News Column

IMPRIVATA INC - 10-Q - Management's discussion and analysis of financial condition and results of operations.

August 8, 2014

The following information should be read in conjunction with the Risk factors included in Item 1A of Part II of this Quarterly Report on Form 10-Q, the unaudited financial information and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in the Prospectus that forms a part of our Registration Statement on Form S-1 (File No. 333-194921), which was filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) dated June 24, 2014. 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 authentication and access management technology solutions for the healthcare industry. Our flagship solution, Imprivata OneSign, is an integrated enterprise single sign-on, authentication and access management and workflow automation platform that addresses multiple security and productivity challenges faced by hospitals and other healthcare organizations. By enabling fast, secure access to healthcare information technology systems, 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. Imprivata OneSign can be installed on every workstation and other application access point throughout a healthcare organization and once deployed becomes a critical part of the customer's security and access infrastructure. As a result, we believe that Imprivata OneSign is one of the most widely-used technology solutions by our customers' physicians, nurses and other clinicians. As a result of the widespread adoption of healthcare information technology systems and increasing privacy and security 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. New non-healthcare customers continue to purchase our solutions and existing customers also continue to add licenses and purchase additional products and services. While the non-healthcare business continues to grow, it has decreased as a percentage of total sales. We are 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 our 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 as a result of becoming a public company.



Initial public offering

On June 30, 2014, we completed our initial public offering ("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 New York Stock Exchange ("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 $3.3 million. Offering expenses at December 31, 2013 of $0.5 million were recorded as other noncurrent assets. These offering expenses, and additional expenses incurred from January 2014 through the closing of the IPO of approximately $2.8 million, have been recorded as a reduction of the proceeds received.



Backlog

Our backlog consists of the total future value of our committed customer purchases, whether billed or unbilled. Backlog includes products, software maintenance and professional services which we have billed or been paid for in advance, and are included in deferred revenue on our balance sheet, as well as committed customer purchases where we have not invoiced or fulfilled the order as of the last day of the applicable period and which are not reflected on our balance sheet. We generally complete the unfulfilled committed customer product purchases by shipment in the next fiscal quarter and recognize revenue upon such shipment. We recognize any maintenance and services revenue related to unfulfilled committed customer purchases in subsequent periods in accordance with our revenue recognition policies. As of June 30, 2014 and December 31, 2013, we had backlog of $34.8 million and $30.9 million, respectively. Of the $34.8 million in backlog as of June 30, 2014, approximately $21.0 million, which includes $14.0 million of maintenance, is expected to be recognized as revenue during the remainder of 2014. Additionally, $10.1 million of maintenance revenue is expected to be recognized over the five year period subsequent to the year ended December 31, 2014. 18



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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.

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 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 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 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 continent

liability related to the acquisition of assets from Validus Medical Systems,

as described in the Notes to consolidated financial statements; and • others may calculate Adjusted EBITDA differently than we do and these



calculations may not be comparable to our Adjusted EBITDA metric. 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 GAAP.

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

Three months ended Six months ended June 30, June 30, (in thousands) 2014 2013 2014 2013 GAAP net loss $ (3,552 )$ (84 )$ (10,619 )$ (1,614 ) Adjustments to reconcile to Adjusted EBITDA: Income tax expense 61 43 87 41 Depreciation and amortization 763 608 1,458 1,163 Other expense (income), net 31 5 192 (55 ) Stock-based compensation 367 140 665 257 Change in fair value of contingent liability (509 ) (68 ) (464 ) 31 Adjusted EBITDA $ (2,839 )$ 644$ (8,681 )$ (177 ) 19



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Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These items are regularly monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ substantially from our estimates. The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and six months ended June 30, 2014 and 2013 are consistent with those described in our prospectus filed with the SEC on June 24, 2014 pursuant to Rule 424(b) under the Securities Act of 1933, as amended.



Jumpstart Our Business Startups Act

Under the JOBS Act, we meet the definition of an emerging growth company. We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.



Accounting standards or updates recently adopted

Effective January 1, 2014, we adopted Accounting Standards Update ("ASU") No. 2013-11, "Presentation of a Liability for an Unrecognized Tax Benefit When a Net Operating Loss or Tax Credit". The new guidance provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The adoption of this update did not have a significant impact on our consolidated financial statements, as it required only enhanced disclosures.



Accounting standards or updates not yet effective

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers"(Topic 606) (ASU 2014-09). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016; early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. This update could impact the timing and amounts of revenue recognized. We are currently evaluating the effect that implementation of this update will have on our consolidated financial position and results of operations upon adoption. 20



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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 Six months ended June 30, June 30, (in thousands) 2014 2013 2014 2013 Revenue Product $ 12,225$ 9,558$ 21,499$ 16,906 Maintenance and services 11,008 7,757 21,175 14,664 Total revenue 23,233 17,315 42,674 31,570 Cost of revenue Product 2,475 1,593 4,635 3,170 Maintenance and services 4,400 2,508 8,593 4,746 Total cost of revenue 6,875 4,101 13,228 7,916 Gross profit 16,358 13,214 29,446 23,654 Operating expenses Research and development 6,291 4,452 12,827 8,453 Sales and marketing 11,216 7,201 21,635 13,459 General and administrative 2,311 1,596 5,324 3,369 Total operating expenses 19,818 13,249 39,786 25,281 Income (loss) from operations (3,460 ) (35 ) (10,340 ) (1,627 ) Other income (expense) Interest and other income (expense), net (31 ) (5 ) (192 ) 54 Income (loss) before income taxes (3,491 ) (40 ) (10,532 ) (1,573 ) Income taxes 61 44 87 41 Net income (loss) $ (3,552 )$ (84 )$ (10,619 )$ (1,614 )



Comparison of the three months ended June 30, 2014 and 2013

Revenue Three months ended June 30, 2014 2013 Change % of % of (dollars in thousands) Amount Revenue Amount Revenue Amount % Revenue Product revenue $ 12,225 52.6 % $ 9,558 55.2 % $ 2,667 27.9 % Maintenance and service revenue 11,008 47.4 %



7,757 44.8 % 3,251 41.9 %

Total revenue $ 23,233 100.0 % $



17,315 100.0 % $ 5,918 34.2 %

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 and fingerprint readers. 21



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Product revenue increased by $2.7 million, or 28%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The increase was driven primarily by an increase of $1.5 million in sales of additional products into our existing customer base, $1.1 million of which were related to healthcare customers. Sales to new customers increased by approximately $1.2 million over the same period. Sales to new healthcare customers increased by $1.7 million for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, which was offset by a $421,000 decrease in sales to new non-healthcare customers due to our focus on the healthcare industry.



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. Professional services revenue consists primarily of fees associated with the implementation of our software and training services.



Our professional service arrangements are generally billed on a time and materials basis and revenue is recognized as the services are performed. Training is generally billed as a fixed fee and revenue is recognized when the training is completed.

Maintenance and service revenue increased by $3.3 million, or 42%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The increase was driven by increased maintenance revenue of $ 2.2 million resulting from our larger installed base of users. In addition, professional services increased by $1.1 million 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 Three months ended June 30, Change

(dollars in thousands) 2014 2013 Amount % Cost of revenue Product $ 2,475$ 1,593$ 882 55.4 % Maintenance and service 4,400 2,508 1,892 75.4 % Total cost of revenue $ 6,875$ 4,101$ 2,774 67.6 % Gross margin Product 79.8 % 83.3 % Maintenance and service 60.0 % 67.7 % Total gross margin 70.4 % 76.3 % Cost of product revenue. Cost of product consists primarily of costs of physical appliances and proximity card and fingerprint readers. Additional product costs include third party software license costs, duties and freight and amortization expense related to intangible assets acquired. Cost of product revenue increased by $882,000 or 55%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The increase was primarily attributable to an increase in product sales related to proximity card and fingerprint devices. Product gross margin decreased due to unfavorable changes in the mix between higher-margin software and device sales. Device sales have lower margins than software sales and device sales were higher as a percentage of total product revenue during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, which resulted in the decrease in product gross margin. 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. 22



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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.

Cost of maintenance and service revenue increased by $1.9 million, or 75%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The increase was primarily attributable to an increase of $1.0 million in payroll-related expenses as a result of an increase of 21 employees to 77 employees. The increase in employees hired also caused an increase in facilities and information technology costs of $320,000 and travel-related costs of $275,000. In addition, we incurred an increase of $97,000 for consulting services. The decrease in gross margin for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 related to maintenance and services was due to our investments in support and service personnel to support our anticipated future growth.



Operating expenses

The following table sets forth our operating expenses.

Three months ended June 30, 2014 2013 Change % of % of (dollars in thousands) Amount Revenue Amount Revenue Amount % Operating expenses Research and development $ 6,291 27.1 % $ 4,452 25.7 % $ 1,839 41.3 % Sales and marketing 11,216 48.3 % 7,201 41.6 % 4,015 55.8 % General and administrative 2,311 9.9 % 1,596 9.2 % 715 44.8 % Total operating expenses $ 19,818 85.3 % $



13,249 76.5 % $ 6,569 49.6 %

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. Research and development expenses increased by $1.8 million, or 41%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The increase was attributable to an increase in payroll-related costs of $1.2 million as a result of an increase of 24 employees to 94 employees, and to an increase in costs for outside contractors of $230,000 as a result of increased use of third-party developers primarily located in Ukraine. The increase in employees hired also caused an increase of $489,000 in facilities and information technology-related expenses. These increase were partially offset by a reduction of third-party recruiting fees of $119,000. All of these increases are the result of our continued investment in the development of our existing and new solutions and are expected to continue in the future.



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. Sales and marketing expenses increased by $4.0 million, or 56%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The increase was attributable to increases in sales-related costs of $1.9 million and marketing and business development-related costs of $2.1 million as we continued to invest in building our brand as well as our sales force. The increase in sales-related costs was due to an increase in payroll-related expenses, including commissions, amounting to $1.6 million as a result of an increase of 13 sales employees to 88 sales employees, increased commissions for existing employees. The increase in employees hired also caused increases in facilities and information technology-related expenses of $335,000 and travel expense of $199,000. These increases were partially offset by a decrease in third-party recruiting fees of $150,000. The marketing and business development increases were due primarily 23



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to an increase of $911,000 in payroll-related expenses as a result of an increase of 16 employees to 39 employees and $73,000 related to third-party recruiting fees. Additionally, spending related to demand generation, marketing events and branding increased by $734,000 along with an increase of $169,000 for travel expense and $171,000 related to facilities and information technology-related expenses.



General and administrative.

General and administrative expenses consist primarily of costs for administrative, finance, IT, legal and human resource personnel, including salaries, benefits, bonuses and stock-based compensation, professional fees, insurance premiums, other corporate expenses and allocated overhead. General and administrative expenses also include the re-valuing of our contingent liability associated with any earnout we may be required to pay in connection with the Validus acquisition. We measure the liability at each balance sheet date based on revenue earned to date from the acquired Validus product (now our Imprivata Cortext solution) and our projections of revenues from sales of Imprivata Cortext. We expect our general and administrative expenses to continue to increase in absolute dollars as we transition to being a public company, although they may fluctuate as a percentage of revenue. We expect additional general and administrative expenses to include increased personnel costs, insurance costs, costs required to comply with the regulatory requirements of the Securities and Exchange Commission as well as costs associated with enhancing our internal controls and accounting systems. General and administrative expenses increased by $715,000, or 45%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The increase was driven by $717,000 in headcount and related expenses as a result of an increase of 12 employees to 35 employees. In addition, we incurred an increase in consulting and professional fees of $199,000 and $103,000 related to facilities and information technology related expenses. The increase in headcount related expenses were offset by a net decrease in our contingent consideration liability expense of $509,000 resulting from revised estimates related to our Validus acquisition.



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.



Comparison of the six months ended June 30, 2014 and 2013

Revenue Six months ended June 30, 2014 2013 Change % of % of (dollars in thousands) Amount Revenue



Amount Revenue Amount %

Revenue

Product revenue $ 21,499 50.4 % $ 16,906 53.6 % $ 4,593 27.2 % Maintenance and service revenue 21,175 49.6 % 14,664 46.4 % 6,511 44.4 % Total revenue $ 42,674 100.0 % $ 31,570 100.0 % $ 11,104 35.2 % Product revenue. Product revenue increased by $4.6 million, or 27%, from the six months ended June 30, 2014 to the six months ended June 30, 2013. The increase was driven primarily by an increase of $3.5 million in sales of additional products into our existing customer base, $2.9 million of which were related to healthcare customers. Sales to new customers increased by $1.0 million. Sales to new healthcare customers increased by $1.7 million from the six months ended June 30, 2014 to the six months ended June 30, 2013, which was offset by a $700,000 decrease in new sales to non-healthcare customers due to our focus on the healthcare industry.



Maintenance and services revenue.

Maintenance and services revenue increased by $6.5 million, or 44%, from the six months ended June 30, 2014 to the six months ended June 30, 2013. The increase was driven by increased maintenance revenue of $4.1 million resulting from our larger installed base of users. In addition, professional services increased by $2.4 million due to increased sales of our products, which resulted in new professional services related to implementations and training. 24



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Table of Contents Cost of revenue Six months ended June 30, Change (dollars in thousands) 2014 2013 Amount % Cost of revenue Product $ 4,635$ 3,170$ 1,465 46.2 % Maintenance and service 8,593 4,746 3,847 81.1 % Total cost of revenue $ 13,228$ 7,916$ 5,312 67.1 % Gross margin Product 78.4 % 81.2 % Maintenance and service 59.4 % 67.6 % Total gross margin 69.0 % 74.9 % Cost of product revenue. Cost of product revenue increased by $1.5 million, or 46%, from the six months ended June 30, 2014 to the six months ended June 30, 2013. The increase was primarily attributable to the increase in product sales related to proximity card and fingerprint devices. Product gross margin decreased due to unfavorable changes in the mix between higher-margin software and device sales. Device sales have lower margins than software sales and increased as a percentage of total product revenue during the six months ended June 30, 2014 to the six months ended June 30, 2013 which resulted in the increase in product gross margin. Device revenues as a percentage of total product revenues can fluctuate and, as a result, we expect product gross margins to vary depending on the mix of device revenues to total product revenues.



Cost of maintenance and services revenue.

Cost of maintenance and services revenue increased by $3.8 million, or 81%, from the six months ended June 30, 2014 to the six months ended June 30, 2013. The increase was primarily attributable to $2.0 million in payroll-related costs as a result of increased investment in our support and service personnel. In addition, the increase in employees hired also caused an increase in rent and information technology costs of $639,000, travel-related costs of $471,000. In addition we incurred an increase of $403,000 for consulting services. The decrease in gross margin from the six months ended June 30, 2014 to the six months ended June 30, 2013 related to maintenance and services was due to our investments in support and service personnel to support our anticipated future growth. Operating expenses



The following table sets forth our operating expenses.

Six months ended June 30, 2014 2013 Change % of % of (dollars in thousands) Amount Revenue Amount Revenue Amount % Operating expenses Research and development $ 12,827 30.0 % $ 8,453 26.8 % $ 4,374 51.7 % Sales and marketing 21,635 50.7 % 13,459 42.6 % 8,176 60.7 % General and administrative 5,324 12.5 %



3,369 10.7 % 1,955 58.0 %

Total operating expenses $ 39,786 93.2 % $



25,281 80.1 % $ 14,505 57.4 %

Research and development.

Research and development expenses increased by $4.4 million, or 52%, from the six months ended June 30, 2014 to the six months ended June 30, 2013. The increase was attributable to an increase in payroll-related costs of $2.6 million as a result of an increase of 24 employees to 94 employees, and to an increase in costs for outside contractors of $623,000 as a result of increased use of third-party developers primarily located in Ukraine. The increase in employees hired also caused increases of $487,000 in facilities and communications charges, $454,000 in information technology-related expenses and $88,000 in travel expense. All of these increases are the result of our continued investment in the development of our existing and new solutions and are expected to continue in the future. 25



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Sales and marketing.

Sales and marketing expenses increased by $8.2 million, or 61%, from the six months ended June 30, 2014 to the six months ended June 30, 2013. The increase was attributable to an increase in spending on sales-related costs of $4.3 million and marketing and business development-related costs of $3.9 million as we continued to invest in building our brand as well as our sales force. The increase in sales-related costs was due to an increase in payroll-related expenses, including commissions, amounting to $3.4 million as a result of an increase of 13 sales employees to 88 employees and increased commissions for existing employees, and an increase of $119,000 related to company sales events. The increase in employees hired also caused an increase in information technology and facilities expenses of $691,000, and travel expense of $465,000. These increases were partially offset by a decrease in third-party recruiting fees of $344,000. The marketing increases were due primarily to an increase of $1.7 million in payroll related expenses and $1.1 million of increases in spending related to demand generation, marketing events and branding along with increases of $126,000 related to spending on consulting and outside services, $328,000 for third-party recruiting fees and an increase of $299,000 related to information technology and facilities expenses.



General and administrative.

General and administrative expenses increased by $2.0 million, or 58%, from six months ended June 30, 2014 to the six months ended June 30, 2013. The increase was driven by $1.4 million in headcount and related expenses as a result of an increase of 12 employees to 35 employees. In addition, we incurred increases in consulting and professional fees of $445,000, company event expenses of $143,000 and facilities and information technology related expenses of $240,000. These increases were offset by a net decrease in our contingent consideration liability expense of $464,000 resulting from revised estimates related to our Validus acquisition. Other income (expense). Other income (expense) decreased by $246,000 for six months ended June 30, 2014 to the six months ended June 30, 2013 primarily due to the recognition of the cumulative translation adjustment as a result of the closure of our UK branch and changes in foreign currency exchange rates.



Liquidity and capital resources

Six months ended June 30, (in thousands) 2014 2013 Net cash used in operating activities $ (4,742 ) $



(802 )

Net cash used in investing activities (1,354 )



(720 )

Net cash provided by financing activities 78,506



584

Effect of exchange rates on cash and cash equivalents 100

(258 )

Net increase (decrease) in cash and cash equivalents $ 72,510$ (1,196 )

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. 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 $3.3 million. As of June 30, 2014, approximately $1.6 million of expenses incurred in connection with the IPO have not been paid. As of June 30, 2014, we had $85.8 million of cash and cash equivalents. We believe our cash and cash equivalents, $10.0 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.



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. 26



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Cash provided by operating activities is influenced by the investment we make in personnel and infrastructure costs necessary to support the anticipated growth of the business, the increase in the sales of software licenses and renewal of software maintenance contracts as well as the timing of customer payments. Our cash used in operating activities during the six months ended June 30, 2014 was primarily due to our net loss of $10.6 million adjusted for $1.7 million of non-cash expenses that included $1.5 million of depreciation and amortization, $665,000 in stock-based compensation, $12,000 loss on disposal of fixed assets, and a decrease of $464,000 to the value of the contingent purchase price liability. Net increases in working capital amounted to $4.2 million attributable primarily to a $5.8 million decrease in accounts receivable and an increase of $1.3 million of deferred revenue offset by a $2.4 million decrease in accounts payable and accrued expenses and a $544,000 increase in prepaid expenses and other current assets. Our cash used in operating activities during the six months ended June 30, 2013 was primarily due to our net loss of $1.6 million adjusted for $1.5 million of non-cash expenses that included $1.2 million of depreciation and amortization, $257,000 in stock-based compensation, $14,000 loss on disposal of fixed assets, and an increase of $31,000 to the value of the contingent purchase price liability. Net decreases in working capital amounted to $653,000 attributable primarily to a $5.1 million decrease in accounts receivable offset by a decrease of $1.0 million of deferred revenue and a $4.3 million decrease in accounts payable and accrued expenses and a $278,000 increase in prepaid expenses and other current assets. 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 our infrastructure and workforce. As our business grows, we expect our capital expenditures and our investment activity to continue to increase.

For the six months ended June 30, 2014 and 2013, cash used in investing activities consisted of purchases of $1.4 million and $720,000, respectively, of property and equipment. In general, our purchases of property and equipment are primarily for the expansion of our leased facilities, network infrastructure equipment to support our business, as well as equipment for supporting our increasing employee headcount.



Financing activities

Our primary financing activities have consisted of proceeds from our IPO, net of underwriting commissions and discounts and offering costs, as well as proceeds from the exercise of stock options and payments on equipment debt obligations entered into to finance equipment leases and purchased software costs. For the six months ended June 30, 2014, cash provided by financing activities primarily consisted of $80.2 million of proceeds from our IPO, net of underwriting discounts and commissions but before offering expenses. In addition, cash provided by financing activities consisted of $389,000 in proceeds from the exercise of stock options, partially offset by $348,000 in payments in connection with our debt, capital leases and royalty obligations, as well as $1.7 million in offering costs associated with the filing of our prospectus. Our cash provided by financing activities during the six months ended June 30, 2013 was primarily due to $765,000 of proceeds related to the exercise of stock options, which was offset by cash used to pay down of $181,000 in debt and capital lease obligations.



Contractual Obligations

There have been no significant changes in contractual obligations from those disclosed in our prospectus filed with the SEC on June 24, 2014 pursuant to Rule 424(b) under the Securities Act of 1933, as amended.



Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements and did not have any such arrangements during the six months ended June 30, 2014 and the year ended December 31, 2013.


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Source: Edgar Glimpses


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