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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

FORM 10-K

(Mark One)
 

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or

For the fiscal year ended December 31, 2015

or

o
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

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
Registrant’s Telephone Number, Including Area Code

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

Title of Each ClassName 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 ý    No 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'sregistrant’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 or an emerging growth company. See the definitions of "large“large accelerated filer," "accelerated filer"” “accelerated filer,” “smaller reporting company,” and "smaller reporting company"“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ox

 
Accelerated filer o
 
Non-accelerated filer ý
(Do not check if ao

smaller reporting company)
 
Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

As of June 30, 2015,2018, the last business day of the registrant'sregistrant’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$520.3 million.

As of February 15, 2016,January 31, 2019, the registrant had 61,658,14872,046,008 shares of Class A common stock outstanding and 90,054,88480,608,685 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'sRegistrant’s definitive proxy statement relating to its 20162019 annual meeting of stockholders (the "2016“2019 Proxy Statement"Statement”). The 20162019 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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20152018

TABLE OF CONTENTS

PART I

 

Item 1.

Business

Business

1
Item 1A.
Risk Factors
13
Item 1B.
Unresolved Staff Comments
29
Item 2.
Properties
29
Item 3.
Legal Proceedings
30
Item 4.
Mine Safety Disclosures
30
PART II
 

Item 1A.

Risk Factors

25

Item 1B.

Unresolved Staff Comments

47

Item 2.

Properties

47

Item 3.

Legal Proceedings

47

Item 4.

Mine Safety Disclosures

47

PART II

Item 5.

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

4831

Item 6.

Selected Financial Data

5132

Item 7.

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

5533

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

7848

Item 8.

Financial Statements and Supplementary Data

7848

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

48
Item 9A.
Controls and Procedures
7948
Item 9B.
Other Information
49
PART III
 

Item 9A.

Controls and Procedures

79

Item 9B.

Other Information

80

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

8150

Item 11.

Executive Compensation

8150

Item 12.

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

8150

Item 13.

Certain Relationships and Related Transactions, and Director Independence

8150

Item 14.

Principal Accountant Fees and Services

50
81PART IV
 

PART IV

Item 15.

Exhibits and Financial Statement Schedules

8251
Signatures

Signatures

8654

Index to Consolidated Financial Statements

F-F-11



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”). All statements contained in this Annual Report other than statements of historical fact, including but not limited to statements regarding our future results of operations and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect,"“believe,” “may,” “see,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Item 1A—Risk Factors. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

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

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

•
our ability to retain our client base;

•
base and sell additional services to them;
the effect of the concentration of our revenue among our top clients;

•
our ability to innovate and adapt our platforms and toolsets;

•
the effects of consolidation in the managed care industry;

•
the ability to successfully integrate our acquisitions and the ability of the acquired business to perform as expected;

•
the successful implementation and adoption of new platforms, products and solutions;

•
the effects of changes in tax legislation for jurisdictions within which we operate;

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

•
the effects of consolidation in the healthcare industry;
the ability to successfully integrate our acquisitions, including ABILITY, and the ability of the acquired business to perform as expected;
the ability to enter into new agreements with existing or new platforms, products, and solutions in the timeframes expected, or at all;
the successful implementation and adoption of new platforms, products and solutions;
the effects of changes in tax legislation for jurisdictions within which we operate, including recent changes in U.S. tax laws;
the ability to protect the privacy of our clients'clients’ data and prevent security breaches;

•
the effect of current or future litigation;
the ability to secure final court approval of existing class action lawsuits related to our initial public offering;
the effect of competition on our business; and

•
the efficacy of our platforms and toolsets.

toolsets; and

the timing and size of business realignment and restructuring charges.
Forward-looking statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from those anticipated by such statements. These factors include, among other factors, those set forth in Part I, Item 1A, “Risk Factors.”
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. In addition, graphics, images or illustrations pertaining to or demonstrating our products, data, services and/or technology that may be used herein are intended for illustrative purposes only unless otherwise noted. We are under no duty to, and we disclaim any obligation to, update any of these forward- lookingforward-looking statements after the date of this Annual Report or to conform these statements to actual results or revised expectations.


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PART I

Explanatory Note Regarding Market Information: This Annual Report on Form 10-K includes market data and forecasts with respect to the healthcare industry. Although we are responsible for all of the disclosure contained in this Annual Report, in some cases we rely on and refer to market data and certain industry forecasts that were obtained from third party surveys, market research, consultant surveys, publicly available information and industry publications and surveys that we believe to be reliable.

Item 1.    Business.

Our Company

We are a leading technology company that combines advancedproviding cloud-based platforms empowering data-driven healthcare. Through the Inovalon ONE® Platform, Inovalon brings to the marketplace a national-scale capability to interconnect with the healthcare ecosystem, aggregate and analyze data analyticsin real-time, and data-driven intervention platformsempower the application of resulting insights to achievedrive meaningful insightimpact at the point of care. Leveraging its platform, unparalleled proprietary data sets, and improvement in clinical and quality outcomes, utilization,industry-leading subject matter expertise, Inovalon enables better care, efficiency, and financial performance across the healthcare landscape.

        Our powerful platform drives high-value impact, improving quality and economics forecosystem. From health plans hospitals, physicians, patients,and provider organizations, to pharmaceutical, medical device, and life sciencesdiagnostics companies, Inovalon’s unique achievement of value is delivered through the effective progression of “Turning Data into Insight, and researchers. The value we deliver to our clients is achieved by turning dataInsight into insights and those insights into action. Through our large proprietary datasets, advanced integration technologies, sophisticated predictive analytics, and subject matter expertise, we deliver seamless, end-to-end platforms that bring the benefits of big data and large-scale analytics to the point of care. Our analytics identify gaps in care, quality, data integrity, and financial performance, while providing clients with differentiated capabilities to resolve these gaps. During 2015, we provided these services to hundredsAction®.” Supporting thousands of clients, providingincluding 24 of the top 25 U.S. health plans and 22 of the top 25 global pharma companies, Inovalon’s technology platforms and analytics are informed by our data and insight, from our MORE2 Registry®, onpertaining to more than 784,000964,000 physicians, 269,000519,000 clinical facilities, 130264 million unique patients (covering approximately 98.2% of all U.S. countiesAmericans, and Puerto Rico), and 11.042 billion medical events, a number that has been increasing at a rate of approximately 2.9% compounding monthly, or 40.9% annually, since 2000.events.

        Healthcare costs in

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

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

        The value we deliver to our clients through our data analytics and intervention platforms are comprised of four primary components:


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On April 2, 2018, the Company acquired Butler Group Holdings, Inc., a comprehensive claims data warehouse that helps our clients comply with government mandated reporting requirements.

        Our abilityDelaware corporation and its wholly-owned subsidiaries, including, without limitation, ABILITY Network Inc., a Delaware corporation (“ABILITY”). The combination of Inovalon and ABILITY creates a vertically integrated cloud-based platform empowering the achievement of real-time, value-based care from payers, manufacturers, and diagnostics all the way to deliver valuethe patient’s point of care.

On September 17, 2014, Inovalon, Inc. implemented a holding company reorganization, pursuant to our clients through our advanced analyticswhich Inovalon Holdings, Inc. became the new parent company of Inovalon, Inc. and intervention platforms has allowed us to achieve significant growth since our company's organization. ForInovalon, Inc. became the year ended December 31, 2015, our revenuedirect, wholly owned subsidiary of the Company. The Company was $437.3 million, representing 21% growth over the year ended December 31, 2014. In this same period, we generated Adjusted EBITDA of $151.6 million, representing 35% of revenue and 13% growth over the same periodincorporated in the prior year. Net income for the year ended December 31, 2015state of Delaware on September 11, 2014. Inovalon, Inc. was $66.1 million, representing 15% of revenue and a 1% increase over the same period in 2014. Non-GAAP net income for the year ended December 31, 2015 was $75.4 million, representing 17% of revenue and a 7% increase over the same period in 2014. Adjusted EBITDA and Non-GAAP net income are measures that are not presented in accordance with accounting principles generally acceptedincorporated in the United States (GAAP). For a reconciliationstate of net income to Adjusted EBITDA and Non-GAAP net income, see "Non-GAAP Financial Measures," provided in Item 6—Selected Financial Data.

Delaware on November 18, 2005. In this Annual Report, unless we indicate otherwise or the context requires, references to the "Company," "Inovalon," "we," "our," "ours,"“Company,” “Inovalon,” “we,” “our,” “ours,” and "us"“us” refer to Inovalon Holdings, Inc. and its consolidated subsidiaries.

Recent Developments

Industry Overview and Demand Drivers
The Company was incorporatedbelieves that healthcare is increasingly becoming data-driven in nature, transactional in design, real-time in speed, and ultimately consumer-centric in focus. Driven by the first waves of disease-burden based reimbursement models and quality incentive programs, data has gained an increasing role in the stateU.S. healthcare system. Data is increasingly a competitive differentiator, as its aggregation, analysis, validation, and associated connectivity can be leveraged to identify individual patients’ unique needs, refine care plans, speed drug discovery and commercialization, reduce waste, expand the value proposition of Delaware on September 11, 2014. Effective September 17, 2014, in order to facilitatemedications and medical devices, and streamline healthcare workflows and supply chains. As transparency into the administration, management, and developmentmany facets of our business and our initial public offering, Inovalon, Inc., which was incorporated inhealthcare increases, the state of Delaware on November 18, 2005, implemented a holding company reorganization, pursuant to which we becameCompany believes the new parent company and Inovalon, Inc. became our direct, wholly owned subsidiary.

        On February 18, 2015, we completed our initial public offering (the "IPO") of 22,222,222 shares of Class A common stock and, upon the underwriters' exercise of their option to purchase additional shares, issued an additional 3,142,581 shares of Class A common stock for a total of 25,364,803 shares issued. Allpace of the shares issuedindustry’s transformation will continue to accelerate, ultimately placing consumers at the center as they play an increasingly active role in the IPO were primary shares offered by us as none of our stockholders sold any shares in the IPO. The offering price of the shares sold in the IPO was $27.00 per share, resulting in net proceeds to us, after underwriters' discounts and commissions and other expenses payable by us, of approximately $639.1 million.

        On September 1, 2015, pursuant to the terms of a Share Purchase Agreement (the "Purchase Agreement") between the Company and Avalere Health, Inc. ("Avalere"), we acquired 100 percent of the capital stock of Avalere for an aggregate stated purchase price of $140.0 million, consisting of cash and 235,737 shares of the Company's Class A common stock which are subject to resale restrictions. Avalere is a provider of data-driven advisory services and business intelligence solutions primarily to the pharmaceutical and life sciences industry. Pursuant to the Purchase Agreement, certain portions of the stated purchase price of $140.0 million are contingent upon the achievement of financial and operational objectives, and other portions are subject to continued employment provisions. 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 our capabilities and client base into the expansive and adjacent markets of the pharmaceutical and life sciences industry. See Note 3 (Business Combinations), included elsewhere within this annual report on Form 10-K for more information.

their care.

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        On September 29, 2015, we announced the introduction of Data Diagnostics™ to the healthcare marketplace. This technology, the latest in our product portfolio releases, provides a suite of hundreds of patient-specific analyses that can be ordered individually by clinicians on demand with the answer provided within seconds—all without leaving the clinician's workflow. The capability leverages vast amounts of data across billions of medical events, interconnectivity, and high-speed cloud-based analytics to allow physician organizations, health plans, accountable care organizations (ACOs), hospitals, integrated healthcare delivery systems, ASO employer groups, government programs, and individual physicians to achieve valuable clinical insights, strong clinical and quality outcomes, utilization efficiency, and overall financial performance on demand and in real time. The technology is delivered in collaboration with Quest Diagnostics, the nation's largest laboratory organization, providing large-scale distribution to clinicians through Quest's more than 200,000 Care360® provider portal installations and more than 400 integrated EHR platforms serving approximately half of the physicians and hospitals in the United States. We have been investing resources as part of the development and anticipated operation and support of Data Diagnostics™ since our second fiscal quarter of 2015 and this continued during the third quarter and accelerated significantly in the fourth quarter of 2015 as we ramp for operational activity within the Data Diagnostic platform. While still in the early stages of this platform's introduction, initial feedback from the marketplace has been very positive.

Industry Overview

We believe that the increasing demand for our platformofferings is driven by the confluence of foura number of fundamental healthcare industry trends:

trends, including:

        Unsustainable Rise in Healthcare Costs.    Healthcare spending in the U.S. increased 5.3% on a year-over-year basis to over $3 trillion in 2014 according to the 2014 National Health Expenditure Highlights prepared by the Centers for Medicare and Medicaid Services, or CMS, representing more than 17% of U.S. Gross Domestic Product, or GDP. The 2015 set of healthcare cost projections from the Congressional Budget Office, or the CBO, indicate national healthcare spending will rise to about 25% of GDP by 2040. To address this expected significant rise in healthcare costs, the U.S. healthcare market is seeking more efficient and effective methods of delivering care. This same trend is playing out across modernized nations around the globe.

Shift to Value-Based Healthcare.    The healthcare industry is undergoing a significant transformation, driven by a shift from volume-based models to value-based and outcome-based models. The traditional fee-for-service reimbursement model in healthcare has played a major role in elevating both the level and growth rate of healthcare spending. In response, both the public and private sectors are shifting away from the historical fee-for-service (volume-based) models toward value-based, capitated payment models that are designed to incentivize value and quality at an individual patient level. The number of Americans covered by capitated payment programs (care programs wherein an organization is financially responsible for the healthcare of a population of patients for which the total compensation is fixed other than adjustments for factors including specifically how sick individual patients are, how much resource is needed to be applied or spent on each patient, what is the quality of the clinical care, and other demographic factors) has been increasing rapidly and,continues to increase, according to industry sources and our internal estimates, is anticipated to increase from approximately 80 million at the start of 2014 to over 150 million by 2019.estimates. This increase is expected to further drive the critical importance to accurately measure, analyze, report, and improve patient disease and comorbidity conditions, utilization rates, and clinical quality outcomes. Further, this shift from volume-based to value-based and outcome-based models is increasingly impacting other segments of the healthcare industry, including pharmaceutical companies, healthcare providers, medical device


manufacturers, and diagnostics companies. For example, pharmaceutical companies are increasingly pursuing outcomes-based contracting (“OBC”) arrangements with health plans in order to leverage data and analytics to demonstrate value and improve care outcomes. This is particularly true as a large number of new, complex, and expensive specialty treatments are expected to enter the market over the coming years.
Digitization of Healthcare Information.    Across the healthcare landscape, a significant amount of data is being created every day, driven by patient care, payment systems, regulatory compliance, and record keeping. These data include information within patient health records, clinical trials, pharmacy benefit programs, imaging systems, sensors and monitoring platforms, laboratory results, patient reported information, hospital and physician performance programs, and billing and payment processing. DespiteHowever, despite significant investments by public and private sources within the industry, however,


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the digitized healthcare data remain largely stored in "walled gardens"“walled gardens”—data that is static and not easily shared or interpreted. As the amount of data in healthcare continues to grow, we believe that it will be critical for participants across the healthcare industry to be able to useanalyze this disparate data and apply insights in a targeted manner in order to better achieve the goals of higher quality and more efficient care.

Healthcare Becoming Increasingly Consumer-centric. Increasingly, the patient (the consumer of healthcare) wants to take a more active and informed role in how their own individual healthcare is delivered—how to select their health plan and based on what information, how to select and interact with a physician, how to determine whether or not to have a particular surgical procedure or whether or not to take a particular medication, etc. Similar to other industries including financial services, retail, and entertainment, the healthcare marketplace is becoming increasingly consumer-centric. This transformation means that interactions in healthcare are becoming increasingly data-driven, transactional, and real-time in nature, all of which require increasingly sophisticated data ingestion and analytical capabilities, extensive industry connectivity, and high-speed, scalable, and secure compute infrastructures.
Increasing Complexity.    The healthcare industry is on a course of dramatically progressive complexity. As technology employed in the healthcare space has become increasingly sophisticated, new diagnostics and treatments have been introduced, the pool of clinical research has expanded, and the paradigms dictating payment and regulatory oversight have multiplied. This expanding complexity drives a growing and continuous need for the aggregation, analysis, and targeted application of the underlying and resulting data.

Unsustainable Rise in Healthcare Costs. According to the 2017 National Health Expenditure Projections prepared by the Centers for Medicare and Medicaid Services (“CMS”), healthcare spending in the U.S. is projected to have increased 4.6% on a year-over-year basis to $3.5 trillion in 2017, representing 17.9% of U.S. Gross Domestic Product (“GDP”). CMS projects healthcare spending in the U.S. to increase to approximately 20% of GDP by 2026. To address this expected significant rise in healthcare costs, the U.S. healthcare market is seeking more efficient and effective methods of delivering care. This same trend is playing out across modernized nations around the globe.

Our Market Opportunity

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

The ability to aggregate, integrate, and analyze data inon a massive scale and apply garnered insights in a manner that achieves meaningful impact is crucial for healthcare payorspayers (e.g., health plans and integrated health delivery systems), clinicalhealthcare providers (e.g., hospitals, ACOs,accountable care organizations (“ACOs”), post-acute care providers, and physicians), pharmaceutical companies (e.g., medication discovery and life sciencesmanufacturers, specialty pharmacies, retail pharmacies, pharmacy benefit management companies), medical device manufacturers, diagnostics companies, and consumers. We estimate that our

According to third-party industry estimates, the addressable market for thesesoftware and related services capabilities serving these healthcare constituents continues to beexpand from an estimated $84 billion in 2014 to approximately $83.8 billion. We believe that the market opportunity for our current platform offering within the payor market, the historical focus of our company, is approximately $10.6 billion.$142 billion in 2018. According to industry sources, the market for software and related services is approximately $14.0$17.3 billion within the U.S. payorpayer market. We believe that as analytics continue to demonstrate greater value within the U.S. payorpayer landscape, the market will expand commensurately. We believe that the market opportunity for our current offerings within the payer market, the historical focus of our Company, is approximately $16.3 billion. As we continue to build and launch new capabilities and expand our market opportunities following the acquisition of ABILITY, we believe itanalytics will provide a significantly larger value opportunity within this same payorpayer space. For providers, industry sources estimate that software and related services represent a $32.3$40.1 billion U.S. market size. We believe that the market opportunity for our current offerings within the provider market is approximately $6.8 billion (excluding expected expansion of market opportunity following the ABILITY acquisition). In the global pharmaceutical and life-sciences market, International Data Corporation, or IDC, inindustry sources estimate a 2013 report, estimates a $30.9$51.4 billion market size for total software and related services spendspend. We believe that the market opportunity for our current offerings within the pharmaceutical and life-sciences market is approximately $7.0 billion, largely driven by our acquisitions of Avalere Health, Inc. (“Avalere”), a leading provider of data-driven advisory services and business intelligence solutions in 2013.the pharmaceutical and life sciences industry, in 2015, and Creehan Holding Co., Inc. (“Creehan”), a leader in specialty pharmacy software platforms, in 2016. In the consumer market, an October 2013 Research and Markets report estimatedindustry sources estimate a $6.6$33.2 billion global market size for mobile health applications and solutions. As with our other market segments, weWe believe that, over time, analytics will also drive a significant opportunity expansion in the consumer market.market, as consumers seek to take a more active and informed role in how their healthcare is delivered.
marketopportunity.jpg

Source: Gartner, IDC, Research and Markets and Inovalon (with methodology validated by HMA).
In addition, the pressures that face the U.S. healthcare market are not unique, as other communities around the world are facing aging populations and growing pressures in the sustainable affordability ofsustaining affordable healthcare. We believe that our capabilities are highly applicable to other developed and developing countries around the globe, which we believe represents a sizable related future opportunity for us.

our Company.

Our PlatformsThe Inovalon ONE

        Our platforms® Platform

Inovalon provides a technology platform that enables healthcare organizations to implement highly sophisticated value-based initiatives in very large scale. At the core of value-based initiatives is the need to aggregate and analyze data, garner meaningful insight from the results, and use these insights to drive material change to outcomes and economics. To achieve this, four competencies are informed by clinicalneeded: 1) large-scale data connectivity, integration, and validation capabilities, 2) advanced predictive analytics and high-speed compute, 3) toolsets to translate resulting insights through our combination ofinto real-world impact, and 4) purpose-built data visualization

and reporting. To inform and enable these competencies, Inovalon brings to bear large-scale datasets, expansive connectivity, robust technology infrastructure, and industry-leading subject matter expertise and extensive proprietary datasets. Through the application of our platforms, we help our clients achieve large- scale insight and meaningful improvement in clinical and quality outcomes, utilization, and financial performance.

        In deploying our technology, our clients want us to synthesize opaque, convoluted, and disparate data into actionable information aligned with individualized goals and, in turn, empower a patient and provider intervention platform that achieves the realization of their goals in a measurable way.

expertise.

inov4.jpg

Table of ContentsThe Inovalon ONE

        Our platforms' capabilities are currently engaged by hundreds of clients that leverage our ability to analyze and improve clinical and quality outcomes and financial performance. These platforms are applied in a variety of environments.

        Data Integration.® Datasets and the management of data are part of our core strengths, which give us insight into how a patient, provider, or populationPlatform is doing. It grants us both relative and absolute insight, and informs the construction of new capabilities, predictive models, and impact predictions. It speeds our time to client impact, decreases the burden on clients choosing to do business with us, and empowers our achievement of mission and results.

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

        In addition to being maintained and tagged within client-specific data lakes, data we receive in the course of providing our services are statistically de-identified and stored in our MORE2 Registry®. The MORE2 Registry® goes beyond just claims data to include information about demographics, enrollment, diagnoses, procedures, pharmacy, laboratory results,80 individual proprietary technology toolsets and deep medical record clinical data assets able to be rapidly configured to empower the operationalization of large-scale, data-driven healthcare initiatives. Each proprietary technology toolset is referred to as a Component, which are grouped into Modules, and presents a significant representative mixinformed by the data of commercial, HIX Marketplace, Medicare Advantage, and managed Medicaid care plan patients. The following is a sample of various components within our MORE2 Registry®.

•

Patient Demographic Data

•

Benefits Data

•

Medical Record Documentation

•

Encounter and Procedural Data

•

Operating Room, Procedure,

•

Pharmacy Data

Discharge Summary,

•

Imaging Report Data

Emergency Room Records

•

Laboratory & Pathology Data

•

Electronic Health Record Data

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Durable Medical Equipment Data

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Health Risk Assessment Data

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Self-Reported Data

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Practitioner Profile Data

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Social History Data

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Claim Diagnostic Data

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Activities of Daily Living (ADL)

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Eligibility and Enrollment Data

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Cost Data

        Advanced Analytics.    For years we have developed, honed, and scaled a portfolio of sophisticated analytics. Applying our team's subject matter expertise in computer processing, data architecture, statistics, medical sciences, healthcare policy, and leveraging the billions of medical events within our significant propriety datasets, we believe that we have developed oneInovalon’s proprietary datasets. Combinations of Components and Modules are configured to empower highly differentiated solutions for client needs quickly and in a highly scalable fashion. The flexibility of the most advanced analytical platforms within the industry, as well as a culture and set of analytical toolsets that serve to rapidly innovate and expand our platform. Examplesmodular design of the innovative analytics powered by this combination of data and processingPlatform enables clients to integrate the capabilities include:


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Additionally, the relative comparison of population and cohort performance levels to assist in guiding strategic investment decisions. More importantly, we can perform these analytics during a relevant date of service period so that our clients can gain insight into how they are performing and how they can make changes within their patient and provider groups to improve their outcomes while theremyABILITY® software platform is still time within the relevant date of service period to achieve improvement. In the absence of comparative analytics, many organizations would otherwise use a previous year's results to guide changes—aan integrated set of datacloud-based applications for providers that often does not even become available until well into a year, let alone representing information that is long outdatedoffers core connectivity, administrative, clinical, and largely irrelevant whenquality analysis, management, and performance is not only based upon how one is doing, but moreover based upon how one is doing in comparisonimprovement capabilities to others.acute, post-acute and ambulatory point-of-care provider facilities.

        Intervention Platforms.The myABILITY® Our data-driven intervention platforms are toolsets and services that enable our clients to take the insights derived from our analytics and implement solutions at the patient and provider level as being via hard copy and electronic mail, interconnected EHR systems, telephonic interactions, in patients' homes, through mobile devices, at dedicated patient centers, through web-enabled decision support tools, in retail pharmacies, and in traditional clinical locations, as examples) in order to achieve meaningful impact with the patient and provider. Some clients utilize our analytical outputs to achieve value on their own. Others license our data-driven interventionsoftware platform to support their ability to achieve data-driven impact. Yet others engage us to not only license our data-driven intervention platform, but also provide the personnel services necessary to leverage these toolsets and actually achieve the patient and provider-level impact. Examples of our data-driven intervention platform tools include:

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


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

Growth Strategies

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

        Deliver Increasing Value to Existing Clients.    We enjoy long term client relationships which entail multiple separate product engagements demonstrated by our average 5.0-year tenure for our top 10 clients with an aggregate of 66 separate statements of work as of December 31, 2015. Additionally, we have hundreds of client organizations that currently have only a limited number of services with us. Frequently we see clients that started with just one service with us realize the value that we are delivering and then expand their business with us to add additional services. We believe that we have a significant opportunity to deliver increasing value to our existing clients and this, in turn, will drive continued growth for us. As our clients recognize value and success as a result of working with our platforms, we frequently see them grow in their patient count and increase the number of products engaged with us—both of which result in our mutual success and growth. As we continue to deliver value to our clients, we plan to increase revenue from our existing clients by expanding their use of our platform, selling to other parts of their organizations, and selling additional analytical toolsets and services to them. Our pricing model allows us to grow incrementally along with our clients' growth. We are also able to introduce new healthcare plans that require additional functionality and insights as the


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healthcare market becomes more complex and the regulatory environment evolves, providing us with a substantial opportunity to increase the value of our client relationships.

        Continue to Grow Our Client Base.Data Integration.    We believe that there is a substantial opportunity to continue to grow our client base. We intend to leverage our expertise and experience from the existing large client base to gain new clients through increased investment in our sales force and marketing efforts. In addition, by leveraging our sector expertise and thought leadership, we believe that we can increasingly become the partner of choice for our existing clients. The network effect created by delivering increasing client value and consequently expanding our brand and service value, coupled with our industry expertise, is also driving substantial inbound client interest.

        Continue to Innovate.    Our strength in applying advanced, big data, cloud- based data analytics and our proprietary datasets enable us to achieve increasingly more impactful results for our clients. In order to continue delivering meaningful results in clinical and quality outcomes, utilization, and financial performance across the healthcare landscape, we intend to continue to invest in research and development to further enhance our data analytics and intervention platforms. For example, we recently announced the launch of Data Diagnostics™, a suite of hundreds of real-time patient-specific data analyses that clinicians can order individually, on demand at the point of care within their existing workflow to identify and address gaps in quality, risk, utilization and medical history insights. Powered by Inovalon's sophisticated large-scale data interconnectivity and analytical platform, Data Diagnostics™ allow clinicians to order advanced analytics for their patients on-demand and, within seconds, receive results, for informed decision making during the patient encounter. We also announced during 2015, the acceleration of big data processing empowering our QSI® platform, enabling a significant functionality expansion in our clinical quality outcomes measurement capabilities supporting accelerated performance for HEDIS, Stars, QARR and other measurement and reporting standards. This advancement will also support the acceleration of our related predictive analytics capabilities. As a result, we expect our clients to experience significantly reduced cycle times, allowing for complex measure calculations at speeds which are more than 10 times faster than any other comparable solution which we are aware of in the healthcare industry.

        Continue Expanding into Adjacent Verticals.    We believe the application of advanced analytics and data extends well beyond our current market opportunities and provides additional adjacent market verticals for growth which include:


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

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

        Expand Internationally.    Governments, corporations, and consumers worldwide face similar pressures as within the U.S. with respect to their healthcare systems. We believe that our capabilities are highly applicable to other countries around the world and we intend to invest in replicating our success in the U.S. market to other strategic countries and regions.


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

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

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

Our Technology

Big Data Platform

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

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

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

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


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Data Intake

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

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

We believe that our enterprise-scale data integration and management capability enables us to receive, integrate, and process extremely large-scale data flows at industry-leading speeds, and is a critical capability in achieving material improvement in clinical quality outcomes and financial performance in healthcare, creating a material market differentiator and value creator for us and our clients. We integrate data seamlessly and securely into our systems through our proprietary Extract, Transform, Load tools and processes. This system manages the process of defining and configuring thousands of industry data feeds from our clients and partners (such as electronic health records (“EHR”), laboratory, pharmacy, patient reported, claims, paper based medical records, biometric, and hospital data feeds respectively), manages the data processing workflow, and monitors the ongoing provision and quality of data through the application of more than 2,000 data integrity checks.
Our big data technology platform is built uponhas been created through the use of internally developed software coupled with industry-leading technology frameworks that are vendor-agnostic. We leverage modern big data frameworks such as Hadoop and the Hadoop Distributed File System, and Hadoop which enables our platformenable us to store structured and unstructured data while making it readily accessible by our analytics engine.

Our big data processing capabilities enable dramatic improvements in data integration and analytical cycle speed to value recognition to empower improvements for intelligent product development through the “real world” functional application. Our big data technology lays the foundation of the data fabric allowing integration into our analytical capabilities.

Advanced Analytics.    We have developed, honed, and scaled a broad portfolio of sophisticated analytics. Applying our subject matter expertise in computer processing, data architecture, statistics, medical sciences, healthcare policy, and leveraging the billions of medical events within our significant propriety datasets, we believe that we have developed one of the most advanced analytical platforms in the industry, as well as a culture and set of analytical toolsets that serve to rapidly innovate and expand our platform capabilities. In addition, by leveraging technologies such as Optical Character Recognition, Natural Language Processing and Machine Learning, we are able to further enhance our analytical capabilities, improve efficiency, and accelerate processing capacity and client value delivery.
Intervention Systems.    In order to translate analytical insights into tangible impact, interventions at the point of care are critical. We are able to translate our analytical insights into meaningful impact through data-driven, multi-channel intervention platforms, which include toolsets and services that enable our clients to take the insights derived from our analytics and implement solutions that achieve meaningful impact at the patient and provider level. Our intervention capabilities include direct connectivity with many leading EHR systems, hard copy and electronic mail, and interactions via telephone, in patients’ homes, through mobile devices, at dedicated patient centers, through web-enabled decision support tools, in retail pharmacies, and in traditional clinical locations.
Business Processing.    Our business processing capability consists of a powerful business intelligence system and comprehensive data warehousing to provide historical and current data insight, reporting, and benchmarking to support multiple client business needs such as government-mandated data filings, financial planning, and compliance requirements. We have also implemented an integrated platform of data visualization, allowing clients and their downstream users and operators to access data and analytical results from the population-level down to sophisticated individual drill-down details in real-time.
Data access providedSets
Datasets and the management of data are part of our core strengths, which provide meaningful insight into how a patient, provider, or population is doing. Our datasets grant us both relative and absolute insight, and inform the construction of new

analytics capabilities, predictive models, and impact predictions. Further, data management speeds our time to client impact, decreases the burden on clients choosing to do business with us, and empowers our achievement of mission and results.
In addition to being maintained and tagged within client-specific data lakes, data we receive in the course of providing our services are statistically de-identified and stored in our MORE2 Registry®. The MORE2 Registry® goes beyond just claims data to include information about demographics, enrollment, diagnoses, procedures, pharmacy, laboratory results, and deep medical record clinical data and presents a significant representative mix of commercial, HIX Marketplace, Medicare Advantage, and managed Medicaid care plan patients. As of December 31, 2018, our MORE2 Registry® dataset contained data pertaining to more than 964,000 physicians, 519,000 clinical facilities, 264 million Americans, and 42 billion medical events. The following is a sample of components within our MORE2 Registry®:
• Patient Demographic Data• Benefits Data
• Medical Record Documentation• Encounter and Procedural Data
• Operating Room, Procedure,• Pharmacy Data
   Discharge Summary,• Imaging Report Data
   Emergency Room Records• Laboratory & Pathology Data
• Electronic Health Record Data• Durable Medical Equipment Data
• Health Risk Assessment Data• Self-Reported Data
• Practitioner Profile Data• Social History Data
• Claim Diagnostic Data• Activities of Daily Living (ADL)
• Eligibility and Enrollment Data• Cost Data
Connectivity
We have developed technology that enables real-time, highly differentiated data aggregation and point-of-care interoperability through many leading EHR systems, which drives positive impact and efficiency for clients, clinicians, patients, and the Company.
The Inovalon ONE® Platform facilitates the two-way exchange of clinical data with both cloud and non-cloud based EHR and integrates the Healthcare Enterprise systems, connecting thousands of physicians in an effective, efficient, secure and scalable fashion while minimizing disruption. The Inovalon ONE® Platform automatically requests and retrieves necessary clinical data, which is then analyzed by our data lake leverages scalable application program interfaces, or APIs,advanced predictive analytics to identify gaps in patient care, and service based architecture techniques enabling accessthen embeds those insights directly into the clinical workflow to inform targeted interventions at the contextual data needed to perform many different types of analytics. An API is an application program interface, or software intermediary, that makes it possible for disparate systems to communicate and function with each other. Ultimately, data is provided to the analytics process and results are stored via service based requests to provide a scalable repository of source and results data.

point-of-care.

connecteddatasources.jpg
Technology Infrastructure

We believe that our track record of service is the result of our commitment to excellence and our devotion to maintaining one of the industry'sindustry’s most sophisticated technology infrastructures. We have made significant investments over the past decade to build an industry-leading enterprise-scale infrastructure capable of managing the heavy computing and storage requirements of our

cloud-based data-driven business. Today, we employ a combination of owned, virtualized data centers along with hosted facilities to enable seamless, secure, and scalable solutions nationwide.

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


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tools, we have achieved significant capabilities within our private cloud environment.

The following diagram provides a high level overview of our key infrastructure elements.
infrastructure.jpg

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

        In partnership with EMC, VMware, and Pivotal, we

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


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

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

Disaster RecoveryRecovery.

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

datacenter.jpg

Business continuity and disaster recovery are an important part of our technology platform. Through significant investment in hardware, software, and application design, Inovalon provides solutions that support mission critical, business critical, and business important products and services through our nationwide enterprise data center presence.
Network Operations CenterCenter.

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


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

Privacy Management and Data SecuritySecurity.

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

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

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


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

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a defense in depth protection model that addresses the network, platform, application, and file and data layers;
ongoing evaluation of privacy and security practices to promote continuous improvement;

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

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

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

Platform Modularity
Our Platforms' Components

        Our platformsplatform has been created through the use of internally-developed software coupled with industry-leading technology frameworks that are composed of analyticalvendor-agnostic. Because we have designed and data-driven intervention components that collectively comprise a fully integrated suite of systems designed, developed our own software, we have built significant flexibility and maintained to achieve client value. The following aremodularity into our key toolsets that we use to deliver our client solutions.

Data Integration Toolsets

        iPort™.    iPort is our data integration and management process toolset.platform components. This proprietary toolset leverages a decade of dataset extraction, transform, and load experience, in combination with data format insights gained from analysis of our extensive MORE2 Registry® dataset, to enable high volume data integration at enterprise scale. Applying more than 1,100 data integrity checks constructed from the analysis of data feeds that have constituted more than 11.0 billion medical events within the MORE2 Registry®, iPort™ is able to manage data integration through an advanced exception rules processing—thus empowering both high throughput rates and accuracy. With data feed profiles monitoring for characteristics ranging from receipt timing, content, and format, to referential integrity, and trend consistency, iPort™ processes the integration of thousands of data feeds received by us while maintaining state-of-the-art security protocols and HIPAA compliance.

        EHR Integration Engine.    Our EHR interoperability is a capability that enables us to both (a) push patient-specificnot only enhance our existing products as our clients’ needs evolve, but also to increase our addressable market opportunity by rapidly developing new product offerings and provider-specificexpanding into adjacent markets in the healthcare industry. Our acquisitions of ABILITY, Avalere, and Creehan further enhance this process through the infusion of our data and analytical results to EHR platforms,analytics into additional offerings, new products, greater differentiation, additional capabilities, technologies, client relationships, and (b) aggregate clinicalindustry expertise that they bring. Our large, deep proprietary data from patient-specificsets in the MORE2 Registry® also enable and provider-specific content within EHR platformssupport this flexibility and modularity, as the depth and breadth of the data allows its analysis and application in a highly efficient manner. Designed to achieve these tasks within both cloud-based and single-install EHR


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environments, our interoperability enables bothmany situations across the capture of clinical data and the delivery of data-driven interventions at the clinical point-of-carehealthcare industry-not just for payers, but also providers, pharmaceutical companies, device manufacturers, diagnostics companies, etc. For example, within the workflowset of the clinical environment.

Inovalon ONEAdvanced Analytics Toolsets®

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

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

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

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

        Monthly Member Detail Map (MMDM™).    The MMDM™ aggregates analytical outputs of other analytical toolsets to arrive at a coordinated gap resolution plan informing intervention strategies to resolve gaps in care, quality, and financial performance across large populations. To achieve this, the MMDM™ uses targeted patient-specific, site-specific, and provider-specific predictive analyticsComponents to enable and direct the right intervention for the right patient, in the right venue, at the right time. In addition to layering, prioritizing, and chronologically orchestrating data-driven intervention plans, the MMDM™ also enables the coexistence of Inovalon-driven analytics alongside client and third- party initiatives. The analytical processes necessary to assemble the separate outputs of other analytical toolsets and creating the MMDM™ output are highly complex but highly valuable in translating such disparate analyses intoour OBC offering with a practical operating plan to achieve positive impact for the provider and patient.global pharmaceutical company.

        Data Diagnostics™.    This technology provides a suite of hundreds of patient-specific analyses that can be ordered individually by clinicians on demand with the answer provided within seconds—all without leaving the clinician's workflow. The capability leverages vast amounts of data across billions of


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medical events, interconnectivity, and high-speed cloud-based analytics to allow physician organizations, health plans, ACOs, hospitals, integrated healthcare delivery systems, ASO employer groups, government programs, and individual physicians to achieve valuable clinical insights, strong clinical and quality outcomes, utilization efficiency, and overall financial performance on demand and in real time.

Intervention Toolsets

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

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

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

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

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


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Business Processing Toolsets

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

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

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

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


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

Our Clients

For over 1619 years, we have provided quality services to our clients. During that time, we have built a leading position and have become a true thought leader and innovator in our industry. We have achieved significant scale, and we believe that we play a key role in the U.S. healthcare market. During 2015, we provided services to hundreds
Our clients renew existing client agreements throughout the year. The renewal rates of existing clients of various sizes in markets aroundfor the country, representing 20 of the top 25 health plans by size, 117 of 456 U.S. health plans, 105 of 733 ACOs, and 176 of 1,665 life sciences organizations. For the yearyears ended December 31, 2014, two significant2018, 2017 and 2016 were approximately 90%, 88% and 93%, respectively. The renewal rate is representative of clients Independence Blue Cross and Anthem (formerly known as WellPoint), each expanded their business with us to account for between 11% and 12%, respectively, of our total revenue during the year. For the year ended December 31, 2015, each of the aforementioned significant clients remained significant clients of ours, however, as our Company grew, Independence Blue Cross no longer represented greater than 10% of ourengagements exceeding $0.1 million in revenue. For the year ended December 31, 2015, Anthem accounted for approximately 12% of our total revenue, while no other clients represented greater than 10% of our revenue. See Note 2 (Summary of Significant Accounting Policies), under the heading "Concentrations of Credit Risk", included elsewhere within this annual report on Form 10-K for more information.

Client Services Support

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

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

Sales and Marketing

We believe that our sales and marketing initiatives are key to capitalizing on our significant market and growth opportunities. During 2018, we significantly increased the scale and sophistication of our sales force by leveraging the expertise of technology focused personnel supported by subject matter experts. While we have successfully leveraged our sales and marketing as we have grown, we believe that additional strategic investments in sales and marketing capacity and capabilities will enable us to increasingly seize on the healthcare industry'sindustry’s need for advanced technological capabilities including data connectivity, advanced analytics, intervention toolsets, and data-driven intervention services.

integrated business processing to empower the healthcare industry’s transformation from volume-based models to value-based models.

We sell our platformofferings primarily through three avenues:

Business development led by product and management personnel:  We benefit significantly from the subject matter expertise, market credibility, thought leadership, and relationships of our

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


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

Our marketing and communications strategies are centered on initiatives that drive awareness of our companyCompany and capabilities. These initiatives include: educating the market about our companyCompany broadly; improving the marketplace’s understanding of our platform offerings; hosting industry-focused events and speaking engagements; disseminating articles discussing data trends and

metrics, and strategic interfacing with key business and trade media personnel. We employ a broad array of specific events to facilitate these initiatives, including but not limited to:

Sponsorship and partnership of key industry conferences;

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Client-focused events and programs;

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

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

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

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

utilization.

Operations

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

IT Operations Group

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

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

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


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

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

Services Operations Group

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

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

Competition

We compete with a broad and diverse set of businesses. We believe the competitive landscape is highly fragmented with no single competitor offering similarly expansive capabilities and diverse platform solution offerings in healthcare data analytics,

data-driven interventions, connectivity, and data-driven interventions.data visualization solutions. Our primary competitive challenge is to demonstrate to our existing and potential clients the value of utilizing our platforms rather than developing or assembling their own alternative capabilities. However, weWe believe that the combination of our competitive strengths and successful culture of innovation, including our industry-leadinglarge proprietary datasets, advanced data integration technologies, sophisticated predictive analytics, and data asset, the time-tested and real-world-tested nature of ourextensive industry connectivity, data-driven intervention platforms, and subject-matterthe deep subject matter expertise of our associates, make it timetime- and cost prohibitivecost-prohibitive for our clients to replace or replicate all that we offer without facing material risk.

offer. In addition, we believe the combination of these attributes differentiates us from our competition.

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

Large-scale healthcare-specific solutions providers, such as Optum, Change Healthcare (formerly Change Healthcare Holdings, Inc. and McKesson Technology Solutions), Verscend Technologies (formerly Verisk Health), and IQVIA (formerly QuintilesIMS);
Providers of enterprise-scale, industry agnostic IT solutions, such as Oracle, Dell, SAP, SAS, and IBM;

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

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

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

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Intellectual Property

We generally rely on copyright, trademark, and trade secret laws as well as confidentiality agreements, licenses, and other agreements with employees, consultants, vendors, and customers. We also seek to control access to and distribution of our proprietary software, confidential information and know- how,know-how, technology, and other intellectual property. Historically, because our initial technological innovations were primarily algorithmic in nature, these innovations were well suited to trade secret protection. Accordingly, and due to the complex, time intensive, and costly patent process, with somewhat limited utility for business processes, the use of patents has not historically been compelling for us. However, beginning in the second quarter of 2015, we filed a limited number of provisional and non-provisional patent applications, which may or may not result in an issued patent or patents, andapplications. We expect to continue to seek patents in the future.

We own and use trademarks in connection with our applications and services, including both unregistered common law marks and issued trademark registrations in the United States. Our material trademarks, service marks and other marks include: CAASTMCAAS™, CARA®CARA®, Caresync Advantage®Advantage®, CCS Advantage®Advantage®, CEDITMCEDI™, ChaseWiseTM, Circle Logo®ChaseWise™, Data-Driven Improvements in Health CareCare™, Data Has a Story to Tell. We Give it VoiceTM®, Distributed Analytics®, EMR AccelerationAnalyticsTM®, eCAAS Advantage®Advantage®, ePASS®ePASS®, Healthcare Empowered®Empowered®, Healthier Members, Healthier Business®Business®, HEDIS Advantage, HCC Surveillance®Surveillance®, HIX Foundation®, iDCTFoundationTM®, INDICESTM®, Inovalon®, Empowering the Transformation From Volume To Value®, Inovalon Inovalon—US, Inovalon—EU, Inovalon Healthcare Empowered (and Spiral Design to left)—EU, Inovalon (and Spiral Design on top), Inovalon (and Spiral Design to left)®, Inovalon Healthcare Empowered (and Spiral Design on top)Design), Inovalon Healthcare Empowered (and Spiral Design to left)—US, Inovalon Healthcare Empowered (wordmark)®, Insights: a business intelligence solution, iPORTTMsolution™, iTCCTMiPORT™, MOREiTCC™, MORE2 Registry2® Registry®, PCIS™, Prospective Advantage®Advantage®, QSCL, QSFD®QSCL™, QSI®QSFD®, SRSAQSITM®, QSI-XL™, Star Advantage®Advantage®, Turning Data into Insight and Insight into Action®Action®, We See SolutionsTMSolutions™, Data DiagnosticsTM®, DDx®, ScriptMed®, Clinical Data Extraction as a Service (CDEaaS™), Natural Language Processing as a Service (NLPaaS™), Elastic Container Technology (ECT™), myABILITY®, and DDxthe Inovalon ONETM®. Platform. We also have trademark applications pending to register marks in the United States, Japan and European Union.

While our intellectual property rights are important to our success, we believe that our business as a whole is not materially dependent on any particular patent, trademark, license or other intellectual property right.
Our Employees

As of December 31, 2015,2018, we had a total of 3,3232,499 associates across fourthe following areas: Technology, Innovation and Product, Data-driven Client Services, and Selling, General and Administrative. There were 2,0192,104 full-time associates and 1,304395 part-time associates. None of our associates are represented by a labor union, andunion; all of our associates currently work in the U.S. and its territories (Puerto Rico), and we consider our current relations with our associates to be good.

Requirements Regarding the Privacy and Security of Personal Information

HIPAA and Other Privacy and Security Requirements.    There are numerous U.S. federal and state laws and regulations related to the privacy and security of personal information. In particular, regulations promulgated pursuant to HIPAAthe Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended, establish privacy and security standards that limit the use and disclosure of PHIProtected Health Information (“PHI”) and require the implementation of administrative, physical, and technical safeguards to ensure the confidentiality, integrity, and availability of individually identifiable health information in electronic form. Our health plan customers, as well as healthcare clearinghouses and certain providers with which we may have or may establish business relationships, are covered entities that are regulated under HIPAA. HITECHThe Health Information Technology for Economic and Clinical Health Act (“HITECH”) and an implementing regulation known as the Omnibus Final Rule significantly expanded HIPAA'sHIPAA’s privacy and security requirements. Among other things, HITECH and the Omnibus Final Rule make HIPAA'sHIPAA’s privacy and security

standards directly applicable to "business“business associates,"” which are independent contractors or agents of covered entities that create, receive, maintain, or transmit PHI in connection with providing a service for or on behalf of a covered entity. Under HIPAA and our contractual agreements with our customers, we are considered a "business associate" to our customers“business associate” and thus are directly subject to HIPAA'sHIPAA’s privacy and security standards. In order to provide our covered entity clients with services that involve the use or disclosure of PHI, HIPAA requires our clients to


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enter into business associate agreements with our clients.us. Such agreements must, among other things, require us to:

limit how we will use and disclose PHI;

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

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

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

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

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

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

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

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

Seasonality

The nature of our customers'customers’ end-market results in partial seasonality reflected in both revenue and cost of revenue differences during the year. Regulatory impact of data submission deadlines in, for example, January, March, June, and September and January drive some degree of predictable timing of analytics and data processing activity


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variances from quarter to quarter. Further, regulatory clinical encounter deadlines of June 30th and December 31st drive predictable intervention concentrations variances from quarter to quarter. The timing of these factors results in analytical and intervention activity mix variances, which predictablyhave limited predictable impact in the aggregate on our financial performance from quarter to quarter. However, quarter to quarter financial performance may increasingly vary from historical seasonal trends as we continue to expand into adjacent markets and increase the portion of our revenue generated from new offerings. Further, we also expect the impact of seasonality to decrease over time as we expand our mix of revenue generated from a subscription-based model. The trendtiming of higher client focus on "watchful waiting" has increasingly shifted intervention platform usagenew contract signings and their respective implementations can also lead to latervariances in the year.

our seasonal revenue performance.

Corporate Information

Our executive offices are located at 4321 Collington Road, Bowie, Maryland 20716. Our telephone number at our executive offices is (301) 809-4000 and our corporate website is www.inovalon.com. The information on, or accessible through, our website

is not incorporated into and does not constitute a part of this Annual Report on Form 10-K or any other report or document we file with or furnish to the SEC. We completed our initial public offering in February 2015Securities and ourExchange Commission (“SEC”). Our Class A common stock is listed on the NASDAQ Global Select Market under the symbol "INOV."

“INOV.”

Available Information

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

”

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

Financial Information

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

Item 1A.    Risk Factors

Factors.

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


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Risks Related to Our Business

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

We have experienced significant growth since 2011,2014, with total revenues growing from approximately $239.7$361.5 million for the year ended December 31, 20112014 to approximately $437.3$527.7 million for the year ended December 31, 2015.2018. Future revenues may not grow at these same rates or may decline, such as the approximate 1%2% revenue decline from the year ended December 31, 20122015 to the year ended December 31, 2013.2016. Our future growth will depend, in part, on our ability to grow our revenue from existing clients, to complete sales to potential futurenew clients, to expand our client base in adjacent industry segments such as the life sciences industry and with provider organizations, and employer and private exchanges, to develop new services and capabilities including direct-to-consumer services, and to expand internationally. We can provide no assurances that we will be successful in executing on these growth strategies or that, even if our key metrics, such as trailing 12 month Patient Analytics Months ("PAM"(“PAM”), would indicate future growth, we will continue to grow our revenue, margins or net income. Our ability to execute on our existing sales pipeline, create additional sales pipelines,opportunities, and expand our client base depends on, among other things, the attractiveness of our services relative to those offered by our competitors, our ability to demonstrate the value of our existing and future services, and our ability to attract and retain a sufficient number of qualified sales and marketing leadership and support personnel. In addition, clients in certain industries in which we have a more limited presence, such as the life sciences industry, may be slower to adopt our services than we currently anticipate, which could adversely affect our results of operations and growth prospects.

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

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

the price, performance and functionality of our services;

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


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

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our ability to develop complementary services;

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

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the stability and security of our platform;

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changes in healthcare laws, regulations or trends; and

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

Contracts with our clients generally have stated terms of two to fourfive years. OurHowever, our clients have no obligation to renew their contracts for our services after the term expires. In addition, a high renewal rate in any particular year does not necessarily correlate to recurring or increasing revenue from our existing clients, as our clients may negotiate terms less advantageous to us upon renewal, may renew for fewer services, may choose to


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discontinue one or more services under an existing contract, may exercise flexibilities within their contracts to adjust service volumes, or which could reduce our revenue from these clients, which, for example, occurred duringclients. Accordingly, annual renewal rate metrics have inherent limitations and renewal rates should not be used as a key metric to evaluate the second quarterCompany’s results of 2013.operations. Our future operating results also depend, in part, on our ability to sell new services to our existing clients. If our clients fail to renew their agreements, renew their agreements upon less favorable terms, at lower fee levels or for fewer services, fail to purchase new services from us, or terminate their agreements with us, and we are unsuccessful in generating significant revenue from new clients to replace any lost revenue, our revenues may decline and our future revenue growth may be constrained.

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

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

Our largest client, Anthem (formerly known as WellPoint), representedtop ten clients accounted for approximately 12%42% of our revenues for the year ended December 31, 2015, while no other clients represented greater than 10% of our revenue. Moreover, our top ten clients accounted for approximately 68% of our revenues for the year ended December 31, 2015.2018. The engagement between these clients and us generally is covered through multiple separate statements of work ("SOWs"(“SOWs”), each often with different and/or staggered terms which are all multi-year in their duration, ranging typically from two to fourfive years. We can provide no assurance that these clients will renew their existing contracts or all SOWs with us upon expiration or that any such failure to renew will not have a material adverse effect on our revenue. For example, our revenue for the year ended December 31, 2013 decreased by approximately 1% as compared to the year ended December 31, 2012, in part as a result of a client's decision to discontinue several integrated solution engagements during the second quarter of 2013. If we lose one or more of our top clients, or if one or more of these clients significantly decreases its use of our services, our business and operating results could be materially and adversely affected.

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

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


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

If we are successful in expanding our client base and growing our business, our existing services may not be as scalable as we anticipate, and we may need to expend significant resources to enhance our IT infrastructure, financial and accounting systems, and controls, and also hire a significant number of qualified client support personnel, professional services personnel, software engineers, technical personnel, and management personnel in order to provide services to those new clients. As a result, our expenses may increase more than expected, which could adversely affect our results of operations.operations and net income. In addition, identifying and recruiting qualified personnel and training them in the use of our services requires significant time, expense, and

attention, and our business may be adversely affected if our efforts to expand and train qualified personnel do not generate a corresponding increase in revenues. If our existing services are not as scalable as we anticipate or if we are unable to manage our growth and the cost thereof effectively, the quality of our services and our reputation may suffer, which could adversely affect our business, results of operations and growth prospects.

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

Our services involve the storage and transmission of clients'clients’ proprietary information, sensitive or confidential data, including valuable intellectual property and personal information of employees, clients and others, as well as protected health information, or PHI, of our clients'clients’ patients. Because of the extreme sensitivity of the information we store and transmit, the security features of our computer, network, and communications systems infrastructure are critical to the success of our business. A breach or failure of our security measures could result from a variety of circumstances and events, including third-party action, employee negligence or error, malfeasance, computer viruses, cyber-attacks by computer hackers, failures during the process of upgrading or replacing software and databases, power outages, hardware failures, telecommunication failures, user errors, or catastrophic events. Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks.cyber-attacks, including, for example, the Spectre and Meltdown threats which, rather than acting as viruses, were design flaws in many CPUs that allowed programs to steal data stored in the memory of other running programs and required patch software to correct. As cyber threats continue to evolve, we may be required to expend additional resources to continue tofurther enhance our information security measures and/or to investigate and remediate any information security vulnerabilities. If our security measures fail or are breached, it could result in unauthorized persons accessing sensitive client or patient data (including PHI), a loss of or damage to our data, an inability to access data sources, or process data or provide our services to our clients. Such failures or breaches of our security measures, or our inability to effectively resolve such failures or breaches in a timely manner, could severely damage our reputation, adversely affect client or investor confidence in us, and reduce the demand for our services from existing and potential clients. In addition, we could face litigation, damages for contract breach, monetary penalties, or regulatory actions for violation of applicable laws or regulations, and incur significant costs for remedial measures to prevent future occurrences and mitigate past violations. Although we maintain insurance covering certain security and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability and in any event, insurance coverage would not address the reputational damage that could result from a security incident.

We may experience cyber-security and other breach incidents that may remain undetected for an extended period. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched, we may be unable to anticipate these techniques or to implement adequate preventive measures. In addition, in the event that our clients authorize or enable third parties to access their information and data that are stored on our systems, we cannot ensure the complete integrity or security of such data in our systems as we would not control


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access. If an actual or perceived breach of our security occurs, or if we are unable to effectively resolve such breaches in a timely manner, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and clients, which could have a material adverse effect on our business, operations, and financial results.

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

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

A portion of the data that we obtain and handle for or on behalf of our clients is considered PHI and subject to HIPAA because our clients are covered entities under HIPAA and we act as their business associate. Under HIPAA and our contractual agreements with our HIPAA-coveredcovered entity health plan clients, we are considered a "business associate" to those clients, and“business associate.” Therefore, we are required to maintain the privacy and security of PHI in accordance with HIPAA and the terms of our agreements with clients including bywhich includes implementing HIPAA-required administrative, technical, and physical safeguards.
We have incurred, and will continue to incur, significant costs to establish and maintain these safeguards and, if additional safeguards are required to comply with HIPAA or our clients'clients’ requirements, our costs could increase further, which would negatively affect our operating results. Furthermore, if we fail to maintain adequate safeguards, or if we use or disclose PHI in a manner not permitted by HIPAA or our agreements with our clients, or if the privacy or security of PHI that we obtain and handle is otherwise compromised, we could be subject to significant liabilities and consequences, including, without limitation:


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

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investigation by the federal regulatory authorities empowered to enforce HIPAA which include- the U.S. Department of Health and Human Services, orOffice for Civil Rights (OCR) within HHS, and the Federal Trade Commission,possible imposition of civil and criminal penalties;
investigation by the state attorneys general empowered under HITECH to enforce comparable state laws, and the possible imposition of civil and criminal penalties;

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

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

Laws and expectations relating to privacy continue to evolve, and we continue to adapt to changing needs. Nevertheless, changes in these laws may limit our data access, use, and disclosure, and may


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require increased expenditures by us or may dictate that we not offer certain types of services. In addition, data protection, privacy and similar laws protect more than patient information and, although they vary by jurisdiction, these laws can extend to employee information, business contact information, provider information, and other information relating to identifiable individuals. Any of the foregoing may have a material adverse effect on our ability to provide services to our clients and, in turn, our results of operations.

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

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

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

In addition, we assist our clients with the management and submission of data to governmental entities, including CMS. These processes and submissions are governed by complex data processing and validation policies and regulations. If we fail to abide by such policies or submit incorrect or incomplete data, we may be exposed to liability to a client, court, or government agency that concludes that our storage, handling, submission, delivery, or display of health information or other data was wrongful or erroneous. AlthoughFurther, although we maintain insurance coverage, this coverage may prove to be inadequate or could cease to be available to us on acceptable terms, if at all. Even unsuccessful claims could result in substantial costs and diversion of management time, attention, and resources. A claim brought against us that is uninsured or under-insured could harm our business, financial condition, and results of operations.

General economic, political and market forces and dislocations beyond our control could reduce demand for our solutions and harm our business.

The demand for our platforms,platform capabilities, toolsets and services may be impacted by factors that are beyond our control, including macroeconomic, political and market conditions, the availability of short-term and long-term funding and capital, and the level of interest rates. TheWe believe that the state of economic and political conditions in the U.S. economy has begunis particularly uncertain due to show signsongoing political discord between and among the legislative and executive branches of slowing,the U.S. government, potential shifts in legislative and regulatory conditions concerning, among other matters, international trade and taxation, as well as healthcare, and that an uneven recovery or a renewed global securities markets have become increasingly volatile. Any one or more of these factorsdownturn may contribute to reduced demand for our platforms, toolsets and services, which could have an adverse effect on our results of operations and financial condition.

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

We derive substantially all of our revenue from clients within the healthcare industry. As a result, our financial condition and results of operations could be adversely affected by conditions affecting the healthcare industry generally and health systems and payorspayers in particular. For example, in 2016 and 2017, consumer operated and oriented plans, or health insurance CO-Ops, have recentlyCo-Ops, experienced financial distress, including insolvency, bankruptcy or liquidation, and have beenmany were forced to exit the exchange marketplace. Our

ability to grow will depend upon the economic environment of the healthcare industry, as well as


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our ability to increase the number of services that we sell to our clients. Furthermore, we may not become aware in a timely manner of changes in regulatory requirements affecting our business, which could result in us taking, or failing to take, actions, resulting in noncompliance with state or federal regulations.

There are many factors that could affect the purchasing practices, operations and, ultimately, the operating funds of healthcare organizations, such as reimbursement policies for healthcare expenses, consolidation in the healthcare industry, and regulation, litigation, and general economic conditions. In particular, we could be required to make unplanned modifications to our services or could suffer delays or cancellations of orders or reductions in demand for our services as a result of changes in regulations affecting the healthcare industry, such as any increased regulation by governmental agencies, changes to HIPAA and other federal or state privacy laws, laws relating to the tax- exempttax-exempt status of many of our clients or restrictions on permissible discounts, and other financial arrangements. We cannot predict with certainty what additional healthcare regulations, if any, will be implemented at the federal and state level, or what the ultimate effect of federal healthcare reform or any future legislation or regulation will have on us and our clients. We cannot predict with certainty what effect the current U.S. presidential administration together with the U.S. Congress may have, if any, on coverage and reimbursement for healthcare items and services. Further, regardless of the prevailing political environment in the United States, Medicare, Medicaid and managed care organizations are increasing pressure to both control healthcare utilization and to limit reimbursement. Changes in reimbursement programs or regulations, including retroactive and prospective rate and coverage criteria changes, competitive bidding for certain products and services, and other changes intended to reduce expenditures could adversely affect the portions of our clients’ businesses that are dependent on third-party reimbursement or direct governmental payment. Moreover, to the extent that our clients experience reimbursement pressure resulting in lower revenue for them, their demand for our products and services might decrease. It is unclear what long-term effects the general economic conditions will have on the healthcare industry, and in turn, on our business, financial condition, and results of operations.

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

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

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

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

Many healthcare laws are complex, subject to frequent change, and dependent on interpretation and enforcement decisions from government agencies and other adjudicatory bodies with broad discretion. The application of these laws to us, our clients, or the specific services and relationships we have with our clients is not always clear. In addition, federal and state legislatures have periodically consideredenacted programs designed to reform or amend the U.S. healthcare system at both the federal and state level, such as the enactment of the Patient Protection and Affordable Care Act, andas amended by the Health Care and Education Reconciliation Act of 2010 or the Affordable Care Act or ACA.(the “ACA”). The ACA included provisions to control health care costs, improve health care quality, and expand access to affordable health insurance. Together with ongoing statutory and budgetary policy developments at a federal level, this health care reform legislation could include changes in Medicare and Medicaid payment policies and other health care delivery administrative reforms that could potentially negatively impact the business of our clients. Because not all the administrative rules implementing health care reform under the legislation have been finalized, because of recent judicial action, because of ongoing federal fiscal budgetary pressures yet to be resolved for federal health programs, and because of the lack of implementing regulations or interpretive guidance, gradual and partially


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delayed implementation, possible amendment, repeal or further implementation delays, the full impact of the health care reform legislation and of further statutory actions to reform healthcare payment on our business and the business of our clients is unknown. ThereFurther, we expect that the current U.S. presidential administration together with the U.S. Congress will continue to seek to modify, repeal or otherwise invalidate all or certain provisions of the ACA. Any such changes will likely take time to be implemented and there can be no assurances that health care reform legislation will not adversely impact either our operational results or the manner in which we operate our business. Health care industry participants may respond by reducing their investments or postponing investment decisions, including investments in our


platforms, solutions and services. Our failure to anticipate accurately the application of these laws and similar or future laws and regulations, or our failure to comply with them, could create liability for us, result in adverse publicity, and negatively affect our business.

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

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

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

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

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

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

Our estimates of market opportunity and forecasts of market growth may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.

Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Our estimates and forecasts


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relating to the size and expected growth of our aggregate market opportunity or any of the sub-components of our total addressable market may prove to be inaccurate. Even if our total addressable market or any sub-component thereof meets our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all.

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

Proprietary software and application development is time-consuming, expensive, and complex, and may involve unforeseen difficulties. We may encounter technical obstacles, and it is possible that we discover additional problems that prevent our proprietary applications from operating properly. If our applications and services do not function reliably or fail to achieve client expectations in terms of performance, clients could assert liability claims against us and attempt to cancel their contracts with us. Moreover, material performance problems, defects, or errors in our existing or new applications and services may arise in the future and may result from, among other things, the lack of interoperability of our applications with systems and data that we did not develop and the function of which is outside of our control or undetected in our testing. Defects or errors in our applications might discourage existing or potential clients from purchasing services from us. Correction of defects or errors could prove to be time consuming, costly, impossible, or impracticable. The existence of errors or defects in our applications and the correction of such errors could divert our resources from other matters relating to our business, damage our reputation, increase our costs, and have a material adverse effect on our business, financial condition, and results of operations.

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

The sales cycle for our services is typically four to six months from initial contact to contract execution, but can vary depending on the particular client, product under consideration, and time of year, among other factors. Some clients, for instance, undertake a more prolonged evaluation process, which has in the past resulted in extended sales cycles. Our sales efforts involve educating

potential clients about the use, technical capabilities, and benefits of our services, and gaining an understanding of their needs and budgets. During the sales cycle, we expend significant time and resources, and we do not recognize any revenue to offset such expenditures, which could result in fluctuations in our quarterly results of operations and adversely affect our future operating results.

In addition, we may be unable to enter into definitive contracts at the end of a sales cycle on terms that are favorable to us or at all, in some cases for reasons outside our control, which may materially adversely affect our ability to accurately forecast future growth which may cause our stock price to decline.

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

In addition, because most of our revenue in each quarter is derived from agreements entered into with our clients during previous quarters, the negative impacts resulting from a decline in new or renewed agreements in any one quarter may not be fully reflected in our revenue for that quarter. Such declines, however, would negatively affect our revenue in future periods and the effect of significant


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downturns in sales of and market demand for our services, and potential changes in our renewal rates or renewal terms may not be fully reflected in our results of operations until future periods. Our sales and implementation cycles also make it difficult for us to rapidly increase our total revenue through additional sales in any period. As a result, the effect of changes in the industry impacting our business, or changes we experience in our new sales, may not be reflected in our short-term results of operations.

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

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

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

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

unsuccessful attempt to maintain our brand, we may fail to attract enough new clients or retain our existing clients to the extent necessary to realize a sufficient return on our brand-building efforts, and our business and our ability to attract and retain qualified employees could suffer.


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

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

        We currently hold no issued patents. We have

Beginning in the second quarter of 2015, we filed a limited number of provisional and non-provisional patent applications, which may or may not result in an issued patent or patents. In addition, we do not know whether the examination process will require us to narrow our claims. To the extent that patents are issued from our patent applications, which are not certain, they may be contested, circumvented or invalidated in the future. Moreover, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages, may be successfully challenged by third parties, and, as with any technology, competitors may be able to develop similar or superior technologies to our own now or in the future.

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

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


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

Existing U.S. federal and state intellectual property laws offer only limited protection. Moreover, if we expand our business into markets outside of the United States, our intellectual property rights may not receive the same degree of protection as they would in the United States because of the differences in foreign trademark and other laws concerning proprietary rights. Governments may adopt regulations, and government agencies or courts may render decisions, requiring compulsory licensing of intellectual property rights. When we seek to enforce our intellectual property rights we may be subject to claims that the intellectual property rights are invalid or unenforceable. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming, and distracting to management and could result in the impairment or loss of portions of our intellectual property rights. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management'smanagement’s attention and resources, could delay further sales or the implementation of our solutions, impair the functionality of our solutions, delay introductions of new solutions, result in our substituting inferior or more costly technologies into our solutions, or have a material adverse effect on our business, financial condition, and results of operations.


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

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

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

We could experience losses or liability not covered by insurance.

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


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

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

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

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

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

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


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

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

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redesign technology to avoid infringement, if feasible.

If we were to discover that our applications and services violate third-party proprietary rights, there can be no assurance that we would be able to obtain licenses to continue offering those applications and services on commercially reasonable terms, or at all, to redesign our technology to avoid


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infringement, or to avoid or settle litigation regarding alleged infringement without substantial expense and damage awards. Any claims against us relating to the infringement of third-party proprietary rights, even if not meritorious, could result in the expenditure of significant financial and managerial resources and in injunctions preventing us from distributing certain products. If we are required to make substantial payments or undertake any of the other actions noted above as a result of any intellectual property infringement claims against us or any obligation to indemnify our clients for such claims, such payments or costs could have a material adverse effect on our business, financial condition, and results of operations.

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

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

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

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

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

We have previously and may in the future seek to acquire or invest in businesses, services, or technologies that we believe could complement or expand our services, enhance our technical capabilities, or otherwise offer growth opportunities. For example, on SeptemberOctober 1, 2015,2016, we acquired Avalere.Creehan, on July 6, 2017, we completed the acquisition of ComplexCare Solutions, Inc. and ComplexCare Solutions IPA, LLC (together, “CCS”), and on April 2, 2018, we acquired ABILITY. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated. Acquisitions also could result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results and financial condition. In addition, we have limited experience in acquiring other businesses. We may not achieve the anticipated benefits from the acquired business, including from Avalere,Creehan, CCS, or ABILITY, due to a number of factors, including:

inability or difficulty integrating and benefiting from acquired technologies, services, or clients in a profitable manner, including as a result of reductions in marginsoperating income, increases in expenses, the failure to achieve anticipated synergies, or otherwise;

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unanticipated costs or liabilities associated with the acquisition;

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

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

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

The integration of newly acquired businesses, including Avalere,Creehan, CCS, and ABILITY, will also require a significant amount of time and attention from management. The diversion of management attention away from ongoing operations and key research and development, marketing or sales efforts could adversely affect ongoing operations and business relationships. Moreover, even if we were able to fully integrate a new acquisition'sacquisition’s business operations and other assets successfully, there can be no assurance that such integration will result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that may be possible or were anticipated from the acquisition or that these benefits will be achieved within a reasonable period of time. Delays in integrating our acquisitions, which could be caused by factors outside of our control, could adversely affect the intended benefits of the acquisitions to our business, financial results, financial condition and the trading price of our Class A common stock.

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

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

The methods, estimates, and judgments that we use in applying accounting policies have a significant impact on our results of operations. For more information on our critical accounting policies and estimates, see "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” and Note 2“Note 2—Summary of Significant Accounting Policies,” of the notes to our consolidated financial statements included elsewhere in this Annual Report.Report on Form 10-K. These methods, estimates, and judgments are subject to significant risks, uncertainties, and assumptions, and changes could affect our results of operations. In addition, our internal control over financial reporting may not prevent or detect misstatements because of the inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of our consolidated financial statements.

As a result of becoming a public company, we

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

The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. We are required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting in the second annual report we file with the Securities and Exchange Commission, or the SEC.each Annual Report on Form 10-K. This assessment will needis required to include disclosure of material


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weaknesses, if any, identified by our management in our internal control over financial reporting. However, as an "emerging growth company," as defined in the JOBS Act,In addition, our independent registered public accounting firm will not beis required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404in each of the Sarbanes-Oxley Act until the later of the year following our first annual report required toAnnual Reports on Form 10-K. There can be filed with the SEC,no assurance that we or the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issuewill not identify a report that is adversematerial weakness in our internal control over financial reporting in the event it is not satisfied with the level at which our controls are documented, designed or operating.future. Any failure of our internal control over financial reporting to be effective or our failure to implement required new or improved controls, if any, or difficulties encountered in their implementation, including delaying or failing to successfully integrate our acquisitions into our internal control over financial reporting or the identification and reporting of a material weakness, may harm our operating results, cause us to fail to meet our reporting obligations, harm investor confidence, and negatively impact the trading price of our Class A common stock.

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

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

        We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which we have total annual gross revenue of $1 billion or more during such fiscal year, (ii) the end of the fiscal year in which we qualify as a large accelerated filer, with at least $700 million of equity securities held by non-affiliates, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period, or (iv) December 31, 2020, which is the last day of the fiscal year following five years from the date of our initial public offering.

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

Our investment, financing, leverage, and dividend policies, and our policies with respect to all other activities, including growth, capitalization, and operations, are determined exclusively by our board of directors, and may be amended or revised at any time by our board of directors without notice to or a vote of our stockholders. This could result in us conducting operational matters, making investments, or pursuing different business or growth strategies than those contemplated in this Annual Report.Report on Form 10-K. Further, our charter and bylaws do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. Higher leverage also increases the risk of default on our obligations. In addition, a change in our investment policies, including the manner in which we allocate our resources across our portfolio or the types of assets in which we seek to invest,

may increase our exposure to interest rate risk and liquidity risk. Changes to our policies with regards to the foregoing could materially adversely affect our financial condition, results of operations, and cash flow.

Future sales to clients outside the United States or with international operationsuse of third party vendors outside the United States might expose us to risks inherent in international salesoperations which, if realized, could adversely affect our business.

An element of our growth strategy is to expand internationally. In addition, we intend to continue to utilize certain third-party vendors that are located outside of the United States. For example, we currently contract with a third-party vendor in India that provides IT support for certain of our operations. Operating in international markets requires significant resources and management attention and will subjectsubjects us to regulatory, economic, and political risks that are different from those in the United States. Because of our limited experience


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with international operations, any international expansion efforts might not be successful in creating demand for our services outside of the United States or in effectively selling our services in the international markets we enter. In addition, we will face risks in doing business internationally that could adversely affect our business, including:

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

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difficulties in staffing and managing foreign operations;

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

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new and different sources of competition;

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

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laws and business practices favoring local competitors;

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

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increased financial accounting and reporting burdens and complexities;

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adverse tax consequences; and

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

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

Our success depends on the efficient and uninterrupted operation of our data centers and service provider locations. Interruptions in service or damage to locations may be caused by natural disasters, power loss, Internet or network failures, physical damage, operator error, security breaches, computer viruses, denial-of-service attacks, or similar events. The varied types and severity of the interruptions that could occur may render our safeguards inadequate. These service interruption events could result in the corruption or loss of data and impair the processing of data and our delivery of services to clients, which could have an adverse effect on our business, operations, and financial results. Furthermore, if any of our data centers are unable to keep up with our growing needs for capacity, it could have an adverse effect on our business.

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

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

We rely on third-party cloud capacity providers to efficiently scale our cloud-based solutions.
Although substantially all of the computer hardware necessary to deliver our solutions, data and compute capacity is located and maintained in our owned data centers, we rely on third-party cloud capacity providers, including Amazon Web Services, Microsoft Azure, and Google cloud services, to efficiently scale our cloud-based solutions. The systems and operations of our third-party cloud based capacity providers could suffer damage or interruption as a result of human error, fire, flood, power loss, telecommunications failure, break-ins, terrorist attacks, acts of war, and similar events. The occurrence of any such natural disaster,

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terrorism or other unanticipated problems at our third-party cloud based capacity providers’ hosting facilities could result in lengthy interruptions in our service. Although our third-party cloud based capacity providers maintain backup facilities and disaster recovery services in the event of a system failure, these systems may be insufficient or fail. Any system failure, including network, software, or hardware failure, that causes an interruption in our use of third-party cloud capacity providers or that causes a decrease in responsiveness of our cloud-based solutions could damage our reputation and cause our customers and potential customers to believe that our service is unreliable, causing us to lose customers, which could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

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

We are currently the subject of purported securities class action lawsuits and additional litigation may be brought against us in the future.
We are currently the subject of two consolidated purported class action lawsuits which assert violations of Section 11, Section 12, and Section 15 of the Securities Act based on allegedly false or misleading statements and omissions in our Registration Statement issued in connection with our initial public offering on February 18, 2015. These lawsuits seek certification as a class and unspecified compensatory damages plus interest and attorneys’ fees. On January 23, 2019, the parties informed the court that they had accepted a mediator’s recommendation on the amount of a settlement of these lawsuits, subject to agreement on the terms and settlement documentation. On the same day, the court stayed all proceedings for a period of not more than 60 days to enable the parties to finalize the settlement and settlement documentation and move for preliminary approval of the settlement. On February 20, 2019, the parties executed a settlement agreement, which is subject to court approval, provides for the dismissal of all claims against the defendants in connection with the securities class action suit, and provides for a payment to the class of $17 million, of which the Company has agreed to contribute $1.7 million, with the remaining amounts to be paid by the Company’s insurance carriers. There can be no assurance that such agreement will be approved by the court, that individual claimants will not opt out of the class and pursue individual claims, that the Company can overcome any objections or appeals regarding the settlement, or that all conditions to the settlement agreement will be satisfied. In addition, in the past, following periods of volatility in the market, securities class action litigation has often been instituted against companies. Such current and additional litigation, if any, including in the form of stockholder derivative actions against our Board of Directors, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, financial condition, results of operations and growth prospects and cause our stock price to decline.
Our debt may restrict our future operations.
We have substantial debt and have the ability to incur additional debt.  As of December 31, 2018, we had approximately $977.6 million of outstanding principal indebtedness. Our incurrence of substantial amounts of debt may have significant consequences. For instance, it could:
make it more difficult for us to satisfy our financial obligations, including those relating to our outstanding debt;

require us to dedicate a substantial portion of our cash flow from operations to the payment of interest and principal due under our debt, which will reduce funds available for other business purposes;
increase our vulnerability to general adverse economic and industry conditions;
limit our flexibility in planning for, or reacting to, changes in our business;
place us at a competitive disadvantage compared with some of our competitors that have less debt; and
limit our ability to obtain additional financing required to fund working capital and capital expenditures and for other general corporate purposes.
Our 2018 Credit Agreement and the terms of our other debt instruments, including agreements relating to debt we may incur in the future, contain or will contain covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. For instance, these covenants place restrictions on our ability to, among other things: incur additional debt; create additional liens, merge or consolidate; make certain investments, loans, advances, guarantees and acquisitions; make certain restricted payments; or enter into transactions with affiliates. In addition, our 2018 Credit Agreement requires that we comply with certain financial ratios, including a maximum senior secured net leverage ratio test. Our ability to comply with these covenants may be adversely affected by events beyond our control, including prevailing economic, financial and industry conditions. A breach, or alleged breach, of any of these covenants could result in a default and our lenders could elect to declare all amounts outstanding to be immediately due and payable and to terminate all commitments to extend further credit. If we were unable to repay those amounts, the secured lenders could proceed against the collateral granted to them to secure such indebtedness. There can be no assurance that we will have sufficient assets to repay amounts due under our indebtedness.
Our failure to hedge effectively against interest rate changes may adversely affect results of operations.
Our 2018 Term Facility currently bears interest at variable rates and we may incur additional variable rate debt in the future. Accordingly, increases in interest rates on variable rate debt would increase our interest expense, which could reduce net earnings and cash available for payment of our debt obligations. We currently manage our exposure to interest rate volatility by using interest rate swap agreements and may in the future use additional interest rate hedging arrangements, such as interest cap agreements. These agreements involve risks, such as the risk that counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate increases and that a court could rule that such an agreement is not legally enforceable.  In addition, hedging strategies involve transaction and other costs, and our hedging strategies and the derivatives that we use may not completely offset the risks of interest rate volatility and may result in or magnify losses. Furthermore, interest rate derivatives may not be available at all, or at favorable terms, particularly during economic downturns. Failure to hedge effectively against interest rate changes may materially and adversely affect our results of operations.
Risks Related to Our Class A Common Stock

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

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

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

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quarter, (quarter to quarter financial performance may increasingly vary from historical seasonal trends as we further expand into adjacent markets and increase the portion of our revenue generated from new offerings);
possible delays in the expected recognition of revenue due to lengthy and sometimes unpredictable sales and implementation timelines;

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

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

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

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

We are currently controlled by holders of our Class B common stock. As of the date of this Annual Report,January 31, 2019, holders of our Class B common stock beneficially own an aggregate of approximately 94%92% of the voting power of our common stock. In particular, Dr. Dunleavy beneficially owns an aggregate of approximately 57%63% of the voting power of our common stock, and Mr. Hoffmann beneficially owns an aggregate of approximately 20%22% of the voting power of our common stock. The shares beneficially owned by Dr. Dunleavy and Mr. Hoffmann and certain other stockholders are shares of Class B common stock, which have 10 votes per share, whereas each share of Class A common stock has one vote per share. As long as holders of our Class B common stock control at least a majority of the voting power of our outstanding common stock, they will have the ability to exercise substantial control over all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the election and removal of directors and the size of our board of directors, any amendment of our certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of all or substantially all of our assets. Even if their ownership falls below 50%, holders of our Class B common stock will continue to be able to exert significant influence or effectively control our decisions because of the dual class structure of our common stock. This concentrated control by our Class B common stockholders will limit or preclude your ability to influence those corporate matters for the foreseeable future and, as a result, we may take actions that holders of our Class A common stock do not view as beneficial. This dual class structure may adversely affect the market price of our Class A common stock. In addition, this structure may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our stockholders.

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

As a newly publicpublicly traded company, in 2015, we incur significant legal, accounting, stockholder communication, and other expenses that we did not incur asand spend a private company.significant amount of management time and internal resources to comply with changing tax laws, regulations and standards relating to corporate governance and public disclosure. For example, we are subject to the reporting requirements of the Exchange Act, and are required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC, and


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the NASDAQ Stock Market LLC or NASDAQ,(“NASDAQ”), including the establishment and maintenance of effective disclosure and financial controls, changes in corporate governance practices, and required filing of annual, quarterly, and current reports with respect to our business and operating results. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act, which will increase when we are no longer an emerging growth company, as definedthe Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and new regulations issued by the JOBS Act.SEC are creating additional disclosure obligations for public companies. We may also need to hire additional accountinginvest substantial resources to comply with evolving standards, which may result in increased expenses and financial staff with appropriate public company experience and technical accounting knowledge. Furthermore, we expect that the expenses necessary to communicate with our stockholders, the financial community, public relations audiences, and other such similar audiences will be significantly more than any such similar expenses have historically been for us.

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

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

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

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


overall performance of the equity markets;

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our operating performance and the performance of other similar companies;

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changes in the market valuations of similar companies;

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

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

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

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

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

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Report on Form 10-K.

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

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our Class A common stock.

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

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

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

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

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

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

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


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

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

Item 1B.    Unresolved Staff Comments.

None.

Item 2.    Properties.

Our corporate headquarters is located in Bowie, Maryland, where we occupy approximately 110,000 square feet under a lease agreement that expires in August 2018.June 2029. In addition, we lease an aggregate of approximately 216,000406,000 square feet at the following locations: Columbia, Maryland; a second facility inMinneapolis, MN; Washington, DC; Bowie, Maryland; Nashville, Tennessee; Phoenix, Arizona; Parsippany, NJ; Tampa, FL; Canonsburg, Pennsylvania; Boston, MA; Morristown, NJ; Herndon, Virginia; Lansing, Michigan; Washington, DC; and Phoenix, Arizona.Yellow Springs, OH. We own one property in Snellville, Georgia, which is approximately 12,000 square feet. In addition, we maintain a number of leases for smaller office facilities in various locations in the regions of our clients coinciding with specific client needs.


Item 3.    Legal Proceedings.
Proceedings

.

Legal Proceedings—From time to time we may bethe Company is involved in various legal proceedings and subject to claims that arise inlitigation matters arising out of the ordinarynormal course of business. AlthoughThe 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 operations, 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 and claims are inherently unpredictable and uncertain, we are not currently a partymatters to any legal proceedings the outcome of which, if determined adversely to us, are believed to, either individually or taken together, have a material adverse effectimpact on our business, operating results, cash flows orthe condensed consolidated financial condition. Regardlessstatements of the outcome, litigation hasCompany.
There have been no significant or material developments to current legal proceedings, including the potentialestimated effects on the Company’s condensed consolidated financial statements and note disclosures, other than the following updates with respect to have an adverse impactthe Xiang v. Inovalon Holdings, Inc., et.al., No. 1:16-cv-04923 case filed in the United States District Court for the Southern District of New York on us becauseJune 24, 2016 against the Company, certain officers, directors and underwriters in the Company’s initial public offering, which was previously disclosed. Expert discovery was completed on December 21, 2018. Subsequent to December 31, 2018, on January 23, 2019, the parties informed the court that they had accepted a mediator’s recommendation on the amount of defensea settlement, subject to agreement on the terms and settlement costs, diversiondocumentation. On the same day, the court stayed all proceedings for a period of management resources,not more than 60 days to enable the parties to finalize the settlement and settlement documentation and move for preliminary approval of the settlement. On January 24, 2019, the parties filed a motion with the U.S. Court of Appeals for the Second Circuit requesting that the pending petition seeking permission to appeal the court’s class certification order under Federal Rule of Civil Procedure 23(f) be held in abeyance pending the resolution of settlement negotiations, which request the court granted on January 28, 2019. On February 20, 2019, the parties executed a settlement agreement, which is subject to court approval, provides for the dismissal of all claims against the defendants in connection with the securities class action suit, and provides for a payment to the class of $17 million, of which the Company has agreed to contribute $1.7 million, with the remaining amounts to be paid by the Company’s insurance carriers. The settlement contains no admission of liability by the Company and the other factors.

defendants. See “Note 11—Commitments and Contingencies” of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Item 4.    Mine Safety Disclosures.

Not Applicable.


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PART II

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

Market Information

Our Class A common stock is listed on the NASDAQ Global Select Market under the symbol "INOV." Initial trading of our Class A common stock commenced on February 12, 2015. Accordingly, no market for our common stock existed prior to that date. On February 12, 2015, we offered our IPO at a price to the public of $27.00 per share. The following table lists quarterly information on the price range of our Class A common stock based on the high and low reported sale prices for our Class A common stock as reported by NASDAQ for the periods indicated below:

“INOV.”
 
 Price Range 
 
 High Low 

Year Ended December 31, 2015:

       

First quarter

 $33.75 $21.68 

Second quarter

 $30.55 $22.06 

Third quarter

 $28.38 $17.78 

Fourth quarter

 $23.87 $16.51 

Stock Performance Graph

The following performance graph and related information shall not be deemed "soliciting material"“soliciting material” or to be "filed"“filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

        Set forth

The line graph and table below is a graph comparingcompare the cumulative total stockholder return on our Class A common stock with the NASDAQ Composite-Total Returns Index and the NASDAQ Computer Index. This graph and Data Processing Index since February 12, 2015 (the date our Class A common stock initialy traded), through December 31, 2015, assuming that antable assume the investment of $100 was invested in ourCompany common stock at $27 per share, and each index referenced at quoted prices on February 12, 2015 and assumes thatthe reinvestment of dividends, if any, dividends were reinvested on the relevant payment dates.
The following performance graph is historical and not necessarily indicative of future price performance.


chart1.jpg

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The following table was used to prepare the preceding chart, above, assumes $100 was invested at the close of market on February 12, 2015, which was our initial trading day, and illustrates the value of the investment based on quoted prices as of the indicated dates:

 
 2/12/2015 3/31/2015 6/30/2015 9/30/2015 12/31/2015 

Inovalon Holdings, Inc. 

 $100 $112 $103 $77 $63 

Nasdaq Composite Index

 $100 $101 $103 $95 $103 

NASDAQ Computer and Data Processing Index

 $100 $99 $99 $94 $104 
 February 12, 2015 December 31, 2015 December 31, 2016 December 31, 2017 December 31, 2018
Inovalon Holdings, Inc. $100
 $63
 $38
 $56
 53
NASDAQ Composite Index$100
 $103
 $111
 $142
 137
NASDAQ Computer Index$100
 $104
 $117
 $162
 156

Holders

As of February 15, 2016,January 31, 2019, there were 17131 stockholders of record of our Class A common stock. However, because many shares of our common stock are held by brokers and other institutions on behalf of stockholders, we believe there are substantially more beneficial holders of our common stock than record holders. As of February 15, 2016,January 31, 2019, there were 5223 stockholders of record of our Class B common stock.

Dividend Policy

Our board of directors does not currently intend to declare and pay dividends on our common stock. However, our board of directors will periodically reevaluate our dividend policy and may determine to pay dividends in the future. Any future determination to declare cash dividends will be at the sole discretion of our board of directors.

        The following table sets forth the cash No dividends per share of our common stock that our board of directorswere declared during the years ended December 31, 2015, 2014, 2013,2018 and 2012, respectively:

2017.
 
 Year Ended December 31, 
 
 2015 2014 2013 2012 

Dividends declared per share

 $— $— $0.15 $0.36 

Unregistered Sales of Equity Securities
None.
Use of Proceeds from Registered Securities

On February 18, 2015, we completed our IPOinitial public offering (“IPO”) of 22,222,222 shares of Class A common stock and, upon the underwriters'underwriters’ exercise of their option to purchase additional shares, issued an additional 3,142,581 shares of Class A common stock for a total of 25,364,803 shares issued. All of the shares issued in the IPO were primary shares offered by us as none of our stockholders sold any shares in the IPO. The offering price of the shares sold in the IPO was $27.00 per share, resulting in net proceeds to us, after underwriters'underwriters’ discounts and commissions and other expenses payable by us, of $639.1 million. All of the shares were sold pursuant to our registration statement on Form S-1, as amended (File No. 333-201321), that was declared effective by the SEC on February 11, 2015. Goldman, Sachs & Co., Morgan Stanley & Co. LLC, and Citigroup Global Markets Inc. acted as joint book-running managers for the IPO and as representatives of the underwriters.

The principal purposes of our IPO were to create a public market for our Class A common stock and thereby enable future access to the public equity markets by us and our employees,stockholders, and obtain additional capital. On September 1, 2015, we used approximately $126.2 million of the net proceeds from the IPO to complete the acquisition of Avalere.Avalere Health, Inc. On October 1, 2016, we committed $120.0 million as partial consideration for our acquisition of Creehan. (See “Note 3—Business Combinations” of the notes to our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K for more information). Through December 31, 2017, in aggregate, we have used approximately $200.0 million of the net proceeds from the IPO to repurchase outstanding shares of Class A common stock under our share repurchase program. We intend to useused the remaining net proceeds to us from our IPO for working capital and other general corporate purposes; however, we do not currently have any specific uses of the remaining net proceeds. Additionally, we may useto fund a portion of the remaining net proceeds for additional acquisitions of complementary businesses, technologies, or other assets, orcash used to repay outstanding indebtedness.

acquire ABILITY on April 2, 2018.

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Unregistered Sales of Equity Securities

        None.

Purchases of Equity Securities by the Issuer or Affiliated Purchasers

        The following table sets forth certain information with respect to common stock purchased by the Company for the three-month period ended December 31, 2015.

Period
 Total
Number of
Shares
Purchased(1)		 Average Price
Paid
per Share		 Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs		 Maximum Number of
Shares that May Yet
be Purchased under
the Plans or Programs		 

October

  —  —  —  — 

November

  64,074 $17.83  —  — 

December

  —  —  —  — 
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Total

  64,074 $17.83  —  — 
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​
​​​ ​ ​​ ​​​ ​ ​​ ​ ​
(1)
During the three months ended December 31, 2015, the Company withheld 64,074 shares of restricted stock for $1.1 million to satisfy employee tax withholding requirements related to the vesting of restricted stock units.
None.

        2015 Employee Stock Purchase Plan—The ESPP became effective on the date of the completion of our initial public offering. The ESPP enables eligible employees to purchase shares of our Class A common stock at a discount through participation in discrete offering periods. Shares of Class A common stock purchased under the ESPP will either be issued by the Company or acquired directly from third parties in the open market. On September 1, 2015, we directed the plan administrator to purchase 30,689 shares of Class A common stock in the open market for a total of $664 thousand, for issuance to the ESPP participants at a discounted price of $18.61 per share; there were no other open market purchases pursuant to the Plan in the fiscal year ended December 31, 2015. We may, in our sole discretion, based on market conditions, relative transaction costs and our need for additional capital, continue to instruct the plan administrator to make semi-annual open market purchases of Class A common stock for ESPP participants to coincide with the ESPP's designated semi-annual purchase dates.

        2015 Omnibus Incentive Plan—We issue restricted stock units ("RSUs") and restricted stock awards ("RSAs") as part of our 2015 Omnibus Incentive Plan (the "2015 Plan"), which was adopted by our board of directors on January 14, 2015 and approved by our stockholders. Shares of common stock issued upon vesting of RSUs and RSAs under the 2015 Plan will be either issued by the Company or acquired directly from third parties in the open market or in privately negotiated transactions. We may, in our sole discretion, determine the source of shares issuable upon vesting of RSUs and RSAs available through the 2015 Plan based on market conditions, relative transaction costs and our need for additional capital. In the future, we may direct the plan administrator to purchase shares of Class A common stock in the open market to cover vested RSUs and RSAs. During the fiscal year ended December 31, 2015, we did not make any open market purchases pursuant to the 2015 Plan.

Securities Authorized for Issuance Under Equity Compensation Plans

See Item 12, "Security“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters"Matters” for information regarding securities authorized for issuance.


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Item 6.    Selected Financial Data.

The following table sets forth selected consolidated financial data for the years presented and at the dates indicated below. We have derived the selected consolidated statements of operations data for the years ended December 31, 2015, 2014, and 2013 from our audited consolidated financial statements included elsewhere in this annual report on Form 10-K. We have derived the selected consolidated balance sheet data as of December 31, 2015 and 2014 from our audited consolidated financial statements included elsewhere in this annual report on Form 10-K. The consolidated statement of operations data for the years ended December 31, 2012 and 2011 and the consolidated balance sheet data as of December 31, 2013, 2012 and 2011 are derived from consolidated financial statements that are not included in this annual report on Form 10-K. In our opinion, such financial statements include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial data set forth in those statements. In the table below we have included measures, "Adjusted EBITDA," "Adjusted EBITDA margin," and "Non-GAAP net income," that are not presented in accordance with GAAP. A discussion of why we utilize these non-GAAP measures and reconciliations to corresponding GAAP measures are provided below.

Our historical results are not necessarily indicative of our results in any future periods. The summary of our consolidated financial data set forth below should be read together with our consolidated financial statements and related notes, as well as the sections entitled "Management's


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“Management’s Discussion and Analysis of Financial Condition and Results of Operations,"” included elsewhere in this Annual Report.

 
 Year Ended December 31, 
 
 2015 2014 2013 2012 2011 
 
 (in thousands, except share and per share information)
 

Consolidated Statement of Operations Data:

                

Revenue

 $437,271 $361,540 $295,798 $300,275 $239,685 

Expenses:

                

Cost of revenue

  146,140  112,761  120,054  101,188  102,695 

Sales and marketing

  14,684  7,143  5,952  6,793  6,752 

Research and development

  22,329  23,130  21,192  15,499  14,855 

General and administrative

  115,029  88,565  80,638  72,661  63,184 

Depreciation and amortization

  22,633  19,880  15,517  12,899  11,229 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Total operating expenses

  320,815  251,479  243,353  209,040  198,715 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Income from operations

  116,456  110,061  52,445  91,235  40,970 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Other income and (expenses):

                

Realized losses on short-term investments

  (328) —  —  —  — 

Interest income

  3,003  6  9  11  10 

Interest expense

  (4,420) (1,336) (79) (129) (62)
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Income before taxes

  114,711  108,731  52,375  91,117  40,918 

Provision for income taxes

  48,648  43,379  19,657  35,962  15,991 
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​

Net income

 $66,063 $65,352 $32,718 $55,155 $24,927 
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​​​​
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Basic net income per share

 $0.45 $0.50 $0.24 $0.40 $0.18 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​

Diluted net income per share

 $0.45 $0.49 $0.24 $0.40 $0.18 
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​
​​​​​​​​​​​​​​​​​
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Weighted average shares of common stock outstanding:

                

Basic

  145,745  130,770  135,305  137,865  137,865 
​​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​​
​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​

Diluted

  148,275  133,289  136,375  139,040  138,855 
​​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​​
​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​

Other Financial Data(1):

                

Adjusted EBITDA

 $151,622 $133,648 $71,847 $108,105 $57,526 

Adjusted EBITDA margin

  35% 37% 24% 36% 24%

Non-GAAP net income

 $75,352 $70,205 $37,393 $59,449 $30,152 
Report on Form 10-K.
(1)
See the section titled "Non-GAAP Financial Measures" below for additional information and a reconciliation of net income to Adjusted EBITDA and net income to Non-GAAP net income.

 
 December 31, 
 
 2015 2014 2013 2012 2011 
 
 (in thousands)
 

Consolidated Balance Sheet Data:

                

Cash and cash equivalents

 $114,034 $162,567 $110,594 $106,361 $114,872 

Short-term investments

  614,130  —  —  —  — 

Accounts receivable, net of allowances

  81,305  43,938  33,398  62,899  36,764 

Working capital

  776,477  168,217  130,562  136,933  131,676 

Property, equipment and capitalized software, net

  65,031  50,962  43,050  34,170  28,089 

Goodwill

  137,733  62,269  62,269  62,269  62,269 

Total assets

  1,112,877  342,569  269,746  285,655  262,922 

Long-term debt

  266,546  281,418  279  168  268 

Total liabilities

  373,721  350,791  38,012  48,826  33,817 

Total stockholders' equity (deficit)

  739,156  (8,222) 231,734  236,829  229,105 
 Year Ended December 31,
 2018 2017 2016 2015 2014
 (in thousands, except share and per share information)
Consolidated Statement of Operations Data: 
  
  
  
  
Revenue$527,676
 $449,358
 $427,588
 $437,271
 $361,540
(Loss) Income from operations(2,585) 33,789
 37,634
 116,456
 110,061
Net (loss) income(39,164) 34,818
 27,104
 66,063
 65,352
Net (loss) income attributable to common stockholders(39,164) 33,828
 26,943
 66,014
 65,352
Basic net (loss) income per share$(0.27) $0.24
 $0.18
 $0.45
 $0.50
Diluted net (loss) income per share$(0.27) $0.24
 $0.18
 $0.45
 $0.49

 December 31,
 2018 2017 2016 2015 2014
 (in thousands)
Consolidated Balance Sheet Data: 
  
  
  
  
Cash and cash equivalents$115,591
 $208,944
 $127,683
 $114,034
 $162,567
Short-term investments7,000
 267,288
 445,315
 614,130
 —
Accounts receivable, net of allowances104,405
 90,054
 85,591
 81,305
 43,938
Working capital130,817
 466,628
 601,720
 776,477
 168,217
Property, equipment and capitalized software, net141,758
 125,768
 76,420
 65,031
 50,962
Goodwill956,029
 184,932
 184,557
 137,733
 62,269
Total assets1,921,415
 995,078
 1,053,344
 1,112,877
 342,569
Long-term debt and capital lease obligations953,441
 203,359
 236,465
 266,546
 281,418
Total liabilities1,238,826
 352,306
 369,767
 373,721
 350,791
Total stockholders’ equity (deficit)682,589
 642,772
 683,577
 739,156
 (8,222)

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Non-GAAP Financial Measures

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

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

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

Adjusted EBITDA and Adjusted EBITDA Margin

        We define Adjusted EBITDA as net income calculated in accordance with GAAP, adjusted for the impact of depreciation and amortization, interest expense, interest income, provision for income taxes, stock-based compensation, acquisition costs, tax on equity exercises, other non-comparable income and expenses, and certain legal costs. We have provided below a reconciliation of net income, which is the most directly comparable GAAP financial measure, to Adjusted EBITDA.

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

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


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

 
 Year Ended December 31, 
 
 2015 2014 2013 2012 2011 
 
 (in thousands)
 

Reconciliation of Net Income to Adjusted EBITDA:

                

Net income

 $66,063 $65,352 $32,718 $55,155 $24,927 

Depreciation and amortization

  22,633  19,880  15,517  12,899  11,229 

Realized losses on short-term investments

  328  —  —  —  — 

Interest expense

  4,420  1,336  79  129  62 

Interest (income)

  (3,003) (6) (9) (11) (10)

Provision for income taxes

  48,648  43,379  19,657  35,962  15,991 
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​

EBITDA

 $139,089 $129,941 $67,962 $104,134 $52,199 

Stock-based compensation

  7,415  2,894  1,842  2,560  3,767 

Acquisition costs:

                

Transaction costs

  1,483  —  —  —  — 

Contingent consideration

  2,938  —  —  —  — 

Tax on equity exercises

  697  —  —  —  — 

Other non-comparable items(a)

  —  —  1,565  1,411  1,560 

Professional service fees(b)

  —  813  478  —  — 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Adjusted EBITDA

 $151,622 $133,648 $71,847 $108,105 $57,526 
​​​​ ​​ ​ ​​ ​​​ ​ ​​ ​​
​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​
(a)
Other "non-comparable items" include business transaction-related professional fees, corporate name change expenses, workforce restructuring expenses, and certain legal costs. We believe that these non-comparable expenses are not attributable to our ongoing operations for the period in which such charges are incurred and do not accurately reflect the performance of our ongoing operations.

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

Non-GAAP net income

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

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


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

 
 Year Ended December 31, 
 
 2015 2014 2013 2012 2011 
 
 (in thousands)
 

Reconciliation of Net Income to Non-GAAP net income:

                

Net income

 $66,063 $65,352 $32,718 $55,155 $24,927 

Stock-based compensation

  7,415  2,894  1,842  2,560  3,767 

Acquisition costs:

                

Transaction costs

  1,483  —  —  —  — 

Contingent consideration

  2,938  —  —  —  — 

Amortization of acquired intangible assets

  3,412  4,368  3,599  3,122  3,250 

Tax on equity exercises

  697  —  —  —  — 

Other non-comparable items(a)

  —  —  1,565  1,411  1,560 

Professional service fees(b)

  —  813  478  —  — 

Tax impact of add-back items(c)

  (6,656) (3,222) (2,809) (2,799) (3,352)
​​​ ​ ​​​ ​​ ​ ​​ ​​​ ​ ​

Non-GAAP net income

 $75,352 $70,205 $37,393 $59,449 $30,152 
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​​​​
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​
(a)
Other "non-comparable items" include business transaction-related professional fees, corporate name change expenses, workforce restructuring expenses, and certain legal costs. We believe that these non-comparable expenses are not attributable to our ongoing operations for the period in which such charges are incurred and do not accurately reflect the performance of our ongoing operations.

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

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

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

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our "Selected“Selected Financial Data"Data” and our consolidated financial statements and notes thereto appearing elsewhere in this annual reportAnnual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion and analysis may contain forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this annual reportAnnual Report on Form 10-K, including those set forth under "Risk Factors"“Risk Factors” and "Special“Special Note Regarding Forward-Looking Statements."”

Overview

Overview

We are a leading technology company that combines advancedproviding cloud-based platforms empowering data-driven healthcare. Through the Inovalon ONE® Platform, Inovalon brings to the marketplace a national-scale capability to interconnect with the healthcare ecosystem, aggregate and analyze data analyticsin real-time, and data-driven intervention platformsempower the application of resulting insights to achievedrive meaningful impact in clinicalat the point of care. Leveraging its platform, unparalleled proprietary data sets, and quality outcomes, utilization,industry-leading subject matter expertise, Inovalon enables better care, efficiency, and financial performance across the healthcare landscape. We deliver value to our clients by turning data into insights and those insights into action. Currently, our clients includeecosystem. From health plans hospitals, physicians, patients,and provider organizations, to pharmaceutical, medical device, and diagnostics companies, Inovalon’s unique achievement of value is delivered through the effective progression of “Turning Data into Insight, and researchers.


Insight into ActionTable®.” Supporting thousands of Contents

        Our large proprietary datasets, advanced integration technologies, sophisticated predictiveclients, including 24 of the top 25 U.S. health plans and 22 of the top 25 global pharma companies, Inovalon’s technology platforms and analytics and deep subject matter expertise allow us to provide seamless, end-to-end platforms that bring the benefits of bigare informed by data and large-scale analytics to the point of care. Our data analytics platforms identify gaps in care, quality, data integrity, and financial performance in our clients' datasets. Our data-driven intervention platforms enable our clients to take the insights derived from the analytics and implement unique, patient-level solutions, drive impact and enhance patient engagement. Through these capabilities, and those of our subsidiary Avalere, which offers data-driven advisory services and business intelligencepertaining to more than 200 pharmaceutical964,000 physicians, 519,000 clinical facilities, 264 million Americans, and life sciences enterprises, as well as an extensive array42 billion medical events.

2018 marked a bookend of client relationshipsa period of transformation in which the company experienced meaningful, positive inflection. A multitude of dynamics have been navigated with payors, providersInovalon emerging with recognized market differentiation and research institutions, we are able to driveleadership, high-value impact, improving qualitycloud-based capabilities, meaningful operating leverage, and economics for health plans, accountable care organizations ("ACOs"), hospitals, physicians, consumers and pharma/life-sciences researchers.

significant accelerating organic growth.

We generate the substantial majority of our revenue through the sale or subscription licensing of our data analyticsplatform solutions, as well as revenue from related arrangements for advisory, implementation, and data-driven intervention platformsupport services. Since our inception, we have experienced significant growth.

        For

Recent Developments
On April 2, 2018, the year ended December 31, 2015, our revenue was $437.3 million, representing 21% growth overCompany completed the year ended December 31, 2014. For the year ended December 31, 2015, we generated Adjusted EBITDAacquisition of $151.6 million, representing a 35% Adjusted EBITDA marginABILITY, for aggregate consideration of $1.19 billion in cash and 13% growth over the same period in the prior year. Net income for the year ended December 31, 2015 was $66.1 million, representing 15% of revenue and a 1% increase over the year ended December 31, 2014. Non-GAAP net income for the year ended December 31, 2015 was $75.4 million, representing 17% of revenue and a 7% increase over the same period in 2014. Adjusted EBITDA and Non-GAAP net income are non-GAAP measures. Adjusted EBITDA and Non-GAAP net income are measures that are not presented in accordance with GAAP. For a reconciliation of net income to Adjusted EBITDA and Non-GAAP net income, see "Non-GAAP Financial Measures," provided in Item 6—Selected Financial Data.

        On February 18, 2015, we completed our IPO of 22,222,222restricted shares of our Class A common stockstock. ABILITY is a leading cloud-based Software-as-a-service (“SaaS”) technology company helping to simplify the administrative and uponclinical complexities of healthcare. Through the underwriters' exercisemyABILITY® software platform, an integrated set of their optioncloud-based applications for providers, ABILITY provides core connectivity, administrative, clinical, and quality analysis, management, and performance improvement capabilities to purchase additional shares, issued an additional 3,142,581 sharesmore than 44,000 acute, post-acute and ambulatory point-of-care provider facilities. The extensive datasets, on-demand compute capability, advanced analytics, and broad healthcare ecosystem connectivity enabled by the Inovalon ONE® Platform are expected to provide a significant expansion of Class A common stockapplication offerings within the myABILITY® software platform while also expanding the nature and reach of high-value solutions for Inovalon’s existing payer, pharma, and device client-base. The combination of Inovalon and ABILITY created a totalvertically integrated cloud-based platform empowering the achievement of 25,364,803 shares issued. Allreal-time, value-based care from payers, manufacturers, and diagnostics all the way to the patient’s point of the shares issuedcare. See “Note 3—Business Combinations” in the IPO were primary shares offered by us as none ofnotes to our stockholders sold any shares in the IPO. The offering price of the shares sold in the IPO was $27.00 per share, resulting in net proceeds to us, after underwriters' discounts and commissions and other expenses payable by us, of $639.1 million. Our Class A common stock is currently traded on the NASDAQ Global Select Market under the symbol "INOV."

        On September 1, 2015, pursuant to the terms of a Share Purchase Agreement between the Company and Avalere (the "Purchase Agreement"), we acquired 100 percent of the capital stock of Avalere for an aggregate stated purchase price of $140.0 million, consisting of cash and 235,737 shares of the Company's Class A common stock which are subject to resale restrictions. 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 our capabilities and client base into the expansive and adjacent markets of the pharmaceutical and life sciences industry. We incurred transaction costs in connection with the acquisition of approximately $1.5 million, which are included in general and administrative expenses. See Note 3 (Business Combinations),audited consolidated financial statements included elsewhere within this annual reportAnnual Report on Form 10-K for more information.

        During 2015 Inovalon announced the introduction of Data Diagnostics™ to the healthcare marketplace. This technology provides a suite of hundreds of patient-specific analyses that can be ordered individually by clinicians on demand


In connection with the answer provided within seconds—all without leavingABILITY acquisition, on April 2, 2018, the clinician's workflow.Company entered into a credit agreement with a group of lenders and Morgan Stanley Senior Funding, Inc., as administrative agent, providing for: (i) a term loan B facility with the Company as borrower in a total principal amount of $980.0 million (the “2018 Term Facility”); and (ii) a revolving credit facility with the Company as borrower in a total principal amount of up to $100.0 million (the “2018 Revolving Facility” and, together with the 2018 Term Facility, the “2018 Credit Facilities”). The capability leverages vast amounts of data across billions of medical events, interconnectivity,entire $980.0 million 2018 Term Facility was borrowed on April 2, 2018, and high-speed cloud-based analyticswas used to allow physician organizations, health


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plans, accountable care organizations (ACOs), hospitals, integrated healthcare delivery systems, ASO employer groups, government programs, and individual physicians to achieve valuable clinical insights, strong clinical and quality outcomes, utilization efficiency, and overall financial performance on demand and in real time. The technology is delivered in collaboration with Quest Diagnostics, the nation's largest laboratory organization, providing large-scale distribution to clinicians through Quest's more than 200,000 Care360® provider portal installations and more than 400 integrated EHR platforms serving approximately halfpay off all of the physicians and hospitalsCompany’s existing debt obligations under its previous credit facilities as well as to provide the financing necessary to fund, in part, the cash consideration paid to acquire ABILITY. See “Note 10—Debt” in the United States. During 2015 Inovalon invested significant resourcesnotes to our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K for more information.

The Company adopted new accounting guidance on revenue from contracts with customers as part of January 1, 2018 using the developmentmodified retrospective approach. Revenues for periods beginning after January 1, 2018 are presented under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, while prior period amounts are not adjusted and anticipated operation and support of Data Diagnostics™. While stillcontinue to be reported in accordance with our historic accounting under ASC 605. See “Note 4—Revenue” in the early stages ofnotes to our audited consolidated financial statements included elsewhere within this platform's introduction, initial feedback from the marketplace has been very positive.

Annual Report on Form 10-K for more information.


Key Metrics

We review a number of metrics, including the key metrics shown in the table below. We believe that these metrics are indicative of our overall level of analytical activity and the underlying growth in our business. Data resulting from the integration with ABILITY is not yet fully reflected within the MORE(in thousands, except percentages)

 
 Year Ended December 31, 
 
 2015 2014 2013 
 
 (in thousands, except percentages)
 

Key Metrics(1):

          

MORE2 Registry® dataset metrics

          

Unique patient count(2)

  130,953  120,170  109,464 

Medical event count(3)

  11,051,441  9,250,424  8,321,236 

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

  21,449,667  16,519,827  12,812,630 

Data analytics and data-driven intervention revenue mix(5):

          

Revenue from data analytics subscriptions(6)

  52.3% 57.7% 48.6%

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

          

Fully automated processes

  12.0% 7.3% 4.3%

Partially automated processes

  32.2% 35.0% 47.1%
​​​ ​ ​​ ​ ​​ ​ ​

Total revenue from data-driven intervention platform services

  44.2% 42.3% 51.4%
(1)
MORE2 Registry® Registry® dataset and is therefore not fully reflected within the related data metrics and Trailing 12 month Patient Analytics Months (PAM), each of which is presented in the table, are key operating metrics that management uses to assess our level of operational activity. While we believe that each of these metrics is indicative of our overall level of analytical activity and the underlying growth in our business, increases or decreases in these metrics do not necessarily correlate to proportional increases or decreases in revenue, Adjusted EBITDA, net income or Non-GAAP net income. For instance, although increased levels of analytical activity historically have corresponded to increases in revenue over the long term, differences in fees charged for different analytical packages exist and differences in how analytics trigger the applicability of our data-driven intervention platforms may result in increases in analytical activity that do not result in proportional increases in revenue, Adjusted EBITDA, net income or Non-GAAP net income (and vice versa). Accordingly, while we believe the presentation of these operating metrics is helpful to investors in understanding our business, these metrics have limitations and should not be considered as substitutes for analysis of our financial results reported under GAAP. In addition, we believe that other companies, including companies in our industry, do not present similar operating metrics and that there is no commonly accepted method of calculating these metrics, which may reduce their usefulness as comparative measures.

(2)
Unique patient count is defined as each unique, longitudinally matched, de-identified natural person represented in our MORE2 Registry®below as of the end of the period presented.this date.

 Year Ended December 31,
 2018 2017 2016
 (in thousands, except percentages)
MORE2 Registry® dataset metrics(1)
 
  
  
Unique patient count(2)
264,220
 240,180
 150,961
Medical event count(3)
42,898,600
 37,813,583
 13,345,220
Trailing 12 month PAM(1)(4)
48,099,042
 42,156,422
 26,401,946

(1)
MORE2 Registry® dataset metrics and Trailing 12 month PAM, each of which is presented in the table, are key operating metrics that management uses to assess our level of operational activity. While we believe that each of these metrics is indicative of our overall level of analytical activity and the underlying growth in our business, increases or decreases in these metrics do not necessarily correlate to proportional increases or decreases in revenue, or net income. For instance, although increased levels of analytical activity historically have corresponded to increases in revenue over the long term, differences in fees charged for different analytical packages exist and differences in how analytics trigger the applicability of our data-driven intervention platforms may result in increases in analytical activity that do not result in proportional increases in revenue, or net income (and vice versa). Accordingly, while we believe the presentation of these operating metrics is helpful to investors in understanding our business, these metrics have limitations and should not be considered as substitutes for analysis of our financial results reported under generally accepted accounting principles (“GAAP”). In addition, we believe that other companies, including companies in our industry, do not present similar operating metrics and that there is no commonly accepted method of calculating these metrics, which may reduce their usefulness as comparative measures.
(2)
Unique patient count is defined as each unique, longitudinally matched, de-identified natural person represented in our MORE2 Registry® as of the end of the period presented.
(3)Medical event count is defined as the total number of discrete medical events as of the end of the period presented (for example, a discrete medical event typically results from the presentation of a patient to a physician for the diagnosis of diabetes and congestive heart failure in a single visit, the presentation of a patient to an emergency department for chest pain, etc.).
(4)PAM is defined as the sum of the analytical processes performed on each respective patient within patient populations covered by clients under contract. As used in the metric, an “analytical process” is a distinct set of data calculations undertaken by us which is initiated and completed within our platform solutions to examine a specific question such as whether a patient is believed to have a condition such as diabetes, or worsening of the disease, during a specific time period.

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(3)
Medical event count is defined as the total number of discrete medical events as of the end of the period presented (for example, a discrete medical event typically results from the presentation of a patient to a physician for the diagnosis of diabetes and congestive heart failure in a single visit, the presentation of a patient to an emergency department for chest pain, etc.).

(4)
Patient Analytics Months, or PAM, is defined as the sum of the analytical processes performed on each respective patient within patient populations covered by clients under contract. As used in the metric, an "analytical process" is a distinct set of data calculations undertaken by us which is initiated and completed by our analytical platform to examine a specific question such as whether a patient is believed to have a condition such as diabetes, or worsening of the disease, during a specific time period.

(5)
Revenue mix excludes advisory services.

(6)
Revenue from data analytics subscriptions is defined as revenue that results from subscription agreements/contracts for the provision of data analytics (which include such components as the company's data integration, data management, data analytics, and data reporting) services.

(7)
Revenue from data-driven intervention platform services is defined as revenue that results from contracts for the provision of data- driven intervention platform services. This revenue is further broken down into revenue achieved through fully automated processes (i.e., those processes that require no material variable-based labor component) and partially automated processes (i.e., those processes that require certain material variable-based labor components).


Trends and Factors Affecting Our Future Performance

A number of factors influence our growth and performance. We see many of these factors as being more quantitatively driven, such as the rate of growth of the underlying data counts within our datasets, the ongoing investment in innovation, the number of statement of work contracts maintained by us, and our levelrevenue mix of analytical activity.subscription-based platform offerings. Additionally, there are several factors that influence our growth and performance that are less quantitatively driven, including seasonality, macro-economic forces, and trends within healthcare (such as payment

models, incentivization, and regulatory oversight), that can be driven by changes in federal and state laws and regulations, as well as private sector market forces.

Growth of Datasets.    Healthcare costs in the United States have been increasing significantly for many years. This rise in healthcare costs has driven a broad transition from consumption-based payment models to quality and value-based payment models across the healthcare landscape. As a result, the specific disease and comorbidity status, clinical and quality outcomes, resource utilization, and care details of the individual patient have become increasingly relevant to the various constituents across the healthcare delivery system. Concurrently, the count and complexity of diseases, diagnostics, and treatments—treatments—as well as payment models and regulatory oversight requirements—requirements—have soared. In this setting, granular data has become critical to determining and improving quality and financial performance in healthcare. Our MORE2 Registry® Registry® is our largest principal dataset and serves as a proxy for our general growth of datasets within Inovalon. The growth of our datasets that inform our analytical capabilities and comparative analytics is a key aspect of our provision of value to our clients and is indicative of our overall growth and capabilities.

Innovation and Platform Development.    Our business model is based upon our ability to deliver value to our clients through the combination of advanced, cloud-based data analyticsour platform solutions and data-driven intervention platformsrelated services focused on the achievement of meaningful and measureablemeasurable improvements in clinical quality outcomes and financial performance in healthcare. Our ability to deliver this value is dependent in part on our ability to continue to innovate, design new capabilities, enter into new agreements with clients for new platforms, and bring these capabilities to market in an enterprise scale. Our continued ability to innovate our platform and bring differentiated capabilities to market is an important aspect of our business success.
Our investment in


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innovation includes costs for research and development, capitalized software development, and capital expenditures related to hardware and software platforms on which our data analytics and data-driven interventions capabilitiesplatform solutions are deployed as summarized below (in thousands, except percentages).

 Year Ended December 31,
 2018 2017 2016
Investment in Innovation 
  
  
Research and development(1)
$28,638
 $27,383
 $29,148
Capitalized software development(2)
38,253
 34,789
 21,994
Research and development infrastructure investments(3)
12,748
 23,642
 11,288
Total investment in innovation$79,639
 $85,814
 $62,430
As a percentage of revenue 
  
  
Research and development(1)
5% 6% 7%
Capitalized software development(2)
7% 8% 5%
Research and development infrastructure investments(3)
3% 5% 3%
Total investment in innovation15% 19% 15%

(1)Research and development primarily includes employee costs related to the development and enhancement of our service offerings.
(2)Capitalized software development includes capitalized costs incurred to develop and enhance functionality for our platform solutions.
(3)Research and development infrastructure investments include strategic capital expenditures related to hardware and software platforms under development or enhancement.
 
 Year Ended December 31, 
 
 2015 2014 2013 

Investment in Innovation

          

Research and development(1)

 $22,329 $23,130 $21,192 

Capitalized software development(2)

  20,199  16,375  10,304 

Research and development infrastructure investments(3)

  5,255  5,023  3,565 
​​​ ​ ​​ ​ ​​​ ​

Total investment in innovation

 $47,783 $44,528 $35,061 
​​​ ​ ​​ ​​​ ​ ​
​​​​​​​​​​​
​​​ ​ ​​ ​ ​​​ ​

As a percentage of revenue

          

Research and development(1)

  5% 6% 7%

Capitalized software development(2)

  5% 5% 3%

Research and development infrastructure investments(3)

  1% 1% 1%
​​​ ​ ​​ ​​​ ​ ​

Total investment in innovation

  11% 12% 11%
​​​ ​​​ ​ ​​ ​​
​​​​​​​​​​​
​​​ ​ ​​​ ​​ ​ ​
(1)
ResearchMix of Subscription-Based Platform Offerings and development primarily includes employee costs related to the development and enhancement of our service offerings.

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

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

        Data Analytics and Data-Driven Intervention Mix.Legacy Solutions.    Our businessIn 2018, we continued to execute an intentional transition in our offering portfolio from legacy platform solutions to subscription-based cloud-based platform offerings with add-on advisory services. Subscription-based cloud-based platform offerings are generally defined as modular, cloud-based solutions that utilize dynamic, high-speed cloud-based compute and operational modelsstorage, offer enhanced data visualization capabilities, and are highly scalable and leverage variable coststied to supportsubscription-based contract structures where revenue generating activities. Our data analytic service costsis predominantly based on factors such as the number of patients under contract or similar relevant metrics (e.g., the number of prescriptions issued), the size of the client, and/or a specific period of time. Legacy platform solutions are less variablegenerally defined as solutions historically not cloud-based in nature and require lower incremental capital expenditures. As a result, following initial developmentnot tied to subscription-based contract structures. We believe subscription-based cloud-based platform offerings provide more advanced capabilities, higher value, and deployment investments, our big data analyticsgreater visibility to clients, as well as improved visibility, market differentiation, and financial performance for us. Over time, we expect that subscription-based cloud-based platform and data technology capabilities allow usofferings will continue to process significant volumes of transactions with lower incremental costs. Conversely, our data- driven intervention costs are generally variable in nature and require incremental costs to generate additional revenue. As a result, the mixrepresent an increasing share of our total revenue, contributing to an increasing base of recurring revenue.

Additionally, through the ABILITY acquisition, we have expanded our subscription-based cloud-based platform offering revenues and we began to achieve revenue synergies realized through i) the infusion of Inovalon’s data and analytics into ABILITY’s

existing offerings, ii) the combination of the Inovalon ONE® Platform and myABILITY® Platform capabilities to introduce new and more vertically integrated offerings which appeal to both organizations’ traditional market base, iii) the enhancement of Inovalon’s offerings from ABILITY’s provider point-of-care data, interventions activities affects ourconnectivity, and workflow presence, and iv) the leveraging of ABILITY’s sales channel, techniques and capacity.
Breadth of Healthcare Industry Connectivity.  The healthcare industry is undergoing a significant transition as it becomes increasingly data-driven. As part of this transition, participants across the healthcare industry, including health plans, pharmaceutical companies, medical device manufacturers, and diagnostic companies, are increasingly interested in achieving timely and seamless access to relevant data and being able to drive impact directly with providers and their patients. Concurrently, providers are also increasingly interested in access to more advanced analytical tools to support and improve their clinical and financial performance. Enhancing and expanding our industry connectivity with payer administrative systems, provider facilities, diagnostic systems, pharmacy systems, healthcare industry systems (e.g., electronic healthcare record systems, health information exchange systems, claims processing systems, decision support systems, etc.), and other healthcare clinical and business systems, offers the potential for increased differentiation in the healthcare marketplace as well as improved efficiency of our operations.

Client and Analytical Process Count Growth.    Our business is generally driven by the number of underlying patients for which our analytics and data-driven intervention platformsplatform solutions are being utilized. As such, we track the number of analytical processes that we run on patients each month in fulfillment of our client contracts, as totaled for the trailing 12 months. This metric is referred to as the Trailing 12 Month Patient Analytical Months, or PAM. We believe that PAM is indicative of our overall level of analytical activity, and we expect our period-to-period comparisons of our PAM to be indicative of underlying growth of our business, although changes in levels of analytical activity do not always directly translate to changes in financial performance of our business. Differences in fees charged for different analytical packages exist and differences in how analytics trigger the applicability of our data-driven intervention platforms may result in increases in analytical activity that do not result in proportional increases in revenue, Adjusted EBITDA, net income or Non-GAAP net income (and vice versa). Therefore, in situations in which a new SOWengagement is initiated for analytical processes that have a higher than average fee rate, revenue could expand disproportionately faster than the increase in PAM.


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Likewise, as was the case in the year ended December 31, 2013, the loss of an SOWif engagements for analytical processes that have a higher than average fee rate are concluded then such conclusions can negatively affect revenue disproportionately more than PAM. Further, in 2013, the initiation of several new SOWs for various analytical processes that commanded, when taken together, a lower than average fee rate offset the reduction in revenue from the aforementioned terminated SOW, while PAM was more than offset, and thus increased.

Seasonality.    The nature of our customers'customers’ end-market results in partial seasonality reflected in both revenue and cost of revenue differences during the year. Regulatory impact of data submission deadlines in, for example, January, March, June, and September and January drive some degree of predictable timing of analytics and data processing activity variances from quarter to quarter. Further, regulatory clinical encounter deadlines of June 30th and December 31st drive predictable intervention concentrations variances from quarter to quarter. The timing of these factors results in analytical and intervention activity mix variances, which predictablyhave limited predictable impact in the aggregate on our financial performance from quarter to quarter. However, quarter to quarter financial performance may increasingly vary from historical seasonal trends as we continue to expand into adjacent markets and increase the portion of our revenue generated from new offerings. Further, we also expect the impact of seasonality to decrease over time as we expand our mix of revenue generated from a subscription-based model. The trendtiming of higher client focus on "watchful waiting" has increasingly shifted intervention platform usagenew contract signings and their respective implementations can also lead to latervariances in the year.our seasonal revenue performance.

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

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

Components of Results of Operations

Revenue

We earn revenue primarily through the sale or subscription licensing of our platform solutions, as well as revenue from related arrangements for advisory, implementation, and support services.
Platform solutions include arrangements for technology-based offerings representing subscription-based cloud-based data analyticsplatform offerings, including solutions offered through the myABILITY® software platform, and data-driven interventionlegacy platform services.

        Cloud-based data analytics solution revenue accounted for approximately 54.2%, 57.7%,solutions that are not cloud-based and 48.6%, of our consolidated revenue during the years ended December 31, 2015, 2014, and 2013, respectively. These percentages include software subscription licensing revenue of approximately 3.2%, 3.6%, and 3.6%, of our consolidated revenue during the years ended December 31, 2015, 2014, and 2013, respectively.not billed under a subscription-based contract structure. Our cloud-based data analytics services are performed either at the beginning of a


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data-driven intervention process, which typically aligns with regulatory submission deadlines, or on a monthly basis, depending on the particular client's needs. Data analyticsplatform solutions revenue is driven primarily by cloud-based data connectivity, analytics, intervention, and visualization software that enables the numberidentification and resolution of identified gaps in care, quality, data integrity,utilization, compliance, and/or other gaps that may impact our clients’ achievement of greater healthcare quality and financial performance identified in a client's dataset, the number of unique patients in a client's dataset, a minimum data analytics processing fee, and a contractually negotiated transactional price for each identified gap or unique patient. Subscription licensing revenueassociated with value-based care. Revenue is driven primarily bypredominantly based on the number of clients, the number of unique patients in a client's population dataset,or similar relevant metrics (e.g., the number of prescriptions issued), the size of the client, the number of analytical services contracted for by a client and the contractually negotiated price of such services.

        Cloud-based data-driven intervention platform services revenue accounted for approximately 45.8%, 42.3%, and 51.4%, of our consolidated revenue during the years ended December 31, 2015, 2014, and 2013, respectively. Data-driven intervention platform service Additionally, revenue is further broken down into revenue that is generated from fully automated processes (i.e., those processes that require no material variable-based labor components) and partially automated processes (i.e., those processes that require certain material variable-based labor components). Respectively, forbased


on the years ended December 31, 2015, 2014, and 2013, revenue from fully automated processes accounted for 12.4%, 7.3%, and 4.3%,number of data-driven intervention platform services revenue and revenue from partially automated processes accounted for 33.4%, 35.0%, and 47.1%, of data- driven intervention platform services revenue.

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

The majority of our platform solutions contracts contain a series of separately identifiable and distinct services that represent performance obligations that are satisfied over time. Revenue is allocated to platform solutions by determining the standalone selling price of each performance obligation. Revenue is generally recognized on our platform offerings over the contract term. For certain contracts, we have determined that we will recognize revenue recognition policy.

when we have the right to invoice.

Service revenue represents revenue that is generated from strategic advisory, implementation and support services. Revenue from our services arrangements is generally provided under time and materials, fixed-price, or retainer-based contracts, based on agreed upon billing rates applied to direct labor hours expended plus the costs of other items used in the performance of the contract. We recognize revenue when we have the right to invoice the customer using the allowable practical expedient since the right to invoice the customer corresponds with the performance obligations completed. Revenues under fixed-price and retainer-based contracts are recognized ratably over the contract period or upon contract completion.
Cost of Revenue

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

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

Sales and Marketing

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


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

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

total revenues.

Research and Development

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

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

revenue.

General and Administrative

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

        We expect our general and administrative expense to increase as we expand our business and incur

In the incremental costs associated with being a public company. However, excluding certain increases as a result of being a public company,near term, we expect our general and administrative expense to grow atcontinue to increase in absolute dollars to support business growth. Over the long term, we expect general and administrative expense to decrease as a lower rate thanpercentage of revenue.


Depreciation and Amortization Expense

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

Realized Loss on Short-term Investments

        Realized loss on short-term investments consists of losses realized upon the sale of certain of the Company's available-for-sale securities, prior

We expect our depreciation and amortization expense to their maturity. The losses were incurredincrease as the value of the available-for-sale securities declined from the date of purchase to the date of sale.

we expand our business organically and through acquisitions.

Interest Income

Interest income represents interest earned net of amortization of premium for purchased interest from our available-for-sale short-term investments.

We expect our interest income to fluctuate in proportion to the amount of funds we invest, according to our corporate investment policy, in available-for-sale short-term investments and considering prevailing available interest rate yields on such investment grade debt securities.
Interest Expense

Interest expense representrepresents interest incurred on our credit facilities and related interest rate swaps.
We expect our interest expense to increase in connection with the debt commitment discussed in “Note 10—Debt” and to fluctuate in proportion to our outstanding principal balance under the 2018 Credit Facilities.

Facilities and the prevailing London Interbank Offer Rate (“LIBOR”) interest rate.

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Provision for Income Taxes

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

purposes, and excess tax benefits or deficiencies derived from exercises of stock options and vesting of restricted stock.

Our effective tax rate has decreased due to the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), which was signed into law on December 22, 2017 and was effective January 1, 2018, and in the future may fluctuate due to the recognition of excess tax benefits and tax deficiencies associated with stock-based compensation transactions which are considered to be discrete items. Excluding discrete items impacting the effective tax rate, we expect our long-term tax rate to reflect the applicable statutory rates.

Results of Operations

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

 
 Year Ended December 31, 
 
 2015 2014 2013 

Revenue

 $437,271 $361,540 $295,798 

Expenses:

          

Cost of revenue

  146,140  112,761  120,054 

Sales and marketing

  14,684  7,143  5,952 

Research and development

  22,329  23,130  21,192 

General and administrative

  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 loss 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 
​​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​
 Year Ended December 31, 
2018 to 2017
Change
 
2017 to 2016
Change
 2018 2017 2016 $ % $ %
Revenue$527,676
 $449,358
 $427,588
 $78,318
 17 % $21,770
 5 %
Expenses: 
  
  
  
    
  
Cost of revenue(1)
144,826
 151,046
 159,169
 (6,220) (4)% (8,123) (5)%
Sales and marketing(1)
45,534
 34,103
 27,078
 11,431
 34 % 7,025
 26 %
Research and development(1)
28,638
 27,383
 29,148
 1,255
 5 % (1,765) (6)%
General and administrative(1)
205,038
 149,948
 137,275
 55,090
 37 % 12,673
 9 %
Depreciation and amortization96,725
 53,089
 37,284
 43,636
 82 % 15,805
 42 %
Restructuring expense9,500
 —
 —
 9,500
 *
 —
 *
Total operating expenses530,261
 415,569
 389,954
 114,692
 28 % 25,615
 7 %
(Loss) Income from operations(2,585) 33,789
 37,634
 (36,374) (108)% (3,845) (10)%
Other income and (expenses): 
  
  
  
    
  
Interest income2,181
 5,429
 5,792
 (3,248) (60)% (363) (6)%
Interest expense(50,898) (6,225) (5,065) (44,673) 718 % (1,160) 23 %
Other (expense) income, net(2,255) (406) 538
 (1,849) *%
 (944) *%
(Loss) Income before taxes(53,557) 32,587
 38,899
 (86,144) (264)% (6,312) (16)%
(Benefit from) Provision for income taxes(14,393) (2,231) 11,795
 (12,162) 545 % (14,026) (119)%
Net (loss) income$(39,164) $34,818
 $27,104
 $(73,982) (212)% $7,714
 28 %

(1) Includes stock-based compensation expense as follows:
Cost of revenue$237
 $1,652
 $483
 $(1,415) (86)% $1,169
 242%
Sales and marketing735
 2,011
 613
 (1,276) (63)% 1,398
 228%
Research and development1,937
 1,293
 1,184
 644
 50 % 109
 9%
General and administrative13,253
 12,362
 7,774
 891
 7 % 4,588
 59%
Total stock-based compensation expense$16,162
 $17,318
 $10,054
 $(1,156) (7)% $7,264
 72%
* Asterisk denotes not meaningful

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

 
 Year Ended December 31, 
 
 2015 2014 2013 

Revenue

  100% 100% 100%

Expenses:

          

Cost of revenue

  33% 31% 41%

Sales and marketing

  3% 2% 2%

Research and development

  5% 6% 7%

General and administrative

  26% 24% 27%

Depreciation and amortization

  5% 5% 5%
​​​ ​​​ ​ ​​ ​​

Total operating expenses

  73% 70% 82%
​​​ ​ ​​ ​ ​​ ​ ​

Income from operations

  27% 30% 18%
​​​ ​ ​​ ​ ​​ ​ ​

Other income and (expenses):

          

Realized loss on short-term investments

  —  —  — 

Interest income

  —  —  — 

Interest expense

  (1)% —  — 
​​​​ ​​ ​ ​​ ​ ​

Income before taxes

  26% 30% 18%
​​​ ​ ​​ ​ ​​ ​ ​

Provision for income taxes

  11% 12% 7%
​​​ ​ ​​ ​​​ ​ ​

Net income

  15% 18% 11%
​​​ ​ ​​ ​​​ ​ ​
​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​ ​
 Year Ended December 31,
 2018 2017 2016
Revenue100 % 100 % 100 %
Expenses:     
Cost of revenue(1)
28 % 34 % 37 %
Sales and marketing(1)
9 % 8 % 6 %
Research and development(1)
5 % 6 % 7 %
General and administrative(1)
39 % 33 % 32 %
Depreciation and amortization18 % 12 % 9 %
Restructuring expense2 % — % — %
Total operating expenses101 % 93 % 91 %
(Loss) Income from operations(1)% 7 % 9 %
Other income and (expenses):     
Interest income*%
 1 % 1 %
Interest expense(10)% (1)% (1)%
Other (expense) income, net*%
 *%
 *%
(Loss) Income before taxes(11)% 7 % 9 %
(Benefit from) Provision for income taxes(3)% (1)% 3 %
Net (loss) income(8)% 8 % 6 %

Years Ended December 31, 2015, 2014,2018, 2017, and 20132016

Revenue

 
 Year Ended December 31, 2014 to 2015
Change		 2013 to 2014
Change		 
 
 2015 2014 2013 $ % $ % 
 
 (dollars in thousands)
 

Total revenue

 $437,271 $361,540 $295,798 $75,731  21%$65,742  22%
Revenue

        20152018 Compared with 2014.2017.    Revenue duringfor the year ended December 31, 2015 increased2018 was $527.7 million, an increase of 17% compared with revenue of $449.4 million for the year ended December 31, 2017. This increase was primarily attributable to $121.2 million in revenue contributed by approximately $75.7the acquired businesses of ABILITY and CCS, through the anniversary date of the acquisition, and $24.2 million in revenue contributed from new clients signed, which was partially offset by a decrease of $67.0 million in revenue from existing clients resulting from a combination of factors including decisions in 2017 by a limited number of clients to withdraw from ACA markets, the transition of client contracts to newer product offerings and more subscription-based agreements versus the year-ago period, and the conclusion of client contracts included in the year-ago period.
2017 Compared with 2016.    In 2017, Inovalon continued to execute on its transition from legacy enterprise solutions to subscription-based cloud-based platform offerings, with this portion of revenue contribution accounting for $295.3 million (or 66% of revenue), reflecting growth of 30% over 2016. Revenue for the year ended December 31, 2017 was $449.4 million, an increase of 5% compared with revenue of $427.6 million for the year ended December 31, 2016. This increase was primarily attributable to $35.3 million in revenue contributed by the acquired businesses of Creehan and CCS, through the anniversary date of the acquisition, and $14.5 million in revenue contributed from new clients signed, which was partially offset by a decrease of $28.0 million in revenue from existing clients resulting from a combination of factors including the transition of client contracts to newer product offerings and more subscription-based agreements versus the year-ago period, and the conclusion of client contracts included in the year-ago period.
Cost of Revenue
2018 Compared with 2017.    During the year ended December 31, 2018, cost of revenue decreased by $6.2 million, or 21%4%, as compared with the year ended December 31, 2014.2017. The decrease in cost of revenue was primarily attributable to a decrease in professional third-party costs of $13.8 million, a decrease of employee-related expenses of $10.4 million, and a decrease in stock-based compensation expense of $1.4 million, which was partially offset by the combined incremental cost of revenue of $20.0 million attributable to the acquired businesses of ABILITY and CCS, through the anniversary date of the acquisition. Cost of revenue as a percentage of revenue was 28% and 34% for the years ended December 31, 2018 and 2017, respectively.
2017 Compared with 2016.    During the year ended December 31, 2017, cost of revenue decreased by $8.1 million, or 5%, compared with the year ended December 31, 2016. The decrease in cost of revenue was primarily attributable to a decrease of employee-related expenses of $30.6 million driven by technology-enabled platform efficiency initiatives, which was partially offset by the combined incremental cost of revenue of $17.5 million attributable to the acquired businesses of Creehan and CCS, an increase in fulfillment of $2.3 million, an increase in professional third-party costs of $1.6 million, and an increase in stock-

based compensation expense of $1.2 million. Cost of revenue as a percentage of revenue was 34% and 37% for the years ended December 31, 2017 and 2016, respectively.
Sales and Marketing
2018 Compared with 2017.    During the year ended December 31, 2018, sales and marketing expenses increased by $11.4 million, or 34%, compared with the year ended December 31, 2017. The increase was primarily attributable to incremental sales and marketing expense of $14.8 million attributable to the acquired business of ABILITY, which was partially offset by a decrease in stock-based compensation expense of $1.2 million, and a decrease in employee-related expenses of $0.9 million. Sales and marketing as a percentage of revenue was 9% and 8% for the years ended December 31, 2018 and 2017, respectively.
2017 Compared with 2016.    During the year ended December 31, 2017, sales and marketing expenses increased by $7.0 million, or 26%, compared with the year ended December 31, 2016. The increase was primarily attributable to an increase in revenue from new clients of $36.0 million along with a net increase of $39.7 million from existing clients. Revenue for 2015 includes $17.5 million related to the acquisition of Avalere.

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


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Cost of Revenue

 
 Year Ended December 31, 2014 to 2015
Change		 2013 to 2014
Change		 
 
 2015 2014 2013 $ % $ % 
 
 (dollars in thousands)
 

Cost of revenue

 $146,140 $112,761 $120,054 $33,379  30%$(7,293) (6)%

Cost of revenue as a percentage of revenue

  33% 31% 41%            

        2015 Compared with 2014.    In 2015, cost of revenue increased by approximately $33.4 million, or 30%, compared with the year ended December 31, 2014. The increase in cost of revenue was primarily due to the corresponding increase in revenue of $75.7 million or 21%, during the period and also resulted from an increase in employee-related expenses related partially to the newly acquired data-driven advisory services service line and a greater volume of data-driven intervention platform services as a percentage of total revenue. Cost of revenue as a percentage of revenue was 33% in 2015 compared to 31% in 2014.

        2014 Compared with 2013.    In 2014, cost of revenue decreased by approximately $7.3$4.9 million, or 6%, as compared to the year ended December 31, 2013, despite the increase in revenue of approximately $65.7 million or 22%, over the same period. The $7.3 million decrease in cost of revenue was primarily due to a reduction in employee related expenses. The reduction in employee related expenses was primarily enabled by advances in our technology platform efficiency and a shift in revenue mix towards a greater proportion of analytics versus data-driven intervention services, as well as a greater proportion of automation within the data-driven intervention services mix. Cost of revenue as a percentage of revenue was 31% in 2014 compared to 41% in 2013.

Sales and Marketing

 
 Year Ended December 31, 2014 to 2015
% Change		 2013 to 2014
% Change		 
 
 2015 2014 2013 $ % $ % 
 
 (dollars in thousands)
 

Sales and marketing

 $14,684 $7,143 $5,952 $7,541  106%$1,191  20%

Sales and marketing as a percentage of revenue

  3% 2% 2%            

        2015 Compared with 2014.    In 2015, sales and marketing expenses increased by approximately $7.5 million, or 106%, compared to 2014. The increase was primarily attributable to increased employee related expenses of approximately $6.5 million, and marketing program spend of approximately $1.0 million, both of which waswere driven by our investment in additionalto expand our sales personnelorganization and partner team to focus on adding new clients and capturing an increased amount of our market opportunity, as well as the addition of the sales and marketing personnel acquired with Avalere.

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


Tablestock-based compensation expense of Contents$1.4 million. Sales and marketing as a percentage of revenue was 8% and 6% for the years ended December 31, 2017 and 2016, respectively.

Research and Development

 
 Year Ended December 31, 2014 to 2015
% Change		 2013 to 2014
% Change		 
 
 2015 2014 2013 $ % $ % 
 
 (dollars in thousands)
 

Research and development

 $22,329 $23,130 $21,192 $(801) (3)%$1,938  9%

Research and development as a percentage of revenue

  5% 6% 7%            

        20152018 Compared with 2014.2017.    In 2015, research and development expenses decreased $2.8 million as a result of incremental capitalization of internally developed software efforts related to our on-going investment in platform and product innovation, and was partially offset by an increase of $2.0 million, which includes $1.0 million attributable to stock based compensation expense, attributable to an increase in employee related expenses and professional fees.

        2014 Compared with 2013.    In 2014,During the year ended December 31, 2018, research and development expense increased by $1.9$1.3 million, or 5%, compared with the year ended December 31, 2017. The increase was primarily attributable to the incremental expense of $8.0 million attributable to the acquired businesses of ABILITY and CCS, through the anniversary date of the acquisition, an increased focus of development on the Inovalon ONE® Platform, resulting in an increase to capitalized software projects of $1.3 million, which was partially offset by a decrease in professional third-party costs of $4.9 million, and a decrease in employee-related expenses of $3.6 million.

2017 Compared with 2016.    During the year ended December 31, 2017, research and development expense decreased by $1.8 million, or 6%, compared with the year ended December 31, 2016. The decrease was primarily attributable to an increased focus of development on the Inovalon ONE® Platform, resulting in an increase to capitalized software projects of $6.8 million, which was partially offset by the incremental expense of $4.4 million attributable to the acquired businesses of Creehan and CCS, through the anniversary date of the acquisition.
General and Administrative
2018 Compared with 2017.    During the year ended December 31, 2018, general and administrative expenses increased by $55.1 million, or 37%, compared with the year ended December 31, 2017. The increase was primarily attributable to incremental expense of $30.4 million attributable to the acquired businesses of ABILITY and CCS, through the anniversary date of the acquisition, an increase of $12.5 million related to the fair value adjustment of contingent consideration, transaction and integration costs related to the acquisition of ABILITY of $6.6 million, and an increase in employee-related expenses of $4.1 million which includes an increase in severance expense related to restructuring initiatives. General and administrative expenses as a percentage of revenue was 39% and 33% for the years ended December 31, 2018 and 2017, respectively.
2017 Compared with 2016.    During the year ended December 31, 2017, general and administrative expenses increased by $12.7 million, or 9%, compared to 2013.with the year ended December 31, 2016. The increase was primarily attributable to our on-going investment in innovationincremental expense of $18.5 million attributable to the acquired businesses of Creehan and platform development.

General and Administrative

 
 Year Ended December 31, 2014 to 2015
Change		 2013 to 2014
Change		 
 
 2015 2014 2013 $ % $ % 
 
 (dollars in thousands)
 

General and administrative

 $115,029 $88,565 $80,638 $26,464  30%$7,927  10%

General and administrative as a percentage of revenue

  26% 24% 27%            

        2015 Compared with 2014.    In 2015, general and administrative expense increased by approximately $26.5 million, or 30%, compared with 2014. ThroughoutCCS, through the second halfanniversary date of 2014 and throughout 2015, we increased our investment in incremental personnel to support our growth and our transition from a private to a public company. Our investment resulted inthe acquisition, an increase in employee relatedprofessional third-party costs of $22.4$5.8 million, which includes a $3.1 million increase in legal expenses related to non-recurring litigation, and an increase of approximately $3.1$4.6 million related to stock-based compensation expense and anexpense. The increase of $7.5 million related to our growth and expansion. In addition, general and administrative expenses for 2015 includes incremental expenses that are not comparable to the prior year, comprised of $1.5 million for acquisition-related transaction costs, $2.9 million of post-acquisition contingent consideration expense related to the acquisition of Avalere, and $0.7 million for employer taxes related to stock option awards exercised by employees. The increases in general and administrative expenses for 2015 wereexpense was partially offset by capitalizationa decrease of internal-use software development costsemployee-related expenses of $1.0$10.2 million, comparedand a decrease of $5.2 million related to the prior period.fair value adjustment of contingent consideration. General and administrative expenses as a percentage of revenue was 33% and 32% for the years ended December 31, 2017 and 2016, respectively.

Depreciation and Amortization
        20142018 Compared with 2013.2017.    In 2014, generalDuring the year ended December 31, 2018, depreciation and administrativeamortization expense increased by approximately $7.9$43.6 million, or 10%82%, compared to 2013.with the year ended December 31, 2017. The increase was primarily attributable to $28.7 million of amortization of acquired intangible assets, depreciation of software licenses and computers of $8.2 million, amortization of capitalized software of $5.0 million, and $1.7 million of depreciation of other assets related to the acquired businesses of ABILITY and CCS, through the anniversary date of the acquisition.
2017 Compared with 2016.    During the year ended December 31, 2017, depreciation and amortization expense increased by $15.8 million, or 42%, compared with the year ended December 31, 2016. The increase was primarily attributable to $6.0 million of amortization of acquired intangible assets, $4.2 million of incremental amortization of capitalized software, and

$0.7 million of depreciation of other assets related to the acquired businesses of Creehan, through the anniversary date of the acquisition, and CCS.
Interest Income
During the year ended December 31, 2018, interest income decreased by $3.2 million, compared with the year ended December 31, 2017. During the year ended December 31, 2017, interest income decreased by $0.4 million, compared with the year ended December 31, 2016. The decrease in our interest income was primarily attributable to a decrease in the balance of our available-for-sale short term investment portfolios as a result of the liquidation of certain investments to fund the ABILITY acquisition and resulted in a decrease in earnings derived from these investments.
Interest Expense
During the year ended December 31, 2018, interest expense increased by $44.7 million, compared with the year ended December 31, 2017. The increase in interest expense was primarily attributable to an increase in employee-related costs of $4.2 million, which includes an increase of approximately $1.1 million related to stock based compensation expense, professional fees of $1.8 million, occupancy costs of $1.1 million,borrowings in connection with the 2018 Term Facility and software licensing and maintenance expenses of $0.5 million.


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Depreciation and Amortization

 
 Year Ended December 31, 2014 to 2015
Change		 2013 to 2014
Change		 
 
 2015 2014 2013 $ % $ % 

Depreciation and amortization

 $22,633 $19,880 $15,517 $2,753  14%$4,363  28%

Depreciation and amortization as a percentage of revenue

  5% 5% 5%            

        2015 Compared with 2014.    In 2015, depreciation and amortization expense increased by approximately $2.8 million, or 14%, compared to 2014. The increase in depreciation and amortization expense is primarily attributable to additional amortization expense for intangible assets recorded in the Avalere acquisition.

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

Realized Losses on Short-Term Investments

 
 Year Ended December 31, 2014 to 2015
Change		 2013 to 2014
Change		 
 
 2015 2014 2013 $ % $ % 
 
 (dollars in thousands)
 

Realized losses on short-term investments

 $(328)$— $— $(328) *%$—  —%

Realized losses on short-term investments as a percentage of revenue

  *% —% —%            
*
not meaningful

        2015 comparedinterest rate swaps entered into in connection with 2014.    The realized investment losses for 2015 are attributable to sales of certain of the Company's available-for-sale short-term investments, prior to maturity, which the Company initiated and completed during2018 Term Facility. During the year ended December 31, 2015. Funds generated from such sales of available-for-sale short term investments were used to fund the Company's acquisition of Avalere. Sales of the Company's available-for-sale, short term investments may be required from time-to-time to fund similar strategic initiatives and such sales may result in realized gains or losses, depending on the value of the securities at the time of liquidation.

Interest Income

 
 Year Ended December 31, 2014 to 2015
Change		 2013 to 2014
Change		 
 
 2015 2014 2013 $ % $ % 
 
 (dollars in thousands)
 

Interest income

 $3,003 $6 $9 $2,997  *%$(3) (33)%

Interest income as a percentage of revenue

  1% —% —%            
*
not meaningful

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        2015 compared with 2014.    In 2015, interest income increased by approximately $3.0 million compared with 2014. Interest income for 2015 is attributable to earnings derived from the Company's available-for-sale short-term investments.

Interest Expense

 
 Year Ended December 31, 2014 to 2015
Change		 2013 to 2014
Change		 
 
 2015 2014 2013 $ % $ % 
 
 (dollars in thousands)
 

Interest expense

 $4,420 $1,336 $79 $3,084  231%$1,257  1,591%

Interest expense as a percentage of revenue

  1% 0% 0%            

        2015 Compared with 2014.    In 2015,2017, interest expense increased by approximately $3.1$1.2 million, compared to 2014. The increase was attributable to interest expense onwith the $300.0 million Term Loan Facility borrowed on September 19, 2014.

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

year ended December 31, 2016.

(Benefit from) Provision for Income Taxes

 
 Year Ended December 31, 2014 to 2015
Change		 2013 to 2014
Change		 
 
 2015 2014 2013 $ % $ % 
 
 (dollars in thousands)
 

Provision for income taxes

 $48,648 $43,379 $19,657 $5,269  12%$23,722  121%

Effective tax rate

  42% 40% 38%            

        20152018 Compared with 2014.2017.    In 2015, provision forDuring the year ended December 31, 2018, benefit from income taxes increased by approximately $5.3$12.2 million, or 12%545%, compared to 2014. The growth of our operations resulted in a $2.4 million increase in income taxesthe year ended December 31, 2017. Our effective tax rate for the year ended December 31, 2015. In addition, expected state income taxes, net of federal income tax benefit and related deferred tax adjustments increased2018 was approximately $2.9 million resulting primarily from changes in revenue sourcing methodology passed into legislation by each of New York State and New York City. Primarily,27%, as a result of the aforementioned statutory income tax legislation changes, our effective tax rate increasedcompared to 42%approximately (7)% for the year ended December 31, 20152017, which included a one-time tax benefit of approximately $15.5 million, resulting in a benefit from 40%income tax. The increase in our benefit from income taxes is primarily attributable to the Tax Act which included a change in the U.S. corporate income tax rate to 21%, and the effect of current year state tax law changes and nondeductible items such as acquisition costs which resulted in an increase to the effective tax rate.

2017 Compared with 2016.    During the year ended December 31, 2017, provision for income taxes decreased by $14.0 million, or 119%, compared to the year ended December 31, 2016. Our effective tax rate for the year ended December 31, 2014.

        2014 Compared with 2013.    In 2014,2017 was approximately (7)%, resulting in a benefit from income tax, as compared to approximately 30% for the year ended December 31, 2016. The decrease in our provision for income taxes increased byis primarily due to a tax benefit of approximately $23.7$15.5 million or 121%, compared to 2013. The increase in period-over-periodrecognized as a result of the Tax Act which was signed into law on December 22, 2017 and is effective January 1, 2018. This tax benefit represents what we believe is a reasonable estimate of the impact of the income tax expense was attributable to our increase in income from operations resulting from our increase in revenues and enhancement in margins. Our effective income tax rate in 2014 was 40% compared to 38% in 2013. The increaseeffects of the Tax Act in our effective income tax rate was due primarily to an increase in our effective state income tax rate.


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Quarterly Results of Operations

        The following table sets forth our unaudited consolidated statement of operations dataas of December 31, 2017.

Quarterly Financial Information
The following tables show a summary of the Company’s quarterly financial information for each of the four quarters in the years ended December 31, 2015of 2018 and 2014. The unaudited quarterly statement of operations data set forth below have been prepared on a basis consistent with our audited annual consolidated financial statements and include, in our opinion, all normal recurring adjustments necessary for a fair statement of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following quarterly financial data should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this Annual Report. In the table below we have included measures, "Adjusted EBITDA" and "Non-GAAP net income," that are not presented in accordance with GAAP. Reconciliations of these non-GAAP measures to corresponding GAAP measures are provided below. Discussion of why we utilize these non-GAAP financial measures is provided under "Non-GAAP Financial Measures," in Item 6—Selected Financial Data.

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


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

 
 Three Months Ended 
Consolidated Statement of
Operations Data:
 December 31,
2015		 September 30,
2015		 June 30,
2015		 March 31,
2015		 December 31,
2014		 September 30,
2014		 June 30,
2014		 March 31,
2014		 
 
 (unaudited, in thousands)
  
 

Revenue

 $120,561 $105,459 $117,618 $93,633 $89,918 $85,991 $100,957 $84,674 

Expenses:

                         

Cost of revenue

  42,293  38,394  33,602  31,851  27,696  27,579  28,899  28,587 

Sales and marketing

  6,511  3,946  2,377  1,850  1,788  2,410  1,612  1,333 

Research and development

  5,131  6,283  5,504  5,411  5,754  6,184  5,144  6,048 

General and administrative

  33,007  32,437  25,327  24,258  25,645  21,645  21,341  19,934 

Depreciation and amortization

  7,380  5,526  4,812  4,915  4,868  5,043  5,114  4,855 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​​

Total operating expenses

  94,322  86,586  71,622  68,285  65,751  62,861  62,110  60,757 
​​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​

Income from operations

  26,239  18,873  45,996  25,348  24,167  23,130  38,847  23,917 
​​​ ​ ​​​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Other income and (expenses):

                         

Realized gains (losses) on short-term investments

  1  (329) —  —  —  —  —  — 

Interest income

  1,196  1,184  615  8  2  1  1  2 

Interest expense

  (1,102) (1,110) (1,105) (1,103) (1,127) (147) (49) (13)
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​​

Income before taxes

  26,334  18,618  45,506  24,253  23,042  22,984  38,799  23,906 

Provision for income taxes

  10,286  8,498  19,370  10,494  9,543  9,318  15,169  9,349 
​​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​

Net income

 $16,048 $10,120 $26,136 $13,759 $13,499 $13,666 $23,630 $14,557 
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​
​​​​​​​​​​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​

Net income attributable to common stockholders, basic and diluted

 $16,013 $10,115 $26,131 $13,759 $13,499 $13,666 $23,630 $14,557 
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​

Basic net income per share

 $0.11 $0.07 $0.18 $0.10 $0.11 $0.10 $0.18 $0.11 
​​​​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​
​​​​​​​​​​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​

Diluted net income per share

 $0.11 $0.07 $0.17 $0.10 $0.11 $0.10 $0.17 $0.11 
​​​​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​
​​​​​​​​​​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​

Weighted average shares of common stock outstanding:

                         

Basic

  150,923  148,871  147,648  135,331  122,257  131,779  134,523  134,645 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​​
​​​​​​​​​​​​​​​​​​​​​​​​​​
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​​

Diluted

  152,260  151,835  151,299  138,902  125,359  134,538  136,814  136,776 
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​
​​​​​​​​​​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​

Other Financial Data

                         

Adjusted EBITDA(1)

 $37,835 $29,022 $52,730 $32,035 $30,589 $28,658 $44,989 $29,412 
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​

Non-GAAP net income(2)

 $19,740 $13,049 $27,390 $15,072 $14,758 $14,475 $25,109 $15,863 
​​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​
​​​​​​​​​​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​
2017 (in thousands, except per share amounts):
(1)
The following table presents a reconciliation of net income to Adjusted EBITDA for each of the periods indicated:

 
 Three Months Ended 
 
 December 31,
2015		 September 30,
2015		 June 30,
2015		 March 31,
2015		 December 31,
2014		 September 30,
2014		 June 30,
2014		 March 31,
2014		 

Reconciliation of net income to Adjusted EBITDA:

                         

Net income

 $16,048 $10,120 $26,136 $13,759 $13,499 $13,666 $23,630 $14,557 

Depreciation and amortization

  7,380  5,526  4,812  4,915  4,868  5,043  5,114  4,855 

Realized losses on short-term investments

  (1) 329  —  —  —  —  —  — 

Interest expense

  1,102  1,110  1,105  1,103  1,127  147  49  13 

Interest (income)

  (1,196) (1,184) (615) (8) (2) (1) (1) (2)

Provision for income taxes

  10,286  8,498  19,370  10,494  9,543  9,318  15,169  9,349 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​​

EBITDA

  33,619  24,399  50,808  30,263  29,035  28,173  43,961  28,772 

Stock-based compensation

  1,716  2,005  1,922  1,772  1,554  518  436  386 

Acquisition costs:

                         

Transaction costs

  153  1,330  —  —  —  —  —  — 

Contingent consideration

  2,232  706  —  —  —  —  —  — 

Tax on equity exercises

  115  582  —  —  —  —  —  — 

Professional service fees

  —  —  —  —  —  (33) 592  254 
​​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​

Adjusted EBITDA

 $37,835 $29,022 $52,730 $32,035 $30,589 $28,658 $44,989 $29,412 
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​
​​​​​​​​​​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​
 2018
 Fourth Quarter Third Quarter Second Quarter First Quarter
Revenue$136,314
 $145,809
 $152,798
 $92,755
Gross profit$100,416
 $109,387
 $113,783
 $59,264
Net loss$(11,020) $(844) $(10,466) $(16,834)
Net loss attributable to common stockholders$(11,020) $(844) $(10,466) $(16,272)
Basic net loss per share(1)
$(0.07) $(0.01) $(0.07) $(0.12)
Diluted net loss per share(1)
$(0.07) $(0.01) $(0.07) $(0.12)

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

 
 Three Months Ended 
 
 December 31,
2015		 September 30,
2015		 June 30,
2015		 March 31,
2015		 December 31,
2014		 September 30,
2014		 June 30,
2014		 March 31,
2014		 

Reconciliation of net income to Non-GAAP net income:

                         

Net income

 $16,048 $10,120 $26,136 $13,759 $13,499 $13,666 $23,630 $14,557 

Stock-based compensation

  1,716  2,005  1,922  1,772  1,554  518  436  386 

Acquisition costs:

                         

Transaction costs

  153  1,330  —  —  —  —  —  — 

Contingent consideration

  2,232  706  —  —  —  —  —  — 

Amortization of acquired intangible assets

  1,843  766  261  542  541  861  1,433  1,533 

Tax on equity exercises

  115  582  —  —  —  —  —  — 

Professional service fees

  —  —  —  —  —  (33) 592  254 

Tax impact on add-back items

  (2,367) (2,460) (929) (1,001) (836) (537) (982) (867)
​​​​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​

Non-GAAP net income

 $19,740 $13,049 $27,390 $15,072 $14,758 $14,475 $25,109 $15,863 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​​
​​​​​​​​​​​​​​​​​​​​​​​​​​
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​
 2017
 Fourth Quarter Third Quarter Second Quarter First Quarter
Revenue$114,619
 $115,855
 $110,578
 $108,306
Gross profit$77,487
 $77,424
 $73,380
 $70,021
Net income$17,449
 $8,241
 $5,486
 $3,642
Net income attributable to common stockholders$16,864
 $7,968
 $5,338
 $3,569
Basic net income per share(1)
$0.12
 $0.06
 $0.04
 $0.02
Diluted net income per share(1)
$0.12
 $0.06
 $0.04
 $0.02

(1)Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.


Liquidity and Capital Resources

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


 Year Ended December 31, Year Ended December 31,

 2015 2014 2013 2018 2017 2016

Consolidated Statements of Cash Flows Data:

        
  
  

Net income

 $66,063 $65,352 $32,718 $(39,164) $34,818
 $27,104

Net cash provided by operating activities

 $67,554 $85,528 $66,015 $90,401
 $97,706
 $92,830

Net cash used in investing activities

 $(768,320)$(22,619)$(18,863)
Net cash (used in) provided by investing activities$(889,354) $106,559
 $39,799

Net cash provided by (used in) financing activities

 $652,233 $(10,936)$(42,919)$705,600
 $(123,004) $(118,980)

Sources of Liquidity

Our principal sourcesources of liquidity hashave been our cash, cash equivalents and available-for-sale short-term investments, as well as cash generated by operating activities. As of December 31, 2015,activities, proceeds from our cash, cash equivalents and short-term investments totaled $728.2 million,initial public offering (the balance of which $614.1 million represented available-for-sale, high grade, domestic debt-securities.was expended in connection with the ABILITY acquisition) and proceeds from our 2018 Credit Facilities. Our cash generated from operationssuch means has been sufficient to fund our growth, including our capital expenditures. Additionally,As of December 31, 2018, our cash, generation has allowedcash equivalents and short-term investments totaled $122.6 million, of which $7.0 million represented short-term, available-for-sale, investment grade, domestic debt-securities, compared to $476.2 million of cash, cash equivalents, and short-term investments as of December 31, 2017, of which $267.3 million represented short-term, available-for-sale, investment grade, domestic debt-securities. All cash held by us to repurchase certain amounts of our outstanding stock and pay dividends to our stockholdersis domiciled in the amount of $421.0 million from January 1, 2012 through December 31, 2015. In addition, on September 19, 2014, we redeemed $300.0 million of our common stock, at a price per share of $27.01, with proceeds from our Term Loan Facility. Prior to this redemption, we had not historically incurred debt nor have we recently generated liquidity through equity sales.

        On February 18, 2015, we completed our IPO of 22,222,222 shares of Class A common stock and, upon the underwriters' exercise of their option to purchase additional shares, issued an additional 3,142,581 shares of Class A common stock for a total of 25,364,803 shares issued. All of the shares issued in the IPO were primary shares offered by us as none of our stockholders sold any shares in the IPO. The offering price of the shares sold in the IPO was $27.00 per share, resulting in net proceeds to us, after underwriters' discounts and commissions and other expenses payable by us, of approximately $639.1 million.

United States.

We believe our current cash, cash equivalents, and short-term investments balance, along with expected cash generated by operating activities and availability of cash under our 2018 Credit Facilities (defined below) will be(including $99.0 million under the 2018 Revolving Facility and a letter of credit of $1.0 million as of December 31, 2018) are sufficient to fund our liquidity needsoperations, finance our strategic initiatives, and fund our investment in innovation and new service offerings, for the foreseeable future.

There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our 2018 Credit Facilities.

Debt

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Debt

On September 19, 2014, we and our subsidiaries entered into a Credit and Guaranty Agreement with a group of lenders includingand Goldman Sachs Bank USA, as administrative agent, (the "Credit Agreement"). The terms of the Credit Agreement provideproviding for credit facilities in the aggregate maximum principal amount of $400.0 million, consisting of a senior unsecured term loan facility in the original principal amount of $300,000$300.0 million (the "Term“2014 Term Loan Facility"Facility”) and a senior unsecured revolving credit facility in the maximum principal amount of $100,000$100.0 million (the "Revolving“2014 Revolving Credit Facility"Facility” and, together with the Term Loan Facility, the "Credit Facilities"“2014 Credit Facilities”). Proceeds
On April 2, 2018, we paid in full all existing debt obligations under the 2014 Credit Facilities and terminated all commitments to extend further credit thereunder. On April 2, 2018, we entered into the 2018 Credit Facilities. As of December 31, 2018, the Company had $100.0 million available to us consisting of $99.0 million under the 2018 Revolving Facility and a letter of credit of $1.0 million.
As of December 31, 2018, we had outstanding indebtedness under the 2018 Term Loan Facility and capital lease obligations of $949.3 million and $16.8 million, respectively. No amounts were outstanding under the 2018 Revolving Credit Facility may be used for our working capital and general corporate purposes.as of December 31, 2018. The obligations under the Credit2018 Facilities are guaranteed by our domestic, wholly owned subsidiaries. The Credit Facilities contain customary affirmative2018 Term Facility has a seven year term and negative covenants, including limitations on negative pledgesis an amortizing facility with quarterly principal payments and liens. In addition, under the Credit Agreement, we are required to maintain certain minimum liquidity levels ($50.0 million while themonthly interest payments. The 2014 Term Loan Facility remains available, or, if the Term Loan Facility has been repaid, $20.0 million), measured at the end of each of our fiscal quarters. In addition, our ability to incur debt is subject to compliancehad a five year term and was an amortizing facility with a 4.00 to 1.00 leverage ratio under certain circumstances. The Credit Agreement also contains certain mandatory prepayment requirements in connection with certain assets salesquarterly principal payments and customary events of default, including as a result of certain specified change of control events. As of,monthly interest payments. Scheduled principal payments totaling $238.7 million and scheduled interest payments totaling $43.6

million were paid during the year ended December 31, 2015, the Company was2018. As of December 31, 2018, we were in compliance with the financial covenants under the 2018 Credit Agreement.

Term Loan Facility

        We utilized the entire principal amount of the Term Loan Facility to redeem approximately 8.33% of our Class B common stock on a pro rata basis in September 2014. As of December 31, 2015, the principal amount outstanding under the Term Loan Facility was $281.3 million. The Term Loan Facility has a five-year term. The Term Loan Facility is an amortizing facility and payments of principal and interest are payable quarterly, beginning March 31, 2015. The outstanding principal amount of the Term Loan Facility will amortize as follows: $18.8 million in year one, $15.0 million in year two, $30.0 million in year three, $45 million in year four, and the remaining principal balance in year five. The interest rate for the Term Loan Facility is LIBOR plus 1.25% per annum or the base rate plus 0.25% per annum (at our election).

Revolving Credit Facility

        Borrowings under the Revolving Credit Facility became available, subject to compliance with the terms and conditions set forth

See “Note 10—Debt” in the Credit Agreement, beginning (atNotes to our option) after the consummation of our initial public offering. The Revolving Credit Facility is scheduled to matureaudited consolidated financial statements, included elsewhere in this Annual Report on March 31, 2020. The interest rateForm 10-K for the Revolving Credit Facility is LIBOR plus 1.25% per annum or the base rate plus 0.25% per annum (at our election).

additional information.

Cash Flows

Operating Cash Flow Activities

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

        20152018 Compared with 2014.2017.    Cash provided by operating activities during the year ended December 31, 20152018 was approximately $67.6$90.4 million, representing ana decrease in cash inflow of approximately $18.0$7.3 million compared towith the year ended December 31, 2014. The decrease of in cash inflow of approximately $18.0 million was effected by revenue seasonality pushing cash collections to early 2016, and an increase in income tax receivables as a result of tax deductible share-based stock


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option exercise activities and a lower effective tax rate.2017. Cash provided by operating activities consistedwas driven by the exclusion of non-cash expenses totaling $118.4 million, which includes depreciation and amortization of $96.7 million, an increase in the fair value adjustment of contingent consideration of $7.2 million, and non-cash restructuring expenses of $7.1 million, partially offset by net loss of approximately $39.2 million.

2017 Compared with 2016.    Cash provided by operating activities during the year ended December 31, 2017 was $97.7 million, representing an increase in cash inflow of $4.9 million compared with the year ended December 31, 2016. Cash provided by operating activities was driven by net income of approximately $66.1$34.8 million, as adjusted for the exclusion of non-cash expenses totaling approximately $20.5$59.5 million, which was partially offset by approximately $19.0and $3.4 million related to the effect of changes in working capital and other balance sheet accounts resultingaccounts.
Investing Cash Flow Activities
We make investments in cash inflows of approximately $67.6 million.

innovation, including research and development expense, capital software development costs, and research and development infrastructure investments, on a recurring basis. We expect our investment in innovation to increase in the foreseeable future to support our continued growth and new service offerings.

        20142018 Compared with 2013.2017.    Cash provided by operatingused in investing activities during the year ended December 31, 20142018 was approximately $85.5 million, an increase in cash inflow of approximately $19.5$889.4 million compared towith cash provided by investing activities of $106.6 million during the year ended December 31, 2013.2017. Cash provided by operatingused in investing activities was driven byprimarily due to the acquisition of ABILITY, net income of approximately $65.4 million, as adjusted for the exclusioncash acquired of non-cash expenses totaling approximately $25.1$1.1 billion and investments in property and equipment and capitalized software of $65.0 million, which was partially offset by approximately $7.7 million related to the effectproceeds generated from sales and maturities of changes in working capital and other balance sheet accounts resulting in cash inflowsavailable-for-sale securities of approximately $85.5$258.4 million.

Investing Activities2017 Compared with 2016.

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

        2015 Compared with 2014.    Cash used in investing activities induring the year ended December 31, 20152017 was approximately $768.3 million, an increase in cash outflow of approximately $745.7$106.6 million compared towith approximately $39.8 million during the year ended December 31, 2014. The increase in cash outflow2016. Cash provided by investing activities was primarily resulteddue to proceeds generated from purchasesmaturities of available-for-sale short term investments, netsecurities of sales and maturities$174.4 million, partially offset by $65.5 million of $619.4 million and $122.6 million related to the acquisition of Avalere, net of cash acquired of $4.0 million, and investments in property and equipement as well asequipment and capitalized software of approximately $26.4 million.software.

Financing Cash Flow Activities
        20142018 Compared with 2013.    Cash used in investing activities in the year ended December 31, 2014 was approximately $22.6 million, an increase in cash outflow of approximately $3.8 million compared to the year ended December 31, 2013. The slight increase in cash outflow was due to an increase in the investment in capitalized software of approximately $5.5 million, which was partially offset by a decrease in purchases of property and equipment of approximately $1.7 million.

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

        2015 Compared with 2014.2017.    Cash provided by financing activities during the year ended December 31, 20152018 was approximately $652.2$705.6 million, an increasecompared with cash used in financing activities of approximately $663.2$123.0 million in cash inflow compared toduring the year ended December 31, 2014.2017. Cash provided by financing activities during the year ended December 31, 2018 was primarily due to proceeds from the 2018 Term Facility of $965.3 million, which was partially offset by $236.3 million for the repayment of 2014 Credit Facility borrowings and the payment of debt issuance costs of $18.3 million.

2017 Compared with 2016.     Cash used in financing activities during the year ended December 31, 2017 was $123.0 million, compared with $119.0 million during the year ended December 31, 2016. The cash used in financing activities during the year ended December 31, 2015 is2017 was primarily comprised of $639.1 million of proceeds from the issuance of common stock in the IPO, $14.7 million of proceeds received from the exercise of stock options, $18.6due to $93.6 million related to excess tax benefits from share-based compensationshare repurchases and was partially offset by repayments of borrowings under our Credit Facilities of $18.8 million and tax payments for equity award issuances of $1.2 million.

        2014 Compared with 2013.    Cash used in financing activities during the year ended December 31, 2014 was approximately $10.9 million, a decrease of approximately $32.0 million in cash outflow compared to the year ended December 31, 2013. The cash used in financing activities during the year ended December 31, 2014 is primarily comprised of $309.1$30.0 million for the repurchaserepayment of common stock, and $2.9 million for the payment of previously declared dividends, partially offset by $300.0 million from proceeds of the Term Loan and $0.7 million from the exercise of employee stock options.Credit Facility borrowings.


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We do not have any off-balance sheet arrangements and did not have any such arrangements during the years ended December 31, 2015, 2014,2018, 2017, and 2013.

2016.

Contractual Obligations

Our principal commitments consist of obligations under our senior unsecured term loan facility (see Note 10 of the Consolidated Financial Statements), and2018 Term Loan Facility, purchase obligations, our operating leases for equipment, office space, and co-located data center facilities. facilities and our capital leases. See “Note 10—Debt,” and “Note 11—Commitment and Contingencies,” of the notes to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

The following table summarizes our future payments in cash, excluding the effects of time value, on contractual obligations by period as of December 31, 2015.

2018 (in thousands).

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

Credit facilities

 $281,250 $15,000 $75,000 $191,250 $— 

Operating lease obligations

  25,651  8,141  14,732  2,778  — 
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Total

 $306,901 $23,141 $89,732 $194,028 $— 
​​​ ​ ​​ ​​​ ​ ​​ ​​​ ​ ​
​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​ ​
 Payments Due by Period
 Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years
Credit facilities$977,550
 $9,800
 $19,600
 $19,600
 $928,550
Purchase obligation1,997
 688
 1,198
 111
 —
Capital lease obligations16,832
 2,976
 3,834
 1,916
 8,106
Operating lease obligations48,930
 11,250
 12,957
 9,124
 15,599
Total$1,045,309
 $24,714
 $37,589
 $30,751
 $952,255

We have cash interest requirements due on the 2018 Credit Facilities, payable at variable rates, that are not included in the table above.

Our existing operating lease agreements may provide us with the option to renew. Our future operating lease obligations would change if we entered into additional operating lease agreements and if we exercised renewal options.

Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude purchase orders for goods and services. Purchase orders are not included in the table above. Our purchase orders represent authorizations to purchase rather than legally binding agreements. The contractual commitment amounts in the table above are associated with agreements that are legally binding and enforceable, and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions and the approximate timing of the transaction.


Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or operating results would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below.

Our significant accounting policies are described in note 2, "Summary“Note 2—Summary of Significant Accounting Policies",Policies,” of the notes to our audited consolidated financial statements, included under Item 15 ofelsewhere in this annual reportAnnual Report on Form 10-K. The following are the accounting policies that we believe involve a greater degree of judgementjudgment and complexity and are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.


Revenue Recognition

Table

We generate the substantial majority of Contents

Revenue Recognition

        We recognizeour revenue when it is realized (or realizable)through the sale or subscription licensing of our platform solutions, as well as revenue from related arrangements for advisory, implementation, 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, revenuesupport services. Revenue is recognized when cashperformance obligations under the terms of a contract are satisfied through the transfer of control of these solutions and services to our customers.

Our platform solutions revenue is collected. Cash collectionspredominantly based on the number of clients, the number of patients or similar relevant metrics (e.g., the number of prescriptions issued), the size of the client, the number of analytical services contracted for by a client and invoices generatedthe contractually negotiated price of such services. Additionally, revenue is based on the number of identified and/or resolved gaps in excess of revenue recognized are recorded as deferred revenue until the revenue recognition criteria are met.

        We have primarily derivedcare, quality, utilization, compliance, and/or other gaps resulting from our revenue from salesanalytical services at a contractually negotiated transactional price for each identified and/or resolved gap. The majority of our data analyticsplatform solutions contracts contain a series of separately identifiable and data-driven intervention platform services.distinct services that represent performance obligations that are satisfied over time. We allocate revenue to our data-driven analytics and data-driven intervention platform services usingsolutions by determining the relativestandalone selling price method. We have generally been unable to establish vendor-specific objective evidence of fair value and, while we continually seek third-party evidenceeach performance obligation. The determination of fair value, meaningful data have generally been unavailable as our services are unique and visibility into our competitors' pricing is unavailable. As a result, we use our best estimate ofstandalone selling price to allocate arrangement consideration to its contractual service elements.

        We havefor each performance obligation is determined an estimated selling price by considering several externalbased on the terms of the contract and internal factors, including, but not limited to pricing practices, margin objectives, competition, customer demand, internal costs, and overall economic trends.can require judgment. Generally, the best estimate of standalone selling price is consistent with the contractual arrangement fee for each element.

Revenue is generally recognized as cloud-based data analytics and data-driven intervention services are performed and information is deliveredon our platform offerings over the contract term. For these contracts, we have determined that we will use the practical expedient under ASC 606-10-55-18 to clients, which generally align with ourrecognize revenue when we have the right to invoice. We qualify for this practical expedient because the right to invoice our clients. Cloud-based data analytics services are considered performed when gaps in care, quality, data integrity, or financial performance,corresponds directly with the value transferred to the customer.

We also generate revenue from advisory, implementation, 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 advisorysupport 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. The Company entersWe primarily enter into arrangements for data-driven advisory services under fixed-price, time and materials, or retainer-based contracts. Revenues under fixed-price and retainer-based contracts are recognized ratably over the contract period or retainer based contracts.upon contract completion. 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 recognizedWe recognize revenue when we have the right to invoice the customer using the proportionalallowable practical expedient under ASC 606-10-55-18 since the right to invoice the customer corresponds with the performance method. Performance is measured based on the ratioobligations completed.
The timing of labor hours incurred to total estimated labor hours. Revenues under certain other fixed-pricerevenue recognition, billings and retainer based contracts are recognized ratably over the contract period or upon contract completion.cash collections results in billed accounts receivable, unbilled receivables, and deferred revenue. 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 uponwhen the achievement of specific events as defined by each contract including deliverables and timetables.occurs. Unbilled receivables if any, are classified as a current asset.accounts receivable on the consolidated balance sheet. Advanced billings to clients in excess of revenue earned are recorded as deferred revenue until the aforementioned revenue recognition criteria are met.

        We also enter into multiple-element software arrangements, which are recognized under ASC 985-605,Software Revenue Recognition, when a software subscription license is provided to customers. Under these arrangements, we provide post-contract support, including help desk support and unspecified upgrades. Vendor-specific objective evidence of fair value has not been established for maintenance as maintenance is not renewed separately from the license fees. As a result, under these subscription software license agreements, we recognize revenue from the license of software ratably


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over the life of the agreement. We begin 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 our arrangements entitle a client to receive a refund if we fail 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 any and all performance obligations are satisfied.

We maintain an allowance, charged to revenue, which reflects our estimated future billing adjustments resulting from client concessions or resolutions of billing disputes.

We believe that our approach and judgments applied to estimating our allowance is reasonable, actual results could differ, and we may be exposed to increases or decreases in revenue to the extent that actual results differ from our estimates.

Stock-Based Compensation

        All stock-basedStock-based awards, including employee stock option, RSUoptions, Restricted Stock Unit (“RSU”) and RSARestricted Stock Award (“RSA”) grants, including RSAs with performance conditions, are measured and recognized in the financial statements at fair value as of the grant date in accordance with ASC 718,Compensation—Stock Compensation. We recognize stock-based compensation expense, net of estimated forfeitures based on historical and anticipated turnover data, usingRSUs are share awards that, upon vesting, will deliver to the straight-line basis over the service periodholder shares of the applicable award, which is generally five years.

        We estimateCompany’s common stock. RSAs are shares of the fair value of each stock option award on the grant date using the Black-Scholes option pricing model. The Black-Scholes option-pricing model requires the input of estimates, including the fair market value of ourCompany’s common stock the expected volatility of the price of our common stock, expected life, the risk free interest rate, and the expected dividend yield of our common stock. The input assumptions usedthat are reserved in the Black-Scholes option-pricing model represent management's best estimates. These estimates involve inherent uncertainties and the application of management's judgment. If factors change and different assumptions are used, the amount of stock-based compensation expense couldgrantee’s name upon grant which will be materially different in the future.

        We estimate the expected volatility of our stock options by using data for several unrelated public companies within our industry that are considered to be comparable to our company and for which historical information was available. The average expected term was determined under the simplified calculation as provided by the SEC Staff's Accounting Bulletin No. 107,Share-Based Payment, which is the mid-point between the vesting date and the end of the contractual term. We determine the risk-free interest rate by referencedelivered to the U.S. Treasury yield curve rates with the remaining term commensurate with the expected life assumed at the date of grant. The dividend yield assumption of zero is basedholder upon the fact that we do not have a formal dividend payment policy, we do not intend to continue to pay cash dividends on our common stock in the future, and, to the extent we pay dividends in the future, there is no assurance that any such dividends will be comparable to those previously declared. We estimate the forfeiture rate of our stock-based awards based on historical experience and adjustments are made annually to reflect actual forfeiture experience. We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense.vesting.

We estimate the fair value of each RSU and RSA based on the fair market values of the underlying common stock on the dates of grant. RSUs are share awards that, uponAdditionally, our performance-based RSAs have vesting will deliverconditions tied to the holder sharesachievement of specified performance conditions, which have target performance levels that span from three to five years. Upon the conclusion of the Company's common stock. RSAs areperformance period, the performance level achieved will be measured and the ultimate number of shares that vest will be determined.
We recognize stock-based compensation expense using the straight-line basis over the requisite service period of the Company's common stock that are reserved inapplicable award, which is generally three to five years. Stock-based compensation expense for RSAs with performance conditions is recorded ratably over their vesting period or using a graded vest method, depending on the grantee's name upon grant which will be deliveredspecific terms of the award and achievement of the specified performance conditions. We record adjustments related to the holder upon vesting.

forfeitures as they occur.

Income Taxes

We account for income taxes using the asset and liability approach, which requires the recognition of deferred tax assets and liabilities related to the expected future tax consequences of events that have


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been recognized between financial reporting and income tax reporting. We measure deferred tax assets and liabilities 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.

We make estimates, assumptions and judgments to determine our provision for income taxes and also for deferred tax assets and liabilities and any valuation allowances recorded against our deferred tax assets. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance.

We have adoptedaccount for uncertain tax positions in accordance with ASC 740-10,Accounting for Uncertainty in Income Taxes, that prescribes a recognition threshold of more-likely- than-not,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. We continually review tax laws, regulations and related guidance in order to properly record any uncertain tax liability positions. We adjust these reserves in light of changing facts and circumstances.

As a result of the Tax Act, we revalued our ending net deferred tax liabilities at December 31, 2017 and recognized a $15.5 million tax benefit in the Company’s consolidated statement of operations for the year ended December 31, 2017. Refer to “Note 16—Income Taxes,” of the notes to our audited consolidated financial statements, included elsewhere in this Annual Report on Form 10-K.
We adopted ASU 2016-09 in the fourth quarter of 2016, which resulted in the modification of income tax consequences for several aspects of stock-based payment awards. Excess tax benefits and tax deficiencies for stock-based payments are now included in our tax provision expense rather than additional-paid-in-capital. Variability of tax consequences arising from excess tax benefits

and tax deficiencies may result due to fluctuations in our stock price and the volume of our employees’ equity awards that are exercised or vest.
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. Goodwillamortized and is subject to impairment testing annually, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable.
Historically, the annual goodwill impairment assessment was performed as of December 31st. During 2018, we changed the date of the goodwill impairment assessment to November 1st for the year ended December 31, 2018 and thereafter. We believe this change in our measurement date does not represent a material change in method of applying the accounting principal as the new and old assessment dates are close in proximity and fall within the same quarter and the change does not produce different results as similar valuation assumptions are used and the carrying values are stable. The change in the date of our goodwill impairment analysis will allow for more time to prepare and review the valuations for each reporting unit and lessen the accounting and valuation resource constraints during year-end reporting.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. This ASU will be applied prospectively and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted the requirements of the new standard in the fourth quarter of 2017. As a result, the amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, then the Company will record an impairment loss in the amount equal to the difference between the fair value and the carrying value.
The Company performs the goodwill impairment testing annually as of November1st, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. The Company'sSignificant judgment in testing goodwill for impairment tests areincludes assigning assets and liabilities to the reporting unit and assessing or determining the fair value of each reporting unit based on a structure consisting of a singlethe Company’s best estimates and assumptions, as well as other information including valuations that utilize customary valuation procedures and techniques. The Company tests its goodwill for impairment at the reporting unit level which is one level below the operating segment and twohas identified four reporting units. units: Inovalon, ABILITY, Avalere and Creehan.
During 2015,2017, the Company performed a qualitative assessment for ourthe Inovalon and ABILITY reporting units during this assessment, qualitative factorsand concluded that they 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.impaired. Qualitative factors that were considered included,include, but were not limited to, macroeconomic conditions, industry and market conditions, company specific events, changes in circumstances, after tax cash flows and market capitalization. As it relates to ABILITY, the Company also considered proximity of and factors impacting the valuation on April 2, 2018 and changes that may have occurred since the valuation date.
The Company elected to bypass the qualitative assessment and performed a quantitative assessment for its Avalere and Creehan reporting units and concluded that these reporting units were not impaired. The Company employed a combined valuation approach that included the income approach using the discounted cash flow method, the market approach using the guideline public company method and the merger and acquisition method to value the reporting units. Critical estimates in determining the fair value of the reporting units include, but are not limited to, historical and projected customer retention rates, anticipated growth in revenue and earnings, and expected future cash outflows. Based on the Company'sCompany’s annual impairment evaluation performed as of December 31, 2015,2018, the Company concluded that there werewas no indicatorsimpairment of impairment and therefore it was more likely than not thatgoodwill.
During 2017, the fair value ofCompany performed a qualitative assessment for the goodwill exceeded its carrying amount, for eachInovalon reporting unit and thereconcluded that it was no reasonnot impaired. Qualitative factors that were considered include, but were not limited to, performmacroeconomic conditions, industry and market conditions, company specific events, changes in circumstances, after tax cash flows and market capitalization.
The Company elected to bypass the two-step impairment test.qualitative assessment and performed a quantitative assessment for its Avalere and Creehan reporting units and concluded that these reporting units were not impaired. The two-step impairment test comparesCompany employed a combined valuation approach that included the income approach using the discounted cash flow method, the market approach using the guideline public company method and the merger and acquisition method to value the reporting unit's carrying value to its fair value. Ifunits. Critical estimates in determining the fair value of the reporting unit exceedsunits include, but are not limited to, historical and projected customer retention rates, anticipated growth in revenue and earnings, and expected future cash outflows. Based on the carryingCompany’s annual impairment evaluation performed as of December 31, 2017, the Company concluded that there was no impairment of goodwill.

Business Combinations
Business combinations, which may include purchased intangible assets, are accounted for at estimated fair value on the date of acquisition. Acquisition costs are expensed as incurred and recorded in general and administrative expenses. Measurement period adjustments relate to information that we should have known at the net assets, including goodwill assignedtime of acquisition and these adjustments and any other changes to that reporting unit, goodwillpurchase accounting are recorded as an adjustment to goodwill. After the measurement period is not impaired. Ifclosed, (not to exceed one year following the carrying value ofacquisition date) any purchase accounting adjustments are recorded in earnings in the reporting unit's net assets, including goodwill, exceedscurrent period.
Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and utilizes data such as discounted cash flow analysis and valuations derived from customary valuation procedures and techniques. Management’s best estimates and assumptions are employed in determining the reporting unit, then the Company will determine the impliedacquisition date fair value including the timing and amounts of future cash inflows and outflows, discount rates, market prices and asset lives. Judgments made in the determination of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its impliedestimated fair value then anassigned to the assets acquired and liabilities assumed, as well as future business and economic conditions, could materially impact the financial statements in periods after the acquisition through impairment loss is recorded for the difference between the carrying amountof goodwill or intangible assets, and the implied fair valueacceleration 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 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 anyamortization period presented.

JOBS Act Accounting Election

        We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

purchased intangible assets.

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Recently Issued Accounting Standards

Recently issued accounting standards and their expected impact, if any, are discussed in note 2, "Summary“Note 2—Summary of Significant Accounting Policies",Policies,” of the notes to our consolidated financial statements, included under Item 15elsewhere within this annual reportAnnual Report on Form 10-K.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

Market risk includes risks that arise from changes in interest rates, equity prices and other market changes that affect market sensitive instruments.

Our primary market risk exposure is related to changes in interest rates on our variable rate debt and marketable securities.

debt.

Variable Rate Debt Risk.    Our variable rate debt includes our 2018 Term Loan Facility and our 2018 Revolving Credit Facility. As of December 31, 2015,2018, we had $281.3$977.6 million of outstanding principal indebtedness under our 2018 Term Loan Facility at an effective interest rate of 1.4%5.9%. As a result, if market interest rates were to increase by 1.0%, or 100 basis points, interest expense would decrease future earnings and cash flows, net of estimated tax benefits, by approximately $1.7$6.6 million annually, assuming that we do not enter into contractual hedging arrangements. As of December 31, 2015,2018, there was no balance outstanding on the 2018 Revolving Credit Facility.

        We had cash, cash equivalents and short-term investments totaling approximately $728.2 million as

To mitigate the risk of December 31, 2015. This amount was invested primarily in marketable securities including corporate notes and bonds, U.S. agency obligations, commercial paper, U.S. treasury securities, certificates of deposit and money market funds. The cash and cash equivalents are held for working capital purposes. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes.

        Our cash equivalents and our short-term investments are subject to market risk due to changes in interest rates, which could affect our results of operations. Fixed rate securities may have their market value adversely affected due to a rise in interest rates, while floatingwe entered into four interest rate securitiesswap transactions during the second quarter of 2018, which mature in March 2025, fixing the LIBOR component of the interest on a total of $700.0 million of our 2018 Term Facility at a weighted average rate of 2.8%. While we have and may produce less income than expected ifcontinue to enter into agreements intending to limit our exposure to higher interest rates, fall. Due in partany such agreements may not completely offset the risks of interest rate volatility or other risks inherent to these factors, our future investment income may fluctuate due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However because we classify our marketable securities as "available for sale," no realized gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary.

        An immediate increase of 100-basis points in interest rates would have resulted in an approximate $4.6 million market value reduction in our investment portfolio as of December 31, 2015. An immediate decrease of 100-basis points in interest rates would have increased the market value by approximately $10.6 million as of December 31, 2015. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. Fluctuations in the value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in accumulated other comprehensive income, and are realized only if we sell the underlying securities.

rate swap transactions.

Item 8.    Financial Statements and Supplementary Data

Data.

Our consolidated financial statements and supplementary data are included as a separate section of this Annual Report on Form 10-K commencing on page F-1 and are incorporated herein by reference.


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The supplementary financial information required by this Item 8 is included in Item 7 under the caption "Quarterly Results of Operations,"“Quarterly Financial Information,” which is incorporated herein by reference.

Item 9.    Changes and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.    Controls and Procedures.

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer ("CEO"(“CEO”) and chief financial officer ("CFO"(“CFO”), has evaluated the effectiveness of our disclosure controls and procedures, (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our CEO and CFO have concluded that, as of December 31, 2015,2018, our disclosure controls and procedures were designed at a reasonable assurance level to ensure that material information relating to Inovalon Holdings, Inc., including its consolidated subsidiaries, is made known to our CEO and CFO by others within those entities, particularly during the period in which this report was being prepared and that our disclosure controls and procedures were effective in providing reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Management's


Management’s Annual Report on Internal Control over Financial Reporting

Our management, with the participation of our CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria established in "Internal“Internal Control—Integrated Framework"Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, which excluded the integration of our acquisition of Butler Group Holdings, Inc., management has concluded that our internal control over financial reporting was effective as of December 31, 2015.

2018.

Our management, including our CEO and CFO, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the


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inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

        This

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears in Part II, Item 8 of this Annual Report on Form 10-K does not include an attestation report of the Company's registered public accounting firm due to a transition period established by rules of the SEC for newly public companies and because we are an Emerging Growth Company.

Attestation Report of Independent Registered Public Accounting Firm

        Not applicable.

10-K.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company'sCompany’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three monthsquarter ended December 31, 20152018 that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.

        On September 1, 2015, we completed our acquisition of Avalere and effective from that date, we began integrating Avalere into our existing control procedures. We do not currently anticipate any changes to materially affect our internal control over financial reporting as a result of the integration of Avalere.

Item 9B.    Other Information.

None.


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PART III

Item 10.    Directors, Executive Officers and Corporate Governance

Governance.

The information required by this Item 10 will be included in the 20162019 Proxy Statement and is incorporated herein by reference.

Item 11.    Executive Compensation

Compensation.

The information required by this Item 11 will be included in the 20162019 Proxy Statement and is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Matters.

The information required by this Item 12 will be included in the 20162019 Proxy Statement and is incorporated herein by reference.

Item 13.    Certain Relationships and Related Transactions and Director Independence

Independence.

The information required by this Item 13 will be included in the 20162019 Proxy Statement and is incorporated herein by reference.

Item 14.    Principal Accounting Fees and Services

Services.

The information required by this Item 14 will be included in the 20162019 Proxy Statement and is incorporated herein by reference.


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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-29.

        (2)   Financial Statement Schedules

        Included herein at pages F-30.

        (3)   Exhibits

(1)Financial Statements
(2)Financial Statement Schedule
(3)Exhibits
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index contained within this annual reportAnnual Report on Form 10-K.


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EXHIBIT INDEX

Exhibit
Number
Description of Document
2.1
Agreement and Plan of Merger by and among Inovalon Holdings, Inc., New Heights Merger Corporation, Butler Group Holdings, Inc. and Shareholder Representative Services LLC, dated March 6, 2018. (Incorporated by reference from Exhibit 2.1 to the Current Report on Form 8-K filed March 7, 2018).
 
3.1
 
Second Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Company'sCompany’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'sCompany’s Registration Statement on Form S-1/A dated February 6, 2015).

 
10.1
3.3
Amendment to Second Amended and Restated Bylaws of Inovalon Holdings, Inc. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed January 7, 2019).
10.1
Form of Indemnification Agreement. (Incorporated by reference to Exhibit 10.1 to the Company'sCompany’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'sCompany’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'sCompany’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'sCompany’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'sCompany’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'sCompany’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'sCompany’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'sCompany’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'sCompany’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'sCompany’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'sCompany’s Registration Statement on Form S-1/A dated January 29, 2015).

 
10.12
Form of Long-Term Incentive Restricted Stock Bonus Award. (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed May 4, 2017).
10.13
Form of Non-Employee Director’s Restricted Stock Unit Deferral Election Form. (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed August 3, 2017).
10.14
Form of Restricted Stock Unit Award under the 2015 Omnibus Incentive Plan (Non-Employee Directors). (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed August 3, 2017).
10.15
Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.12 to the Company'sCompany’s Registration Statement on Form S-1/A dated January 29, 2015).

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Exhibit
Number
Description of Document
10.1610.13
 
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'sCompany’s Registration Statement on Form S-1 dated December 30, 2014).

 
10.14
10.17

Credit and Guaranty Agreement, dated as September 19, 2014 by and among Inovalon Holdings,
Debt Commitment Letter with Morgan Stanley Senior Funding, 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.dated March 6, 2018. (Incorporated by reference tofrom Exhibit 10.1410.1 to the Company's Registration StatementCurrent Report on Form S-1 dated December 30, 2014)8-K filed March 7, 2018).

 
10.15
10.18

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'sCompany’s Registration Statement on Form S-1/A dated January 29, 2015).

 
10.16
10.19

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'sCompany’s Registration Statement on Form S-1/A dated January 29, 2015).

 
10.17
10.20

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'sCompany’s Registration Statement on Form S-1/A dated January 29, 2015).

 
10.18
10.21

Amended and Restated Employment
Credit Agreement dated December 3, 2014,as of April 2, 2018 among Inovalon Holdings, Inc., Morgan Stanley Senior Funding Inc., as Administrative Agent, and the other lenders party thereto (incorporated by reference to the Company’s Current Report on Form 8-K, filed April 2, 2018).
10.22
Guarantee and between Inovalon,Collateral Agreement with Morgan Stanley Senior Funding, Inc., as Collateral Agent for the secured parties thereto, and Thomas R. Kloster.the Subsidiary Guarantors dated April 2, 2018 (incorporated by reference to the Company’s Current Report on Form 8-K, filed April 2, 2018).
10.23
Agreement for Consulting Services with Mark A. Pulido, dated March 29, 2018. (Incorporated by reference to Exhibit 10.1810.2 to the Company's Registration StatementCompany’s Quarterly Report on Form S-1/A dated January 29, 2015)10-Q filed on May 8, 2018).

 
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)

21.1*
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)


21.1
*
Subsidiaries of the Registrant.

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Exhibit
Number		Description of Document
 23.1*
23.1*
Consent of Deloitte & Touche LLP.

 
31.1
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
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
*
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
*
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
 101.INS*
*
XBRL Instance Document

 
101.SCH
101.SCH*
*
XBRL Taxonomy Extension Schema

 
101.CAL
101.CAL*
*
XBRL Taxonomy Extension Calculation Linkbase

 
101.DEF
101.DEF*
*
XBRL Taxonomy Extension Definition Linkbase

 
101.LAB
101.LAB*
*
XBRL Taxonomy Extension Label Linkbase

 
101.PRE
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..
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 
Date:February 20, 2019INOVALON HOLDINGS, INC.



By:
 
/s/ KEITH R. DUNLEAVY, M.D.
Keith R. Dunleavy, M.D.
M.D
Chief Executive Officer and& Chairman
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature
Title
Date


 
Title
 
Date
/s/ KEITH R. DUNLEAVY, M.D.
Keith R. Dunleavy, M.D.		 Chief Executive Officer and& Chairman (principal executive officer) February 26, 201620, 2019

Keith R. Dunleavy, M.D.
/s/ THOMASJONATHAN R. KLOSTER
Thomas R. KlosterBOLDT
 
Chief Financial Officer (principal
(principal financial officer and& principal accounting officer)

 
February 26, 201620, 2019

Jonathan R. Boldt
/s/ DENISE K. FLETCHER
DirectorFebruary 20, 2019
Denise K. Fletcher
 
Director
 
February 26, 2016

/s/ ANDRÉ S. HOFFMANN
WILLIAM D. GREEN		DirectorFebruary 20, 2019
William D. Green
Director
André S. Hoffmann
 
Director
 
February 26, 2016

Director
Isaac S. Kohane
/s/ MARK A. PULIDODirectorFebruary 20, 2019
Mark A. Pulido
/s/ LEE D. ROBERTS
DirectorFebruary 20, 2019
Lee D. Roberts
 
Director
 
February 26, 2016

/s/ WILLIAM J. TEUBER
DirectorFebruary 20, 2019
William J. Teuber
 
Director
 
February 26, 2016

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INOVALON HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTSSTATEMENT

S

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets as of December 31, 20152018 and 2014

2017
F-3F-4

Consolidated Statements of Operations for the years ended December 31, 2015, 2014,2018, 2017, and 2013

2016
F-4F-5

Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2015, 2014,2018, 2017, and 2013

2016
F-5F-6

Consolidated Statements of Stockholders'Stockholders’ Equity (Deficit) for the years ended December 31, 2015, 2014,2018, 2017, and 2013

2016
F-6F-7

Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014,2018, 2017, and 2013

2016
F-7F-8

Notes to Consolidated Financial Statements

F-8F-
9

Consolidated Financial Statement Schedule

F-29F-
38

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Report of Independent Registered Public Accounting Firm

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

MD


Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Inovalon Holdings, Inc. and subsidiaries (the "Company"“Company”) as of December 31, 20152018 and 2014, and2017, the related consolidated statements ofoperations, consolidated statements of comprehensive (loss) income, stockholders'consolidated statements of stockholders’ equity, (deficit), and the consolidated statements of cash flows, for each of the three years in the period ended December 31, 2015. Our audits also included2018, and the financial statementrelated notes and the schedule listed in the Index at Item 15. These financial statements and financial statement schedule are15 (collectively referred to as the responsibility of the Company's management. Our responsibility is to express an“financial statements”). In our opinion, on the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and financial statement schedule based on our audits.

2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We conducted our auditshave also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 20, 2019, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. 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 requiredmisstatement, whether due to have, nor were we engaged to perform, an audit of its internal control over financial reporting.error or fraud. Our audits included considerationperforming procedures to assess the risks of internal control overmaterial misstatement of the financial reporting as a basis for designing auditstatements, whether due to error or fraud, and performing 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 includesrespond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated


/s/ DELOITTE & TOUCHE LLP
Baltimore, Maryland
February 20, 2019

We have served as the Company’s auditor since 2007.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of
Inovalon Holdings, Inc.
Bowie, MD

Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial statements present fairly, in all material respects, the financial positionreporting of Inovalon Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the resultsCommittee of their operations and their cash flows for eachSponsoring Organizations 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, inTreadway Commission (COSO). In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairlyCompany maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the information set forth therein.

standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018 of the Company and our report dated February 20, 2019, expressed an unqualified opinion on those financial statements.

As described in Management’s Annual Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Butler Group Holdings, Inc. which was acquired on April 2nd, 2018 and whose financial statements constitute 60% of total assets and 22% of revenues of the consolidated financial statement amounts as of and for the year ended December 31, 2018. Accordingly, our audit did not include the internal control over financial reporting at Butler Group Holdings, Inc.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ DELOITTE & TOUCHE LLP
McLean, VA
Baltimore, Maryland
February 26, 2015

20, 2019

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Inovalon Holdings, Inc.

Consolidated Balance Sheets

(inIn thousands, except share amounts)


 December 31, December 31,

 2015 2014 2018 2017

ASSETS

ASSETS

    

Current assets:

      
  

Cash and cash equivalents

 $114,034 $162,567 $115,591
 $208,944

Short-term investments

 614,130 — 7,000
 267,288

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

 81,305 43,938 
Accounts receivable (net of allowances of $3,350 and $2,038 at December 31, 2018 and 2017, respectively)104,405
 90,054

Prepaid expenses and other current assets

 16,162 6,015 34,801
 10,441

Income tax receivable

 18,377 6,797 10,330
 11,987

Deferred income taxes

 — 491 
​​ ​​​ ​ ​

Total current assets

 844,008 219,808 272,127
 588,714

Non-current assets:

      
  

Property, equipment and capitalized software, net

 65,031 50,962 141,758
 125,768

Goodwill

 137,733 62,269 956,029
 184,932

Intangible assets, net

 61,855 7,447 535,343
 89,326

Other assets

 4,250 2,083 16,158
 6,338
​​ ​ ​​​ ​

Total assets

 $1,112,877 $342,569 $1,921,415
 $995,078
​​ ​ ​​ ​​
​​​​​
​​ ​ ​​ ​ ​

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

      
  

Accounts payable

 $21,136 $10,974 
Accounts payable and accrued expenses$31,295
 $34,109

Accrued compensation

 13,538 15,305 25,298
 18,592

Other current liabilities

 11,444 1,992 50,765
 15,277
Deferred revenue20,628
 6,954

Deferred rent

 797 567 619
 1,818

Deferred revenue

 5,507 3,904 

Credit facilities

 15,000 18,750 9,800
 45,000

Capital lease obligation

 109 99 2,905
 336
​​ ​​​ ​ ​

Total current liabilities

 67,531 51,591 141,310
 122,086

Non-current liabilities:

      
  

Credit facilities, less current portion

 266,250 281,250 939,514
 191,250

Capital lease obligation, less current portion

 296 168 13,927
 12,109

Deferred rent

 2,446 2,619 
Deferred rent, less current portion3,186
 219
Other liabilities30,220
 —

Deferred income taxes

 37,198 15,163 110,669
 26,642
​​ ​​​ ​ ​

Total liabilities

 373,721 350,791 1,238,826
 352,306
​​ ​ ​​ ​​

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

 — — 
Commitments and contingencies (Note 11)

 

Stockholders’ equity: 
  
Common stock, $0.000005 par value, 900,000,000 shares authorized, zero shares issued and outstanding at each of December 31, 2018 and 2017, respectively—
 —
Class A common stock, $0.000005 par value, 750,000,000 shares authorized; 86,679,575 shares issued and 72,059,400 shares outstanding at December 31, 2018; 77,588,018 shares issued and 62,967,843 shares outstanding at December 31, 2017
—
 —
Class B common stock, $0.000005 par value, 150,000,000 shares authorized; 80,608,685 shares issued and outstanding at December 31, 2018; 80,957,495 shares issued and outstanding at December 31, 20171
 1
Preferred stock, $0.0001 par value, 100,000,000 shares authorized, zero shares issued and outstanding at December 31, 2018 and 2017, respectively—
 —

Additional paid-in-capital

 493,197 110,317 618,674
 534,159

Retained earnings

 247,540 181,477 270,471
 308,905

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 
​​ ​ ​​ ​​
​​​​​
​​ ​ ​​ ​ ​
Treasury stock, at cost, 14,620,175 shares at December 31, 2018 and 2017(199,817) (199,817)
Other comprehensive loss, net of tax(6,740) (476)
Total stockholders’ equity682,589
 642,772
Total liabilities and stockholders’ equity$1,921,415
 $995,078

See notes to consolidated financial statements.


Table of Contents


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 
​​​​ ​ ​​ ​ ​​​ ​
​​​​​​​​​​​​
​​​​ ​​​ ​ ​​ ​ ​
 Year Ended December 31,
 2018 2017 2016
Revenue$527,676
 $449,358
 $427,588
Expenses: 
  
  
Cost of revenue(1)
144,826
 151,046
 159,169
Sales and marketing(1)
45,534
 34,103
 27,078
Research and development(1)
28,638
 27,383
 29,148
General and administrative(1)
205,038
 149,948
 137,275
Depreciation and amortization96,725
 53,089
 37,284
Restructuring expense9,500
 —
 —
Total operating expenses530,261
 415,569
 389,954
(Loss) Income from operations(2,585) 33,789
 37,634
Other income and (expenses): 
  
  
Interest income2,181
 5,429
 5,792
Interest expense(50,898) (6,225) (5,065)
Other (expense) income, net(2,255) (406) 538
(Loss) Income before taxes(53,557) 32,587
 38,899
(Benefit from) Provision for income taxes(14,393) (2,231) 11,795
Net (loss) income$(39,164) $34,818
 $27,104
Net (loss) income attributable to common stockholders, basic and diluted$(39,164) $33,828
 $26,943
Net (loss) income per share attributable to common stockholders, basic and diluted: 
  
  
Basic net (loss) income per share$(0.27) $0.24
 $0.18
Diluted net (loss) income per share$(0.27) $0.24
 $0.18
Weighted average shares of common stock outstanding: 
  
  
Basic145,389
 142,225
 150,048
Diluted145,389
 142,737
 150,955

(1) Includes stock-based compensation expense as follows:     
Cost of revenue$237
 $1,652
 $483
Sales and marketing735
 2,011
 613
Research and development1,937
 1,293
 1,184
General and administrative13,253
 12,362
 7,774
Total stock-based compensation expense$16,162
 $17,318
 $10,054
See notes to consolidated financial statements.


Table of Contents


Inovalon Holdings, Inc.

Consolidated Statements of Comprehensive (Loss) 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 $32,718 
​​​ ​​​ ​ ​​ ​​
​​​​​​​​​​​
​​​ ​ ​​​ ​​ ​ ​
 Year Ended December 31,
 2018 2017 2016
Net (loss) income$(39,164) $34,818
 $27,104
Other comprehensive income (loss): 
  
  
Realized losses on cash flow hedges reclassified from accumulated other comprehensive income, net of tax of $(956), $0 and $0, respectively2,022
 —
 —
Net change in unrealized losses on cash flow hedges, net of tax of $4,156, $0 and $0, respectively(8,751) —
 —
Realized losses (gains) on short-term investments reclassified from accumulated other comprehensive income, net of tax of $(319), $0 and $4, respectively716
 —
 (6)
Net change in unrealized (losses) and gains on available-for-sale investments, net of tax of $69, $(94) and $(682), respectively(149) 104
 1,008
Reclassification of income tax effects of the Tax Cuts and Jobs Act of 2017(102) —
 —
Comprehensive (loss) income$(45,428) $34,922
 $28,106

See notes to consolidated financial statements.


Table of Contents


Inovalon Holdings, Inc.

Consolidated Statements of Stockholders'Stockholders’ Equity (Deficit)

(inIn 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 
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​​
​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​
  Issued Class A Common Stock Issued Class B Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders’ Equity
  Shares Amount Shares Amount Shares Amount    
Balance—January 1, 2016 53,482,669
 $—
 98,230,363
 $1
 —
 $—
 $493,197
 $247,540
 $(1,582) $739,156
Adjustment to adopt ASU 2016-09 —
 —
 —
 —
 —
 —
 757
 (557) —
 200
Repurchase of common stock —
 —
 —
 —
 (7,508,985) (106,231) —
 —
 —
 (106,231)
Stock-based compensation expense —
 —
 —
 —
 —
 —
 9,914
 —
 —
 9,914
Issuance of common stock related to business combination 651,355
 —
 —
 —
 —
 —
 7,764
 —
 —
 7,764
Exercise of stock options 660,156
 —
 158,753
 —
 —
 —
 6,200
 —
 —
 6,200
Conversion Class B to Class A common stock 15,085,488
 —
 (15,085,488) —
 —
 —
 —
 —
 —
 —
Issuance of shares for Employee Stock Purchase Plan —
 —
 —
 —
 —
 —
 (34)   —
 (34)
Issuance of shares related to restricted stock units and awards 2,453,593
 —
 —
 —
 —
 —
 —
 —
 —
 —
Shares withheld for employee taxes upon conversion of restricted stock (61,963) —
 —
 —
 —
 —
 (1,498) —
 —
 (1,498)
Other comprehensive loss —
 —
 —
 —
 —
 —
 —
 —
 1,002
 1,002
Net income —
 —
 —
 —
 —
 —
 —
 27,104
 —
 27,104
Balance—December 31, 2016 72,271,298
 $—
 83,303,628
 $1
 (7,508,985) $(106,231) $516,300
 $274,087
 $(580) $683,577
Repurchase of common stock —
 —
 —
 —
 (7,111,190) (93,586) —
 —
 —
 (93,586)
Stock-based compensation expense —
 —
 —
 —
 —
 —
 17,164
 —
 —
 17,164
Exercise of stock options 654,035
 —
 6,833
 —
 —
 —
 4,967
 —
 —
 4,967
Conversion Class B to Class A common stock 2,352,966
 —
 (2,352,966) —
 —
 —
 —
 —
 —
 —
Issuance of shares related to restricted stock units and awards 2,546,426
 —
 —
 —
 —
 —
 —
 —
 —
 —
Shares withheld for employee taxes upon conversion of restricted stock (236,707) —
 —
 —
 —
 —
 (4,272) —
 —
 (4,272)
Other comprehensive loss —
 —
 —
 —
 —
 —
 —
 —
 104
 104
Net income —
 —
 —
 —
 —
 —
 —
 34,818
 —
 34,818
Balance—December 31, 2017 77,588,018
 $—
 80,957,495
 $1
 (14,620,175) $(199,817) $534,159
 $308,905
 $(476) $642,772
Stock-based compensation expense —
 —
 —
 —
 —
 —
 16,044
 —
 —
 16,044
Issuance of common stock related to business combination 7,598,731
 —
 —
 —
 —
 —
 70,000
 —
 —
 70,000
Exercise of stock options 258,921
 —
 —
 —
 —
 —
 1,834
 —
 —
 1,834
Conversion Class B to Class A common stock 348,810
 —
 (348,810) —
 —
 ���
 —
 —
 —
 —
Issuance of shares related to restricted stock units and awards 1,168,541
 —
 —
 —
 —
 —
 —
 —
 —
 —
Shares withheld for employee taxes upon conversion of restricted stock (283,446) —
 —
 —
 —
 —
 (3,363) —
 —
 (3,363)
Other comprehensive loss —
 —
 —
 —
 —
 —
 —
 —
 (6,264) (6,264)
Adjustment to retained earnings for adoption of ASC 606 —
 —
 —
 —
 —
 —
 —
 628
 —
 628
Adjustment to retained earnings for adoption of ASU 2018-02 —
 —
 —
 —
 —
 —
 —
 102
 —
 102
Net (loss) —
 —
 —
 —
 —
 —
 —
 (39,164) —
 (39,164)
Balance—December 31, 2018 86,679,575
 $—
 80,608,685
 $1
 (14,620,175) $(199,817) $618,674
 $270,471
 $(6,740) $682,589

See notes to consolidated financial statements.


Table of Contents


Inovalon Holdings, Inc.

Consolidated Statements of Cash Flows

(inIn 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 
 Year Ended December 31,
 2018 2017 2016
Cash flows from operating activities: 
  
  
Net (loss) income$(39,164) $34,818
 $27,104
Adjustments to reconcile net income to net cash provided by operating activities: 
  
  
Stock-based compensation expense16,162
 17,318
 10,054
Depreciation52,742
 37,853
 28,078
Amortization of intangibles43,983
 15,236
 9,206
Amortization of premiums on short-term investments289
 1,958
 3,163
Amortization of debt issuance costs and debt discount3,138
 —
 —
Deferred income taxes(12,495) (6,665) (1,740)
Restructuring expense, non-cash7,075
 —
 —
Change in fair value of contingent consideration7,212
 (5,200) 706
Bargain purchase gain—
 (1,434) —
Other332
 406
 (332)
Changes in assets and liabilities: 
  
  
Accounts receivable3,280
 (977) 4,683
Prepaid expenses and other current assets(20,002) 3,346
 (6,198)
Income taxes receivable2,208
 3,293
 3,639
Other assets(4,209) (3,355) 4,071
Accounts payable and accrued expenses(6,007) 8,252
 (3,463)
Accrued compensation9,292
 3,030
 243
Other current and non-current liabilities17,672
 (5,373) 10,479
Deferred rent2,219
 (440) (770)
Deferred revenue6,674
 (4,360) 3,907
Net cash provided by operating activities90,401
 97,706
 92,830
Cash flows from investing activities: 
  
  
Maturities of short-term investments96,588
 174,416
 300,524
Sales of short-term investments161,772
 1,175
 31,549
Purchases of short-term investments—
 —
 (164,737)
Purchases of property and equipment(25,505) (32,565) (19,360)
Investment in capitalized software(39,469) (32,977) (19,668)
Acquisition, net of cash acquired of $23,850, $1,535 and $861, respectively(1,082,740) (3,490) (88,509)
Net cash (used in) provided by investing activities(889,354) 106,559
 39,799
Cash flows from financing activities: 
  
  
Repurchase of common stock—
 (93,586) (106,231)
Proceeds from credit facility borrowings, net of discount965,300
 —
 —
Repayment of credit facility borrowings(238,700) (30,000) (15,000)
Payments for debt issuance costs(18,269) —
 —
Acquisition-related contingent consideration—
 —
 (2,300)
Proceeds from exercise of stock options1,833
 4,967
 6,165
Capital lease obligations paid(1,201) (113) (116)
Tax payments for equity award issuances(3,363) (4,272) (1,498)
Net cash provided by (used in) financing activities705,600
 (123,004) (118,980)
(Decrease) Increase in cash and cash equivalents(93,353) 81,261
 13,649
Cash and cash equivalents, beginning of period208,944
 127,683
 114,034
Cash and cash equivalents, end of period$115,591
 $208,944
 $127,683
Supplemental cash flow disclosure: 
  
  
Cash (received) paid during the year for: 
  
  
Income taxes, net of refunds$(4,136) $962
 $11,117
Interest43,573
 5,972
 4,835
Non-cash investing activities: 
  
  
Capital lease obligations incurred5,677
 12,231
 —
Accruals of purchases of property, equipment12,097
 7,924
 816
Accruals for investment in capitalized software1,495
 2,711
 913
Acquisition consideration84,156
 —
 —

See notes to consolidated financial statements.


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"“Company”), is a leading technology company that combines advancedproviding cloud-based platforms empowering data-driven healthcare. Through the Inovalon ONE® Platform, Inovalon brings to the marketplace a national-scale capability to interconnect with the healthcare ecosystem, aggregate and analyze data analyticsin real-time, and data-driven intervention platformsempower the application of resulting insights to achievedrive meaningful impact in clinicalat the point of care. Leveraging its platform, unparalleled proprietary data sets, and quality outcomes, utilization,industry-leading subject matter expertise, Inovalon enables better care, efficiency, and financial performance across the healthcare landscape. Theecosystem. From health plans and provider organizations, to pharmaceutical, medical device, and diagnostics companies, Inovalon’s unique achievement of value thatis delivered through the Company delivers to its clients is achieved by turning dataeffective progression of “Turning Data into insightsInsight, and those insightsInsight 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)Action®. 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"(“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. Certain prior period amounts have been reclassified within the consolidated statements of operations and within the operating section of the consolidated statements of cash flows to conform with current period presentation. Such reclassifications had no impact on net income or net cash provided by operating activities as previously reported.

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;recognition; 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;


Table fair value of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

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

contingent consideration; depreciable lives of property, equipment and capitalized software; and useful lives of intangible assets. Actual results could differ from management'smanagement’s estimates, and such differences could be material to the Company'sCompany’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-termShort-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'stockholders’ equity. The Company evaluates its investments to assess whether those with unrealized loss positions are other than temporarily impaired. The Company considers impairmentsImpairments are considered 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 sell 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 2015.2018.

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'sCompany’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'sclient’s financial condition. Exposure to losses on receivables is principally dependent on each client'sclient’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 a significant clients, thoseclient, representing 10% or more of total revenue for the respective periods, is summarized as follows:

 Year Ended December 31,
 2018 2017 2016
Client A* 12% 17%

 
 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

The Company did not have accounts receivable from a significant clients, thoseclient, 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%
as of December 31, 2018 and December 31, 2017, respectively.
*
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,(“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


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'sCompany’s Credit Facilities (as defined in Note 9 below)“Note 10—Debt”) approximate fair value because of their floating rate structure.

Interest Rate Swaps—The Company uses interest rate swaps to mitigate the risk of a rise in interest rates. The Company applies ASC 815, Derivatives and Hedging and the interest rate swaps are recorded on the balance sheet at fair value as either assets or liabilities and any changes to the fair value are recorded through accumulated other comprehensive income and reclassified into interest expense in the same period in which the hedged transaction is recognized in earnings. Cash flows from interest rate swaps are reported in the same category as the cash flows from the items being hedged.

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Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

*

Leasehold improvements

*
Assets under capital leases

*

(*)
lesser*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 expenseexpensed 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.


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'ssoftware’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.

period.

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

 2Useful Life
Technology3 - 1013 years

Trademark

and trade names		53 - 1017 years

Database

10 years

Customer relationships

48 - 15.75 years

Non-compete agreements

Contractual term
In-process research and developmentIndefinite

At least annually, or whenever events or changes in circumstances indicate a revision to the useful life, the Company reviews the remaining useful lives of its definite-lived intangible assets. On an annual basis, the Company reviews its intangible assetsindefinite-lived in process research and development for impairment based on estimated future undiscounted cash flows attributable tountil 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.research and development is completed or abandoned. There were no impairment charges on indefinite-lived intangible assets for the years ended December 31, 20152018 and 2014.

2017.

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. Goodwillamortized and 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
Historically, the annual goodwill 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,st. During 2018, the Company concluded that there were no indicators of impairment and therefore it was more likely than not thatchanged the fair valuedate of the goodwill exceeded itsimpairment assessment to November 1st for the year ended December 31, 2018 and thereafter. The Company believes this change in the Company’s measurement date does not represent a material change in method of

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Table of Contents
Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

applying the accounting principal as the new and old assessment dates are close in proximity and fall within the same quarter. Additionally, the change does not produce different results as similar valuation assumptions are used and the carrying amount,values are stable. The change in the date of the Company’s goodwill impairment analysis will allow for each reporting unit, and there was no reasonmore time to perform the two-step impairment test. The two-step impairment test comparesanalysis and prepare the valuations for certain reporting units.
Impairment is the condition that exists when the carrying amount of a reporting unit's carrying value tounit exceeds 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,unit 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, thenrecord an impairment loss is recorded forin the amount equal to the difference between the carrying amountfair value and the impliedcarrying value.
Significant judgment in testing goodwill for impairment includes assigning assets and liabilities to the reporting unit and assessing or determining the fair value of each reporting unit based on the goodwill.Company’s best estimates and assumptions, as well as other information including valuations that utilize customary valuation procedures and techniques. The Company completedtests its goodwill for impairment at the reporting unit level which is one level below the operating segment and has identified four reporting units: Inovalon, ABILITY, Avalere and Creehan. Based on the Company’s annual impairment testevaluation performed as of December 31, 2014 which resulted inNovember 1, 2018, the Company concluded that there was no impairment of goodwill. Our 2014 impairment test was based


TableRefer to “Note 9—Goodwill and Intangible Assets” for a summary of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(changes 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.

goodwill.

Valuation of Long-Lived Assets—The Company reviews long- livedlong-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, 20152018, and 2013.2017.

Revenue Recognition—The Company generates a substantial majority of its revenue through the sale or subscription licensing of its platform solutions, as well as revenue from related arrangements for advisory, implementation, and support services.
The Company recognizes revenue when itperformance obligations under the terms of a contract are satisfied. A performance obligation is realized (or realizable) and earned (i.e., when services have been rendereda contractual promise to transfer a distinct good or delivery of applicable deliverables has occurred).service to the customer. This occurs when persuasive evidencethe control of an arrangement exists, the product or service has been performed or delivered, feesis transferred to the customer.
The majority of the Company’s platform solutions contracts contain a series of separately identifiable and distinct services that represent performance obligations that 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.satisfied over time. The Company allocates revenue to its cloud-based data analytics and data-driven intervention platform services usingby determining the relativestandalone selling price method.of each performance obligation. The Company has generally been unable to establish vendor-specific objective evidencedetermination 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 ofstandalone selling price to allocate arrangement consideration to its contractual service elements.

        The Company hasfor each performance obligation is determined a best estimatebased on the terms of selling price by considering several externalthe contract and internal factors including, but not limited to, pricing practices, margin objectives, competition, customer demand, internal costs, and overall economic trends.

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

Revenue is generally recognized as cloud-based data analytics and data-driven intervention services are performed and information is deliveredon platform offerings over the contract term. For these contracts, the Company has determined that it will use the practical expedient under ASC 606-10-55-18 to clients, which generally align withrecognize revenue when it has the Company'sright to invoice. The Company qualifies for this practical expedient because the 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 deliveredcorresponds directly with the value transferred 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 customer.

The Company also generates revenuesrevenue from data-driven advisory, implementation, and support 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.


Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

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

The Companyprimarily enters into arrangements for data-driven advisory services under fixed-price, time and materials, or retainer-based contracts. Revenues under fixed-price and retainer-based contracts are recognized ratably over the contract period or retainer based contracts.upon contract completion. 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 fromwhen the license of software ratably overCompany has the life ofright to invoice the agreement. The Company beginscustomer using the allowable practical expedient under ASC 606-10-55-18 since the right to recognize revenue upon execution of a signed agreement and delivery ofinvoice the software, provided thatcustomer corresponds with the software license fees are fixed and determinable, and collection of the resulting receivable is reasonably assured.

performance obligations completed.

Certain of the Company'sCompany’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'sCompany’s estimated future billing adjustments resulting from client concessions or resolutions of billing disputes.

Cost of Revenue—Cost of revenue consists primarily of employee-related 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.severance for employees that provide direct revenue-generating services to clients. Cost of revenue also includes expenses associated with the integration and verification of data and other service costs incurred to fulfill the Company'sCompany’s revenue contracts. Cost of revenue does not include allocated amounts for occupancy expense, and depreciation and amortization.


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Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Research and Development—Research and development expenses consist primarily of employee-related costs.expenses. 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,


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 developsprovides cloud-based data analytics and data-driven intervention platforms under a shared infrastructure 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 or subscription licensing of its platform solutions, as well as revenue from related arrangements for advisory, implementation, and support services of one group of similar products and related services—product offerings—proprietary datasets, core connectivity, 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'sCompany’s chief operating decision maker ("CODM"(“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'sCompany’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'sCompany’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 plusand 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 plusand 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.

As a result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), which was signed into law on December 22, 2017 and was effective January 1, 2018, the Company remeasured the ending deferred tax assets to reflect the decrease in the federal corporate tax rate resulting in a tax benefit. Refer to “Note 16—Income Taxes.”

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


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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.method or using a graded vest schedule for RSAs with a performance condition and ratable vest terms.

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-basedstock-based awards represent management'smanagement’s best estimates.

The Company measures RSUs and RSAs that vest upon satisfaction of a service condition, a performance condition, or a liquidity condition, if such a condition isconditions are 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'sCompany’s common stock. Compensation expense is recognized based upon the satisfaction of the requisite service, and or liquidity condition as of that date, and/or the probability

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Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

of achievement of the specified performance conditions following the straight-line method netor using a graded vest method, depending on the specific terms 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.

award.

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'sCompany’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'sCompany’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 IssuedAdopted Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB"(“FASB”) issued updatedAccounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers and subsequent clarifying guidance on revenue from contracts with customers. This revenue recognition guidance supersedes existing


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.(“ASU 2014-09”). 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 achievingCompany adopted this principle. On July 9, 2015, the FASB approved a one year deferral of the effective date of ASU 2014-09 tostandard on January 1, 2018. ASU 2014-09 may be applied either retrospectively or through2018 using 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 2014-09approach. Refer 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.

“Note 4—Revenue.”

In June 2014,August 2016, the FASB issued ASU 2014-12,2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update amends the guidance in Accounting Standards Codification (“ASC”) 230, Statement of Cash Flows, and clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The Company adopted the requirements of the new standard in the first quarter of 2018 and there was no material impact on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Share-Based Payments WhenHedging Activities (“ASU 2017-12”). The update amends the Termscurrent hedge accounting model and eliminates the requirement to separately measure and report hedge ineffectiveness. This guidance also requires, for qualifying hedges, the entire change in the fair value of an Award Provide a Performance Target Could Be Achieved Afterhedging instrument to be presented in the Requisite Service Period,same income statement line item as the hedged item. The update also eases documentation and assessment requirements, modifies certain disclosure requirements, and modifies the method of accounting for components excluded from the assessment of hedge effectiveness. The Company adopted the requirements of the new standard in the second quarter of 2018 concurrent with entering into four interest rate swaps. Refer to “Note 7—Fair Value Measurements.”
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. 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 areis effective for all public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company does not expect2018. This guidance allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from Tax Act. Early adoption is permitted in any interim period or fiscal year before 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 acquisitioneffective date. ASU No. 2015-16 is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. The Company early adopted the provisionsrequirements of ASU No. 2015-16 during the fourthnew standard in the first quarter of 2015. Under the previous guidance, an acquirer must recognize adjustments2018, and elected 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 onreclassify 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 facetax effects of the Tax Act of $0.1 million from other comprehensive 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 adjustmentto retained earnings. Refer to the provisional amounts had been recognized asconsolidated statements 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.

comprehensive (loss) income.

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Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

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

        In November 2015, the FinancialRecently Issued Accounting Standards Board ("FASB")

In February 2016, the FASB issued Accounting Standards Update ("ASU"ASU 2016-02, Leases (Topic 842) and, in July 2018, issued subsequent clarifying guidance (collectively, “ASU 2016-02”) 2015-17, Balance Sheet Classification. ASU 2016-02 requires the recognition of Deferred Taxes, which will require entities to present all deferred taxlease assets ("DTAs") and deferred taxlease liabilities ("DTLs") as non-current on the balance sheet.sheet and enhanced disclosure about leasing arrangements. The lease asset represents a right of use asset and the lease liability represents the obligation to make lease payments. This guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early2018. The Company has finalized its portfolio of leases to determine the impact that will be recorded to the balance sheet, reviewed applicable lease agreements, and is in the process of implementing changes to our processes and internal controls. The standard initially required the use of a modified-retrospective method. In July 2018, the FASB issued updated guidance which allows for an additional transition method which requires that the cumulative effect of applying the new standard is recognized as an adjustment to the opening retained earnings balance. The Company adopted the

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Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

new standard effective January 1, 2019 using the additional transition approach and has elected all applicable practical expedients under ASC 842-10-65-1. The Company is finalizing the calculation of the financial statement impact and currently expects the right of use asset to be in the approximate range of $34 million and $35 million and currently expects the lease liability to be in the approximate range of $36 million and $37 million. The adjustment to retained earnings is currently expected to be in the approximate range of $0.5 million to $1.5 million. The Company will provide additional disclosures as required by the new standard in the first quarter of 2019.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent clarifying guidance (“ASU 2016-13”). ASU 2016-13 replaces the current incurred loss impairment method with a methodology that reflects the amortized cost basis net of expected credit losses that are calculated based on certain relevant information. The standard also amends the credit loss guidance for available-for-sale debt securities and requires the measurement and recognition of an expected allowance for credit losses for financial assets held at amortized cost. This guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is in the process of evaluating the timing and impact of adoption on the consolidated financial statements and notes disclosures.
In June 2018, the FASB issued ASU 2018-07, Compensation–Stock Compensation (Topic 718). ASU 2018-07 expands the scope of ASC 718, Compensation–Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting, to include share-based payment transactions for acquired goods and services from non-employees. This update includes changing the accounting for non-employee stock-based compensation as it relates to the award measurement date, the fair value measurement of the awards, and forfeitures, among other changes to align the accounting with ASC 718. This guidance is permitted,effective for public companies for fiscal years, and entities may choose whetherinterim periods within those fiscal years, beginning after December 15, 2018. The Company adopted the new standard effective January 1, 2019 and expects no material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to adopt thisthe Requirements for Fair Value Measurement. This update prospectivelychanges the fair value measurement disclosure requirements of ASC 820. The standard consists of removals, modifications, and additions to the existing disclosure requirements. This guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is in the process of evaluating the timing and impact of adoption on the notes disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or retrospectively. Weobtain internal-use software. The standard requires that an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. This guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is in the process of evaluating the timing and impact of adoption on the consolidated financial statements and notes disclosures.
In October 2018, the FASB issued ASU 2018-17, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes in response to the potential transition away from the London Interbank Offer Rate (“LIBOR”).This update permits the use of the Overnight Index Swap (“OIS”) Rate based on the Secured Overnight Financing Rate (“SOFR”) as a U.S. benchmark interest rate for hedge accounting purposes under ASC Topic 815. For public companies that have electedadopted ASU 2017-12, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company adopted the guidance under ASU 2017-12 which applies to early adopt ASU 2015-17 and changeinterest rate swap agreements that fix the LIBOR component on our method2018 Credit Facility. The Company will apply the requirements of classifying DTAs and DTLs as either current or non-current to classifying all DTAs and DTLs as non-current, and have chosen to applythe new standard on a prospective method. Prior balance sheets were not retrospectively adjusted.

basis beginning January 1, 2019 for any new or redesignated hedging agreements. Refer to “Note 7—Fair Value Measurements.”

3. BUSINESS COMBINATIONS
2018 Acquisition
ABILITY Network, Inc.
On April 2, 2018, the Company completed the acquisition (the “ABILITY Acquisition”) of Butler Group Holdings, Inc., a Delaware corporation, and its wholly-owned subsidiaries, including, without limitation, ABILITY Network Inc., a Delaware corporation (“ABILITY”), for aggregate consideration of $1.19 billion in cash and restricted shares of our Class A common stock (the “Purchase Price”).

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Table of Contents
Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

3. BUSINESS COMBINATIONS(Continued)

ABILITY is a leading cloud-based Software-as-a-service (“SaaS”) technology company helping to simplify the administrative and clinical complexities of healthcare. Through the myABILITY® (in thousands, except share amounts)software platform, an integrated set of cloud-based applications for providers, ABILITY provides core connectivity, administrative, clinical, and quality analysis, management, and performance improvement capabilities to more than 44,000 acute, post-acute and ambulatory point-of-care provider facilities. The extensive datasets, on-demand compute capability, advanced analytics, and broad healthcare ecosystem connectivity enabled by the Inovalon ONE

        On September 1, 2015, (the "Acquisition Date"), pursuant® Platform are expected to provide a significant expansion of application offerings within the myABILITY® software platform while also expanding the nature and reach of high-value solutions for Inovalon’s existing payer, pharma, and device client-base. The combination of Inovalon and ABILITY creates a vertically integrated cloud-based platform empowering the achievement of real-time, value-based care from payers, manufacturers, and diagnostics all the way to the provisionspatient’s point of care.

A summary of the Sharecomposition of the stated Purchase Agreement, ("Price and fair value of the stated Purchase Price is as follows (in thousands):
Purchase Price$1,220,800
Working capital adjustment(630)
Shareholder payable adjustment576
Subtotal1,220,746
Fair value adjustments: 
Restricted stock marketability discount(30,000)
Total fair value purchase price$1,190,746
The composition of the fair value of the consideration transferred is as follows (in thousands):
Cash$1,107,220
Issuance of Class A common stock70,000
Contingent consideration14,156
Working capital adjustment(630)
Total fair value purchase price$1,190,746
The ABILITY Acquisition was accounted for using the acquisition method of accounting under ASC No. 805, Business Combinations, which requires that assets acquired and liabilities assumed are recognized at their estimated fair values. The excess of the aggregate consideration over the estimated fair values has been allocated to goodwill.
In addition, ASC No. 805 requires that the consideration transferred be measured at the closing date of the ABILITY Acquisition at the then-current market prices. The preliminary value of consideration and the purchase agreement"),price allocation is subject to adjustment until the Company acquired 100 percenthas completed its analysis within the measurement period. The Company is in the process of reviewing its assumptions related to the fair value of the consideration including any working capital adjustments and estimates of tax related matters. The Purchase Price allocation is preliminary and the finalization of the Company’s Purchase Price allocation may result in changes in the valuation of assets acquired and liabilities assumed. The Company will finalize the Purchase Price allocation as soon as practicable in accordance with ASC No. 805, but not to exceed one year following the ABILITY Acquisition.

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Table of Contents
Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

3. BUSINESS COMBINATIONS(Continued)

The preliminary estimates of fair value represent the Company’s best preliminary estimates and preliminary valuations. The following table summarizes the net assets acquired and liabilities assumed (in thousands):
 
Preliminary
Fair Value
Cash and cash equivalents$23,850
Accounts receivable16,739
Income tax receivable551
Prepaid expenses and other current assets3,025
Property and equipment3,095
Goodwill(1)(2)
771,097
Intangible assets(1)
490,000
Other assets1,252
Accounts payable and accrued expenses(6,863)
Deferred revenue(7,000)
Other current liabilities(507)
Other liabilities(5,291)
Deferred tax liabilities(2)
(99,202)
Total consideration transferred$1,190,746

(1)The Company allocated a portion of the goodwill associated with the ABILITY Acquisition to the Inovalon reporting unit based on expected revenue synergies. As a result, the fair value of the customer relationships intangible asset was adjusted by $23.0 million during the third quarter of 2018.
(2)The Company recognized a net purchase accounting adjustment of $1.6 million resulting in a decrease to goodwill. This adjustment was driven by a $7.2 million decrease to deferred tax liabilities primarily attributable to the tax impact related to the reduction to the fair value of the customer relationships intangible assets, which was partially offset by a $5.0 million increase in deferred tax liabilities related to tax basis goodwill and provision-to-tax adjustments from ABILITY’s 2017 tax return filings and an adjustment of $0.6 million to the shareholder payable attributable to the ABILITY Acquisition.
The amounts attributed to identified intangible assets are summarized in the table below (in thousands):
 Estimated
Useful Life		 Preliminary
Fair Value		 
Measurement
Period
Adjustments
 
Adjusted Preliminary Fair
Value
Customer relationships13 years $408,000
 $(23,000) $385,000
Technology13 years 86,000
 —
 86,000
Tradenames17 years 19,000
 —
 19,000
Total intangible assets  $513,000
 $(23,000) $490,000
Acquisition-related costs were expensed as incurred. For the twelve months ended December 31, 2018, the Company incurred acquisition-related costs of $6.5 million. Acquisition-related costs are recognized within “General and administrative” expenses in the accompanying consolidated statements of operations.
The following table presents revenue and loss before taxes of ABILITY since the acquisition date, April 2, 2018, included in the consolidated statements of operations (in thousands):
 Total
Revenue$113,578
Loss before taxes$(3,902)
The following pro forma financial information is based on Inovalon’s and ABILITY’s historical consolidated financial statements as adjusted to give effect to pro forma events that are (1) directly attributable to the ABILITY Acquisition, (2) factually

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Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

3. BUSINESS COMBINATIONS(Continued)

supportable, and (3) with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results. The pro forma adjustments include, but are not limited to: (i) amortization of acquired intangible assets, (ii) net increase to interest expense resulting from the extinguishment of the 2014 Credit Facilities and historical ABILITY debt, borrowings under the 2018 Term Facility and the amortization of related debt issuance costs, and (iii) elimination of non-recurring acquisition and integration-related expenses. The following pro forma financial information is unaudited and gives effect to the transactions as if they had occurred on January 1, 2017 (in thousands):
 Year ended December 31,
 2018 2017
Revenue$565,040
 $589,197
Loss before taxes$(56,016) $(5,554)
The unaudited pro forma revenue and loss before taxes was prepared for informational purposes only based on estimates and assumptions that the Company believes to be reasonable and is not necessarily indicative of the results of operations that would have occurred if the ABILITY Acquisition had been completed on the date indicated nor of the future financial position or results of operations following completion of the ABILITY Acquisition.
2017 Acquisition
ComplexCare Solutions
On July 6, 2017, the Company completed the acquisition of ComplexCare Solutions, Inc. and ComplexCare Solutions IPA, LLC (together, “CCS”). CCS is a company which provides technology-enabled interventions and member engagement coordination services for a number of payers and employers throughout the United States. The 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. The final purchase price was allocated to identifiable assets acquired and liabilities assumed based upon valuation procedures performed to-date. The Company acquired all of the capital stock of Avalere Health,CCS for approximately $4.5 million in cash and the settlement of an existing payable to CCS of $2.3 million. The Company acquired approximately $9.8 million of assets, including approximately $1.5 million of cash, and approximately $3.9 million of liabilities. The net assets acquired exceeded the consideration paid by approximately $1.4 million, and as such the Company recorded a bargain purchase gain in general and administrative expenses.
2016 Acquisition
Creehan Holding Co., Inc. ("Avalere"
On October 3, 2016, the Company completed its acquisition of Creehan Holding Co., Inc. (“Creehan”). AvalereCreehan, through its subsidiary Creehan & Company Corporation, is a leading provider of data-driven advisory services and business intelligencespecialty pharmacy software 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 portionsindustry. Pursuant to the terms of the statedStock Purchase Agreement between the Company and Creehan (the “Stock Purchase Agreement”), Creehan became a wholly owned subsidiary of Inovalon.
Pursuant to the terms of the Stock Purchase Agreement, Inovalon acquired all of the issued and outstanding capital stock of Creehan for an aggregate purchase price of $140,000 are contingent upon$130.0 million, which was comprised of $120.0 million in cash and $10.0 million in shares of Class A common stock of the achievement of financial and operational objectives, and other portions are subject to continued employment provisions.Company. The Company completed the acquisition of AvalereCreehan through the use of cash on hand and the issuance of 235,737651,355 shares subject to sale restrictions, of Class A common stock.stock, subject to resale restrictions. Certain components, which are referred to below as contingent consideration, of the aggregate purchase price are subject to the achievement of financial performance objectives. 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 andCompany acquired Creehan for the assembled workforce, technology platform, client base, and to accelerate entry into the expansivespecialty pharmacy software market. Transaction costs in connection with the acquisition are expensed as incurred and adjacent marketsare included in general and administrative expenses. The results of operations related to Creehan are included in our consolidated statements of operations beginning from the pharmaceutical and life sciences industry.

date of acquisition.


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Table of Contents
Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

3. BUSINESS COMBINATIONS(Continued)

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

follows (in thousands):

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 
​​​ ​ ​
​​​​​
​​​ ​ ​
Share Purchase Agreement purchase price$130,000
Working capital adjustment755
Subtotal130,755
Fair value adjustments: 
Marketability restrictions on equity consideration(2,236)
Contingent consideration probability of achievement adjustment(12,400)
Post-acquisition compensation expense(5,952)
Total fair value purchase price$110,167

The Company finalized the working capital adjustment in the third quarter of 2017 resulting in an increase of approximately $0.4 million to the initial purchase price allocation. After adjusting for this difference the composition of the fair value purchase priceof the consideration transferred is as follows:

follows (in thousands):

Cash

 $118,755 $89,803

Issuance of Class A common stock

 3,847 7,764

Contingent consideration

 2,300 12,600
​​ ​ ​

Total fair value purchase price

 $124,902 $110,167
​​ ​ ​
​​​
​​ ​ ​

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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

The Company finalized the fair value includedof acquired assets, assumed liabilities and tax related matters 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 allocationthird quarter 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.

2017. The following table summarizes the final purchase price allocation to assets acquired and liabilities assumed, including identification of measurement period adjustments:

adjustments (in thousands):
 
Recorded
Value
Cash and cash equivalents$861
Accounts receivable9,048
Other current assets171
Property, equipment and capitalized software641
Intangible assets(1)
50,900
Goodwill(2)
51,362
Total assets acquired112,983
Current liabilities(916)
Deferred revenue(1,900)
Total liabilities assumed(2,816)
Net assets acquired$110,167

 
 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.
(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. The goodwill attributable to the Creehan acquisition is deductible for tax purposes.

F-19
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:

below (in thousands):

 
 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 
​​​​​ ​​​ ​ ​​ ​​
​​​​​​​​​​​​​
​​​​​ ​​​ ​ ​​ ​ ​
 
Weighted
Average
Useful Life
 
Recorded
Value
Customer relationships8 years $36,500
Tradename4 years 4,000
Technology4 years 8,800
In-process Research and Developmentindefinite 1,600
Total intangible assets  $50,900

Acquisition-related costs were expensed as incurred. For the year ended December 31, 2015,2016, the Company incurred acquisition-related costs of $1,483$1.6 million recognized within "General“General and administrative"administrative” expenses in the accompanying consolidated statements of operations.

Avalere

Creehan Results and Pro Forma Impact of Acquisition

The following table presents revenue and loss before taxes of AvalereCreehan since the acquisition date, September 1, 2015,October 3, 2016, included in the consolidated statements of operations for the year ended December 31, 2015:

and includes amortization expense related to acquired intangible assets (in thousands):

Year Ended December 31,

 Total 2016

Revenue

 $17,492 $8,106

Loss before taxes

 $(29)$(976)

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 AvalereCreehan had occurred at the beginning of the earliest period presented:

presented (unaudited, in thousands):


 Unaudited 

 Year Ended
December 31,		 Year Ended December 31,

 2015 2014 2016

Pro forma revenue

 $469,784 $408,671 $453,613

Pro forma income before taxes

 $108,977 $92,635 $44,203

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.REVENUE
The Company adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective approach. Revenues for periods beginning after January 1, 2018 are presented under ASC 606, Revenue from Contracts with Customers, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605. The Company recorded a cumulative effect net adjustment to increase retained earnings by $0.6 million as of January 1, 2018. The impact as a result of adopting ASC 606 was an increase of $0.7 million in revenue and an increase of $0.4 million in expense resulting from deferred commissions for the year ended December 31, 2018.
These adjustments primarily related to commissions for certain contracts which are now expensed over the remaining life of the contracts and credits provided to customers which are recorded as a reduction to revenue over the applicable service period. For the remaining contracts, the Company has elected to use the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.
On April 2, 2018, concurrent with the ABILITY Acquisition (as defined in “Note 3—Business Combinations”), the Company was required to comply with ASC 606 and adopted ASU 2014-09 with respect to ABILITY. There was no material impact on the consolidated financial statements as a result of adopting ASU 2014-09.

F-20
Table of Contents
Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

4. REVENUE (Continued)

The Company primarily derives its revenues through the sale or subscription licensing of its platform solutions and services. The following table disaggregates revenue by offering (in thousands):
 Year Ended December 31,
 2018 
2017(1)
Platform solutions(2)
$466,544
 $382,778
Services(3)
61,132
 66,580
Total revenue$527,676
 $449,358

(1)Prior period amounts have not been adjusted under the modified retrospective method.
(2)Platform solutions include arrangements for technology-based offerings representing subscription-based cloud-based platform offerings and legacy platform solutions that are not cloud-based and not billed under a subscription-based contract structure.
(3)Services include advisory, implementation, and support services under time and materials, fixed price, or retainer-based contracts.
Performance Obligations
A performance obligation is a contractual promise to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation based on standalone selling price and revenue is recognized when the performance obligations under the terms of a contract are satisfied. The determination of standalone selling price for each performance obligation requires judgment based on the terms of the contract.
The majority of the Company’s platform solutions contracts contain a series of separately identifiable and distinct services that represent performance obligations that are satisfied over time. The Company allocates revenue to platform solutions by determining the standalone selling price of each performance obligation. Revenue is generally recognized on our platform offerings over the contract term. For these contracts, the Company has determined that it will use the practical expedient under ASC 606-10-55-18 to recognize revenue when it has the right to invoice. The Company qualifies for this practical expedient because the right to invoice corresponds directly with the value transferred to the customer.
The Company allocates revenue to its service arrangements for advisory, implementation, and support services based on contractually agreed upon billing rates applied to direct labor hours expended plus the costs of other items used in the performance of the contract. The Company concluded that it will recognize revenue when it has the right to invoice the customer using the allowable practical expedient since the right to invoice the customer corresponds with the performance obligations completed. Revenues under fixed-price and retainer-based contracts are recognized ratably over the contract period or upon contract completion.
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. Historically, the Company has met contractually specified performance obligations.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, and deferred revenue. 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 when the achievement of specific events as defined by each contract occurs. The Company had an unbilled receivables balance of $20.5 million and $14.1 million as of December 31, 2018 and December 31, 2017, respectively. The increase in the unbilled receivables balance was primarily driven by the timing of new contract signings, the timing of billings, and $2.3 million related to the acquisition of ABILITY. Refer to “Note 3—Business Combinations.” Unbilled receivables are classified as accounts receivable on the consolidated balance sheet. Advanced billings to clients in excess of revenue earned are recorded as deferred revenue until the aforementioned revenue recognition criteria are met.
The Company had deferred commissions of $5.7 million as of December 31, 2018 and no deferred commissions as of December 31, 2017. The change in deferred commissions was primarily driven by $4.9 million related to the acquisition of ABILITY.
The Company had a deferred revenue balance of $20.6 million and $7.0 million as of December 31, 2018 and December 31, 2017, respectively. The change in the deferred revenue balance was primarily driven by $9.5 million related to the acquisition of

F-21
Table of Contents
Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

4. REVENUE (Continued)

ABILITY. Revenue recognized during the year ended December 31, 2018 that was included in the deferred revenue balance at the beginning of the year, or as of the acquisition date as it relates to ABILITY, was $11.2 million.
5. NET (LOSS) 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 presentedpresents the impact on net income per share (EPS) of this reorganization(“EPS”) by calculating EPS based on the newly authorized, issued and outstanding shares of Class A and Class B


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 awardsRSAs 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'sCompany’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.

If the Company incurs a loss from continuing operations, losses are not allocated to participating securities.

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 (loss) income per share of common stock is computed by dividing the net (loss) 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.

If the Company incurs a loss from continuing operations, diluted EPS is computed in the same manner as basic EPS.

F-22
Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

4.


5. NET (LOSS) 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:

follows (in thousands, except per share amounts):

 
 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 
​​​ ​ ​​ ​ ​​​ ​
​​​​​​​​​​​
​​​ ​​​ ​ ​​ ​ ​
 Year Ended December 31,
 2018 2017 2016
Basic 
  
  
Numerator: 
  
  
Net (loss) income$(39,164) $34,818
 $27,104
Undistributed earnings allocated to participating securities—
 (990) (161)
Net (loss) income attributable to common stockholders—basic$(39,164) $33,828
 $26,943
Denominator: 
  
  
Weighted average shares used in computing net (loss) income per share attributable to common stockholders—basic145,389
 142,225
 150,048
Net (loss) income per share attributable to common stockholders—basic$(0.27) $0.24
 $0.18
Diluted 
  
  
Numerator: 
  
  
Net income attributable to common stockholders—diluted$(39,164) $33,828
 $26,943
Denominator: 
  
  
Number of shares used for basic EPS computation145,389
 142,225
 150,048
Effect of dilutive securities—
 512
 907
Weighted average shares used in computing net income per share attributable to common stockholders—diluted145,389
 142,737
 150,955
Net income per share attributable to common stockholders—diluted$(0.27) $0.24
 $0.18

The computation of diluted EPS does not include 645, and 1,234, and 4,905 equitycertain awards, on a weighted average basis, for the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, respectively, because their inclusion would have an anti-dilutive effect on EPS.

The awards excluded because of their anti-dilutive effect are as follows (in thousands):
 Year Ended December 31,
 2018 2017 2016
Awards excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive89
 88
 44
6. SHORT-TERM INVESTMENTS
As of December 31, 2018, short-term investments consisted of the following (in thousands):
 Amortized Cost 
Gross Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
Available-for-sale securities: 
  
  
  
Corporate notes and bonds$7,018
 $—
 $(18) $7,000
Total available-for-sale securities$7,018
 $—
 $(18) $7,000

F-23
Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)
6.

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


As of December 31, 2015,2017, short-term investments consisted of the following:

following (in thousands):

 
 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 
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​
​​​ ​ ​​ ​​​ ​ ​​ ​ ​
 Amortized Cost 
Gross Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
Available-for-sale securities: 
  
  
  
Corporate notes and bonds$232,048
 $3
 $(572) $231,479
U.S. agency obligations15,341
 —
 (99) 15,242
U.S. treasury securities20,735
 —
 (168) 20,567
Total available-for-sale securities$268,124
 $3
 $(839) $267,288

        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:

shown (in thousands):

 
 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 $— 
​​​ ​ ​​ ​ ​
​​​​​​​​
​​​ ​ ​​ ​ ​
 December 31,
 2018 2017
Due in one year or less$7,000
 $204,725
Due after one year through two years—
 62,563
Total$7,000
 $267,288

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.position. 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'sCompany’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'sinvestment’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.

2018.

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 beenwere in a gross unrealized loss position, for less than 12 months,as of December 31, 2018, aggregated by investment category as of December 31, 2015:

(in thousands):

 
 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)
​​​ ​ ​​ ​ ​
​​​​​​​​
​​​ ​ ​​ ​ ​
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
Corporate notes and bonds$7,000
 $(18)

6. 7.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:

2018 (in thousands):

 
 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 
​​​ ​ ​​​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​​ ​ ​
 Level 1 Level 2 Level 3 Total
Cash Equivalents: 
  
  
  
Money market funds$34,064
 $—
 $—
 $34,064
Short-term investments: 
  
  
  
Corporate notes and bonds—
 7,000
 —
 7,000
Other current liabilities: 
  
  
  
Interest rate swaps—
 (1,778) —
 (1,778)
Contingent consideration—
 —
 (15,182) (15,182)
Other liabilities       
Interest rate swaps—
 (8,151) —
 (8,151)
Contingent consideration—
 —
 (16,642) (16,642)
Total$34,064
 $(2,929) $(31,824) $(689)


F-24
Table of Contents
Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

7.FAIR VALUE MEASUREMENTS (Continued)

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, 2017 (in thousands):
 Level 1 Level 2 Level 3 Total
Cash equivalents: 
  
  
  
Money market funds$162,347
 $—
 $—
 $162,347
Short-term investments: 
  
  
  
Corporate notes and bonds—
 231,479
 —
 231,479
U.S. agency obligations—
 15,242
 —
 15,242
U.S. treasury securities—
 20,567
 —
 20,567
Other current liabilities: 
  
  
  
Contingent consideration—
 —
 (7,400) (7,400)
Total$162,347
 $267,288
 $(7,400) $422,235
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

The following table presents our financial instruments measured at it fair value in conjunction withusing unobservable inputs (Level 3) as of the acquisition of Avalere. years ended December 31 (in thousands):
 
Fair Value
Measurements Using
Unobservable Inputs
(Level 3)
 2018 2017
Balance, beginning of period$(7,400) $(12,600)
Fair value adjustment(1)
(6,159) 5,200
Accretion expense (recognized in general and administrative expenses)(1,053) —
Contingent consideration attributable to and assumed from ABILITY Acquisition(17,212) —
Total$(31,824) $(7,400)

(1)The Company recognized an adjustment of $5.6 million in general and administrative expenses related to the change in fair value of contingent consideration, and an adjustment of $0.6 million recognized in goodwill, which was a purchase accounting adjustment attributable to the ABILITY Acquisition.
2018 Credit Facilities
The Company determinesrecords debt on the balance sheet at carrying value. The estimated fair value of its contingent consideration, usingthe Company’s debt is determined based on Level 32 inputs underincluding current market rates for similar types of borrowings. The following table presents the carrying value and fair value hierarchy, consisting of information provided by observing certain operating metrics alongthe Company’s debt (including the current portion thereof) as of December 31, 2018 (in thousands):
 December 31,
2018
Carrying amount$949,314
Fair value$922,021
Interest Rate Swaps
In connection with management's own assumptions.the 2018 Credit Agreement, the Company entered into four interest rate swaps during the second quarter of 2018, each of which mature in March 2025, to mitigate the risk of a rise in interest rates. These interest rate swaps mitigate the exposure on the variable component of interest on the Company’s 2018 Credit Facility. The Company adjusts

interest rate swaps fix the LIBOR rate component of interest on $700.0 million of the 2018 Term Facility at a weighted average rate of approximately 2.8%. See “Note

F-25
Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

7.

6. FAIR VALUE MEASUREMENTS ((Continued)


10—Debt” for additional information. These interest rate swaps are designated as cash flow hedges and are deemed highly effective under ASC 815, Derivatives and Hedging. The interest rate swaps are recorded on the balance sheet at fair value as either assets or liabilities and any changes to the fair value are recorded through accumulated other comprehensive income and reclassified into interest expense in thousands) (Continued)

the estimatedsame period in which the hedged transaction is recognized in earnings. Cash flows from interest rate swaps are reported in the same category as the cash flows from the items being hedged.

The following table presents the fair value of its contingent consideration quarterly. interest rate swaps on the balance sheet as of December 31, 2018 (in thousands):
  Liability Derivative
  Balance Sheet Location Fair Value
Interest rate swap contract Other current liabilities $(1,778)
Interest rate swap contract Other liabilities $(8,151)
The changefollowing table presents the location and amount of gains and losses on interest rate swaps included in value is reflected in our statementsother comprehensive income (“OCI”) and the statement of operations as gain (loss) from contingent consideration valuation as a component of general and administrative expenses. Duringfor the year ended December 31, 20152018 (in thousands):
  Gain (Loss) recognized in OCI Statement of Operations Location (Gain) Loss reclassified from OCI
Interest rate swap contract $(12,907) Interest expense $2,978
The net amount of accumulated other comprehensive income expected to be reclassified to interest expense in 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.next 12 months is $1.9 million.

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

Property, equipment and capitalized software consisted of the following:

following (in thousands):


 December 31, December 31,

 2015 2014 2018 2017

Office and computer equipment

 $30,286 $23,844 $76,748
 $55,840

Leasehold improvements

 12,428 11,999 13,158
 10,096

Purchased software

 12,351 9,916 45,304
 26,425

Capitalized software

 60,735 39,432 128,356
 114,569

Furniture and fixtures

 5,391 4,894 6,412
 4,670

Land

 390 390 390
 390

Building

 1,797 1,750 
Buildings14,028
 14,028

Work in process

 3,333 2,917 5,811
 16,323
​​ ​​​ ​ ​

Total

 126,711 95,142 290,207
 242,341

Less: accumulated depreciation and amortization

 (61,680) (44,180)(148,449) (116,573)
​​ ​ ​​ ​ ​

Property, equipment and capitalized software, net

 $65,031 $50,962 $141,758
 $125,768
​​ ​ ​​ ​ ​
​​​​​
​​ ​ ​​ ​ ​

The Company leases certainpurchases software licenses and office equipment under capital lease agreements, with bargain purchase options at the end of the lease term. LeasedThe total net amount of purchased software licenses and office equipment included in property and equipment at December 31, 20152018 and 20142017 was $734$5.5 million and $961,$0.6 million, respectively.

The Company leases certain office space under a lease agreement that was determined to be a capital lease. This capital lease is classified as buildings within property and equipment. The total net amount of the capital lease at December 31, 2018 and 2017 was $10.9 million and $12.0 million, respectively. There were no leases of office spaces that were determined to be capital leases in 2016.
Depreciation expense for the years ended December 31, 2015, 2014,2018, 2017, and 20132016 was $19,221, $15,512,$52.7 million, $37.9 million, and $11,918,$28.1 million, respectively. Amortization of the capital leases included in depreciation expense was $118, $133,$1.4 million, $0.3 million, and $115,$0.1 million, for the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, respectively. At December 31, 20152018 and 2014,2017, the Company had unamortized capitalized software costs, including costs classified as work in progress, of $38,165$57.8 million and $28,417,$54.2 million, respectively.


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Table of Contents
Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

8.PROPERTY, EQUIPMENT AND CAPITALIZED SOFTWARE (Continued)

At December 31, 20152018 and 2014,2017, work in process consisted primarily of purchased software licenses, computer equipment, and capitalized software, which was not placed into service.


Table of Contents9.


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'sCompany’s acquisitions of ABILITY in 2018, Creehan in 2016, Avalere in 2015, Catalyst Information Technologies, Inc. in 2009, and Medical Reliance Group, Inc. in 2006. Refer to Note 3“Note 2—Summary of Significant Accounting Policies” for a discussion of our accounting policy. Refer to “Note 3—Business Combinations” for further information regarding the goodwill that arose from the Company's acquisitionCompany’s acquisitions of AvalereABILITY during 2015.

2018 and Creehan during 2016.

The following table summarizes the activity related to the carrying value of our goodwill during the years ended December 31, 20152018 and 2014:

2017 (in thousands):

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 
​​​ ​ ​
​​​​​
​​​ ​ ​
Goodwill as of January 1, 2017$184,557
Adjustments recorded in connection with the acquisition of Creehan(1)
375
Goodwill as of December 31, 2017184,932
Goodwill recorded in connection with the acquisition of ABILITY771,097
Goodwill as of December 31, 2018$956,029

(1)During 2017, the Company finalized the working capital adjustments for Creehan. The adjustments had no impact on the Company’s revenues or expenses. Based on our assessments of qualitative and quantitative factors, the adjustments were not considered to be material to our consolidated financial statements, individually or in the aggregate, to any previously issued consolidated financial statements.
Intangible Assets

Intangible assets at December 31, 20152018 and 20142017 were as follows:

follows (in thousands):

 
 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, 2018
 Gross 
Accumulated
Amortization
 Net 
Weighted
Average Remaining
Useful Life (years)
Technology(1)
$116,177
 $(28,882) $87,295
 11.7
Trademark and trade names31,860
 (6,415) 25,445
 13.4
Database6,500
 (6,012) 488
 0.7
Customer relationships480,950
 (58,835) 422,115
 11.6
Non-compete agreements820
 (820) —
 0.0
Total$636,307
 $(100,964) $535,343
  


 
 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    
​​​ ​ ​​ ​ ​​ ​ ​​​​
​​​​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​​​​
(1)Upon completion of the development process of our in-process R&D the Company performed an impairment assessment and determined there was no impairment. As such, $1.6 million of in-process R&D was reclassified to a definite-lived technology intangible asset upon being placed into service. The Company evaluated the useful life of the asset resulting from the R&D activities pursuant to ASC 350 and determined a useful life of 5.0 years was appropriate based on the period over which the asset is expected to contribute to future cash flows. The Company began amortizing the asset over the useful life on the date the asset was placed into service.

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Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

9.

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.


 December 31, 2017
 Gross 
Accumulated
Amortization
 Net 
Weighted
Average Remaining
Useful Life (years)
Technology$28,577
 $(20,313) $8,264
 2.8
Trademark and tradenames12,860
 (3,580) 9,280
 6.2
Database6,500
 (5,362) 1,138
 1.8
Customer relationships95,950
 (27,088) 68,862
 7.4
Non-compete agreements820
 (638) 182
 0.7
In-Process R&D1,600
 —
 1,600
 Indefinite
Total$146,307
 $(56,981) $89,326
  
Amortization expense for the years ended December 31, 2015, 2014,2018, 2017, and 20132016 was $3,412, $4,368,$44.0 million, $15.2 million, and $3,599,$9.2 million, respectively.

Estimated future amortization expense of intangible assets, based upon the Company'sCompany’s intangible assets at December 31, 2015,2018, is as follows:

follows (in thousands):

 
 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 
​​​ ​ ​
​​​​​
​​​ ​ ​
 Amount
Year ending December 31: 
2019$52,302
202050,821
202148,035
202248,035
202347,874
Thereafter288,276
Total$535,343

9. CREDIT FACILITIES (in thousands)

10. DEBT
On September 19, 2014, the Company entered into a Credit and Guaranty Agreement ("Credit Agreement"), with a group of lenders includingand Goldman Sachs Bank USA, as administrative agent to provide(the “2014 Credit Agreement”). The terms of the 2014 Credit Agreement provided for credit facilities in the aggregate maximum principal amount of $400,000,$400.0 million, consisting of a senior unsecured term loan facility in the original principal amount of $300,000$300.0 million (the "Term“2014 Term Loan Facility"Facility”), and a senior unsecured revolving credit facility in the maximum principal amount of $100,000 (together$100.0 million (the “2014 Revolving Credit Facility” and, together with the 2014 Term Loan Facility, the "Credit Facilities"“2014 Credit Facilities”).

The Credit Facilities consisted of the following:

2014 Term Loan Facility had a five-year term and was an amortizing facility with principal payments quarterly and interest payments monthly.
 
 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 toOn April 2, 2018, the Company on February 18, 2015, upon the consummation of its IPO.


Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

9. CREDIT FACILITIES (in thousands) (Continued)

        The Company's borrowing ratepaid in full all existing debt obligations under the 2014 Credit Facilities is dependent on whetherAgreement and terminated all commitments to extend further credit thereunder. On April 2, 2018, the Company elects Eurodollar loans or base rate loans. Interest accrues on Eurodollar loans atentered into a defined Eurodollar rate, defined as the London Interbank Offer Rate ("LIBOR"credit agreement (the “2018 Credit Agreement”) 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 commingledMorgan Stanley Senior Funding, Inc. (“MSSF”), as administrative agent, providing for (i) a term loan B facility with the Company's operating funds.Company as borrower in a total principal amount of $980.0 million (the “2018 Term Facility”); and (ii) a revolving credit facility with the Company as borrower in a total principal amount of up to $100.0 million (the “2018 Revolving Facility” and, together with the 2018 Term Facility, the “2018 Credit Facilities”). The 2018 Revolving Facility will terminate on April 2, 2023 and the 2018 Term Facility will mature on April 2, 2025. The entire $980.0 million 2018 Term Facility was borrowed on April 2, 2018, and was used to pay off all of the Company’s existing debt obligations under the 2014 Credit Facility also contains various covenants, including affirmative covenants with respectFacilities as well as to certain reporting requirements and maintaining certain business activities, and negative covenants that, among other things, may limit or impose restrictionsprovide the financing necessary to fund, in part, the cash consideration paid to acquire ABILITY. A loss on the Company's ability to incur liens, incur additional indebtedness, make investments, make acquisitions and undertake certain additional actions. Asearly extinguishment of anddebt of $0.1 million was recognized during the year ended December 31, 2015,2018 related to the write-off of unamortized deferred financing fees.

At the option of the Company, wasthe loans outstanding under the 2018 Term Facility will bear interest either at: (i) Adjusted London Interbank Offer Rate (“LIBOR”) plus an applicable rate of 3.50% or (ii) the Alternate Base Rate (“ABR”) plus an applicable margin. The Company may elect interest periods of one, two, three or six months for Adjusted LIBOR borrowings. As set forth in the 2018 Credit Agreement, the ABR is the higher of: (i) the rate that MSSF as Administrative Agent announces from time to

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Table of Contents
Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

10. DEBT (Continued)

time as its prime or base commercial lending rate, as in effect from time to time, (ii) the Federal Funds Effective Rate plus ½ of 1.0% and (iii) one-month Adjusted LIBOR plus 1.0%.
The Company is required to pay a commitment fee ranging from 0.25% to 0.375% per annum in respect of the daily average unused commitments under the 2018 Revolving Facility based on the Company’s senior secured net leverage ratio. As of December 31, 2018, the Company had $100.0 million available consisting of $99.0 million on the 2018 Revolving Facility and a letter of credit of $1.0 million.
The following table discloses the outstanding debt at each balance date as follows (in thousands):
 December 31, 2018 December 31, 2017
2018 Term Facility(1)
$949,314
 $—
2014 Revolving Credit Facility—
 236,250
Total Credit Facilities949,314
 236,250
Less: current portion9,800
 45,000
Non-current Credit Facilities$939,514
 $191,250

(1)The 2018 Term Facility is presented net of unamortized deferred financing fees and original issue discount (“OID”) of $28.2 million.
The Company incurred an OID of $14.7 million and deferred financing fees of $16.4 million related to the 2018 Term Facility, which are shown as a direct reduction to the face amount and amortized as interest expense, using the effective interest method, over the life of the 2018 Credit Agreement. The Company incurred $1.9 million in deferred financing fees related to the 2018 Revolving Facility, which is amortized as interest expense using the straight-line method. During the year ended December 31, 2018, the Company recognized $1.4 million in OID amortization expense related to the 2018 Term Facility. The Company recognized $1.5 million in deferred financing fees related to the 2018 Term Facility during the year ended December 31, 2018. The Company recognized $0.3 million in amortization expense related to the 2018 Revolving Facility during the year ended December 31, 2018.
The Company and its Restricted Subsidiaries (as defined in the 2018 Credit Agreement) are subject to certain affirmative and negative covenants under the 2018 Credit Agreement, and the 2018 Credit Agreement includes certain customary representations and warranties of the Company. As of December 31, 2018, the Company is in compliance with the financial covenants under the 2018 Credit Agreement.

Scheduled principal maturity of the 2018 Credit Facilities follows:

follows (in thousands):

 
 Amount 

2016

 $15,000 

2017

  30,000 

2018

  45,000 

2019

  191,250 
​​​ ​ ​

Total

 $281,250 
​​​ ​ ​
​​​​​
​​​ ​ ​
 Amount
2019$9,800
20209,800
20219,800
20229,800
20239,800
Thereafter928,550
Total scheduled maturities977,550
Unamortized deferred financing fees and OID(28,236)
Total Credit Facilities$949,314

10.

11. COMMITMENTS AND CONTINGENCIES
(in thousands)

Operating Leases—The Company leases office space and co-located data center facilities under operating lease arrangements, some of which contain renewal options.


F-29
Table of Contents
Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

11.COMMITMENTS AND CONTINGENCIES (Continued)

Future non-cancellable lease payments as of December 31, 20152018 are as follows:

follows (in thousands):

 
 Amount 

Year ending December 31,

    

2016

 $8,141 

2017

  7,960 

2018

  6,772 

2019

  2,778 

2020

  — 
​​​ ​ ​

Total

 $25,651 
​​​ ​ ​
​​​​​
​​​ ​ ​
 Amount
Year ending December 31, 
2019$11,250
20207,059
20215,898
20225,303
20233,821
Thereafter15,599
Total$48,930

Total expense under operating leases was $7,178, $7,438,$10.7 million, $11.3 million, and $6,572,$8.9 million, during the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, 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


Table of Contents


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$3.8 million and $3,186$2.0 million at December 31, 2015,2018 and 2014,2017, respectively.

Capital Leases—The total capital lease liability at December 31, 20152018 and 20142017 was $405$16.8 million 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$12.4 million, respectively. Future minimum lease payments 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.2018 are as follows (in thousands):

 Amount
Year ending December 31, 
2019$3,509
20202,567
20212,017
20221,181
20231,275
Thereafter8,831
Total minimum lease payments19,380
Less amount representing interest(2,548)
Present value of minimum lease payments$16,832
        LitigationLegal Proceedings—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'sCompany’s business, financial condition, results of operation,operations, 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'sCompany’s management does not presently expect any litigation matters to have a material adverse impact on the condensed consolidated financial statements of the Company.

There have been no significant or material developments to current legal proceedings, including the estimated effects on the Company’s condensed consolidated financial statements and note disclosures, other than the following updates with respect to the Xiang v. Inovalon Holdings, Inc., et.al., No. 1:16-cv-04923 case filed in the United States District Court for the Southern District of New York on June 24, 2016 against the Company, certain officers, directors and underwriters in the Company’s initial public offering, which was previously disclosed. Expert discovery was completed on December 21, 2018. Subsequent to December 31, 2018, on January 23, 2019, the parties informed the court that they had accepted a mediator’s recommendation on the amount of a settlement, subject to agreement on the terms and settlement documentation. On the same day, the court stayed all proceedings for a period of not more than 60 days to enable the parties to finalize the settlement and settlement documentation and move for preliminary approval of the settlement. On January 24, 2019, the parties filed a motion with the U.S. Court of Appeals for the

F-30
Table of Contents
Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

11.COMMITMENTS AND CONTINGENCIES (Continued)

Second Circuit requesting that the pending petition seeking permission to appeal the court’s class certification order under Federal Rule of Civil Procedure 23(f) be held in abeyance pending the resolution of settlement negotiations, which request the court granted on January 28, 2019. On February 20, 2019, the parties executed a settlement agreement, which is subject to Court approval, and provides for the dismissal of all claims against the defendants in connection with the securities class action suit, and provides for a payment to the class of $17 million, of which the Company has agreed to contribute $1.7 million, with the remaining amounts to be paid by the Company’s insurance carriers. The settlement contains no admission of liability by the Company and the other defendants. The amounts owed by and due to the Company have been recorded within other current liabilities and within prepaid expenses and other current assets, respectively, on the consolidated balance sheet.
12. RESTRUCTURING EXPENSE
During the second quarter of 2018, the Company completed actions under restructuring programs as part of its continuing efficiency-enhancement and cost-reduction initiatives, both as part of its ongoing margin expansion goals, as well as related to the recent acquisition and ongoing integration of ABILITY. The initiatives primarily related to workforce reductions, site closures, streamlining of software development initiatives, changes in the structure of certain business functions, and strategic initiatives to achieve cost and product development synergies in connection with the ABILITY Acquisition (as defined in “Note 3—Business Combinations”).
During the year ended December 31, 2018, the Company incurred $9.5 million in restructuring expense which includes $6.4 million related to a streamlining of software development initiatives, $1.8 million in severance expense, and $1.3 million for lease termination costs and accelerated depreciation related to associated leasehold improvements. As of December 31, 2018, the Company had a remaining restructuring liability associated with severance and lease termination costs of $0.6 million.
The following table presents restructuring liability activity for the year ended December 31, 2018 (in thousands):
Balance as of December 31, 2017$—
Accruals for severance1,764
Accruals for lease termination1,405
Severance payments(1,750)
Lease termination accretion(830)
Balance as of December 31, 2018$589
13. 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,(the “2007 Plan”), under which the Company'sCompany’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 optionsstock-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'sCompany’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'sCompany’s IPO, the Company'sCompany’s 2015 Omnibus Incentive Plan (the "2015 Plan"“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"“Code”), to the Company'sCompany’s employees and any parent and subsidiary employees, and for


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)

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'sCompany’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'sCompany’s 2007 Long-Term Incentive Plan, which was terminated upon completion of the IPO, that are forfeited, canceled, or expire (whether voluntarily or involuntarily).

Stock Options

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Table of Contents
Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
13. STOCK-BASED COMPENSATION (Continued)

The Company selecteduses the Black-Scholes option-pricing model as the most appropriate model for determiningto determine the estimated fair value for stock-basedstock option awards. The Black-Scholes option-pricing model requires the use of estimates, including the fair market value of the Company'sCompany’s common stock prior to the Company'sCompany’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'sCompany’s IPO, determining the fair value of the Company'sCompany’s common stock required complex and subjective judgment and estimates. There is inherent uncertainty in making these judgments and estimates. Since the Company'sCompany’s share price was not publicly quoted and lacked an active trading market prior to the Company'sCompany’s IPO in February 2015, the Company'sCompany’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'sCompany’s common stock performed by an unrelated third-party specialist, the lack of marketability of the Company'sCompany’s common stock, developments in the business, share repurchase arrangements, the status of the Company'sCompany’s development and sales efforts, revenue growth, valuations of comparable companies, and additional objective and subjective factors relating to the Company'sCompany’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'sCompany’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


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)

Commission’s 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 iswas 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'sCompany’s Board of Directors. The risk-free interest rate iswas 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 andrecorded as adjustments are made annually to reflect actual forfeiture experience.

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

they occur.
 
 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 stockCompany did not grant any options granted during the years ended December 31, 2015, 2014,2018, 2017 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.

2016. 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, 20181,313,310
 $7.47
  
 5.4 $9,895
Stock options granted—
 $—
 $—
    
Stock options exercised(258,921) $7.01
  
    
Stock options cancelled(197,305) $7.36
  
    
Balance at December 31, 2018857,084
 $7.63
  
 4.3 $5,616
Exercisable at December 31, 2018701,742
 $7.63
  
 4.1 $4,600
Vested and expected to vest at December 31, 2018857,084
 $7.63
  
 4.3 $5,616
As of December 31, 2015,2018, there is $4.8$0.6 million of total unrecognized compensation expense related to unvested stock options, and this expense is expected to be recognized over a weighted-average period of 3.20.5 years.

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the fair value of the Company'sCompany’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


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'sCompany’s common stock.

The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 was $1.2 million, $4.2 million, and $7.7 million, respectively.

Restricted Stock Units

        On

In November 13, 2014, the Company granted 488,780began issuing RSUs pursuant to the Company's 2007 Long-Term Incentive Plan. The RSUs had a grant date fair value of $9,722. The Company useduses 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.RSUs. 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

F-32
Table of Contents
Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
13. STOCK-BASED COMPENSATION (Continued)

the completion of the Company'sCompany’s IPO. As of December 31, 2014, no share-basedstock-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-basedstock-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-basedstock-based compensation expense related to these RSUs will beis 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,method.

During 2015, the Company granted 76,273began granting RSUs to employees pursuant to the 2015 Plan. TheThese awards granted vest ratably over five years on each anniversary of the award grant date, and upondate. Upon vesting, the Company will deliver to the holder shares of the Company'sCompany’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'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, 2018220,938
 $19.94
RSUs granted during 2018101,454
 10.35
RSUs vested during 2018(95,690) 19.14
RSUs forfeited during 2018(34,834) 21.50
RSUs granted and unvested at December 31, 2018191,868
 $14.98
The weighted-average fair value of RSUs granted during the years ended December 31, 2018, and 2017 was $10.35 and $13.70, respectively. There were no RSUs granted during the year ended December 31, 2016. During the years ended December 31, 2018 and 2017, these awards had an aggregate grant date fair value of the RSUs was $2,337, in aggregate, or $30.64 per RSU.$1.1 million and $0.6 million, respectively. 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 summarytotal fair value of RSUs granted and unvested as ofvested during the years ended 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 
​​​ ​ ​​​ ​

Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

11. STOCK-BASED COMPENSATION (in thousands, except share2018, 2017 and per share amounts, years,2016 was $1.1 million, $1.3 million and percentages) (Continued)

$1.5 million, respectively. As of December 31, 2015,2018, there was a total of $7,188$1.7 million 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 3.930.8 years.

Restricted Stock Awards

        On May 28,

During 2015, the Company granted 71,946began granting RSAs pursuant to the 2015 Plan. RSAs granted to directors fully vest upon the one year anniversary of the award grant date, anddate. RSAs granted to employees vest ratably over two to five years either ratably on each anniversary of the award grant date.date or cliff vest at the end of the vest period. Upon vesting, the Company will deliver shares of the Company'sCompany’s Class A common stock to the holders. Pursuant to the terms of the awards, any unvested shares terminate upon the RSA holders'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-basedstock-based compensation expense for the RSAs following the straight-line method net of estimated forfeitures, over the requisite service period. The Company estimates futurerecords adjustments related to forfeitures atas they occur.
In March 2017, 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 524,105Company began issuing RSAs pursuant towith performance conditions under the 2015 Plan. The RSAs were grantedawards have vesting conditions tied to employeesthe 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 five yearsthe vesting period or based on each anniversarya graded vest method, depending on the specific terms of the award grant date. Upon vesting,and the probability of achievement of the specified performance conditions. During 2018, the Company will deliver sharesgranted 2.6 million RSAs, of which 0.4 million had performance vesting conditions.


F-33
Table of Contents
Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
13. STOCK-BASED COMPENSATION (Continued)

A summary of RSA activity is as follows:
 
Number of
RSAs
 
Weighted
Average
Fair Value
Per Unit
RSAs granted and unvested at January 1, 20184,601,632
 $13.43
RSAs granted during 20182,571,839
 11.12
RSAs vested during 2018(758,277) 13.57
RSAs forfeited during 2018(1,475,775) 12.87
RSAs granted and unvested at December 31, 20184,939,419
 $12.37
The weighted-average fair value of an RSA granted during the Company's Class A common stock toyears ended December 31, 2018, 2017 and 2016 was $11.12, $12.64 and $13.81, respectively. During the holders. Pursuant to the terms of theyears ended December 31, 2018, 2017 and 2016, these awards any unvested shares terminate upon the RSA holders' separation from the Company. Thehad an aggregate grant date fair value of the RSAs was $9,198, in aggregate, or $17.55 per RSA.$28.6 million, $33.5 million and $36.9 million, respectively. 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 summarytotal fair value of RSAs granted and unvested as ofvested during the years ended 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 
​​​ ​ ​​​ ​

2018, 2017 and 2016 was $8.6 million, $9.3 million and $3.0 million, respectively. As of December 31, 2015,2018, there was a total of $7,401$52.6 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 4.83.4 years.


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'sCompany’s IPO, the 2015 Employee Stock Purchase Plan ("(“2015 ESPP"ESPP”) became effective. The 2015 ESPP provides (i) for (i) six-monthsix months 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'sCompany’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. DuringThe following table summarizes the year ended December 31, 2015,ESPP activity during 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.

years shown:

 Year Ended December 31,
 2018 2017 2016
Shares purchased and issued90,084
 49,247
 61,184
Weighted average discounted price per share$9.74
 $11.08
 $14.03
Stock-based compensation expense (in thousands)$141
 $154
 $140
12.14. EMPLOYEE BENEFIT PLANS (in thousands)

On June 1, 2007, the Company adopted a 401(k) Profit Sharing Plan and Trust or (“401(k) Plan.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, 2014,2018, 2017, and 2013,2016, total expense recorded for the Company'sCompany’s matching 401(k) contributions were $4,227, $2,820,$6.3 million, $5.2 million, and $2,846,$5.2 million, respectively.

13. STOCKHOLDERS'

15. STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands, except
On May 4, 2016, the Company announced that its Board of Directors authorized a program to repurchase up to $100.0 million of Inovalon’s Class A common stock through December 31, 2017. Repurchases under the Company’s share amounts)

        In February 2013,repurchase program have been made in open-market or privately negotiated transactions. The Company funded repurchases through a combination of cash on hand, cash generated by operations and sales of short-term investments, if needed. On November 2, 2016, the Company announced that its Board of Directors authorized an expansion of the share repurchase program to provide liquidityrepurchase up to certain existing stockholders who desired liquidity and to reduce the numberan additional $100.0 million of stockholders and outstanding shares of common stock,Inovalon’s Class A Common Stock (bringing the total to $200.0 million) through December 31, 2017. The share repurchase program did not obligate the Company initiated a share repurchaseto acquire any particular amount of Class A common stock. During the years ended December 31, 2017 and liquidity initiative for and among existing stockholders. During 2013,2016, the Company repurchased 10,703,3607,111,190 and 7,508,985 Class A common shares of common stock for aggregate consideration of $72,114$93.6 million and sold 7,216,610 shares of common stock for $52,114, resulting in a net repurchase of 3,486,750 treasury stock shares$106.2 million, respectively, at an aggregate netaverage 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$13.16 and $17,597 was allocated to retained earnings. The amount allocated to additional paid- in capital was determined based on the paid-in capital$14.15 per share, generated from the historical issuances of these treasury stock shares.

respectively, excluding commissions. The share repurchase program expired on December 31, 2017 and there were no repurchases during 2018.

F-34

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.


Table of Contents16.


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:

following (in thousands):

 
 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 
​​​ ​ ​​​ ​​ ​ ​
​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​
 Year Ended December 31,
 2018 2017 2016
Current: 
  
  
Federal(1)
$(2,113) $2,272
 $7,747
State215
 2,162
 5,788
Total current (benefit) provision(1,898) 4,434
 13,535
Deferred: 
  
  
Federal(8,009) (8,333) (1,533)
State(4,486) 1,668
 (207)
Total deferred benefit(12,495) (6,665) (1,740)
Total (benefit from) provision for income taxes$(14,393) $(2,231) $11,795

(1)As of December 31, 2018, the current income tax benefit reflects the recognition of a $2.1 million income tax receivable from amended federal income tax returns to carry back the net operating loss and tax credits generated in 2017 and refundable alternative minimum tax credit.
The provision for income taxes reconciles to the amount computed by applying the federal statutory rate, (35.0%)21.0%, to income before income taxes as follows:

follows (in thousands, except percentages):


 Year Ended December 31, Year Ended December 31,

 2015 2014 2013 2018 2017 2016

Expected federal income tax

 35.0%$40,149 35.0%$38,056 35.0%$18,331 21.0 % $(11,247) 35.0 % $11,406
 35.0 % $13,650

State income taxes, net of federal income tax effect

 6.8 7,753 4.6 4,961 3.9 2,047 8.0 % (4,270) 8.0 % 2,606
 7.4 % 2,859

Permanent items

 0.3 390 0.4 422 0.5 237 1.1 % (614) 0.3 % 88
 (0.9)% (357)

Research and development tax credits

 (0.8) (864) (0.6) (695) (1.4) (744)1.6 % (850) (2.6)% (850) (1.9)% (756)
Excess tax benefits and stock-based compensation(1.0)% 559
 (0.7)% (243) (3.0)% (1,165)
Acquisition-related tax adjustments(2.1)% 1,144
 (1.4)% (445) (4.3)% (1,686)
Enactment of the Tax Act— % —
 (47.4)% (15,461) — % —

Other

 1.1 1,220 0.5 635 (0.5) (214)(1.7)% 885
 2.0 % 668
 (2.0)% (750)
​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​

Income tax expense

 42.4%$48,648 39.9%$43,379 37.5%$19,657 26.9 % $(14,393) (6.8)% $(2,231) 30.3 % $11,795
​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​
​​​​​​​​​​​​​
​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​
In December 2017, the Tax Act was enacted which included a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. The Tax Act also provided for the acceleration of depreciation for certain assets placed into service after September 27, 2017 and prospective changes beginning in 2018, including repeal of the domestic manufacturing deduction, acceleration of tax revenue recognition, capitalization of research and development expenditures, additional limitations on executive compensation and limitations on the deductibility of interest. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act, the Company revalued its ending net deferred tax liabilities at December 31, 2017 and recognized a $15.5 million tax benefit in the Company’s consolidated statement of operations for the year ended December 31, 2017. The Company completed its accounting for the income tax effects of the Tax Act in 2017.

F-35
Table of Contents


Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

16.

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'sCompany’s deferred tax assets and liabilities were as follows:

follows (in thousands):


 December 31,  December 31,

 2015 2014 2018 2017

Components of deferred tax assets and liabilities

      
  

Deferred tax assets:

      
  
Net operating loss carryforwards$17,258
 $2,654
Interest expense carryforwards11,278
 —

Accrued expenses and reserves

 $1,743 $843 4,571
 313

Stock-based compensation

 2,490 2,713 3,553
 3,040
Unrealized gains and losses in other comprehensive income3,200
 257
Tax credit carryforwards3,114
 217

Deferred rent

 1,190 1,259 1,263
 581

Net operating loss carryforwards

 2,402 — 

Other

 1,270 414 1,371
 284
​​​ ​​ ​ ​

Total deferred tax assets

 $9,095 $5,229 45,608
 7,346
​​ ​ ​​ ​ ​

Deferred tax liabilities:

      
  

Intangibles

 $22,267 $2,943 127,272
 9,568

Property, equipment and capitalized software

 21,042 16,192 26,612
 21,564

Prepaids and other

 2,752 766 2,092
 2,639
​​ ​ ​​ ​ ​

Total deferred tax liabilities

 46,061 19,901 155,976
 33,771
​​ ​ ​​ ​ ​
Net deferred tax liabilities before valuation allowance110,368
 26,425
Valuation Allowance301
 217

Net deferred tax liabilities

 $36,966 $14,672 $110,669
 $26,642
​​ ​ ​​ ​ ​
​​​​​
​​ ​ ​​ ​ ​

As ofDecember 31, 2018, the Company has U.S. federal and state net operating loss carryforwards of approximately $10.7 million and $8.3 million, respectively. The deferredmajority of the U.S. federal net operating loss carryforwards will not expire and the majority of the state net operating losses will expire by 2038. As of December 31, 2018, the Company has interest expense carryforwards of approximately $11.3 million that can be carried forward indefinitely. As ofDecember 31, 2018, the Company has U.S. federal and state tax liability hascredit carryforwards of approximately $3.1 million and $0.5 million, respectively, gross of any uncertain tax position considerations. The tax credit carryforwards will expire between 2022 and 2038. Change of control provisions as defined in Section 382 of the Internal Revenue Code have been classified inanalyzed and are not expected to materially limit 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 
​​​ ​ ​​ ​ ​
​​​​​​​​
​​​ ​ ​​ ​ ​
Company’s use of the interest expense, net operating loss, or tax credit carryforwards.
(1)
See Note 2 regarding our early adoption of ASU 2015-17.

Uncertain Tax Positions—During the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, changes in the liability for gross uncertain tax position, including interest were $1.2 million, $0.1 million, and $0.1 million, respectively. The interest and penalties related to uncertain tax positions are classified as a component of income tax expense.

The following table presents the changes in uncertain tax position (in thousands).
 2018 2017 2016
Uncertain tax position 
  
  
January 1$—
 $80
 $—
Gross increase in tax positions in prior period32
 291
 80
Gross decrease in tax positions in prior period(1) (160) —
Gross increase in tax positions from acquisitions1,162
 —
 —
Settlement—
 (211) —
Lapse of statute of limitations(35) —
 —
Uncertain tax position at December 31$1,158
 $—
 $80

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Table of Contents
Inovalon Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)

16.INCOME TAXES (Continued)

If the uncertain tax positions were to be resolved favorably, total uncertain tax position in an amount of approximately $1.2 million would reduce income tax expense and the Company’s effective tax rate in the future. While it is reasonably possible that the amount of the unrecognized tax benefits including interest, totaled $0, $0, and $48, respectively. At December 31, 2015 and 2014,could increase or decrease during the Company did not measurenext twelve months, we believe it is unlikely that the change would be a liability for unrecognized tax benefits.

        Net Operating Losses carryforwards(NOLs)—At December 31, 2015, we had federal net operating loss ("NOL") carryforwards of approximately $5.0 million. These NOL carryforwards will expire in 2036.

material amount.

While the Company believes it has adequately provided for all tax positions, amounts asserted by taxing authorities could differ from the Company'sCompany’s accrued position. Accordingly, additional provisions


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Inovalon Holdings, Inc.

Notes to Consolidated Financial Statements (Continued)

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

on federal, state and foreign tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.

The Company is subject to taxation by the United States of America, various United States of America jurisdictions, and Puerto Rico. The number of years with open tax audits varies depending on the tax jurisdiction.


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INOVALON HOLDINGS, INC.
Schedule II
Valuation and Qualifying Accounts and Reserves
(in thousands)

Description
 Balance at
Beginning
of Year		 Additions
Charged
Against
Revenue		 Additions
Charged to
Cost and
Expense		 Deductions Balance at
End of Year		 

  Year Ended December 31, 2015 

Allowance for accounts receivable

 $1,827 $1,126 $— $(1,931)$1,022 

  Year Ended December 31, 2014 

Allowance for accounts receivable

 $1,484 $2,498 $— $(2,155)$1,827 

  Year Ended December 31, 2013 

Allowance for accounts receivable

 $451 $2,711 $— $(1,678)$1,484 
 Allowance for Accounts Receivable
 
Balance at
Beginning
of Year
 
Additions
Charged
Against
Revenue
 
Additions
Charged to
Cost and
Expense
 Deductions 
Balance at
End of Year
Year Ended December 31, 2018$2,038
 $3,039
 $3,520
 $(5,247) $3,350
Year Ended December 31, 2017$3,782
 $8,886
 $—
 $(10,630) $2,038
Year Ended December 31, 2016$1,022
 $3,792
 $—
 $(1,032) $3,782


F-38