STOCK-BASED COMPENSATION

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Abstract]

On December 31, 2006, the Company and its stockholders established the 2007 Long-Term Incentive Plan (the “2007 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-based awards 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 provided 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 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. At the Company’s annual meeting of stockholders held on June 5, 2019, the Company’s stockholders, upon the recommendation of the Board of Directors of the Company (the “Board”), approved the Amended and Restated 2015 Omnibus Incentive Plan (the “Amended Plan”), which was previously adopted by the Board on February 14, 2019, subject to the approval by the stockholders. The Amended Plan (i) increases the maximum number of shares of the Company’s Class A common stock available for issuance by 6,000,000 shares to a total of 13,335,430; (ii) removes the provisions regarding Section 162(m) of the Code that are no longer relevant due to recent changes to the Code pursuant to the Tax Cuts and Jobs Act of 2017, which eliminated the “performance-based compensation” exception to the deduction limitation under Section 162(m) of the Code; and (iii) extends the term of the Amended Plan until the tenth anniversary of the date of Board approval of the Amended Plan.

Restricted Stock Units

During 2015, the Company began granting RSUs to employees pursuant to the 2015 Plan. These awards vest ratably over five years on each anniversary of the grant date. Upon vesting, the Company will deliver to the holder shares of the Company’s Class A common stock under the 2015 Plan. In 2017, the Company began issuing RSUs to non-employee directors. These awards fully vest upon the one-year anniversary of the award grant date, subject to continued service as a director through the vesting date. Upon vesting, the Company will deliver to the holder shares of the Company’s Class A common stock unless a deferral election has been made under certain circumstances. Pursuant to the terms of the awards, any unvested shares terminate upon the RSU holders’ separation from the Company. The Company recognizes stock-based compensation expense ratably over the requisite service period and records adjustments related to forfeitures as they occur.

A summary of RSU activity is as follows:



	Number of RSUs		Weighted Average Fair Value Per Unit
RSUs granted and unvested at January 1, 2019	191,868		$	14.98
RSUs granted during 2019	94,558		13.88
RSUs vested during 2019	(150,250	)	14.98
RSUs forfeited during 2019	—		—
RSUs granted and unvested at December 31, 2019	136,176		$	14.21

The weighted-average fair value of RSUs granted during the years ended December 31, 2019, 2018, and 2017 was $13.88, $10.35, and $13.70, respectively. During the years ended December 31, 2019 and 2018, and 2017, these awards had an aggregate grant date fair value of $1.3 million, $1.1 million, and $0.6 million, respectively. The total fair value of RSUs vested during the

years ended December 31, 2019, 2018 and 2017 was $2.3 million, $1.1 million, and $1.3 million, respectively. As of December 31, 2019, there was a total of $0.5 million in unrecognized compensation cost related to unvested RSUs, which are expected to be recognized over a weighted-average period of approximately 0.4 years.

Restricted Stock Awards

During 2015, the Company began granting RSAs pursuant to the 2015 Plan. RSAs granted to non-employee directors fully vest upon the one year anniversary of the award grant date. RSAs granted to employees vest over two to five years either ratably on each anniversary of the grant date or cliff vest at the end of the vest period. 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 Company recognizes stock-based compensation expense for the RSAs following the straight-line method over the requisite service period. The Company records adjustments related to forfeitures as they occur.

In March 2017, the Company began issuing RSAs with performance conditions under the 2015 Plan. The awards have vesting conditions tied to the achievement of specified performance conditions, which have target performance levels that span from three to five years. Upon the conclusion of the performance period, the performance level achieved will be measured and the ultimate number of shares that vest will be determined. Stock-based compensation expense for these awards is recorded either ratably over the vesting period or based on a graded vest method, depending on the specific terms of the award and the probability of achievement of the specified performance conditions.

During 2019, the Company granted 2.7 million RSAs, of which 0.5 million had performance vesting conditions. A summary of RSA activity is as follows:



	Number of RSAs		Weighted Average Fair Value Per Unit
RSAs granted and unvested at January 1, 2019	4,939,419		$	12.37
RSAs granted during 2019	2,678,047		14.96
RSAs vested during 2019	(1,066,293	)	12.66
RSAs forfeited during 2019	(541,918	)	12.08
RSAs granted and unvested at December 31, 2019	6,009,255		$	13.51

The weighted-average fair value of an RSA granted during the years ended December 31, 2019, 2018, and 2017 was $14.96, $11.12, and $12.64, respectively. During the years ended December 31, 2019, 2018, and 2017, these awards had an aggregate grant date fair value of $40.1 million, $28.6 million, and $33.5 million, respectively. The total fair value of RSAs vested during the years ended December 31, 2019, 2018, and 2017 was $15.9 million, $8.6 million, and $9.3 million, respectively. As of December 31, 2019, there was a total of $62.9 million in unrecognized compensation cost related to unvested RSAs, which are expected to be recognized over a weighted-average period of approximately 3.3 years.

Stock Options

The Company did not grant any options during the years ended December 31, 2019, 2018, and 2017. The Company used the Black-Scholes option-pricing model to determine the estimated fair value for previously granted stock option 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.

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.

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, which is the mid-point between the vesting date and the end of the contractual term. The dividend yield assumption of zero was 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 was 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 recorded as adjustments to expense as they occur.

Stock option activity is as follows:



	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 (in thousands)
Balance at January 1, 2019	857,084		$	7.63			4.3	$	5,616
Stock options granted during 2019	—		$	—	$	—
Stock options exercised during 2019	(547,964	)	$	7.60
Stock options canceled during 2019	(5,845	)	$	9.94
Balance at December 31, 2019	303,275		$	7.63			4.4	$	3,393
Exercisable at December 31, 2019	303,275		$	7.63			4.4	$	3,393
Vested and expected to vest at December 31, 2019	303,275		$	7.63			4.4	$	3,393

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 holders exercised their options. This amount is subject to change based on changes to the fair market value of the Company’s common stock. The total intrinsic value of options exercised during the years ended December 31, 2019, 2018, and 2017 was $4.6 million, $1.2 million, and $4.2 million, respectively.

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 (i) for 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.

The following table summarizes the ESPP activity during the years shown:



	Year Ended December 31,
	2019		2018		2017
Shares purchased and issued	92,738		90,084		49,247
Weighted average discounted price per share	$	12.64	$	9.74	$	11.08
Stock-based compensation expense (in thousands)	$	234	$	141	$	154