10-K/A 1 a2227517z10-ka.htm 10-K/A

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

FORM 10-K/A
AMENDMENT NO. 1

(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, 2015

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 ý    No o

         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. o

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

Large accelerated filer o

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

         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, 2015, the last business day of the registrant's most recently completed second fiscal quarter, aggregate market value of the voting stock (common stock) held by non-affiliates of the registrant was approximately $949.3 million.

         As of February 15, 2016, the registrant had 61,658,148 shares of Class A common stock outstanding and 90,054,884 shares of Class B common stock outstanding.

Documents Incorporated by Reference

         The information required by Part III (Items 10, 11, 12, 13 and 14) will be incorporated by reference from the Registrant's definitive proxy statement relating to its 2016 annual meeting of stockholders (the "2016 Proxy Statement"). The 2016 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.

   


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INOVALON HOLDINGS, INC.
FORM 10-K/A
TABLE OF CONTENTS


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EXPLANATORY NOTE

        Inovalon Holdings, Inc. (the "Company") is filing this Amendment No. 1 (the "Amendment") to its Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the "Original Filing") solely to correct a typographical error with regard to the date of the Report of Independent Registered Public Accounting Firm issued by Deloitte & Touche, LLP and included on page F-2 of the Original Filing. In the Original Filing, the correct date, February 26, 2016, was inadvertently changed to February 26, 2015 during the filing process.

        This Amendment also revises Item 15 of the Original Filing to include an updated exhibit list and, as required under Rule 12b-15, includes certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 302 and 906 of the Sarbanes-Oxley Act of 2002.

        This Amendment does not in any other way amend or restate the Independent Auditor's Report issued by Deloitte & Touche, LLP or the Company's previously reported financial statements, or make any other changes to the Original Filing and should be read in conjunction with the Original Filing. The Company has not updated the disclosures contained in the Original Filing to reflect any events that have occurred after the filing date of the Original Filing.

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PART IV

Item 15.    Exhibits and Financial Statement Schedules.

        The following is a list of documents filed as a part of this report:

    (1)
    Financial Statements

    Included herein at pages F-3 through F-38.

    (2)
    Financial Statement Schedules

    Included herein at pages F-39.

    (3)
    Exhibits

        The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index contained within this Amendment No. 1 to the annual report on Form 10-K.

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EXHIBIT INDEX

Exhibit
Number
  Description of Document
  3.1   Second Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1/A dated February 6, 2015)

 

3.2

 

Second Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1/A dated February 6, 2015)

 

10.1

 

Form of Indemnification Agreement. (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 dated December 30, 2014)

 

10.2

 

Inovalon, Inc. Amended and Restated Long-term Incentive Plan (as amended on October 7, 2010), as assumed by Inovalon Holdings, Inc. (Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 dated December 30, 2014)

 

10.3

 

Form of Stock Option Agreement under the Amended and Restated Long- term Incentive Plan (as amended on October 7, 2010), as assumed by Inovalon Holdings, Inc. (Incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 dated December 30, 2014)

 

10.4

 

Form of Restricted Stock Units Agreement under the Amended and Restated Long-term Incentive Plan (as amended on October 7, 2010), as assumed by Inovalon Holdings, Inc. (Incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 dated December 30, 2014)

 

10.5

 

2015 Omnibus Incentive Plan. (Incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

 

10.6

 

Form of Stock Option Award under the 2015 Omnibus Incentive Plan. (Incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

 

10.7

 

Form of Restricted Stock Award under the 2015 Omnibus Incentive Plan. (Incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

 

10.8

 

Form of Restricted Stock Unit Award under the 2015 Omnibus Incentive Plan. (Incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

 

10.9

 

Form of Stock Option Award under the 2015 Omnibus Incentive Plan (Section 16 Grantees). (Incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

 

10.10

 

Form of Restricted Stock Award under the 2015 Omnibus Incentive Plan (Section 16 Grantees). (Incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

 

10.11

 

Form of Restricted Stock Unit Award under the 2015 Omnibus Incentive Plan (Section 16 Grantees). (Incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

 

10.12

 

Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

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Exhibit
Number
  Description of Document
  10.13   Shareholders Voting Agreement, dated as of September 15, 2008, by and among Inovalon Holdings, Inc. and those persons identified on Exhibit A thereto. (Incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 dated December 30, 2014)

 

10.14

 

Credit and Guaranty Agreement, dated as September 19, 2014 by and among Inovalon Holdings, Inc., certain subsidiaries of Inovalon Holdings, Inc., as guarantors, various lenders, Goldman Sachs Bank USA, as joint lead arranger and joint lead bookrunner, and Goldman Sachs Bank USA, as administrative agent. (Incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 dated December 30, 2014)

 

10.15

 

Second Amended and Restated Stockholders Rights Agreement, dated as of September 15, 2014, by and among Inovalon Holdings, Inc. and certain of its stockholders. (Incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

 

10.16

 

Amended and Restated Employment Agreement, dated December 3, 2014, by and between Inovalon, Inc. and Dr. Keith R. Dunleavy. (Incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

 

10.17

 

Amended and Restated Employment Agreement, dated December 3, 2014, by and between Inovalon, Inc. and Robert A. Wychulis. (Incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

 

10.18

 

Amended and Restated Employment Agreement, dated December 3, 2014, by and between Inovalon, Inc. and Thomas R. Kloster. (Incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

 

10.19

 

Amended and Restated Employment Agreement, dated December 3, 2014, by and between Inovalon, Inc. and Christopher E. Greiner. (Incorporated by reference to Exhibit 10.19 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

 

10.20

 

Amended and Restated Employment Agreement, dated December 3, 2014, by and between Inovalon, Inc. and Daniel L. Rizzo. (Incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

 

10.21

 

Amended and Restated Employment Agreement, dated December 3, 2014, by and between Inovalon, Inc. and Jason Z. Rose. (Incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

 

10.22

 

Amended and Restated Employment Agreement, dated December 3, 2014, by and between Inovalon, Inc. and Joseph R. Rostock. (Incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

 

10.23

 

Amended and Restated Employment Agreement, dated December 3, 2014, by and between Inovalon, Inc. and Shauna Vernal. (Incorporated by reference to Exhibit 10.23 to the Company's Registration Statement on Form S-1/A dated January 29, 2015)

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Exhibit
Number
  Description of Document
  21.1   Subsidiaries of the Registrant. (Incorporated by reference to Exhibit 21.1 to the Company's Annual Report on Form 10-K filed February 26, 2016)

 

23.1

*

Consent of Deloitte & Touche LLP.

 

31.1

*

Certification of Chief Executive Officer pursuant to Rule 13a- 14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2

*

Certification of Chief Financial Officer pursuant to Rule 13a- 14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1

**

Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2

**

Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS

 

XBRL Instance Document

 

101.SCH

 

XBRL Taxonomy Extension Schema

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

*
Filed herewith.

**
This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended (Securities Act), or the Exchange Act.

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SIGNATURES

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

Date: February 26, 2016   INOVALON HOLDINGS, INC.

 

 

By:

 

/s/ THOMAS R. KLOSTER

Thomas R. Kloster
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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INOVALON HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1


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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Inovalon Holdings, Inc.
Bowie, Maryland

        We have audited the accompanying consolidated balance sheets of Inovalon Holdings, Inc. and subsidiaries (the "Company") as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Inovalon Holdings, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

McLean, VA

February 26, 2016

F-2


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Inovalon Holdings, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

 
  December 31,  
 
  2015   2014  

ASSETS

 

Current assets:

             

Cash and cash equivalents

  $ 114,034   $ 162,567  

Short-term investments

    614,130      

Accounts receivable (net of allowances of $1,022 and $1,827 at December 31, 2015 and 2014, respectively)                   

    81,305     43,938  

Prepaid expenses and other current assets

    16,162     6,015  

Income tax receivable

    18,377     6,797  

Deferred income taxes

        491  

Total current assets

    844,008     219,808  

Non-current assets:

             

Property, equipment and capitalized software, net

    65,031     50,962  

Goodwill

    137,733     62,269  

Intangible assets, net

    61,855     7,447  

Other assets

    4,250     2,083  

Total assets

  $ 1,112,877   $ 342,569  

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 

Current liabilities:

             

Accounts payable

  $ 21,136   $ 10,974  

Accrued compensation

    13,538     15,305  

Other current liabilities

    11,444     1,992  

Deferred rent

    797     567  

Deferred revenue

    5,507     3,904  

Credit facilities

    15,000     18,750  

Capital lease obligation

    109     99  

Total current liabilities

    67,531     51,591  

Non-current liabilities:

             

Credit facilities, less current portion

    266,250     281,250  

Capital lease obligation, less current portion

    296     168  

Deferred rent

    2,446     2,619  

Deferred income taxes

    37,198     15,163  

Total liabilities

    373,721     350,791  

Commitments and contingencies (Note 10)

             

Stockholders' equity (deficit):

             

Common stock, $0.000005 par value, 900,000,000 shares authorized, zero shares issued and outstanding at each of December 31, 2015 and 2014, respectively

         

Class A common stock, $0.000005 par value, 750,000,000 shares authorized, 53,482,669 and 11,109,285 shares issued and outstanding at December 31, 2015 and 2014, respectively

         

Class B common stock, $0.000005 par value, 150,000,000 shares authorized, 98,230,363 and 122,257,145, shares issued and outstanding at December 31, 2015 and 2014, respectively

    1     1  

Preferred stock, $0.0001 par value, 100,000,000 shares authorized, zero shares issued and outstanding at December 31, 2015 and 2014, respectively

         

Additional paid-in-capital

    493,197     110,317  

Retained earnings

    247,540     181,477  

Treasury stock, at cost, zero and 11,109,285 shares at December 31, 2015 and 2014, respectively

        (300,017 )

Other comprehensive income (loss)

    (1,582 )    

Total stockholders' equity (deficit)

    739,156     (8,222 )

Total liabilities and stockholders' equity (deficit)

  $ 1,112,877   $ 342,569  

   

See notes to consolidated financial statements.

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Inovalon Holdings, Inc.

Consolidated Statements of Operations

(In thousands, except per share amounts)

 
  Year Ended December 31,  
 
  2015   2014   2013  

Revenue

  $ 437,271   $ 361,540   $ 295,798  

Expenses:

                   

Cost of revenue(1)

    146,140     112,761     120,054  

Sales and marketing(1)

    14,684     7,143     5,952  

Research and development(1)

    22,329     23,130     21,192  

General and administrative(1)

    115,029     88,565     80,638  

Depreciation and amortization

    22,633     19,880     15,517  

Total operating expenses

    320,815     251,479     243,353  

Income from operations

    116,456     110,061     52,445  

Other income and (expenses):

                   

Realized losses on short-term investments

    (328 )        

Interest income

    3,003     6     9  

Interest expense

    (4,420 )   (1,336 )   (79 )

Income before taxes

    114,711     108,731     52,375  

Provision for income taxes

    48,648     43,379     19,657  

Net income

  $ 66,063   $ 65,352   $ 32,718  

Net income attributable to common stockholders, basic and diluted

  $ 66,014   $ 65,352   $ 32,718  

Net income per share attributable to common stockholders, basic and diluted:

                   

Basic net income per share

  $ 0.45   $ 0.50   $ 0.24  

Diluted net income per share

  $ 0.45   $ 0.49   $ 0.24  

Weighted average shares of common stock outstanding:

                   

Basic

    145,745     130,770     135,305  

Diluted

    148,275     133,289     136,375  

Cash dividend declared per share

  $   $   $ 0.15  

(1)
Includes stock-based compensation expense as follows:

 

Cost of revenue

  $ 164   $   $  
 

Sales and marketing

    173          
 

Research and development

    1,212          
 

General and administrative

    5,866     2,894     1,842  
 

Total stock-based compensation expense

  $ 7,415   $ 2,894   $ 1,842  

   

See notes to consolidated financial statements.

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Inovalon Holdings, Inc.

Consolidated Statements of Comprehensive Income

(In thousands)

 
  Year Ended December 31,  
 
  2015   2014   2013  

Net income

  $ 66,063   $ 65,352   $ 32,718  

Other comprehensive income (loss):

                   

Realized losses on short-term investments reclassified from accumulated other comprehensive income, net of tax of ($139)

    191          

Net change in unrealized gains and (losses) on available-for-sale investments, net of tax of $1,269

    (1,773 )        

Comprehensive income

  $ 64,481   $ 65,352   $ 32,718  

   

See notes to consolidated financial statements.

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Inovalon Holdings, Inc.

Consolidated Statements of Stockholders' Equity (Deficit)

(in thousands, except share amounts)

 
   
   
  Issued
Common Stock
  Issued Class A
Common Stock
  Issued Class B
Common Stock
   
   
   
   
   
   
 
 
  Preferred Stock   Treasury Stock    
   
  Accumulated
Other
Comprehensive
Loss
  Total
Stockholders'
Equity
(Deficit)
 
 
  Additional
Paid-in
Capital
  Retained
Earnings
 
 
  Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount  

Balance—January 1, 2013

      $       $       $     137,869,575   $ 1       $   $ 107,769   $ 129,059   $   $ 236,829  

Repurchase of common stock for treasury

                                    (10,703,360 )   (72,114 )               (72,114 )

Sale of common stock from treasury

                                    7,216,610     52,114                 52,114  

Retirement of common stock

                            (3,486,750 )       3,486,750     20,000     (2,403 )   (17,597 )        

Exercise of stock options

                            258,955                   270             270  

Tax benefit from exercise of non-qualified stock options

                                            437             437  

Forfeiture of fully vested non-qualified stock options

                                            (362 )           (362 )

Stock-based compensation expense—options

                                            1,842             1,842  

Dividends declared

                                                (20,000 )       (20,000 )

Net income

                                                32,718         32,718  

Balance—December 31, 2013

      $       $       $     134,641,780   $ 1       $   $ 107,553   $ 124,180   $   $ 231,734  

Repurchase of Class B common stock for treasury

                                    (12,571,605 )   (309,083 )               (309,083 )

Conversion Class B to Class A common stock

                    11,109,285         (11,109,285 )                            

Retirement of treasury stock

                            (1,462,320 )       1,462,320     9,066     (1,011 )   (8,055 )        

Exercise of stock options

                                    186,970                   720               720  

Stock-based compensation expense—options

                                            2,894             2,894  

Tax benefit from exercise of non-qualified stock options

                                            409             409  

Forfeiture of vested non-qualified stock options

                                            (248 )           (248 )

Net income

                                                65,352         65,352  

Balance—December 31, 2014

      $       $     11,109,285   $     122,257,145   $ 1     (11,109,285 ) $ (300,017 ) $ 110,317   $ 181,477   $   $ (8,222 )

Issuance of common stock upon initial public offering, net of offering costs

                    14,255,518                         359,170             359,170  

Issuance of treasury stock upon initial public offering, net of offering costs

                                    11,109,285     300,017     (20,115 )           279,902  

Stock-based compensation expense

                    538,383         94,784                 7,259             7,259  

Issuance of common stock related to business combination

                    235,737                         3,847             3,847  

Exercise of stock options

                            3,222,201                 14,652             14,652  

Tax benefit from exercise of non-qualified stock options

                                            18,608             18,608  

Conversion Class B to Class A common stock

                    27,313,057         (27,313,057 )                            

Issuance of shares for Employee Stock Purchase Plan

                    30,689                         8             8  

Shares retired for settlement of employee taxes upon conversion of restricted stock units

                            (30,710 )               (549 )           (549 )

Other comprehensive loss

                                                    (1,582 )   (1,582 )

Net income

                                                66,063         66,063  

Balance—December 31, 2015

      $       $     53,482,669   $     98,230,363   $ 1       $   $ 493,197   $ 247,540   $ (1,582 ) $ 739,156  

See notes to consolidated financial statements.

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Table of Contents


Inovalon Holdings, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 
  Year Ended December 31,  
 
  2015   2014   2013  

Cash flows from operating activities:

                   

Net income

  $ 66,063   $ 65,352   $ 32,718  

Adjustments to reconcile net income to net cash provided by operating activities:

                   

Stock-based compensation expense

    7,415     2,894     1,842  

Depreciation

    19,221     15,512     11,918  

Amortization of intangibles

    3,412     4,368     3,599  

Amortization/accretion of premiums or discounts on short-term investments

    2,212          

Realized losses on short-term investments

    328          

Tax payments for equity award issuances

    697          

Excess tax benefits from share-based compensation

    (18,608 )        

Deferred income taxes

    5,786     1,882     (333 )

Loss on disposal of long-lived assets

    52     197     250  

Loss on impairment of long-lived assets

        255      

Changes in assets and liabilities:

                   

Accounts receivable

    (24,475 )   (10,539 )   29,502  

Prepaid expenses and other current assets

    (1,110 )   (3,484 )   (181 )

Income taxes receivable

    7,825     (2,025 )   (3,121 )

Other assets

    (1,776 )   (1,035 )   (197 )

Accounts payable

    4,474     2,120     (1,468 )

Accrued compensation

    (6,178 )   7,686     (6,677 )

Other liabilities

    2,788     1,314     (233 )

Deferred rent

    (575 )   (357 )   230  

Deferred revenue

    3     1,388     (1,834 )

Net cash provided by operating activities

    67,554     85,528     66,015  

Cash flows from investing activities:

                   

Acquisition, net of cash acquired of $4,037

    (114,718 )        

Escrow funding associated with acquisition

    (7,875 )        

Purchases of short-term investments

    (964,037 )        

Maturities and sales of short-term investments

    344,653          

Purchases of property and equipment

    (6,486 )   (7,518 )   (9,202 )

Investment in capitalized software

    (19,951 )   (15,164 )   (9,664 )

Proceeds from sale of property and equipment

    94     63     3  

Net cash used in investing activities

    (768,320 )   (22,619 )   (18,863 )

Cash flows from financing activities:

                   

Proceeds from issuance of common stock, net of underwriters' discount

    362,082          

Proceeds from issuance of treasury stock, net of underwriters' discount

    282,172          

Payment of offering costs

    (5,182 )        

Repayment of credit facility borrowings

    (18,750 )        

Repurchase of common stock

        (309,083 )   (72,114 )

Sale of common stock

            52,114  

Proceeds from credit facility borrowings

        300,000      

Dividends paid

        (2,852 )   (23,511 )

Proceeds from exercise of stock options

    14,660     720     270  

Capital lease obligations paid

    (112 )   (130 )   (115 )

Tax paid for equity award issuances

    (1,245 )        

Excess tax benefits from stock-based compensation

    18,608     409     437  

Net cash provided by (used in) financing activities

    652,233     (10,936 )   (42,919 )

Decrease in cash and cash equivalents

    (48,533 )   51,973     4,233  

Cash and cash equivalents, beginning of period

    162,567     110,594     106,361  

Cash and cash equivalents, end of period

  $ 114,034   $ 162,567   $ 110,594  

Supplemental cash flow disclosure:

                   

Cash paid during the year for:

                   

Income taxes, net of refunds

  $ 35,038   $ 43,115   $ 22,723  

Interest

    4,359     1,101      

Non-cash investing activities:

                   

Tenant improvement allowance

            1,536  

Capital lease obligations incurred

    249     14     240  

Accounts payable for purchases of and investment in property, equipment and capitalized software

    3,189     2,089     1,209  

Accrued compensation for investment in capitalized software

    567     978     276  

Non-cash financing activities:

                   

Dividends declared, not paid

            2,852  

   

See notes to consolidated financial statements.

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements

1. NATURE OF OPERATIONS(in thousands, except share and per share amounts)

        Inovalon Holdings, Inc., (the "Company"), is 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. The value that the Company delivers to its clients is achieved by turning data into insights and those insights into action. Through the Company's large proprietary datasets, advanced integration technologies, sophisticated predictive analytics, and deep subject matter expertise, the Company delivers seamless, end-to-end platforms that bring the benefits of big data and large-scale analytics to the point of care. The Company's analytics platforms identify gaps in care, quality, data integrity, and financial performance, in its clients' datasets. The Company's data-driven intervention platforms enable clients to take the insights derived from the analytics and implement unique, patient-level solutions, drive impact and enhance patient engagement.

        On September 17, 2014, Inovalon, Inc. implemented a holding company reorganization, pursuant to which Inovalon Holdings, Inc. (together with its wholly owned subsidiaries, Inovalon or the Company) became the new parent company of Inovalon, Inc. and Inovalon, Inc. became the direct, wholly owned subsidiary of the Company. The Company was incorporated in the state of Delaware on September 11, 2014. Inovalon, Inc. was incorporated in the state of Delaware on November 18, 2005. The impact of the holding company reorganization is retrospectively presented in the accompanying consolidated financial statements by recognizing the entity as Inovalon Holdings, Inc. The consolidated balance sheet and consolidated statement of stockholders' equity (deficit) depict the newly authorized classes of stock. Additionally, earnings per share is calculated based upon the newly created Class B common stock (refer to Notes 4 and 13 for additional information). On January 14, 2015, the Company's board of directors approved a five-for-one stock split of the Company's Class A common stock and Class B common stock. Effective January 16, 2015 the Company amended its certificate of incorporation to give effect to the stock split and to change the Company's authorized common equity capital to 900,000,000 shares of common stock, 750,000,000 shares of Class A common stock, and 150,000,000 shares of Class B common stock, par value $0.000005 per share. All share data included in these financial statements give retroactive effect to the stock split and related amendment to the Company's certificate of incorporation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(in thousands, except years)

        Principles of Consolidation—The accompanying consolidated financial statements include the accounts of Inovalon Holdings, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

        Basis of Presentation and Use of Estimates—These consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles ("GAAP"). The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period.

        Significant estimates made by management include, but are not limited to: revenue recognition, specifically selling prices associated with the individual elements in multiple element arrangements; accounts receivable allowances; estimates of the fair value of the Company's common stock and the related estimates of the fair value of stock-based awards; fair value of intangibles and goodwill;

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(in thousands, except years) (Continued)

depreciable lives of property, equipment and capitalized software; and useful lives of intangible assets. Actual results could differ from management's estimates, and such differences could be material to the Company's consolidated financial position and results of operations.

        Cash and Cash Equivalents—Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less at the time of purchase, and demand deposits with financial institutions.

        Short-term investments—Our portfolio of short-term investments consists of investment grade debt securities. The Company classifies short-term investments as available-for-sale at the time of purchase and reevaluates such classification as of each balance sheet date. All short-term investments are recorded at estimated fair value. Unrealized gains and losses for available-for-sale securities are included in accumulated other comprehensive loss, a component of stockholders' equity. The Company evaluates its investments to assess whether those with unrealized loss positions are other than temporarily impaired. The Company considers impairments to be other-than-temporary if they are related to deterioration in credit risk, if it is more likely than not that the Company will be required to or if the Company intends to sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported as components of other income and (expenses), in the consolidated statements of operations. Interest, amortization of premiums, and accretion of discount on short-term investments classified as available for sale are included as a component of interest income, in the consolidated statements of operations. There were no other-than-temporary impairments during 2015.

        The Company may sell short-term investments at any time, without significant penalty, for use in current operations or for other purposes, even if the short-term investments have not yet reached maturity. As a result, the Company classifies these investments, including securities with maturities beyond 12 months, as current assets in the accompanying consolidated balance sheets. Gains or losses realized from the sale of securities are reclassified out of other comprehensive income (loss) into earnings using the specific identification method.

        Concentrations of Credit Risk—Accounts receivable and cash and cash equivalents subject the Company to its highest potential concentrations of credit risk. Although the Company deposits its cash and cash equivalents with multiple financial institutions, the Company's deposits may exceed federally insured limits. The Company has not experienced any losses on cash and cash equivalent accounts to date, and management believes the Company is not exposed to any significant credit risk related to cash and cash equivalents.

        The Company sells services to clients without requiring collateral, based on an evaluation of the client's financial condition. Exposure to losses on receivables is principally dependent on each client's financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses.

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(in thousands, except years) (Continued)

        Revenue from significant clients, those representing 10% or more of total revenue for the respective periods, is summarized as follows:

 
  Year Ended
December 31,
 
Revenue:
  2015   2014   2013  

Client A

    12 %   12 %   *  

Client B

    *     *     12 %

Client C

    *     11 %   *  

Client D

    *     *     11 %

Client E

    *     *     11 %

Client F

    *     *     10 %

*
Less than 10%

        Accounts receivable from significant clients, those representing 10% or more of total accounts receivable for the dates noted, is summarized below:

 
  December 31,  
Accounts Receivable:
  2015   2014  

Client C

    10 %   22 %

Client B

    *     12 %

*
Less than 10%

        Accounts Receivable and Allowances—Accounts receivable consists primarily of amounts due to the Company from its normal business activities. The Company provides an allowance for estimated losses resulting from the failure of clients to make required payments (credit losses) and a sales allowance for estimated future billing adjustments resulting from client concessions or resolutions of billing disputes. The provision for sales allowances are charged against revenue while credit losses are recorded in general and administrative expenses.

        Fair Value Measurements—The Company applies the Accounting Standards Codifications, or ASC, 820-10, Fair Value Measurements and Disclosures, ASC 820-10. ASC 820-10 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value, and expands required disclosures about fair value measurements. This guidance requires the Company to classify and disclose assets and liabilities measured at fair value on a recurring basis, as well as fair value measurements of assets and liabilities measured on a nonrecurring basis in periods subsequent to initial measurement, in a three-tier fair value hierarchy as described below.

        The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(in thousands, except years) (Continued)

unobservable inputs. The guidance describes three levels of inputs that may be used to measure fair value:

    Level 1—Financial assets and liabilities whose values are based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

    Level 2—Financial assets and liabilities whose values are based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

    Level 3—Financial assets and liabilities whose values are based on unobservable inputs for the asset or liability.

        Financial instruments are defined as cash, or other financial instruments to a third party. The carrying amounts of accounts receivable and other current assets, accounts payable and accrued liabilities approximate fair value due to their short-term nature. The Company's Credit Facilities (as defined in Note 9 below) approximate fair value because of their floating rate structure.

        Property, Equipment and Capitalized Software, net—Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization on property, leasehold improvements, equipment, and software is computed on a straight-line basis over the estimated useful lives of the assets, as follows:

 
  Useful Life

Office and computer equipment

  3 - 5 years

Purchased software

  5 years

Capitalized software

  3 - 5 years

Furniture and fixtures

  7 years

Building

  40 years

Leasehold improvements

  *

Assets under capital leases

  *

(*)
lesser of lease term or economic life

        Expenses for repairs and maintenance that do not extend the life of property and equipment are charged to expense as incurred. Expenses for major renewals and betterments, which significantly extend the useful lives of existing property and equipment, are capitalized and depreciated. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized.

        In accordance with ASC 350-40, Internal-use Software, the Company capitalizes certain software development costs while in the application development stage related to software developed for internal use. All other costs to develop software for internal use, either in the preliminary project stage or post implementation stage, are expensed when incurred. Software development costs are amortized on a straight-line basis over a three to five year period, which management believes represents the useful life of these capitalized costs.

        In accordance with ASC 985-20, Software to be Sold, Leased, or Marketed, certain software development costs are expensed as incurred until technological feasibility has been established.

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(in thousands, except years) (Continued)

Thereafter, all software development costs incurred through the software's general release date are capitalized and subsequently reported at the lower of amortized cost or net realizable value. Capitalized costs are amortized based on current and expected future revenue for each software solution with minimum annual amortization equal to the straight-line amortization over the estimated economic life, which is typically over a three to five year period, of the solution.

        Intangible Assets—Intangible assets consist of acquired technology, including developed and core technology, databases, trade names, and customer relationships. Intangible assets are initially recorded at fair value and amortized on a straight line basis over their estimated useful lives. Acquired intangible assets are being amortized over the following periods:

 
  Useful Life

Proprietary software technology

  2 - 10 years

Trademark

  5 - 10 years

Database

  10 years

Customer relationships

  4 - 15.75 years

Non-compete agreements

  Contractual term

        On an annual basis, the Company reviews its intangible assets for impairment based on estimated future undiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their net realizable values. There were no impairment charges on intangible assets for the years ended December 31, 2015 and 2014.

        Goodwill—Goodwill represents the excess of acquisition costs over the fair value of tangible net assets and identifiable intangible assets of the businesses acquired. Goodwill is not amortized. Goodwill is subject to impairment testing annually as of December 31st, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. The Company's impairment tests are based on a structure consisting of a single operating segment and two reporting units. During 2015, the Company performed a qualitative assessment for our reporting units, during this assessment, qualitative factors were first assessed to determine whether it was more likely than not that the fair value of the reporting units were less than their carrying amounts. Qualitative factors that were considered included, but were not limited to, macroeconomic conditions, industry and market conditions, company specific events, changes in circumstances, after tax cash flows and market capitalization. Based on the Company's annual impairment evaluation performed as of December 31, 2015, the Company concluded that there were no indicators of impairment and therefore it was more likely than not that the fair value of the goodwill exceeded its carrying amount, for each reporting unit, and there was no reason to perform the two-step impairment test. The two-step impairment test compares a reporting unit's carrying value to its fair value. If the fair value of the reporting unit exceeds the carrying value of the net assets, including goodwill assigned to that reporting unit, goodwill is not impaired. If the carrying value of the reporting unit's net assets, including goodwill, exceeds the fair value of the reporting unit, then the Company will determine the implied fair value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then an impairment loss is recorded for the difference between the carrying amount and the implied fair value of the goodwill. The Company completed its annual impairment test as of December 31, 2014 which resulted in no impairment of goodwill. Our 2014 impairment test was based

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(in thousands, except years) (Continued)

on a single operating segment and reporting unit structure. The fair value of our reporting unit significantly exceeded its respective carrying value at December 31, 2014. Accordingly, we did not record any goodwill impairments for any period presented.

        Valuation of Long-Lived Assets—The Company reviews long- lived assets for events or changes in circumstances that would indicate potential impairment. If the Company determines that an asset may not be recoverable, an impairment charge is recorded. A $255 impairment charge on long-lived assets was recognized in general as administrative expenses for the year ended December 31, 2014. There were no impairment charges on long-lived assets for the years ended December 31, 2015 and 2013.

        Revenue Recognition—The Company recognizes revenue when it is realized (or realizable) and earned (i.e., when services have been rendered or delivery of applicable deliverables has occurred). This occurs when persuasive evidence of an arrangement exists, the product or service has been performed or delivered, fees are fixed or determinable, and collection is reasonably assured. When collectability is not reasonably assured, revenue is recognized when cash is collected. Cash collections and invoices generated in excess of revenue recognized are recorded as deferred revenue until the revenue recognition criteria are met.

        The Company primarily derives its revenue from multiple-element arrangement sales of its cloud-based data analytics and data-driven intervention platform services. Revenue from these multiple element arrangements are recognized in accordance with ASC 605-25, Revenue Recognition—Multiple Element Arrangements. The Company allocates revenue to its cloud-based data analytics and data-driven intervention platform services using the relative selling price method. The Company has generally been unable to establish vendor-specific objective evidence of fair value, and while the Company routinely seeks third party evidence of fair value, meaningful data has generally been unavailable as the Company's services are unique and visibility into competitors pricing is unavailable. As a result, the Company uses its best estimate of selling price to allocate arrangement consideration to its contractual service elements.

        The Company has determined a best estimate of selling price by considering several external and internal factors including, but not limited to, pricing practices, margin objectives, competition, customer demand, internal costs, and overall economic trends.

        Generally, the best estimate of selling price is consistent with the contractual arrangement fee for each element.

        Revenue is recognized as cloud-based data analytics and data-driven intervention services are performed and information is delivered to clients, which generally align with the Company's right to invoice its clients. Cloud- based data analytics services are considered performed when gaps in care, quality, data integrity, or financial performance, and summarized key analytics and benchmarking analytics reports are delivered to its clients, provided that all contractual performance requirements and other revenue recognition criteria are met. Cloud-based data-driven intervention services are considered performed upon completion, provided that all contractual performance requirements and other revenue recognition criteria are met.

        The Company also generates revenues from data-driven advisory services. The Company recognizes revenue for data-driven advisory services when persuasive evidence of an arrangement exists, services have been rendered, the contract price is fixed or determinable, and collectability is reasonably assured.

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(in thousands, except years) (Continued)

The Company enters into arrangements for data-driven advisory services under time and materials, fixed-price, or retainer based contracts. Revenue for time and material contracts is recognized based upon contractually agreed upon billing rates applied to direct labor hours expended plus the costs of other items used in the performance of the contract. Revenue on certain fixed-price contracts is recognized using the proportional performance method. Performance is measured based on the ratio of labor hours incurred to total estimated labor hours. Revenues under certain other fixed-price and retainer based contracts are recognized ratably over the contract period or upon contract completion. Invoices to clients are generated in accordance with the terms of the applicable contract, which may not be directly related to the performance of services. Unbilled receivables are invoiced based upon the achievement of specific events as defined by each contract including deliverables and timetables. Unbilled receivables, if any, are classified as a current asset. Advanced billings to clients in excess of revenue earned are recorded as deferred revenue until the aforementioned revenue recognition criteria are met.

        The Company also enters into multiple-element software arrangements, which are recognized under ASC 985-605, Software Revenue Recognition, when software subscription licenses are provided to clients. Under these arrangements, the Company provides post-contract support, or PCS, including help desk support and unspecified upgrades. Vendor-specific objective evidence of fair value has not been established for PCS as PCS is not renewed separately from the license fees. As a result, under these subscription software license agreements, the Company recognizes revenue from the license of software ratably over the life of the agreement. The Company begins to recognize revenue upon execution of a signed agreement and delivery of the software, provided that the software license fees are fixed and determinable, and collection of the resulting receivable is reasonably assured.

        Certain of the Company's arrangements entitle a client to receive a refund if the Company fails to satisfy contractually specified performance obligations. The refund is limited to a portion or all of the consideration paid. In this case, revenue is recognized when performance obligations are satisfied.

        The Company maintains an allowance, charged to revenue, which reflects the Company's estimated future billing adjustments resulting from client concessions or resolutions of billing disputes.

        Cost of Revenue—Cost of revenue consists primarily of expenses for employees who provide direct revenue-generating services to clients, including salaries, benefits, discretionary incentive bonus compensation, employment taxes, equity compensation costs, and severance. Cost of revenue also includes expenses associated with the integration and verification of data and other service costs incurred to fulfill the Company's revenue contracts. Cost of revenue does not include allocated amounts for occupancy expense and depreciation and amortization.

        Research and Development—Research and development expenses consist primarily of employee-related costs. All such costs are expensed as incurred, except for certain internal use software development costs that are capitalized. Research and development excludes any allocation of occupancy expense, depreciation and amortization.

        Selling and Marketing—Sales and marketing expense consists primarily of employee-related expenses including salaries, benefits, discretionary incentive compensation, employment taxes, severance and equity compensation costs for employees engaged in sales, sales support, business development, and marketing. Sales and marketing expense also includes operating expenses for marketing programs,

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(in thousands, except years) (Continued)

research, trade shows and brand messages, and public relations costs. Sales and marketing expense excludes any allocation of occupancy expense, depreciation and amortization.

        General and Administrative—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. General and administrative expense excludes any allocation of depreciation and amortization.

        Segments—The Company operates its business as one operating segment. The Company develops cloud-based data analytics and data-driven intervention platforms and provides related services to its clients in order to achieve meaningful insight and improvement in clinical and quality outcomes, utilization, and financial performance. The Company derives substantially all of its revenue from the sale and support of one group of similar products and related services—proprietary datasets, advanced integration technologies, sophisticated predictive analytics, and deep subject matter expertise that enable the Company to provide seamless, end-to-end platforms that bring the benefits of big data and large-scale analytics to clients. Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the Company's chief operating decision maker ("CODM"), or decision-making group, in deciding how to allocate resources and in assessing performance. In the process of allocating resources and assessing performance, the Company's CODM, its chief executive officer, reviews financial information presented on a consolidated basis.

        Income Taxes—The Company accounts for income taxes in accordance with Accounting Standards Codification ASC 740, Income Taxes, which prescribes the use of the asset and liability approach to the recognition of deferred tax assets and liabilities related to the expected future tax consequences of events that have been recognized in the Company's financial statements or income tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets when it is more likely than not that a portion or all of a given deferred tax asset will not be realized. In accordance with ASC 740, income tax expense includes (i) deferred tax expense, which generally represents the net change in the deferred tax asset or liability balance during the period plus any change in valuation allowances and (ii) current tax expense, which represents the amount of tax currently payable to or receivable from a taxing authority plus amounts accrued for expected tax contingencies (including both tax and interest). ASC 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those positions to be recognized in the financial statements. The Company continually reviews tax laws, regulations and related guidance in order to properly record any uncertain tax liability positions. The Company adjusts these reserves in light of changing facts and circumstances.

        Stock-Based Compensation—All stock-based awards, including employee stock option grants, restricted stock unit ("RSU") grants, and restricted stock awards ("RSA"), are recorded at fair value as

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(in thousands, except years) (Continued)

of the grant date in accordance with ASC 718, Compensation—Stock Compensation, and recognized in the statement of operations over the service period of the applicable award using the straight-line method.

        The Company determines the fair value of its stock option awards on the date of grant, using the Black-Scholes option pricing model. The Company estimates the number of share-based awards that are expected to be forfeited based on historical and anticipated turnover data at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The assumptions used in calculating the fair value of share-based awards represent management's best estimates.

        The Company measures RSUs and RSAs that vest upon satisfaction of a service condition, or a liquidity condition if such a condition is applicable, based on the fair market values of the underlying common stock on the dates of grant. RSUs are share awards that, upon vesting, will deliver to the holder shares of the Company's common stock. Compensation expense is recognized based upon the satisfaction of the requisite service and or liquidity condition as of that date, following the straight-line method, net of estimated forfeitures. The Company estimates future forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

        Treasury Stock—The Company records treasury stock activities under the cost method whereby the cost of the acquired stock is recorded as treasury stock. The Company's accounting policy upon the formal retirement of treasury stock is to deduct the par value from common stock and to reflect any excess of cost over par value as a reduction to additional paid-in capital (to the extent created by previous issuances of the shares) and then retained earnings.

        Deferred Rent—Deferred rent consists of rent escalation payment terms, tenant improvement allowances and other incentives received from landlords related to the Company's operating leases for its facilities. Rent escalation represents the difference between actual operating lease payments due and straight-line rent expense, which is recorded by the Company over the term of the lease, including any construction period. The excess is recorded as a deferred credit in the early periods of the lease, when cash payments are generally lower than straight-line rent expense, and is reduced in the later periods of the lease when payments begin to exceed the straight-line expense. Tenant allowances from landlords for tenant improvements are generally comprised of cash received from the landlord as part of the negotiated terms of the lease or reimbursements of moving costs. These cash payments are recorded as deferred rent from landlords and are amortized as a reduction of periodic rent expense, over the term of the applicable lease.

        Deferred Initial Public Offering ("IPO") Issuance Costs—The Company capitalizes IPO costs, which primarily consist of direct incremental legal and accounting fees relating to the IPO. The IPO issuance costs will be offset against IPO proceeds in periods following the consummation of the offering. As of December 31, 2014, there was $2,888 deferred as prepaid expenses and other current assets, and no amounts were deferred at December 31, 2015.

    Recently Issued Accounting Standards

        In May 2014, the Financial Accounting Standards Board ("FASB") issued updated guidance on revenue from contracts with customers. This revenue recognition guidance supersedes existing

F-16


Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(in thousands, except years) (Continued)

GAAP guidance, including most industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance identifies five steps to apply in achieving this principle. On July 9, 2015, the FASB approved a one year deferral of the effective date of ASU 2014-09 to January 1, 2018. ASU 2014-09 may be applied either retrospectively or through the use of a modified-retrospective method. The Company is currently evaluating both methods of adoption as well as the effect ASU 2014-09 will have on the Company's consolidated financial position, results of operations, cash flows and financial disclosures, including whether the Company elects retrospective, or modified retrospective, method adoption. The Company currently expects the most significant impact arising from the adoption of ASU 2014-09 to result in additional disclosures related to qualitative and quantitative information concerning the nature, amount, timing, and any uncertainty of revenue and cash flows from contracts with customers.

        In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide a Performance Target Could Be Achieved After the Requisite Service Period, requiring that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company does not expect the adoption of this pronouncement to have an impact on our financial statements as this guidance mirrors our existing policy for such share-based awards.

        In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments ("ASU No. 2015-16"). ASU No. 2015-16 requires, for business combinations, that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU No. 2015-16 is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. The Company early adopted the provisions of ASU No. 2015-16 during the fourth quarter of 2015. Under the previous guidance, an acquirer must recognize adjustments to provisional amounts during the measurement period retrospectively (i.e. as if the accounting for the business combination had been completed at the acquisition date). That is, the acquirer must revise comparative information on the income statement and balance sheet for any prior periods affected. Under ASU 2015-16, acquirers must recognize measurement-period adjustments in the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The amendments in ASU 2015-16 require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earning by line item that would have been in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 did not change the criteria for determining whether an adjustment qualifies as a measurement-period adjustment and does not change the length of the measurement period. See Note 3 for the Company's disclosures related to the early adoption of ASU 2015-16.

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(in thousands, except years) (Continued)

        In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-17, Balance Sheet Classification of Deferred Taxes, which will require entities to present all deferred tax assets ("DTAs") and deferred tax liabilities ("DTLs") as non-current on the balance sheet. This guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted, and entities may choose whether to adopt this update prospectively or retrospectively. We have elected to early adopt ASU 2015-17 and change our method of classifying DTAs and DTLs as either current or non-current to classifying all DTAs and DTLs as non-current, and have chosen to apply a prospective method. Prior balance sheets were not retrospectively adjusted.

3. BUSINESS COMBINATIONS (in thousands, except share amounts)

        On September 1, 2015, (the "Acquisition Date"), pursuant to the provisions of the Share Purchase Agreement, ("the purchase agreement"), the Company acquired 100 percent of the stock of Avalere Health, Inc. ("Avalere"). Avalere is a provider of data-driven advisory services and business intelligence solutions primarily to the pharmaceutical and life sciences industry, as well as within their extensive array of client relationships with payors, providers and research institutions. Certain portions of the stated purchase price of $140,000 are contingent upon the achievement of financial and operational objectives, and other portions are subject to continued employment provisions. The Company completed the acquisition of Avalere through the use of cash on hand and the issuance of 235,737 shares, subject to sale restrictions, of Class A common stock. The addition of Avalere, with its more than 200 pharmaceutical and life sciences clients, as well as an extensive array of client relationships with payors, providers and research institutions, is expected to expand Inovalon's capabilities and client base into the expansive and adjacent markets of the pharmaceutical and life sciences industry.

        A summary of the composition of the stated purchase price and fair value of the stated purchase price is as follows:

Share Purchase Agreement purchase price

  $ 140,000  

Working capital adjustment

    3,112  

Subtotal

    143,112  

Fair Value Adjustments:

       

Restricted stock marketability discount

    (1,153 )

Performance objectives discount from maximum value

    (700 )

Post-acquisition compensation expense

    (16,357 )

Total fair value purchase price

  $ 124,902  

        The composition of the fair value purchase price is as follows:

Cash

  $ 118,755  

Issuance of Class A common stock

    3,847  

Contingent consideration

    2,300  

Total fair value purchase price

  $ 124,902  

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

3. BUSINESS COMBINATIONS (in thousands, except share amounts) (Continued)

Recording of Assets Acquired and Liabilities Assumed

        Estimates of fair value included in the consolidated financial statements, in conformity with ASC No. 820, Fair Value Measurements and Disclosures, represent the Company's best estimates and valuations. In accordance with ASC No. 805, Business Combinations, the allocation of the consideration value is subject to adjustment until the Company has completed its analysis, but not to exceed one year after the date of acquisition, which was September 1, 2015, to provide the Company with the time to complete the valuation of its assets and liabilities. As of December 31, 2015, the Company has completed and finalized its analysis and allocation of the consideration value to assets acquired and liabilities assumed. In addition, as discussed in Note 2, the Company early adopted the provisions of ASU 2015-16 and recorded measurement period adjustments that were identified in the process of finalizing the aforementioned analysis and allocation.

        The following table summarizes the final purchase price allocation to assets acquired and liabilities assumed, including identification of measurement period adjustments:

 
  Preliminary
Recorded
Value
  Measurement
Period
Adjustments
  Final
Recorded
Value
 

Cash and cash equivalents

  $ 4,037   $   $ 4,037  

Accounts receivable

    13,011     (120 )   12,891  

Current assets

    1,958         1,958  

Property, equipment and capitalized software

    3,248         3,248  

Intangible assets(1)

    57,520     300     57,820  

Goodwill(2)

    74,238     1,226     75,464  

Deferred income taxes

    947     (224 )   723  

Other assets

    224         224  

Total assets acquired

    155,183     1,182     156,365  

Current liabilities

    (11,054 )   108     (10,946 )

Deferred tax liability

    (17,677 )   (686 )   (18,363 )

Deferred revenue

    (1,600 )       (1,600 )

Other liabilities

    (554 )       (554 )

Total liabilities assumed

    (30,885 )   (578 )   (31,463 )

Net assets acquired

  $ 124,298   $ 604   $ 124,902  

(1)
Identifiable intangible assets were measured using a combination of an income approach and a market approach.

(2)
Goodwill is the excess of the consideration transferred over the net assets recognized and represents the future economic benefits, primarily as a result of other assets acquired that could not be individually identified and separately recognized. Goodwill is not amortized and is not deductible for tax purposes.

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

3. BUSINESS COMBINATIONS (in thousands, except share amounts) (Continued)

        The amounts attributed to identified intangible assets are summarized in the table below:

 
  Weighted
Average
Useful Life
  Preliminary
Recorded
Value
  Measurement
Period
Adjustments
  Final
Recorded
Value
 

Customer relationships

  10 years   $ 45,800   $   $ 45,800  

Tradename

  10 years     8,300         8,300  

Technology

  5 years     2,600     300     2,900  

Non-compete agreements

  3 years     820         820  

Total intangible assets

      $ 57,520   $ 300   $ 57,820  

        Acquisition-related costs were expensed as incurred. For year ended December 31, 2015, the Company incurred acquisition-related costs of $1,483 recognized within "General and administrative" expenses in the accompanying consolidated statements of operations.

Avalere Results and Pro Forma Impact of Acquisition

        The following table presents revenue and loss before taxes of Avalere since the acquisition date, September 1, 2015, included in the consolidated statements of operations for the year ended December 31, 2015:

 
  Total  

Revenue

  $ 17,492  

Loss before taxes

  $ (29 )

        The following table presents pro forma information, based on estimates and assumptions that the Company believes to be reasonable, for the Company as if the acquisition of Avalere had occurred at the beginning of the earliest period presented:

 
  Unaudited  
 
  Year Ended
December 31,
 
 
  2015   2014  

Pro forma revenue

  $ 469,784   $ 408,671  

Pro forma income before taxes

  $ 108,977   $ 92,635  

        The pro forma information provided in the table above is not necessarily indicative of the consolidated results of operations for future periods or the results that actually would have been realized had the acquisition been completed at the beginning of the periods presented.

4. NET INCOME PER SHARE (in thousands, except per share amounts)

        During September 2014, the Company completed a holding company reorganization. As part of the reorganization, the Company implemented a multi-class stock structure. The Company has retrospectively presented the impact on net income per share (EPS) of this reorganization by calculating EPS based on the newly authorized, issued and outstanding shares of Class A and Class B

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

4. NET INCOME PER SHARE (in thousands, except per share amounts) (Continued)

common stock. Holders of all outstanding classes of common stock participate ratably in earnings on an identical per share basis as if all shares were a single class.

        The Company has issued restricted share awards of Class A common stock (RSAs) under the 2015 Omnibus Incentive Plan. The Company considers issued and unvested RSAs to be participating securities as the holders of these RSAs have a non-forfeitable right to dividends in the event of the Company's declaration of a dividend on shares of Class A and Class B common stock. Subsequent to the issuance of the participating securities, the Company applied the two-class method required in calculating net income per share of Class A and Class B common stock.

        Undistributed net income for a given period is apportioned to participating securities based on the weighted-average shares of each class of common stock outstanding during the applicable period as a percentage of the total weighted-average shares outstanding during the same period.

        Under the two-class method, net income attributable to common stockholders is determined by allocating undistributed earnings, calculated as net income, less earnings attributable to participating securities. The net income per share attributable to common stockholders is allocated based on the contractual participation rights of the Class A common stock and Class B common stock as if the income for the period has been distributed. As the liquidation and dividend rights are identical for both classes of common stock, the net income attributable to common stockholders is allocated on a proportionate basis.

        The Company has issued Class A common stock and Class B common stock. Holders of Class A common stock generally have the same rights, including rights to dividends, as holders of Class B common stock, except that holders of Class A common stock have one vote per share while holders of Class B common stock have ten votes per share. Each share of Class B common stock will convert into one share of Class A common stock immediately upon its sale or transfer. As such, basic and fully diluted earnings per share for Class A common stock and Class B common stock are the same.

        Basic net income per share of common stock is computed by dividing the net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. All participating securities are excluded from the basic weighted-average shares of common stock outstanding. Unvested RSAs are excluded from the calculation of the weighted-average shares of common stock until vesting occurs, as the restricted shares are subject to forfeiture and cancellation until vested. For purposes of the diluted net income per share attributable to common stockholders calculation, unvested shares of common stock resulting from RSAs are considered to be potentially dilutive shares of common stock.

        Diluted net income per share attributable to common stockholders is computed by dividing net income attributable to common stockholders by the weighted-average shares outstanding, including potentially dilutive shares of common stock assuming the dilutive effect of potential shares of common stock for the period determined using the treasury stock method. Potentially dilutive securities also include stock options, restricted stock units, and shares to be purchased under the employee stock purchase plan. Under the treasury stock method, dilutive securities are assumed to be exercised at the beginning of the periods and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Securities are excluded from the computations of diluted net income per share if their effect would be anti-dilutive to earnings per share.

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

4. NET INCOME PER SHARE (in thousands, except per share amounts) (Continued)

        The numerators and denominators of the basic and diluted EPS computations, reconciliations of the weighted average shares outstanding, and resulting basic and diluted earnings per share for our common stock are calculated as follows:

 
  Year Ended December 31,  
 
  2015   2014   2013  

Basic

                   

Numerator:

                   

Net income

  $ 66,063   $ 65,352   $ 32,718  

Undistributed earnings allocated to participating securities

    49          

Net income attributable to common stockholders—basic

  $ 66,014   $ 65,352   $ 32,718  

Denominator:

                   

Weighted average shares used in computing net income per share attributable to common stockholders—basic

    145,745     130,770     135,305  

Net income per share attributable to common stockholders—basic

  $ 0.45   $ 0.50   $ 0.24  

Diluted

                   

Numerator:

                   

Net income attributable to common stockholders—diluted

  $ 66,014   $ 65,352   $ 32,718  

Denominator:

                   

Number of shares used for basic EPS computation

    145,745     130,770     135,305  

Effect of dilutive securities

    2,530     2,519     1,070  

Weighted average shares used in computing net income per share attributable to common stockholders—diluted

    148,275     133,289     136,375  

Net income per share attributable to common stockholders—diluted

  $ 0.45   $ 0.49   $ 0.24  

        The computation of diluted EPS does not include 645, and 1,234, and 4,905 equity awards for the years ended December 31, 2015, 2014, and 2013, respectively, because their inclusion would have an anti-dilutive effect on EPS.

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

5. SHORT-TERM INVESTMENTS (in thousands)

        As of December 31, 2015, short-term investments consisted of the following:

 
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Estimated
Fair Value
 

Available-for-sale securities:

                         

Corporate notes and bonds

  $ 390,185   $ 12   $ (2,321 ) $ 387,876  

U.S. agency obligations

    121,521     11     (203 )   121,329  

U.S. treasury securities

    60,362     2     (179 )   60,185  

Commercial paper

    36,849         (28 )   36,821  

Certificates of deposit

    7,928         (9 )   7,919  

Total available-for-sale securities

  $ 616,845   $ 25   $ (2,740 ) $ 614,130  

        As of December 31, 2014, the Company held no short-term investments.

        The following table summarizes the estimated fair value of our short-term investments, designated as available-for-sale and classified by the contractual maturity date of the securities as of the dates shown:

 
  December 31,
2015
  December 31,
2014
 

Due in one year or less

  $ 206,679   $  

Due in greater than one year

    407,451      

Total

  $ 614,130   $  

        The Company has certain available-for-sale securities in a gross unrealized loss position, all of which have been in such position for less than 12 months. The Company reviews its debt securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. The Company considers factors such as the length of time and extent to which the market value has been less than the cost, the financial position and near-term prospects of the issuer and the Company's intent to sell, or whether it is more likely than not the Company will be required to sell the investment before recovery of the investment's amortized-cost basis. If the Company determines that an other-than-temporary decline exists, or if write downs related to credit losses are necessary, in one of these securities, the unrealized losses attributable to the respective investment would be reclassified to realized losses on short-term investments within the statement of operations. There were no impairments considered other-than-temporary as of December 31, 2015.

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

5. SHORT-TERM INVESTMENTS (in thousands) (Continued)

        The following table shows the fair values and the gross unrealized losses of available-for-sale securities that have been in a gross unrealized loss position for less than 12 months, aggregated by investment category as of December 31, 2015:

 
  Estimated
Fair Value
  Gross
Unrealized
Losses
 

Corporate notes and bonds

  $ 384,570   $ (2,321 )

U.S. agency obligations

    86,044     (203 )

U.S. treasury securities

    55,796     (179 )

Commercial paper

    36,821     (28 )

Certificates of deposit

    7,679     (9 )

  $ 570,910   $ (2,740 )

6. FAIR VALUE MEASUREMENTS (in thousands)

        The following table presents the fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2015:

 
  Level 1   Level 2   Level 3   Total  

Cash Equivalents:

                         

Money market funds

  $ 2,521   $   $   $ 2,521  

Short-term investments:

                         

Corporate notes and bonds

        387,876         387,876  

U.S. agency obligations

        121,329         121,329  

U.S. treasury securities

        60,185         60,185  

Commercial paper

        36,821         36,821  

Certificates of deposit

        7,919         7,919  

Other Current Liabilities:

                         

Contingent consideration

            (2,300 )   (2,300 )

Total

  $ 2,521   $ 614,130   $ (2,300 ) $ 614,351  

        The Company determines the fair value of its security holdings based on pricing from its pricing vendors. The valuation techniques used to measure the fair value of financial instruments having Level 2 inputs were derived from non-binding consensus prices that are corroborated by observable market data or quoted market prices for similar instruments. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs). The Company performs procedures to ensure that appropriate fair values are recorded such as comparing prices obtained from other sources.

        On September 1, 2015, the Company recorded contingent consideration at it fair value in conjunction with the acquisition of Avalere. The Company determines fair value of its contingent consideration, using Level 3 inputs under the fair value hierarchy, consisting of information provided by observing certain operating metrics along with management's own assumptions. The Company adjusts

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

6. FAIR VALUE MEASUREMENTS (in thousands) (Continued)

the estimated fair value of its contingent consideration quarterly. The change in value is reflected in our statements of operations as gain (loss) from contingent consideration valuation as a component of general and administrative expenses. During the year ended December 31, 2015 the fair value of the Company's contingent consideration decreased $100 as a result of finalizing the Company's analysis and allocation of the consideration value to assets acquired and liabilities assumed.

        As of December 31, 2014, the Company measured its money market investment balances, included in cash and cash equivalents, at fair value based on quoted prices that are equivalent to cost (Level 1); the Company did not have any assets measured at fair value on a recurring basis using significant other observable inputs (Level 2), or significant unobservable inputs (Level 3), or any liabilities measured at fair value as prescribed by ASC 820-10.

7. PROPERTY, EQUIPMENT AND CAPITALIZED SOFTWARE (in thousands)

        Property, equipment and capitalized software consisted of the following:

 
  December 31,  
 
  2015   2014  

Office and computer equipment

  $ 30,286   $ 23,844  

Leasehold improvements

    12,428     11,999  

Purchased software

    12,351     9,916  

Capitalized software

    60,735     39,432  

Furniture and fixtures

    5,391     4,894  

Land

    390     390  

Building

    1,797     1,750  

Work in process

    3,333     2,917  

Total

    126,711     95,142  

Less: accumulated depreciation and amortization

    (61,680 )   (44,180 )

Property, equipment and capitalized software, net

  $ 65,031   $ 50,962  

        The Company leases certain office equipment under capital lease agreements, with bargain purchase options at the end of the lease term. Leased office equipment included in property and equipment at December 31, 2015 and 2014 was $734 and $961, respectively.

        Depreciation expense for the years ended December 31, 2015, 2014, and 2013 was $19,221, $15,512, and $11,918, respectively. Amortization of the capital leases included in depreciation expense was $118, $133, and $115, for the years ended December 31, 2015, 2014, and 2013, respectively. At December 31, 2015 and 2014, the Company had unamortized capitalized software costs, including costs classified as work in progress, of $38,165 and $28,417, respectively.

        At December 31, 2015 and 2014, work in process consisted primarily of purchased software licenses, computer equipment, and capitalized software, which was not placed into service.

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

8. GOODWILL AND INTANGIBLE ASSETS (in thousands, except years)

Goodwill

        Goodwill is primarily derived from the Company's acquisitions of Avalere in 2015, Catalyst Information Technologies, Inc. in 2009, and Medical Reliance Group, Inc. in 2006. Refer to Note 3 for further information regarding the goodwill that arose from the Company's acquisition of Avalere during 2015.

        The following table summarizes the activity related to the carrying value of our goodwill during the years ended December 31, 2015 and 2014:

Goodwill as of January 1, 2014

  $ 62,269  

Goodwill as of December 31, 2014

  $ 62,269  

Goodwill recorded in connection with the acquisition of Avalere Health, Inc

    75,464  

Goodwill as of December 31, 2015

  $ 137,733  

Intangible Assets

        Intangible assets at December 31, 2015 and 2014 were as follows:

 
  December 31, 2015  
 
  Gross   Accumulated
Amortization
  Net   Weighted
Average Remaining
Useful Life (years)
 

Proprietary software technologies

  $ 16,077   $ (16,077 ) $      

Trademark

    360     (360 )        

Database

    6,500     (4,097 )   2,403     3.8  

Customer relationships

    13,650     (9,931 )   3,719     9.4  

Avalere acquisition (see Note 3):

                         

Customer Relationships

    45,800     (1,526 )   44,274     9.8  

Tradename

    8,300     (277 )   8,023     9.8  

Technology

    2,900     (193 )   2,707     4.7  

Non-compete agreements

    820     (91 )   729     2.7  

Total

  $ 94,407   $ (32,552 ) $ 61,855        

 

 
  December 31, 2014  
 
  Gross   Accumulated
Amortization
  Net   Weighted
Average Remaining
Useful Life (years)
 

Proprietary software technologies

  $ 16,077   $ (15,796 ) $ 281     0.3  

Trademark

    360     (360 )        

Database

    6,500     (3,447 )   3,053     4.8  

Customer relationships

    13,650     (9,537 )   4,113     10.4  

Total

  $ 36,587   $ (29,140 ) $ 7,447        

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

8. GOODWILL AND INTANGIBLE ASSETS (in thousands, except years) (Continued)

        Driven primarily by the accelerated arrival of advancing generations of technological software capabilities, management decided to discontinue the use of proprietary software technology, acquired in the Medical Reliance Group acquisition, with an initial expected useful life of ten years. The Company shortened the life of the intangible asset, and accelerated straight-line amortization over the period of time the Company transitioned to an advanced software application, which occurred during 2015. At December 31, 2015 and 2014, the net carrying value of this proprietary software technology was zero and $281, respectively.

        Amortization expense for the years ended December 31, 2015, 2014, and 2013 was $3,412, $4,368, and $3,599, respectively.

        Estimated future amortization expense of intangible assets, based upon the Company's intangible assets at December 31, 2015, is as follows:

 
  Amount  

Year ending December 31:

       

2016

  $ 7,307  

2017

    7,307  

2018

    7,216  

2019

    6,837  

2020

    6,190  

Thereafter

    26,998  

Total

  $ 61,855  

9. CREDIT FACILITIES (in thousands)

        On September 19, 2014, the Company entered into a Credit and Guaranty Agreement ("Credit Agreement"), with a group of lenders including Goldman Sachs Bank USA, as administrative agent, to provide credit facilities in the aggregate maximum principal amount of $400,000, consisting of a senior unsecured term loan facility in the original principal amount of $300,000 (the "Term Loan Facility"), and a senior unsecured revolving credit facility in the maximum principal amount of $100,000 (together with the Term Loan Facility, the "Credit Facilities").

        The Credit Facilities consisted of the following:

 
  December 31,
2015
  December 31,
2014
 

Revolving Credit Facility

  $   $  

Term Loan Facility

    281,250     300,000  

Total Credit Facilities

    281,250     300,000  

Less: current portion

    15,000     18,750  

Non-current Credit Facilities

  $ 266,250   $ 281,250  

        The revolving credit facility became available to the Company on February 18, 2015, upon the consummation of its IPO.

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Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

9. CREDIT FACILITIES (in thousands) (Continued)

        The Company's borrowing rate under the Credit Facilities is dependent on whether the Company elects Eurodollar loans or base rate loans. Interest accrues on Eurodollar loans at a defined Eurodollar rate, defined as the London Interbank Offer Rate ("LIBOR") plus the applicable margin of 1.25%, as defined in the Credit Agreement. Interest is payable monthly in arrears.

        The Credit Facility requires the Company to comply with specified financial covenants, including the maintenance of a $50,000 minimum cash and cash equivalents balance as of each calendar quarter end. The minimum cash and cash equivalents balance is not required to be held with any of the group of lenders and may be commingled with the Company's operating funds. The Credit Facility also contains various covenants, including affirmative covenants with respect to certain reporting requirements and maintaining certain business activities, and negative covenants that, among other things, may limit or impose restrictions on the Company's ability to incur liens, incur additional indebtedness, make investments, make acquisitions and undertake certain additional actions. As of, and during, the year ended December 31, 2015, the Company was in compliance with the financial covenants under the Credit Agreement.

        Scheduled maturity of the Credit Facilities follows:

 
  Amount  

2016

  $ 15,000  

2017

    30,000  

2018

    45,000  

2019

    191,250  

Total

  $ 281,250  

10. COMMITMENTS AND CONTINGENCIES (in thousands)

        Operating Leases—The Company leases office space under operating lease arrangements, some of which contain renewal options. Future non-cancellable lease payments as of December 31, 2015 are as follows:

 
  Amount  

Year ending December 31,

       

2016

  $ 8,141  

2017

    7,960  

2018

    6,772  

2019

    2,778  

2020

     

Total

  $ 25,651  

        Total expense under operating leases was $7,178, $7,438, and $6,572, during the years ended December 31, 2015, 2014, and 2013, respectively. Certain operating leases contain rent escalation clauses, which are recorded on a straight-line basis over the initial term of the lease, with the difference between the rent paid and the straight-line rent recorded as a deferred rent liability. Lease incentives received from landlords are recorded as deferred rent liabilities and are amortized on a straight-line

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Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

10. COMMITMENTS AND CONTINGENCIES (in thousands) (Continued)

basis over the lease term as a reduction to rent expense. The deferred rent liability was $3,243 and $3,186 at December 31, 2015, and 2014, respectively.

        Capital Leases—The total capital lease liability at December 31, 2015 and 2014 was $405 and $267, respectively, which approximates fair value due to the short duration of the obligations.

        Letter of Credit—During 2014 the Company maintained a letter of credit with its primary commercial financial institution. As of December 31, 2015 and 2014, the outstanding letter of credit was $0 and $247, respectively. The letter of credit was in lieu of a security deposit for the Company's corporate office. During 2015 the letter of credit was eliminated.

        Litigation—From time to time, the Company is involved in various litigation matters arising out of the normal course of business. The Company consults with legal counsel on those issues related to litigation and seeks input from other experts and advisors with respect to such matters. Estimating the probable losses or a range of probable losses resulting from litigation, government actions and other legal proceedings is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, may involve discretionary amounts, present novel legal theories, are in the early stages of the proceedings, or are subject to appeal. Whether any losses, damages or remedies ultimately resulting from such matters could reasonably have a material effect on the Company's business, financial condition, results of operation, or cash flows will depend on a number of variables, including, for example, the timing and amount of such losses or damages (if any) and the structure and type of any such remedies. The Company's management does not presently expect any litigation matters to have a material adverse impact on the consolidated financial statements of the Company.

11. STOCK-BASED COMPENSATION (in thousands, except share and per share amounts, years, and percentages)

Stock Options

        On December 31, 2006, the Company and its stockholders established the 2007 Long-Term Incentive Plan, or Plan, under which the Company's Board of Directors, at its discretion, could grant stock options to employees and certain directors of the Company. During 2009, the Plan was amended and currently authorizes the grant of stock options or other equity instruments for up to 10,275,000 shares of common stock. The stock options granted under the Plan generally expire at the earlier of a specified period after termination of service or the date specified by the Board of Directors at the date of grant, but not more than ten years from such grant date. Stock issued as a result of exercised stock options will be issued from the Company's authorized available stock. Effective June 5, 2012, the 2007 Long-Term Incentive Plan changed its name to the Inovalon, Inc. 2007 Long-Term Incentive Plan. Options granted under the Plan may be incentive stock options or non-qualified stock options under the applicable provisions of the Internal Revenue Code. The 2007 Long-Term Incentive Plan was terminated upon completion of the IPO. Awards granted under the 2007 Long-Term Incentive Plan will remain outstanding until the earlier of exercise, forfeiture, cancellation or expiration.

        On February 18, 2015, the date of the completion of the Company's IPO, the Company's 2015 Omnibus Incentive Plan (the "2015 Plan") became effective. The 2015 Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to the Company's employees and any parent and subsidiary employees, and for

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Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

11. STOCK-BASED COMPENSATION (in thousands, except share and per share amounts, years, and percentages) (Continued)

the grant of non-qualified stock options, stock appreciation rights, restricted stock, RSAs, RSUs, dividend equivalent rights, cash-based awards (including annual cash incentives and long-term cash incentives), and any combination thereof to the Company's employees, directors, and consultants and to employees, directors, and consultants of certain affiliated entities. The Company reserved for issuance under the 2015 Plan shares of its Class A common stock equal to the sum of: (i) 7,335,430 shares of Class A common stock; and (ii) the number of shares of its Class A common stock underlying awards granted under the Company's 2007 Long-Term Incentive Plan, which was terminated upon completion of the IPO, that are forfeited, canceled, or expire (whether voluntarily or involuntarily).

        The Company selected the Black-Scholes option-pricing model as the most appropriate model for determining the estimated fair value for stock-based awards. The Black-Scholes option-pricing model requires the use of estimates, including the fair market value of the Company's common stock prior to the Company's IPO, expected stock price volatility, expected term, estimated forfeitures and the risk-free interest rate. The fair value of stock option awards is amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. The amount of stock-based compensation expense recognized is based on the estimated portion of the awards that are expected to vest. Actual and anticipated forfeiture rates were applied in the expense calculation.

        Prior to the Company's IPO, determining the fair value of the Company's common stock required complex and subjective judgment and estimates. There is inherent uncertainty in making these judgments and estimates. Since the Company's share price was not publicly quoted and lacked an active trading market prior to the Company's IPO in February 2015, the Company's Compensation Committee was required to estimate the fair value of the common stock at each meeting at which options were granted based on factors including, but not limited to, contemporaneous valuations of the Company's common stock performed by an unrelated third-party specialist, the lack of marketability of the Company's common stock, developments in the business, share repurchase arrangements, the status of the Company's development and sales efforts, revenue growth, valuations of comparable companies, and additional objective and subjective factors relating to the Company's business.

        The Company did not grant any options during 2015. The fair value of each option grant is estimated on the date of grant applying the Black-Scholes option pricing model using the following assumptions:

 
  December 31,  
 
  2015   2014   2013  

Expected stock price volatility

    %   42.9 %   41.5 %

Expected term

    —Years     6.5 Years     6.5 Years  

Expected dividend yield

             

Risk-free interest rate

    %   2.1 %   2.3 %

Weighted-average fair value of underlying common stock

  $   $ 21.68   $ 6.90  

        Expected volatility was calculated as of each grant date based on reported data for several unrelated public companies within the Company's industry that are considered to be comparable to the Company and for which historical information was available. The average expected term was determined under the simplified calculation as provided by the Securities and Exchange Commission's

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Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

11. STOCK-BASED COMPENSATION (in thousands, except share and per share amounts, years, and percentages) (Continued)

Staff Accounting Bulletin No. 107, Share-Based Payment, which is the mid-point between the vesting date and the end of the contractual term. The dividend yield assumption of zero is based upon the fact that the Company does not have a formal dividend payment policy, the Company does not intend to pay cash dividends on its common stock in the future, and, to the extent the Company pays dividends in the future, there is no assurance that any such dividends will be comparable to those previously declared. Any declarations of dividends and the establishment of future record and payment dates are subject to the final determination of the Company's Board of Directors. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve rates with the remaining term commensurate with the expected life assumed at the date of grant. Forfeitures are estimated based on historical experience and adjustments are made annually to reflect actual forfeiture experience.

        Stock option activity under the Company's plans was as follows:

 
  Shares
Available
for Grant
  Number of
Shares
Outstanding
  Weighted-
Average
Exercise
Price
  Weighted-
Average
Grant-date
Fair Value
of Underlying
Common
Stock
  Weighted-
Average
Remaining
Contractual
Life (in years)
  Aggregate
Intrinsic
Value
 

Balance at January 1, 2013

    2,913,375     6,388,040   $ 5.63           6.2   $ 14,557  

Stock options granted

    (1,246,985 )   1,246,985   $ 6.90   $ 6.90              

Stock options exercised

        (258,955 ) $ 1.04                    

Stock options cancelled

    1,466,535     (1,466,535 ) $ 7.29                    

Balance at December 31, 2013

    3,132,925     5,909,535   $ 5.69           5.7   $ 10,471  

Stock options granted

    (1,644,720 )   1,644,720   $ 7.58   $ 14.28              

Stock options exercised

        (186,970 ) $ 3.85                    

Stock options cancelled

    916,010     (916,010 ) $ 7.45                    

Balance at December 31, 2014

    2,404,215     6,451,275   $ 5.97           5.7   $ 101,318  

Stock options granted

                                 

Stock options exercised

        (3,222,201 ) $ 4.55                    

Stock options cancelled

    5,000     (5,000 ) $ 6.77                    

Balance at December 31, 2015

    2,409,215     3,224,074   $ 7.40                    

Exercisable at December 31, 2015

          1,288,900   $ 7.61           5.4   $ 21,091  

Vested and expected to vest at December 31, 2015

          2,273,160   $ 7.43           6.5   $ 37,589  

        The total grant-date fair value of stock options granted during the years ended December 31, 2015, 2014, and 2013 was $0, $14,922, and $3,661, respectively. The weighted average grant-date fair value per share of stock options granted during the years ended December 31, 2015, 2014, and 2013, was $0, $9.07, and $2.94, respectively.

        As of December 31, 2015, there is $4.8 of total unrecognized compensation expense related to unvested stock options, and this expense is expected to be recognized over a weighted-average period of 3.2 years.

        The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the fair value of the Company's common stock and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

11. STOCK-BASED COMPENSATION (in thousands, except share and per share amounts, years, and percentages) (Continued)

holders exercised their options. This amount is subject to change based on changes to the fair market value of the Company's common stock.

Restricted Stock Units

        On November 13, 2014, the Company granted 488,780 RSUs pursuant to the Company's 2007 Long-Term Incentive Plan. The RSUs had a grant date fair value of $9,722. The Company used the fair market value of the underlying common stock on the date of grant to determine the fair value of RSUs, which was $19.89 per RSU. The RSUs vest upon the satisfaction of both a service condition and a liquidity condition. The service condition for these awards is satisfied over five years. The liquidity condition is satisfied upon the occurrence of a qualifying event, defined as a change of control transaction or six months following the completion of the Company's IPO. As of December 31, 2014, no share-based compensation expense had been recognized for these RSUs because the qualifying events (described above) had not occurred. This six-month period following the IPO is not a substantive service condition and, accordingly, in 2015, the year in which the Company consummated its IPO, the Company recognized a cumulative share-based compensation expense for the portion of the RSUs that had met the service condition as of that date, following the straight-line method, net of estimated forfeitures. All remaining unrecognized share-based compensation expense related to these RSUs will be recorded over the remaining requisite service period using the straight-line method, based on awards ultimately expected to vest. The Company estimates future forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

        On March 5, 2015, the Company granted 76,273 RSUs pursuant to the 2015 Plan. The awards granted vest ratably over five years on each anniversary of the award grant date, and upon vesting, the Company will deliver to the holder shares of the Company's Class A common stock under the 2015 Plan. Pursuant to the terms of the awards, any unvested shares terminate upon the RSU holders' separation from the Company. The grant date fair value of the RSUs was $2,337, in aggregate, or $30.64 per RSU. The Company will recognize share-based compensation expense following the straight-line method, net of estimated forfeitures, over the requisite service period. The Company estimates future forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

        A summary of RSUs granted and unvested as of December 31, 2015 is as follows:

 
  RSUs Outstanding  
 
  Number of
RSUs
  Weighted
Average
Fair Value
Per Unit
 

RSUs granted and unvested at January 1, 2015

    488,780   $ 19.89  

RSUs granted during 2015

    76,273     30.64  

RSUs vested during 2015

    (94,784 )   19.89  

RSUs forfeited during 2015

    (14,860 )   19.89  

RSUs granted and unvested at December 31, 2015

    455,409   $ 21.69  

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

11. STOCK-BASED COMPENSATION (in thousands, except share and per share amounts, years, and percentages) (Continued)

        As of December 31, 2015, there was a total of $7,188 in unrecognized compensation cost, net of estimated forfeitures, related to unvested RSUs, which are expected to be recognized over a weighted-average period of approximately 3.93 years.

Restricted Stock Awards

        On May 28, 2015, the Company granted 71,946 RSAs pursuant to the 2015 Plan. RSAs granted to directors fully vest upon the one year anniversary of the award grant date, and RSAs granted to employees vest ratably over five years on each anniversary of the award grant date. Upon vesting, the Company will deliver shares of the Company's Class A common stock to the holders. Pursuant to the terms of the awards, any unvested shares terminate upon the RSA holders' separation from the Company. The grant date fair value of the RSAs was $2,000, in aggregate, or $27.80 per RSA. The Company recognizes share-based compensation expense for the RSAs following the straight-line method, net of estimated forfeitures, over the requisite service period. The Company estimates future forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

        On November 12, 2015, the company granted 524,105 RSAs pursuant to the 2015 Plan. The RSAs were granted to employees and vest ratably over five years on each anniversary of the award grant date. Upon vesting, the Company will deliver shares of the Company's Class A common stock to the holders. Pursuant to the terms of the awards, any unvested shares terminate upon the RSA holders' separation from the Company. The grant date fair value of the RSAs was $9,198, in aggregate, or $17.55 per RSA. The Company recognizes share-based compensation expense for the RSAs following the straight-line method, net of estimated forfeitures, over the requisite service period. The Company estimates future forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

        A summary of RSAs granted and unvested as of December 31, 2015 is as follows:

 
  RSAs Outstanding  
 
  Number of
RSUs
  Weighted
Average
Fair Value
Per Unit
 

RSAs granted and unvested at January 1, 2015

      $  

RSAs granted during 2015

    596,051     18.79  

RSAs vested during 2015

         

RSAs forfeited during 2015

    (26,979 )   27.80  

RSAs granted and unvested at December 31, 2015

    569,072   $ 18.36  

        As of December 31, 2015, there was a total of $7,401 million in unrecognized compensation cost, net of estimated forfeitures, related to unvested RSAs, which are expected to be recognized over a weighted-average period of approximately 4.8 years.

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

11. STOCK-BASED COMPENSATION (in thousands, except share and per share amounts, years, and percentages) (Continued)

Employee Stock Purchase Plan

        On February 18, 2015, the date of the completion of the Company's IPO, the 2015 Employee Stock Purchase Plan ("2015 ESPP") became effective. The 2015 ESPP provides for (i) six-month purchase periods (commencing each March 1 and September 1) and (ii) that the purchase price for shares of Class A common stock purchased under the 2015 ESPP will be 85% of the fair market value of the Company's Class A common stock on the last day of the applicable offering period. Eligible employees are able to select a rate of payroll deduction between 1% and 15% of their base cash compensation subject to a maximum payroll deduction per offering period of $7,500. The 2015 ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Code. The Company reserved 1,833,857 shares of Class A common stock for issuance under the 2015 ESPP. During the year ended December 31, 2015, the Company purchased and issued 30,689 shares of common stock to 2015 ESPP participants at a discounted price of $18.61 per share and recorded stock-based compensation related to the 2015 ESPP of $156.

12. EMPLOYEE BENEFIT PLANS (in thousands)

        On June 1, 2007, the Company adopted a 401(k) Profit Sharing Plan and Trust, or 401(k) Plan. The 401(k) Plan was amended on February 1, 2010. The amended 401(k) Plan allows employees to become eligible to participate upon the completion of 30 days of service. The Company matches employee contributions up to 4.0% of their compensation and the employer contributions vest immediately.

        The Company has a separate defined contribution retirement plan for employees of Avalere. Under this 401(k) retirement plan, employees can make voluntary contributions to the retirement program in the form of salary reductions. Additionally, the Company matched 100% of employee deferrals up to 5% of qualifying compensation for all eligible participants. There is a one year waiting period for eligibility from date of hire. Participants are fully vested in both the employee deferral and employer contributions upon meeting eligibility requirements.

        During the years ended December 31, 2015, 2014, and 2013, total expense recorded for the Company's matching 401(k) contributions were $4,227, $2,820, and $2,846, respectively.

13. STOCKHOLDERS' EQUITY (DEFICIT) (in thousands, except share amounts)

        In February 2013, to provide liquidity to certain existing stockholders who desired liquidity and to reduce the number of stockholders and outstanding shares of common stock, the Company initiated a share repurchase and liquidity initiative for and among existing stockholders. During 2013, the Company repurchased 10,703,360 shares of common stock for aggregate consideration of $72,114 and sold 7,216,610 shares of common stock for $52,114, resulting in a net repurchase of 3,486,750 treasury stock shares at an aggregate net cost of $20,000. Upon repurchase, the treasury stock shares were immediately retired. In connection with the retirement, of the $20,000 value assigned to the treasury stock shares, $2,403 was allocated to additional paid-in capital and $17,597 was allocated to retained earnings. The amount allocated to additional paid- in capital was determined based on the paid-in capital per share generated from the historical issuances of these treasury stock shares.

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

13. STOCKHOLDERS' EQUITY (DEFICIT) (in thousands, except share amounts) (Continued)

        During June 2014, the Company repurchased 1,462,320 shares at a cost of $9,066. Upon repurchase, the shares were immediately retired. In connection with the retirement, of the $9,066 value assigned to the repurchased shares, $1,011 was allocated to additional paid-in capital and $8,055 was allocated to retained earnings. The amount allocated to additional paid-in capital was determined based on the paid-in capital per share generated from the historical issuances of these shares.

        On September 16, 2014, in connection with the holding company reorganization, the Company's common stock was reclassified to implement a multi-class capital structure providing for common stock, Class A common stock and Class B common stock. Each share of common stock held by the then-existing stockholders of Inovalon, Inc. at the time of the holding company reorganization was reclassified as Class B common stock of the Company.

        On September 19, 2014, the Company authorized the pro-rata redemption of approximately 8.33% of the Company's outstanding Class B common stock from the then-existing holders. During September 2014, the Company completed the pro-rata redemption and repurchased 11,109,285 shares of Class B common stock for $300,017, which automatically converted from Class B common stock to Class A common stock. This redemption occurred at a price per share of $27.01, which was in excess of the estimated fair value of our common stock of $19.89 per share as of September 30, 2014 calculated for the purpose of determining our stock-based compensation expense. The estimated fair value of our common stock on a per share basis, as of September 30, 2014, was based upon a contemporaneous valuation of the Company's common stock performed in conjunction with an unrelated third-party specialist and the calculation of the estimated fair value of the common stock includes certain assumptions and discounts that are required to be applied to the valuations of privately held companies. The Company did not contribute nor receive any stated or unstated rights, privileges, or other consideration as part of the redemption, therefore, at December 31, 2014, these repurchased 11,109,285 Class A shares of common stock were held and accounted for as treasury shares.

        On February 18, 2015, the Company completed its initial public offering 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 (the "IPO"). All of the shares issued in the IPO were primary shares offered by the Company as none of the Company's 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 the Company, after the underwriters' discounts and commissions and other expenses, payable by the Company, of approximately $639.1 million.

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Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

14. INCOME TAXES (in thousands, except percentages)

        The provision for income taxes consisted of the following:

 
  Year Ended December 31,  
 
  2015   2014   2013  

Current:

                   

Federal

  $ 31,351   $ 33,577   $ 16,254  

State

    10,937     7,294     3,443  

Foreign (Puerto Rico)

    574     626     293  

Total current provision

    42,862     41,497     19,990  

Deferred:

                   

Federal

    4,708     1,541     (347 )

State

    1,078     341     14  

Total deferred provision

    5,786     1,882     (333 )

Total provision for income taxes

  $ 48,648   $ 43,379   $ 19,657  

        The provision for income taxes reconciles to the amount computed by applying the federal statutory rate (35.0%) to income before income taxes as follows:

 
  Year Ended December 31,  
 
  2015   2014   2013  

Expected federal income tax

    35.0 % $ 40,149     35.0 % $ 38,056     35.0 % $ 18,331  

State income taxes, net of federal income tax effect

    6.8     7,753     4.6     4,961     3.9     2,047  

Permanent items

    0.3     390     0.4     422     0.5     237  

Research and development tax credits

    (0.8 )   (864 )   (0.6 )   (695 )   (1.4 )   (744 )

Other

    1.1     1,220     0.5     635     (0.5 )   (214 )

Income tax expense

    42.4 % $ 48,648     39.9 % $ 43,379     37.5 % $ 19,657  

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

14. INCOME TAXES (in thousands, except percentages) (Continued)

        Deferred income taxes reflect 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. Significant components of the Company's deferred tax assets and liabilities were as follows:

 
  December 31,  
 
  2015   2014  

Components of deferred tax assets and liabilities

             

Deferred tax assets:

             

Accrued expenses and reserves

  $ 1,743   $ 843  

Stock-based compensation

    2,490     2,713  

Deferred rent

    1,190     1,259  

Net operating loss carryforwards

    2,402      

Other

    1,270     414  

Total deferred tax assets

  $ 9,095   $ 5,229  

Deferred tax liabilities:

             

Intangibles

  $ 22,267   $ 2,943  

Property, equipment and capitalized software

    21,042     16,192  

Prepaids and other

    2,752     766  

Total deferred tax liabilities

    46,061     19,901  

Net deferred tax liabilities

  $ 36,966   $ 14,672  

        The deferred tax liability has been classified in the accompanying consolidated balance sheets as follows:

 
  December 31,  
 
  2015   2014  

Current deferred tax assets

  $   $ 491  

Deferred tax assets(1)

    232      

Non-current deferred tax liabilities(1)

    37,198     15,163  

Total deferred tax liabilities, net

  $ 36,966   $ 14,672  
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