S-1 1 a2222565zs-1.htm S-1

Use these links to rapidly review the document
TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

As filed with the Securities and Exchange Commission on December 30, 2014

Registration No. 333-              


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549



FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



Inovalon Holdings, Inc.
(Exact name of registrant as specified in its charter)



Delaware   7374   47-1830316
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)



4321 Collington Road
Bowie, MD 20716
(301) 809-4000
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)



Keith R. Dunleavy, M.D.
Chief Executive Officer and Chairman
Inovalon Holdings, Inc.
4321 Collington Road
Bowie, MD 20716
(301) 809-4000
(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

David P. Slotkin
Spencer D. Klein
Justin R. Salon
Morrison & Foerster LLP
2000 Pennsylvania Avenue, Suite 6000
Washington, DC 20006
(202) 887-1500
  Shauna L. Vernal
Chief Legal Officer
Inovalon Holdings, Inc.
4321 Collington Road
Bowie, MD 20716
(301) 809-4000
  Rachel W. Sheridan
John H. Chory
Latham & Watkins LLP
John Hancock Tower, 27th Floor
200 Clarendon Street
Boston, MA 02116
(617) 948-6000



            Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. o

            If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

            If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

            If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. o

            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. (Check one):

Large accelerated filer o   Accelerated filer o

Non-accelerated filer ý (Do not check if a smaller reporting company)

 

Smaller reporting company o

CALCULATION OF REGISTRATION FEE

       
 
Title of Each Class of
Securities to be Registered

  Proposed Maximum
Aggregate
Offering Price(1)

  Amount of
Registration Fee

 

Class A Common Stock, $0.000025 par value per share

  $500,000,000   $58,100

 

(1)
Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes shares of common stock that may be purchased by the underwriters pursuant to their option to purchase additional shares.

            The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion. Dated December 30, 2014.

                  Shares

LOGO

Class A Common Stock



           This is the initial public offering of shares of Class A common stock of Inovalon Holdings, Inc.

           We have two classes of common stock, Class A common stock and Class B common stock. The rights of the holders of our Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. Each share of Class A common stock will be entitled to one vote per share. Each share of Class B common stock will be entitled to 10 votes per share and will be convertible at the election of each holder at any time, or automatically upon the occurrence of certain events, into one share of Class A common stock. Immediately following the completion of this offering, outstanding shares of our Class B common stock will represent approximately         % of the voting power of our outstanding common stock. See "Description of Capital Stock — Class A and B Common Stock."

           Prior to this offering, there has been no public market for our Class A common stock. It is currently estimated that the initial public offering price per share will be between $             and $             per share. We have applied for listing of our Class A common stock on the NASDAQ Global Select Market under the symbol "INOV."

           We are an "emerging growth company" as defined under federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements.

           Investing in our Class A common stock involves significant risks. See "Risk Factors" beginning on page 19 to read about factors you should consider before buying shares of our Class A common stock.



           Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.



 
 
Per Share
 
Total
 

Initial public offering price

  $                       $                      

Underwriting discount(1)

  $                       $                      

Proceeds, before expenses, to Inovalon

  $                       $                      

(1)
See "Underwriting" for additional information regarding underwriting compensation.



           The underwriters have the option to purchase up to an additional                          shares from us at the initial public offering price less the underwriting discount.

           The underwriters expect to deliver the shares of Class A common stock to purchasers in New York, New York on or about                          , 2015.



Goldman, Sachs & Co.   Morgan Stanley   Citigroup

 

BofA Merrill Lynch   UBS Investment Bank

 

Baird   Piper Jaffray   Wells Fargo Securities   William Blair



   

Prospectus dated                          , 2015.


Table of Contents

LOGO


Table of Contents

GRAPHIC


Table of Contents


TABLE OF CONTENTS

PROSPECTUS SUMMARY

  1

RISK FACTORS

  19

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

  42

USE OF PROCEEDS

  43

DIVIDEND POLICY

  44

CAPITALIZATION

  45

DILUTION

  47

SELECTED CONSOLIDATED FINANCIAL DATA

  49

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  51

BUSINESS

  77

MANAGEMENT

  119

EXECUTIVE COMPENSATION

  129

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

  137

PRINCIPAL STOCKHOLDERS

  138

DESCRIPTION OF CAPITAL STOCK

  140

SHARES ELIGIBLE FOR FUTURE SALE

  148

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF OUR CLASS A COMMON STOCK

  151

UNDERWRITING

  156

LEGAL MATTERS

  162

EXPERTS

  162

WHERE YOU CAN FIND ADDITIONAL INFORMATION

  162

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

  F-1



          Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we nor the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

          Persons who come into possession of this prospectus and any applicable free writing prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.

          This prospectus includes market data and forecasts with respect to the healthcare industry. Although we are responsible for all of the disclosure contained in this prospectus, in some cases we rely on and refer to market data and certain industry forecasts that were obtained from third party surveys, market research, consultant surveys, publicly available information and industry publications and surveys that we believe to be reliable.

i


Table of Contents

 


PROSPECTUS SUMMARY

          This summary highlights information contained elsewhere in this prospectus. It may not contain all the information that may be important to you. You should read the entire prospectus carefully, including the section entitled "Risk Factors" and our financial statements and the related notes included elsewhere in this prospectus before making an investment decision to purchase shares of our common stock.

          In this prospectus, unless we indicate otherwise or the context requires, references to the "company," "Inovalon," "we," "our," "ours," and "us" refer to Inovalon Holdings, Inc. and its consolidated subsidiaries. The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes thereto included elsewhere in this prospectus.


Inovalon Holdings, Inc.

Our Company

          We are a leading technology company that combines advanced cloud-based data analytics and data-driven intervention platforms to achieve meaningful insight and improvement in clinical and quality outcomes, utilization, and financial performance across the healthcare landscape. Our powerful platforms drive high-value impact, improving quality and economics for health plans, hospitals, physicians, patients, pharmaceutical companies, and researchers. The value we deliver to our clients is achieved by turning data into insights and those insights into action. Through our large proprietary datasets, advanced data integration technologies, sophisticated predictive analytics, and deep subject matter expertise, we deliver seamless, end-to-end platforms that bring the benefits of big data and large-scale analytics to the point of care. Our analytics identify gaps in care, quality, data integrity, and financial performance, while our data-driven intervention platforms provide clients with differentiated capabilities to resolve these gaps. During 2014, we provided these services to nearly 100 clients representing approximately 200 patient populations, providing analytics informed by our data and insight on more than 744,000 physicians, 244,000 clinical facilities, 118 million unique patients (covering approximately 98.2% of all U.S. counties), and 9.1 billion discrete entries relating to patient interactions, medical procedures or changes in patients' medical conditions, which we refer to as medical events, a number that has been increasing at a rate of approximately 3.0% compounding monthly, or 43.3% annually, since 2000.

          Healthcare costs in the United States have been increasing significantly for many years, currently approaching almost $3 trillion annually. This rise in healthcare costs has driven a broad transition from consumption-based payment models to value-based payment models across the healthcare landscape. As a result, the specific disease and comorbidity status (i.e., the presence of one or more diseases or medical conditions co-occurring with a primary disease or medical condition), clinical and quality outcomes, resource utilization, and care details of the individual patient have become increasingly relevant to the various constituents of the healthcare delivery system. Concurrently, the count and complexity of diseases, diagnostics, and treatments — let alone payment models and regulatory oversight requirements — have soared. In this setting, granular data has become critical to determining and improving quality of care and financial performance in healthcare.

          We believe that the opportunity before us is substantial as data increasingly becomes the lynchpin in healthcare — from clinical quality outcomes and financial performance, to the consumer experience and drug discovery. A January 2013 McKinsey & Company, or McKinsey, report estimates that utilizing data analytics could drive improvements in healthcare resulting in a beneficial economic impact of $300 billion to $450 billion annually. As a reflection of the increasing need for data analytics, in the last several years our advanced analytics and data-driven intervention

 

1


Table of Contents

platforms have been driving significant economic impact through improvements in clinical and quality outcomes, disease and comorbidity data accuracy, and utilization, achieving hundreds of millions of dollars per year in quantified beneficial financial improvements for our clients.

          At the core of our capabilities is a long history of innovation and profitable growth, positioning us to deliver value to our clients and capitalize on the confluence of recent changes in the healthcare industry that many describe as historically unprecedented. Our ability to rapidly innovate is enabled by the depth and breadth of our industry expertise, large-scale proprietary datasets, advanced analytical prowess, highly flexible platform components, a common native code base, and experience across the healthcare landscape.

          We deliver value to our clients through our platforms, which are accomplished through four primary components:

    Data Integration:  Highly efficient and effective data assimilation of structured and unstructured healthcare data in any format from highly disparate and disconnected sources;

    Advanced Analytics:  Data analysis using big-data processing to yield highly actionable insights identifying gaps in care, quality, data integrity, and financial performance;

    Intervention Platforms:  Software and services that allow our clients to take the insights derived from our analytics to address and resolve the identified gaps in care, quality, data integrity, and financial performance; and

    Business Processing:  Powerful business intelligence tools that summarize key analytics and benchmarking information as well as a comprehensive claims data warehouse that helps our clients comply with government mandated reporting requirements.

          Our ability to deliver value to our clients through our advanced analytics and intervention platforms has allowed us to achieve significant growth since the company's organization. Over the last three years, our revenue has increased at a compounded annual growth rate of 19%, Adjusted EBITDA at a compounded annual growth rate of 20%, and net income at a compounded annual growth rate of 33% despite a 1% revenue decrease during the year ended December 31, 2013 as compared to the year ended December 31, 2012. For the nine months ended September 30, 2014, our revenue was $271.6 million, representing 17% growth over the same period of the prior year. In this same period, we generated Adjusted EBITDA of $103.1 million, representing 38% of revenue and 77% growth over the same period in the prior year. Net income for the nine months ended September 30, 2014 was $51.9 million, representing 19% of revenue and a 92% increase over the same period in 2013. Adjusted EBITDA is a non-GAAP measure. For a reconciliation of Adjusted EBITDA to net income, see "Selected Consolidated Financial Data."

Industry Overview

          We believe that the increasing demand for our platform is driven by the confluence of four fundamental healthcare industry trends:

          Unsustainable Rise in Healthcare Costs.    Healthcare spending in the U.S. was almost $3 trillion in 2012 according to the 2012 National Health Expenditure Highlights prepared by the Centers for Medicare and Medicaid Services, or CMS, representing more than 17% of U.S. Gross Domestic Product, or GDP. The 2014 set of healthcare cost projections from the Congressional Budget Office, or the CBO, indicate national healthcare spending will rise to 22% of GDP by 2039. To address this expected significant rise in healthcare costs, the U.S. healthcare market is seeking more efficient and effective methods of delivering care. This same trend is playing out across modernized nations around the globe.

 

2


Table of Contents

          Shift to Value-Based Healthcare.    The traditional fee-for-service reimbursement model in healthcare has played a major role in elevating both the level and growth rate of healthcare spending. In response, both the public and private sectors are shifting away from the historical fee-for-service models toward value-based, capitated payment models that are designed to incentivize value and quality at an individual patient level. As seen in the figure below, the number of Americans covered by capitated payment programs (care programs provided in shared risk arrangements wherein an organization is responsible for the healthcare of a population of patients for which the total compensation is fixed other than adjustments for factors including the populations' individual, patient-specific disease burden, utilization efficiency, outcomes, quality, and other demographic factors) has been increasing rapidly and, according to industry sources and our internal estimates, is anticipated to increase from approximately 80 million at the start of 2014 to over 150 million by 2019. This increase is expected to further drive the critical importance to accurately measure, analyze, report, and improve patient disease and comorbidity conditions, utilization rates, and clinical quality outcomes.

GRAPHIC

          Digitization of Healthcare Information.    Across the healthcare landscape, a significant amount of data is being created every day driven by patient care, payment systems, regulatory compliance, and record keeping. These data include information within patient health records, clinical trials, pharmacy benefit programs, imaging systems, sensors and monitoring platforms, laboratory results, patient reported information, hospital and physician performance programs, and billing and payment processing. Despite significant investments by public and private sources within the industry, however, the digitized healthcare data remain largely stored in "walled gardens" — data that is static and not easily shared or interpreted. As the amount of data in healthcare continues to grow, we believe that it will be critical for the healthcare industry to be able to use this disparate data to better achieve the goals of higher quality and more efficient care.

          Increasing Complexity.    The healthcare industry is on a course of dramatically progressive complexity. As technology employed in the healthcare space has become increasingly

 

3


Table of Contents

sophisticated, new diagnostics and treatments have been introduced, the pool of clinical research has expanded, and the paradigms dictating payment and regulatory oversight have multiplied. This expanding complexity drives a growing and continuous need for analysis of the underlying and resulting data.

Problems Our Clients Face

          As the U.S. healthcare market continues to transform, the aforementioned industry trends have set into motion a number of significant challenges faced by our clients. We believe that we are well-positioned and have the solutions to help clients not only adapt to, but thrive within, the new healthcare landscape.

          Understanding and Improving Clinical Quality Outcomes.    Quality and value-based, capitated programs require that clinical and quality outcomes be measured at the individual patient level. These measures require detailed and highly granular reporting of the care sought and delivered to each patient to allow for the accurate calculation of population quality metrics. The results of these quality measurements drive significant financial incentives and consequences, influencing more than an estimated $3 billion in quality-related payments annually.

          Understanding the True Health Status of Patients.    The ability to establish the appropriate treatment protocol among multiple physicians, ensure that patients are supported with the correct care resources and monitored for the proper patient-relevant quality metrics, and determine the overall population risk is contingent on the ability to become accurately aware of a patients' disease and comorbidity status. Having detailed and highly granular reporting of the disease and comorbidities of each patient is essential for care, quality, and financial performance.

          Understanding and Improving Utilization.    Under new legislation, health plans are required to submit data on the percentage of revenue collected from health insurance premiums that is spent on clinical services and quality improvement, which is more commonly known as the Medical Loss Ratio, or the MLR. If health plans fail to meet set MLR thresholds, they are required to rebate the customer. If the cost of care exceeds the MLR threshold, however, health plans must absorb the shortfall. Given the importance of accurately reporting the MLR and managing the underlying healthcare costs, many health plans enter into complex arrangements with key providers in their networks and other industry constituents (such as pharmaceutical companies and pharmacy benefit managers) through shared risk arrangements and performance bonus programs to help manage costs, drive improvements in patient health, and achieve long-term utilization containment and quality goals.

          Complying with Increasingly Complex Regulatory Requirements.    Federal and state regulation and compliance is increasing and becoming ever more complex, with agencies at nearly every level of government regulating the activities of organizations participating within the healthcare marketplace. The breadth, complexity, and intensity of regulation require these organizations to focus nearly every activity through a compliance lens in order to meet the data-intensive regulatory reporting requirements.

          Enabling and Empowering the Consumer.    Individuals can now buy direct coverage, select clinicians and hospitals, and directly research implications of specific medications, procedures, and treatment courses. Further, the individual is increasingly participating in the quantified-self movement in which they can self-monitor their key health metrics. This shift to a more informed and engaged consumer is resulting in new challenges and opportunities for how practice groups, payors, employers, pharmaceutical companies, retail pharmacies, and other healthcare constituents interact with consumers.

 

4


Table of Contents

          Unlocking the Value of Data through Actionable Interventions.    A key commonality among the changes in the healthcare landscape is the importance of highly granular data. However, data by itself has limited usefulness without the right technology and systems in place to analyze and act on it and drive meaningful action. We believe that the leveraging of data is the critical differentiator in deriving meaningful insight and turning that insight into action to drive valuable impact across the healthcare landscape. However, in today's healthcare technology environment, much of this data goes unrecorded in a structured or meaningful way, unintegrated with other pertinent data related to the patient's events or conditions, and unanalyzed for the purposes of driving improvements in care and affordability.

          Easily Deploying and Interoperating Platforms at Massive Scale.    The ability to receive, seamlessly integrate, and accurately process extremely large-scale data flows efficiently and at high speeds is increasingly important and necessary for the healthcare industry. However, data integration and processing in massive scale is extremely challenging, which prevents the various components of the healthcare landscape from effectively communicating and coordinating with one another to deliver higher quality care. Overcoming this in scale is integral to managing large patient populations efficiently and effectively. Our platforms provide solutions to help address our clients' challenges and drive meaningful improvements in the clinical quality outcomes and financial performance across a wide expanse of our society's healthcare landscape.

Our Market Opportunity

          We believe that our opportunity is significant and growing. According to a January 2013 McKinsey report, utilizing data analytics could reduce healthcare costs in the United States by $300 billion to $450 billion, or 12% to 17% of total U.S. healthcare costs today.

          The ability to aggregate, integrate, and analyze data in massive scale and apply garnered insights in a manner that achieves meaningful impact is crucial for healthcare payors (e.g., health plans and integrated health delivery systems), clinical providers (e.g., hospitals, ACOs, and physicians), pharmaceutical and life sciences companies, and consumers. We estimate that our addressable market for these capabilities serving these healthcare constituents to be approximately $83.8 billion. We believe that the market opportunity for our current platform offering within the payor market, the historical focus of our company, is approximately $10.6 billion. According to industry sources, the market for software and related services is approximately $14.0 billion within the U.S. payor market. We believe that as analytics continue to demonstrate greater value within the U.S. payor landscape, the market will expand commensurately. As we continue to build and launch new capabilities, we believe it will provide a significantly larger value opportunity within this same payor space. For providers, industry sources estimate that software and related services represent a $32.3 billion U.S. market size. In the global pharmaceutical and life-sciences market, International Data Corporation, or IDC, in a 2013 report, estimates a $30.9 billion market size for total software and services spend in 2013. In the consumer market, an October 2013 Research and Markets report estimated a $6.6 billion global market size for mobile health applications and solutions. As with our other market segments, we believe that analytics will also drive a significant expansion in the consumer market.

          In addition, the pressures that face the U.S. healthcare market are not unique, as other communities around the world are facing aging populations and growing pressures in the sustainable affordability of healthcare. We believe that our capabilities are highly applicable to other developed and developing countries around the globe, which we believe represents a sizable related future opportunity for us.

Our Platforms

          Through the application of our platforms, we help our clients achieve large-scale insight and meaningful improvement in clinical and quality outcomes, utilization, and financial performance.

 

5


Table of Contents


          In deploying our technology to attain the results our clients require, they want us to synthesize opaque, convoluted, and disparate data into actionable information aligned with individualized goals and, in turn, empower patient and provider intervention platforms that achieve the realization of their goals in a measurable way. The diagram below illustrates the components of our technology platforms.

GRAPHIC

          Our platforms' capabilities are currently engaged by nearly 100 clients supporting approximately 200 patient populations that leverage our ability to analyze and improve clinical and quality outcomes and financial performance.

          Data Integration:    Datasets and the management of data are part of our core strengths, which give us insight into how a patient, provider, or population is doing. We integrate data seamlessly and securely into our systems through our proprietary extraction, transformation, and load tools and processes. Data we receive in the course of providing our services are statistically de-identified and stored in our Medical Outcomes Research for Effectiveness and Economics Registry, or MORE2 Registry®, which, as of September 30, 2014, contained more than 9.1 billion medical events from more than 118 million unique patients, 744,000 physicians, and 244,000 clinical facilities, touching 98.2% of all U.S. counties and Puerto Rico and growing at a rate of approximately 43.3% annually since 2000.

 

6


Table of Contents

          Advanced Analytics.    For years we have developed, honed, and scaled a portfolio of sophisticated analytics. Applying our team's deep subject matter expertise in compute processing, data architecture, statistics, medical sciences, and healthcare policy, and leveraging the billions of medical events within our significant propriety datasets, we believe that we have developed one of the most advanced analytical platforms within the industry, as well as a culture and set of analytical toolsets that serve to rapidly innovate and significantly expand our platform. Examples of the innovative analytics powered by this combination of data and processing capabilities include:

    disease and comorbidity presence and closure probability determination analytics;

    clinical and quality outcomes gap presence and closure probability determination analytics;

    medication compliance and persistence analytics;

    principally relevant provider determination analytics;

    targeted intervention timing optimization analytics;

    targeted intervention venue and logistics optimization analytics;

    gap resolution valuation determination and prioritization analytics;

    population simulation analytics; and

    relative comparative analytics.

          Intervention Platforms.    Our data-driven intervention platforms are toolsets and services that enable our clients to take the insights derived from our analytics and implement solutions at the patient and provider level in order to achieve meaningful impact with the patient and provider. Our data-driven intervention platform tools encompass both internal administrative tasks as well as outbound, patient-oriented and provider-oriented functions. Examples of our intervention platform tools include:

    point of care tools that provide patient-level insight to the healthcare provider, which guides the provider to aid in the assessment, documentation, and care of a specific patient;

    communication tools that support a wide range of notifications and interactions with patients and providers at the appropriate level of implied education and language to aid in the process of achieving patient and provider actions;

    supplemental patient encounter tools that facilitate the coordination of data-driven patient encounters for those who are unable to participate in traditional office encounter venues; and

    medical record data tools that facilitate electronic medical record data pulls, remote accessing, and clinical facility communications regardless of the underlying medical record data medium (e.g., digital or paper).

          Business Processing.    Our business processing toolsets are made up of a powerful business intelligence system and comprehensive data warehousing, which provide historical and current data insight, reporting, and benchmarking to support multiple client business needs such as government-mandated data filings, financial planning, and compliance requirements.

Our Competitive Strengths

          We believe that our operational and financial success is based on the following key strengths:

          Industry-Leading Analytics.    We have demonstrated performance and leadership in disease and comorbidity identification analytics, predictive model analytics, patient and provider intervention

 

7


Table of Contents

prioritization analytics, quality outcomes analytics, and a host of additional analytical and data-driven processes. Based on our experience in the industry and our interactions with existing and prospective clients, we believe that very few other organizations, if any, are able to offer the depth and breadth of data-driven analytical insights, tools, and actionable interventions that our platforms are able to offer.

          Industry-Leading Data Asset.    We maintain one of the industry's largest independent datasets in our MORE2 Registry. The primary source nature of the contributing data, the clinical content depth of certain elements, the analytically-derived enrichments, the significant data integrity, and the ability to maintain accurate identification of entries and patient matching over time regardless of data source and chronology (a valuable characteristic within our datasets known as longitudinal matching) all combine to create a unique and valuable asset. We believe that these datasets serve as a significant differentiator, informing analytical and product strength design, population simulations, health outcomes research, patient engagement, and both speed-to-market and speed-to-impact capabilities.

          Fully Integrated End-To-End Solution Delivery.    Our platform is able to turn data into insights and insights into actionable interventions. The ability of our platform to integrate disparate and highly complex data to derive impactful and actionable insights has enabled us to bridge the gap from analytics to practical applications on a vast scale.

          Scale of Organically Developed Platform.    We have developed a highly efficient and scalable data and analytics platform that has successfully scaled to serve many of the nation's largest health plans as well as hundreds of separate patient populations concurrently. This platform has been developed on one common code base, supporting strong interoperability within our platform, efficiency in innovating and expanding our platform capabilities, and establishing both predictability and reliability when operated at high levels of load.

          Subject Matter Expertise.    We have, and plan to continue to cultivate, a culture of fostering domain expertise. We maintain a dedicated research team comprised of industry experts and thought leaders, including physicians, as well as clinical, statistical, economical, and data research scientists, and field practitioners who focus on next-generation healthcare solutions and data applications. In addition, we empower our product groups with their own industry experts who focus on research and development in their respective product domains.

          Industry Innovator and Thought-Leader.    We invest considerable time and resources to produce ground-breaking research and strategically share it through industry publications, peer presentations, strategic relationships, and the media. Our MORE2 Registry is routinely featured at high-profile industry events and within influential publications, which we believe further reinforces our brand as an industry innovator and thought-leader.

          Long, Successful, Profitable Operating History.    We have been delivering value to our clients while gaining scale and profitability since 2006, the year of our reorganization as a C corporation. This scale and profitability has provided organizational stability, an empowerment to invest in ongoing research and development, a high level of trust and confidence in us from our existing clients and potential clients, and ready access to resources to meet our clients' needs.

          Trusted, Independent, and Unbiased Partner.    We are not owned or influenced by a health plan or private equity organization. As a result, our data and analyses remain truly independent, not biased to any single patient base, we are incentivized to be transparent with our clients, and we believe our goals are more fully aligned with the success of our clients.

          We have grown by attracting clients, accumulating increasingly larger and more robust datasets, and developing more advanced analytics from this growing dataset that deliver

 

8


Table of Contents

increasingly valuable insights and impact. By providing increasingly valuable insights and performing increasingly effective patient and provider interventions we are able to deliver greater value to our clients. As our data asset continues to grow, our analytics and intervention solutions become even more effective and our clients realize even more value from our solutions. This in turn results in greater demand for our solutions and attracts new clients. We believe that this virtuous cycle provides us with a competitive position that cannot be easily replicated.

Growth Strategies

          Our objective is to continue to provide leading data analytics and intervention platforms across the healthcare landscape while continuing to grow profitably. We intend to achieve this objective through the following key strategies.

          Deliver Increasing Value to Existing Clients.    We believe that we have a significant opportunity to deliver increasing value to our existing clients and this, in turn, will drive continued growth for us. As our clients recognize value and success as a result of working with our platforms, we frequently see our clients grow in their patient count and increase the number of products engaged with us — both of which result in our mutual success and growth. As we continue to deliver value to our clients, we plan to increase revenue from our existing clients by expanding their use of our platforms, selling to other parts of their organizations, and selling additional analytical toolsets and services to them.

          Continue to Grow Our Client Base.    We believe that we are still in the early stages of realizing our substantial opportunity to grow our client base. We intend to leverage our expertise and experience from the existing large client base to gain new clients through increased investment in our sales force and marketing efforts.

          Continue to Innovate.    Our strength in applying advanced, big data, cloud-based data analytics and our proprietary datasets enable us to achieve increasingly more impactful results for our clients. We intend to continue to invest in research and development to further enhance our data analytics and intervention platforms.

          Continue Expanding into Adjacent Verticals.    We believe the application of advanced analytics and data extends well beyond our current market opportunities and provides additional adjacent market verticals for growth. These verticals include providers, pharmaceutical and life sciences, employer and private exchanges, and direct to consumer.

          Expand Reach through Growing our Channel Partnerships.    While we have been successful in growing our business through our direct sales efforts, we believe there is a significant opportunity that exists for us to further expand and accelerate our reach through channel partnerships with organizations such as retail clinics, pharmaceutical companies, contract research organizations, large technology solution providers, and consulting firms.

          Continue to Leverage our Technology Partnerships.    The healthcare industry has traditionally lagged behind the technology innovation curve. Our advanced data processing and analytics capabilities, coupled with infrastructure thought leadership from leading vendors like EMC, has enabled us to empower our clients with powerful data-driven solution offerings and further transform the use case of modern technologies across the evolving IT healthcare landscape. We intend to continue to invest in these partnerships with thought leaders in the software and infrastructure sector.

          Expand Internationally.    Governments, corporations, and consumers worldwide face similar pressures as within the U.S. with respect to their healthcare systems. We believe that our

 

9


Table of Contents

capabilities are highly applicable to other countries around the world and we intend to invest in replicating our success in the U.S. market to other strategic countries and regions.

          Selectively Pursue Acquisitions.    We plan to selectively pursue acquisitions of complementary businesses, technologies, and teams that will allow us to add new features and functionalities to our platform and accelerate the pace of our innovation and expansion into adjacent market spaces beyond what we can achieve organically.

          Leverage our Dynamic, Passionate and Mission-Focused Culture.    We believe that our work must meet a higher standard. We believe that the analytics that we design, deliver, and support achieve an impact in the lives of real people — parents, spouses, partners, siblings, and children — making integrity and quality cornerstones of our culture. Our dedication to integrity and quality extends to the proprietary technology used for medical data integration, analysis, abstraction, and reporting. Even more importantly, this culture is embraced throughout our company.

Summary Risk Factors

          Our business is subject to a number of risks and uncertainties, including those highlighted in the section titled "Risk Factors" immediately following this prospectus summary. Some of these risks include, among others:

    we may not grow at the rates we historically have achieved or at all, even if our key metrics indicate growth, which could have a material adverse effect on the market price of our Class A common stock;

    if our existing clients do not renew their agreements with us, renew at lower fee levels, decline to purchase additional services from us, choose to purchase fewer services from us, or terminate their agreement with us, and we are unable to replace any lost revenue, our business and operating results could suffer;

    our top clients account for a significant portion of our revenues and, as a result, the loss of one or more of these clients could materially and adversely affect our business and operating results;

    if we do not develop new services that are adopted by clients or fail to provide high-quality support services to our clients, our growth prospects, revenues and operating results could be materially and adversely affected;

    we cannot assure you that we will be able to manage our growth effectively, which could have a material adverse effect on our business, results of operations, and growth prospects;

    if our security measures fail or are breached and unauthorized access to a client's data is obtained, our services may be perceived as insecure, we may incur significant liabilities, our reputation may be harmed, and we could lose sales and clients;

    our quarterly operating results may fluctuate significantly, which could adversely impact the value of our Class A common stock;

    because the dual class structure of our common stock has the effect of concentrating voting control with holders of our Class B common stock, these holders will continue to have significant influence over our company after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote; and

    an active, liquid trading market for our Class A common stock may not develop, which may limit your ability to sell your shares at or above the initial public offering price.

 

10


Table of Contents

Corporate Reorganization and Credit Facilities

          Effective September 17, 2014, in order to facilitate the administration, management, and development of our business and this offering, Inovalon, Inc. implemented a holding company reorganization, or the Corporate Reorganization, pursuant to which we became the new parent company and Inovalon, Inc. became our direct, wholly owned subsidiary. To implement the Corporate Reorganization, Inovalon, Inc. formed our company and we, in turn, formed Inovalon Merger Sub, Inc., or Merger Sub. The holding company structure was implemented by the merger of Merger Sub with and into Inovalon, Inc. with Inovalon, Inc. surviving the merger as a direct, wholly-owned subsidiary of our company. As a result of the Corporate Reorganization, each share of Inovalon, Inc. issued and outstanding immediately prior to the merger automatically converted into one share of common stock of our company.

          On September 19, 2014, we and our subsidiaries entered into a credit and guaranty agreement with Goldman Sachs Bank USA, as administrative agent, and the lenders from time to time party thereto, which we refer to as the Credit Agreement. The terms of the Credit Agreement provide for credit facilities in the aggregate maximum principal amount of $400.0 million, consisting of a senior unsecured term loan facility in the original principal amount of $300.0 million, which we refer to as the Term Loan Facility, and a senior unsecured revolving credit facility in the maximum principal amount of $100.0 million, or the Revolving Credit Facility, which we refer to together with the Term Loan Facility as the Credit Facilities. Proceeds of the Revolving Credit Facility may be used for working capital and general corporate purposes. The obligations under the Credit Facilities are guaranteed by our domestic, wholly owned subsidiaries.

          After the Corporate Reorganization, our capital stock was reclassified to implement a dual class capital structure providing for two classes of common stock, with each share of common stock held by our existing stockholders reclassified as Class B common stock. Following the reclassification, we redeemed approximately 8.33% of our Class B common stock on a pro rata basis from our existing stockholders for an aggregate amount of $300.0 million using the proceeds from the Term Loan Facility, as more fully described in "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Debt."

Corporate Information

          Our principal executive offices are located at 4321 Collington Road, Bowie, Maryland 20716. Our telephone number at that address is (301) 809-4000 and our Internet address is www.inovalon.com. The information contained on, or that can be accessed through, our website is not a part of this prospectus. Investors should not rely on any such information in deciding whether to purchase our Class A common stock.

          "Inovalon," the Inovalon logo, and other Inovalon marks are trademarks of Inovalon. This prospectus contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays may appear without the ® or ™ symbols, but such references are not intended to indicate that we or their respective owners will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies' trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any such companies.

Implications of Being an Emerging Growth Company

          As a company with less than $1.0 billion in revenue during our most recently completed fiscal year, we qualify as an "emerging growth company" as defined in Section 2(a) of the Securities Act of 1933, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or

 

11


Table of Contents

the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable, in general, to public companies that are not emerging growth companies. These provisions include:

    an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting;

    an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements;

    reduced disclosure about our executive compensation arrangements; and

    exemptions from the requirements to obtain a non-binding advisory vote on executive compensation or a shareholder approval of any golden parachute arrangements.

          We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock. We would cease to be an emerging growth company upon the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; the date we qualify as a "large accelerated filer," with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of this offering.

          The JOBS Act also permits us, as an emerging growth company, to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies and thereby allows us to delay the adoption of those standards until those standards would apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

12


Table of Contents

 


THE OFFERING

Class A common stock offered by us

                            shares

Class A common stock to be outstanding after this offering

 

                          shares(1)

Class B common stock to be outstanding after this offering

 

                          shares(1)

Total Class A and Class B common stock to be outstanding after this offering

 

                          shares(1)

Use of Proceeds

 

We estimate the net proceeds to us from this offering, after deducting the underwriting discounts and estimated offering expenses payable by us, will be approximately $             million (or $             million if the underwriters' option to purchase additional shares in this offering is exercised in full), assuming the shares are offered at $             per share, which is the midpoint of the estimated price range set forth on the front cover page of this prospectus.

 

We plan to use the net proceeds from this offering for working capital and other general corporate purposes. See "Use of Proceeds."

Voting Rights

 

The rights of the holders of our Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. Holders of our Class A common stock are entitled to one vote per share and holders of our Class B common stock are entitled to 10 votes per share. Holders of shares of Class A common stock and Class B common stock will vote together as a single class on all matters submitted to a vote of stockholders (including the election of directors), with certain exceptions described in our restated certificate of incorporation. See "Description of Capital Stock — Class A and B Common Stock — Voting Rights." Immediately following the completion of this offering, outstanding shares of our Class B common stock will represent approximately         % of the voting power of our outstanding common stock. As a result, holders of our Class B common stock, comprised of our common stockholders prior to the Corporate Reorganization, will be able to control the outcome of all matters submitted to a vote of our stockholders, including, for example, the election of directors, amendments to our certificate of incorporation and mergers or other business combinations.

 

13


Table of Contents

Class B Common Stock Conversion Rights

 

Each outstanding share of Class B common stock is convertible at any time at the option of the holder into one share of Class A common stock. Each share of Class B common stock will also convert automatically into one share of Class A common stock upon any transfer, whether or not for value, except for certain transfers described in our restated certificate of incorporation, including, without limitation, transfers for tax and estate planning purposes, so long as the transferring holder of Class B common stock continues to hold exclusive voting and dispositive power with respect to the shares transferred, and transfers to persons or entitities who are Class B stockholders at the time of the transfer. Also, each share of Class B common stock held of record by a natural person, other than a natural person who held the shares as of our initial public offering, will convert automatically into one share of Class A common stock upon the death of the holder. In addition, each share of Class B common stock will convert automatically into one share of Class A common stock upon the earlier to occur of (i) the date upon which the number of shares of Class A common stock and Class B common stock beneficially owned by our Class B common stockholders, in the aggregate, represents less than 10% of the total number of shares of Class A and Class B common stock then outstanding and (ii) the date specified by affirmative vote of the holders of at least 662/3% of the outstanding shares of Class B common stock, voting as a single class. Once converted into Class A common stock, a share of Class B common stock may not be reissued. See "Description of Capital Stock — Class A and B Common Stock."

Risk Factors

 

You should read the "Risk Factors" section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our Class A common stock.

Proposed NASDAQ Global Select Market symbol

 

"INOV"


(1)
The number of shares of our Class A and Class B common stock that will be outstanding after this offering is based on                          shares of Class A common stock offered in this offering and excludes:

24,451,429 shares of Class A common stock issuable upon the conversion of shares of Class B common stock that will be outstanding after this offering;

1,290,255 shares of our Class B common stock issuable upon the exercise of options to purchase shares of our Class B common stock outstanding as of September 30, 2014, with a weighted-average exercise price of $29.86 per share;

97,756 shares of Class B common stock issuable upon vesting of restricted stock units; and

             shares of Class A common stock available for future grant under our 2015 Omnibus Incentive Plan.

 

14


Table of Contents

 


SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

          The following table sets forth summary consolidated financial data for the years presented and at the dates indicated below. We have derived the summary consolidated statements of operations data for the years ended December 31, 2011, 2012, and 2013 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated balance sheet data as of December 31, 2012 and 2013 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated balance sheet data as of December 31, 2011 from our audited consolidated financial statements not included in this prospectus. The summary consolidated statement of operations data for the nine months ended September 30, 2013 and 2014 and the consolidated balance sheet data as of September 30, 2014 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated balance sheet data as of September 30, 2013 from our unaudited interim consolidated financial statements not included in this prospectus. In our opinion, such financial statements include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial data set forth in those statements.

          Our historical results are not necessarily indicative of our results in any future periods, including the full year ending December 31, 2014. The summary of our consolidated financial data set forth below should be read together with our consolidated financial statements and related notes, as well as the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this prospectus.

 
  Year Ended December 31,   Nine Months
Ended
September 30,
 
 
 
2011
 
2012
 
2013
 
2013
 
2014
 
 
  (in thousands, except per share data)
 

Consolidated Statement of Operations Data:

                         

Revenue

  $ 239,685   $ 300,275   $ 295,798   $ 231,264   $ 271,622  

Expenses:

                               

Cost of revenue

    102,695     101,188     120,054     94,869     85,065  

Sales and marketing        

    6,752     6,793     5,952     4,597     5,355  

Research and development

    14,855     15,499     21,192     16,171     17,376  

General and administrative

    63,184     72,661     80,638     60,266     62,920  

Depreciation and amortization

    11,229     12,899     15,517     11,105     15,012  
                       

Total operating expenses

    198,715     209,040     243,353     187,008     185,728  
                       

Income from operations

    40,970     91,235     52,445     44,256     85,894  
                       

Other income and (expenses):

                               

Interest income

    10     11     9     6     4  

Interest expense

    (62 )   (129 )   (79 )   (61 )   (209 )
                       

Income before taxes

    40,918     91,117     52,375     44,201     85,689  

Provision for income taxes        

    15,991     35,962     19,657     17,218     33,836  
                       

Net income

  $ 24,927   $ 55,155   $ 32,718   $ 26,983   $ 51,853  
                       
                       

Basic net income per share

  $ 0.90   $ 2.00   $ 1.21   $ 1.00   $ 1.94  
                       
                       

Diluted net income per share

  $ 0.90   $ 1.98   $ 1.20   $ 0.99   $ 1.91  
                       
                       

Weighted average shares of common stock outstanding:

                               

Basic

    27,573     27,573     27,061     27,111     26,728  
                       
                       

Diluted

    27,771     27,808     27,275     27,346     27,167  
                       
                       

 

15


Table of Contents

 
  Year Ended December 31,   Nine Months
Ended
September 30,
 
 
 
2011
 
2012
 
2013
 
2013
 
2014
 
 
  (in thousands, except percentages and statements of work)
 

Other Financial Data and Key Metrics(1):

                               

Adjusted EBITDA(2)

 
$

57,526
 
$

108,105
 
$

71,847
 
$

58,333
 
$

103,059
 

Adjusted EBITDA margin(2)

    24 %   36 %   24 %   25 %   38 %

MORE2 Registry dataset metrics

   
 
   
 
   
 
   
 
   
 
 

Unique patient count(3)

    69,916     86,002     109,464     98,607     118,932  

Medical event count(4)

    5,479,599     6,379,293     8,321,236     7,560,838     9,112,175  

Trailing 12 month Patient Analytics Months (PAM)(5)

   
8,797,514
   
10,822,673
   
12,830,914
   
12,272,280
   
15,593,906
 

Engaged patient population statements of work(6)

   
227
   
314
   
355
   
344
   
536
 

Data analytics and data-driven intervention revenue mix:

                               

Revenue from data analytics subscriptions(7)        

    42.3 %   45.3 %   48.6 %   47.0 %   56.3 %

Revenue from data-driven intervention platform services(8):

                               

Fully automated processes

    1.5 %   4.2 %   4.3 %   4.8 %   7.1 %

Partially automated processes

    56.2 %   50.5 %   47.1 %   48.2 %   36.6 %
                       

    57.7 %   54.7 %   51.4 %   53.0 %   43.7 %

 
  December 31,   September 30,  
 
 
2011
 
2012
 
2013
 
2013
 
2014
 
 
  (in thousands)
 

Consolidated Balance Sheet Data:

   
 
   
 
   
 
   
 
   
 
 

Cash and cash equivalents

  $ 114,872   $ 106,361   $ 110,594   $ 110,891   $ 131,947  

Accounts receivable, net of allowances

    36,764     62,899     33,398     43,233     52,037  

Working capital

    131,676     136,933     130,562     145,209     156,446  

Property, equipment and capitalized software, net

    28,089     34,170     43,050     40,561     49,126  

Goodwill

    62,269     62,269     62,269     62,269     62,269  

Total assets

    262,922     285,655     269,746     277,710     317,345  

Long-term debt

                    285,191  

Total liabilities

    33,817     48,826     38,012     32,471     340,706  

Total stockholders' equity (deficit)

    229,105     236,829     231,734     245,239     (23,361 )

(1)
MORE2 Registry dataset metrics, Trailing 12 month Patient Analytics Months (PAM), and Engaged patient population statements of work, each of which is presented in the table, are key operating metrics that management uses to assess our level of operational activity. While we believe that each of these metrics is indicative of our overall level of analytical activity and the underlying growth in our business, increases or decreases in these metrics do not necessarily correlate to proportional increases or decreases in revenue, Adjusted EBITDA or net income. For instance, although increased levels of analytical activity historically have corresponded to increases in revenue over the long term, differences in fees charged for different analytical packages exist and differences in how analytics trigger the applicability of our data-driven intervention platforms may result in increases in analytical activity that do not result in proportional increases in revenue, Adjusted EBITDA or net income (and vice versa). Accordingly, while we believe the presentation of these operating metrics is helpful to investors in understanding our business, these metrics have limitations and should not be considered as substitutes for analysis of our

 

16


Table of Contents

    financial results reported under GAAP. In addition, we believe that other companies, including companies in our industry, do not present similar operating metrics and that there is no commonly accepted method of calculating these metrics, which may reduce their usefulness as comparative measures.

(2)
Adjusted EBITDA and Adjusted EBITDA margin are financial measures not calculated in accordance with U.S. generally accepted accounting principles, or GAAP. For definitions of Adjusted EBITDA and Adjusted EBITDA margin, as well as the reasons why we believe that Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors and, to the extent material, any additional purposes for which we use Adjusted EBITDA and Adjusted EBITDA margin, see "Selected Consolidated Financial Data."


The following table presents a reconciliation of net income to Adjusted EBITDA for each of the periods indicated (dollars in thousands):

 
  Year Ended December 31,   Nine Months
Ended
September 30,
 
 
 
2011
 
2012
 
2013
 
2013
 
2014
 

Reconciliation of Net Income to Adjusted EBITDA:

                               

Net income

  $ 24,927   $ 55,155   $ 32,718   $ 26,983   $ 51,853  

Depreciation and amortization           

    11,229     12,899     15,517     11,105     15,012  

Interest expense

    62     129     79     61     209  

Interest (income)

    (10 )   (11 )   (9 )   (6 )   (4 )

Provision for income taxes

    15,991     35,962     19,657     17,218     33,836  
                       

EBITDA

  $ 52,199   $ 104,134   $ 67,962   $ 55,361   $ 100,906  

Stock-based compensation

    3,767     2,560     1,842     1,408     1,340  

Other non-comparable items(a)           

    1,560     1,411     1,565     1,564      

Professional service fees(b)

            478         813  
                       

Adjusted EBITDA

  $ 57,526   $ 108,105   $ 71,847   $ 58,333   $ 103,059  
                       
                       
    (a)
    Other "non-comparable items" include business transaction-related professional fees, corporate name change and associated rebranding expenses, workforce restructuring expenses, and certain legal costs. We believe these are non-comparable expenses that should be excluded from Adjusted EBITDA in order to more effectively assess our period-over-period and on-going operating performance.

    (b)
    Represents legal costs associated with the enforcement of a specific client contract. The legal process associated with this matter began in the first quarter of 2013 and concluded in the second quarter of 2014.

(3)
Unique patient count is defined as each unique, longitudinally matched, de-identified natural person represented in our MORE2 Registry as of the end of the period presented.

(4)
Medical event count is defined as the total number of discrete medical events as of the end of the period presented (for example, a discrete medical event typically results from the presentation of a patient to a physician for the diagnosis of diabetes and congestive heart failure in a single visit, the presentation of a patient to an emergency department for chest pain, etc.).

(5)
Patient Analytics Months, or PAM, is defined as the sum of the analytical processes performed on each respective patient within patient populations covered by clients under contract. As used in the metric, an "analytical process" is a distinct set of data analytical calculations undertaken by us which is initiated and completed by our analytical platform to examine a specific question such as whether a patient is believed to have diabetes, or progression of the disease, during a specific time period. Examples of the analytical processes tallied within the PAM metric include disease and comorbidity gap presence and closure probability determination analytics, clinical and quality outcomes gap presence and closure probability determination analytics, targeted intervention timing, venue, and logistics optimization analytics, and a variety of population simulation and relative comparative analytics which are executed on

 

17


Table of Contents

    engaged patient populations on a periodic or recurring basis. See "Business — Our Platforms — Advanced Analytics."

(6)
Engaged patient population statements of work is defined as the number of discrete identified patient populations (for example, the Medicare Advantage members enrolled in a client health plan within the state of Florida) engaged under a contracted statement of work, or SOW, during the period presented. SOWs for any discontinued product offerings are not reflected within this metric.

(7)
Revenue from data analytics subscriptions is defined as revenue that results from subscription agreements/contracts for the provision of data analytics (which include such components as the company's data integration, data management, data analytics, and data reporting) services.

(8)
Revenue from data-driven intervention platform services is defined as revenue that results from contracts for the provision of data-driven intervention platform services. This revenue is further broken down into revenue achieved through fully automated processes (i.e., those processes that require no material variable-based labor component) and partially automated processes (i.e., those processes that require certain material variable-based labor components).

 

18


Table of Contents


RISK FACTORS

          Investing in our Class A common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the consolidated financial statements and the related notes included elsewhere in this prospectus, before deciding whether to invest in shares of our Class A common stock. If any of the following risks actually occur, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the market price of our stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business

We may not grow at the rates we historically have achieved or at all, even if our key metrics may indicate growth, which could have a material adverse effect on the market price of our Class A common stock.

          We have experienced significant growth since 2010, with total revenues growing from approximately $176.7 million for the year ended December 31, 2010 to approximately $295.8 million for the year ended December 31, 2013, and from approximately $231.3 million for the nine months ended September 30, 2013 to approximately $271.6 million for the nine months ended September 30, 2014. Future revenues may not grow at these same rates or may decline, such as the approximate 1% revenue decline from the year ended December 31, 2012 to the year ended December 31, 2013. Our future growth will depend, in part, on our ability to grow our revenue from existing clients, to complete sales to potential future clients, to expand our client base in the life sciences industry and with provider organizations and employer and private exchanges, to develop direct-to-consumer services and to expand internationally. We can provide no assurances that we will be successful in executing on these growth strategies or that, even if our key metrics, such as trailing 12 month PAM, would indicate future growth, we will continue to grow our revenue or net income. Our ability to execute on our existing sales pipeline, create additional sales pipelines, and expand our client base depends on, among other things, the attractiveness of our services relative to those offered by our competitors, our ability to demonstrate the value of our existing and future services, and our ability to attract and retain a sufficient number of qualified sales and marketing leadership and support personnel. In addition, clients in certain industries in which we have a more limited presence, such as the life sciences industry, may be slower to adopt our services than we currently anticipate, which could adversely affect our results of operations and growth prospects.

If our existing clients do not renew their agreements with us, renew at lower fee levels, decline to purchase additional services from us, choose to purchase fewer services from us, or terminate their agreement with us, and we are unable to replace any lost revenue, our business and operating results could suffer.

          We historically have derived, and expect in the future to derive, a significant portion of our revenue from renewals of existing client agreements and sales of additional services to existing clients. As a result, achieving a high renewal rate of our client agreements and selling additional services to existing clients is critical to our future operating results. It is difficult to predict our client renewal rate, and we may experience significantly more difficulty than we anticipate in renewing existing client agreements. Factors that may affect the renewal rate for our services and our ability to sell additional services include:

    the price, performance and functionality of our services;

    the availability, price, performance and functionality of competing services;

19


Table of Contents

    our clients' perceived ability to develop and perform the services that we offer using their internal resources;

    our ability to develop complementary services;

    our continued ability to access the data necessary to enable us to effectively develop and deliver new services to clients;

    the stability and security of our platform;

    changes in healthcare laws, regulations or trends; and

    the business environment of our clients, in particular, reductions in our clients' membership populations and budgetary constraints affecting our clients.

          Contracts with our clients generally have stated terms of two to four years. Our clients have no obligation to renew their contracts for our services after the term expires. In addition, our clients may negotiate terms less advantageous to us upon renewal, may renew for fewer services, may choose to discontinue one or more services under an existing contract, may exercise flexibilities within their contracts to adjust service volumes, or which could reduce our revenue from these clients, which, for example, occurred during the second quarter of 2013. Our future operating results also depend, in part, on our ability to sell new services to our existing clients. If our clients fail to renew their agreements, renew their agreements upon less favorable terms, at lower fee levels or for fewer services, fail to purchase new services from us, or terminate their agreements with us, and we are unsuccessful in generating significant revenue from new clients to replace any lost revenue, our revenues may decline and our future revenue growth may be constrained.

          If a client fails to fulfill its obligations under its agreements with us, or permanently terminates certain services or its agreement in its entirety prior to its expected completion date, whether or not in our view permitted by the terms of the agreement, and revenue and cash flows expected from a client are not realized in the time period expected or at all, our business, operating results and financial condition could be adversely affected.

Our top clients account for a significant portion of our revenues and, as a result, the loss of one or more of these clients could materially and adversely affect our business and operating results.

          Our top four clients individually accounted for 12%, 11%, 11%, and 10%, respectively, of our revenues for the year ended December 31, 2013. Moreover, our top ten clients accounted for approximately 70% and 75% of our revenues for the nine months ended September 30, 2014 and the year ended December 31, 2013, respectively. The engagement between these clients and us generally is covered through multiple separate statements of work ("SOWs"), each with different and/or staggered terms which are all multi-year in their duration, ranging from two to four years. We can provide no assurance that these clients will renew their existing contracts or all SOWs with us upon expiration or that any such failure to renew will not have a material adverse effect on our revenue. For example, our revenue for the year ended December 31, 2013 decreased by approximately 1% as compared to the year ended December 31, 2012, in part as a result of a client's decision to discontinue several integrated solution engagements during the second quarter of 2013. If we lose one or more of our top clients, or if one or more of these clients significantly decreases its use of our services, our business and operating results could be materially and adversely affected.

20


Table of Contents

If we do not develop new services that are adopted by clients, or fail to provide high quality support services to our clients, our growth prospects, revenues and operating results could be materially and adversely affected.

          Our longer-term operating results and revenue growth will depend in part on our ability to successfully develop and sell new services that existing and potential clients want and are willing to purchase. We must continue to invest significant resources in research and development in order to enhance our existing services and introduce new high-quality services that clients and prospective clients will want. If we are unable to predict or adapt to changes in user preferences or industry or regulatory changes, or if we are unable to modify our services on a timely basis in response to those changes, clients may not renew their agreements with us, and our services may become less attractive than services offered by our competitors. Our operating results could also suffer if our innovations are not responsive to the needs of our clients, are not appropriately timed with market opportunity, or are not effectively brought to market. Our success also depends on successfully providing high-quality support services to resolve any issues related to our services. High-quality education and client support is important for the successful marketing and sale of our services and for the renewal of existing clients. If we do not help our clients quickly resolve issues and provide effective ongoing support, our ability to sell additional services to existing clients would suffer and our reputation with existing or potential clients would be harmed.

We cannot assure you that we will be able to manage our growth effectively, which could have a material adverse effect on our business, results of operations and growth prospects.

          If we are successful in expanding our client base and growing our business, our existing services may not be as scalable as we anticipate, and we may need to expend significant resources to enhance our IT infrastructure, financial and accounting systems, and controls, and also hire a significant number of qualified client support personnel, professional services personnel, software engineers, technical personnel, and management personnel in order to provide services to those new clients. As a result, our expenses may increase more than expected, which could adversely affect our results of operations. In addition, identifying and recruiting qualified personnel and training them in the use of our services requires significant time, expense, and attention, and our business may be adversely affected if our efforts to expand and train qualified personnel do not generate a corresponding increase in revenues. If our existing services are not as scalable as we anticipate or if we are unable to manage our growth effectively, the quality of our services and our reputation may suffer, which could adversely affect our business, results of operations and growth prospects.

If our security measures fail or are breached and unauthorized access to a client's data is obtained, our services may be perceived as insecure, we may incur significant liabilities, our reputation may be harmed, and we could lose sales and clients.

          Our services involve the storage and transmission of clients' proprietary information, sensitive or confidential data, including valuable intellectual property and personal information of employees, clients and others, as well as protected health information, or PHI, of our clients' patients. Because of the extreme sensitivity of the information we store and transmit, the security features of our computer, network, and communications systems infrastructure are critical to the success of our business. A breach or failure of our security measures could result from a variety of circumstances and events, including third-party action, employee negligence or error, malfeasance, computer viruses, cyber-attacks by computer hackers, failures during the process of upgrading or replacing software and databases, power outages, hardware failures, telecommunication failures, user errors, or catastrophic events. Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of

21


Table of Contents

perpetrators of cyber-attacks. As cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures or to investigate and remediate any information security vulnerabilities. If our security measures fail or are breached, it could result in unauthorized persons accessing sensitive client or patient data (including PHI), a loss of or damage to our data, an inability to access data sources, or process data or provide our services to our clients. Such failures or breaches of our security measures, or our inability to effectively resolve such failures or breaches in a timely manner, could severely damage our reputation, adversely affect client or investor confidence in us, and reduce the demand for our services from existing and potential clients. In addition, we could face litigation, damages for contract breach, monetary penalties, or regulatory actions for violation of applicable laws or regulations, and incur significant costs for remedial measures to prevent future occurrences and mitigate past violations. Although we maintain insurance covering certain security and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability and in any event, insurance coverage would not address the reputational damage that could result from a security incident.

          We may experience cyber-security and other breach incidents that may remain undetected for an extended period. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched, we may be unable to anticipate these techniques or to implement adequate preventive measures. In addition, in the event that our clients authorize or enable third parties to access their information and data that are stored on our systems, we cannot ensure the complete integrity or security of such data in our systems as we would not control access. If an actual or perceived breach of our security occurs, or if we are unable to effectively resolve such breaches in a timely manner, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and clients, which could have a material adverse effect on our business, operations, and financial results.

Data protection, privacy and similar laws restrict access, use, and disclosure of information, and failure to comply with or adapt to changes in these laws could materially and adversely harm our business.

          We are subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. The Health Insurance Portability and Accountability Act of 1996, and its implementing regulations, which we refer to collectively as HIPAA, established uniform federal standards for certain "covered entities," which include healthcare providers and health plans, governing the conduct of specified electronic healthcare transactions and protecting the security and privacy of PHI. The Health Information Technology for Economic and Clinical Health Act, or HITECH, which became effective on February 17, 2010, and an implementing regulation known as the Omnibus Final Rule, which became effective on September 23, 2013, make HIPAA's privacy and security standards directly applicable to "business associates," which are independent contractors or agents of covered entities that create, receive, maintain, or transmit PHI in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates, and other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce HIPAA's requirements and seek attorney's fees and costs associated with pursuing federal civil actions.

          A portion of the data that we obtain and handle for or on behalf of our clients is considered PHI and subject to HIPAA because our clients are covered entities under HIPAA and we act as their business associate. Under HIPAA and our contractual agreements with our HIPAA-covered entity health plan clients, we are considered a "business associate" to those clients, and are required to maintain the privacy and security of PHI in accordance with HIPAA and the terms of our agreements

22


Table of Contents

with clients, including by implementing HIPAA-required administrative, technical, and physical safeguards. We have incurred, and will continue to incur, significant costs to establish and maintain these safeguards and, if additional safeguards are required to comply with HIPAA or our clients' requirements, our costs could increase further, which would negatively affect our operating results. Furthermore, if we fail to maintain adequate safeguards, or we use or disclose PHI in a manner not permitted by HIPAA or our agreements with our clients, or if the privacy or security of PHI that we obtain and handle is otherwise compromised, we could be subject to significant liabilities and consequences, including, without limitation:

    breach of our contractual obligations to clients, which may cause our clients to terminate their relationship with us and may result in potentially significant financial obligations to our clients;

    investigation by the federal regulatory authorities empowered to enforce HIPAA, which include the U.S. Department of Health and Human Services, or HHS, and the Federal Trade Commission, and investigation by the state attorneys general empowered to enforce comparable state laws, and the possible imposition of civil and criminal penalties;

    private litigation by individuals adversely affected by any violation of HIPAA, HITECH, or comparable state laws to which we are subject; and

    negative publicity, which may decrease the willingness of current and potential future clients to work with us and negatively affect our sales and operating results.

          Laws and expectations relating to privacy continue to evolve, and we continue to adapt to changing needs. Nevertheless, changes in these laws may limit our data access, use, and disclosure, and may require increased expenditures by us or may dictate that we not offer certain types of services. Any of the foregoing may have a material adverse effect on our ability to provide services to our clients and, in turn, our results of operations.

          Data protection, privacy and similar laws protect more than patient information and, although they vary by jurisdiction, these laws can extend to employee information, business contact information, provider information, and other information relating to identifiable individuals. Failure to comply with these laws may result in, among other things, civil and criminal liability, negative publicity, damage to our reputation, and liability under contractual provisions. In addition, compliance with such laws may require increased costs to us or may dictate that we not offer certain types of services in the future.

The information that we provide to our clients could be inaccurate or incomplete, which could harm our business reputation, financial condition, and results of operations.

          We aggregate, process, and analyze healthcare-related data and information for use by our clients. Because data in the healthcare industry is fragmented in origin, inconsistent in format, and often incomplete, the overall quality of data received or accessed in the healthcare industry is often poor, the degree or amount of data which is knowingly or unknowingly absent or omitted can be material, and we frequently discover data issues and errors during our data integrity checks. If the analytical data that we provide to our clients are based on incorrect or incomplete data or if we make mistakes in the capture, input, or analysis of these data, our reputation may suffer and our ability to attract and retain clients may be materially harmed.

          In addition, we assist our clients with the management and submission of data to governmental entities, including CMS. These processes and submissions are governed by complex data processing and validation policies and regulations. If we fail to abide by such policies or submit incorrect or incomplete data, we may be exposed to liability to a client, court, or government agency that concludes that our storage, handling, submission, delivery, or display of health

23


Table of Contents

information or other data was wrongful or erroneous. Although we maintain insurance coverage, this coverage may prove to be inadequate or could cease to be available to us on acceptable terms, if at all. Even unsuccessful claims could result in substantial costs and diversion of management time, attention, and resources. A claim brought against us that is uninsured or under-insured could harm our business, financial condition, and results of operations.

Our business is principally focused on the healthcare industry, and factors that adversely affect the financial condition of the healthcare industry could consequently affect our business.

          We derive substantially all of our revenue from clients within the healthcare industry. As a result, our financial condition and results of operations could be adversely affected by conditions affecting the healthcare industry generally and health systems and payors in particular. Our ability to grow will depend upon the economic environment of the healthcare industry, as well as our ability to increase the number of services that we sell to our clients. Furthermore, we may not become aware in a timely manner of changes in regulatory requirements affecting our business, which could result in us taking, or failing to take, actions, resulting in noncompliance with state or federal regulations.

          There are many factors that could affect the purchasing practices, operations and, ultimately, the operating funds of healthcare organizations, such as reimbursement policies for healthcare expenses, consolidation in the healthcare industry, and regulation, litigation, and general economic conditions. In particular, we could be required to make unplanned modifications to our services or could suffer delays or cancellations of orders or reductions in demand for our services as a result of changes in regulations affecting the healthcare industry, such as any increased regulation by governmental agencies, changes to HIPAA and other federal or state privacy laws, laws relating to the tax-exempt status of many of our clients or restrictions on permissible discounts, and other financial arrangements. It is unclear what long-term effects the general economic conditions will have on the healthcare industry, and in turn, on our business, financial condition, and results of operations.

Consolidation in the industries in which our clients operate may result in certain clients discontinuing their use of our services following an acquisition or merger, which could materially and adversely affect our business and financial results.

          Mergers or consolidations among our clients have in the past and could in the future reduce the number of our existing and potential clients. When companies consolidate, overlapping services previously purchased separately are typically purchased only once by the combined entity, leading to loss of revenue for the service provider. If our clients merge with or are acquired by other entities that are not our clients, they may discontinue their use of our services. There can be no assurance as to the degree to which we may be able to address the revenue impact of such consolidation. Any of these developments could materially and adversely affect our business and financial results.

Our proprietary applications may not operate properly, which could damage our reputation, give rise to a variety of claims against us, or divert our resources from other purposes, any of which could harm our business and operating results.

          Proprietary software and application development is time-consuming, expensive, and complex, and may involve unforeseen difficulties. We may encounter technical obstacles, and it is possible that we discover additional problems that prevent our proprietary applications from operating properly. If our applications and services do not function reliably or fail to achieve client expectations in terms of performance, clients could assert liability claims against us and attempt to cancel their contracts with us. Moreover, material performance problems, defects, or errors in our

24


Table of Contents

existing or new applications and services may arise in the future and may result from, among other things, the lack of interoperability of our applications with systems and data that we did not develop and the function of which is outside of our control or undetected in our testing. Defects or errors in our applications might discourage existing or potential clients from purchasing services from us. Correction of defects or errors could prove to be time consuming, costly, impossible, or impracticable. The existence of errors or defects in our applications and the correction of such errors could divert our resources from other matters relating to our business, damage our reputation, increase our costs, and have a material adverse effect on our business, financial condition, and results of operations.

As a result of our variable sales and implementation cycles, we might not be able to recognize revenue to offset expenditures, which could result in fluctuations in our quarterly results of operations or otherwise adversely affect our future operating results.

          The sales cycle for our services is typically four to six months from initial contact to contract execution, but can vary depending on the particular client, product under consideration, and time of year, among other factors. Some clients, for instance, undertake a more prolonged evaluation process, which has in the past resulted in extended sales cycles. Our sales efforts involve educating potential clients about the use, technical capabilities, and benefits of our services, and gaining an understanding of their needs and budgets. During the sales cycle, we expend significant time and resources, and we do not recognize any revenue to offset such expenditures, which could result in fluctuations in our quarterly results of operations and adversely affect our future operating results.

          After a client contract is signed, we provide an implementation process for the client during which we load, test, and integrate data into our system and train client personnel. Our implementation cycle generally ranges from 20 to 90 days from contract execution to completion of implementation, but can vary depending on the amount and quality of the client's data and how quickly the client facilitates access to data. In addition, for certain clients, our third-party vendors must go through delegation processes in order to become authorized to provide certain services to those clients, which could delay our ability to provide such services to those clients. During the implementation cycle, we expend time, effort, and financial resources implementing our services, but accounting principles do not allow us to recognize the resulting revenue until implementation is complete and the services are available for use by our clients. If implementation periods are extended, revenue recognition will be delayed, which could adversely affect our results of operations in certain periods.

          In addition, because most of our revenue in each quarter is derived from agreements entered into with our clients during previous quarters, the negative impacts resulting from a decline in new or renewed agreements in any one quarter may not be fully reflected in our revenue for that quarter. Such declines, however, would negatively affect our revenue in future periods and the effect of significant downturns in sales of and market demand for our services, and potential changes in our renewal rates or renewal terms may not be fully reflected in our results of operations until future periods. Our sales and implementation cycles also make it difficult for us to rapidly increase our total revenue through additional sales in any period. As a result, the effect of changes in the industry impacting our business, or changes we experience in our new sales, may not be reflected in our short-term results of operations.

25


Table of Contents

We operate in a competitive industry, and if we are not able to compete effectively, our business and financial results could be materially and adversely impacted.

          We operate in a competitive industry, and we expect that competition will increase as a result of consolidation in both the information technology and healthcare industries. Our future growth and success will depend on our ability to successfully compete with other companies that provide similar services, including existing clients and other healthcare organizations that seek to build and operate competing services themselves and newer companies that provide similar services, often at substantially lower prices. We compete on the basis of various factors, including breadth and depth of services, reputation, reliability, quality, innovation, security, price, and industry expertise, and experience. If we are unable to maintain our technology, management, healthcare, or regulatory expertise or attract and retain a sufficient number of qualified sales and marketing leadership and support personnel, we will be at a competitive disadvantage. Some of our competitors, in particular health plans and larger technology or technology-enabled consultative service providers, have greater name recognition, longer operating histories, and significantly greater resources than we do. Furthermore, our current or potential competitors may have greater financial resources and larger sales and marketing capabilities than we have, and may have a more diversified set of revenue sources, which may allow them to be less sensitive to changes in client preferences and more aggressive in pricing their services, any of which could put us at a competitive disadvantage. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or client requirements and may have the ability to initiate or withstand substantial price competition. In addition, potential clients frequently have requested competitive bids from us and our competitors in terms of price and services offered and, if we do not accurately assess potential clients' needs and budgets when submitting our proposals, they may appear less attractive than those of our competitors, and we may not be successful in attracting new business. In addition, our clients may perceive our toolsets to be at a higher price point than our competitors, which could result in reduced revenue if we are not able to adequately demonstrate the value of our toolsets to our clients and prospective clients. Increases in competition in our industry could reduce our market share and result in price declines for certain services, which could negatively impact our business, profitability, and growth prospects.

If we fail to maintain awareness of our brand cost-effectively, our business might suffer.

          Maintaining awareness of our brand in a cost-effective manner is critical to continuing the widespread acceptance of our existing services and is an important element in attracting new clients and in attracting and retaining qualified employees. The importance of brand recognition may increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful services at competitive prices. Our efforts to build and maintain our brand nationally have involved and will continue to involve significant expense. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in maintaining our brand. In addition, third parties' use of trademarks or branding similar to ours could materially harm our business or result in litigation and other costs. If we fail to successfully maintain our brand, or incur substantial expenses in an unsuccessful attempt to maintain our brand, we may fail to attract enough new clients or retain our existing clients to the extent necessary to realize a sufficient return on our brand-building efforts, and our business and our ability to attract and retain qualified employees could suffer.

Our success depends on our ability to protect our intellectual property rights.

          Our success depends in part on our ability to protect our proprietary software, confidential information and know-how, technology, and other intellectual property and intellectual property

26


Table of Contents

rights. To do so, we rely generally on copyright, trademark and trade secret laws, confidentiality and invention assignment agreements with employees and third parties, and license and other agreements with consultants, vendors, and clients. There can be no assurance that employees, consultants, vendors, and clients have executed such agreements or have not breached or will not breach their agreements with us, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently developed by competitors. Additionally, we monitor our use of open source software to avoid uses that would require us to disclose our proprietary source code or violate applicable open source licenses, but if we engaged in such uses inadvertently, we could be required to take remedial action or release certain of our proprietary source code. These scenarios could materially and adversely affect our business, financial condition, and results of operations. In addition, despite the protections we do place on our intellectual property, a third party could, without authorization, copy or otherwise obtain and use our products or technology, or develop similar technology. In addition, agreement terms that address non-competition are difficult to enforce in many jurisdictions and might not be enforceable in certain cases.

          Pursuant to our initial strategy regarding intellectual property protection, we currently hold no issued patents. As we begin to pursue patents, we might not be able to obtain meaningful patent protection for our technology. In addition, if any patents are issued in the future, they might not provide us with any competitive advantages or might be successfully challenged by third parties.

          We rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors, and collaborators to enter into confidentiality agreements. We cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how, or other proprietary information in the event of any unauthorized use, misappropriation, or disclosure of such trade secrets, know-how, or other proprietary information. Further, the theft or unauthorized use or publication of our trade secrets and other confidential business information could reduce the differentiation of our services and harm our business, the value of our investment in development or business acquisitions could be reduced, and third parties might make claims against us related to losses of their confidential or proprietary information.

          We rely on our trademarks, service marks, trade names, and brand names to distinguish our services from the services of our competitors, and have registered or applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our services, which could result in loss of brand recognition and could require us to devote resources advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe our trademarks or that we will have adequate resources to enforce our trademarks.

Our ability to obtain, protect, and enforce our intellectual property rights is subject to uncertainty as to the scope of protection, registerability, patentability, validity, and enforceability of our intellectual property rights in each applicable jurisdiction, as well as the risk of general litigation or third-party oppositions.

          Existing U.S. federal and state intellectual property laws offer only limited protection. Moreover, if we expand our business into markets outside of the United States, our intellectual property rights may not receive the same degree of protection as they would in the United States because of the differences in foreign trademark and other laws concerning proprietary rights. Governments may adopt regulations, and government agencies or courts may render decisions, requiring compulsory licensing of intellectual property rights. When we seek to enforce our intellectual property rights we

27


Table of Contents

may be subject to claims that the intellectual property rights are invalid or unenforceable. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming, and distracting to management and could result in the impairment or loss of portions of our intellectual property rights. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management's attention and resources, could delay further sales or the implementation of our solutions, impair the functionality of our solutions, delay introductions of new solutions, result in our substituting inferior or more costly technologies into our solutions, or have a material adverse effect on our business, financial condition, and results of operations.

Our services could become subject to new, revised, or enhanced regulatory requirements in the future, which could result in increased costs, could delay or prevent our introduction of new services, or could impair the function or value of our existing services, which could materially and adversely affect our results of operations and growth prospects.

          The healthcare industry is highly regulated on the federal, state, and local levels, and is subject to changing legislative, regulatory, political, and other influences. Changes to existing laws and regulations, or the enactment of new federal and state laws and regulations affecting the healthcare industry, could create unexpected liabilities for us, could cause us or our clients to incur additional costs, and could restrict our or our clients' operations.

          Many healthcare laws are complex, subject to frequent change, and dependent on interpretation and enforcement decisions from government agencies with broad discretion. The application of these laws to us, our clients, or the specific services and relationships we have with our clients is not always clear. In addition, federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level, such as the enactment of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, or the Affordable Care Act or ACA. Our failure to anticipate accurately the application of these laws and similar or future laws and regulations, or our failure to comply with them, could create liability for us, result in adverse publicity, and negatively affect our business.

          Our services may become subject to new or enhanced regulatory requirements, and we may be required to change or adapt our services in order to comply with these regulations. For example, the introduction of the new ICD-10 coding framework in 2015, pursuant to which physicians are expected to characterize the specific conditions of patients among more than 90,000 discrete descriptions (up from nearly 15,000 discrete descriptions under the existing ICD-9 framework), could present additional challenges for our business, including requiring us to allocate resources to training and upgrading our systems. If we fail to successfully implement the new ICD-10 coding framework, it could adversely affect our ability to offer services deemed critical by our clients, which could materially and adversely affect our results of operations. New or enhanced regulatory requirements may render our services obsolete or prevent us from performing certain services. New or enhanced regulatory requirements could impose additional costs on us, and thereby make existing services unprofitable, and could make the introduction of new services more costly or time-consuming than we anticipate, which could materially and adversely affect our results of operations and growth prospects.

          Because personal, public, and non-public information is stored in some of our databases, we are vulnerable to government regulation and adverse publicity concerning the use of our data. We provide many types of data and services that already are subject to regulation under HIPAA and, to

28


Table of Contents

a lesser extent, various other federal, state, and local laws and regulations. These laws and regulations are designed to protect the privacy of the public and to prevent the misuse of personal information in the marketplace. However, many consumer advocates, privacy advocates, and government regulators believe that the existing laws and regulations do not adequately protect privacy. They have become increasingly concerned with the use of personal information, including health information. As a result, they are lobbying for further restrictions on the dissemination or commercial use of personal information to the public and private sectors. Similar initiatives are under way in other countries in which we may do business in the future. The following legal and regulatory developments also could have a material adverse effect on our business, financial position, results of operations, or cash flows:

    amendment, enactment, or interpretation of laws and regulations that restrict the access and use of personal information and reduce the supply of data available to clients;

    changes in cultural and consumer attitudes to favor further restrictions on information collection and sharing, which may lead to regulations that prevent full utilization of our solutions;

    failure of our solutions to comply with current laws and regulations; and

    failure of our solutions to adapt to changes in the regulatory environment in an efficient, cost-effective manner.

Laws regulating the corporate practice of medicine could restrict the manner in which we provide our clients certain of our intervention toolsets, and the failure to comply with such laws could subject us to penalties or require that we change the manner in which we provide such toolsets.

          Among our intervention toolsets are supplemental patient encounters, or SPEs. While some clients utilize our platform toolsets to conduct their own SPEs directly or through third-parties, some of our clients engage us to utilize our intervention platform toolsets to facilitate SPEs. In such cases, we use third-parties to undertake such SPEs utilizing our intervention platform toolsets or may utilize our own associate to undertake such SPEs. Certain of our SPEs may be considered patient care. Some states have laws that prohibit business entities from practicing medicine, employing providers to practice medicine, exercising control over medical decisions by providers (also known collectively as the corporate practice of medicine). These laws, regulations, and interpretations have, in certain states, been subject to enforcement, as well as judicial and regulatory interpretation, and are subject to change.

          In these states, we operate by maintaining long term contracts with affiliated physician groups, which are each owned and operated by physicians and which employ or contract with additional providers to perform the SPEs, If there were a determination that a corporate practice of medicine violation existed or exists, we could be subject to criminal or civil penalties or an injunction for practicing medicine without a license or aiding and abetting the unlicensed practice of medicine. The occurrence of any of such events could have a material adverse effect on our ability to continue to provide our clients with the full array of our intervention toolsets.

We could experience losses or liability not covered by insurance.

          Our business exposes us to risks that are inherent in the provision of analytics and toolsets that assist clinical decision-making and relate to patient medical histories and treatment plans. If clients or individuals assert liability claims against us, any ensuing litigation, regardless of outcome, could result in a substantial cost to us, divert management's attention from operations, and decrease market acceptance of our toolsets. We attempt to limit our liability to clients by contract;

29


Table of Contents

however, the limitations of liability set forth in the contracts may not be enforceable or may not otherwise protect us from liability for damages. Additionally, we may be subject to claims that are not explicitly covered by contract. We also maintain general liability coverage; however, this coverage may not continue to be available on acceptable terms, may not be available in sufficient amounts to cover one or more large claims against us, and may include larger self-insured retentions or exclusions for certain products. In addition, the insurer might disclaim coverage as to any future claim. A successful claim not fully covered by our insurance could have a material adverse impact on our liquidity, financial condition, and results of operations.

We could incur substantial costs as a result of any claim of infringement of another party's intellectual property rights.

          In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. Companies in the software and healthcare technology and services industries are increasingly bringing and becoming subject to suits alleging infringement of proprietary rights, particularly patent rights, and our competitors and other third parties may hold patents or have pending patent applications which could be related to our business. These risks have been amplified by the increase in third parties, which we refer to as non-practicing entities, whose primary business is to assert infringement claims or make royalty demands. Moreover, many of our current and potential competitors may dedicate substantially greater resources to protection and enforcement of intellectual property rights, especially patents. It is difficult to proceed with certainty in a rapidly evolving technological environment in which there may be patent applications pending related to our technologies, many of which are confidential when filed.

          We may receive in the future notices that claim we or our clients using our services have misappropriated or misused other parties' intellectual property rights, particularly as the number of competitors in our market grows and the functionality of services among competitors overlaps. If we are sued by a third party that claims that our technology infringes its rights, the litigation, whether or not successful, could be extremely costly to defend, divert our management's time, attention, and resources, damage our reputation and brand, and substantially harm our business. We do not currently have a patent portfolio of our own, which may limit the defenses available to us in any such litigation.

          In addition, in most instances, we have agreed to indemnify our clients against certain third-party claims, which may include claims that one of our services infringes the intellectual property rights of such third parties. These claims may require us to initiate or defend protracted and costly litigation on behalf of our clients, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our clients or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our services. In addition, our business could be adversely affected by any significant disputes between us and our clients as to the applicability or scope of our indemnification obligations to them. The results of any intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may also require us to do one or more of the following:

    cease offering or using technologies that incorporate the challenged intellectual property;

    make substantial payments for legal fees, settlement payments, or other costs or damages;

    obtain a license, which may not be available on reasonable terms, to sell or use the relevant technology; or

    redesign technology to avoid infringement, if feasible.

30


Table of Contents

          If we were to discover that our applications and services violate third-party proprietary rights, there can be no assurance that we would be able to obtain licenses to continue offering those applications and services on commercially reasonable terms, or at all, to redesign our technology to avoid infringement, or to avoid or settle litigation regarding alleged infringement without substantial expense and damage awards. Any claims against us relating to the infringement of third-party proprietary rights, even if not meritorious, could result in the expenditure of significant financial and managerial resources and in injunctions preventing us from distributing certain products. If we are required to make substantial payments or undertake any of the other actions noted above as a result of any intellectual property infringement claims against us or any obligation to indemnify our clients for such claims, such payments or costs could have a material adverse effect on our business, financial condition, and results of operations.

We depend on our senior management team and other key employees, and the loss of one or more of our executive officers or key employees could materially and adversely affect our business.

          Our success depends in large part upon the continued services of our key executive officers, including Dr. Dunleavy. We also rely on our leadership team in the areas of research and development, marketing, services, and general and administrative functions. We can provide no assurances that any of our executive officers or key employees will continue their employment with us. The replacement of one or more of our executive officers or other key employees would likely involve significant time and costs and may significantly delay or prevent the achievement of our business objectives.

We may fail to attract, train, and retain enough qualified employees to support our operations and growth strategy, which could materially and adversely affect our business and growth strategy.

          The success of our business and growth strategy depends on our ability to attract, train, and retain qualified employees, particularly technology personnel, subject matter experts, sales and marketing leadership and support personnel, and personnel with healthcare regulatory, clinical, and appropriate management expertise. The market for qualified employees in our industry and in the markets in which we operate is very competitive, and companies that we compete with for experienced personnel may have greater resources than we. In addition, our ability to attract and retain qualified employees depends in part on our ability to maintain awareness of our brand. If we are not successful in our recruiting efforts, or if we are unable to train and retain a sufficient number of qualified employees, our ability to develop and deliver successful technologies and services and grow our business may be materially and adversely affected.

We may acquire other companies or technologies, which could divert our management's attention, result in dilution to our stockholders and otherwise disrupt our operations and adversely affect our operating results.

          We may in the future seek to acquire or invest in businesses, services, or technologies that we believe could complement or expand our services, enhance our technical capabilities, or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated. Acquisitions also could result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results and financial condition. In addition, we have limited experience in acquiring other businesses. If we acquire additional businesses, we may not be able to integrate the acquired personnel, operations, and technologies successfully, or effectively manage the combined business

31


Table of Contents

following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:

    inability or difficulty integrating and benefiting from acquired technologies, services, or clients in a profitable manner;

    unanticipated costs or liabilities associated with the acquisition;

    difficulty integrating the accounting systems, operations, and personnel of the acquired business;

    adverse effects to our existing business relationships with business partners and clients as a result of the acquisition;

    assuming potential liabilities of an acquired company;

    possibility of overpaying for acquisitions, particularly those with significant intangibles and those assets that derive value using novel tools or are involved in niche markets;

    difficulty in acquiring suitable businesses, including challenges in predicting the value an acquisition will ultimately contribute to our business;

    the potential loss of key employees;

    use of substantial portions of our available cash to consummate the acquisition; and

    the need to understand local healthcare regulatory regimes.

          If an acquired business fails to meet our expectations, our operating results, business, and financial condition may suffer materially.

          In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could adversely affect our results of operations.

Our use of accounting estimates involves judgment and could adversely impact our financial results, and ineffective internal controls could adversely impact our business and operating results.

          The methods, estimates, and judgments that we use in applying accounting policies have a significant impact on our results of operations. For more information on our critical accounting policies and estimates, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 to our consolidated financial statements included elsewhere in this prospectus. These methods, estimates, and judgments are subject to significant risks, uncertainties, and assumptions, and changes could affect our results of operations. In addition, our internal control over financial reporting may not prevent or detect misstatements because of the inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of our consolidated financial statements.

32


Table of Contents

As a result of becoming a public company, we will be obligated to report on the effectiveness of our internal control over financial reporting. These internal controls may not be determined to be effective, which may harm investor confidence in our company and, as a result, the trading price of our Class A common stock.

          We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting in the second annual report we file with the Securities and Exchange Commission, or the SEC. This assessment will need to include disclosure of material weaknesses, if any, identified by our management in our internal control over financial reporting. However, as an "emerging growth company," as defined in the JOBS Act, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Any failure of our internal control over financial reporting to be effective or our failure to implement required new or improved controls, if any, or difficulties encountered in their implementation, may harm our operating results, cause us to fail to meet our reporting obligations, and negatively impact the trading price of our Class A common stock.

We are an emerging growth company and we cannot be certain that the reduced disclosure requirements applicable to emerging growth companies will not make our Class A common stock less attractive to investors.

          We are an emerging growth company, as defined under the JOBS Act. For as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our Class A common stock less attractive because we will rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

          We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our Class A common stock that is held by non-affiliates exceeds $700 million as of June 30, (ii) the end of the fiscal year in which we have total annual gross revenue of $1 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period, or (iv) December 31, 2020, which is the last day of the fiscal year following five years from the date of this prospectus.

Our Board of Directors may change our strategies, policies, and procedures without stockholder approval and we may become more highly leveraged, which may increase our risk of default under our debt obligations.

          Our investment, financing, leverage, and dividend policies, and our policies with respect to all other activities, including growth, capitalization, and operations, are determined exclusively by our board of directors, and may be amended or revised at any time by our board of directors without notice to or a vote of our stockholders. This could result in us conducting operational matters, making investments, or pursuing different business or growth strategies than those contemplated in

33


Table of Contents

this prospectus. Further, our charter and bylaws do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. Higher leverage also increases the risk of default on our obligations. In addition, a change in our investment policies, including the manner in which we allocate our resources across our portfolio or the types of assets in which we seek to invest, may increase our exposure to interest rate risk and liquidity risk. Changes to our policies with regards to the foregoing could materially adversely affect our financial condition, results of operations, and cash flow.

Future sales to clients outside the United States or with international operations might expose us to risks inherent in international sales which, if realized, could adversely affect our business.

          An element of our growth strategy is to expand internationally. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic, and political risks that are different from those in the United States. Because of our limited experience with international operations, any international expansion efforts might not be successful in creating demand for our services outside of the United States or in effectively selling our services in the international markets we enter. In addition, we will face risks in doing business internationally that could adversely affect our business, including:

    the need to localize and adapt our services for specific countries, including translation into foreign languages and associated expenses;

    difficulties in staffing and managing foreign operations;

    different pricing environments, longer sales cycles, and longer accounts receivable payment cycles and collections issues;

    new and different sources of competition;

    weaker protection for intellectual property and other legal rights than in the United States and practical difficulties in enforcing intellectual property and other rights outside of the United States;

    laws and business practices favoring local competitors;

    compliance challenges related to the complexity of multiple, conflicting, and changing governmental laws and regulations, including employment, anti-bribery, foreign investment, tax, privacy, and data protection laws and regulations;

    increased financial accounting and reporting burdens and complexities;

    adverse tax consequences; and

    if we denominate our international contracts in local currencies, fluctuations in the value of the U.S. dollar and foreign currencies might impact our operating results when translated into U.S. dollars.

Our business could be harmed by disruptions in network service or operational failures at our data centers (including our co-location facility) related to the storage, transmission and presentation of client data.

          Our success depends on the efficient and uninterrupted operation of our data centers and service provider locations. Interruptions in service or damage to locations may be caused by natural disasters, power loss, Internet or network failures, physical damage, operator error, security breaches, computer viruses, denial-of-service attacks, or similar events. The varied types and severity of the interruptions that could occur may render our safeguards inadequate. These service

34


Table of Contents

interruption events could result in the corruption or loss of data and impair the processing of data and our delivery of services to clients, which could have an adverse effect on our business, operations, and financial results. Furthermore, if any of our data centers are unable to keep up with our growing needs for capacity, it could have an adverse effect on our business.

          Problems faced by our third-party data center location, with the telecommunications network providers with whom we or it contract, or with the systems by which our telecommunications providers allocate capacity among their clients, including us, could adversely affect the experience of our clients and the security of the data.

          Further, our ability to deliver our cloud-based services depends on the infrastructure of the Internet and a reliable network with the necessary speed, data capacity, bandwidth capacity, and security. Our services are designed to operate without interruption in accordance with our service level commitments. We have, however, experienced, and may experience in the future, interruptions and delays in services and availability from time to time. An extended period of network unavailability could negatively impact our ability to deliver acceptable or accurate services, and negatively impact our relationship with clients, which could have an adverse effect on our reputation, financial condition, and results of operations.

We rely on agreements with third parties to provide certain services, goods, technology, and intellectual property rights necessary to enable us to implement some of our applications.

          Our ability to implement and provide our applications and services to our clients depends, in part, on services, goods, technology, and intellectual property rights owned or controlled by third parties, including one vendor from whom we purchase significant components of our storage architecture. These third parties may become unable to or refuse to continue to provide these services, goods, technology, or intellectual property rights on commercially reasonable terms consistent with our business practices, or otherwise discontinue a service important for us to continue to operate our applications. If we fail to replace these services, goods, technologies, or intellectual property rights in a timely manner or on commercially reasonable terms, our operating results and financial condition could be harmed. In addition, we exercise limited control over our third-party vendors, which increases our vulnerability to problems with technology and services those vendors provide. If the services, technology, or intellectual property of third parties were to fail to perform as expected, it could subject us to potential liability, adversely affect our renewal rates, and have a material adverse effect on our financial condition and results of operations.

Our reliance on third-party vendors to perform certain of our intervention toolsets could have an adverse effect on our business, results of operations and growth prospects.

          We rely in part on third-party vendors to perform certain of our intervention toolsets, including supplemental patient encounters such as in-home encounters. These third parties may not perform their obligations to us in a timely and cost-effective manner, in compliance with applicable regulations, or in a manner that is in our and our clients' best interests, which could have an adverse effect on our reputation and our ability to retain and attract clients. In addition, our growth depends in part on the ability of our third-party vendors to leverage our intervention toolsets to a larger group of clients. If our third-party vendors do not perform their services at a level acceptable to us or our clients or if they are unable to leverage our intervention toolsets to a larger group of clients, it could have an adverse effect on our business, results of operations, and growth prospects.

35


Table of Contents

Risks Related to Our Class A Common Stock and this Offering

Our quarterly operating results may fluctuate significantly, which could adversely impact the value of our Class A common stock.

          Our quarterly results of operations, including our revenue, gross margin, net income, and cash flows, may vary significantly in the future, and sequential quarter-to-quarter comparisons of our operating results may not be meaningful. In addition to the other risk factors included in this section, some of the important factors that may cause sequential quarter-to-quarter fluctuations in our operating results include:

    seasonal variations driven primarily by regulatory timelines cause a significantly higher proportion of our services to be performed, and therefore revenues and costs to be recognized, during the second and, to a lesser extent, the fourth quarters of the year compared to the first and, most significantly, the third quarter;

    possible delays in the expected recognition of revenue due to lengthy and sometimes unpredictable sales and implementation timelines;

    the amount and timing of operating expenses related to the maintenance and expansion of our business, operations, and infrastructure;

    the timing and success of introductions of new applications and services by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, clients, or strategic partners;

    the addition or loss of large clients, including through acquisitions or consolidations of such clients;

    network outages or security breaches;

    our ability to attract new clients;

    general economic, industry, and market conditions;

    client renewal rates and the timing and terms of client renewals;

    changes in our pricing policies or those of our competitors;

    the mix of applications and services sold during a period; and

    the timing of expenses related to the development or acquisition of technologies or businesses.

          Any fluctuations in our quarterly operating results may not accurately reflect the underlying longer-term performance of our business and could cause a decline in the trading price of our Class A common stock.

Because the dual class structure of our common stock has the effect of concentrating voting control with holders of our Class B common stock, holders of our Class B common stock, including Dr. Dunleavy and Mr. Hoffmann, will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.

          We are currently controlled, and after this offering is completed will continue to be controlled, by holders of our Class B common stock. Upon completion of this offering, holders of our Class B common stock will beneficially own an aggregate of         % of the voting power of our common stock (or          % if the underwriters exercise in full their option to purchase additional shares). In

36


Table of Contents

particular, Dr. Dunleavy will beneficially own an aggregate of         % (or         % if the underwriters exercise in full their option to purchase additional shares), and Mr. Hoffmann will beneficially own an aggregate of         % (or         % if the underwriters exercise in full their option to purchase additional shares). The shares beneficially owned by Dr. Dunleavy and Mr. Hoffmann and other current stockholders are shares of Class B common stock, which have 10 votes per share, whereas each share of Class A common stock to be sold in this offering has one vote per share. As long as holders of our Class B common stock control at least a majority of the voting power of our outstanding common stock, they will have the ability to exercise substantial control over all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the election and removal of directors and the size of our board of directors, any amendment of our certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of all or substantially all of our assets. Even if their ownership falls below 50%, holders of our Class B common stock will continue to be able to exert significant influence or effectively control our decisions because of the dual class structure of our common stock. This concentrated control by our Class B common stockholders will limit or preclude your ability to influence those corporate matters for the foreseeable future and, as a result, we may take actions that holders of our Class A common stock do not view as beneficial. This dual class structure may adversely affect the market price of our Class A common stock. In addition, this structure may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our stockholders.

An active, liquid trading market for our Class A common stock may not develop, which may limit your ability to sell your shares at or above the initial public offering price.

          Prior to this offering, there has been no public market for our Class A common stock. Although we have applied to have our Class A common stock listed on the NASDAQ Global Select Market under the symbol "INOV," an active trading market for our Class A common stock may never develop or be sustained following this offering. The initial public offering price will be determined by negotiations between us and the underwriters and may not be indicative of market prices of our Class A common stock that will prevail in the open market after this offering. A public trading market having the desirable characteristics of depth, liquidity, and orderliness depends upon the existence of willing buyers and sellers at any given time, such existence being dependent upon the individual decisions of buyers and sellers over which neither we nor any market maker has control. The failure of an active and liquid trading market to develop and be sustained would likely have a material adverse effect on the value of our Class A common stock. The market price of our Class A common stock may decline below the initial public offering price, and you may not be able to sell your shares of our Class A common stock at or above the price you paid in this offering, or at all. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

We will incur significantly increased costs and devote substantial management time as a result of operating as a public company.

          As a public company, we will incur significant legal, accounting, stockholder communication, and other expenses that we did not incur as a private company. For example, we will be subject to the reporting requirements of the Exchange Act and will be required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC, and the NASDAQ Stock Market LLC, or NASDAQ, including the establishment and maintenance of effective disclosure and financial controls, changes in corporate governance practices, and required filing of annual, quarterly, and current reports with respect to our business and operating results. We expect

37


Table of Contents

that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an emerging growth company, as defined by the JOBS Act. We may also need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Furthermore, we expect that the expenses necessary to communicate with our stockholders, the financial community, public relations audiences, and other such similar audiences will be significantly more than any such similar expenses have historically been for us.

          We also expect that operating as a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. This could also make it more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees, or as executive officers.

          Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions, and other regulatory action and potentially civil litigation, which could have a material adverse effect on our financial condition and results of operations.

The stock price of our Class A common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

          The market price of our Class A common stock may fluctuate significantly. These fluctuations could cause you to lose all or part of your investment in our common stock since you might be unable to sell your shares at or above the price you paid in this offering. Factors, many of which are beyond our control, that could cause fluctuations in the market price of our Class A common stock include the following:

    overall performance of the equity markets;

    our operating performance and the performance of other similar companies;

    changes in the market valuations of similar companies;

    changes in our capital structure, such as future issuances of securities or the incurrence of debt;

    changes in the estimates of our operating results that we provide to the public or our failure to meet these projections;

    failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors or changes in recommendations by securities analysts that elect to follow our Class A common stock;

    sales of shares of our Class B common stock by our stockholders upon expiration of the market stand-off under our Stockholders' Agreement or contractual lock-up agreements with the underwriters;

    announcements of technological innovations, new services or enhancements to services, acquisitions, strategic alliances, or significant agreements by us or by our competitors;

38


Table of Contents

    disruptions in our services due to computer hardware, software, or network problems or a security breach;

    announcements of client additions and client cancellations or delays in client purchases;

    recruitment or departure of key personnel;

    the economy as a whole or market conditions in our industry and the industries of our clients;

    litigation involving us, our industry, or both, or investigations by regulators into our operations or those of our competitors;

    developments or disputes concerning our intellectual property or other proprietary rights;

    new laws or regulations, or new interpretations of existing laws or regulations, applicable to our business;

    the size of our market float; and

    any other factors discussed in this prospectus.

          In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and materially adversely affect our business.

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 Class A common stock.

          Although we have paid cash dividends on our common stock in the past, we currently intend to invest any future earnings to finance the operation and growth of our business and do not expect to pay any dividends for the foreseeable future. As a result, the success of an investment in shares of our Class A common stock will depend upon future appreciation in its value, if any, and there is no guarantee that shares of our Class A common stock will appreciate in value or even maintain the price at which our stockholders purchase their shares in this offering.

If you purchase shares of our Class A common stock in this offering, you will experience immediate and substantial dilution of your investment.

          The initial public offering price will be substantially higher than the net tangible book value of each outstanding share of common stock immediately after this offering. If you purchase shares of our Class A common stock in this offering, you will suffer immediate and substantial dilution. At the initial public offering price of $             per share, which is the midpoint of the price range on the cover of this prospectus, with net proceeds to us of $              million, after deducting underwriting discounts and commissions and estimated offering expenses, investors who purchase shares in this offering from us will have contributed approximately         % of the total amount of funding we have received to date. The dilution will be $             per share in the net tangible book value of the common stock from the initial public offering price. In addition, if outstanding options to purchase shares of our common stock are exercised, there could be further dilution. For more information refer to "Dilution."

39


Table of Contents

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future when "market standoff" and contractual lock-up periods end, which could cause the market price of our common stock to decline significantly, even if our business is doing well.

          Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding shares of Class A common stock (assuming no exercise of the underwriters' option to purchase additional shares). All of the shares of our Class B common stock (including any shares converted by the holders thereof to shares of Class A common stock) are subject to a 180-day market stand-off agreement provided under our Stockholders' Agreement or contractual lock-up agreements with the underwriters, pursuant to which holders have agreed, subject to specific exceptions, not to sell, dispose of, or transfer their shares of our common stock for a period of 180 days following the date of this prospectus. We also intend to file a Form S-8 under the Securities Act to register all shares of common stock that we may issue under our equity compensation plans, and we have entered into the second amended and restated stockholders' agreement with the existing holders of our common stock, including certain of our executive officers and directors, that provides them with registration rights. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up and market stand-off agreements described in the "Underwriting" section of this prospectus. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them. See the information under the heading "Shares Eligible For Future Sale" and "Certain Relationships and Related Party Transactions — Stockholders' Agreement" for a more detailed description of the shares of common stock that will be available for future sale upon completion of this offering.

Delaware law and provisions in our restated certificate of incorporation and bylaws that will be in effect at the closing of our initial public offering could make a merger, tender offer, or proxy contest difficult, thereby depressing the trading price of our Class A common stock.

          Following the closing of our initial public offering, our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder (generally a stockholder, who together with affiliates and associates, owns 15% or more of our voting rights) for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and bylaws that will be in effect at the closing of this offering will contain provisions that may make the acquisition of our company more difficult, including the following:

    we have a dual class common stock structure, which could provide the holders of our Class B common stock, including our executive officers, directors, and their affiliates, with the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding Class A and Class B common stock;

    when the outstanding shares of our Class B common stock represent less than 10% of the total outstanding shares of our common stock, certain amendments to our restated bylaws will require the approval of two-thirds of the voting power of our then-outstanding shares of common stock;

40


Table of Contents

    when the outstanding shares of our Class B common stock represent less than 10% of the total outstanding shares of our common stock, vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders;

    when the outstanding shares of our Class B common stock represent less than 10% of the total outstanding shares of our common stock, our board of directors will be classified into three classes of directors with staggered three-year terms and directors will only be able to be removed from office for cause;

    when the outstanding shares of our Class B common stock represent less than 10% of the total outstanding shares of our common stock, our stockholders will only be able to take action at a meeting of stockholders and not by written consent;

    only our chairman, our chief executive officer, a majority of our board of directors, or stockholders holding shares representing at least 50% of the combined voting power of our Class A common Stock and Class B common stock will be authorized to call a special meeting of stockholders until the outstanding shares of our Class B common stock represent less than 10% of the total outstanding shares of our common stock, at which time only our chairman, our chief executive officer, or a majority of our board of directors will be authorized to call a special meeting of stockholders;

    advance notice procedures will apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders;

    our restated certificate of incorporation will authorize up to 100,000,000 shares of undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without stockholder approval; and

    certain litigation against us can only be brought in Delaware.

          For information regarding these and other provisions, see "Description of Capital Stock — Anti-Takeover Provisions."

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares, or if our results of operations do not meet their expectations, the share price and trading volume of our Class A common stock could decline.

          The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause the share price or trading volume of our Class A common stock to decline. Moreover, if one or more of the analysts who cover us, express views regarding us that may be perceived as negative or less favorable than previous views, downgrade our stock, or if our results of operations do not meet their expectations, the share price of our Class A common stock could decline.

41


Table of Contents


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

          This prospectus contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including but not limited to statements regarding our future results of operations and financial position, our business strategy and plans, market growth, the use of the net proceeds from this offering and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the "Risk Factors" section. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

          Factors that may cause actual results to differ from expected results include, among others:

    our future financial performance, including our ability to continue and manage our growth;

    our ability to retain our client base;

    the effect of the concentration of our revenue among our top clients;

    our ability to innovate and adapt our platforms and toolsets;

    the effects of regulations applicable to us, including regulations relating to data protection and data privacy;

    the ability to protect the privacy of our clients' data and prevent security breaches;

    the effect of competition on our business; and

    the efficacy of our platforms and toolsets.

          You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to, and we disclaim any obligation to, update any of these forward-looking statements after the date of this prospectus or to conform these statements to actual results or revised expectations.

42


Table of Contents


USE OF PROCEEDS

          We estimate that the net proceeds to us from the sale of shares of our Class A common stock in this offering will be approximately $              million (or $              million, assuming the underwriters exercise their option to purchase additional shares in full), based on an assumed public offering price of $             per share, which is the midpoint of the estimated price range set forth on the front cover page of this prospectus, and after deducting estimated underwriting discounts and estimated offering expenses payable by us.

          The principal purposes of our initial public offering are to create a public market for our Class A common stock and thereby enable future access to the public equity markets by us and our employees, and obtain additional capital. We intend to use the net proceeds to us from this offering for working capital and other general corporate purposes; however, we do not currently have any specific uses of the net proceeds planned. Additionally, we may use a portion of the proceeds for acquisitions of complementary businesses, technologies, or other assets or to repay outstanding indebtedness.

          Our management will have broad discretion in the application of the net proceeds from this offering to us, and investors will be relying on the judgment of our management regarding the application of the proceeds. Pending their use, we plan to invest our net proceeds from this offering in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit, or direct or guaranteed obligations of the U.S. government.

43


Table of Contents


DIVIDEND POLICY

          Following the completion of this offering, our board of directors does not currently intend to declare and pay dividends on our common stock. However, our board of directors will periodically reevaluate our dividend policy following this offering and may determine to pay dividends in the future. Any future determination to declare cash dividends will be at the sole discretion of our board of directors and will depend upon various factors, including our results of operations, financial condition and liquidity requirements, restrictions that may be imposed by applicable law and our contracts, and other factors deemed relevant by our board of directors.

          The following table sets forth the cash dividends per share of our common stock that our board of directors declared during the years ended December 31, 2012 and 2013 and during the nine months ended September 30, 2014.

 
   
   
 
Nine
Months
Ended
September 30,
2014
 
 
 
Year Ended
December 31,
 
 
 
2012
 
2013
 

Dividends declared per share

  $ 1.81   $ 0.74   $  

44


Table of Contents


CAPITALIZATION

          The following table sets forth our cash and cash equivalents, as well as our consolidated capitalization as of September 30, 2014 as follows:

    on an actual basis;

    on an as-adjusted basis, giving effect to the sale and issuance by us of             shares of our class A common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

          You should read this information together with our consolidated financial statements and the related notes to those statements, and the sections titled "Selected Consolidated Financial and Other Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" that are appearing elsewhere in this prospectus.

 
  As of September 30, 2014  
 
 
Actual
 
As Adjusted(1)(2)
 
 
  (in thousands, except share
and per share data)

 

Cash and cash equivalents

  $ 131,947   $    
           
           

Long-term debt

  $ 285,191   $    

Stockholders' equity (deficit):

             

Common stock, $0.000025 par value, 100,000,000 shares authorized, actual and as adjusted; zero shares issued and outstanding, actual and as adjusted

           

Class A common stock, $0.000025 par value, 50,000,000 shares authorized, actual and as adjusted; 2,221,857 shares issued and zero outstanding, actual and         shares issued and         outstanding, as adjusted

           

Class B common stock, $0.000025 par value, 50,000,000 shares authorized, actual and as adjusted; 24,451,429 issued and outstanding, actual;                          shares issued and outstanding, as adjusted

    1        

Preferred stock, $0.0001 par value, 100,000,000 shares authorized, actual and as adjusted; zero shares issued and outstanding, actual and as adjusted

           

Additional paid-in-capital

    108,677        

Retained earnings

    167,978        

Treasury stock, at cost, 2,221,857 shares actual and zero shares as adjusted

    (300,017 )      
           

Total stockholders' equity (deficit)

    (23,361 )      
           

Total capitalization

  $ 261,830   $    
           
           

(1)
A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) each of cash and cash equivalents, additional paid-in capital, retained earnings, total stockholders' equity (deficit), and total capitalization by $              million, assuming that the number of shares offered by us, as set forth on the

45


Table of Contents

    cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. If the underwriters' option to purchase additional shares is exercised in full, the as adjusted amount of each of cash and cash equivalents, additional paid-in capital, retained earnings total stockholders' equity (deficit), and total capitalization would increase by approximately $              million, after deducting estimated underwriting discounts and commissions.

(2)
The as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of our initial public offering determined at pricing.

          The number of shares shown as issued and outstanding in the table above does not include:

    1,290,255 shares of our Class B common stock issuable upon the exercise of options to purchase shares of our common stock outstanding as of September 30, 2014, with a weighted-average exercise price of $29.86 per share;

    97,756 shares of our Class B common stock issuable upon vesting of restricted stock units granted subsequent to September 30, 2014; and

                 shares of our Class A common stock reserved for future issuance under our 2015 Omnibus Incentive Plan.

46


Table of Contents


DILUTION

          If you invest in our Class A common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the as adjusted net tangible book value per share of our common stock immediately after this offering.

          Net tangible book value per share represents the amount of our tangible assets less our liabilities divided by the total number of shares of our common stock outstanding.

          Our as adjusted net tangible book value as of September 30, 2014 was $              million, or $             per share of common stock. As adjusted net tangible book value per share gives effect to the sale by us of             shares of our Class A common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the front cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. This represents an immediate increase in as adjusted net tangible book value of $             per share to existing stockholders and immediate dilution of $             per share to new investors purchasing shares in this offering.

          The following table illustrates this per share dilution:

Assumed initial public offering price per share

        $    

Net tangible book value per share as of September 30, 2014, before giving effect to this offering

  $          

Increase in net tangible book value per share attributable to investors purchasing shares in this offering

             
             

As adjusted net tangible book value per share, after giving effect to this offering

             
             

Dilution per share to investors in this offering

        $    
             
             

          Each $1.00 increase or decrease in the assumed initial public offering price of $             per share of our Class A common stock, which is the midpoint of the estimated offering price range set forth on the cover of this prospectus, would increase or decrease our as adjusted net tangible book value per share after this offering by $             and the dilution to new investors by $             per share, assuming that the number of shares offered by us, as set forth on the front cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1,000,000 shares in the number of shares of Class A common stock offered by us would increase or decrease the as adjusted net tangible book value by approximately $             per share and the dilution to new investors by $             per share, assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

          If the underwriters exercise their option to purchase             additional shares of Class A common stock in full, the as adjusted net tangible book value per share after this offering would be $             per share, and the dilution in as adjusted net tangible book value per share to new investors in this offering would be $             per share.

          The following table summarizes, on a as adjusted basis as of September 30, 2014, the differences between the number of shares of common stock purchased from us, the total cash consideration and the average price per share paid to us by existing stockholders and by new investors             purchasing shares in this offering, at the initial public offering price of $             per

47


Table of Contents

share, before deducting estimated underwriting discounts and commissions, and estimated offering expenses payable by us:

 
  Shares
Purchased
  Total
Consideration
   
 
 
 
Average
Price Per
Share
 
 
 
Number
 
Percent
 
Amount
 
Percent
 

Existing stockholders

            % $         % $    

New public investors

                          $    
                         

Total

          100 % $       100 %      
                         
                         

          Each $1.00 increase or decrease in the assumed initial public offering price of $             per share of our Class A common stock, which is the midpoint of the estimated offering price range set forth on the front cover page of this prospectus, would increase or decrease the total consideration paid by new investors by $              million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

          If the underwriters' option to purchase additional shares of our Class A common stock is exercised in full, the number of shares of common stock held by existing stockholders will be reduced to approximately         % of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to             shares, or approximately         % of the total number of shares of common stock to be outstanding after this offering.

          The number of shares of Class A and Class B common stock shown as issued and outstanding in the table and discussion above is based on no shares of our Class A common stock and 24,451,429 shares of our Class B common stock issued and outstanding as of September 30, 2014 and excludes:

    24,451,429 shares of Class A common stock issuable upon the conversion of shares of Class B common stock that will be outstanding after this offering;

    1,290,255 shares of our Class B common stock issuable upon the exercise of options to purchase shares of our common stock outstanding as of September 30, 2014, with a weighted-average exercise price of $29.86 per share;

    97,756 shares of our Class B common stock issuable upon vesting of restricted stock units granted subsequent to September 30, 2014; and

                 shares of our Class A common stock available for future issuance under our 2015 Omnibus Incentive Plan.

          To the extent that any outstanding options or warrants to purchase our common stock are exercised or new awards are granted under our equity compensation plans, or we issue additional shares of our common stock or convertible securities in the future, there will be further dilution to investors participating in this offering.

48


Table of Contents


SELECTED CONSOLIDATED FINANCIAL DATA

          The following table sets forth selected consolidated financial data for the years presented and at the dates indicated below. We have derived the selected consolidated statements of operations data for the years ended December 31, 2011, 2012 and 2013 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the selected consolidated balance sheet data as of December 31, 2012 and 2013 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the selected consolidated balance sheet data as of December 31, 2011 from our audited consolidated financial statements not included in this prospectus. The selected consolidated statement of operations data for the nine months ended September 30, 2013 and 2014 and the consolidated balance sheet data as of September 30, 2014 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. We have derived the selected consolidated balance sheet data as of September 30, 2013 from our unaudited interim consolidated financial statements not included in this prospectus. In our opinion, such financial statements include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial data set forth in those statements.

          Our historical results are not necessarily indicative of our results in any future periods, including the full years ending December 31, 2014. The summary of our consolidated financial data set forth below should be read together with our consolidated financial statements and related notes, as well as the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this prospectus.

 
  Year Ended December 31,   Nine Months
Ended
September 30,
 
 
 
2011
 
2012
 
2013
 
2013
 
2014
 
 
  (in thousands, except per share data)
 

Consolidated Statement of Operations Data:

                               

Revenue

 
$

239,685
 
$

300,275
 
$

295,798
 
$

231,264
 
$

271,622
 

Expenses:

                               

Cost of revenue

    102,695     101,188     120,054     94,869     85,065  

Sales and marketing

    6,752     6,793     5,952     4,597     5,355  

Research and development

    14,855     15,499     21,192     16,171     17,376  

General and administrative           

    63,184     72,661     80,638     60,266     62,920  

Depreciation and amortization

    11,229     12,899     15,517     11,105     15,012  
                       

Total operating expenses

    198,715     209,040     243,353     187,008     185,728  
                       

Income from operations

    40,970     91,235     52,445     44,256     85,894  
                       

Other income and (expenses):

                               

Interest income

    10     11     9     6     4  

Interest expense

    (62 )   (129 )   (79 )   (61 )   (209 )
                       

Income before taxes

    40,918     91,117     52,375     44,201     85,689  

Provision for income taxes

    15,991     35,962     19,657     17,218     33,836  
                       

Net income

  $ 24,927   $ 55,155   $ 32,718   $ 26,983     51,853  
                       
                       

Basic net income per share

  $ 0.90   $ 2.00   $ 1.21   $ 1.00   $ 1.94  
                       
                       

Diluted net income per share

  $ 0.90   $ 1.98   $ 1.20   $ 0.99   $ 1.91  
                       
                       

Weighted average shares of common stock outstanding:

                               

Basic

    27,753     27,573     27,061     27,111     26,728  
                       
                       

Diluted

    27,771     27,808     27,275     27,346     27,167  
                       
                       

Other Financial Data:

                               

Adjusted EBITDA(1)

 
$

57,526
 
$

108,105
 
$

71,847
 
$

58,333
 
$

103,059
 

Adjusted EBITDA margin(1)

    24 %   36 %   24 %   25 %   38 %

49


Table of Contents

 
  December 31,   September 30,  
 
 
2011
 
2012
 
2013
 
2013
 
2014
 
 
  (in thousands)
 

Consolidated Balance Sheet Data:

                               

Cash and cash equivalents

 
$

114,872
 
$

106,361
 
$

110,594
 
$

110,891
 
$

131,947
 

Accounts receivable, net of allowances

    36,764     62,899     33,398     43,233     52,037  

Working capital

    131,676     136,933     130,562     145,209     156,446  

Property, equipment and capitalized software, net

    28,089     34,170     43,050     40,561     49,126  

Goodwill

    62,269     62,269     62,269     62,269     62,269  

Total assets

    262,922     285,655     269,746     277,710     317,345  

Long-term debt

                    285,191  

Total liabilities

    33,817     48,826     38,012     32,471     340,706  

Total stockholders' equity (deficit)

    229,105     236,829     231,734     245,239     (23,361 )

(1)
We define Adjusted EBITDA as net income calculated in accordance with GAAP, adjusted for the impact of depreciation and amortization, interest expense, interest income, provision for income taxes, stock-based compensation, other non-comparable income and expenses, and certain legal costs. We use a variety of operating and other information to evaluate the operating performance of our business, develop financial forecasts, make strategic decisions, and prepare and approve our annual budgets. These key indicators include financial information that is prepared in accordance with GAAP and presented in our consolidated financial statements as well as Adjusted EBITDA and Adjusted EBITDA margin, both of which are non-GAAP metrics, to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions. We have provided below a reconciliation of Adjusted EBITDA to net income, which is the most closely comparable non-GAAP financial measure. Adjusted EBITDA margin is our calculation of Adjusted EBITDA divided by revenue calculated in accordance with GAAP. We use Adjusted EBITDA as a supplemental measure of our performance to gain insight into our operating performance.


We use Adjusted EBITDA margin as a key metric to assess our ability to increase revenues while controlling expense growth and the scalability of our business model. We believe that the exclusion of the expenses eliminated in calculating Adjusted EBITDA and Adjusted EBITDA margin provides management and investors a useful measure for period-to-period comparisons of our core business and operating results by excluding items that are not comparable across reporting periods or that do not otherwise relate to our ongoing operating results. Accordingly, we believe that Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors and others in understanding and evaluating our operating results. However, our use of Adjusted EBITDA and Adjusted EBITDA margin as analytical tools has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under GAAP. In addition, other companies, including companies in our industry, might calculate Adjusted EBITDA and Adjusted EBITDA margin or similarly titled measures differently, which may reduce their usefulness as comparative measures.


The following table presents a reconciliation of net income to Adjusted EBITDA for each of the periods indicated (dollars in thousands):

   
  Year Ended December 31,   Nine Months
Ended
September 30,
 
   
 
2011
 
2012
 
2013
 
2013
 
2014
 
 

Reconciliation of Net Income to Adjusted EBITDA:

                               
 

Net income

  $ 24,927   $ 55,155   $ 32,718   $ 26,983   $ 51,853  
 

Depreciation and amortization           

    11,229     12,899     15,517     11,105     15,012  
 

Interest expense

    62     129     79     61     209  
 

Interest (income)

    (10 )   (11 )   (9 )   (6 )   (4 )
 

Provision for income taxes        

    15,991     35,962     19,657     17,218     33,836  
                         
 
 

EBITDA

  $ 52,199   $ 104,134   $ 67,962   $ 55,361   $ 100,906  
 

Stock-based compensation        

    3,767     2,560     1,842     1,408     1,340  
 

Other non-comparable items(a)           

    1,560     1,411     1,565     1,564      
 

Professional service fees(b)

            478         813  
                         
 
 

Adjusted EBITDA

  $ 57,526   $ 108,105   $ 71,847   $ 58,333   $ 103,059  
                         
 
 
                         
    (a)
    Other "non-comparable items" include business transaction-related professional fees, corporate name change and associated rebranding expenses, workforce restructuring expenses, and certain legal costs. We believe these are non-comparable expenses that should be excluded from Adjusted EBITDA in order to more effectively assess our period-over-period and on-going operating performance.

    (b)
    Represents legal costs associated with the enforcement of a specific client contract. The legal process associated with this matter began in the first quarter of 2013 and concluded in the second quarter of 2014.

50


Table of Contents


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 in conjunction with our "Selected Consolidated Financial Data" and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those forward-looking statements below. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section entitled "Risk Factors" included elsewhere in this prospectus.


Overview

          We are a leading technology company that combines advanced cloud-based data analytics and data-driven intervention platforms to achieve meaningful impact in clinical and quality outcomes, utilization, and financial performance across the healthcare landscape. We deliver value to our clients by turning data into insights and those insights into action. Currently, our clients include health plans, hospitals, physicians, patients, pharmaceutical companies and researchers.

          Our large proprietary datasets, advanced integration technologies, sophisticated predictive analytics, and deep subject matter expertise allow us to provide seamless, end-to-end platforms that bring the benefits of big data and large-scale analytics to the point of care. Our data analytics platforms identify gaps in care, quality, data integrity, and financial performance in our clients' datasets. Our data-driven intervention platforms enable our clients to take the insights derived from the analytics and implement unique, patient-level solutions, drive impact and enhance patient engagement.

          We generate the substantial majority of our revenue through the sale or subscription licensing of our data analytics and data-driven intervention platform services. Since our inception, we have experienced significant growth. During the most recent three years, our ability to deliver value to our customers through our advanced analytics and data-driven intervention platforms has allowed us to expand our revenue at a compounded annual growth rate of 19%, Adjusted EBITDA, at a compounded annual growth rate of 20%, and net income at a compounded annual growth rate of 33% despite a 1% revenue decrease during the year ended December 31, 2013 as compared to the year ended December 31, 2012. For the nine months ended September 30, 2014, our revenue was $271.6 million, representing 17% growth over the same period of the prior year. In the same period, we generated Adjusted EBITDA of $103.1 million, representing a 38% Adjusted EBITDA margin and 77% growth over the same period in the prior year. Net income for the nine months ended September 30, 2014 was $51.9 million, representing 19% of revenue and a 92% increase over the same period in 2013. Adjusted EBITDA is a non-GAAP measure. For a reconciliation of Adjusted EBITDA to net income, see "Selected Consolidated Financial Data."


Trends and Factors Affecting Our Future Performance

          A number of factors influence our growth and performance. We see many of these factors as being more quantitatively driven, such as the rate of growth of the underlying data counts within our datasets, the ongoing investment in innovation, the number of statement of work contracts maintained by us, and our level of analytical activity. Additionally, there are several factors that influence our growth and performance that are less quantitatively driven, including seasonality, macro-economic forces, and trends within healthcare (such as payment models, incentivization, and regulatory oversight), that can be driven by changes in federal and state laws and regulations, as well as private sector market forces.

          Growth of Datasets.    Healthcare costs in the United States have been increasing significantly for many years. This rise in healthcare costs has driven a broad transition from consumption-based

51


Table of Contents

payment models to quality and value-based payment models across the healthcare landscape. As a result, the specific disease and comorbidity status, clinical and quality outcomes, resource utilization, and care details of the individual patient have become increasingly relevant to the various constituents across the healthcare delivery system. Concurrently, the count and complexity of diseases, diagnostics, and treatments — as well as payment models and regulatory oversight requirements — have soared. In this setting, granular data has become critical to determining and improving quality and financial performance in healthcare. Our MORE2 Registry is our largest principal dataset and serves as a proxy for our general growth of datasets within Inovalon. It has expanded at a rate of approximately 3.0% compounding monthly, or 43.3% annually, since 2000 as illustrated below. The growth of our datasets that inform our analytical capabilities and comparative analytics is a key aspect of our provision of value to our clients and is indicative of our overall growth and capabilities.

GRAPHIC

          For more information regarding the growth of our MORE2 Registry, including our calculations of patient count and medical event count, see "Prospectus Summary — Summary Consolidated Financial and Other Data."

          Innovation and Platform Development.    Our business model is based upon our ability to deliver value to our clients through the combination of advanced, cloud-based data analytics and data-driven intervention platforms focused on the achievement of meaningful and measureable improvements in clinical quality outcomes and financial performance in healthcare. Our ability to deliver this value is dependent in part on our ability to continue to innovate, design new capabilities, and bring these capabilities to market in an enterprise scale. Our continued ability to innovate our platform and bring differentiated capabilities to market is an important aspect of our business success. Our investment in innovation includes costs for research and development, capitalized software development, and capital expenditures related to hardware and software

52


Table of Contents

platforms on which our data analytics and data-driven interventions capabilities are deployed as summarized below (in thousands, except percentages).

 
  Year Ended
December 31,
  Nine Months
Ended
September 30,
 
 
 
2011
 
2012
 
2013
 
2013
 
2014
 

Investment in Innovation

                               

Research and development(1)

  $ 14,855   $ 15,499   $ 21,192   $ 16,171   $ 17,376  

Capitalized software development(2)

    5,778     10,070     10,304     7,341     11,758  

Research and development infrastructure investments(3)

    421     1,759     3,565     2,853     4,567  
                       

Total investment in innovation

  $ 21,054   $ 27,328   $ 35,061   $ 26,365   $ 33,701  
                       
                       

As a percentage of revenue

                               

Research and development(1)

    6 %   5 %   7 %   7 %   6 %

Capitalized software development(2)

    2 %   3 %   3 %   3 %   4 %

Research and development infrastructure investments(3)

    0 %   1 %   1 %   1 %   2 %
                       

Total investment in innovation

    8 %   9 %   11 %   11 %   12 %
                       
                       

(1)
Research and development primarily includes employee costs related to the development and enhancement of our service offerings.

(2)
Capitalized software development includes capitalized costs incurred to develop and enhance functionality for our data analytics and data-driven intervention platforms.

(3)
Research and development infrastructure investments include strategic capital expenditures related to hardware and software platforms under development or enhancement.

          Data Analytics and Data-Driven Intervention Mix.    Our business and operational models are highly scalable and leverage variable costs to support revenue generating activities. Our data analytic service costs are less variable in nature and require lower incremental capital expenditures. As a result, following initial development and deployment investments, our big data analytics platform and data technology capabilities allow us to process significant volumes of transactions with lower incremental costs. Conversely, our data-driven intervention service costs are generally variable in nature and require incremental costs to generate additional revenue. As a result, the mix of our data analytics and data interventions activities affects our financial performance. Over the past several years the percentage of our business which is derived from data and analytics subscription fees has been increasing, as has the portion of the data-driven intervention platform services that are fully automated. The chart below illustrates the mix of revenue we have generated

53


Table of Contents

from data analytics subscriptions, fully automated data-driven intervention platform services, and partially automated data-driven intervention platform services for the periods presented.

GRAPHIC

          For more information regarding our data analytics and data-driven intervention platform services revenue mix, see "Prospectus Summary — Summary Consolidated Financial and Other Data."

          Client and Analytical Process Count Growth.    Our business is generally driven by the number of underlying patients for which our analytics and data-driven intervention platforms are being utilized. In addition to this patient count, however, the number of specific analytical processes and data-driven interventions services for which any one specific patient population is engaged, is also a driver. As such, increasing the size, number, and analytical portfolio penetration of populations for which we provide our analytics and data-driven intervention platform services is important to the overall growth of our business. In general, as the application of our analytics and data-driven intervention platform services deliver value, our clients often engage with us to utilize additional analytics and data-driven intervention platform services. Our ability to deliver demonstrable value, retain clients, add new clients, and realize growth within existing clients affects our financial performance. As such, on an annual basis (and produced here for the period ending September 30, 2014 for the purposes of this prospectus) we track the number of patient populations for which we are engaged to provide data analytics and provide data-driven

54


Table of Contents

intervention services (each engagement memorialized with a contracted statement of work, or SOW).

GRAPHIC

          For more information regarding patient population statements of work, see "Prospectus Summary — Summary Consolidated Financial and Other Data."

          In addition, we track the number of analytical processes that we run on patients each month in fulfillment of our client contracts, as totaled for the trailing 12 months. This metric, referred to as the Trailing 12 Month Patient Analytical Months, or PAM, is displayed through the quarter ending September 30, 2014 in the figure below. We believe that PAM is indicative of our overall level of analytical activity, and we expect our period-to-period comparisons of our PAM to be indicative of underlying growth of our business, although changes in levels of analytical activity do not always directly translate to changes in financial performance of our business. Differences in fees charged for different analytical packages exist and differences in how analytics trigger the applicability of our data-driven intervention platforms may result in increases in analytical activity that do not result in proportional increases in revenue, Adjusted EBITDA or net income (and vice versa). Therefore, in situations in which a new engaged client SOW is initiated for analytical processes that have a higher than average fee rate, revenue could expand disproportionately faster than the increase in PAM. Likewise, as was the case in the year ended December 31, 2013, the loss of an engaged client SOW for analytical processes that have a higher than average fee rate can negatively affect revenue disproportionately more than PAM. Further, in 2013, the initiation of several new engaged client SOWs for various analytical processes that commanded, when taken together, a lower than

55


Table of Contents

average fee rate offset the reduction in revenue from the aforementioned terminated client SOW, while PAM was more than offset, and thus increased.

Trailing 12 Month Patient Analytics Months (PAMs)

GRAPHIC

          For more information regarding Trailing 12 month patient analytics months (PAM), see "Prospectus Summary — Summary Consolidated Financial and Other Data."

          Seasonality.    We typically experience the highest level of revenue in the second quarter of each year, which coincides with specific accreditation and regulatory deadlines. In particular, as a result of certain data filing deadlines established by CMS, state departments of health, and the National Committee for Quality Assurance, or NCQA, clients typically engage us to perform higher levels of data-driven analytics and data-driven interventions during the first two quarters of each year when compared to other quarters of the year. Conversely, the third quarter of the year has relatively few such deadlines and, as such, typically has lower levels of analytics engagement activity than other quarters of the year.

          Macro-Economic and Macro-Industry Trends.    Our clients are affected, sometimes directly, and sometimes counter-intuitively, by macro-economic trends such as economic growth (or economic recession), inflation, and unemployment. Further, industry trends in federal and state laws and regulations, as well as emerging trends in private sector payment models, affect our clients' businesses and their need for technologies and services to support these challenges. These factors have various effects on our business, and on occasion have resulted in the slowing or cessation of the decision-making process by clients adopting our technologies and services. On the other hand, changes in macro-economic trends and the industry landscape have accelerated the need for our technologies and services from time-to-time, particularly as regulators introduce complex requirements with which our clients must comply.

Components of Results of Operations

Revenue

          We earn revenue through the sale or subscription licensing of our cloud-based data analytics and data-driven intervention platform services.

          Cloud-based data analytics solution revenue accounted for approximately 42.3%, 45.3%, and 48.6% of our consolidated revenue during the years ended December 31, 2011, 2012, and 2013, respectively, and approximately 47.0% and 56.3% of our consolidated revenue during the nine

56


Table of Contents

months ended September 30, 2013 and 2014, respectively. These percentages include software subscription licensing revenue of approximately 2.9%, 2.6%, and 3.6% of our consolidated revenue during the years ended December 31, 2011, 2012, and 2013, respectively, and approximately 3.5% and 3.7% of our consolidated revenue for the nine months ended September 30, 2013 and 2014, respectively. Our cloud-based data analytics services are performed either at the beginning of a data-driven intervention process, which typically aligns with regulatory submission deadlines, or on a monthly basis, depending on the particular client's needs. Data analytics revenue is driven primarily by the number of identified gaps in care, quality, data integrity, and financial performance identified in a client's dataset, the number of unique patients in a client's dataset, a minimum data analytics processing fee, and a contractually negotiated transactional price for each identified gap or unique patient. Subscription licensing revenue is driven primarily by the number of clients, the number of unique patients in a client's population dataset, the number of analytical services contracted for by a client, and the contractually negotiated price of such services.

          Cloud-based data-driven intervention platform services revenue accounted for approximately 57.7%, 54.7%, and 51.4% of our consolidated revenue during the years ended December 31, 2011, 2012, and 2013, respectively, and approximately 53.0% and 43.7% of our consolidated revenue during the nine months ended September 30, 2013 and 2014, respectively. Data-driven intervention platform service revenue is further broken down into revenue that is generated from fully automated processes (i.e., those processes that require no material variable-based labor components) and partially automated processes (i.e., those processes that require certain material variable-based labor components). For the years ended December 31, 2011, 2012, and 2013, and the nine months ended September 30, 2013 and 2014, respectively, revenue from fully automated processes accounted for 1.5%, 4.2%, 4.3%, 4.8%, and 7.1% of data-driven intervention platform services revenue and revenue from partially automated processes accounted for 56.2%, 50.5%, 47.1%, 48.2%, and 36.6% of data-driven intervention platform services revenue.

          Our data-driven intervention platform services include medical record data abstraction and review services, encounter decision support, encounter facilitation, outbound telephonic and written communications, and supplemental patient encounter services. Data-driven intervention platform service revenue is driven primarily by the results of our data analytic processes, the quantity and assortment of completed interventions, and a contractually negotiated transactional price for each intervention performed by us.

          See "— Critical Accounting Policies — Revenue Recognition" for a more detailed discussion of our revenue recognition policy.

Cost of Revenue

          Cost of revenue consists primarily of expenses for employees who provide direct contractual services to our clients, including salaries, benefits, discretionary incentive compensation, employment taxes, severance, and equity compensation costs. Cost of revenue also includes expenses associated with the integration, and verification of data and other service costs incurred to fulfill our revenue contracts. Cost of revenue does not include allocated amounts for occupancy expense and depreciation and amortization. Many of the elements of our cost of revenue are relatively variable and semi-variable, and can be reduced in the near-term to offset any decline in our revenue.

          Our business and operational models are designed to be highly scalable and leverage variable costs to support revenue generating activities. While we expect to grow our headcount over time to capitalize on our market opportunities, we believe our increased investment in automation, electronic health record integration capabilities, and economies of scale in our operating model, will position us to grow our revenue at a greater rate than our cost of revenue.

57


Table of Contents

Sales and Marketing

          Sales and marketing expense consists primarily of employee-related expenses, including salaries, benefits, commissions, discretionary incentive compensation, employment taxes, severance, and equity compensation costs for our employees engaged in sales, sales support, business development, and marketing. Sales and marketing expense also includes operating expenses for marketing programs, research, trade shows and brand messages, and public relations costs. Our sales and marketing expense excludes any allocation of occupancy expense and depreciation and amortization.

          We expect our sales and marketing expenses to increase as we strategically invest to expand our business. We expect to hire additional sales personnel and related support personnel to capture an increasing amount of our market opportunity. As we scale our sales and marketing activities in the short to medium term, we expect these expenses to increase in both absolute dollars and as a percentage of revenue.

Research and Development

          Research and development expense (one component of our investment in innovation) consists primarily of employee-related expenses, including salaries, benefits, discretionary incentive compensation, employment taxes, severance, and equity compensation costs for our software developers, engineers, analysts, project managers, and other employees engaged in the development and enhancement of our service offerings. Research and development expense also includes certain third party consulting fees. Our research and development expense excludes any allocation of occupancy expense and depreciation and amortization.

          We expect to continue our focus on developing new data analytics and data-driven intervention platforms and enhancing our existing data analytics and data-driven intervention platforms. As a result, we expect our research and development expense to continue to increase in absolute dollars, although it may vary from period to period as a percentage of revenue.

General and Administrative

          Our general and administrative expense consists primarily of employee-related expenses including salaries, benefits, discretionary incentive compensation, employment taxes, severance, and equity compensation costs, for employees who are responsible for management information systems, administration, human resources, finance, legal, and executive management. General and administrative expense also includes occupancy expenses (including rent, utilities, communications, and facilities maintenance), professional fees, consulting fees, insurance, travel, and other expenses. Our general and administrative expense excludes depreciation and amortization.

          We expect our general and administrative expense to increase as we expand our business and incur the incremental costs associated with being a public company. However, excluding certain increases as a result of being a public company, we expect our general and administrative expense to grow at a lower rate than revenue.

Depreciation and Amortization Expense

          Our depreciation and amortization expense consists primarily of depreciation of fixed assets, amortization of capitalized software development costs, and amortization of acquisition-related intangible assets.

Provision for Income Taxes

          Provision for income taxes consists of federal and state income taxes in the United States and foreign income taxes from the territory of Puerto Rico, including deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

58


Table of Contents


Results of Operations

          The following tables set forth our consolidated statement of operations data for each of the periods presented (in thousands):

 
  Year Ended December 31,   Nine Months
Ended
September 30,
 
 
 
2011
 
2012
 
2013
 
2013
 
2014
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

  $ 239,685   $ 300,275   $ 295,798   $ 231,264   $ 271,622  

Expenses:

                               

Cost of revenue

    102,695     101,188     120,054     94,869     85,065  

Sales and marketing

    6,752     6,793     5,952     4,597     5,355  

Research and development

    14,855     15,499     21,192     16,171     17,376  

General and administrative

    63,184     72,661     80,638     60,266     62,920  

Depreciation and amortization

    11,229     12,899     15,517     11,105     15,012  
                       

Total operating expenses

    198,715     209,040     243,353     187,008     185,728  
                       

Income from operations

    40,970     91,235     52,445     44,256     85,894  
                       

Other income and (expenses):

                               

Interest income

    10     11     9     6     4  

Interest expense

    (62 )   (129 )   (79 )   (61 )   (209 )
                       

Income before taxes

    40,918     91,117     52,375     44,201     85,689  

Provision for income taxes

    15,991     35,962     19,657     17,218     33,836  
                       

Net income

  $ 24,927   $ 55,155   $ 32,718   $ 26,983   $ 51,853  
                       
                       

          The following table sets forth our consolidated statement of operations data for each of the periods presented as a percentage of revenue:

 
  Year Ended December 31,   Nine Months
Ended
September 30,
 
 
 
2011
 
2012
 
2013
 
2013
 
2014
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

    100 %   100 %   100 %   100 %   100 %

Expenses:

                               

Cost of revenue

    43 %   34 %   41 %   41 %   31 %

Sales and marketing

    3 %   2 %   2 %   2 %   2 %

Research and development

    6 %   5 %   7 %   7 %   6 %

General and administrative

    26 %   24 %   27 %   26 %   23 %

Depreciation and amortization

    5 %   4 %   5 %   5 %   6 %
                       

Total operating expenses

    83 %   69 %   82 %   81 %   68 %
                       

Income from operations

    17 %   31 %   18 %   19 %   32 %
                       

Other income and (expenses):

                               

Interest income

                     

Interest expense

                     
                       

Income before taxes

    17 %   31 %   18 %   19 %   32 %
                       

Provision for income taxes

    7 %   12 %   7 %   7 %   12 %
                       

Net income

    10 %   19 %   11 %   12 %   19 %
                       
                       

59


Table of Contents

Nine Months Ended September 30, 2013 and 2014

Revenue

 
  Nine Months Ended
September 30,
  Change  
 
  2013   2014   $   %  
 
  (dollars in thousands)
 

Revenue

  $ 231,264   $ 271,622   $ 40,358     18 %

          Revenue for the nine months ended September 30, 2014 increased by approximately $40.4 million, or 18%, compared to the nine months ended September 30, 2013. The increase was primarily attributable to an increase in revenue from new clients of $29.7 million along with a net increase of $10.7 million from existing clients.

Cost of Revenue

 
  Nine Months Ended
September 30,
  Change  
 
  2013   2014   $   %  
 
  (dollars in thousands)
 

Cost of revenue

  $ 94,869   $ 85,065   $ (9,804 )   (10 )%

Cost of revenue as a percentage of revenue

    41 %   31 %            

          For the nine months ended September 30, 2014, cost of revenue decreased by $9.8 million, or 10%, compared to the nine months ended September 30, 2013. The $9.8 million decrease was driven by a $10.7 million reduction in employee-related expenses due to our continued focus on technology implementation, standardization of services, and operational process automation. The decrease was partially offset by an increase of $1.6 million in costs for third-party services which enable our data-driven intervention services. Cost of revenue as a percentage of revenue was 31% for the nine months ended September 30, 2014 compared to 41% for the nine months ended September 30, 2013. This decrease was primarily the result of revenue mix shifting toward more data-driven analytical solution activities from data-driven intervention services, which are more employee-intensive. Data analytics revenue as a percentage of total revenue was 56% for the nine months ended September 30, 2014 compared to 47% for the nine months ending September 30, 2013.

Sales and Marketing

 
  Nine Months Ended
September 30,
  % Change  
 
  2013   2014   $   %  
 
  (dollars in thousands)
 

Sales and marketing

  $ 4,597   $ 5,355   $ 758     17 %

Sales and marketing as a percentage of revenue

    2 %   2 %            

          In the nine months ended September 30, 2014, sales and marketing expenses increased by $0.8 million, or 17%, compared to the nine months ended September 30, 2013. The increase primarily was attributable to an increase in marketing expense associated with our annual client conference of $0.3 million and employee related costs of $0.4 million.

60


Table of Contents

Research and Development

 
  Nine Months Ended
September 30,
  % Change  
 
  2013   2014   $   %  
 
  (dollars in thousands)
 

Research and development

  $ 16,171   $ 17,376   $ 1,205     8 %

Research and development as a percentage of revenue

    7 %   6 %            

          For the nine months ended September 30, 2014, research and development expense increased by $1.2 million, or 8%, compared to the nine months ended September 30, 2013. The increase was primarily attributable to a $0.7 million increase in third-party software developer fees, together with an increase of $0.3 million in employee related costs.

General and Administrative

 
  Nine Months Ended
September 30,
  Change  
 
  2013   2014   $   %  
 
  (dollars in thousands)
 

General and administrative

  $ 60,266   $ 62,920   $ 2,654     4 %

General and administrative as a percentage of revenue

    26 %   23 %            

          For the nine months ended September 30, 2014, general and administrative expense increased by approximately $2.7 million, or 4%, compared to the nine months ended September 30, 2013. The increase was primarily attributable to an increase in professional fees of $1.3 million, software licensing and maintenance expenses of $0.3 million, occupancy costs of $0.3 million and employee related costs of $0.5 million.

Depreciation and Amortization

 
  Nine Months Ended
September 30,
  Change  
 
  2013   2014   $   %  
 
  (dollars in thousands)
 

Depreciation and amortization

  $ 11,105   $ 15,012   $ 3,907     35 %

Depreciation and amortization as a percentage of revenue

    5 %   6 %            

          For the nine months ended September 30, 2014, depreciation and amortization expense increased by approximately $3.9 million, or 35%, compared to the nine months ended September 30, 2013. The increase in depreciation and amortization expense primarily was attributable to an increase in amortization expense of capitalized software of $3.4 million as a result of accelerating amortization on software expected to be decommissioned due to the successful development of a next generation software service.

Provision for Income Taxes

 
  Nine Months Ended
September 30,
  Change  
 
  2013   2014   $   %  
 
  (dollars in thousands)
 

Provision for income taxes

  $ 17,218   $ 33,836   $ 16,618     97 %

Effective tax rate

    39 %   39 %            

61


Table of Contents

          Income tax expense for the nine months ended September 30, 2014 increased by approximately $16.6 million, or 97%, compared to the nine months ended September 30, 2013. The increase in period-over-period income tax expense was attributable to our increase in income from operations resulting from our increase in revenues and our decrease in cost of revenue. Our effective income tax rate for the nine months ended September 30, 2014 remained relatively stable at 39% as compared to the same period in 2013.

Years Ended December 31, 2011, 2012 and 2013

Revenue

 
  Year Ended December 31,   2011 to 2012
Change
  2012 to 2013
Change
 
 
  2011   2012   2013   $   %   $   %  
 
  (dollars in thousands)
 

Total revenue

  $ 239,685   $ 300,275   $ 295,798   $ 60,590     25 % $ (4,477 )   (1 )%

          2013 Compared to 2012.    Revenue during the year ended December 31, 2013 decreased by approximately $4.5 million, or 1%, as compared to the year ended December 31, 2012. The decrease was primarily attributable to a client's decision to discontinue several integrated solution engagements during the second quarter of 2013 subsequent to an acquisition by the client. This resulted in a year-over-year reduction of revenue of approximately $38.9 million. The aforementioned decrease was almost entirely offset by an increase in revenue from new clients of $9.1 million along with a net increase of $25.3 million from other existing clients.

          2012 Compared to 2011.    Revenue during the year ended December 31, 2012 increased by approximately $60.6 million, or 25%, as compared to the year ended December 31, 2011. The increase was primarily driven by an increase in revenue from new clients of $38.2 million along with a net increase of $22.4 million (inclusive of a $21.9 million discontinuation of a service offering) from existing clients.

Cost of Revenue

 
  Year Ended December 31,   2011 to 2012
Change
  2012 to 2013
Change
 
 
  2011   2012   2013   $   %   $   %  
 
  (dollars in thousands)
 

Cost of revenue

  $ 102,695   $ 101,188   $ 120,054   $ (1,507 )   (1 )% $ 18,866     19 %

Cost of revenue as a percentage of revenue

    43 %   34 %   41 %                        

          2013 Compared to 2012.    Cost of revenue during the year ended December 31, 2013 was $120.0 million, or 41% of revenue, which represented a year-over-year increase of approximately $18.9 million, or 19%, over our cost of revenue of $101.2 million, or 34% of revenue, during the year ended December 31, 2012. The increase was attributable primarily to increased employee-related costs of $11.0 million, as well as increased costs for third-party services which enable our data-driven intervention services of $6.8 million. Cost of revenue as a percentage of revenue increased as a result of management's conscious decision to not fully implement certain cost reduction strategies as a result of a client loss but rather substantially maintain its cost infrastructure to support anticipated near-term revenue growth driven by demand for analytics and data-driven intervention services in association with the launch of the Federal and State commercial exchanges.

62


Table of Contents

          2012 Compared to 2011.    Cost of revenue for the year ended December 31, 2012 was approximately $101.2 million, or 34% of revenue, which represented a year-over-year decrease of approximately $1.5 million over our cost of revenue of approximately $102.7 million, or 43% of revenue, during the year ended December 31, 2011. The improvement in the costs of revenue as a percentage of revenue was attributable to a decrease in employee related costs of $14.2 million, partially offset by an increase of $12.9 million in costs for third-party services which enable our data-driven intervention services.

Sales and Marketing

 
  Year Ended December 31,   2011 to 2012
% Change
  2012 to 2013
% Change
 
 
  2011   2012   2013   $   %   $   %  
 
  (dollars in thousands)
 

Sales and marketing

  $ 6,752   $ 6,793   $ 5,952   $ 41       $ (841 )   (12 )%

Sales and marketing as a percentage of revenue

    3 %   2 %   2 %                        

          2013 Compared to 2012.    In 2013, sales and marketing expense decreased by $0.8 million, or 12%, compared to 2012. The decrease was primarily attributable to costs associated with a corporate rebranding initiative of $1.3 million incurred in 2012, which was not incurred again in 2013, partially offset by additional investments in conference and advertising activities of $0.4 million in 2013.

          2012 Compared to 2011.    In 2012, sales and marketing expenses remained constant compared to 2011. During 2012, we incurred costs associated with a corporate rebranding initiative of $1.3 million, partially offset by lower employee-related costs of $0.6 million, lower advertising and marketing costs of $0.4 million, and lower travel related costs of $0.2 million.

Research and Development

 
  Year Ended December 31,   2011 to 2012
% Change
  2012 to 2013
% Change
 
 
  2011   2012   2013   $   %   $   %  
 
  (dollars in thousands)
 

Research and development

  $ 14,855   $ 15,499   $ 21,192   $ 644     4 % $ 5,693     37 %

Research and development as a percentage of revenue

    6 %   5 %   7 %                        

          2013 Compared to 2012.    In 2013, research and development expenses increased by $5.7 million, or 37%, compared to 2012. The increase was primarily attributable to a $5.6 million increase in employee-related costs.

          2012 Compared to 2011.    In 2012, research and development expenses increased by $0.6 million, or 4%, compared to 2011. The increase was attributable to an increase in third-party software developer costs.

63


Table of Contents

General and Administrative

 
  Year Ended December 31,   2011 to 2012
Change
  2012 to 2013
Change
 
 
  2011   2012   2013   $   %   $   %  
 
  (dollars in thousands)
 

General and administrative

  $ 63,184   $ 72,661   $ 80,638   $ 9,477     15 % $ 7,977     11 %

General and administrative as a percentage of revenue

    26 %   24 %   27 %                        

          2013 Compared to 2012.    During the year ended December 31, 2013, general and administrative expense increased by approximately $8.0 million, or 11%, compared to the year ended December 31, 2012. The year-over-year increase in general and administrative expense was driven primarily by an increase in employee-related expenses of approximately $5.7 million as a result of growth in average employee headcount during 2013 as compared to 2012 in order to manage new customer additions and expected future revenue growth.

          2012 Compared to 2011.    During the year ended December 31, 2012, general and administrative expense increased by approximately $9.5 million, or 15%, compared to the year ended December 31, 2011. This increase was driven by increased employee-related costs of approximately $9.5 million as a result of increased headcount to manage realized and expected revenue growth.

Depreciation and Amortization

 
  Year Ended December 31,   2011 to 2012 Change   2012 to 2013
Change
 
 
  2011   2012   2013   $   %   $   %  

Depreciation and amortization

  $ 11,229   $ 12,899   $ 15,517   $ 1,670     15 % $ 2,618     20 %

Depreciation and amortization as a percentage of revenue

    5 %   4 %   5 %                        

          2013 Compared to 2012.    Depreciation and amortization during the year ended December 31, 2013 increased approximately $2.6 million, or 20%, compared to the year ended 2012. The increase was attributable primarily to an increase of $2.6 million of amortization expense from capitalized software.

          2012 Compared to 2011.    Depreciation and amortization during the year ended December 31, 2012 increased approximately $1.7 million, or 15%, compared to the year ended 2011. The increase was attributable primarily to an increase of amortization expense from capitalized software of $1.2 million.

Provision for Income Taxes

 
  Year Ended December 31,   2011 to 2012
Change
  2012 to 2013
Change
 
 
 
2011
 
2012
 
2013
 
$
 
%
 
$
 
%
 
 
  (dollars in thousands)
 

Provision for income taxes

  $ 15,991   $ 35,962   $ 19,657   $ 19,971     125 % $ (16,305 )   (45 )%

Effective tax rate

    39 %   39 %   38 %                        

64


Table of Contents

          2013 Compared to 2012.    Our provision for income taxes during the year ended December 31, 2013 was approximately $19.7 million compared to approximately $36.0 million during the year ended December 31, 2012. Our effective income tax rate was 38% for the year ended December 31, 2013 compared to 39% for the year ended December 31, 2012. The decrease in our effective income tax rate was due primarily to the recognition of the 2012 and 2013 federal research and development tax credits during the year ended December 31, 2013 and a decrease in state income taxes.

          2012 Compared to 2011.    Our provision for income taxes during the year ended December 31, 2012 was approximately $36.0 million compared to approximately $16.0 million during the year ended December 31, 2011. Our effective income tax rate was 39% for both 2012 and 2011. The approximately $20.0 million increase in our provision for income taxes during the year ended December 31, 2012 as compared to the year ended December 31, 2011 was due primarily to our increase in income from operations resulting from our increase in revenues and our decrease in cost of revenue.

Quarterly Results of Operations

          The following table sets forth our unaudited consolidated statement of operations data for each of the seven quarters in the period ended September 30, 2014. The unaudited quarterly statement of operations data set forth below have been prepared on a basis consistent with our audited annual consolidated financial statements and include, in our opinion, all normal recurring adjustments necessary for a fair statement of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following quarterly financial data should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this prospectus.

          We typically experience the highest level of revenue in the second quarter of each year, which coincides with specific accreditation and regulatory deadlines. See "Management's Discussion and

65


Table of Contents

Analysis of Financial Condition and Results of Operations — Trends and Factors Affecting Our Future Performance — Seasonality."

 
  Three Months Ended  
Consolidated Statement of Operations Data:
 
March 31,
2013
 
June 30,
2013
 
September 30,
2013
 
December 31,
2013
 
March 31,
2014
 
June 30,
2014
 
September 30,
2014
 
 
  (unaudited, in thousands)
 

Revenue

  $ 75,036   $ 81,224   $ 75,004   $ 64,534   $ 84,674   $ 100,957   $ 85,991  

Expenses:

                                           

Cost of revenue

    32,210     33,278     29,381     25,185     28,587     28,899     27,579  

Sales and marketing

    1,087     1,982     1,528     1,355     1,333     1,612     2,410  

Research and development

    5,673     5,248     5,250     5,021     6,048     5,144     6,184  

General and administrative

    20,892     20,006     19,368     20,372     19,934     21,341     21,645  

Depreciation and amortization

    3,529     3,642     3,934     4,412     4,855     5,114     5,043  
                               

Total operating expenses

    63,391     64,156     59,461     56,345     60,757     62,110     62,861  
                               

Income from operations

    11,645     17,068     15,543     8,189     23,917     38,847     23,130  
                               

Other income and (expenses):

                                           

Interest income

    3     2     1     3     2     1     1  

Interest expense

    (16 )   (24 )   (21 )   (18 )   (13 )   (49 )   (147 )
                               

Income before taxes

    11,632     17,046     15,523     8,174     23,906     38,799     22,984  

Provision for income taxes

    4,532     6,640     6,046     2,439     9,349     15,169     9,318  
                               

Net income

  $ 7,100   $ 10,406   $ 9,477   $ 5,735   $ 14,557   $ 23,630   $ 13,666  
                               
                               

Other Financial Data

                                           

Adjusted EBITDA(1)

  $ 16,146   $ 22,372   $ 19,816   $ 13,513   $ 29,412   $ 44,989   $ 28,658  
                               
                               

(1)
The following table presents a reconciliation of net income to Adjusted EBITDA for each of the periods indicated:

 
  Three Months Ended  
 
 
March 31,
2013
 
June 30,
2013
 
September 30,
2013
 
December 31,
2013
 
March 31,
2014
 
June 30,
2014
 
September 30,
2014
 
 
  (unaudited, in thousands)
   
 

Reconciliation of net income to Adjusted EBITDA:

                                           

Net income

  $ 7,100   $ 10,406   $ 9,477   $ 5,735   $ 14,557   $ 23,630   $ 13,666  

Depreciation and amortization

    3,529     3,642