder may rely confirming the following (or whether any exceptions exist to the following):

(a) The Commencement Date and Expiration Date;

(b) The documents that constitute the Lease, and that the Lease is unmodified and in full force and effect;

(c) The date through which Base Rent, Additional Rent, and other Rent has been paid;

(d) That, to Tenant’s actual knowledge neither Landlord nor Tenant is in Default;

(e) That, to Tenant’s actual knowledge, Landlord has satisfied all Lease obligations to improve the Premises (or provide Tenant an allowance therefor) and Tenant has accepted the Premises;

(f) That, unless the Premises have been sublet, Tenant solely occupies the Premises; and

(g) Such other matters concerning this Lease or Tenant’s occupancy that Landlord may reasonably require.

15. DEFAULT AND REMEDIES

15.1 Tenant’s Default and Remedies.

(a) Tenant will be in “Default” of this Lease if Tenant either:

(1) Fails to pay Rent when due, and the failure continues for 7 days after Landlord notifies Tenant of this failure under §17.2 (Tenant waiving any other notice that may be required by law);

(2) Fails to perform a non-monetary Lease obligation of Tenant and the failure continues for 30 days after Landlord notifies Tenant of this failure, but:

(A) In an emergency Landlord may require Tenant to perform this obligation in a reasonable time of less than 30 days, or

(B) If it will reasonably take more than 30 days to perform this obligation, then Tenant will have a reasonable time to perform this obligation, but only if Tenant commences performing this obligation within 30 days after Landlord notifies Tenant of this failure;

(3) Consummates a Transfer that violates Article 13;

(4) Fails, within 15 days after it occurs, to discharge any attachment or levy on Tenant’s interest in this Lease;

(5) Fails, within 60 days after it occurs, to have vacated or dismissed any appointment of a receiver or trustee of Tenant’s assets (or any Lease guarantor’s assets), or any voluntary or involuntary bankruptcy or assignment for the benefit of Tenant’s creditors (or any Lease guarantor’s creditors); or

(6) Is listed or named as a Blocked Person, or acts directly or indirectly for or on behalf of any Blocked Person in connection with this Lease.

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(b) If Tenant is in Default, Landlord may, without prejudice to the exercise of any other remedy, exercise any remedy available under law, including those described below:  

(1) Landlord has the remedy described in California Civil Code §1951.4. Landlord may continue this Lease in effect after Tenant’s breach and abandonment (until Landlord terminates Tenant’s right to possess the Premises under (2), below) and recover Rent as it becomes due. If Landlord elects this remedy, any Transfer Tenant proposes will be subject only to reasonable limitations.

(2) Landlord has the remedy described in California Civil Code §1951.2. If Tenant breaches the Lease and abandons the Premises before the end of the Term, or Tenant’s right to possession is terminated by Landlord as a result of a Default, then Landlord may recover from Tenant all of the following:

(A) The worth at the time of award (computed by allowing interest at the rate in (3), below, on amounts due prior to award, and discounting amounts due after award at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus 1%) of:

(i) The unpaid Rent earned as of termination

(ii) The amount that the unpaid Rent earned after termination to the date of award exceeds the rental loss that Tenant proves could have been reasonably avoided; and

(iii) The amount that the unpaid Rent for the balance of the Term after the date of award exceeds the rental loss that Tenant proves could have been reasonably avoided; and

(B) Any other amount necessary to compensate Landlord for damage caused by Tenant’s failure to observe this Lease (or Which, in the ordinary course of things would be likely to result therefrom, including costs of obtaining mitigating rental income, such as excused rent, brokerage commissions, improvements, lease takeovers, cash payments, advertising, and moving costs).

(3) For any amounts owed under (1) or (2), recover interest at the greater of the interest rate permitted under law or l0% (“Default Rate”) from the date each amount is due until paid by Tenant.

15.2 Landlord’s Default and Remedies.

(a) Landlord will be in “Default” of this Lease if Landlord fails to perform any Lease obligation of Landlord and this failure continues for 20 days after Tenant notifies Landlord of such failure, or such longer period of time as is reasonable if more than 20 days is reasonably required to perform this obligation if performance commences within this 20-day period and is diligently prosecuted to completion.

(b) If Landlord is in Default, then Tenant may exercise any remedy available under law that is not waived or limited under this Lease, subject to the following:

(1) Tenant may not terminate this Lease due to any Landlord Default until Tenant notifies each Encumbrance holder identified by Landlord to Tenant and each Encumbrance holder is provided a reasonable opportunity to gain legal possession of the Project and, after gaining possession, cure the Default.

(2) Landlord’s liability under this Lease is limited to Landlord’s interest in the Building.

(3) No liability under this Lease is assumed by Landlord’s Affiliates.

15.4 Enforcement Costs. If Landlord or Tenant brings any action against the other to enforce or interpret any provision of this Lease (including any claim in a bankruptcy or an assignment for the benefit of creditors), the prevailing party will be entitled to recover from the other reasonable costs and attorneys’ fees incurred in such action.

15.5 Jury Trial. Landlord and Tenant each waive trial by jury in any action, proceeding, or counterclaim brought by either party against the other concerning any matter related to this Lease.

15.6 Force Majeure. “Force Majeure” means any cause or event beyond both Landlord’s and Tenant’s reasonable control, including any act of God, government act or restriction, labor disturbance, general shortage of materials or supplies, riot, insurrection, or act of war or terrorism. Force Majeure excuses a party from performing any non-monetary Lease obligation for a commercially reasonable time.

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16. LETTER OF CREDIT; FINANCIAL STATEMENTS  

16.1 Delivery of Letter of Credit. Tenant shall deliver to Landlord, as protection for all losses and damages to which Landlord is entitled under applicable law that result from any breach or default by Tenant under this Lease, an irrevocable and unconditional negotiable standby letter of credit (the “Letter of Credit”) naming Landlord as beneficiary, substantially in the form attached hereto as Exhibit E, and otherwise meeting the following requirements:

(a) Tenant shall provide the Letter of Credit to Landlord on or before the date that is 3 business days after full execution and delivery of this Lease to both Landlord and Tenant. Notwithstanding anything to the contrary contained in this Lease, prior to Tenant’s delivery of the Letter of Credit, Landlord shall have no obligation to commence Landlord’s Work, and the failure of Tenant to provide the Letter of Credit to Landlord when required under this subsection (a) shall be a Tenant Delay.

(b) The Letter of Credit shall be issued by a solvent, nationally recognized bank (the “Bank”) with a long term debt rating by Standard & Poors of not less than A, and shall initially be in the LC Amount specified in §1.1 (I), and shall be subject to reduction as follows:

(1) Effective on the first day of Month 25 of the Term, the LC Amount will be reduced to $231,962.64;

(2) Effective on the first day of Month 37 of the Term, the LC Amount will be reduced to $193,302.20;

(3) Effective on the first day of Month 49 of the Term, the LC Amount will be reduced to $154,641.76;

(4) Effective on the first day of Month 61 of the Term, the LC Amount will be reduced to $115,981.32.

(5) Effective on the first day of Month 73 of the Term, the LC Amount will be reduced to $77,320.88.

(6) Effective on the first day of Month 85 of the Term, the LC Amount will be reduced to $38,660.44.

(c) The Letter of Credit shall be maintained in effect, whether through renewal or extension, for the period from the date of Tenant’s execution of this Lease to a date 60 days after the Expiration Date of this Lease (the “LC Expiration Date”). If the Letter of Credit held by Landlord expires prior to the LC Expiration Date, then Tenant shall deliver a new Letter of Credit or certificate of renewal or extension to Landlord at least 60 days prior to the expiration of the Letter of Credit then held by Landlord, without any action whatsoever on the part of Landlord.

(d) The Letter of Credit shall provide that Landlord, and each of its successors and assigns, may at any time and without Tenant’s consent, transfer one or more times all of its interest in and to the Letter of Credit to a successor to Landlord’s interest in this Lease. Landlord will give Tenant notice of any such assignment of the Letter of Credit. In the event of a transfer of Landlord’s interest in the Building by Landlord, or any of its successors and assigns, such party shall transfer the Letter of Credit to the transferee of such interest and thereupon the transferring party shall, without Tenant’s consent, be released by Tenant from all subsequent liability with respect to the Letter of Credit. In connection with any such transfer of the Letter of Credit by Landlord, or any of its successors and assigns, Tenant shall (i) without charge to Landlord execute and submit to the Bank such applications, documents and instruments as may be necessary to effectuate such transfer, and (ii) pay the Bank’s transfer and processing fees in connection each such transfer.

(e) The Letter of Credit shall be presentable at sight at a location within a major city in the continental United States, permit partial draws, and permit multiple presentations and draws. The Letter of Credit may not contain any provision or condition (i) that requires the Landlord to make any representations to the Bank as to the basis for draw set forth in §16.2, (ii) under which the Bank may determine whether any condition for draw set forth in §16.2, below, has occurred, or (iii) permits the Bank to dishonor any draw because of the existence of any dispute between Landlord and Tenant.

(f) Subject to the foregoing requirements, the Letter of Credit shall be subject to the Uniform Customs and Practices for Documentary Credits (2007-Rev), International Chamber of Commerce Publication #500, or the International Standby Practices-ISP 98, International Chamber of Commerce Publication #590.

16.2 Drawing Upon the Letter of Credit. Landlord may (by and through its managing agent) draw down an amount up to the face amount of the Letter of Credit if any of the following occurs:

(a) Tenant is in Default of any monetary obligation under this Lease; or

(b) A receiver or trustee of Tenant’s assets is appointed, or any voluntary or involuntary bankruptcy is filed by or against Tenant, or Tenant makes any assignment for the benefit of Tenant’s creditor; or

(c) The Bank has notified Landlord that the Letter of Credit will not be renewed or extended through the LC Expiration Date and an acceptable replacement Letter of Credit is not provided by Tenant to Landlord at least 60 days prior to the expiration of the Letter of Credit then held by Landlord.

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For purposes of Landlord’s right to draw upon the Letter of Credit, the occurrences described in subsections (b) and (c), above, shall, notwithstanding anything to the contrary contained in this Lease, not require any prior notice of default or opportunity to cure.

16.3 Restoration of Amount. If, as a result of any draw by Landlord upon the Letter of Credit, the amount of the Letter of Credit is less than the LC Amount, then Tenant shall within 10 business days after receipt of written notice from Landlord provide Landlord with additional Letter of Credit in an amount equal to the deficiency. Tenant’s failure to comply with its obligations under this § 16.3 shall, notwithstanding anything to the contrary contained in this Lease, constitute an incurable default by Tenant under this Lease (without the need for any additional notice and/or cure period).

16.4 General Provisions.

(a) Tenant may not assign or encumber the Letter of Credit or any part thereof, and neither Landlord nor its successors or assigns will be bound by any such assignment, encumbrance.

(b) Landlord shall not be required to segregate the proceeds of the Letter of Credit from Landlord’s other assets.

(c) Landlord is entering into this Lease in material reliance upon the ability of Landlord to draw upon the Letter of Credit on the terms and conditions described in this Article 16, upon the occurrence of any Default on the part of Tenant under this Lease.

(d) The use, application or retention of the Letter of Credit, or any portion thereof, by Landlord shall not prevent Landlord from exercising any other right or remedy provided by this Lease or by any applicable law, or limit any recovery under law to which Landlord may be entitled. Landlord is not required to first proceed against the Letter of Credit.

(e) Tenant shall not interfere in any way with the Bank’s obligation to pay to Landlord any proceeds of the Letter of Credit, either prior to or following a “draw” by Landlord of any portion of the Letter of Credit, regardless of whether any dispute exists between Tenant and Landlord as to Landlord’s right to draw upon the Letter of Credit. No condition or term of this Lease shall be deemed to render the Letter of Credit conditional to justify the Bank’s failing to honor a drawing upon such Letter of Credit in a timely manner. Notwithstanding the foregoing, nothing herein shall be deemed to prevent Tenant from seeking order for injunctive relief against Landlord (but not the Bank) prohibiting Landlord from presenting the Letter of Credit to the Bank.

(f) The Letter of Credit constitutes a separate and independent contract between Landlord and the Bank, and Tenant is not a third party beneficiary of such contract. Tenant has no property interest whatsoever in the Letter of Credit or the proceeds thereof. If Tenant becomes a debtor under any chapter of the Bankruptcy Code, neither Tenant (or its bankruptcy estate) nor any trustee thereof shall have any right to restrict or limit Landlord’s claim and/or rights to the Letter of Credit and/or the proceeds thereof by application of Section 502(b)(6) of the U. S. Bankruptcy Code or otherwise.

(g) Neither Landlord nor Tenant intends, and in no event or circumstance shall the Letter of Credit or any renewal thereof or any proceeds thereof constitute a “security deposit” within the meaning of California Civil Code § 1950.7, or otherwise be subject to the terms of such section or any other law, rule or regulations applicable to security deposits in the commercial context, and each party waives any and all rights, duties and obligations that the other party may now or, in the future, relating to or arising from the application of any such laws.

16.5 Financial Statements. Unless Tenant is a public company traded on a major stock exchange in the United States, Landlord may from time to time (but nor more often than once each Year) require Tenant to furnish Landlord with an certified financial statement covering the preceding Year and a certified financial statement covering each completed quarter of the current Year for which a statement is reasonably available, and Landlord shall keep such financial statements strictly confidential. All financial statements furnished Landlord will be prepared according to generally accepted accounting principles, consistently applied.

17. MISCELLANEOUS

17.1 Rules and Regulations. Tenant will comply with the Rules and Regulations attached as Exhibit B. Landlord may reasonably modify or add to the Rules and Regulations upon notice to Tenant. If the Rules and Regulations conflict with this Lease, the Lease shall govern.

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17.2 Notice. Notice to Landlord must be given to Landlord’s Notice Addresses. Notice to Tenant must be given to Tenant’s Notice Addresses. By notice to the other, either party may change its Notice Address. Each notice must be in writing and will be validly given if either: (a) the notice is personally delivered and receipt is acknowledged in writing; (b) the notice is delivered by a nationally recognized overnight courier service (e.g., FedEx) and receipt is acknowledged in writing. If the party to receive notice fails or refuses to accept delivery or acknowledge receipt of the notice in writing, then notice may be validly given by mailing the notice first-class, certified or registered mail, postage prepaid, and the notice will be deemed received by such party 2 business days after the notice’s deposit in the U.S. Mail.

17.3 Relocation. Landlord may relocate Tenant to other premises in the Building (“Replacement Premises”) upon not less than 60-days’ notice (the “Relocation Notice”), provided that the Replacement Premises (i) is the same size or bigger than the Premises as of the date of Relocation Notice, (ii) will have the same finishes, number of offices, conference rooms and amenities as the Premises as of the date of the Relocation Notice, and (iii) has all or a portion thereof that faces Market Street. The Base Rent and the Additional Rent for the Replacement Premises shall be the same amount of the monthly Base Rent and Additional Rent paid for the Premises pursuant to this lease, including any scheduled increases, regardless if the Relocation Premises is larger than the Premises. If Landlord elects to relocate Tenant under this § 17.3, then Landlord will, at Landlord’s cost, construct Leasehold improvements in the Replacement Premises of comparable quality to those existing in the Premises, move Tenant’s personal property from the Premises to the Replacement Premises over a single-weekend, relocate Tenant’s existing telephone, computer systems and other IT and cabling systems, and replace up to $500 of any in-stock stationery identifying the Premises. Landlord may not relocate Tenant to other premises in the Building during the last 12 months of the Term.

17.4 Building Name and Image. Tenant shall not use the Building’s name for any purpose other than Tenant’s address. Landlord may change the name of the Building without any obligation or liability to Tenant. Tenant may not use any image of the Building without Landlord’s prior written consent, which may be withheld in Landlord’s sole discretion.

17.5 Entire Agreement. This Lease is deemed integrated and contains all of each party’s representations, waivers, and obligations. The parties may only modify or amend this Lease in a writing that is fully executed by, and delivered to each party.

17.6 Successors. Unless provided to the contrary elsewhere in this Lease, this Lease binds and inures to the benefit of each party’s heirs, successors, and permissible assignees.

17.7 No Waiver. A party’s waiver of a breach of this Lease will not beconsidered a waiver of any other breach. No custom or practice that develops between the parties will prevent either party from requiring strict performance of the terms of this Lease. No Lease provision or act of a party creates any relationship between the parties other than that of landlord and tenant.

17.8 Independent Covenants. The covenants of this Lease are independent. A court’s declaration that any part of this Lease is invalid, void or illegal will not impair or invalidate the remaining parts of this Lease, which will remain in full force and effect.

17.9 Captions. The use of captions, headings, boldface, italics, or underlining is for convenience only, and will not affect the interpretation of this Lease.

17.10 Authority. Individuals signing this Lease on behalf of either party represent and warrant that they are authorized to bind that party.

17.11 Applicable Law. The laws of California govern this Lease. In any action brought under this Lease, Tenant submits to the jurisdiction of the courts of the State of California, and to venue in the County of San Francisco.

17.12 Confidentiality. Tenant will not record this Lease or a memorandum of this Lease without Landlord’s written consent. Tenant will keep the terms of this Lease confidential and, unless required by law, may not disclose the terms of this Lease to anyone other than Tenant’s Affiliates, its agents and advisors and prospective lenders, investors, purchasers, assignees and sublessees to the extent necessary to Tenant’s business.

17.13 Reasonableness. Tenant’s sole remedy for any claim against Landlord that Landlord has unreasonably withheld or unreasonably delayed any consent or approval shall be an action for injunctive or declaratory relief.

17.14 Time. Time of the essence as to all provisions in this Lease in which time is a factor.

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17.15 Quiet Enjoyment. So long as Tenant is not in Default and subject to the terms of this Lease, Tenant may peacefully and quietly enjoy the Premises for the Term under the terms of this Lease. Landlord will not be liable for any interference with Tenant’s peaceful and quiet enjoyment of the Premises and use of the Common Areas that is caused by anyone other than Landlord or its Affiliates.

17.16 Landlord’s Entry. Landlord may enter the Premises at all reasonable hours to perform its obligations under this Lease. During the last 12 months of the Term, upon 12 hours’ prior notice and provided that an employee of Tenant accompanies Landlord and such prospective tenants, Landlord may enter the Premises with reasonable prior notice to Tenant to show the Premises to prospective tenants. Tenant will endeavor to makes its employees available to accompany Landlord and such prospective tenants during such showings.

17.17 Exhibits. The Exhibits attached to this Lease are part of this Lease. If any exhibit is inconsistent with the body of this Lease, then the provisions of the body of this Lease will govern.

18. BROKERS

18.1 Agency. Pursuant to California Civil Code §2079.17, with respect to the transaction set forth in this Lease, Landlord and Tenant confirm the following:

(a) T3 Advisors is the agent of the Buyer (i.e., Tenant) exclusively.

(b) Brookfield Properties Management (CA) Inc. and Jones Lang LaSalle are, collectively, the agent of the Seller (i.e., the Landlord) exclusively.

18.2 Brokers. Landlord and Tenant each represent to the other that no broker other than Brokers represented Tenant or Landlord, respectively, or is entitled to a commission for services provided to Tenant or Landlord with respect to the transaction set forth in this Lease. Landlord will pay the Brokers’ commissions in accordance with separate agreements between Landlord and each of the Brokers

19. TENANT’S SECURITY SYSTEM

19.1 Right to Install. Subject to Landlord’s approval (whic11 may account for Landlord’s policies and protocols), Tenant may install, maintain and repair, at its sale expense, a security system within the Premises (“Tenant’s Security System”). Tenant’s Security System and any components thereof shall be Tenant’s personal property and removed from the Premises at the expiration of the Term. Tenant acknowledges that Landlord does n01 represent or warrant the suitability of Tenan1’sSecurity System for Tenant’s use thereof and Landlord will not be responsible for monitoring, responding to security breaches, repairing, or damage associated with Tenant’s Security System. Tenant’s Security System shall be separate and apart from any security sys1em installed by Landlord for the Building (“Landlord’s Security System”) and Tenant’s Security System will not interfere in any manner with Landlord’s Security System. Tenant will insure that Landlord will have access to the Premises in accordance with this. Lease to perform its obligations under the Lease notwithstanding such Tenant’s Security System.

Landlord And Tenant Execute This Lease AS Follows:

Imprivata, Inc.		BOP 685 Market LLC
By:	/s/ John F. Milton	By:	/s/ John R. Barganski
Print:	John F. Milton	Print:	John R. Barganski
Title:	VP and General Counsel	Title:	Senior Vice President, Leasing
By:		By:	/s/ Mark C. Phillips
Print:		Print:	Mark C. Phillips
Title:		Title:	Senior Vice President, Regional Counsel

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EXHIBIT A – LOCATION OF PREMISES

685 Market Street •San Francisco, California

Suite 500

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EXHIBIT B -RULES & REGULATIONS

685 Market Street • San Francisco, California

Suite 500

1. Rules Applied. These Rules and Regulations apply equally to Tenant’s Affiliates, Transferees and others permitted by Tenant to access, use, or occupy the Premises.

2. Right to Exclude. Landlord may require that Tenant, its Affiliates, and guests comply with each reasonable security measure that Landlord may establish as a condition entry to the Premises, Building, or Project. These measures may include submitting to a search by persons or devices employed by Landlord, presenting an identification card or pass issued by the government, Landlord, or both, being announced to Tenant and accepted as a visitor by Tenant, and signing a register on entry and exit. Any person who cannot comply with these requirements may be excluded from the Project. If Landlord requires a Building pass issued by Landlord as a condition of entry to the Premises, Building, or Project, Landlord will furnish a Building pass to all persons reasonably designated by Tenant in writing. Landlord may exclude or expel from the Project any person who, in Landlord’s reasonable opinion, is intoxicated or under the influence of alcohol or drugs.

3. Obstructions. Tenant will not cause the Common Areas, or sidewalks or driveways outside the Building to be obstructed. Landlord may, at Tenant’s expense, remove any such obstruction without prior notice to Tenant.

4. Trash. Tenant may not litter. Tenant will reasonably participate in Landlord’s recycling program. Tenant will place trash in proper receptacles in the Premises provided by Tenant at Tenant’s cost, or in Building receptacles designated by Landlord for removal by Landlord; however, Tenant, at Tenant’s cost, will be responsible for removing trash that results from large move-ins or deliveries.

5. Public Safety. Tenant will not throw anything out of doors, windows, or skylights, down passageways or over walls. Tenant will not use any fire exits or stairways in the Building except in case of emergency. Firearms, weapons, explosives, flammable materials and other hazardous liquids and materials may not be brought into or stored in the Premises, Building, or Project without the prior written consent of Landlord, which Landlord may withhold or condition in Landlord’s sole discretion, except reasonable quantities of customary office and cleaning supplies. Tenant must comply with all life safety programs established by Landlord or required by law and use commercially reasonable efforts to cause each of Tenant’s employees, invitees and guests to likewise comply, including participation in drills. Tenant will provide Landlord with the names and telephone numbers of representatives of Tenant that may be contacted in an emergency, and of all changes in personnel that may access the Premises.

6. Keys, Access Cards, and Locks. Landlord may from time to time install and change locks on entrances to the Project, Building, Common Areas, or Premises, and will provide Tenant a number of keys to meet Tenant’s reasonable requirements. Additional keys will be furnished by Landlord at Tenant’s cost. At the end of the Term, Tenant will promptly return to Landlord all keys for the Building and Premises issued by Landlord to Tenant. Unless Tenant obtains Landlord’s prior written consent, Tenant will not add any locks or change existing locks on any door to the Premises, or in or about the Premises. If with Landlord’s consent, Tenant installs any lock incompatible with the Building master locking system, Tenant will: relieve Landlord of each Lease obligation that requires access to each affected area; indemnify Landlord against any Claim resulting from forced entry to each affected area in an emergency; and, at the end of the Term, remove each incompatible lock and replace it with a Building Standard lock at Tenant’s expense.

7. Aesthetics. Unless Tenant obtains Landlord’s prior written consent (which may be withheld in Landlord’s sole discretion), Tenant may not:

(a) Attach any awnings, signs, displays, or projections to either the outside walls or windows of the Building, or to any part of the Premises visible from outside the Premises;

(b) Hang any non-Building Standard curtains, blinds, shades, or screens in any window or door of the Premises;

(c) Coat or sunscreen the interior or exterior of any windows; or

(d) Place any objects on windowsills.

8. Directories and Signs. Tenant may list 1 trade name and suite number in each Building-wide directory in the Building’s main lobby. Tenant will keep all listings accurate and current. Tenant may install 1 Building Standard tenant identification sign containing Tenant’s trade name and suite number at the entrance to each separately demised suite leased by Tenant. Tenant will reimburse Landlord for the cost of all future signage and above Building Standard sign age (subject to Landlord’s approval) requested by Tenant and installed by Landlord, plus Landlord’s standard administration fee. Except as provided in this paragraph or elsewhere in the Lease, Tenant may not install any signs outside the Premises.

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9. HVAC Operation. Tenant will not obstruct the HVAC convectors or diffusers, or adjust or interfere with the HVAC system. Tenant will assist the HVAC system in maintaining comfort in the Premises by drawing shades, blinds and other window coverings in the Premises as may be reasonably required. Tenant may not use any method of heating or cooling the Premises other than that supplied by Landlord.

10. Plumbing. Tenant will use plumbing fixtures only for the purpose for which they are constructed. Tenant will reimburse Landlord for any damage caused by Tenant’s misuse of plumbing fixtures. Tenant will promptly advise Landlord of any damage, defects or breakage of plumbing, electrical fixtures or HVAC equipment of which Tenant has knowledge. Tenant may not dispose of liquids, materials or substances (including coffee grounds) that may damage plumbing in any rest rooms, kitchen sinks, water closets, or other plumbing fixtures serving the Premises or Building, and shall be responsible for the cost of repairs caused by any misuse or neglect of such fixtures.

11. Equipment Location. Landlord may specify the location of any of Tenant’s Business machines, mechanical equipment, or other property that are unusually heavy, may damage the Building, or may cause vibration, noise, or annoyance to other tenants. Tenant will reimburse Landlord for any professional engineering certification or assistance reasonably required to determine the location of these items.

12. Bicycles. Tenant may not bring bicycles, scooters, or other means of personal conveyance (other than medically prescribed devices for use by the physically impaired) into the Building or Premises, and such devices must be parked in areas designated by Landlord.

13. Animals. Tenant may not keep in or bring into the Building or Premises any fish, birds, or animals, except assistance animals that are permitted and identified in accordance with law.

14. Carpet Protection. To protect carpeting in the Premises, Tenant will, at its own expense, install and maintain pads to protect the carpet under al1 chairs having castors other than carpet castors.

15. Elevators. Any use of the passenger elevators for purposes other than normal passenger use (such as moving to or from the Building or delivering freight), whether during or after Business Hours, must be scheduled through the office of the Property Manager. Tenant will reimburse Landlord for any extra costs incurred by Landlord in connection with any such non-passenger use of the elevators.

16. Moving and Deliveries. Moving of Tenant’s Personal Property and deliveries of materials and supplies to the Premises must be made during the times and through the entrances, elevators, and corridors reasonably designated by Landlord. Moving and deliveries may not be made through any of the main entrances to the Building without Landlord’s prior permission. Any hand truck or other conveyance used in the Common Areas must be equipped with rubber tires and rubber side guards to prevent damage to the Building and its property. Tenant will promptly reimburse Landlord for the cost of repairing any damage to the Building or its property caused by any person making deliveries to the Premises.

17. Solicitation. Canvassing, soliciting and peddling in the Building are prohibited and Tenant will cooperate in preventing the same. Tenant may not post any notices, or distribute any advertisements or handbills outside the Premises.

18. Food and Vending Machines. Only persons approved from time to time by Landlord may prepare, solicit orders for, sell, serve, or distribute food in or around the Project. Except as may be specified in the Lease or on construction drawings for the Premises approved by Landlord, and except for microwave cooking, Tenant will not use the Premises for preparing or dispensing food, or soliciting of orders for sale, serving or distribution of food without the prior written approval of Landlord. Tenant may not place any vending machine or dispensing machine in the Premises without Landlord’s prior written consent.

19. Pest Control. At Tenant’s sole cost and expense, Tenant must keep the Premises free of insects, rodents, vermin and other pests and to keep insects, rodents, vermin, and other pests from infesting the Premises, other premises, and Common Areas. Tenant will use a pest control service that is approved by Landlord to perform work in the Building and, if Landlord requests coordinate Tenant’s pest control efforts with Landlord. Tenant will comply with all requirements of law to post warnings in the Premises concerning the use of insecticides and other chemicals for pest control, and post in the Premises or distribute to occupants of the Premises any warnings provided by Landlord to Tenant concerning Landlord’s pest control efforts. If Tenant fails or refuses to comply with this paragraph, then Landlord may provide pest control services to the Premises at Tenant’s cost and expense, plus Landlord’s standard administration fee; however, Landlord’s performance of pest control on Tenant’s behalf does not release Tenant from any obligation under this paragraph.

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20. Work Orders and Service Requests. Only authorized representatives of Tenant may request services or work on behalf of Tenant. Tenant may not request that Building employees perform any work outside of their duties assigned by Landlord.

21. Smoking. Neither Tenant nor its Affiliates shall smoke or permit smoking in any part of the Project in which Landlord, in Landlord’s sole discretion, prohibits smoking. Landlord may designate the entire Project a no-smoking area, excepting areas in which Landlord, in Landlord’s sole discretion, permits smoking.

[Remainder of Page Intentionally Left Blank]

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EXHIBIT C -NOTICE OF LEASE TERM

685 Market Street • San Francisco, California

Suite 500

This NOTICE OF LEASE TERM (this “NLT”) dated is made by and between ("Tenant”) and BOP 685 Market LLC, a Delaware limited liability company (“Landlord”), with respect to that certain Lease dated (the “Lease”), concerning premises located at 685 Market Street, San Francisco, California (the “Building”). Except for those terms defined in this NLT, capitalized terms have the meanings attributed to them in the Lease.

Pursuant to the Lease, Tenant has agreed to lease from Landlord Suite (the “Subject Premises”) in the Building. In accordance with the Lease, Landlord and Tenant certify and confirm the following with respect to the Subject Premises:

(a) The Commencement Date is .

(b) The Expiration Date is .

Landlord andTenant execute this NLT as follows:

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EXHIBIT D - WORK LETTER

685 Market Street • San Francisco, California

Suite 500

This Work Letter is part of the Lease. All capitalized terms not defined in this Work Letter have the same meaning provided in the Lease.

1. CONSTRUCTION REPRESENTATIVES

1.1 Landlord’s Director of Construction or Senior Project Manager of Landlord’s Construction Department (“Landlord’s Representative”) will represent Landlord in connection with Landlord’s duties under this Work Letter.

1.2 Tenant will designate an individual (“Tenant’s Representative”) to represent Tenant in connection with Tenant’s duties under this Work Letter.

1.3 Landlord’s Representative and Tenant’s Representative will communicate with each other concerning matters covered by this Work Letter. Either party may change its representative by giving written notice to the other.

2. AS-IS CONDITION

2.1 Except for Landlord’s obligation to furnish the Construction Allowance and Perform Landlord’s Work in accordance with this Work Letter, Tenant accepts the Premises and Leasehold Improvements in their as-is condition and Landlord will have no obligation to improve the Premises, Common Areas or Building, or provide Tenant with any allowance to do so.

2.2 Notwithstanding anything to the contrary contained in §2.1, Landlord shall, at Landlord’s cost and expense (and not as a Work Cost), perform such improvements to the Common Areas on the floors on which the Premises are located as may be required by governing entities as a condition of approval of Tenant’s Work and/or Tenant’s occupancy of the Premises (“Landlord’s Compliance Work”); provided, however, that if such Landlord’s Compliance Work is required as a result of any item of Tenant’s Work is that is not a customary improvement for office use, then Tenant shall reimburse Landlord for the cost of such Landlord’s Compliance Work as a Work Cost.

3. LANDLORD’S WORK

3.1 All work shown on the finalized and fully-approved Construction Drawings (as may be amended by approved Change Orders), or otherwise required as a condition of obtaining permits, approvals and certificates from governing authorities necessary for construction of the work and Tenant’s use and occupancy of the Premises (“Landlord’s Work”), will be performed and constructed by Landlord in accordance with the provisions of this Work Letter and the Lease, as amended by the Amendment.

3.2 Landlord’s Work will be performed, constructed, installed, inspected and supervised in a good and workmanlike manner, in compliance with all laws enacted as of the Commencement Date and otherwise in accordance with the provisions of this Work Letter. Landlord’s Work will conform to the Construction Drawings (as may be amended by approved Change Orders).

4. CONSTRUCTION SCHEDULE AND DELAY

4.1 Landlord and Tenant will complete the tasks on the following schedule (the “Construction Schedule”) for which they are responsible, by the dates or within the periods set forth:

Task	Party Responsible	Date Due
Submit Tenant-Approved Construction Drawings and Specify Building Standard Finishes to Landlord	Tenant	28 calendar days after the Date

4.2 “Tenant Delay” means any delay in the Substantial Completion of Landlord’s Work caused by Tenant’s act or failure to act, including, without limitation: the failure to complete any item of Tenant’s Work upon which Landlord’s Work is dependent in accordance with the approved Construction Schedule; Change Orders required by Tenant; specification of a material, finish or installation that is unavailable or has a lead time exceeding that of comparable products; and failure to cooperate with government authorities having jurisdiction over Landlord’s Work.

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4.3 “Landlord Delay” means any delay in the Substantial Completion of Landlord’s Work caused by Landlord’s act or failure to act, including, without limitation: Change Orders required by Landlord; requirement of a material, finish or installation that is unavailable or has a lead time exceeding that of comparable products (provided, however, that in no event will Landlord be required to approve any material finish or installation that does not meet or exceed Building Standard); failure to cooperate with government authorities having jurisdiction over Landlord’s Work; and failure to timely pay Landlord’s Contractor.

4.4 “Force Majeure Delay” is defined as any delay in the substantial completion of Landlord’s Work caused by Force Majeure, including: an act of God or the elements of nature; fire or other casualty; war, riot, insurrection, or public disturbance; a black-out or other interruption of utility service from the provider to the Building; a strike or other labor disturbance (except to the extent caused by an illegal act of Landlord); changes in government codes or regulations (or the interpretation of same); the unavailability of government permits or approvals within the time customarily available; or a general shortage of materials or supplies. Force Majeure Delay does not include the inability of either Landlord or Tenant to meet their monetary obligations either under this Lease or Work Letter.

4.5 Each party claiming delayon the part of the other party, or Force Majeure Delay, shall give the other party written notice of such delay, including with reasonable specificity the nature of the delay, within 3 business days after such delay is alleged by such party to have occurred.

5. PLANS & PERMITS

5.1 Tenant will engage an architect licensed to do business in California that is experienced in the design and construction of leasehold improvements in first-class office buildings in the Los Angeles area (“Tenant’s Architect”). Tenant’s Architect will prepare plans showing the architectural design of the Premises, including partition layout, location of receptacles, location of major trade fixtures, reflective ceiling plans (the “Space Plans”). The Landlord and Tenant approved Space Plans by Brereton Architects dated March 16, 2016 are attached hereto as Schedule 1.

5.2 Tenant’s Architect will prepare or cause to be prepared complete architectural plans, drawings and specifications, and engineered mechanical, structural and electrical working drawings in a form and in such detail as is reasonably necessary to accurately construct Landlord’s Work in accordance with all applicable codes; including, without limitation, layout, finish and decorative work (including carpeting and other floor coverings), any proposed improvement affecting the base Building structural, mechanical, electrical, intra-Building telephone network cabling, plumbing, fire/life safety, heating, ventilation and air conditioning systems, exhaust systems, and any item will require installation of conduit, plumbing or other improvements within Common Areas or other premises (the “Construction Drawings”). Tenant’s Architect will work with Tenant and will submit the Tenant-approved Construction Drawings to Landlord for its review and approval in accordance with the Construction Schedule. Landlord will review the Construction Drawings and issue its written approval or disapproval of the Construction Drawings within 10 business days of receipt. If Landlord disapproves of any part of the Construction Drawings, then Tenant’s Architect will revise the Construction Drawings and resubmit them to each party for further review. Each party will review the revised Construction Drawings and issue its written approval or disapproval of the Construction Drawings within 5 business days of receipt. Review, revision and resubmission of the Construction Drawings will continue in this manner until the Construction Drawings arc fully approved by Landlord and Tenant. Landlord will not disapprove the Construction Drawings so long as the Construction Drawings are consistent with the Space Plans and do not present a Design Problem.

5.3 Except as otherwise set forth in the approved Construction Drawings (and not further modified by any Change Orders), the finishes, quantities and qualities to be furnished and constructed by Landlord as part of Landlord’s Work shall not exceed Building Standard as defined in that certain Tenant and Building Manual for the Building in effect as of the Date (the “Construction Manual”), a copy of which Landlord has furnished to Tenant and Tenant acknowledges receipt.

5.4 If Tenant wants to change the approved Construction Drawings, then Tenant must notify Landlord of the proposed change with reasonable particularity and will cause Tenant’s Architect to modify the Construction Drawings as required (a “Change Order”). Upon receipt of the Change Order, Landlord will within 5 business days of receipt issue its written approval or disapproval of the Change Order, and if approved provide Tenant with an estimate of any Tenant Delay that may reasonably occur as a result of the proposed Change Order and advise Tenant of the increased Work Costs that may be incurred. Upon receipt of Tenant’s written approval of the approved Change Order and receipt of any increased Work Costs (to the extent such increased costs exceed the amount deposited with Landlord pursuant to §8.2 of this Work Letter), Landlord will proceed with Landlord’s Work, as so modified by the Change Order.

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5.5 Tenant will not knowingly include in the Construction Drawings or any Change Order any requirement that will result in a Design Problem (as defined in §8.1 of the Lease). Landlord’s approval of the Construction Drawings, or any Change Order shall not be deemed a waiver of any Design Problem incorporated therein. A Design Problem mayonly he waived by Landlord in a writing that specifically identifies the Design Problem and its waiver by Landlord.

5.6 Landlord will secure such permits and approvals as may be required from any governmental authority having jurisdiction over Landlord’s Work. If any government authority requires alterations, modifications, or supplements to the Construction Drawings, Tenant hereby agrees to promptly make such alterations, modifications, or supplements necessary to obtain any required permits.

5.7 Upon completion of Landlord’s Work, Tenant’s Architect will furnish Landlord and Tenant with complete Construction Drawings modified to show all improvements as actually constructed, in an industry standard electronic format otherwise compatible with Landlord’s CAD system, with industry standard layering (the “As-Built Drawings”).

6. GENERAL CONTRACTOR

6.1 Landlord shall not be required to solicit bids from contractors or subcontractors other than those pre-approved by Landlord to perform work in the Building. Landlord may require that each general contractor solicit bids from unionized subcontractors for certain trades. Landlord shall provide Tenant with a summary of the bids received along with copies of all related paperwork.

6.2 Subject to Landlord’s approval, which shall not be unreasonably withheld, conditioned or delayed, from those approved contractors that have submitted bids, Tenant and Landlord will mutually select a general contractor to perform Landlord’s Work (“Landlord’s Contractor”) within 5 business days of receipt of Landlord’s summary of the received bids (the “Bid Summary”). Such Bid Summaries will include a contingency amount reasonably determined by Landlord. Landlord will then enter into a written guaranteed maximum price contract providing for payment on a progress payment basis, a commercially reasonable retention, and having such other terms and conditions that are commercially reasonable and do not violate the terms of the Lease or this Work Letter, although Landlord shall not be required to either impose a performance penalty upon, or provide a performance incentive to Landlord’s Contractor in connection with the timely performance of Landlord’s Work. The contract with Landlord’s Contractor will provide for a retention of not less than 10% of the contract price (the “Retention”).

7. TENANT’S ACCESS

7.1 In the 30 day period prior to Substantial Completion of Landlord’s Work, Landlord will provide Tenant and its subcontractors and vendors (collectively, “Tenant’s Personnel”) with reasonable access to the Premises and Common Areas necessary to install Tenant’s furnishing, fixtures, equipment and systems as may be reasonably necessary for Tenant to occupy the Premises for the conduct of business (“Tenant’s Work”), subject to the following:

(a) Tenant’s Work and Landlord’s Work will be coordinated.

(b) Tenant’s Personnel must comply with all reasonable rules and regulations that Landlord establishes for the performance of work in the Building. Tenant acknowledges receipt of Landlord’s Construction Manual for the Building. Tenant’s Personnel will follow Landlord’s reasonable directions. Tenant’s Personnel shall have, during the hours specified in the Construction Manual and subject to the terms set forth in the Construction Manual, access during normal business hours to the Premises and reasonable use in common with Landlord and other tenants to the loading docks and freight elevators.

(c) If Tenant’s Work unreasonably interferes with Landlord’s Work, Building operations or causes labor unrest at the Building, then Landlord may order Tenant’s Personnel to immediately cease Tenant’s Work and vacate the Premises, Common Areas and Building of personnel, equipment, materials and supplies to the extent reasonably required to eliminate this interference. Landlord’s actions under this (c) shall not constitute a Landlord Delay.

(d) Tenant’s Work will comply with all applicable laws, regulations, permits and other government approvals applicable to entry and work in the Premises.

(e) Before being provided access to the Premises, Tenant’s Personnel must furnish Landlord with:

(1) Certificates or other proof reasonably required by Landlord to establish that Tenant’s Personnel is in compliance with the following insurance requirements:

(A) Tenant’s Personnel shall maintain the coverage types and limits required in the Construction Manual with respect to the particular trade and/or work being performed.

(B) Prior to commencing work, Tenant’s Personnel and each subcontractor shall submit to Landlord certificates of insurance showing the required insurance has been obtained. If the coverage expires prior to completion of the work, then Tenant’s Personnel and each subcontractor shall submit replacement certificates of insurance to

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Landlord prior to the expiration of such coverage. All certificates shall provide that there will be no cancellation, material modification, or reduction of coverage without reasonable written notice to Landlord. 

(2) A copy of all required building permits for Tenant’s Work;

(3) A complete list of Tenant’s Personnel;

(4) A copy of the contractor’s license for Tenant’s Personnel; and

(5) A copy of the work schedule for Tenant’s Personnel.

8. WORK COSTS

8.1 “Work Costs” means the total of the following:

(a) All design and engineering fees incurred in connection with the preparation and review of the Space Plans, Construction Drawings, Change Orders, and As-Built Drawings by Tenant’s Architect;

(b) All reasonable out-of-pocket fees incurred by Landlord in having third party engineers or other consultants review, test or inspect the Space Plans, Construction Drawings, Change Orders, or Landlord’s Work;

(c) Governmental agency plan check, permit, and other fees applicable to Landlord’s Work;

(d) The cost of any improvements, modifications, additions or alterations to the Base Building or Common Areas that are required by any government agency or authority having jurisdiction over Landlord’s Work as a condition of performing any item of Landlord’s Work that is required by Tenant and does not constitute normal and customary office improvements;

(e) Sales and use taxes applicable to Landlord’s Work;

(f) Material and labor costs incurred in performing Landlord’s Work;

(g) General conditions and contractor’s fees; and

(h) A supervision fee payable to Landlord in the amount of 3% of the Work Costs defined in subsections (d) through (g), above.

8.2 Work Costs will be paid as follows:

(a) If the contracted Work Costs exceed the Construction Allowance, then Tenant will within 5 business days after receipt of Landlord’s invoice for the same

(1) Deposit with Landlord such excess amount, or

(2) Deliver written notice to Landlord that Tenant elects to receive an “Additional Construction Allowance” of such overage amount from Landlord that will be fully amortized over the Term and repaid by Tenant to Landlord in advance in equal monthly installments (without any such installment being subject to excuse or abatement for any cause whatsoever), with the interest on the unpaid principal balance at the rate of 8% per annum, and computed using beginning of period accounting. The Additional Construction Allowance plus the Construction Allowance shall not exceed the Work Costs.

If Tenant elects the Additional Construction Allowance, the dollar amount of Tenant’s monthly payments. Tenant may not convert any of the Additional Construction Allowance amount to Rent payments. Landlord may require additional deposits as a result of increases in Work Costs.

(b) Out of the Construction Allowance and amounts deposited by Tenant, Landlord will pay all Work Costs on a progress payment basis for Landlord’s Work, withholding the applicable Retention from each progress payment.

(c) Landlord will pay the Retention upon final completion of Landlord’s Work, evidenced by Landlord’s receipt of all of the following:

(1) The permit card with all final inspector sign-offs completed and, if required by law, a certificate of occupancy for the Premises;

(2) A copy of the recorded Notice of Completion of Landlord’s Work (and Tenant’s Work, if applicable);

(3) The As-Built Drawings;

(4) An air balance report evidencing that the HVAC system has been balanced and calibrated to industry and Building Standards;

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(5) Completion of all punchlist items; and 

(6) Unconditional lien releases from all contractors and subcontractors for all amounts due in connection with Landlord’s Work and Tenant’s Work (if applicable).

(d) If Tenant has deposited any amount with Landlord in accordance with subsection (a), above, and after payment of all Work Costs and disbursement of the entire Construction Allowance (including the Retention) any portion of such deposit remains, then Landlord will repay such unused portion to Tenant within 10 business days of such determination.

(e) If after payment of the Work Costs and application of Construction Allowance against Base Rent to the extent provided in this §8.2, there remains unused Construction Allowance after December 31, 2016, then such Construction Allowance will be deemed forfeited and no longer available to Tenant.

(f) Tenant shall be solely responsible for all after-hours security, after-hours HVAC, after-hours freight elevator use, and cabling for the Premises. Tenant shall be solely responsible, and not as a Work Cost, for all furniture, fixtures and equipment in the Premises.

9. SUBSTANTIAL COMPLETION; PUNCHLIST ITEMS

9.1 “Substantially Complete” (as such term is modified for the context) means the Landlord’s Work is sufficiently complete so that the Premises can be occupied and used for the Use, subject only to punchlist items that do not render the Premises unsuitable for the conduct of business for the Use, and all certificates of occupancy or other permit(s) issued by appropriate governmental entities necessary for such use and occupancy have been issued.

9.2 Within 30 days after the later of completion of Landlord’s Work or Tenant’s occupancy of the Premises, Tenant shall give Landlord written notice of any claimed deficiencies in Landlord’s Work. Landlord shall promptly cause corrective work to begin and will diligently prosecute the same to completion. Notwithstanding the foregoing, Landlord shall not be responsible for correcting any damage to Landlord’s Work caused by Tenant or its employees, contractors or agents. Except for latent defects in the materials and workmanship of Landlord’s Work and any defects under warranty by Landlord’s Contractor, if Tenant fails to give Landlord notice of any deficiency as provided herein, then Tenant shall be deemed to have accepted Landlord’s Work inclusive of such deficiency and waived any right to corrective work with respect to the same; provided, however, that Landlord’s Contractor shall provide a customary construction warranty with a term of at least one year from Substantial Completion and such warranty shall be assignable and shall be assigned by Landlord to Tenant.

[Remainder of Page Intentionally Left Blank]

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SCHEDULE 1 - SPACE PLANS

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EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTED PURSUANT

TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Omar Hussain, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Imprivata, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting

Date: May 6, 2016	/s/ Omar Hussain
	Omar Hussain,
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTED PURSUANT

TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jeff Kalowski, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Imprivata, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 6, 2016	/s/ Jeff Kalowski
	Jeff Kalowski
	Chief Financial Officer
	(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Imprivata, Inc. (the “Company”) for the period ended March 31, 2016 as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company hereby certifies, pursuant to 18 U.S.C. Section 1350, that to his or her knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 6, 2016	By:	/s/ Omar Hussain
		Omar Hussain
		President and Chief Executive Officer
		(Principal Executive Officer)
Date: May 6, 2016	By:	/s/ Jeff Kalowski
		Jeff Kalowski
		Chief Financial Officer
		(Principal Financial Officer)

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2016	Apr. 29, 2016
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q1
Trading Symbol	IMPR
Entity Registrant Name	Imprivata Inc
Entity Central Index Key	0001328015
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		25,327,530

XML

Condensed Consolidated Balance Sheets (Unaudited) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Current assets:
Cash and cash equivalents	$ 49,328	$ 51,712
Accounts receivable, net of allowances	30,080	36,629
Prepaid expenses and other current assets	5,002	4,431
Total current assets	84,410	92,772
Property and equipment, net	7,979	7,901
Goodwill	11,885	14,380
Intangible assets, net	6,333	5,681
Other assets	1,346	23
Total assets	111,953	120,757
Current liabilities:
Accounts payable	7,188	6,997
Accrued expenses and other current liabilities	8,282	11,567
Current portion of capital lease obligations and long-term debt	395	442
Current portion of other long-term liabilities	240	240
Current portion of deferred revenue	43,218	43,929
Current portion of contingent purchase price liability	611	818
Total current liabilities	59,934	63,993
Deferred revenue, net of current portion	4,916	5,430
Deferred tax liability	771	662
Capital lease obligations, long-term debt and royalty obligations, net of current portion	119	209
Other long-term liabilities, net of current portion	1,817	1,850
Total liabilities	$ 67,557	$ 72,144
Commitments and contingencies (Note 11)
Stockholders' equity:
Undesignated preferred stock, $0.001 par value, 20,000,000 shares authorized; none issued at March 31, 2016 and December 31, 2015
Common stock, $0.001 par value, 250,000,000 shares authorized at March 31, 2016 and December 31, 2015; 25,243,884 and 25,041,643 shares were issued and outstanding at March 31, 2016 and December 31, 2015, respectively	$ 25	$ 25
Additional paid-in capital	181,824	179,357
Accumulated other comprehensive loss	(161)	(151)
Accumulated deficit	(137,292)	(130,618)
Total stockholders’ equity	44,396	48,613
Total liabilities and stockholders’ equity	$ 111,953	$ 120,757

XML

Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares	Mar. 31, 2016	Dec. 31, 2015
Statement Of Financial Position [Abstract]
Undesignated preferred stock, par value	$ 0.001	$ 0.001
Undesignated preferred stock, authorized	20,000,000	20,000,000
Undesignated preferred stock, issued	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, authorized	250,000,000	250,000,000
Common stock, issued	25,243,884	25,041,643
Common stock, outstanding	25,243,884	25,041,643

XML

Condensed Consolidated Statements of Operations (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Revenue
Product	$ 15,978	$ 12,913
Maintenance and services	15,543	12,723
Total revenue	31,521	25,636
Cost of revenue
Product	4,692	3,423
Maintenance and services	5,270	4,927
Total cost of revenue	9,962	8,350
Gross profit	21,559	17,286
Operating expenses
Research and development	8,688	6,872
Sales and marketing	14,221	12,018
General and administrative	5,426	4,580
Total operating expenses	28,335	23,470
Loss from operations	(6,776)	(6,184)
Other income (expense)
Foreign currency exchange (loss) gain	251	(462)
Interest and other income (expense), net	(9)	(16)
Loss before income taxes	(6,534)	(6,662)
Income taxes	140	37
Net loss	$ (6,674)	$ (6,699)
Net loss per share attributable to common stockholders
Basic and diluted	$ (0.27)	$ (0.28)
Weighted average common shares outstanding used in computing net loss per share attributable to common stockholders
Basic and diluted	25,120	23,868

XML

Condensed Consolidated Statements of Comprehensive Loss (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Statement Of Income And Comprehensive Income [Abstract]
Net loss	$ (6,674)	$ (6,699)
Other comprehensive loss:
Foreign currency translation adjustments	(10)	(45)
Comprehensive loss	$ (6,684)	$ (6,744)

XML

Condensed Consolidated Statements of Stockholders' Equity (Unaudited) - 3 months ended Mar. 31, 2016 - USD ($) shares in Thousands, $ in Thousands	Total	Common Stock [Member]	Additional Paid-in Capital [Member]	Accumulated Other Comprehensive Loss [Member]	Accumulated Deficit [Member]
Beginning balance at Dec. 31, 2015	$ 48,613	$ 25	$ 179,357	$ (151)	$ (130,618)
Beginning balance, Shares at Dec. 31, 2015		25,042
Exercise of common stock options	461		461
Exercise of common stock options, Shares		136
Stock-based compensation expense	1,357		1,357
Employee stock purchase plan	649		649
Employee stock purchase plan, Share		66
Net loss	(6,674)				(6,674)
Other comprehensive loss	(10)			(10)
Ending balance at Mar. 31, 2016	$ 44,396	$ 25	$ 181,824	$ (161)	$ (137,292)
Ending balance, Shares at Mar. 31, 2016		25,244

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Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Cash flows from operating activities:
Net loss	$ (6,674)	$ (6,699)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense	981	780
Provision for doubtful accounts	104
Provision for excess inventory	90
Stock-based compensation	1,357	701
Loss on disposal of fixed assets	16	14
Change in value of contingent purchase price liability	(101)	21
Deferred income taxes	110
Changes in operating assets and liabilities:
Accounts receivable	8,344	6,262
Prepaid expenses and other current assets	(1,997)	(857)
Deferred revenue	(495)	(35)
Accounts payable	77	412
Accrued expenses and other current liabilities	(3,382)	(4,145)
Other liabilities	(34)	5
Net cash used in operating activities	(1,604)	(3,541)
Cash flows from investing activities:
Purchases of property and equipment	(807)	(371)
Purchases of intangible assets	(792)
Net cash used in investing activities	(1,599)	(371)
Cash flows from financing activities:
Payment of contingent liability	(106)
Repayments for capital lease obligations, long-term debt and other	(135)	(180)
Proceeds from employee stock purchase plan	649	684
Proceeds from exercise of stock options	428	330
Net cash provided by financing activities	836	834
Effect of exchange rates on cash and cash equivalents	(17)	(69)
Net decrease in cash and cash equivalents	(2,384)	(3,147)
Cash and cash equivalents, beginning of year	51,712	78,524
Cash and cash equivalents, end of year	49,328	75,377
Supplemental disclosures of non-cash investing and financing activities:
Property and equipment purchases included in accounts payable and accrued expenses	35	$ 99
Intangible asset purchases included in accrued expenses	$ 95

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Organization and Business

3 Months Ended

Mar. 31, 2016

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Organization and Business

1. Organization and business

(a) Description of business

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

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

(b) Basis of presentation and principles of consolidation

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

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

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Imprivata Securities Corporation and Imprivata International, Inc., 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.

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

(c) Use of estimates

When preparing financial statements in conformity with U.S. GAAP, we 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.

(d) Foreign currency

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

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

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Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2016

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

2. Summary of significant accounting policies

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

Recent accounting guidance

Recently adopted accounting updates

In April 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“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 became 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 did not have an impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU No. 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 No.2015-05 became effective for interim and annual reporting periods beginning after December 15, 2015. The Company’s adoption of this guidance had an immaterial impact on its consolidated financial statements.

Accounting standards or updates not yet effective

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) (ASU 2014-09). ASU No. 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 No. 2015-14, “Revenue from Contracts with Customers—Deferral of the Effective Date,” that defers by one year the effective date of ASU No. 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 guidance could impact the timing and amounts of revenue recognized. In 2015, the FASB proposed amendments and clarifications to various aspects of the guidance. These amendments were proposed in three FASB exposure drafts. The Company is currently evaluating the effect that implementation of this guidance and any amendments will have on the Company’s consolidated financial statements upon adoption. Any changes to the guidance resulting from the proposed amendments could change the Company’s assessment of the impact that adoption might have on the Company’s consolidated financial statements and could impact the Company’s decision on whether or not to early adopt.

In March 2016, the FASB issue ASU No. 2016-08, “Revenue from contracts with customers (Topic 606): Principal versus Agent Consideration.”  This guidance clarifies the implementation guidance related to principal versus agent consideration.  It provides illustrative examples to assist in the application of principal versus agent revenue recognition in the context of the new revenue.  This guidance’s effective date and transition requirements are the same as those of the new revenue standard which 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. The Company is evaluating the effect this guidance will have on the Company’s consolidated financial statements upon adoption.

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

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

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

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Business Combination

3 Months Ended

Mar. 31, 2016

Business Combinations [Abstract]

Business Combination

3. Business combination

HT Systems, LLC Acquisition

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

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

The Company has contingent obligations to pay up to $5.0 million of potential additional earn-out consideration to the selling equity-holders of HT Systems, which will be determined based upon the achievement of certain sales targets over the two-year period following the closing of the transaction on April 30, 2015, provided, that the selling equity-holders remain employees of the Company when the earn-out consideration becomes payable. The earn-out consideration will be recognized in the Company’s consolidated financial statements as compensation expense as earned. For the three months ended March 31, 2016, the Company did not record 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.

Purchase Price Allocation

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

				Useful lives
(dollars in thousands)	Amount			(in years)
Assets:
Accounts and unbilled receivables	$	7,195
Prepaid expenses and other current assets		20
Property and equipment		59		3
Intangible assets		3,291		4 to 7
Liabilities assumed:
Accrued expenses		(85	)
Deferred revenue		(1,730	)
Net assets acquired		8,750
Goodwill		10,325
Total fair value consideration	$	19,075

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

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 March 31, 2016, the Company finalized the valuation of the assets and liabilities acquired and recorded the following measurement period adjustments:

• a $120,000 working capital adjustment to the balance sheet as a result of increasing the pre-acquisition unbilled receivables not previously recorded in the acquiree’s opening balance sheet;

• a $34,000 decrease to trade accounts receivable to the balance sheet as a result of writing off pre-acquisition receivables deemed to be uncollectible;

• a $14,000 decrease to prepaid expense to the balance sheet as a result of the decision to not move forward with a project; and

• a decrease in the fair value of deferred revenue acquired by $730,000, due to the refinement of the valuation estimates for deferred revenue and a $1.9 million increase to unbilled receivables as a result of reviewing the contractual billing obligations of the acquired customers for goods and services delivered in pre-acquisition periods.

These measurement period adjustments resulted in a $2.5 million decrease in the amount of goodwill reported in the consolidated balance sheet at March 31, 2016.

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Fair Value Measurements

3 Months Ended

Mar. 31, 2016

Fair Value Disclosures [Abstract]

Fair Value Measurements

4. Fair value measurements

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

(a) Fair value hierarchy

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

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

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

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

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

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

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

	Fair value measurements at March 31, 2016
							Total
(in thousands)	Level 1		Level 2		Level 3		carrying value
Assets
Cash equivalents:
Money market funds	$	2,690	$	—	$	—	$	2,690
Certificates of deposit		—		97		—		97
Liabilities
Contingent consideration		—		—		611		611

	Fair value measurements at December 31, 2015
							Total
(in thousands)	Level 1		Level 2		Level 3		carrying value
Assets
Cash equivalents:
Money market funds	$	2,689	$	—	$	—	$	2,689
Certificates of deposit		—		97		—		97
Liabilities
Contingent consideration		—		—		818		818

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

There were no fair value measurements on a non-recurring basis during the three months ended March 31, 2016. In April 2015, the Company completed an acquisition of HT Systems. Under the acquisition method of accounting, the Company allocated the purchase price to the identifiable assets and liabilities based on their estimated fair values which are level 3 inputs. Refer to “Note 3. Business combination” for additional information.

(d) Level 3 fair value measurements

Contingent consideration

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

The Company re-measures the fair value of the contingent liability at each balance sheet date based on the present value of forecasted revenues through March 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:  

	March 31,			December 31,
(in thousands)	2016			2015
Beginning balance as of January 1st	$	818		$	632
Revaluation recognized in general and administrative    expenses in the corresponding statements of operations		(101	)		197
Cash payment on the contingent liability		(106	)		(11	)
Ending balance	$	611		$	818

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

	March 31,		December 31,
	2016		2015
Discount Rate		17%		17%

(e) Other financial instruments

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

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Trade Accounts Receivable, Net of Allowances

3 Months Ended

Mar. 31, 2016

Receivables [Abstract]

Trade Accounts Receivable, Net of Allowances

5. Trade accounts receivable, net of allowances

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

	March 31,			December 31,
(in thousands)	2016			2015
Trade accounts receivable(1)	$	28,875		$	35,815
Unbilled receivables(2)		1,667			1,171
Total trade accounts receivable		30,542			36,986
Allowance for doubtful accounts		(263	)		(158	)
Allowance for sales returns		(199	)		(199	)
Total allowance		(462	)		(357	)
Trade accounts receivable, net	$	30,080		$	36,629

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

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

As of March 31, 2016 and December 31, 2015, the Company had $1.7 million and $1.2 million unbilled receivables presented in Accounts receivable, net of allowances in the consolidated balance sheets. The unbilled receivables are primarily related to contracts acquired in the acquisition of HT Systems. As of March 31, 2016, $1.3 million of these unbilled receivables are long term commitments and are presented in Other assets in the condensed consolidated balance sheets.

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Inventory

3 Months Ended

Mar. 31, 2016

Inventory Disclosure [Abstract]

Inventory

6. Inventory

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

The components of inventories are as follows:

	March 31,		December 31,
(in thousands)	2016		2015
Finished goods	$	932	$	1,051
Raw materials		146		146
Total	$	1,078	$	1,197

When recorded, inventory reserves are intended to reduce the carrying value of inventories to their net realizable value. The Company establishes inventory reserves when conditions exist that indicate inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for the Company’s products or market conditions. The Company regularly evaluates the ability to realize the value of inventories based on a combination of factors including the following: forecasted sales or usage, estimated product end of life dates, estimated current and future market value and new product introductions. The Company recorded immaterial charges for excess and obsolete inventories for the year ended December 31, 2015. During the three months ended March 31, 2016, the Company recorded a $147,000 for excess and obsolete inventories.

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Intangible Assets

3 Months Ended

Mar. 31, 2016

Goodwill And Intangible Assets Disclosure [Abstract]

Intangible Assets

7. Intangible assets

Internally-developed software costs

As of March 31, 2016 and December 31, 2015, the Company recorded $2.1 million and $1.2 million, respectively, of costs associated with an internally developed software project for one of its existing product offerings. The costs, which primarily consist of third party developer expenses, are included in Intangible assets in the consolidated balance sheets.

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Accrued Expenses and Other Current Liabilities

3 Months Ended

Mar. 31, 2016

Payables And Accruals [Abstract]

Accrued Expenses and Other Current Liabilities

8. Accrued expenses and other current liabilities

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

	March 31,		December 31,
(in thousands)	2016		2015
Accrued payroll and related	$	4,449	$	8,212
Accrued taxes(1)		707		933
Other accrued expenses		3,126		2,422
	$	8,282	$	11,567

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

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Warranty Obligations

3 Months Ended

Mar. 31, 2016

Guarantees [Abstract]

Warranty Obligations

9. Warranty obligations

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

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

	March 31,			December 31,
(in thousands)	2016			2015
Beginning balance	$	40		$	40
Provision for estimated claims		5			44
Adjustment to estimate		—			—
Settlement of claims		(5	)		(44	)
Ending balance	$	40		$	40

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

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Debt

3 Months Ended

Mar. 31, 2016

Debt Disclosure [Abstract]

Debt

10. Debt

Bank credit facility

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

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

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Commitments and Contingencies

3 Months Ended

Mar. 31, 2016

Commitments And Contingencies Disclosure [Abstract]

Commitments and Contingencies

11. Commitments and contingencies

(a) Operating lease obligations

The Company’s principal headquarters is located in Lexington, Massachusetts. The Company currently leases approximately 93,000 square feet of office space under a lease expiring in 2021. In addition, the Company amended its lease agreement in 2015 to lease additional 6,338 square feet of office space to its headquarters beginning January 2017 and expiring in 2021.

The Company leases offices for research and development in San Francisco, California. During the first quarter of 2016, the Company entered into a new agreement to lease approximately 5,000 square feet of office space. The lease term begins in June 2016 and expires in June 2023. The rent expense totals approximately $2.9 million.

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 $61,000. In October 2015, the Company extended the lease term through March 31, 2017.

(b) Litigation

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

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

(c) Indemnifications

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

As of March 31, 2016 and December 31, 2015, the Company had not experienced any material losses related to these indemnification obligations, and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible, and no related reserves were established.  

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Accumulated Other Comprehensive Loss

3 Months Ended

Mar. 31, 2016

Equity [Abstract]

Accumulated Other Comprehensive Loss

12. Accumulated other comprehensive loss

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

	ForeignCurrency			Affectedline item in the
	Translation			statement where net
(in thousands)	Adjustments			income is presented
Balance as of January 1, 2015	$	(100	)
Other comprehensive loss		(17	)
Amounts reclassified from accumulated other comprehensive income:
Closure of foreign branch		(34	)	Other income (expense)
Net current-period other comprehensive loss		(51	)
Balance as of December 31, 2015		(151	)
Other comprehensive loss		(10	)
Balance as of March 31, 2016	$	(161	)

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Stock Award Plans and Stock Based Compensation

3 Months Ended

Mar. 31, 2016

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Stock Award Plans and Stock Based Compensation

13. Stock award plans and stock based compensation

(a) Equity incentive plan

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

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

During the three months ended March 31, 2016, the Company granted 1,782,000 options to purchase common stock at a weighted average exercise price of $11.55.

At March 31, 2016, there were 1,449,178 shares available for future grant under the 2014 Plan.

(b) Employee stock purchase plan

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

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

At March 31, 2016, there were 765,596 shares available for future grant under the ESPP.

(c) Early exercise of stock options

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

At March 31, 2016 and December 31, 2015, a total of 17,500 and 21,875 shares of unvested stock options exercised were subject to repurchase at an aggregate price of $81,200 and $102,000, respectively. These amounts are recorded as accrued and other current liabilities in the Company’s consolidated balance sheets and will be reclassified to equity as the Company’s repurchase right lapses.

During the three months ended March 31, 2016 and 2015, 4,375 and 5,202 stock options associated with the early exercise vested, respectively.

(d) Valuation of share-based compensation

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

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

	Three Months ended
	March 31,
	2016			2015
Risk-free interest rate(1)	1.39% - 1.74%				1.77	%
Expected life (years)(2)		6.02			6.02
Expected dividend yield(3)		—	%		—	%
Expected volatility of underlying stock(4)	45% - 48%				47	%

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

	March 1, 2016 to August 31, 2016			September 1, 2015 to February 29, 2016			March 1, 2015 to August 31, 2015			June 25, 2014 to February 28, 2015
Risk-free interest rate(1)		0.50	%		0.26	%		0.07	%		0.08	%
Expected life (years)(5)		0.50			0.50			0.50			0.68
Expected dividend yield(3)		—	%		—	%		—	%		—	%
Expected volatility of underlying stock(4)		72	%		40	%		55	%		40	%

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:

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

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

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

(4) Expected volatility—the Company is responsible for estimating volatility. The Company has limited trading history as a public company and does not have relevant historical data to develop its volatility assumptions. Therefore, the Company used a weighted average of its volatility and analyzed the volatility of several public peer companies to support the assumptions used in its calculations for the three months ended March 31, 2016.

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

(e) Summary of share-based compensation expense

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

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

	Three Months ended
	March 31,
(in thousands)	2016		2015
Cost of maintenance and professional services	$	129	$	60
Research and development		345		223
Sales and marketing		341		216
General and administrative		542		202
Total	$	1,357	$	701

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Income Taxes

3 Months Ended

Mar. 31, 2016

Income Tax Disclosure [Abstract]

Income Taxes

14. Income taxes

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

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

Income tax expense related to tax deductible goodwill

During the three months ended March 31, 2016, the Company recorded U.S. tax expense of $110,000, 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 March 31, 2016 and December 31, 2015, the Company had no uncertain positions or unrecorded liabilities for uncertain tax positions.

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

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Computation of Net Loss Per Share

3 Months Ended

Mar. 31, 2016

Earnings Per Share [Abstract]

Computation of Net Loss Per Share

15. Computation of net loss per share

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

The components of net loss per share are as follows:

	Three Months Ended March 31,
(in thousands, except per share data)	2016			2015
Numerator:
Net loss	$	(6,674	)	$	(6,699	)
Denominator:
Weighted average common shares outstanding used in    computing basic and diluted net loss per common share		25,120			23,868
Net loss per share, basic and diluted	$	(0.27	)	$	(0.28	)

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

	Three Months Ended March 31,
(in thousands)	2016		2015
Options to purchase common stock		5,714		4,951
Common stock subject to repurchase		21		35
Total		5,735		4,986

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Concentration of Risk and Off-Balance Sheet Risk

3 Months Ended

Mar. 31, 2016

Text Block [Abstract]

Concentration of Risk and Off-Balance Sheet Risk

16. Concentration of risk and off-balance sheet risk

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

For the three months ended March 31, 2016, one reseller accounted for 21% of revenues; no other reseller or customer accounted for more than 10% of revenues. For the three months ended March 31, 2015, no customer or reseller accounted for more than 10% of revenues.

At March 31, 2016, one reseller accounted for 23% of accounts receivable; no other reseller or customer accounted for more than 10% of the accounts receivable. At December 31, 2015, one reseller accounted for 12% of accounts receivable; no other reseller or customer accounted for more than 10% of accounts receivable.

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

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Related Party Transactions

3 Months Ended

Mar. 31, 2016

Related Party Transactions [Abstract]

Related Party Transactions

17. Related Party Transactions

The Company completed its acquisition of HT Systems on April 30, 2015. The Company has contingent obligations to pay up to $5.0 million of potential additional earn-out consideration to the selling equity-holders of HT Systems, which will be determined based upon the achievement of certain sales targets over the two-year period following the closing of the transaction on April 30, 2015. The earn-out consideration will be paid to each of the selling equity-holders of HT Systems, based on their equity ownership of HT Systems prior to the acquisition, provided that such selling equity-holder remains an employee of the Company at the time the earn-out becomes payable. Each of the selling equity-holder became employees of the Company upon the closing of the acquisition on April 30, 2015. One selling equity-holder is a member of the Company’s executive management team, but is not a director, executive officer or five percent holder of the Company’s equity securities. No payments associated with the earn-out have been made during the three months ended March 31, 2016.

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, 2017. The Company made rental payments totaling $15,000 and $0 during the three months ended March 31, 2016, and 2015, respectively.

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Organization and Business (Policies)

3 Months Ended

Mar. 31, 2016

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Basis of presentation and principles of consolidation

(b) Basis of presentation and principles of consolidation

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

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

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Imprivata Securities Corporation and Imprivata International, Inc., 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.

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

Use of estimates

(c) Use of estimates

When preparing financial statements in conformity with U.S. 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.

Foreign currency

(d) Foreign currency

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

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

Recent accounting guidance

Recent accounting guidance

Recently adopted accounting updates

In April 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“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 became 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 did not have an impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU No. 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 No.2015-05 became effective for interim and annual reporting periods beginning after December 15, 2015. The Company’s adoption of this guidance had an immaterial impact on its consolidated financial statements.

Accounting standards or updates not yet effective

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) (ASU 2014-09). ASU No. 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 No. 2015-14, “Revenue from Contracts with Customers—Deferral of the Effective Date,” that defers by one year the effective date of ASU No. 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 guidance could impact the timing and amounts of revenue recognized. In 2015, the FASB proposed amendments and clarifications to various aspects of the guidance. These amendments were proposed in three FASB exposure drafts. The Company is currently evaluating the effect that implementation of this guidance and any amendments will have on the Company’s consolidated financial statements upon adoption. Any changes to the guidance resulting from the proposed amendments could change the Company’s assessment of the impact that adoption might have on the Company’s consolidated financial statements and could impact the Company’s decision on whether or not to early adopt.

In March 2016, the FASB issue ASU No. 2016-08, “Revenue from contracts with customers (Topic 606): Principal versus Agent Consideration.”  This guidance clarifies the implementation guidance related to principal versus agent consideration.  It provides illustrative examples to assist in the application of principal versus agent revenue recognition in the context of the new revenue.  This guidance’s effective date and transition requirements are the same as those of the new revenue standard which 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. The Company is evaluating the effect this guidance will have on the Company’s consolidated financial statements upon adoption.

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

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

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

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Business Combination (Tables)

3 Months Ended

Mar. 31, 2016

Business Combinations [Abstract]

Schedule of Purchase Consideration to Assets Acquired and Liabilities Assumed

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

				Useful lives
(dollars in thousands)	Amount			(in years)
Assets:
Accounts and unbilled receivables	$	7,195
Prepaid expenses and other current assets		20
Property and equipment		59		3
Intangible assets		3,291		4 to 7
Liabilities assumed:
Accrued expenses		(85	)
Deferred revenue		(1,730	)
Net assets acquired		8,750
Goodwill		10,325
Total fair value consideration	$	19,075

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Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2016

Fair Value Disclosures [Abstract]

Assets and Liabilities Measured at Fair Value on Recurring Basis

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 March 31, 2016
							Total
(in thousands)	Level 1		Level 2		Level 3		carrying value
Assets
Cash equivalents:
Money market funds	$	2,690	$	—	$	—	$	2,690
Certificates of deposit		—		97		—		97
Liabilities
Contingent consideration		—		—		611		611

	Fair value measurements at December 31, 2015
							Total
(in thousands)	Level 1		Level 2		Level 3		carrying value
Assets
Cash equivalents:
Money market funds	$	2,689	$	—	$	—	$	2,689
Certificates of deposit		—		97		—		97
Liabilities
Contingent consideration		—		—		818		818

Reconciliation of Contingent Liability Measured at Fair Value

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:  

	March 31,			December 31,
(in thousands)	2016			2015
Beginning balance as of January 1st	$	818		$	632
Revaluation recognized in general and administrative    expenses in the corresponding statements of operations		(101	)		197
Cash payment on the contingent liability		(106	)		(11	)
Ending balance	$	611		$	818

Significant Unobservable Inputs Used in Valuation of Contingent Liability

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

	March 31,		December 31,
	2016		2015
Discount Rate		17%		17%

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Trade Accounts Receivable, Net of Allowances (Tables)

3 Months Ended

Mar. 31, 2016

Receivables [Abstract]

Trade Accounts Receivable, Net

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

	March 31,			December 31,
(in thousands)	2016			2015
Trade accounts receivable(1)	$	28,875		$	35,815
Unbilled receivables(2)		1,667			1,171
Total trade accounts receivable		30,542			36,986
Allowance for doubtful accounts		(263	)		(158	)
Allowance for sales returns		(199	)		(199	)
Total allowance		(462	)		(357	)
Trade accounts receivable, net	$	30,080		$	36,629

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

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

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Inventory (Tables)

3 Months Ended

Mar. 31, 2016

Inventory Disclosure [Abstract]

Schedule of Components of Inventories

The components of inventories are as follows:

	March 31,		December 31,
(in thousands)	2016		2015
Finished goods	$	932	$	1,051
Raw materials		146		146
Total	$	1,078	$	1,197

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Accrued Expenses and Other Current Liabilities (Tables)

3 Months Ended

Mar. 31, 2016

Payables And Accruals [Abstract]

Summary of Accrued Expenses and Other Current Liabilities

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

	March 31,		December 31,
(in thousands)	2016		2015
Accrued payroll and related	$	4,449	$	8,212
Accrued taxes(1)		707		933
Other accrued expenses		3,126		2,422
	$	8,282	$	11,567

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

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Warranty Obligations (Tables)

3 Months Ended

Mar. 31, 2016

Guarantees [Abstract]

Summary of Allowance for Warranty Obligations

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

	March 31,			December 31,
(in thousands)	2016			2015
Beginning balance	$	40		$	40
Provision for estimated claims		5			44
Adjustment to estimate		—			—
Settlement of claims		(5	)		(44	)
Ending balance	$	40		$	40

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Accumulated Other Comprehensive Loss (Tables)

3 Months Ended

Mar. 31, 2016

Equity [Abstract]

Schedule of Changes in Accumulated Other Comprehensive Loss Before Taxes

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:

	ForeignCurrency			Affectedline item in the
	Translation			statement where net
(in thousands)	Adjustments			income is presented
Balance as of January 1, 2015	$	(100	)
Other comprehensive loss		(17	)
Amounts reclassified from accumulated other comprehensive income:
Closure of foreign branch		(34	)	Other income (expense)
Net current-period other comprehensive loss		(51	)
Balance as of December 31, 2015		(151	)
Other comprehensive loss		(10	)
Balance as of March 31, 2016	$	(161	)

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Stock Award Plans and Stock Based Compensation (Tables)

3 Months Ended

Mar. 31, 2016

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Schedule of Estimated Weighted-Average Assumptions Related to Stock Options Used in Calculation of Fair Value of Options Granted and Rights to Acquire Stock Under ESPP

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

	Three Months ended
	March 31,
	2016			2015
Risk-free interest rate(1)	1.39% - 1.74%				1.77	%
Expected life (years)(2)		6.02			6.02
Expected dividend yield(3)		—	%		—	%
Expected volatility of underlying stock(4)	45% - 48%				47	%

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

	March 1, 2016 to August 31, 2016			September 1, 2015 to February 29, 2016			March 1, 2015 to August 31, 2015			June 25, 2014 to February 28, 2015
Risk-free interest rate(1)		0.50	%		0.26	%		0.07	%		0.08	%
Expected life (years)(5)		0.50			0.50			0.50			0.68
Expected dividend yield(3)		—	%		—	%		—	%		—	%
Expected volatility of underlying stock(4)		72	%		40	%		55	%		40	%

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:

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

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

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

(4) Expected volatility—the Company is responsible for estimating volatility. The Company has limited trading history as a public company and does not have relevant historical data to develop its volatility assumptions. Therefore, the Company used a weighted average of its volatility and analyzed the volatility of several public peer companies to support the assumptions used in its calculations for the three months ended March 31, 2016.

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

Schedule of Stock-Based Compensation Expense

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

	Three Months ended
	March 31,
(in thousands)	2016		2015
Cost of maintenance and professional services	$	129	$	60
Research and development		345		223
Sales and marketing		341		216
General and administrative		542		202
Total	$	1,357	$	701

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Computation of Net Loss Per Share (Tables)

3 Months Ended

Mar. 31, 2016

Earnings Per Share [Abstract]

Summary of Components of Net Loss per Share

The components of net loss per share are as follows:

	Three Months Ended March 31,
(in thousands, except per share data)	2016			2015
Numerator:
Net loss	$	(6,674	)	$	(6,699	)
Denominator:
Weighted average common shares outstanding used in    computing basic and diluted net loss per common share		25,120			23,868
Net loss per share, basic and diluted	$	(0.27	)	$	(0.28	)

Summary of Common Stock Equivalents Excluded from Computation of Diluted Net Loss per Share

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

	Three Months Ended March 31,
(in thousands)	2016		2015
Options to purchase common stock		5,714		4,951
Common stock subject to repurchase		21		35
Total		5,735		4,986

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Organization and Business - Additional Information (Detail)	3 Months Ended
	Mar. 31, 2016 Branches
Organization Consolidation And Presentation Of Financial Statements [Abstract]
Incorporated state	Delaware
Month and Year of incorporation	2001-05
Number of branches	2
Cash availability, term	12 months

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Business Combination - Additional Information (Detail) - USD ($)		3 Months Ended
	Apr. 30, 2015	Mar. 31, 2016
Business Acquisition [Line Items]
Increase decrease in goodwill		$ (2,500,000)
Earn-Out Consideration [Member]
Business Acquisition [Line Items]
Compensation expense associated with earn-out consideration		0
HT Systems [Member]
Business Acquisition [Line Items]
Percentage of acquired equity interest	100.00%
Business acquisition purchase price	$ 19,100,000
Business combination, acquisition related costs	$ 709,000
Payment period for payments based on achieving certain sales targets	2 years
Working capital adjustment to pre-acquisition unbilled receivables		120,000
Increase (decrease) in trade accounts receivable		(34,000)
Decrease in prepaid expense		(14,000)
Increase (decrease) in fair value of deferred revenue acquired		(730,000)
Increase (decrease) in unbilled receivables acquired		$ 1,900,000
HT Systems [Member] | Earn-Out Consideration [Member]
Business Acquisition [Line Items]
Amount paid based on achieving certain sales target	$ 5,000,000
Payment period for payments based on achieving certain sales targets	2 years
HT Systems [Member] | Continued Employment
Business Acquisition [Line Items]
Amount paid on retention-based payments	$ 1,900,000
Payment period for retention-based payments	2 years
Additional retention payments for employees	$ 341,000
Business combination employee retention payments period, minimum	8 months
Business combination employee retention payments period, maximum	20 months

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Business Combination - Schedule of Purchase Consideration to Assets Acquired and Liabilities Assumed (Detail) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Current assets:
Goodwill	$ 11,885	$ 14,380
HT Systems [Member]
Assets:
Accounts and unbilled receivables	7,195
Prepaid expenses and other current assets	20
Property and equipment	59
Intangible assets	$ 3,291
Property and equipment, useful life	3 years
Liabilities assumed:
Accrued expenses	$ (85)
Deferred revenue	(1,730)
Net assets acquired	8,750
Current assets:
Goodwill	10,325
Total fair value consideration	$ 19,075
HT Systems [Member] | Minimum [Member]
Assets:
Finite lived intangible assets, useful life	4 years
HT Systems [Member] | Maximum [Member]
Assets:
Finite lived intangible assets, useful life	7 years

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Fair Value Measurements - Assets and Liabilities Measured at Fair Value on Recurring Basis (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Liabilities
Contingent consideration	$ 9,800
Fair Value Measurements on a Recurring Basis [Member]
Liabilities
Contingent consideration	611	$ 818
Money Market Funds [Member] | Fair Value Measurements on a Recurring Basis [Member]
Assets
Cash equivalents fair value on a recurring	2,690	2,689
Certificates of Deposit [Member] | Fair Value Measurements on a Recurring Basis [Member]
Assets
Cash equivalents fair value on a recurring	97	97
Level 1 [Member] | Money Market Funds [Member] | Fair Value Measurements on a Recurring Basis [Member]
Assets
Cash equivalents fair value on a recurring	2,690	2,689
Level 2 [Member] | Certificates of Deposit [Member] | Fair Value Measurements on a Recurring Basis [Member]
Assets
Cash equivalents fair value on a recurring	97	97
Level 3 [Member]
Liabilities
Contingent consideration	611	818	$ 632
Level 3 [Member] | Fair Value Measurements on a Recurring Basis [Member]
Liabilities
Contingent consideration	$ 611	$ 818

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Fair Value Measurements - Additional Information (Detail)	Mar. 31, 2016 USD ($)
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Contingent liability	$ 9,800,000
Fair Value, Measurements, Non-recurring [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Fair value measurements on a non-recurring basis	$ 0

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Fair Value Measurements - Reconciliation of Contingent Liability Measured at Fair Value (Detail) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Dec. 31, 2015
Business Acquisition Contingent Consideration [Line Items]
Revaluation recognized in general and administrative expenses in the corresponding statements of operations	$ (101)	$ 21
Ending balance	9,800
Level 3 [Member]
Business Acquisition Contingent Consideration [Line Items]
Beginning balance	818	$ 632	$ 632
Revaluation recognized in general and administrative expenses in the corresponding statements of operations	(101)		197
Cash payment on the contingent liability	(106)		(11)
Ending balance	$ 611		$ 818

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Fair Value Measurements - Significant Unobservable Inputs Used in Valuation of Contingent Liability (Detail)	3 Months Ended	12 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Level 3 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Discount Rate	17.00%	17.00%

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Trade Accounts Receivable, Net of Allowances - Trade Accounts Receivable, Net (Detail) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Accounts Notes And Loans Receivable [Line Items]
Trade accounts receivable, net	$ 30,080	$ 36,629
Trade Accounts Receivable [Member]
Accounts Notes And Loans Receivable [Line Items]
Total trade accounts receivable	30,542	36,986
Unbilled receivables	1,667	1,171
Allowance for doubtful accounts	(263)	(158)
Allowance for sales returns	(199)	(199)
Total allowance	(462)	(357)
Trade accounts receivable, net	30,080	36,629
Trade Accounts Receivable [Member] | Trade Accounts Receivable [Member]
Accounts Notes And Loans Receivable [Line Items]
Total trade accounts receivable	$ 28,875	$ 35,815

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Trade Accounts Receivable, Net of Allowances - Additional Information (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Accounts Notes And Loans Receivable [Line Items]
Other assets	$ 1,346	$ 23
HT Systems [Member]
Accounts Notes And Loans Receivable [Line Items]
Unbilled receivables primarily due to the acquisition of HT Systems	1,700	$ 1,200
Other assets	$ 1,300

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Inventory - Schedule of Components of Inventories (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Inventory Disclosure [Abstract]
Finished goods	$ 932	$ 1,051
Raw materials	146	146
Total	$ 1,078	$ 1,197

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Inventory - Additional Information (Detail)	3 Months Ended
	Mar. 31, 2016 USD ($)
Inventory Disclosure [Abstract]
Reserve for excess and obsolete inventories	$ 147,000

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Intangible Assets - Additional Information (Detail) - USD ($) $ in Millions	3 Months Ended	12 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Goodwill And Intangible Assets Disclosure [Abstract]
Costs associated with internally developed software project	$ 2.1	$ 1.2

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Accrued Expenses and Other Current Liabilities - Summary of Accrued Expenses and Other Current Liabilities (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Payables And Accruals [Abstract]
Accrued payroll and related	$ 4,449	$ 8,212
Accrued taxes	707	933
Other accrued expenses	3,126	2,422
Total	$ 8,282	$ 11,567

XML

Warranty Obligations - Summary of Allowance for Warranty Obligations (Detail) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Guarantees [Abstract]
Beginning balance	$ 40	$ 40
Provision for estimated claims	5	44
Settlement of claims	(5)	(44)
Ending balance	$ 40	$ 40

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Debt - Additional Information (Detail) - Loan and Security Agreement [Member] - Revolving Credit Facility [Member] - USD ($)	1 Months Ended	3 Months Ended
	Apr. 30, 2015	Mar. 31, 2016	Dec. 31, 2015	Mar. 31, 2015
Line of Credit Facility [Line Items]
Credit facility maturity date	Apr. 30, 2016	Apr. 30, 2017
Maximum borrowing limit on accounts receivable	$ 15,000,000			$ 10,000,000
Outstanding revolving credit facility		$ 0	$ 0
Prime Rate [Member]
Line of Credit Facility [Line Items]
Outstanding borrowings, interest rate		0.75%

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Commitments and Contingencies - Additional Information (Detail)	1 Months Ended		3 Months Ended
	Oct. 31, 2015	Apr. 30, 2015 USD ($) ft²	Mar. 31, 2016 USD ($) ft²
HT Systems [Member]
Operating Leased Assets [Line Items]
Operating lease office space		3,500
Operating lease termination date		Mar. 31, 2016
Lease payments | $		$ 61,000
Operating lease extended expiration date	Mar. 31, 2017
Massachusetts [Member]
Operating Leased Assets [Line Items]
Operating lease office space square feet			93,000
Operating lease additional office space square feet			6,338
Operating lease additional office space beginning year and month			2017-01
Operating lease termination year			2021
San Francisco, California [Member]
Operating Leased Assets [Line Items]
Operating lease office space			5,000
Operating lease beginning month and year			2016-06
Operating leases expiration month and year			2023-06
Total rent expense | $			$ 2,900,000

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Accumulated Other Comprehensive Loss - Schedule of Changes in Accumulated Other Comprehensive Loss Before Taxes (Detail) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Dec. 31, 2015
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	$ (151)
Other comprehensive loss	(10)	$ (45)
Amounts reclassified from accumulated other comprehensive income:
Net current-period other comprehensive loss	(10)
Ending balance	(161)		$ (151)
Foreign Currency Translation Adjustments [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	(151)	$ (100)	(100)
Other comprehensive loss	(10)		(17)
Amounts reclassified from accumulated other comprehensive income:
Other income (expense)			(34)
Net current-period other comprehensive loss			(51)
Ending balance	$ (161)		$ (151)

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Stock Award Plans and Stock Based Compensation - Additional Information (Detail) - USD ($)				3 Months Ended		12 Months Ended
	Feb. 29, 2016	Aug. 31, 2015	Feb. 27, 2015	Mar. 31, 2016	Mar. 31, 2015	Dec. 31, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock options expiration period				10 years
Stock options vesting period				4 years
Employee stock purchase plan fair market value of the common stock				85.00%
Share based compensation unvested stock options				17,500		21,875
Share based compensation stock options repurchase				$ 81,200		$ 102,000
2014 Stock Option and Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares granted				1,782,000
Weighted average price				$ 11.55
Common stock, capital shares reserved for future instance				1,449,178
Employee Stock Purchase Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common stock, capital shares reserved for future instance				765,596
Common stock, issued	66,179	45,969	58,793
Common stock, purchase price	$ 9.81	$ 11.63	$ 11.64
Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock option associated with early exercise vested				4,375	5,202

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Stock Award Plans and Stock Based Compensation - Schedule of Estimated Weighted-Average Assumptions Related to Stock Options Used in Calculation of Fair Value of Options Granted and Rights to Acquire Stock Under ESPP (Detail)	3 Months Ended		6 Months Ended			8 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Aug. 31, 2016	Feb. 29, 2016	Aug. 31, 2015	Feb. 28, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Risk-free interest rate		1.77%
Risk-free interest rate, minimum	1.39%
Risk-free interest rate, maximum	1.74%
Expected life (years)	6 years 7 days	6 years 7 days
Expected volatility of underlying stock		47.00%
Expected volatility of underlying stock, minimum	45.00%
Expected volatility of underlying stock, maximum	48.00%
Employee Stock Purchase Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Risk-free interest rate				0.26%	0.07%	0.08%
Expected life (years)				6 months	6 months	8 months 5 days
Expected volatility of underlying stock				40.00%	55.00%	40.00%
Employee Stock Purchase Plan [Member] | Scenario Forecast [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Risk-free interest rate			0.50%
Expected life (years)			6 months
Expected volatility of underlying stock			72.00%

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Stock Award Plans and Stock Based Compensation - Schedule of Stock-Based Compensation Expense (Detail) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 1,357	$ 701
Cost of Maintenance and Professional Services [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	129	60
Research and Development [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	345	223
Sales and Marketing [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	341	216
General and Administrative [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 542	$ 202

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Income Taxes - Additional Information (Detail) - USD ($)	3 Months Ended	12 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Income Tax Disclosure [Abstract]
Valuation allowance related to income taxes		$ 36,000,000
Cumulative loss position in United States		3 years
Deferred tax assets		$ 0
U.S. tax expense	$ 110,000
Liability for uncertain tax positions	0	0
Accrued interest or penalties related to uncertain tax positions	$ 0	$ 0

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Computation of Net Loss Per Share - Summary of Components of Net Loss per Share (Detail) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Numerator:
Net loss	$ (6,674)	$ (6,699)
Denominator:
Weighted average common shares outstanding used in computing basic and diluted net loss per common share	25,120	23,868
Net loss per share, basic and diluted	$ (0.27)	$ (0.28)

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Computation of Net Loss Per Share - Summary of Common Stock Equivalents Excluded from Computation of Diluted Net Loss per Share (Detail) - shares shares in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of diluted net loss per share	5,735	4,986
Options to Purchase Common Stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of diluted net loss per share	5,714	4,951
Common Stock Subject to Repurchase [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of diluted net loss per share	21	35

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Concentration of Risk and Off-Balance Sheet Risk - Additional Information (Detail) - Customer Concentration Risk - Customer	3 Months Ended		12 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Dec. 31, 2015
Revenues [Member]
Concentration Risk [Line Items]
Number of customers or resellers accounted for more than 10% of revenues or accounts receivable	1	0
Concentration risk percentage	21.00%	10.00%
Accounts Receivable [Member]
Concentration Risk [Line Items]
Number of customers or resellers accounted for more than 10% of revenues or accounts receivable	1		1
Concentration risk percentage	23.00%		12.00%

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Related Party Transactions - Additional Information (Detail) - USD ($)		3 Months Ended
	Apr. 30, 2015	Mar. 31, 2016	Mar. 31, 2015
HT Systems [Member]
Related Party Transaction [Line Items]
Amount paid based on achieving certain sales target	$ 5,000,000
Payment period for payments based on achieving certain sales targets	2 years
Selling Members of HT Systems [Member] | HT Systems [Member]
Related Party Transaction [Line Items]
Payment associated with earn out		$ 0
Member of Executive Management Team [Member]
Related Party Transaction [Line Items]
Lease term		1 year
Lease expiration period		Mar. 31, 2017
Rent expense		$ 15,000	$ 0