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INOVALON HOLDINGS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

   

ý

 

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

For the fiscal year ended December 31, 2014

or

o

 

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

For the transition period from                to              

Commission file number 001-36841



INOVALON HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)



Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
  47-1830316
(IRS Employer
Identification No.)

4321 Collington Road
Bowie, Maryland

(Address of Principal Executive Offices)

 

20716
(Zip Code)

(301) 809-4000
Registrant's Telephone Number, Including Area Code

         Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class   Name Of Each Exchange On Which Registered

Class A Common Stock, $0.000005 par value per share

  NASDAQ Global Select Market

         Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o    No ý

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

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

         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

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

         As of June 30, 2014, the last business day of the registrant's most recently completed second fiscal quarter, the registrant's equity was not listed on a domestic exchange or over-the-counter market. The registrant's Class A common stock began trading on the NASDAQ Global Select Market on February 12, 2015.

         As of March 31, 2015, the registrant had 25,364,803 shares of Class A common stock outstanding and 122,257,145 shares of Class B common stock outstanding.

Documents Incorporated by Reference

         None

   


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INOVALON HOLDINGS, INC.

FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

TABLE OF CONTENTS

 
   
   
 

PART I

 

Item 1.

 

Business

    1  

Item 1A.

 

Risk Factors

    34  

Item 1B.

 

Unresolved Staff Comments

    55  

Item 2.

 

Properties

    55  

Item 3.

 

Legal Proceedings

    55  

Item 4.

 

Mine Safety Disclosures

    55  

PART II

 

Item 5.

 

Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    56  

Item 6.

 

Selected Financial Data

    57  

Item 7.

 

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

    62  

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

    82  

Item 8.

 

Financial Statements and Supplementary Data

    82  

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

    82  

Item 9A.

 

Controls and Procedures

    82  

Item 9B.

 

Other Information

    83  

PART III

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

    84  

Item 11.

 

Executive Compensation

    92  

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    98  

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

    101  

Item 14.

 

Principal Accountant Fees and Services

    102  

PART IV

 

Item 15.

 

Exhibits and Financial Statement Schedules

    103  

Signatures

    107  

Index to Consolidated Financial Statements

    F-1  

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements contained in this Annual Report 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, 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 Item 1A—Risk Factors. 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 Annual Report 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 Annual Report or to conform these statements to actual results or revised expectations.

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PART I

Item 1.    Business.

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 platform drives 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 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 providing clients with differentiated capabilities to resolve these gaps. During 2014, we provided these services to more than 100 clients representing approximately 200 patient populations, providing analytics informed by our data and insight on more than 754,000 physicians, 248,000 clinical facilities, 120 million unique patients (covering approximately 98.2% of all U.S. counties and Puerto Rico), and 9.2 billion medical events, a number that has been increasing at a rate of approximately 3.0% compounding monthly, or 42.6% 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, 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 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 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 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 improvement for our clients.

        At the core of our enabling 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 entire healthcare landscape.

        The value we deliver to our clients through our data analytics and intervention platforms are comprised of 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;

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    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;

    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 our company's organization. For the year ended December 31, 2014, our revenue was $361.5 million, representing 22% growth over the year ended December 31, 2013. In this same period, we generated Adjusted EBITDA of $133.6 million, representing 37% of revenue and 86% growth over the same period in the prior year. Net income for the year ended December 31, 2014 was $65.4 million, representing 18% of revenue and a 100% increase over the same period in 2013. Non-GAAP Net Income for the year ended December 31, 2014 was $70.2 million, representing 19% of revenue and a 88% increase over the same period in 2013. Adjusted EBITDA and Non-GAAP Net Income are measures that are not presented in accordance with accounting principles generally accepted in the United States (GAAP). For a reconciliation of net income to Adjusted EBITDA and Non-GAAP Net Income, see "Non-GAAP Financial Measures," provided in Item 6—Selected Financial Data.

        In this Annual Report, 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.

Recent Developments

        On February 18, 2015, we completed our initial public offering (the "IPO") of 22,222,222 shares of Class A common stock and, upon the underwriters' exercise of their option to purchase additional shares, issued an additional 3,142,581 shares of Class A common stock for a total of 25,364,803 shares issued. All of the shares issued in the IPO were primary shares offered by us as none of our stockholders sold any shares in the IPO. The offering price of the shares sold in the IPO was $27.00 per share, resulting in net proceeds to us, after underwriters' discounts and commissions and other expenses payable by us, of approximately $639.4 million.

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.

        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

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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 wherein an organization is financially responsible for the healthcare of a population of patients for which the total compensation is fixed other than adjustments for factors including specifically how sick individual patients are, how much resource is needed to be applied or spent on each patient, what is the quality of the clinical care, 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.

        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 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 are driving fundamental changes in payment and delivery models, as well as technology requirements. These changes 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 are directly tied to clinical and quality outcomes which need to be measured at the individual patient level. These outcome requirements are designed to monitor a populations' compliance with industry accepted healthcare processes and healthcare outcomes goals, patients' satisfaction with the healthcare that they receive, and the effective operation of healthcare practice groups. Clinical and quality outcomes measurement programs require the detailed and highly granular reporting of the care sought and delivered to each patient within an overall population to allow for the accurate calculation of population quality metrics. Industry accreditation organizations such as NCQA, Utilization Review Accreditation Committee, or URAC, Pharmacy Quality Alliance, or PQA, National Quality Forum, or NQF, and medical societies looking to provide thought leadership on behalf of their patients, produce quality measures utilized by the industry. These measures have been adopted directly or in modified versions by federal and state regulations, private sector employers, and in shared-risk and accountable care contracts, in ways that drive significant financial incentives and consequences in the setting of strong positive or negative performance respectively. The results of these quality measurements drive significant incentives and consequences, influencing more than an estimated $3 billion in quality-related payments annually.

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        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, monitor 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. Additionally, inaccuracies in disease status awareness impede resource planning, provider network design efforts, and financial projections. Furthermore, new payment models are designed to adjust the payments based upon the overall population illness burden of the patients in any particular plan. This is known as risk adjustment payments. There are multiple risk adjustment payment models across Medicare Advantage, managed Medicaid, ACA Health Insurance Exchanges, or HIX, and private sector contracts. Risk adjustment also impacts ACO shared savings calculations. Risk adjustment payments are governed by a complex set of rules using thousands of diagnosis and procedure codes, depending on the specific risk adjustment model. All together, having detailed and highly granular reporting of the disease and comorbidities of each patient is essential for care, quality, and financial performance today.

        Understanding and Improving Utilization.    Utilization, which is the cost incurred in the delivery of care, has increasingly become a focus in healthcare. Within fixed payment models, the ability to pass cost increases onto customers has materially decreased or altogether disappeared. 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 also more commonly known as the MLR. The MLR rules are designed to ensure that premiums received by insurers are primarily spent towards patient care and not directed towards administrative activities or excess profit. If health plans fail to meet the 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 through shared risk arrangements and performance bonus programs to help manage costs, to drive improvements in patient health, and to achieve long-term utilization containment and quality goals. As a result, the MLR rules impact multiple constituents of the healthcare community, from payors and providers to pharmaceutical companies, PBMs, and other cost-center elements of the healthcare landscape.

        Complying with Increasingly Complex Regulatory Requirements.    Federal and state regulation and compliance is increasing and becoming ever more complex. The regulatory obligations are impacting the entire healthcare delivery landscape, from individual practice groups and payors, to process and technology support vendors, all with the responsibility to adequately protect the privacy of patients and the manner in which services are provided, payments are made, and data is utilized, among other goals. This regulatory burden is intense, 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.    Historically, insurance companies did not offer healthcare plans directly to the consumer, but typically through larger programs sponsored by an employer or government agency. That has changed where now individuals can buy coverage, select clinicians and hospitals, and directly research implications of specific medications, procedures, and treatment courses. As a result, new solutions are put in place to assist the consumer. For example, the U.S. government has created a Five-Star Quality Rating system designed specifically to help consumers compare the quality of the different types of services a healthcare plan offers in order to make a more informed purchasing decision. Payors are now incentivized to engage with customers on an individual level and use the increasingly granular data around personal demographics and preferences to design new plans. Physicians and hospitals are now incentivized to pay attention to quality, cost, and outcome

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metrics which are increasingly available to consumers. In addition, through the advancement of technology, individuals are increasingly participating in the quantified-self movement in which they can self-monitor their key health metrics, creating immense amounts of new health data that can assist in providing higher quality care. 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.

        Unlocking the Value of Data through Actionable Interventions.    The 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 for 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 in paper based and electronic medical record systems, 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 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. Data integration and processing in massive scale within the healthcare landscape is plagued by issues of highly disparate and "dirty" data characteristics. This is a significant barrier which prevents the various components of the healthcare landscape from effectively communicating and coordinating with one another to deliver higher quality care. For example, hospitals and insurance companies which have business across different states and markets face an increasingly uphill task of establishing an infrastructure and capability to assimilate, integrate and process all the disparate healthcare data they are generating. Despite billions of dollars in investment, the data and information systems resident within hospitals, physician practices, pharmacy benefit programs, urgent care centers, laboratory systems, and the other components of the healthcare landscape remain largely disconnected from each other. Interoperability frequently requires systems that add additional cost, time delay, or actions outside of the ordinary workflow. Overcoming this in scale is integral to managing large patient populations efficiently and effectively.

        The need to fully aggregate, organize, integrate, and analyze healthcare data—and translate the resulting insight into actionable and meaningful impact—is a critical challenge that the healthcare industry will continue to face for years to come. Our platform provides a solution 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

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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

        Our platforms are informed by deep clinical insights through our combination of industry-leading subject matter expertise and extensive proprietary datasets. 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.

        In deploying our technology, our clients want us to synthesize opaque, convoluted, and disparate data into actionable information aligned with individualized goals and, in turn, empower a patient and provider intervention platform that achieves 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. These platforms are applied in a variety of environments with many additional applications of the technologies being planned.

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        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. It grants us both relative and absolute insight, and informs the construction of new capabilities, predictive models, and impact predictions. It speeds our time to client impact, decreases the burden on clients choosing to do business with us, and empowers our achievement of mission and results.

        We believe that our enterprise-scale data integration and management processes are a critical capability in achieving a material improvement in clinical quality outcomes and financial performance in healthcare. We integrate data seamlessly and securely into our systems through our proprietary ETL tools and processes. This system manages the process of defining and configuring thousands of industry data feeds from our clients and partners (depicted in the diagram above as electronic health records ("EHR"), laboratory, pharmacy, patient reported, claims, paper based medical records, biometric, and hospital data feeds respectively, as examples), manages the data processing workflow, and monitors the ongoing provision and quality of data through the application of more than 2,000 data integrity checks.

        In addition to being maintained and tagged within client-specific data lakes, data we receive in the course of providing our services are statistically de-identified and stored in our MORE2 Registry®. As of December 31, 2014, this registry contained more than 9.2 billion medical events from more than 120 million unique patients, 754,000 physicians, and 248,000 clinical facilities, touching 98.2% of all U.S. counties and Puerto Rico and growing at a rate of approximately 42.6% annually since 2000. The MORE2 Registry® goes beyond just claims data to include information about demographics, enrollment, diagnoses, procedures, pharmacy, laboratory results, and deep medical record clinical data and presents a significant representative mix of commercial, HIX Marketplace, Medicare Advantage, and managed Medicaid care plan patients. The following is a sample of various components within our MORE2 Registry®.

Patient Demographic Data

 

Benefits Data

Medical Record Documentation

 

Encounter and Procedural Data

Operating Room, Procedure,

 

Pharmacy Data

Discharge Summary,

 

Imaging Report Data

Emergency Room Records

 

Laboratory & Pathology Data

Electronic Health Record Data

 

Durable Medical Equipment Data

Health Risk Assessment Data

 

Self-Reported Data

Practitioner Profile Data

 

Social History Data

Claim Diagnostic Data

 

Activities of Daily Living (ADL)

Eligibility and Enrollment Data

 

Cost Data

        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, 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 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:  Arriving at an accurate understanding, documentation, and codification of the disease states of patients is critical. In addition, through a proper understanding of each patient's needs, care can be more effectively guided and delivered, quality achieved, and financial implications understood. In order to guide the efficient use of resources to clarify the disease state of each patient across the landscape of tens of thousands of codes, analytics are employed to predictively determine whether a disease or comorbidity is being overlooked or is progressing at a rate or severity otherwise not noted. Analytics that transcend a single point in time, location, or point of view to

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      take into consideration a more holistic view both in absolute terms (i.e. solely with the patient data in mind) and relative terms (i.e. taking into consideration millions of other similar and different cases) can be achieved. In addition to determining the potential presence of specific disease and comorbidities, our analytics can be applied to determine the statistical probability of successfully confirming and resolving such a potential gap between known and suspected disease conditions. In this way, resource prioritization can be achieved.

    Clinical and quality outcomes gap presence and closure probability determination analytics:  Every patient, whether healthy or acutely, or chronically ill, needs a specific set of preventative or treatment-based healthcare services in periods specific to each patient's clinical profile. Additionally, patients with specific conditions, such as diabetes, need specific elements of care such as blood sugar testing, medication compliance, and examinations to detect complications of diabetes. Standards within the industry around quality of care have been created by organizations such as NCQA, URAC, PQA, NQF, and medical societies looking to provide thought leadership on behalf of their patients. In order to help guide patients and their physicians in addressing the preventative care and treatment needs of each patient, our predictive analytics are employed to determine each patient's clinical profile, their compliance with treatment protocols and quality measure standards, and how these match up to established quality standards. Further, our analytics are not only focused on determining accurate quality measure profiles, but also on predicting which measures that are unfulfilled today will become resolved on their own by the actions of the patient or provider independent of any new intervention. Not only do these analytics empower better quality care, but they make care more cost effective, by suggesting the avoidance of unnecessary testing, diagnostics, or treatment, that may not benefit the patient or change the patient's clinical course based upon historical patient behavior.

    Medication compliance and persistence analytics:  Critical management of many chronic conditions is the effective utilization of prescription drugs to stabilize disease progression, ease symptoms, and facilitate healing. However, many barriers exist to patients reliably filling their prescriptions and taking the medications that their physician has prescribed, including the cost of treatment, the side effects of treatment, and the patient's engagement in the treatment process. In order to determine which patients are the most likely to achieve compliance with their prescribed treatment, the least likely, and susceptible to influence, we apply predictive models that examine patients against their historical behavior patterns and clinical profiles to guide the right resources to the right patient in order to maximize medication compliance and persistence.

    Principally Relevant Provider (PRP) determination analytics:  In order to best engage a patient with the healthcare delivery system, it is important to identify the physician whom the patient considers to be his or her PRP with respect to specific issues needing attention. Particularly important for patients with chronic conditions or complex issues that see multiple physicians, the determination of which physician possesses the greatest bond can make a significant difference when seeking to assist the patient with resolution of an identified concern. In some cases, for instance, the patient's health plan assigned primary care provider may or may not be the physician that has established a trusted care provider relationship with the patient. Rather, a patient's key specialist may be most applicable to address the patient's needs and to engage the patient in effective self-management. We analyze utilization patterns, follow-up patterns, treatment compliance patterns, and other patient behaviors to help identify the provider that is most relevant to address specific issues which the patient may need addressed within their care plan.

    Targeted intervention timing optimization analytics:  While the clinical lives of patients always present opportunities for improvement, the presence of a gap does not necessarily mean that such gap should be acted upon with high intensity, or even acted upon at all depending upon

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      the historical utilization patterns of the patient. Through predictive models that examine the historical behavior patterns of the patient in combination with the gaps that need to be addressed, optimal intervention timing can be achieved to allow the patient to address his or her gap without external intervention based upon their preferences in utilizing the healthcare system, suggesting the intervention occur only after the patient would have been expected to act on their own. Often watchful waiting may be the most appropriate recommendation. By watchfully waiting and evaluating the patient's self-management of his or her issue, resources can be applied only after the patient has demonstrated a failure or delay in acting themselves. Through successful intervention timing analytics, multiple goals can be achieved: cost avoidance (by not undertaking costly interventions that may not have been needed), confusion and frustration avoidance (by not accidently directing a patient or provider to undergo an intervention when the same was imminently being done), and resource planning (by having insight into when during a year an intervention is most likely expected to be needed).

    Targeted intervention venue and logistics optimization analytics:  For those patients who have been identified with a gap that needs to be addressed, in order to cost effectively deliver the appropriate care and achieve gap closure, the right intervention tool must be selected and deployed to effectively address the specific patient and their needs. This avoids deploying a low cost activity, such as a message or phone call, when such an intervention has little or no likely or predictable ability to achieve gap closure, while also avoiding deploying high cost activities, such as a home visit or emergency room visit, when the gap could have been easily addressed through a scheduled appointment at a convenient retail clinic or provider office. Applying analytics to determine the right venue for gap closure, sensitive to the cost profile and effectiveness of each, is critical for achieving cost effective and high quality healthcare.

    Gap resolution valuation determination and prioritization analytics:  Because patients have multiple gaps and needs, particularly those patients with chronic conditions, it is important to prioritize which gaps need to be understood by the patient and addressed in a manner that increases their engagement and self-management capability, without overwhelming the patient or provider. As such, analytics must be employed throughout the year to evaluate the unresolved gaps of each patient and prioritize the resolution of such gaps based upon the combined likelihood of closure and the ultimate value of closure to the patient and their health plan. By understanding the context of each gap in light of the patient's full clinical profile and by understanding the patient's situation in light of the health plan's quality metrics and financial performance, gaps can be valued and prioritized to make sure that the most important gaps are known and addressed at the right time for each patient.

    Population simulation analytics:  We apply analytical processes to create propensity-matched patient cohorts from our MORE2 Registry® to simulate the characteristics of patients, their behavior, their providers, and how these factors translate into their utilization of healthcare resources, financial performance, and the achievement of clinical quality and outcomes goals. This simulation process allows us to effectively provide a control group for demonstrating the outcomes trajectory of such patients in comparison to populations that we manage to highlight performance variations. This simulation process also allows us to understand these populations and design effective tools for improving their quality of care and clinical outcomes. Additionally, these simulations allow us to bring new technology capabilities and associated products to market more quickly, accurately, and cost effectively. Lastly, these simulations allow us to gain insight into how a potential client population may perform, enabling us to have an additional differentiator during a sales process.

    Relative Comparative Analytics:  An increasing number of measurement, incentive, shared savings and reimbursement programs are based upon "budget neutral," "zero sum games," and other relative or comparative models. Using our data and analytics capabilities, we can inform the

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      relative comparison of population and cohort performance levels to assist in guiding strategic investment decisions. More importantly, we can perform these analytics during a relevant date of service period so that our clients can gain insight into how they are performing and how they can make changes within their patient and provider groups to improve their outcomes while there is still time within the relevant date of service period to achieve improvement. In the absence of comparative analytics, many organizations would otherwise use a previous year's results to guide changes—a set of data that often does not even become available until well into a year, let alone representing information that is long outdated and largely irrelevant when performance is not only based upon how one is doing, but moreover based upon how one is doing in comparison to others.

        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 (depicted in the diagram above as being via hard copy and electronic mail, interconnected EHR systems, telephonic interactions, in patients' homes, through mobile devices, at dedicated patient centers, through web-enabled decision support tools, in retail pharmacies, and in traditional clinical locations, as examples) in order to achieve meaningful impact with the patient and provider. Some clients utilize our analytical outputs to achieve value on their own. Others license our data-driven intervention platform to support their ability to achieve data-driven impact. Yet others engage us to not only license our data-driven intervention platform, but also provide the personnel services necessary to leverage these toolsets and actually achieve the patient and provider-level impact. Examples of our data-driven intervention platform tools include:

    point of care tools that provide patient-level insight to the healthcare provider, which guides the provider through precise data-driven topics, issues, and decision support to aid in the assessment, documentation, and care of a specific respective patient. For example, our analytics may identify that a patient's diabetes has potentially progressed—possibly due to a non-compliance with their medications. Our decision support tools provide a mechanism for this information to be made known to a provider in such a way as to help them know that a patient visit may be warranted, aid them during the patient clinical encounter to efficiently determine the situation with the patient, support proper documentation, reporting, and outcomes measurement;

    communication tools that support a wide range of notifications and interactions with patients and providers via phone calls, mail, SMS messages, e-mails, etc., at the appropriate level of implied education and language to aid in the process of achieving patient and provider actions. It also may include education outreach which coordinates the communications with health plan patients regarding their health issues and to support self-management of their conditions by guiding them to supplemental resources, coaching and health literacy;

    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 for site, scheduling, medical record data collection, abstraction, review, quality control, archiving, and process tracking—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 to provide historical and current data insight, reporting, and benchmarking to support multiple client business needs such as government-mandated

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data filings, financial planning, and compliance requirements. Examples of our business processing tools include:

    Data Warehousing and Business Intelligence.  We provide toolsets that enable comprehensive warehousing and management of healthcare data in raw, native formats as well as processed, high-integrity data. We provide the flexibility and accommodation for healthcare practice groups who have varying levels of data sophistication—from advanced electronic connectivity (i.e. remote medical practices) to onsite digitization and collection, to self-provision of medical records via fax, mail and electronic mail allowing for clinical data collection throughout the U.S. These datasets are presented to our clients' users through business intelligence systems that include flexible dashboards, parameterized reports, and ad hoc querying capabilities for summarizing key analytics, allowing for the investigation of data trends and deeper data segregation and analyses, and access to key benchmarking information. These data warehousing and business intelligence toolsets are built on industry-leading technologies to integrate our clients' data (e.g., provider, facility, patient, enrollment, benefits, lab results, pharmacy, claims, quality scores, financial metrics, performance forecasts, etc.) and the data results and benchmark information from our MORE2 Registry®. We are able to provide our clients with the ability to gain insight into both their own data and their own data in comparison to our large integrated dataset to help improve the quality of care provided to patients, drive financial performance, and aid in strategic business processes of the client organization.

    Data Management and Submission.  Leveraging our data warehousing toolsets, our solutions help our clients to manage their data and translate their data into the formats necessary for, among other needs, submission to government entities in support of quality and outcomes measurement and revenue determinations, and provision to their various internal and external business processes. These data management solutions address the formulation of data submission files in summary and patient level-data format as required by regulatory bodies, as well as the workflow processes to receive submission response files to support the reconciliation of data submissions, corrections to data submitted with response issues, and resubmission processes. These processes operate in an integrated manner with our business intelligence solutions to provide our clients visibility into the details of their data submissions at the population level, the patient level, the attributed provider level, and for user defined custom cohorts.

Illustrative Workflow and Patient Case Study

        The following is an illustrative workflow of how a healthcare organization (whether a public or private health plan, integrated healthcare delivery system, independent physician or practice association, or other provider/patient organization) may leverage our platforms.

    Stage 1: Data Integration.  Following the engagement of a new healthcare organization client, large amounts of data are integrated from multiple disparate sources within the healthcare organization related to patients, physicians, quality, payments, regulatory files, and clinical facilities. Other data sources are interconnected from sources such as hospitals, laboratories, pharmacy benefit plans, EHRs, and physicians. The initial data feeds typically "backfill" (i.e. provide for data pertaining to prior periods of time) for several years. Our platform facilitates rapid initial integration of this data, applying more than 1,100 data integrity checks. The data integrity analyses compare the potential erroneous presence, accidental absence, and potential errors within the data to our large scale comparative data sources containing billions of medical events from thousands of current and historical sources to aid in improving data quality and identifying potential gaps and errors within the new client data flows. Once integrated, data flows are scheduled at standard intervals thereafter. Some data are scheduled for monthly updates while other data flows update transactionally, whenever a data source event occurs such as a patient clinical encounter. All data connecting through our data integration platform, both

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      structured and unstructured, drop into our data repository, which we call our data lake, where they can easily be accessed by all of our platforms—analytical platform, intervention platform, and business processes platform.

    Stage 2: Advanced Analytics.  With data resident within our data lake, a series of analytical processes are applied. Key analytics begin determining the current disease status, comorbidity status, quality status, and utilization status of the patient, provider, facility, or population based on actual available data (referred to as the known current state of the patient, provider, facility, or population). A set of predictive analytics is then applied to derive models for where the broader datasets suggest the patient, provider, facility, or population have progressed to outside of the otherwise obvious data indications (referred to as the predicted current state of the patient, provider, facility, or population). Informed by our broader datasets, yet another set of predictive analytics is then applied to derive models suggesting where the patient, provider, facility, or population will progress to with respect to the analyzed conditions or issues (referred to as the predicted future state of the patient, provider, facility, or population). Examining differences between known current state, predicted current state, predicted future state, and what is referred to as the desired state pertaining to the respective goal, allows for gaps between those various states to be identified. Each gap between a current or predicted state and a desired state can then be analyzed further. To do this, for each gap, a series of analytics is undertaken to determine the (i) probability that the gap is a real gap, (ii) the value of the gap being resolved, (iii) the way through which the gap would be most likely able to be resolved, (iv) the venue at which the gap would best be resolved, (v) the timing which would be best for resolving the gap, and (vi) the predictability of the gap being able to be resolved. By undertaking these various analytical processes, not only can the field of opportunities for improvement be identified and the concrete approaches to their resolution be weighed, but also the business rules pertaining to prioritization and return on investment, or ROI, thresholds can be calculated and applied.

    Stage 3: Intervention Platforms.  With gaps identified for resolution and concrete approaches to their resolution determined, a series of platforms can then support the resolution process. For some clients this stage may be handled through their in-house resources, while for others, the client requests us to leverage our intervention platforms to achieve the realization of impact value sought by the analytical processes. For these, guided by the insights garnered from the various analytical processes, the appropriate intervention platforms can be employed to interface the right resources with the patient, provider, facility, or population to achieve the desired goal within the business rules pertaining to prioritization and ROI thresholds.

    Stage 4: Business Processes.  With actions taken by the various intervention platforms (or, in some cases, by the client's resources), resulting outcome data is then re-combined with the data resulting from all stages of our processes to inform business intelligence platforms, regulatory data submission processes, financial reporting processes, and other business processes that ultimately reflect the value achieved and complete the process initially sought by the client.

        The following is an illustrative example of how this translates to an individual patient.

        Applying the stages of our platforms, a client engaged us for the improvement of quality and financial performance within their managed Medicaid population. Following data integration, our analytics identify that a patient's diabetes is believed to be worsening rapidly. Analytics predict that the diabetes is now likely out of control and has likely progressed to where there is concern for kidney, eye, and nerve complications. Unfortunately, the analytics also identify that there is no significant evidence that these predicted comorbidities have yet been identified or addressed by the physicians within the health plan's physician network.

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        Our models gain a high level of confidence that these concerns are valid and that the value to the patient, physician, and health plan is significant. Further analytics determine that historical care patterns and the patient's activities strongly suggest that the patient has the strongest relationship for diabetes-related matters with their OB/GYN (and not their endocrinologist, dermatologist, internist, or cardiologist). The information is sent to our data-driven intervention platforms. The platforms rely on analytical outputs which predicted that this patient would respond best to a phone call encouraging a physician visit with her OB/GYN while the information is concurrently made available within ePASS®, our provider portal for patient clinical encounters. Alternatively, the patient could have been seen at a retail pharmacy with a walk-in clinic utilizing our technology platform or the physician could have received notification and accessed the information within their EHRs. During the encounter, a patient profile constructed by our data and analytics provides the OB/GYN with past medical history, medications, laboratory results, and the analytical outputs determined by our analytical platform indicating the specific areas for assessment concern, pointing out gaps in quality measures, indicating and supporting important relevant screening.

        Supported by the data and insights of our platform, the patient's diabetes progression is diagnosed. Additional goals set by the health plan around quality, screening, and patient education are achieved. A care plan is put into place. The patient gains an increased bond with his or her provider and health plan. The patient's data continues to be analyzed in the days, weeks, and months that follow. The impact results are made available to the healthcare organization showing the decreased use of the emergency room and hospital admissions by the patient, improved quality scores, and greater risk score data accuracy. The resulting decreased utilization costs, improved premium payments, incremental quality incentive payments, and improved patient retention drive material financial impact for the healthcare organization—allowing them to improve benefits, lower premiums, and, together with enhanced patient quality scores, better succeed in competitive marketing.

        While the illustrative example was focused upon managed care client applications, our platforms also support multiple additional client examples as presented below in shorter form:

    Pharmaceutical Industry.  For the pharmaceutical company seeking to successfully transition from the consumption-based industry model to the performance-based industry model, our platforms can assist in empowering pharmaceutical companies to construct highly focused programs specifically aimed at patients who are failing to be identified as candidates for improved diagnostics or treatments; are at high risk of complications or poor outcomes; or are non-compliant on specific treatment programs.

    Research.  For the contract research organization, or CRO, seeking to increase its speed, efficiency, and capabilities in a highly competitive marketplace, our platforms provide a deep and unique data source for research, clinical trial design modeling, and physician identification. Our intervention platforms can support Phase 3 and Phase 4 clinical trial processes, highly granular clinical data abstraction, directed clinical encounter activities, and a network of near-real time data aggregation that can dramatically differentiate a CRO.

Our Competitive Strengths

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

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

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        Industry-Leading Data Asset.    We maintain one of the industry's largest independent datasets in our MORE2 Registry®, representing, as of December 31, 2014, more than 120 billion medical events from more than 9.2 million unique patients, 754,000 physicians, and 248,000 clinical facilities, touching 98.2% of all U.S. counties and Puerto Rico. 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. As of December 31, 2014, our MORE2 Registry® has expanded at a rate of approximately 3.0% compounding monthly, or 42.6% annually, since 2000 as illustrated below.

MORE2 REGISTRY® GROWTH

GRAPHIC

        Fully Integrated End-To-End Solution Delivery.    Our platform is able to turn data into insights and insights into actionable interventions. Our platform covers a comprehensive range of services for our clients turning raw data into meaningful impact and allowing our clients to realize intervention benefits immediately following integration of our platform. 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 association with innovating and expanding our platform capabilities, and establishing both beneficial predictability and reliability when operated at high levels of load. We operate enterprise-grade datacenters complemented by a cloud technology based architecture that allows massive, on-demand capacity expansion and speed of execution. We integrate directly with the EHRs of many clinical facilities, bringing analytics and insight to the point of care and decreasing the process burden on providers and clinical facilities. We have a leading nationwide intervention platform services footprint and are able to support our client partners in more than 98.2% of all U.S. counties and Puerto Rico, as of December 31, 2014.

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        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. This subject matter expertise and leading research capabilities position us to stay at the forefront of industry innovations in data-driven healthcare interventions. This concentration of highly relevant subject matter expertise is uncommon in the market, and contributes to both our capabilities and our being called upon by clients, partners, and industry-leaders to address challenging and important questions.

        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. Leveraging our MORE2 Registry®, we provide healthcare insights for diverse audiences, thus driving visibility and credibility, and providing significant recognition for our toolsets, capabilities and innovation. 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, an element of reassurance for existing clients and potential clients, and ready access to resources to meet our clients' needs. We have been able to accomplish this in a manner conducive to client partnership through a variety of means, including the self-financing of individual client upfront project integration and start-up fees.

        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 larger and more robust datasets, and developing more advanced analytics from this growing dataset that deliver 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 analytics and interventions 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 enjoy long term client relationships which entail multiple separate product engagements demonstrated by our average 4.9-year tenure for our top 10 clients with an aggregate of 80 separate statements of work as of December 31, 2014. Additionally, we have approximately 90 client organizations that currently have only a limited number of services with us. Frequently we see clients that started with just one service with us realize the value that we are delivering and then expand their business with us to add additional services. We believe that we have a

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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 them 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 platform, selling to other parts of their organizations, and selling additional analytical toolsets and services to them. Our pricing model allows us to grow incrementally along with our clients' growth. We are also able to introduce new healthcare plans that require additional functionality and insights as the healthcare market becomes more complex and the regulatory environment evolves, providing us with a substantial opportunity to increase the value of our client relationships.

        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. In addition, by leveraging our sector expertise and thought leadership, we believe that we can increasingly become the partner of choice for our existing clients. The network effect created by delivering increasing client value and consequently expanding our brand and service value, coupled with our industry expertise, is also driving substantial inbound client interest.

        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. In order to continue delivering meaningful results in clinical and quality outcomes, utilization, and financial performance across the healthcare landscape, we intend to continue to invest in research and development to further enhance our data analytics and intervention platforms. For example, we recently announced the acceleration of big data processing empowering our QSI® platform, enabling a significant functionality expansion in our clinical quality outcomes measurement capabilities supporting accelerated performance for HEDIS, Stars, QARR and other measurement and reporting standards. This advancement will also support the acceleration of our related predictive analytics capabilities. As a result, we expect our clients to experience significantly reduced cycle times, allowing for complex measure calculations at speeds which are more than 10 times faster than any other comparable solution which we are aware of in the healthcare industry.

        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 which include:

    Providers:  Physicians, practice groups, hospitals, and combinations of such providers are making a transition from a fee-for-service based healthcare model environment to a quality and value based healthcare model environment. As part of this, providers are entering into shared savings, shared risk, and other forms of arrangements with private and government payors. They are investing in the technology infrastructure needed to compete and survive in the changing healthcare environment. Many of the forces being applied to healthcare payors are being pushed downstream to the provider marketplace directly through contractual arrangements, and indirectly through traditional competitive forces. Our business intelligence platforms assist providers and provider organizations to understand the current status and projected implications of the complex arrangements that are increasingly governing their marketplace. In addition, our datasets, analytical tools, and clinical encounter engagement platforms can be applied to assist these providers and provider organizations to focus on delivery of high quality care and to succeed under the increasing pressure of these market forces.

    Pharmaceutical and Life Sciences:  The significant investment in drug and treatment development pipelines creates pressure within life sciences companies to focus on the areas of greatest need and opportunity, while growing their presence in the treatment process, from simply the creation

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      of treatments, to the ongoing delivery and support of treatments that achieve desired outcomes. Our deep and growing healthcare datasets, analytical tools, and clinical encounter engagement platforms can be applied to assist life science companies in advancing their missions to improve healthcare by providing them the insights necessary for them to provide safe, effective, and affordable treatments for individuals and populations, informing the growth of their treatment portfolios and assisting in the delivery of treatment programs.

    Employer and Private Exchanges:  The growing cost of healthcare is putting pressure on employers to find creative ways to control costs while continuing to offer competitive benefits and attractive healthcare options to their employees. Our capabilities in analytics supporting the advancement of quality of care and cost effectiveness in healthcare can be applied to assisting employers in understanding and improving their populations' utilization of healthcare services to advance the design of innovative plan benefit packages, provider networks, and population management support programs.

    Direct-To-Consumer:  As consumers become increasingly interested in quantifying and improving their health, our capabilities can help them understand their relevant data and empower their ability to make better decisions in a broad range of health-related areas from informing and managing their own health-related decisions to selecting physicians, hospitals, and treatments that best fit their individual needs. Further, our datasets and connectivity with the payor and provider landscape can provide a valuable element to the consumer's increasing desire to monitor and manage their holistic healthcare profile.

        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 our reach through channel partnerships. There are many organizations in the healthcare space outside of the traditional payor and provider space that have meaningful impact on the quality of healthcare, such as retail clinics, pharmaceutical companies, CROs, large technology solution providers, and consulting firms. We believe our platform is well positioned to empower these organizations with powerful data-driven analytics and intervention insights, which can benefit their end consumers through improved care and better outcomes. For example, we launched a partnership with Walgreens, the nation's largest drugstore chain. This partnership has allowed us to leverage our proprietary data assets and distinctive analytics capabilities to bolster Walgreens' Clinics point-of-care solutions by providing clinicians with access to predictive insights about a patient's health status and data-driven intervention considerations, resulting in more efficient and higher quality standard of patient care while reducing the cost of care.

        Continue to Leverage our Technology Partnerships.    The healthcare industry has traditionally lagged behind the technology innovation curve. Big data and high-performance analytics frameworks have not yet been widely adopted by the healthcare industry. We have been a leader in the use of these high-performance technologies and analytics in the healthcare industry. We have been closely collaborating with EMC and their federated companies of VMware and Pivotal on numerous infrastructure projects to integrate and enable modern high-performance compute and storage frameworks at the point of care. Our advanced data processing and analytics capabilities, coupled with infrastructure thought leadership from leading vendors such as 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.

        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 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.

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        Selectively Pursue Acquisitions.    We plan to selectively pursue acquisitions of complementary businesses, technologies, and teams that we expect to 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.

        We hold ourselves to a high standard. We strive to ensure that each report, file, and dataset delivered to clients meets or exceeds superior standards of quality. We strive to ensure that each phone call, every patient encounter, and each customer encounter informed and supported by our analytics and platform meets or exceeds superior standards of quality. These values permeate our organization and drive our identity as a company that we believe drives growth and how we innovate, deliver our solutions to our clients, and attract and retain the best talent.

Our Technology

Big Data Platform

        Throughout the healthcare industry, data is captured from many different sources, and while standards for exchanging information between healthcare applications are emerging, much of the data associated with population health remains in disparate silos, in various formats, on paper, and is both interchanged and processed without automation. Where investments have been made in the digitization of health data, many of the resulting solutions remain "walled gardens" of information—data that is static and not easily shared or interpreted.

        Our big data technology platform was designed and developed to address these challenges. Our platform enables integration of any data source, on any hardware platform, in any data format at extremely high speeds. This advanced approach to delivering technology is comprehensive in that it provides for real-time capture, extremely rapid analytical processing and redistribution of health data. We believe that very few other healthcare technology platforms, if any, so effectively address the integration of the payor, the provider, and the patient, with high volume, at rapid velocity, with the same depth of data.

        We believe that our big data capabilities enable us to receive, integrate, and process extremely large-scale data flows at truly industry-leading speeds, creating what we believe to be a material market differentiator and value creator for us and our clients. While data integration and processing at scale within the healthcare landscape (known for its highly disparate and "dirty" data characteristics) are key technology barriers to many organizations, we believe that we have made these capabilities a true differentiator—we are able to onboard clients and maintain high velocity computes in industry-leading times.

        Our big data platform has been created through the use of internally created software coupled with industry-leading technology frameworks that are vendor-agnostic. We leverage modern big data frameworks such as Hadoop Distributed File System and Hadoop which enable our platform to store structured and unstructured data while making it readily accessible by our analytics engine. Our big data processing capabilities enable dramatic improvements in data integration and analytical cycle speed to value recognition to empower improvements for intelligent product development through the "real world" functional application. Our big data platform laid the foundation of the data fabric allowing integration into our analytical capabilities. We have moved analytics to the data instead of requiring the data to be brought to the analytics platform.

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Data Intake

        Our platform receives information from multiple external sources that are loaded into our "data lake" in its native format. Files may be received through secure FTP, web services, and direct connections to external systems. Loading the data into the data lake in its native format ensures that we maintain all data as it is received and allows users to query the data directly in its structured or unstructured format.

        Processing data in its raw format presents many technological challenges. We have developed interactive data mapping technologies to support the mapping of the raw data files to staging structures used by our platform to convert data from its native format into a structured format that can be used by all processes on our platform. Once mapped, the data is run through multiple processes to standardize the data and perform data verification and integrity checks. For example, one source may provide person's gender using code values of "1" for male and "2" for female. Other clients may use values of "M" and "F" to represent the same data. Similarly, one source may send a specific laboratory result value as 7.25 while another source may fill in significant digits and send 7250. Our platform applies our data integrity analytics to convert the incoming data to values that are uniform across our entire platform.

        Our technology platform is built upon modern big data frameworks such as Hadoop Distributed File System and Hadoop which enables our platform to store structured and unstructured data while making it readily accessible by our analytics engine.

        Data access provided by our data lake leverages scalable application program interfaces, or APIs, and service based architecture techniques enabling access to the contextual data needed to perform many different types of analytics. An API is an application program interface, or software intermediary, that makes it possible for disparate systems to communicate and function with each other. Ultimately, data is provided to the analytics process and results are stored via service based requests to provide a scalable repository of source and results data.

Technology Infrastructure

        We believe that our track record of strong service is the result of our commitment to excellence and our devotion to maintaining one of the industry's most sophisticated technology infrastructures. We have made significant investments over the past decade to build an industry-leading enterprise-scale infrastructure capable of managing the heavy computing and storage requirements of our data-driven business. Today, we employ a combination of owned, virtualized data centers along with hosted facilities to enable seamless, secure, and scalable solutions nationwide.

        Our physical compute and storage infrastructure is deployed with a hybrid approach to cloud computing. Leveraging heavily virtualized infrastructure together with orchestration and automation

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tools, we have achieved tremendous capabilities within our private cloud environment. The following diagram provides a high level overview of our key infrastructure elements.

GRAPHIC

      Our data and compute capacity is maintained within an interconnected set of infrastructure sets made up of two principal datacenters owned by us in the Washington Metro and Atlanta Metro region, and one co-located datacenter facility located in Northern Virginia, with the ability to interconnect agnostically to third-party cloud capacity providers such as those shown within the diagram. This macro architecture provides us a significant ability to maintain both enterprise-level capacity and redundancy, while also achieving significant flexibility and cost effectiveness for burst capacity needs.

        We have a proven track record in implementing virtualization as our current datacenters are over 85% virtualized using VMware technologies. Operations of the virtualization technologies are streamlined by the orchestration, automation, and reporting capabilities provided by our private cloud and integration with public cloud service providers. These technologies will be used to provide computing, storage, and networking components to the hosting environment and provide operational efficiencies and cost optimization for the corporation.

        In partnership with EMC, VMware, and Pivotal, we have implemented a sophisticated hybrid cloud and service based application stack design, enabling "burst" capacity architecture to allow provider-agnostic utilization of public cloud capacity if such capacity is required. Our virtualization technology has been integrated with automation and orchestration technology to create a cloud environment that provides both Infrastructure and Platform as Service capabilities. These service based capabilities allow us to dynamically expand our compute capacity in real time and provide the business with a cost effective and nimble platform. By leveraging both private and public cloud offerings, we can provide efficient, elastic, and cost effective compute resources based on the operational needs of our clients. We believe we are pioneers in the use of big data technology and high performance compute technology stack at the point of care in our industry.

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        Our platform is built utilizing an innovative enterprise infrastructure platform enabling robust performance scaling, strong security, high availability, and advanced business continuity options. The building blocks of this infrastructure consist of the following:

    Multiple data centers connected by redundant high-speed WAN connections;

    High competency and utilization of virtualization technologies;

    Rapid provisioning of computing capabilities to support the dynamic elasticity needed to support the variable computing needs of the application;

    Measured service to optimize resource utilization and provide transparency of the utilized services; and

    Available hosting facilities providing physical structure compliance with Federal Information Security Management Act, or FISMA, standards.

        The following diagram provides a high-level view of our key platform elements.

GRAPHIC

Disaster Recovery

        Our contingency program is designed to provide an immediate response and subsequent recovery from unplanned business disruptions. Supported by our Washington, DC Metro, Atlanta Metro, and Northern Virginia data centers, our contingency program provides a coordinated emergency response foundation across the organization. The program includes business continuity, emergency occupant, security incident response, and disaster recovery plans that encompass all areas of our technology and business operations. These interrelated processes align to provide maximum protection and risk mitigation. In addition to company-wide plans, specific details on event response and subsequent business recovery actions and activities are included within each respective business unit plan.

Network Operations Center

        We maintain a central network operations center, or NOC, where systems are monitored to ensure proper operation and capacity utilization. The NOC monitors and collects information about a

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multitude of technology operating metrics regarding system load and status. In conjunction with the rapid provisioning capability, automation, and standardization, the NOC provides us with the automated capabilities to oversee and manage our technology resources in order to meet business demands.

Infrastructure Certification and Compliance

        We leverage third party attestations to test and validate our technology controls and operating framework. Among these attestations, a nationally recognized professional services firm has conducted an annual Statement on Standards for Attestation Engagements, or SSAE, No. 16, Reporting on Controls at a Service Organization audit of our toolsets and infrastructure for the last several years. We also undergo third party audits and assessments as required by our clients.

Privacy Management and Data Security

        Protected health information is perhaps the most sensitive component of personal information. It is highly important that information about an individual's healthcare is properly and thoroughly protected from any inappropriate access, use and disclosure. Given the industry vertical in which we operate, we realize the importance of the safety and sensitivity of personal health information. We have been a trusted partner to our clients and are committed to ensuring the security and privacy of our client data, enterprise data, and our systems through the application of highly trained personnel, robust processes, and technology. Our privacy and security management includes:

    governance, frameworks, and models to promote good decision making and accountability. Our comprehensive privacy and security program is based on industry practices including those of the National Institute of Standards and Technology, the Control Objectives for Information and Related Technology, Defense Information Systems Agency, and FISMA;

    an internal security council, which advises on and prioritizes the development of information security initiatives, projects, and policies;

    a layered approach to privacy and security management to avoid single points of failure;

    ongoing evaluation of privacy and security practices to promote continuous improvement;

    use of safeguards and controls including: administrative, technical, and physical safeguards;

    collaboration with our clients on best security and privacy practices; and

    working closely with leading researchers, thought leaders, and policy makers.

Our Platforms' Components

        Our platforms are composed of analytical and data-driven intervention components that collectively comprise a fully integrated suite of systems designed, developed, and maintained to achieve client value. The following are our key toolsets that we use to deliver our client solutions.

Data Integration Toolsets

        iPort™.    iPort is our data integration and management process toolset. This proprietary toolset leverages a decade of dataset extraction, transform, and load experience, in combination with data format insights gained from analysis of our extensive MORE2 Registry® dataset, to enable high volume data integration at enterprise scale. Applying more than 1,100 data integrity checks constructed from the analysis of data feeds that have constituted the 9.2 billion medical events within the MORE2 Registry®, iPort™ is able to manage data integration through an advanced exception rules processing—thus empowering both high throughput rates and accuracy. With data feed profiles monitoring for

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characteristics ranging from receipt timing, content, and format, to referential integrity, and trend consistency, iPort™ processes the integration of thousands of data feeds received by us while maintaining state-of-the-art security protocols and HIPAA compliance.

        EHR Integration Engine.    Our EHR interoperability is a capability that enables us to both (a) push patient-specific and provider-specific data and analytical results to EHR platforms, and (b) aggregate clinical data from patient-specific and provider-specific content within EHR platforms in a highly efficient manner. Designed to achieve these tasks within both cloud-based and single-install EHR environments, our interoperability enables both the capture of clinical data and the delivery of data-driven interventions at the clinical point-of-care within the workflow of the clinical environment.

Advanced Analytics Toolsets

        In addition to the innovative analytics capabilities discussed above under "—Our Platforms—Advanced Analytics," our data analytics platform includes the following key toolsets to facilitate our provision of data analytics services to our clients:

        Predictive Clinical Insight System (PCIS™).    PCIS™ identifies the diagnoses and comorbidities that may exist for a patient but which are incompletely or improperly reflected within the clinical profile of the patient as known to the patient's health plan. The PCIS™ system is designed to evaluate patients for undocumented conditions, worsening conditions, and uncoded conditions that are important for the effective ongoing management of the patient. Each of these gaps represents a potential incongruence between the "data picture" and the "true clinical picture" of the patient. These gaps, if unresolved, can prevent the proper care and resources to be directed to the respective patient, as well as cause health plans to recognize significant financial losses due to reimbursement inaccuracy, failed quality improvement goals, and utilization waste. Upon identifying each disease and comorbidity incongruence, PCIS™ generates and reports a potential impact, probability, and prioritization for the resolution of each gap. Evidence of unconfirmed diagnosis, worsening disease states, overlooked chronic conditions, implications of durable medical equipment, absences of coding specificity, and coding combinations are but a few examples of categorical analysis that are undertaken by PCIS™.

        Quality Spectrum Insights Suite (QSI®, QSFD® and QSCL®).    These toolsets provide a flexible run-time engine and user-friendly tools for the design, development, and deployment of a broad set of healthcare data analytics across the spectrum of clinical and quality outcomes, healthcare utilization, spending patterns, provider and network performance, and patient risk profiles. The advanced graphical user interface (provided through Quality Spectrum Flowchart Designer, or QSFD®) empowers clients' clinical, product development, and research staff to achieve superior analytical functionality without having advanced statistical, epidemiological, or programming experience.

        QSI® operates on both traditional relational database architectures, as well as on advanced big data architectures within the QSCL® and QSI®-XL versions of the system. Core to its architecture is a proprietary Massively Parallel Processing (MPP) engine utilizing a Shared Nothing processing approach that scales linearly with additional processors, and a highly scalable grid storage array, enabling the development of an exceptional generation of toolsets driven by near-real time analytics across extremely large datasets.

        Monthly Member Detail Map (MMDM™).    The MMDM™ aggregates analytical outputs of other analytical toolsets to arrive at a coordinated gap resolution plan informing intervention strategies to resolve gaps in care, quality, and financial performance across large populations. To achieve this, the MMDM™ uses targeted patient-specific, site-specific, and provider-specific predictive analytics to enable and direct the right intervention for the right patient, in the right venue, at the right time. In addition to layering, prioritizing, and chronologically orchestrating data-driven intervention plans, the MMDM™ also enables the coexistence of Inovalon-driven analytics alongside client and third-party

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initiatives. The analytical processes necessary to assemble the separate outputs of other analytical toolsets and creating the MMDM™ output are highly complex but highly valuable in translating such disparate analyses into a practical operating plan to achieve positive impact for the provider and patient.

Intervention Toolsets

        ePASS®.    Our electronic patient assessment solution suite, or ePASS®, is a web-enabled, point-of-care decision support tool designed to deliver both patient-level insight and guided clinical decision support. Through the use of ePASS®, the point-of-care clinical provider is able to access patient- specific information and is guided through data-driven topics for their consideration.

        The ePASS® tool offers clinicians insight into the patient profile analytically compiled from claims data (e.g., procedures, admissions, diagnoses, durable medical equipment, nursing homes, etc.), prescription drug data, laboratory data, clinical data, and patient reported data. Additionally, the outputs from our analytical processes translate into patient-specific questions and guidance within the ePASS® toolset availing the clinician to potential concerns around disease, quality, utilization, medication adherence, preventative medicine, patient education, and many other areas of focus. In addition to its core functionality, ePASS® is easily configured to allow custom analytics, question sets, and testing follow-up to be incorporated for specific needs. ePASS® patient-specific, point-of-care documentation and decision support capabilities generates medical record documentation in a regulatory-compliant format to support treatment plans, continuity of care, and patient data accuracy. Ultimately, the use of ePASS® patient data access and decision support capability results in not only a more comprehensive clinical encounter, but a more efficient encounter.

        Site Review Support Application (SRSA™).    SRSA™ coordinates clinical data collection at facilities across the nation. To achieve this, as a first step, SRSA™ orchestrates the determination of which clinical data medium and transfer modality may be most efficiently achieved (e.g., remote EHR access, EHR data export, fully integrated EHR interoperability, paper-based medical records, etc.). Once data mediums are determined, SRSA™ undertakes necessary steps of facility communications, onsite scheduling, data abstraction, review, and quality control. During the fourth quarter of 2014, Inovalon launched the next generation of SRSA™, known as SAFHIRE™. This next generation of SRSA™ advances our ability to aggregate, quality control, and process clinical data more efficiently and on a greater scale than ever before, enhancing the ability to interact with clinical facilities more effectively and load balance workflows across Inovalon's nationwide presence.

        Integrated Data Collection Tool (iDCT™).    The iDCT™ facilitates the accurate and efficient recordation of clinical information into discrete data elements from a wide variety of clinical data sources. The iDCT™ incorporates both hard and soft error correction and quality control capabilities supporting the comprehensive data review and audit trail development process. Deployed in both cloud-based configurations and through an "occasionally connected" mobile configuration, the iDCT™ allows for clinical data abstraction in large volumes.

        Integrated Telephonic Communication Coordinator (iTCC™).    In order to achieve effective provider and patient engagement, outbound and inbound communications must be highly targeted based upon analytics and informed with integrated patient and provider profiles to make communications effective and efficient. iTCC™ supports this communication to ensure that value is delivered and program goals are achieved for clients. The iTCC™ manages the communications and logistics of the following value delivery modalities:

    Encounter Facilitation:  Through traditional and electronically generated letters and targeted telephonic outreach, iTCC™ connects patients with providers to improve care management, clinical outcomes, and prospective reimbursement rates.

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    Supplemental Patient Encounter:  In certain situations, patients are unable to participate in a traditional office encounter within a desired or optimal timeline. For these cases, a Supplemental Patient Encounter (e.g., in-home encounter, retail clinic encounter, or other facility enabling a clinician and patient face-to-face encounter opportunity to occur) can be performed to achieve patient assessment, care, quality, documentation, and other goals of an analytically-driven and data-driven encounter. iTCC™ manages the process of coordinating such encounters when this type of intervention is indicated by our analytics.

    Patient Education Outreach:  iTCC™ supports data-driven outreach in written and telephonic modalities to educate a patient regarding their health issues and to support patient-specific self-management of their conditions by guiding patients to community resources, providing coaching, and providing health education and health literacy support.

Business Processing Toolsets

        Claims Aggregation, Analysis and Submissions system, or CAAS™.    CAAS™ provides comprehensive claims data warehousing and processing to support government-mandated data submissions and cost reporting. It supports the integration of data in the raw, native format with strong data quality oversight to ensure ETL data accuracy. As a component of regulatory compliance, the CAAS™ system manages the formulation of de-identified patient-level datasets and provides a solution to manage and respond in a timely manner to rejected, edited records/reports from HHS.

        CAAS™ serves as a staging warehouse and processing system where all pertinent submission data is stored, and on which analytics are run to identify the data appropriate for submission including:

    The maintenance of longitudinal matching between the de-identified submission data and the identified data within the CAAS™ data warehouse to achieve full lineage and auditability;

    The identification of eligible claims for risk adjustment calculations, and codification/indexing of claims excluded from calculations for quality assurance analysis;

    The replication of HHS risk models to calculate risk scores based upon available data;

    The assignment of patients into models and risk score calculation categories;

    The calculation of risk score components including demographic factors, Hierarchical Condition Categories, or HCCs, HCC groups, interactions, severity adjustment, and cost sharing reduction adjustments; and

    Accumulation calculations of patient-specific costs against attachment points and caps for reinsurance submissions.

        INDICESTM.    Our INDICES™ toolset is an enterprise-level, web-enabled business intelligence reporting toolset that provides visualization of data and results to authorize client users via dashboards, reports, and ad hoc queries. INDICES™ is built on online analytical processes (OLAP) technologies to integrate our clients' data (e.g., patient, enrollment, lab results, pharmacy, claims, etc.), the results from our data analytics and data-driven interventions, and benchmark information from our MORE2 Registry®, to provide our clients with the ability to gain insight into the multiple facets of their patients, providers, and facility network. INDICES™ supports our clients' goals to improve the quality of care provided to patients, drive financial performance, and aid in the support of their strategic business and care decisions.

        In addition to enabling real-time insight into common considerations such as utilization, member demographics, and financial performance across populations and customized cohorts, the INDICES™ toolset also provides valuable business intelligence into the analysis of highly complex and valuable considerations in healthcare. For example, INDICES™ can provide users patient- level risk

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sub-segmented by plan-defined characteristics; population, cohort, and patient-level premium revenue and risk-adjusted revenue sub- segmented by plan-defined characteristics; population, cohort, and patient- level reinsurance accumulation sub-segmented by plan-defined characteristics; population, cohort, and patient-level medical loss ratios sub-segmented by plan-defined characteristics; and population, cohort, and patient-level Edge Server processing analysis and results reconciliation. Further, INDICES™ provides insight into highly sophisticated analytics such as quality outcome score projections for future reporting periods which necessarily take into consideration the impact of national score projections on individual Star rating thresholds as set by CMS.

Our Clients

        For over 16 years, we have provided quality services to our clients. During that time, we have built a leading position and have become a true thought leader and innovator in our industry. We have achieved significant scale, and we believe that we play a key role in the U.S. healthcare market. During 2014, we had more than 100 clients providing services to approximately 200 patient populations through hundreds of separate statements of work. Our clients include the largest health plans in the nation, 17 of the top 25 health plans by size as reported by Atlantic Information Services, accreditation organizations, physician organizations, pharmaceutical companies, academic institutions, and group purchasing organizations. For the year ended December 31, 2013, Blue Cross Blue Shield of Michigan, EmblemHealth, HealthFirst, and WellCare each accounted for between 10% and 12% of our total revenue. For the year ended December 31, 2014, each of these clients remained significant clients of ours; however, as our company grew, they were no longer greater than 10% of our revenue, while Independence Blue Cross and Anthem (formerly known as WellPoint) each expanded their business with us to account for between 11% and 12% of our total revenue during the year. During 2014, we provided services to a broad and diverse group of clients of various sizes in markets around the country.

Client Services Support

        Because our analytics and data-driven intervention services speak to a complex set of industry pressures, we have chosen to structure our client services organization around associates with industry-leading subject matter expertise. This approach affords our clients the opportunity to leverage their client services support as consultative partners, providing greater opportunity to maximize the value clients receive from our platforms. By interacting with our clients in this manner, we are able to leverage our associate industry-specific knowledge to better anticipate client needs and identify opportunities for our clients in the markets they serve. We believe our clients highly value this differentiated approach and, along with it, the industry, technological, and product expertise our associates possess.

        Client services support teams are assigned to our clients, and receive support from client service general managers and their teams of subject matter experts. The client service general managers are responsible for the end-to-end delivery of our solutions and contractual commitments.

Sales and Marketing

        We believe that our sales and marketing initiatives are key to capitalizing on our significant market and growth opportunities. While we have successfully leveraged our sales and marketing as we have grown, we believe that additional strategic investments in sales and marketing will enable us to increasingly seize on the healthcare industry's need for data analytics and data-driven intervention services.

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        We sell our platform primarily through three avenues:

    Business development led by product and management personnel:  We benefit significantly from the subject matter expertise, market credibility, thought leadership, and relationships of our executives, senior management, and product leaders within the industry. They have played, and are expected to continue to play, a significant role in the establishment and ongoing development of our client relationships.

    Business Development led by dedicated sales personnel:  We have a dedicated, direct sales team which is comprised of focused field sales professionals who are organized principally by geography and product type. Our dedicated sales personnel are supported by a sales operations staff, including product technology experts, lead generation personnel, and sales data personnel.

    Business development led by strategic channel relationships:  We increasingly are developing and expect to expand our use of strategic partnerships and channel relationships for the establishment and development of new and existing clients.

        Our marketing and communications strategies are centered on initiatives that drive awareness of our company and capabilities. These initiatives include: educating the market about our company broadly; hosting speaking engagements; disseminating articles discussing data trends and metrics, and strategic interfacing with key business and trade media personnel. We employ a broad array of specific events to facilitate these initiatives, including but not limited to:

    Sponsorship and partnership of key industry conferences;

    Client-focused events and programs;

    Hosting our annual Client Congress highlighted by healthcare leaders, industry icons and senior government officials sharing best practices, strategies, and trends;

    Web and social properties, digital and video content marketing, creative online advertising, and blogs; and

    Hosted webinars, direct mail, analyst relations, and media relations.

        In addition, in order to enhance our value proposition, our sales and marketing staff develop best practices tools, case studies, and educational materials to drive deeper client utilization and engagement.

Operations

        Our operations are divided into two groups. Our IT operations group manages the process steps from data receipt through to the generation of analytical outputs. Our services operations group manages the process steps applied to achieve impact through our data-driven intervention platforms.

IT Operations Group

        We achieve excellence in the operation of our technology based on a foundation of service management aligned with data integration, data provisioning, system support, and security operations. These operational processes are measured clearly through a framework of key performance indicators, which seek to provide an optimal level of transparency and control.

        We have implemented a rigorous command and control structure for maintaining availability of production systems and ensuring the security of technology infrastructure. Our NOC is responsible for monitoring network and systems, security incident response, and management and communication as well as the oversight of planned system maintenance. The personnel of the NOC are also responsible for invoking our business continuity plan when appropriate.

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        The security operations within our NOC maintains the confidentiality, integrity, and availability of our production systems and technology infrastructure by maintaining security situational awareness, as well as coordinating security incident response and proactively protecting sensitive data. The security operations team utilizes a variety of tools and techniques to identify, contain, remediate, and gather intelligence on both known and emerging technology threats. Reports are tracked through automated event management triggers and communicated to leadership through our business service management layer.

        We have a comprehensive framework for managing change control, problem management, incident and event management, service management, and production operations. We use a defined quality change control management system for managing technology changes.

        Product support integration across all of our solutions enables commonality of processes—allowing our clients to benefit from increased technology operational efficiencies. Regardless of the efficiencies achieved, we are continuously enhancing our technology product operations through the dedication of the process automation and performance assurance team focused on designing and deploying zero-touch capabilities.

Services Operations Group

        Many of our clients utilize the analytical outputs of our platform to feed into their own internal systems to achieve value within the provider and patient base. Other clients license our data-driven intervention platforms to facilitate the realization of value from our analytics. For still other clients, our service support personnel operate our data-driven intervention platforms to deliver end-to-end value realization. For these clients, through the implementation of our sophisticated platforms, we leverage our analytical output to provide data-driven intervention support services at the varying points of care necessary to achieve the goals of our clients. This unique end-to-end approach implements the solutions necessary to turn insight into meaningful impact and realized value on a national scale.

        One of the centerpieces of our services operations is our strong management systems which serve as vehicles to drive transparency, ownership and execution. We enable our management systems to allow general managers and operational Leaders the ability to "see around the corner," and be ambidextrous in how they balance achieving efficiency gains while also focusing on exceptional client value delivery.

Competition

        We compete with a broad and diverse set of businesses. We believe the competitive landscape is highly fragmented with no single competitor offering similarly expansive capabilities and solution offerings in healthcare data analytics and data-driven interventions. Our primary competitive challenge is to demonstrate to our existing and potential clients the value of utilizing our platforms rather than developing or assembling their own alternative capabilities. However, we believe that the combination of our competitive strengths and successful culture of innovation, including our industry-leading analytics and data asset, the time-tested and real-world-tested nature of our platforms, and subject-matter expertise of our associates, make it time and cost prohibitive for our clients to replace or replicate all that we offer without facing material risk.

        The competitive landscape can be characterized by the following categories of companies that provide capabilities or solutions that compete with one or more components of our platforms:

    Providers of enterprise-scale, industry agnostic IT solutions, such as Oracle, Dell, SAP, SAS, and IBM;

    Large-scale IT consultants and third-party service providers, such as Accenture and Deloitte Consulting;

    Large-scale healthcare-specific solutions providers, such as McKesson, OptumHealth, Truven, and Verisk;

    Point solution providers, such as DST Health, The Advisory Board, Alere, Altegra, Matrix, edifecs, and Silverlink.

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Thought Leadership and Subject Matter Expertise

        Industry-Leading Research Team.    Our research team has significant research experience that includes advanced econometric and predictive modeling expertise, and the development and implementation of clinical research designs. The team includes PhDs in Economics/Econometrics, Pharmacy, Molecular Genetics, Psychology, and Public Health, multiple MS degrees in Social Medicine and Healthcare Administration, Experimental Psychology, Economics, and Biostatistics, experienced in big data and geo-mapping. In addition, dedicated medical doctors on the team and contributing medical doctor personnel within the broader company are dedicated to the research and development of our technologies.

        Our subject-matter experts are sought-after for research focusing on:

    Health economics and outcomes research and population health studies;

    Evaluating comparative effectiveness of health plan programs, practice groups, and treatments;

    Development and testing of new quality performance measures;

    Assessing cost effectiveness of medical care and interventions; and

    Identifying meaningful impact in clinical outcomes and financial performance.

        Industry-Leading Database Resources.    Our research group combines advanced modeling and statistical analysis expertise with the power of our MORE2 Registry®. Additionally, the research team leverages a wide range of healthcare database resources, including PHARM data, Area Health Resource Files, survey databases, market source geo data including detailed socioeconomic and sociodemographic data at the zipcode level, household and individual level, cost data, and other health data files.

        Strategic Partnerships.    Our research team has developed relationships throughout the healthcare service delivery community. This has resulted in a variety of funded research engagements that have provided valuable insight into the healthcare challenges facing stakeholders within the healthcare industry from payors to regulators, health plans to practice groups, and pharmaceutical companies to trade associations. The following highlights some of this work.

        National Committee for Quality Assurance:    NCQA is a not-for- profit organization dedicated to improving healthcare quality. NCQA has played a key role in driving improvement throughout the healthcare system and helping to elevate the issue of healthcare quality to the top of the national agenda. NCQA has repeatedly contracted our research team to assist with quality measure testing work beginning in 2010. The research team has utilized our large nationally representative Medicare Advantage database to develop and/or validate several key quality measures for NCQA:

        For a CMS contract, NCQA subcontracted with us to assist with testing and refining the high profile quality measure, Health Plan All-Cause Hospital Readmission measure, or PCR, which has been adopted by CMS for the Five Star quality measurement program, giving purchasers, including CMS, additional insight into the quality of care provided to Medicare beneficiaries.

        NCQA has also subcontracted with us to assist in testing and refining a new measure of hospitalizations for potentially preventable complications (HPC) by testing alternate statistical models. The final coefficients will be used by NCQA to calculate case-mix adjusted rates, or expected rates, for PCR and PAH measures at the H-contract level to measure plan performance.

        We supported NCQA to test two new overuse measures: (1) Non-Recommended PSA-Based Screening in Older Men and (2) Non-Recommended Colorectal Cancer Screening in Older Adults. This work was presented jointly at the Academy Health Annual Research Meeting in San Diego in June 2014.

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        Industry Dual Eligible Study.    Patients who are eligible for both Medicare and Medicaid, referred to as Dual Eligibles, have been found to suffer from health disparities in achieving high quality outcomes of care compared to non-dual patients. In 2013 we investigated this issue and published the industry's largest study on this phenomena, entitled "The Impact of Dual Eligible Populations on CMS Five-Star Quality Measures and Patient Outcomes in Medicare Advantage Health Plans," released on October 30, 2013. This study was widely reviewed and prompted several industry leaders to approach the company and request further analysis into factors within the vulnerable population that statistically impact the achievement of certain quality outcomes given the same quality of care. Working with the senior management of multiple health plans (encompassing large, small, national, regional, publicly traded, and non-profit organizations) and in consultation with CMS and other key stakeholders, Inovalon is undertaking a more in-depth analysis of 2.3 million Medicare Advantage patients (28% of whom are dual eligible) making it the largest study of its type ever undertaken by the industry to examine these issues.

        America's Health Insurance Plan, or AHIP.    This is the national trade association representing the health insurance industry. AHIP's members provide health and supplemental benefits to more than 200 million Americans through employer-sponsored coverage, the individual insurance market, and public programs such as Medicare and Medicaid. AHIP's Center for Policy and Research conducts and publishes original research and provides analysis and commentary on the research of others. We have been asked to collaborate with AHIP on a variety of research efforts, including the study of Medicare Advantage readmissions which became one of the largest studies of this type ever performed. This work resulted in the publication of this research within the American Journal of Managed Care in 2012: Lemieux J, Sennett C, Wang R, Mulligan T, Bumbaugh J.; Hospital Readmission Rates in Medicare Advantage Plans. American Journal of Managed Care. 18(2) 2012: 96-104.

        The Heart Rhythm Society, or HRS.    This is a leading international organization in science, education, and advocacy for cardiac arrhythmia professionals and patients. HRS engaged our research team to test a new measure for heart rhythm care, "cardiac tamponade and/or pericardiocentesis following atrial fibrillation ablation." Our team leveraged our datasets and analytical platforms to generate physician and facility level measure scores using a three year rolling average criteria to support performance gap, validity, and reliability testing for submission to the NQF. This research was presented at the American Heart Association annual Quality Care Outcomes Research conference in Baltimore in June 2014.

        Inovalon Research Team Conference Presentations:    The research team further enhances our contribution to improvement of health care by publishing and presenting results impacting many diverse areas of the nation's health care delivery system. Over the past two years we have presented at over 20 major academic, research, and healthcare-related conferences and have published multiple peer-reviewed manuscripts in widely cited industry journals.

Intellectual Property

        We rely on copyright, trademark, and trade secret laws as well as confidentiality agreements, licenses, and other agreements with employees, consultants, vendors, and customers. We also seek to control access to and distribution of our proprietary software, confidential information and know- how, technology, and other intellectual property. Historically, because our initial technological innovations were primarily algorithmic in nature, these innovations were well suited to trade secret protection. Accordingly, and due to the complex, time intensive, and costly patent process, with somewhat limited utility for business processes, the use of patents has not been compelling for us. However, we have begun to seek patents recently and expect to continue to do so in the future.

        We own and use trademarks in connection with our applications and services, including both unregistered common law marks and issued trademark registrations in the United States. Our material

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trademarks, service marks and other marks include: CAASTM, CARA®, Caresync Advantage, CCS Advantage®, CEDITM, ChaseWiseTM, Circle Logo®, Data-Driven Improvements in Health CareTM, Distributed AnalyticsTM, EMR AccelerationTM, eCAAS Advantage®, ePASS®, Healthcare Empowered®, Healthier Members, Healthier Business®, HEDIS Advantage, HCC SurveillanceTM, HIX Foundation®, iDCTTM, INDICESTM, Inovalon, Inovalon—US, Inovalon—EU, Inovalon Healthcare Empowered (and Spiral Design to left)—EU, Inovalon (and Spiral Design on top), Inovalon (and Spiral Design to left), Inovalon Healthcare Empowered (and Spiral Design on top), Inovalon Healthcare Empowered (and Spiral Design to left)—US, Inovalon Healthcare Empowered (wordmark), Insights: a business intelligence solution, iPORTTM, iTCCTM, MORE2 Registry®, PCISTM, Prospective Advantage®, QSCL®, QSFD®, QSI®, SRSATM, Star Advantage®, Turning Data into Insight and Insight into Action®, and We See SolutionsTM. We also have trademark applications pending to register marks in the United States and European Union.

Our Employees

        As of December 31, 2014, we had a total of 2,474 associates across four areas: Technology, Innovation and Product, Data-driven Client Services, and Selling, General and Administrative. There were 1,565 full-time associates and 909 part-time associates. None of our associates are represented by a labor union, and all of our associates currently work in the U.S. and its territories (Puerto Rico), and we consider our current relations with our associates to be good.

Requirements Regarding the Privacy and Security of Personal Information

        HIPAA and Other Privacy and Security Requirements.    There are numerous U.S. federal and state laws and regulations related to the privacy and security of personal information. In particular, regulations promulgated pursuant to HIPAA establish privacy and security standards that limit the use and disclosure of PHI and require the implementation of administrative, physical, and technical safeguards to ensure the confidentiality, integrity, and availability of individually identifiable health information in electronic form. Our health plan customers, as well as healthcare clearinghouses and certain providers with which we may have or may establish business relationships, are covered entities that are regulated under HIPAA. HITECH and the Omnibus Final Rule significantly expanded HIPAA's privacy and security requirements. Among other things, HITECH and the Omnibus Final Rule 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. Under HIPAA and our contractual agreements with our customers, we are considered a "business associate" to our customers and thus are directly subject to HIPAA's privacy and security standards. In order to provide our covered entity clients with services that involve the use or disclosure of PHI, HIPAA requires our clients to enter into business associate agreements with our clients. Such agreements must, among other things, require us to:

    limit how we will use and disclose PHI;

    implement reasonable administrative, physical, and technical safeguards to protect such information from misuse;

    enter into similar agreements with our agents and subcontractors that have access to the information;

    report security incidents, breaches, and other inappropriate uses or disclosures of the information; and

    assist the customer in question with certain of its duties under the privacy standards.

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        In addition to HIPAA, HITECH, and their implementing regulations, we may be subject to other state and federal privacy laws, including laws that prohibit unfair privacy and security practices and deceptive statements about privacy and security and laws that place specific requirements on certain types of activities, such as data security and texting. We may also be subject to state medical record privacy laws, which may be more strict than HIPAA, including the laws of the state of California.

        Data Protection and Breaches.    In recent years, there have been a number of well-publicized data breaches involving the improper use and disclosure of individuals' personal information. Many states have responded to these incidents by enacting laws requiring holders of personal information to maintain safeguards and to take certain actions in response to a data breach, such as providing prompt notification of the breach to affected individuals and state officials. In addition, under HIPAA and pursuant to our business associate agreement obligations, we must report breaches of unsecured PHI to our contractual partners following discovery of the breach. Notification must also be made in certain circumstances to affected individuals HHS and the media.

        We have implemented and maintain physical, technical, and administrative safeguards intended to protect individually identifiable health information and have processes in place to assist us in complying with all applicable laws, regulations, and contractual requirements regarding the protection of these data and properly responding to any security breaches or incidents. Furthermore, in many cases, applicable state laws, including breach notification requirements, are not preempted by the HIPAA privacy and security standards and are subject to interpretation by various courts and other governmental authorities, thereby complicating our compliance efforts. Where a state law is not preempted by HIPAA, we may also be subject to that state law's requirements, in addition to our obligations under HIPAA, HITECH, and their implementing regulations. Additionally, state and federal laws regarding deceptive practices may apply to public assurances we give to individuals about the security of services we provide on behalf of our contractual customers.

        Other Requirements.    In addition to HIPAA, numerous other U.S. state and federal laws govern the collection, dissemination, use, access to, and confidentiality of individually identifiable health information and healthcare provider information. Some states also are considering new laws and regulations that further protect the confidentiality, privacy, and security of medical records or other types of medical information. Further, Congress and a number of states have considered or are considering prohibitions or limitations on the disclosure of medical or other information to individuals or entities located outside of the United States.

Corporate Information

        Our executive offices are located at 4321 Collington Road Bowie, Maryland 20716. Our telephone number at our executive offices is (301) 809-4000 and our corporate website is www.inovalon.com. The information on, or accessible through, our website is not incorporated into and does not constitute a part of this Annual Report on Form 10-K or any other report or document we file with or furnish to the SEC. We completed our initial public offering in February 2015 and our Class A common stock is listed on the NASDAQ Global Select Market under the symbol "INOV."

Available Information

        We file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports with the SEC. You may obtain copies of these documents by visiting the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, by calling the Securities and Exchange Commission, or SEC, at 1-800-SEC-0330 or by accessing the SEC's website at www.sec.gov. In addition, as soon as reasonably practicable after such materials are furnished to the SEC, we make copies of these documents available

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to the public free of charge through our website or by contacting our Secretary at the address set forth above under "—Corporate Information."

        Our Board of Directors Corporate Governance Charter, Code of Business Conduct and Ethics, and the charters of our audit committee, compensation committee, nominating and corporate governance committee and security and compliance committee are all available in the Governance Documents section of the Corporate Information section of our website.

Financial Information

        For required financial information related to our operations, please refer to our consolidated financial statements, including the notes thereto, included with this Annual Report on Form 10-K.

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Item 1A.    Risk Factors

        Set forth below are the risks that we believe are material to our stockholders. You should carefully consider the following risks in evaluating our Company and our business. The occurrence of any of the following risks could materially adversely impact our financial condition, results of operations, cash flow, the market price of shares of our common stock and our ability to, among other things, satisfy our debt service obligations and to make distributions to our stockholders, which in turn could cause our stockholders to lose all or a part of their investment. Some statements in this report including statements in the following risk factors constitute forward-looking statements. Please refer to the section entitled "Special Note Regarding Forward-Looking Statements" at the beginning of this Annual Report on Form 10-K.

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 2011, with total revenues growing from approximately $239.7 million for the year ended December 31, 2011 to approximately $361.5 million for the year ended December 31, 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 Patient Analytics Months ("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;

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

    our ability to develop complementary services;

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    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 two clients individually accounted for 12%, and 11%, respectively, of our revenues for the year ended December 31, 2014. Moreover, our top ten clients accounted for approximately 76% of our revenues for the year ended December 31, 2014. The engagement between these clients and us generally is covered through multiple separate statements of work ("SOWs"), each often with different and/or staggered terms which are all multi-year in their duration, ranging typically 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.

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

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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 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

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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 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

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      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 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.

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        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 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.

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        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.

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.

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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 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.

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        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 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.

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        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 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

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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; 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

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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.

        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

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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 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 Annual Report. 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.

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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 our initial public offering.

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 this Annual Report. 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

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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 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

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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.

Risks Related to Our Class A Common Stock

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,

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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, have significant influence over us, 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 by holders of our Class B common stock. As of the date of this Annual Report, holders of our Class B common stock beneficially own an aggregate of 98.0% of the voting power of our common stock. In particular, Dr. Dunleavy beneficially owns an aggregate of 44.0% of the voting power of our common stock, and Mr. Hoffmann beneficially owns an aggregate of 23.0% of the voting power of our common stock. The shares beneficially owned by Dr. Dunleavy and Mr. Hoffmann and certain other stockholders are shares of Class B common stock, which have 10 votes per share, whereas each share of Class A common stock 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

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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.

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 are subject to the reporting requirements of the Exchange Act, and are 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 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 price at which you acquire our Class A shares.

        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. 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;

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    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 for our initial public offering;

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

    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 Annual Report.

        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.

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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. 122,257,145 shares of our Class B common stock (as well as 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 for our initial public offering, 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 our initial public offering. We also have filed 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. These shares can be freely sold in the public market upon issuance, subject to lock-up and market stand-off agreements. As restrictions on resale end, the market price of our Class A common stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them.

Delaware law and provisions in our restated certificate of incorporation and bylaws could make a merger, tender offer, or proxy contest difficult, thereby depressing the trading price of our Class A common stock.

        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 stockholders. In addition, our restated certificate of incorporation and bylaws 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;

    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

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      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.

Our restated certificate of incorporation provides that, subject to certain exceptions, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

        Our restated certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law, our restated certificate of incorporation or our restated bylaws, or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our restated certificate of incorporation described above. This choice of forum provision may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers or other employees, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.

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.

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Item 1B.    Unresolved Staff Comments.

        None.

Item 2.    Properties.

        Our corporate headquarters is located in Bowie, Maryland, where we occupy approximately 105,000 square feet under a lease agreement that expires in August 2018. In addition, we lease an aggregate of approximately 200,000 square feet at the following locations: Columbia, Maryland; a second facility in Bowie, Maryland; Herndon, Virginia; Lansing, Michigan; Tampa, Florida; and Phoenix, Arizona. We own one property in Snellville, Georgia, which is approximately 12,000 square feet. In addition, we maintain a number of leases for smaller office facilities in various locations in the regions of our clients coinciding with specific client needs.

Item 3.    Legal Proceedings.

        From time to time, we may be involved in various legal proceedings and subject to claims that arise in the ordinary course of business. Although the results of litigation and claims are inherently unpredictable and uncertain, we are not currently a party to any legal proceedings the outcome of which, if determined adversely to us, are believed to, either individually or taken together, have a material adverse effect on our business, operating results, cash flows or financial condition. Regardless of the outcome, litigation has the potential to have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

Item 4.    Mine Safety Disclosures.

        Not Applicable.

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PART II

Item 5.    Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

        Our Class A common stock is listed on the NASDAQ Global Select Market under the symbol "INOV." As of December 31, 2014 our common stock was not listed on a domestic exchange or over-the-counter market. Our Class A common stock began trading on the NASDAQ Global Select Market on February 12, 2015

        On March 30, 2015, the last sales price of our Class A common stock, as reported on the NASDAQ Global Select Market, was $29.68 per share.

Holders

        As of March 27, 2015, there were 101 stockholders of record of our Class A common stock. However, because many shares of our common stock are held by brokers and other institutions on behalf of stockholders, we believe there are substantially more beneficial holders of our common stock than record holders. As of March 27, 2015, there were 69 stockholders of our Class B common stock.

Dividend Policy

        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 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, 2014, 2013, 2012 and 2011, respectively:

 
  Year Ended December 31,  
 
  2014   2013   2012   2011  

Dividends declared per share

  $   $ 0.15   $ 0.36   $ 0.15  

Use of Proceeds from Registered Securities

        On February 18, 2015, we completed our IPO of 22,222,222 shares of Class A common stock and, upon the underwriters' exercise of their option to purchase additional shares, issued an additional 3,142,581 shares of Class A common stock for a total of 25,364,803 shares issued. All of the shares issued in the IPO were primary shares offered by us as none of our stockholders sold any shares in the IPO. The offering price of the shares sold in the IPO was $27.00 per share, resulting in net proceeds to us, after underwriters' discounts and commissions and other expenses payable by us, of $639.4 million. All of the shares were sold pursuant to our registration statement on Form S-1, as amended (File No. 333-201321), that was declared effective by the SEC on February 11, 2015. Goldman, Sachs & Co., Morgan Stanley & Co. LLC, and Citigroup Global Markets Inc. acted as joint book-running managers for the IPO and as representatives of the underwriters.

        The principal purposes of our IPO were 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 our IPO for working capital and other general corporate purposes; however, we do not currently have any specific uses of the net proceeds

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planned. Additionally, we may use a portion of the proceeds for acquisitions of complementary businesses, technologies, or other assets or to repay outstanding indebtedness.

Unregistered Sales of Equity Securities

        From January 1, 2014 through December 31 2014, we granted our directors, officers, and employees an aggregate of 1,644,720 options to purchase shares of our Class B common stock and an aggregate of 488,780 restricted stock units to be settled in shares of our Class B common stock in each case under our Amended and Restated Long-Term Incentive Plan. All of the grants were deemed to be exempt from registration under the Securities Act in reliance upon Rule 701 promulgated under Section 3(b) of the Securities Act in that they were offered and sold either pursuant to written compensatory plans or pursuant to a written contract relating to compensation, as provided by Rule 701.

Issuer Purchases of Equity Securities

        We did not repurchase any of our equity securities in the quarter ended December 31, 2014.

Item 6.    Selected 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, 2014, 2013 and 2012 from our audited consolidated financial statements included elsewhere in this annual report on Form 10-K. We have derived the selected consolidated balance sheet data as of December 31, 2014 and 2013 from our audited consolidated financial statements included elsewhere in this annual report on Form 10-K. The consolidated statement of operations data for the year ended December 31, 2011 and the consolidated balance sheet data as of December 31, 2012 and 2011 are derived from consolidated financial statements that are not included in this annual report on Form 10-K. 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. In the table below we have included measures, "Adjusted EBITDA," "Adjusted EBITDA margin," and "Non-GAAP Net Income," that are not presented in accordance with GAAP. A discussion of why we utilize these non-GAAP measures and reconciliations to corresponding GAAP measures are provided below.

        Our historical results are not necessarily indicative of our results in any future periods. 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

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Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Annual Report.

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

Consolidated Statement of Operations Data:

                         

Revenue

  $ 361,540   $ 295,798   $ 300,275   $ 239,685  

Expenses:

                         

Cost of revenue

    112,761     120,054     101,188     102,695  

Sales and marketing

    7,143     5,952     6,793     6,752  

Research and development

    23,130     21,192     15,499     14,855  

General and administrative

    88,565     80,638     72,661     63,184  

Depreciation and amortization

    19,880     15,517     12,899     11,229  

Total operating expenses

    251,479     243,353     209,040     198,715  

Income from operations

    110,061     52,445     91,235     40,970  

Other income and (expenses):

                         

Interest income

    6     9     11     10  

Interest expense

    (1,336 )   (79 )   (129 )   (62 )

Income before taxes

    108,731     52,375     91,117     40,918  

Provision for income taxes

    43,379     19,657     35,962     15,991  

Net income

  $ 65,352   $ 32,718   $ 55,155   $ 24,927  

Basic net income per share

  $ 0.50   $ 0.24   $ 0.40   $ 0.18  

Diluted net income per share

  $ 0.49   $ 0.24   $ 0.40   $ 0.18  

Weighted average shares of common stock outstanding:

                         

Basic

    130,770     135,305     137,865     137,865  

Diluted

    133,289     136,375     139,040     138,855  

Other Financial Data(1):

                         

Dividends declared per share

  $   $ 0.15   $ 0.36   $ 0.15  

Adjusted EBITDA

  $ 133,648   $ 71,847   $ 108,105   $ 57,526  

Adjusted EBITDA margin

    37 %   24 %   36 %   24 %

Non-GAAP Net Income

  $ 70,205   $ 37,393   $ 59,449   $ 30,152  

(1)
See the section titled "Non-GAAP Financial Measures" below for additional information and a reconciliation of net income to Adjusted EBITDA and net income to Non-GAAP Net Income.

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  December 31,  
 
  2014   2013   2012   2011  
 
  (in thousands)
 

Consolidated Balance Sheet Data:

                         

Cash and cash equivalents

  $ 162,567   $ 110,594   $ 106,361   $ 114,872  

Accounts receivable, net of allowances

    43,938     33,398     62,899     36,764  

Working capital

    168,217     130,562     136,933     131,676  

Property, equipment and capitalized software, net

    50,962     43,050     34,170     28,089  

Goodwill

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

Total assets

    342,569     269,746     285,655     262,922  

Long-term debt

    281,418     279     168     268  

Total liabilities

    350,791     38,012     48,826     33,817  

Total stockholders' equity (deficit)

    (8,222 )   231,734     236,829     229,105  

Non-GAAP Financial Measures

        We provide the measures Adjusted EBITDA, Adjusted EBITDA margin, and Non-GAAP Net Income as additional information for its operating results. These measures are not in accordance with, or an alternative for accounting principles generally accepted in the United States ("GAAP") and may be different from non-GAAP measures used by other companies.

        Investors frequently have requested information from management regarding depreciation, amortization other non-cash charges, such as stock-based compensation, as well as the impact of non-comparable items and management believes, based on discussions with investors, that these non-GAAP measures enhance investors' ability to assess our historical and projected future financial performance. While we believe these non-GAAP financial measures provide useful supplemental information to investors, there are limitations associated with the use of non-GAAP financial measures. For example, one limitation of Adjusted EBITDA is that it excludes depreciation and amortization, which represents the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our business. We compensate for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reviewing the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to the comparable GAAP measures that are provided below.

        These non-GAAP measures include financial information that is prepared in accordance with GAAP and presented in our consolidated financial statements and are used to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions and as an important factor in determining variable compensation. Reconciliations of net income, the most closely comparable GAAP financial measure, to Adjusted EBITDA and Non-GAAP Net Income are presented below.

Adjusted EBITDA and Adjusted EBITDA Margin

        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 have provided below a reconciliation of net income, which is the most closely comparable non-GAAP financial measure, to Adjusted EBITDA.

        Adjusted EBITDA margin is our calculation of Adjusted EBITDA divided by revenue calculated in accordance with GAAP.

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        We use Adjusted EBITDA and Adjusted EBITDA margin as a supplemental measure of our performance to gain insight into our operating performance. We use Adjusted EBITDA and 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, 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,  
 
  2014   2013   2012   2011  
 
  (in thousands)
 

Reconciliation of Net Income to Adjusted EBITDA:

                         

Net income

  $ 65,352   $ 32,718   $ 55,155   $ 24,927  

Depreciation and amortization

    19,880     15,517     12,899     11,229  

Interest expense

    1,336     79     129     62  

Interest (income)

    (6 )   (9 )   (11 )   (10 )

Provision for income taxes

    43,379     19,657     35,962     15,991  

EBITDA

  $ 129,941   $ 67,962   $ 104,134   $ 52,199  

Stock-based compensation

    2,894     1,842     2,560     3,767  

Other non-comparable items(a)

        1,565     1,411     1,560  

Professional service fees(b)

    813     478          

Adjusted EBITDA

  $ 133,648   $ 71,847   $ 108,105   $ 57,526  

(a)
Other "non-comparable items" include business transaction-related professional fees, corporate name change 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.

Non-GAAP Net Income

        We define Non-GAAP Net Income as net income adjusted to exclude tax-affected stock-based compensation expense, tax-affected amortization of acquired intangible assets, and tax-affected other non-comparable income and certain expenses.

        We use Non-GAAP Net Income as a supplemental measure of our performance to gain insight into our financial performance. We use Non-GAAP Net Income 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 Non-GAAP Net Income provides

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management and investors a useful measure for period to period comparisons of our core business and financial results by excluding items that are not comparable across reporting periods or that do not otherwise relate to our ongoing financial results. Accordingly, we believe that Non-GAAP Net Income provides useful information to investors and others in understanding and evaluating our performance. However, use of Non-GAAP Net Income as an analytical tool has limitations, and you should not consider this measure in isolation or as a substitute for analysis of our financial results as reported under GAAP. In addition, other companies, including companies in our industry, might calculate Non-GAAP Net Income or similarly titled measures differently, which may reduce their usefulness as comparative measures.

        The following table presents a reconciliation of net income to Non-GAAP Net Income for each of the periods indicated:

 
  Year Ended December 31,  
 
  2014   2013   2012   2011  
 
  (in thousands)
 

Reconciliation of Net Income to Non-GAAP Net Income:

                         

Net income

  $ 65,352   $ 32,718   $ 55,155   $ 24,927  

Stock-based compensation

    2,894     1,842     2,560     3,767  

Amortization of acquired intangible assets

    4,368     3,599     3,122     3,250  

Other non-comparable items(a)

        1,565     1,411     1,560  

Professional service fees(b)

    813     478          

Tax impact of add-back items(c)

    (3,222 )   (2,809 )   (2,799 )   (3,352 )

Non-GAAP Net Income

  $ 70,205   $ 37,393   $ 59,449   $ 30,152  

(a)
Other "non-comparable items" include business transaction-related professional fees, corporate name change expenses, workforce restructuring expenses, and certain legal costs. We believe these are non-comparable expenses that should be excluded from Non-GAAP Net Income 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.

(c)
Assumes the tax rate applicable for the respective year.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

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. For the year ended December 31, 2014, our revenue was $361.5 million, representing 22% growth over the year ended December 31, 2013. For the year ended December 31, 2014, we generated Adjusted EBITDA of $133.6 million, representing a 37% Adjusted EBITDA margin and 86% growth over the same period in the prior year. Net income for the year ended December 31, 2014 was $65.4 million, representing 18% of revenue and a 100% increase over the year ended December 31, 2013. Non-GAAP Net Income for the year ended December 31, 2014 was $70.2 million, representing 19% of revenue and a 88% increase over the same period in 2013. Adjusted EBITDA and Non-GAAP Net Income are non-GAAP measures. Adjusted EBITDA and Non-GAAP Net Income are measures that are not presented in accordance with GAAP. For a reconciliation of net income to Adjusted EBITDA and Non-GAAP Net Income, see "Non-GAAP Financial Measures," provided in Item 6—Selected Financial Data.

        On February 18, 2015, we completed our IPO of 22,222,222 shares of Class A common stock and, upon the underwriters' exercise of their option to purchase additional shares, issued an additional 3,142,581 shares of Class A common stock for a total of 25,364,803 shares issued. All of the shares issued in the IPO were primary shares offered by us as none of our stockholders sold any shares in the IPO. The offering price of the shares sold in the IPO was $27.00 per share, resulting in net proceeds to us, after underwriters' discounts and commissions and other expenses payable by us, of $639.4 million. Our Class A common stock is currently traded on the NASDAQ Global Select Market under the symbol "INOV."

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Key Metrics

        We review a number of metrics, including the key metrics shown in the table below. We believe that these metrics are indicative of our overall level of analytical activity and the underlying growth in our business.

 
  Year Ended December 31,  
 
  2014   2013   2012  
 
  (in thousands, except percentages and
statements of work)

 

Key Metrics(1):

                   

MORE2 Registry® dataset metrics

                   

Unique patient count(2)

    120,170     109,464     86,002  

Medical event count(3)

    9,250,424     8,321,236     6,379,293  

Trailing 12 month Patient Analytics Months (PAM)(4)

    16,519,827     12,812,630     10,822,673  

Engaged patient population statements of work(5)

    575     356     314  

Data analytics and data-driven intervention revenue mix:

                   

Revenue from data analytics subscriptions(6)

    57.7 %   48.6 %   45.3 %

Revenue from data-driven intervention platform services(7):

                   

Fully automated processes

    7.3 %   4.3 %   4.2 %

Partially automated processes

    35.0 %   47.1 %   50.5 %

Total revenue from data driven intervention platform services

    42.3 %   51.4 %   54.7 %

(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, net income or Non-GAAP 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, net income or Non-GAAP 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 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)
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.

(3)
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.).

(4)
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 calculations undertaken by us which is initiated and completed by our analytical platform to examine a specific question such as whether

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    a patient is believed to have a condition such as diabetes, or worsening of the disease, during a specific time period.

(5)
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.

(6)
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.

(7)
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).


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 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 treatmentsas well as payment models and regulatory oversight requirementshave 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. 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.

        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

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

 
  Year Ended December 31,  
 
  2014   2013   2012  

Investment in Innovation

                   

Research and development(1)

  $ 23,130   $ 21,192   $ 15,499  

Capitalized software development(2)

    16,375     10,304     10,070  

Research and development infrastructure investments(3)

    5,023     3,565     1,759  

Total investment in innovation

  $ 44,528   $ 35,061   $ 27,328  

As a percentage of revenue

                   

Research and development(1)

    6 %   7 %   5 %

Capitalized software development(2)

    5 %   3 %   3 %

Research and development infrastructure investments(3)

    1 %   1 %   1 %

Total investment in innovation

    12 %   11 %   9 %

(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.

        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 we track the number of patient populations for which we are engaged to provide data analytics and provide data-driven intervention services (each engagement memorialized with a contracted statement of work, or SOW).

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        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 is referred to as the Trailing 12 Month Patient Analytical Months, or PAM. 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, net income or Non-GAAP 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 average fee rate offset the reduction in revenue from the aforementioned terminated client SOW, while PAM was more than offset, and thus increased.

        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.

        Shift to Fully Automated Data-Driven Intervention Platform Services.    We view the decreased proportion of revenue derived from partially automated data-driven intervention platform services as a positive reflection of our cloud-based interconnectivity and automation capabilities. The proportion of our revenue derived from pure data analytics and fully automated data-driven intervention platform services revenue is expected to continue to expand over time as a percentage of total revenue as a result of our continued expansion of our cloud-based interconnectivity technologies and the continued expansion of interconnectivity within the healthcare landscape. In order to drive value for our clients and serve them irrespective of their level of connectivity, we continue to provide cloud-based partially automated data-driven intervention platform services, converting the performance of such services to cloud-based fully automated data-driven intervention platform services wherever possible. As the healthcare infrastructure becomes more interconnected and our integration and interconnectivity technologies continue to expand, we believe that we will be able to achieve more rapid implementation, and greater value impact, at more efficient costs.

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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 57.7%, 48.6%, and 45.3%,of our consolidated revenue during the years ended December 31, 2014, 2013, and 2012, respectively. These percentages include software subscription licensing revenue of approximately 3.6%, 3.6%, and 2.6% of our consolidated revenue during the years ended December 31, 2014, 2013, and 2012, 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 42.3%, 51.4%, and 54.7% of our consolidated revenue during the years ended December 31, 2014, 2013, and 2012, 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, 2014, 2013, and 2012, revenue from fully automated processes accounted for 7.3%, 4.3%, and 4.2% of data-driven intervention platform services revenue and revenue from partially automated processes accounted for 35.0%, 47.1%, and 50.5% of data-driven intervention platform services revenue.

        As many of our analytical capabilities are designed to identify gaps in care, quality, utilization, compliance, and/or other gaps that may impact our clients' achievement of greater healthcare quality and financial performance, our cloud-based data driven intervention platform services revenue is driven primarily by the results of our data analytic processes and our clients' desire to utilize our cloud-based intervention platforms to resolve such identified gaps. Informed by our analytics, our cloud-based intervention platforms are designed to enable the resolution of specific gaps through the aggregation of specific data or achievement of specific impact. Revenue from our intervention platform utilization is generally driven by the quantity and type of completed interventions enabled by our platform, and a contractually negotiated transactional price for each such intervention.

        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

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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.

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.

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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.


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,  
 
  2014   2013   2012  

Revenue

  $ 361,540   $ 295,798   $ 300,275  

Expenses:

                   

Cost of revenue

    112,761     120,054     101,188  

Sales and marketing

    7,143     5,952     6,793  

Research and development

    23,130     21,192     15,499  

General and administrative

    88,565     80,638     72,661  

Depreciation and amortization

    19,880     15,517     12,899  

Total operating expenses

    251,479     243,353     209,040  

Income from operations

    110,061     52,445     91,235  

Other income and (expenses):

                   

Interest income

    6     9     11  

Interest expense

    (1,336 )   (79 )   (129 )

Income before taxes

    108,731     52,375     91,117  

Provision for income taxes

    43,379     19,657     35,962  

Net income

  $ 65,352   $ 32,718   $ 55,155  

        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,
 
 
  2014   2013   2012  

Revenue

    100 %   100 %   100 %

Expenses:

                   

Cost of revenue

    31 %   41 %   34 %

Sales and marketing

    2 %   2 %   2 %

Research and development

    6 %   7 %   5 %

General and administrative

    24 %   27 %   24 %

Depreciation and amortization

    5 %   5 %   4 %

Total operating expenses

    70 %   82 %   69 %

Income from operations

    30 %   18 %   31 %

Other income and (expenses):

                   

Interest income

             

Interest expense

             

Income before taxes

    30 %   18 %   31 %

Provision for income taxes

    12 %   7 %   12 %

Net income

    18 %   11 %   19 %

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Years Ended December 31, 2014, 2013 and 2012

Revenue

 
  Year Ended December 31,   2013 to 2014
Change
  2012 to 2013
Change
 
 
  2014   2013   2012   $   %   $   %  
 
  (dollars in thousands)
 

Total revenue

  $ 361,540   $ 295,798   $ 300,275   $ 65,742     22 % $ (4,477 )   (1 )%

        2014 Compared to 2013.    Revenue during the year ended December 31, 2014 increased by approximately $65.7 million, or 22%, as compared to the year ended December 31, 2013. The increase was primarily attributable to an increase in revenue from new clients of $50.5 million along with a net increase of $15.2 million from existing clients.

        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.

Cost of Revenue

 
  Year Ended December 31,   2013 to 2014
Change
  2012 to 2013
Change
 
 
  2014   2013   2012   $   %   $   %  
 
  (dollars in thousands)
 

Cost of revenue

  $ 112,761   $ 120,054   $ 101,188   $ (7,293 )   (6 )% $ 18,866     19 %

Cost of revenue as a percentage of revenue

    31 %   41 %   34 %                        

        2014 Compared to 2013.    In 2014, cost of revenue decreased by approximately $7.3 million, or 6%, as compared to the year ended December 31, 2013, despite the increase in revenue of approximately $65.7 million or 22%, over the same period. The $7.3 million decrease in cost of revenue was primarily due to a reduction in employee related expenses. The reduction in employee related expenses was primarily enabled by advances in our technology platform efficiency and a shift in revenue mix towards a greater proportion of analytics versus data-driven intervention services, as well as a greater proportion of automation within the data-driven intervention services mix. Cost of revenue as a percentage of revenue was 31% in 2014 compared to 41% in 2013.

        2013 Compared to 2012.    In 2013, cost of revenue increased by approximately $18.9 million, or 19%, compared to 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, from 34% in 2012 to 41% in 2013, 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.

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Sales and Marketing

 
  Year Ended December 31,   2013 to 2014
% Change
  2012 to 2013
% Change
 
 
  2014   2013   2012   $   %   $   %  
 
  (dollars in thousands)
 

Sales and marketing

  $ 7,143   $ 5,952   $ 6,793   $ 1,191     20 % $ (841 )   (12 )%

Sales and marketing as a percentage of revenue

    2 %   2 %   2 %                        

        2014 Compared to 2013.    In 2014, sales and marketing expenses increased by $1.2 million, or 20%, compared to 2013. The increase primarily was attributable to an increase in employee-related costs.

        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.

Research and Development

 
  Year Ended December 31,   2013 to 2014
% Change
  2012 to 2013
% Change
 
 
  2014   2013   2012   $   %   $   %  
 
  (dollars in thousands)
 

Research and development

  $ 23,130   $ 21,192   $ 15,499   $ 1,938     9 % $ 5,693     37 %

Research and development as a percentage of revenue

    6 %   7 %   5 %                        

        2014 Compared to 2013.    In 2014, research and development expense increased by $1.9 million, or 9%, compared to 2013. The increase was attributable to our on-going investment in innovation and platform development.

        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.

General and Administrative

 
  Year Ended December 31,   2013 to 2014
Change
  2012 to 2013
Change
 
 
  2014   2013   2012   $   %   $   %  
 
  (dollars in thousands)
 

General and administrative

  $ 88,565   $ 80,638   $ 72,661   $ 7,927     10 % $ 7,977     11 %

General and administrative as a percentage of revenue

    24 %   27 %   24 %                        

        2014 Compared to 2013.    In 2014, general and administrative expense increased by approximately $7.9 million, or 10%, compared to 2013. The increase was primarily attributable to an increase in employee-related costs of $4.2 million, which includes an increase of approximately $1.1 million related to stock based compensation expense, professional fees of $1.8 million, occupancy costs of $1.1 million, and software licensing and maintenance expenses of $0.5 million.

        2013 Compared to 2012.    In 2013, general and administrative expense increased by approximately $8.0 million, or 11%, compared to 2012. The year-over-year increase in general and administrative

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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.

Depreciation and Amortization

 
  Year Ended December 31,   2013 to 2014
Change
  2012 to 2013
Change
 
 
  2014   2013   2012   $   %   $   %  

Depreciation and amortization

  $ 19,880   $ 15,517   $ 12,899   $ 4,363     28 % $ 2,618     20 %

Depreciation and amortization as a percentage of revenue

    5 %   5 %   4 %                        

        2014 Compared to 2013.    In 2014, depreciation and amortization expense increased by approximately $4.4 million, or 28%, compared to 2013. The increase in depreciation and amortization expense primarily was attributable to an increase in amortization expense of capitalized software of $4.5 million as a result of accelerating amortization on software expected to be decommissioned due to the successful development of a next generation software service.

        2013 Compared to 2012.    In 2013, depreciation and amortization expense increased approximately $2.6 million, or 20%, compared to 2012. The increase was attributable primarily to an increase of $2.6 million of amortization expense from capitalized software.

Interest Expense

 
  Year Ended December 31,   2013 to 2014
Change
  2012 to 2013
Change
 
 
  2014   2013   2012   $   %   $   %  
 
  (dollars in thousands)
 

Interest expense

  $ 1,336   $ 79   $ 129   $ 1,257     1,591 % $ (50 )   39 %

General and administrative as a percentage of revenue

    0 %   0 %   0 %                        

        2014 Compared to 2013.    In 2014, interest expense increased by approximately $1.3 million compared to 2013. The increase was attributable to interest expense on the $300.0 million Term Loan Facility borrowed on September 19, 2014.

        2013 Compared to 2012.    In 2013, interest expense was consistent with 2012.

Provision for Income Taxes

 
  Year Ended December 31,   2013 to 2014
Change
  2012 to 2013
Change
 
 
  2014   2013   2012   $   %   $   %  
 
  (dollars in thousands)
 

Provision for income taxes

  $ 43,379   $ 19,657   $ 35,962   $ 23,722     121 % $ (16,305 )   (45 )%

Effective tax rate

    40 %   38 %   39 %                        

        2014 Compared to 2013.    In 2014, provision for income taxes increased by approximately $23.7 million, or 121%, compared to 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 enhancement in margins. Our effective income tax rate in 2014 was 40% compared to 38% in 2013.

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The increase in our effective income tax rate was due primarily to an increase in our effective state income tax rate.

        2013 Compared to 2012.    In 2013, provision for income taxes was approximately $19.7 million compared to approximately $36.0 million in 2012. Our effective income tax rate was 38% in 2013 compared to 39% in 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 in 2013 and a decrease in state income taxes.

Quarterly Results of Operations

        The following table sets forth our unaudited consolidated statement of operations data for each of the eight quarters in the period ended December 31, 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 Annual Report. In the table below we have included measures, "Adjusted EBITDA" and "Non-GAAP Net Income," that are not presented in accordance with GAAP. Reconciliations of these non-GAAP measures to corresponding GAAP measures are provided below. Discussion of why we utilize these non-GAAP financial measures is provided under "Non-GAAP Financial Measures," in Item 6—Selected Financial Data.

        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

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

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

Revenue

  $ 89,918   $ 85,991   $ 100,957   $ 84,674   $ 64,534   $ 75,004   $ 81,224   $ 75,036  

Expenses:

                                                 

Cost of revenue

    27,696     27,579     28,899     28,587     25,185     29,381     33,278     32,210  

Sales and marketing

    1,788     2,410     1,612     1,333     1,355     1,528     1,982     1,087  

Research and development

    5,754     6,184     5,144     6,048     5,021     5,250     5,248     5,673  

General and administrative

    25,645     21,645     21,341     19,934     20,372     19,368     20,006     20,892  

Depreciation and amortization

    4,868     5,043     5,114     4,855     4,412     3,934     3,642     3,529  

Total operating expenses

    65,751     62,861     62,110     60,757     56,345     59,461     64,156     63,391  

Income from operations

    24,167     23,130     38,847     23,917     8,189     15,543     17,068     11,645  

Other income and (expenses):

                                                 

Interest income

    2     1     1     2     3     1     2     3  

Interest expense

    (1,127 )   (147 )   (49 )   (13 )   (18 )   (21 )   (24 )   (16 )

Income before taxes

    23,042     22,984     38,799     23,906     8,174     15,523     17,046     11,632  

Provision for income taxes

    9,543     9,318     15,169     9,349     2,439     6,046     6,640     4,532  

Net income

  $ 13,499   $ 13,666   $ 23,630   $ 14,557   $ 5,735   $ 9,477   $ 10,406   $ 7,100  

Basic net income per share

  $ 0.11   $ 0.10   $ 0.18   $ 0.11   $ 0.04   $ 0.07   $ 0.08   $ 0.05  

Diluted net income per share

  $ 0.11   $ 0.10   $ 0.17   $ 0.11   $ 0.04   $ 0.07   $ 0.08   $ 0.05  

Weighted average shares of common stock outstanding:

                                                 

Basic

    122,257     131,779     134,523     134,645     134,558     134,400     134,437     137,870  

Diluted

    125,359     134,538     136,814     136,776     135,572     135,754     135,635     139,101  

Other Financial Data

                                                 

Adjusted EBITDA(1)

 
$

30,589
 
$

28,658
 
$

44,989
 
$

29,412
 
$

13,513
 
$

19,816
 
$

22,372
 
$

16,146
 

Non-GAAP Net Income(2)

  $ 14,758   $ 14,475   $ 25,109   $ 15,863   $ 7,114   $ 10,165   $ 11,921   $ 8,193  

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

 
  Three Months Ended  
 
  December 31,
2014
  September 30,
2014
  June 30,
2014
  March 31,
2014
  December 31,
2013
  September 30,
2013
  June 30,
2013
  March 31,
2013
 

Reconciliation of net income to Adjusted EBITDA:

                                                 

Net income

  $ 13,499   $ 13,666   $ 23,630   $ 14,557   $ 5,735   $ 9,477   $ 10,406   $ 7,100  

Depreciation and amortization              

    4,868     5,043     5,114     4,855     4,412     3,934     3,642     3,529  

Interest expense              

    1,127     147     49     13     18     21     24     16  

Interest (income)              

    (2 )   (1 )   (1 )   (2 )   (3 )   (1 )   (2 )   (3 )

Provision for income taxes

    9,543     9,318     15,169     9,349     2,439     6,046     6,640     4,532  

EBITDA

    29,035     28,173     43,961     28,772     12,601     19,477     20,710     15,174  

Stock-based compensation

    1,554     518     436     386     434     387     285     736  

Other non-comparable items

                        (48 )   1,377     236  

Professional service fees

        (33 )   592     254     478              

Adjusted EBITDA

  $ 30,589   $ 28,658   $ 44,989   $ 29,412   $ 13,513   $ 19,816   $ 22,372   $ 16,146  

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(2)
The following table presents a reconciliation of net income to Non-GAAP Net Income for each of the periods indicated:

 
  Three Months Ended  
 
  December 31,
2014
  September 30,
2014
  June 30,
2014
  March 31,
2014
  December 31,
2013
  September 30,
2013
  June 30,
2013
  March 31,
2013
 

Reconciliation of net income to Non-GAAP Net Income:

                                                 

Net income

  $ 13,499   $ 13,666   $ 23,630   $ 14,557   $ 5,735   $ 9,477   $ 10,406   $ 7,100  

Stock-based compensation

    1,554     518     436     386     434     387     285     736  

Amortization of acquired intangible assets

    541     861     1,433     1,533     1,296     763     763     777  

Other non-comparable items

                        (48 )   1,377     236  

Professional service fees

        (33 )   592     254     478              

Tax impact on add-back items

    (836 )   (537 )   (982 )   (867 )   (829 )   (414 )   (910 )   (656 )

Non-GAAP Net Income

  $ 14,758   $ 14,475   $ 25,109   $ 15,863   $ 7,114   $ 10,165   $ 11,921   $ 8,193  


Liquidity and Capital Resources

        The following table presents a summary of our cash flow activity for the periods set forth below (in thousands):

 
  Year Ended December 31,  
 
  2014   2013   2012  

Consolidated Statements of Cash Flows Data:

                   

Net income

  $ 65,352   $ 32,718   $ 55,155  

Net cash provided by operating activities

  $ 85,528   $ 66,015   $ 53,705  

Net cash used in investing activities

  $ (22,619 ) $ (18,863 ) $ (15,084 )

Net cash used in financing activities

  $ (10,936 ) $ (42,919 ) $ (47,132 )

Sources of Liquidity

        Our principal source of liquidity has been cash generated by operating activities. Our cash generated from operations has been sufficient to fund our growth, including our capital expenditures. Additionally, our cash generation has allowed us to repurchase certain amounts of our outstanding stock and pay dividends to our stockholders in the amount of $421.0 million from January 1, 2012 through December 31, 2014. In addition, on September 19, 2014, we redeemed $300.0 million of our common stock, at a price per share of $27.01, with proceeds from our Term Loan Facility. Prior to this redemption, we had not historically incurred debt nor have we recently generated liquidity through equity sales. As of December 31, 2014, we had a cash and cash equivalent balance of $162.6 million.

        On February 18, 2015, we completed our IPO of 22,222,222 shares of Class A common stock and, upon the underwriters' exercise of their option to purchase additional shares, issued an additional 3,142,581 shares of Class A common stock for a total of 25,364,803 shares issued. All of the shares issued in the IPO were primary shares offered by us as none of our stockholders sold any shares in the IPO. The offering price of the shares sold in the IPO was $27.00 per share, resulting in net proceeds to us, after underwriters' discounts and commissions and other expenses payable by us, of approximately $639.4 million.

        We believe our current cash and cash equivalent balance, expected cash generated by operating activities and availability under our Credit Facilities (defined below) is sufficient to fund our liquidity needs for the foreseeable future.

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Debt

        On September 19, 2014, we and our subsidiaries entered into 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 the Term Loan Facility and the Revolving Credit Facility. Proceeds of the Revolving Credit Facility may be used for our working capital and general corporate purposes. The obligations under the Credit Facilities are guaranteed by our domestic, wholly owned subsidiaries. The Credit Facilities contain customary affirmative and negative covenants, including limitations on negative pledges and liens. In addition, under the Credit Agreement, we are required to maintain certain minimum liquidity levels ($50.0 million while the Term Loan Facility remains available, or, if the Term Loan Facility has been repaid, $20.0 million), measured at the end of each of our fiscal quarters. In addition, our ability to incur debt is subject to compliance with a 4.00 to 1.00 leverage ratio under certain circumstances. The Credit Agreement also contains certain mandatory prepayment requirements in connection with certain assets sales and customary events of default, including as a result of certain specified change of control events.

Term Loan Facility

        We utilized the entire principal amount of the Term Loan Facility to redeem approximately 8.33% of our Class B common stock on a pro rata basis. As of December 31, 2014, the principal amount outstanding under the Term Loan Facility was $300.0 million. The Term Loan Facility has a five-year term. The Term Loan Facility is an amortizing facility and payments of principal and interest are payable quarterly, beginning March 31, 2015. The outstanding principal amount of the Term Loan Facility will amortize as follows: $18.8 million in year one, $15.0 million in year two, $30.0 million in year three, $45 million in year four, and the remaining principal balance in year five. The interest rate for the Term Loan Facility is LIBOR plus 1.25% per annum or the base rate plus 0.25% per annum (at our election).

Revolving Credit Facility

        Borrowings under the Revolving Credit Facility became available, subject to compliance with the terms and conditions set forth in the Credit Agreement, beginning (at our option) after the consummation of our initial public offering. The Revolving Credit Facility is scheduled to mature on March 31, 2020. The interest rate for the Revolving Credit Facility is LIBOR plus 1.25% per annum or the base rate plus 0.25% per annum (at our election).

Cash Flows

Operating Activities

        Cash provided by operating activities consisted of net income adjusted for certain non-cash items, including depreciation and amortization, stock-based compensation, and deferred income taxes, as well as the effect of changes in working capital and other activities.

        Cash provided by operating activities during the year ended December 31, 2014 was approximately $85.5 million, an increase in cash inflow of approximately $19.5 million compared to the year ended December 31, 2013. Cash provided by operating activities was driven by net income of approximately $65.4 million, as adjusted for the exclusion of non-cash expenses totaling approximately $25.1 million, which was partially offset by approximately $7.7 million related to the effect of changes in working capital and other balance sheet accounts resulting in cash outflows of approximately $85.5 million.

        Cash provided by operating activities during the year ended December 31, 2013 was approximately $66.0 million, an increase of approximately $12.3 million compared to the year ended December 31, 2012. Cash provided by operating activities was driven by net income of approximately $32.7 million, as

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adjusted for the exclusion of non-cash expenses totaling approximately $17.3 million, which was partially offset by approximately $16.0 million related to the effect of changes in working capital and other balance sheet accounts resulting in cash inflows of approximately $66.0 million.

Investing Activities

        Our primary investing activities consisted of purchases of property and equipment, investments in internally developed capitalized software, and leasehold improvements for our facilities.

        Cash used in investing activities in the year ended December 31, 2014 was approximately $22.6 million, an increase in cash outflow of approximately $3.8 million compared to the year ended December 31, 2013. The slight increase in cash outflow was due to an increase in the investment in capitalized software of approximately $5.5 million, which was partially offset by a decrease in purchases of property and equipment of approximately $1.7 million.

        Cash used in investing activities during the year ended December 31, 2013 was approximately $18.9 million, an increase in cash outflow of approximately $3.8 million compared to the year ended December 31, 2012. The increase in cash outflow was primarily due to the purchase of property and equipment of approximately $9.2 million during the year ended December 31, 2013 as compared to approximately $5.5 million during the year ended December 31, 2012.

Financing Activities

        Our primary financing activities have consisted of private purchases and sales of common stock, credit facility borrowings, dividend distributions, and stock option exercises by employees.

        Cash used in financing activities during the year ended December 31, 2014 was approximately $10.9 million, a decrease of approximately $32.0 million in cash outflow compared to the year ended December 31, 2013. The cash used in financing activities during the year ended December 31, 2014 is primarily comprised of $309.1 million for the repurchase of common stock, and $2.9 million for the payment of previously declared dividends, partially offset by $300.0 million from proceeds of the Term Loan and $0.7 million from the exercise of employee stock options.

        Cash used in financing activities during the year ended December 31, 2013 was approximately $42.9 million, a decrease in cash outflow of approximately $4.2 million compared to the year ended December 31, 2012. The decrease in cash outflow was primarily due to the net repurchase of common stock of $20.0 million, which was offset by a decrease in dividends paid of approximately $23.5 million.

Off Balance Sheet Arrangements

        We do not have any off-balance sheet arrangements and did not have any such arrangements during the years ended December 31, 2014, 2013 and 2012.

Contractual Obligations

        Our principal commitments consist of obligations under our senior unsecured term loan facility (see Note 6 of the Consolidated Financial Statements), and our operating leases for equipment, office

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space, and co-located data center facilities. The following table summarizes our future payments in cash, excluding the effects of time value, on contractual obligations by period as of December 31, 2014.

 
  Payments Due by Period  
 
  (in thousands)
 
 
  Total   Less than
1 year
  1 - 3 years   3 - 5 years   More than
5 years
 

Credit facilities

  $ 300,000   $ 18,750   $ 45,000   $ 236,250   $  

Operating lease obligations

    24,795     6,728     12,368     5,699      

Total

  $ 324,795   $ 25,478