UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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| | | | | | | |
(Mark One) | | |
x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended | September 30, 20172021 |
or |
o☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File Number 001-36841
INOVALON HOLDINGS, INC.Inovalon Holdings, Inc.
(Exact name of registrant as specified in its charter)
|
| | | | | | | |
Delaware | 47-1830316 |
(State or other jurisdiction of incorporation or organization)
| 47-1830316
(I.R.S. Employer Identification No.)
|
4321 Collington Road, | |
Bowie, | Maryland | 20716 |
(Address of principal executive offices) | 20716
(Zip Code) |
(301) 809-4000
Registrant'sRegistrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of Each Class | | Trading Symbol | | Name Of Each Exchange On Which Registered |
Class A Common Stock, $0.000005 par value per share | | INOV | | NASDAQ Global Select Market |
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 x☒ 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 x☒ No o��
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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" and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | | Accelerated filer | ☐ | | Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | | | | |
Large accelerated filer x
| | Accelerated filer o
| | Non-accelerated filer o
(Do not check if a
smaller reporting company)
| | Smaller reporting company o
Emerging growth companyo | ☐ |
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 x☒
As of October 27, 2017,31, 2021, the registrant had 64,657,89977,165,256 shares of Class A common stock outstanding and 81,215,21278,081,076 shares of Class B common stock outstanding.
INOVALON HOLDINGS, INC.
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20172021
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
INOVALON HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and par value amounts)
| | | September 30, 2017 | | December 31, 2016 | | September 30, 2021 | | December 31, 2020 |
ASSETS | |
| | |
| ASSETS | | | |
Current assets: | |
| | |
| Current assets: | | | |
Cash and cash equivalents | $ | 232,555 |
| | $ | 127,683 |
| Cash and cash equivalents | $ | 108,869 | | | $ | 123,880 | |
Short-term investments | 293,101 |
| | 445,315 |
| |
Accounts receivable (net of allowances of $2,669 and $5,865 at September 30, 2017 and December 31, 2016, respectively) | 83,818 |
| | 85,591 |
| |
| Accounts receivable (net of allowances of $3,175 at September 30, 2021 and $2,700 at December 31, 2020) | | Accounts receivable (net of allowances of $3,175 at September 30, 2021 and $2,700 at December 31, 2020) | 180,584 | | | 148,003 | |
Prepaid expenses and other current assets | 11,747 |
| | 12,100 |
| Prepaid expenses and other current assets | 36,447 | | | 26,529 | |
Income tax receivable | 4,104 |
| | 15,165 |
| Income tax receivable | 40,402 | | | 24,664 | |
Total current assets | 625,325 |
| | 685,854 |
| Total current assets | 366,302 | | | 323,076 | |
Non-current assets: | |
| | |
| Non-current assets: | | | |
Property, equipment and capitalized software, net | 101,419 |
| | 76,420 |
| Property, equipment and capitalized software, net | 174,035 | | | 168,113 | |
Operating lease right-of-use assets | | Operating lease right-of-use assets | 31,071 | | | 35,355 | |
Goodwill | 184,932 |
| | 184,557 |
| Goodwill | 955,881 | | | 955,881 | |
Intangible assets, net | 93,176 |
| | 103,549 |
| Intangible assets, net | 422,941 | | | 452,558 | |
Other assets | 5,706 |
| | 2,964 |
| Other assets | 34,464 | | | 36,415 | |
Total assets | $ | 1,010,558 |
| | $ | 1,053,344 |
| Total assets | $ | 1,984,694 | | | $ | 1,971,398 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | |
| |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | |
| | |
| Current liabilities: | | | |
Accounts payable | $ | 30,509 |
| | $ | 16,474 |
| |
Accounts payable and accrued expenses | | Accounts payable and accrued expenses | $ | 44,890 | | | $ | 52,998 | |
Accrued compensation | 21,297 |
| | 15,211 |
| Accrued compensation | 34,618 | | | 40,860 | |
Other current liabilities | 7,708 |
| | 9,468 |
| Other current liabilities | 42,769 | | | 39,835 | |
Deferred revenue | 8,807 |
| | 11,850 |
| Deferred revenue | 9,956 | | | 10,854 | |
Deferred rent | 1,520 |
| | 1,016 |
| |
Credit facilities | 41,250 |
| | 30,000 |
| Credit facilities | 9,800 | | | 9,800 | |
Capital lease obligation | 108 |
| | 115 |
| |
Operating lease liabilities | | Operating lease liabilities | 7,143 | | | 5,968 | |
Finance lease liabilities | | Finance lease liabilities | 3,460 | | | 3,963 | |
Total current liabilities | 111,199 |
| | 84,134 |
| Total current liabilities | 152,636 | | | 164,278 | |
Non-current liabilities: | |
| | |
| Non-current liabilities: | | | |
Credit facilities, less current portion | 202,500 |
| | 236,250 |
| Credit facilities, less current portion | 873,607 | | | 877,574 | |
Capital lease obligation, less current portion | 136 |
| | 215 |
| |
Deferred rent | 261 |
| | 1,457 |
| |
Operating lease liabilities, less current portion | | Operating lease liabilities, less current portion | 37,825 | | | 40,807 | |
Finance lease liabilities, less current portion | | Finance lease liabilities, less current portion | 23,089 | | | 25,759 | |
Other liabilities | 11,932 |
| | 13,158 |
| Other liabilities | 33,329 | | | 54,350 | |
Deferred income taxes | 32,440 |
| | 34,553 |
| Deferred income taxes | 96,927 | | | 99,916 | |
Total liabilities | 358,468 |
| | 369,767 |
| Total liabilities | 1,217,413 | | | 1,262,684 | |
Commitments and contingencies (Note 5) |
|
| |
|
| |
Stockholders' equity: | |
| | |
| |
Common stock, $0.000005 par value, 900,000,000 shares authorized, zero shares issued and outstanding at each of September 30, 2017 and December 31, 2016, respectively | — |
| | — |
| |
Class A common stock, $0.000005 par value, 750,000,000 shares authorized; 77,425,861 shares issued and 64,681,372 shares outstanding at September 30, 2017; 72,271,298 shares issued and 64,786,705 shares outstanding at December 31, 2016 | — |
| | — |
| |
Class B common stock, $0.000005 par value, 150,000,000 shares authorized; 81,215,212 shares issued and outstanding at September 30, 2017; 83,303,628 shares issued and outstanding at December 31, 2016 | 1 |
| | 1 |
| |
Preferred stock, $0.0001 par value, 100,000,000 shares authorized, zero shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | — |
| | — |
| |
Commitments and contingencies (Note 7) | | Commitments and contingencies (Note 7) | 0 | | 0 |
Stockholders’ equity: | | Stockholders’ equity: | | | |
Common stock, $0.000005 par value, 900,000,000 shares authorized, zero shares issued and outstanding at each of September 30, 2021 and December 31, 2020, respectively | | Common stock, $0.000005 par value, 900,000,000 shares authorized, zero shares issued and outstanding at each of September 30, 2021 and December 31, 2020, respectively | — | | | — | |
Class A common stock, $0.000005 par value, 750,000,000 shares authorized; 92,813,948 shares issued and 78,193,773 shares outstanding at September 30, 2021; 91,617,450 shares issued and 76,997,275 shares outstanding at December 31, 2020 | | Class A common stock, $0.000005 par value, 750,000,000 shares authorized; 92,813,948 shares issued and 78,193,773 shares outstanding at September 30, 2021; 91,617,450 shares issued and 76,997,275 shares outstanding at December 31, 2020 | 1 | | | 1 | |
Class B common stock, $0.000005 par value, 150,000,000 shares authorized; 78,081,076 shares issued and outstanding at September 30, 2021; 78,331,591 shares issued and outstanding at December 31, 2020 | | Class B common stock, $0.000005 par value, 150,000,000 shares authorized; 78,081,076 shares issued and outstanding at September 30, 2021; 78,331,591 shares issued and outstanding at December 31, 2020 | — | | | — | |
Preferred stock, $0.0001 par value, 100,000,000 shares authorized, zero shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | | Preferred stock, $0.0001 par value, 100,000,000 shares authorized, zero shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | — | | | — | |
Additional paid-in-capital | 532,084 |
| | 516,300 |
| Additional paid-in-capital | 669,767 | | | 655,444 | |
Retained earnings | 291,456 |
| | 274,087 |
| Retained earnings | 331,361 | | | 300,890 | |
Treasury stock, Class A common stock, at cost, 12,744,489 and 7,508,985 shares at September 30, 2017 and December 31, 2016, respectively | (171,217 | ) | | (106,231 | ) | |
Treasury stock, at cost, 14,620,175 shares at September 30, 2021 and December 31, 2020, respectively | | Treasury stock, at cost, 14,620,175 shares at September 30, 2021 and December 31, 2020, respectively | (199,817) | | | (199,817) | |
Other comprehensive loss | (234 | ) | | (580 | ) | Other comprehensive loss | (34,031) | | | (47,804) | |
Total stockholders' equity | 652,090 |
| | 683,577 |
| |
Total liabilities and stockholders' equity | $ | 1,010,558 |
| | $ | 1,053,344 |
| |
Total stockholders’ equity | | Total stockholders’ equity | 767,281 | | | 708,714 | |
Total liabilities and stockholders’ equity | | Total liabilities and stockholders’ equity | $ | 1,984,694 | | | $ | 1,971,398 | |
See notes to condensed consolidated financial statements.
INOVALON HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(Unaudited, in thousands, except per-share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Revenue | $ | 192,230 | | | $ | 161,377 | | | $ | 559,845 | | | $ | 477,779 | |
Expenses: | | | | | | | |
Cost of revenue(1) | 54,951 | | | 39,561 | | | 151,013 | | | 117,365 | |
Sales and marketing(1) | 21,098 | | | 14,898 | | | 62,306 | | | 45,130 | |
Research and development(1) | 9,569 | | | 7,941 | | | 27,437 | | | 23,880 | |
General and administrative(1) | 55,389 | | | 54,865 | | | 161,957 | | | 163,977 | |
Depreciation and amortization | 29,647 | | | 28,183 | | | 87,988 | | | 86,749 | |
Impairment charge | 2,954 | | | — | | | 2,954 | | | — | |
| | | | | | | |
Total operating expenses | 173,608 | | | 145,448 | | | 493,655 | | | 437,101 | |
Income from operations | 18,622 | | | 15,929 | | | 66,190 | | | 40,678 | |
Other income and (expenses): | | | | | | | |
Interest income | 69 | | | 50 | | | 166 | | | 436 | |
Interest expense | (12,999) | | | (13,648) | | | (38,991) | | | (42,468) | |
Other expense, net | (728) | | | (332) | | | (768) | | | (502) | |
Income (Loss) before taxes | 4,964 | | | 1,999 | | | 26,597 | | | (1,856) | |
(Benefit from) Provision for income taxes | (6,771) | | | 1,175 | | | (3,874) | | | (3,022) | |
Net income | $ | 11,735 | | | $ | 824 | | | $ | 30,471 | | | $ | 1,166 | |
Net income attributable to common stockholders, basic and diluted | $ | 11,410 | | | $ | 800 | | | $ | 29,654 | | | $ | 1,130 | |
Net income per share attributable to common stockholders, basic and diluted: | | | | | | | |
Basic net income per share | $ | 0.08 | | | $ | 0.01 | | | $ | 0.20 | | | $ | 0.01 | |
Diluted net income per share | $ | 0.08 | | | $ | 0.01 | | | $ | 0.20 | | | $ | 0.01 | |
Weighted average shares of common stock outstanding: | | | | | | | |
Basic | 150,873 | | | 149,720 | | | 150,624 | | | 149,474 | |
Diluted | 150,952 | | | 149,903 | | | 150,728 | | | 149,650 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue | $ | 115,855 |
| | $ | 105,013 |
| | $ | 334,739 |
| | $ | 331,495 |
|
Expenses: | | | | | | | |
Cost of revenue(1) | 38,431 |
| | 35,433 |
| | 113,914 |
| | 120,570 |
|
Sales and marketing(1) | 7,929 |
| | 7,037 |
| | 24,365 |
| | 19,712 |
|
Research and development(1) | 5,780 |
| | 7,404 |
| | 20,850 |
| | 21,047 |
|
General and administrative(1) | 36,283 |
| | 37,209 |
| | 108,002 |
| | 105,222 |
|
Depreciation and amortization | 13,550 |
| | 8,904 |
| | 38,514 |
| | 25,794 |
|
Total operating expenses | 101,973 |
| | 95,987 |
| | 305,645 |
| | 292,345 |
|
Income from operations | 13,882 |
| | 9,026 |
| | 29,094 |
| | 39,150 |
|
Other income and (expenses): | | | | | |
| | |
|
Realized gains on short-term investments | — |
| | 9 |
| | — |
| | 4 |
|
(Loss) Gain on disposal of equipment | (243 | ) | | — |
| | (381 | ) | | 534 |
|
Interest income | 1,365 |
| | 1,450 |
| | 4,045 |
| | 4,424 |
|
Interest expense | (1,617 | ) | | (1,302 | ) | | (4,549 | ) | | (3,806 | ) |
Income before taxes | 13,387 |
| | 9,183 |
| | 28,209 |
| | 40,306 |
|
Provision for income taxes | 5,146 |
| | 1,376 |
| | 10,840 |
| | 13,883 |
|
Net income | $ | 8,241 |
| | $ | 7,807 |
| | $ | 17,369 |
| | $ | 26,423 |
|
Net income attributable to common stockholders, basic and diluted | $ | 7,968 |
| | $ | 7,771 |
| | $ | 16,905 |
| | $ | 26,308 |
|
Net income per share attributable to common stockholders, basic and diluted: | | | | | | | |
Basic net income per share | $ | 0.06 |
| | $ | 0.05 |
| | $ | 0.12 |
| | $ | 0.17 |
|
Diluted net income per share | $ | 0.06 |
| | $ | 0.05 |
| | $ | 0.12 |
| | $ | 0.17 |
|
Weighted average shares of common stock outstanding: | | | | | | | |
Basic | 141,226 |
| | 150,732 |
| | 142,861 |
| | 151,240 |
|
Diluted | 141,699 |
| | 151,562 |
| | 143,327 |
| | 152,122 |
|
|
| | | | | | | | | | | | | | | | |
(1) | Includes stock-based compensation expense as follows: | | | |
| | | | |
| Cost of revenue | $ | 474 |
| | $ | 94 |
| | $ | 1,189 |
| | $ | 334 |
|
| Sales and marketing | 561 |
| | 140 |
| | 1,456 |
| | 446 |
|
| Research and development | 349 |
| | 186 |
| | 929 |
| | 927 |
|
| General and administrative | 3,597 |
| | 1,704 |
| | 8,751 |
| | 4,645 |
|
| Total stock-based compensation expense | $ | 4,981 |
| | $ | 2,124 |
| | $ | 12,325 |
| | $ | 6,352 |
|
________________________________________________ | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Includes stock-based compensation expense as follows: | | | | | | | |
| Cost of revenue | $ | 327 | | | $ | 156 | | | $ | 812 | | | $ | 474 | |
| Sales and marketing | 1,259 | | | 717 | | | 3,333 | | | 2,089 | |
| Research and development | 427 | | | 287 | | | 1,110 | | | 1,009 | |
| General and administrative | 6,403 | | | 6,853 | | | 17,106 | | | 19,562 | |
| Total stock-based compensation expense | $ | 8,416 | | | $ | 8,013 | | | $ | 22,361 | | | $ | 23,134 | |
See notes to condensed consolidated financial statements.
INOVALON HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income | $ | 8,241 |
| | $ | 7,807 |
| | $ | 17,369 |
| | $ | 26,423 |
|
Other comprehensive income: | | | | | | | |
Realized gains on short-term investments reclassified from accumulated other comprehensive income, net of tax of $0, $5, $0 and $3, respectively | — |
| | (10 | ) | | — |
| | (7 | ) |
Net change in unrealized gains on available-for-sale investments, net of tax of ($61), ($380), ($274) and ($2,182), respectively | 135 |
| | 832 |
| | 346 |
| | 3,350 |
|
Comprehensive income | $ | 8,376 |
| | $ | 8,629 |
| | $ | 17,715 |
| | $ | 29,766 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income | $ | 11,735 | | | $ | 824 | | | $ | 30,471 | | | $ | 1,166 | |
Other comprehensive income (loss): | | | | | | | |
Realized losses on cash flow hedges reclassified from accumulated other comprehensive income, net of tax of $(1,554), $(1,503), $(4,587), and $(3,477) respectively | 3,288 | | | 3,197 | | | 9,704 | | | 7,390 | |
Net change in unrealized gains (losses) on cash flow hedges, net of tax of $137, $42, $(1,887), and $14,734, respectively | (291) | | | (46) | | | 4,069 | | | (31,263) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Comprehensive income (loss) | $ | 14,732 | | | $ | 3,975 | | | $ | 44,244 | | | $ | (22,707) | |
See notes to condensed consolidated financial statements.
INOVALON HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2021 | 91,617,450 | | | $ | 1 | | | 78,331,591 | | | $ | — | | | (14,620,175) | | | $ | (199,817) | | | $ | 655,444 | | | $ | 300,890 | | | $ | (47,804) | | | $ | 708,714 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 5,533 | | | — | | | — | | | 5,533 | |
Exercise of stock options | 165,311 | | | — | | | — | | | — | | | — | | | — | | | 1,110 | | | — | | | — | | | 1,110 | |
Conversion of Class B to Class A common stock | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of shares related to restricted stock units and awards, net of forfeitures | 619,090 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Shares withheld for employee taxes upon conversion of restricted stock | (159,699) | | | — | | | — | | | — | | | — | | | — | | | (4,235) | | | — | | | — | | | (4,235) | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9,443 | | | 9,443 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9,156 | | | — | | | 9,156 | |
Balance—March 31, 2021 | 92,242,152 | | | $ | 1 | | | 78,331,591 | | | $ | — | | | (14,620,175) | | | $ | (199,817) | | | $ | 657,852 | | | $ | 310,046 | | | $ | (38,361) | | | $ | 729,721 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 8,176 | | | — | | | — | | | 8,176 | |
Exercise of stock options | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Conversion of Class B to Class A common stock | 250,515 | | | — | | | (250,515) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of shares related to restricted stock units and awards, net of forfeitures | 281,030 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Shares withheld for employee taxes upon conversion of restricted stock | (107,107) | | | — | | | — | | | — | | | — | | | — | | | (3,301) | | | — | | | — | | | (3,301) | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,333 | | | 1,333 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9,580 | | | — | | | 9,580 | |
Balance—June 30, 2021 | 92,666,590 | | | $ | 1 | | | 78,081,076 | | | $ | — | | | (14,620,175) | | | $ | (199,817) | | | $ | 662,727 | | | $ | 319,626 | | | $ | (37,028) | | | $ | 745,509 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 8,405 | | | — | | | — | | | 8,405 | |
Exercise of stock options | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Conversion Class B to Class A common stock | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of shares related to restricted stock units and awards, net of forfeitures | 189,466 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Shares withheld for employee taxes upon conversion of restricted stock | (42,108) | | | — | | | — | | | — | | | — | | | — | | | (1,365) | | | — | | | — | | | (1,365) | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,997 | | | 2,997 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 11,735 | | | — | | | 11,735 | |
Balance—September 30, 2021 | 92,813,948 | | | $ | 1 | | | 78,081,076 | | | $ | — | | | (14,620,175) | | | $ | (199,817) | | | $ | 669,767 | | | $ | 331,361 | | | $ | (34,031) | | | $ | 767,281 | |
INOVALON HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)
(Unaudited, in thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2020 | 90,327,728 | | | $ | 1 | | | 79,369,411 | | | $ | — | | | (14,620,175) | | | $ | (199,817) | | | $ | 636,461 | | | $ | 278,246 | | | $ | (26,732) | | | $ | 688,159 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 7,164 | | | — | | | — | | | 7,164 | |
Exercise of stock options | 23,183 | | | — | | | — | | | — | | | — | | | — | | | 183 | | | — | | | — | | | 183 | |
Conversion of Class B to Class A common stock | 98,550 | | | — | | | (98,550) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of shares related to restricted stock units and awards, net of forfeitures | 574,082 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Shares withheld for employee taxes upon conversion of restricted stock | (148,071) | | | — | | | — | | | — | | | — | | | — | | | (2,947) | | | — | | | — | | | (2,947) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (24,200) | | | (24,200) | |
Adjustment to retained earnings for adoption of ASC 326 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 65 | | | — | | | 65 | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,683) | | | — | | | (1,683) | |
Balance—March 31, 2020 | 90,875,472 | | | $ | 1 | | | 79,270,861 | | | $ | — | | | (14,620,175) | | | $ | (199,817) | | | $ | 640,861 | | | $ | 276,628 | | | $ | (50,932) | | | $ | 666,741 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 7,757 | | | — | | | — | | | 7,757 | |
Exercise of stock options | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Conversion of Class B to Class A common stock | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of shares related to restricted stock units and awards, net of forfeitures | (40,849) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Shares withheld for employee taxes upon conversion of restricted stock | (124,672) | | | — | | | — | | | — | | | — | | | — | | | (2,163) | | | — | | | — | | | (2,163) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,824) | | | (2,824) | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,025 | | | — | | | 2,025 | |
Balance—June 30, 2020 | 90,709,951 | | | $ | 1 | | | 79,270,861 | | | $ | — | | | (14,620,175) | | | $ | (199,817) | | | $ | 646,455 | | | $ | 278,653 | | | $ | (53,756) | | | $ | 671,536 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 7,912 | | | — | | | — | | | 7,912 | |
Exercise of stock options | 2,104 | | | — | | | — | | | — | | | — | | | — | | | 15 | | | — | | | — | | | 15 | |
Conversion Class B to Class A common stock | 939,270 | | | — | | | (939,270) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of shares related to restricted stock units and awards, net of forfeitures | 175,185 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Shares withheld for employee taxes upon conversion of restricted stock | (85,702) | | | — | | | — | | | — | | | — | | | — | | | (2,035) | | | — | | | — | | | (2,035) | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,151 | | | 3,151 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 824 | | | — | | | 824 | |
Balance—September 30, 2020 | 91,740,808 | | | $ | 1 | | | 78,331,591 | | | $ | — | | | (14,620,175) | | | $ | (199,817) | | | $ | 652,347 | | | $ | 279,477 | | | $ | (50,605) | | | $ | 681,403 | |
See notes to consolidated financial statements.
INOVALON HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2021 | | 2020 |
Cash flows from operating activities: | |
| | |
| Cash flows from operating activities: | | | |
Net income | $ | 17,369 |
| | $ | 26,423 |
| Net income | $ | 30,471 | | | $ | 1,166 | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Stock-based compensation expense | 12,325 |
| | 6,352 |
| Stock-based compensation expense | 22,361 | | | 23,134 | |
Depreciation | 27,129 |
| | 20,368 |
| Depreciation | 46,988 | | | 45,894 | |
Amortization of intangibles | 11,385 |
| | 5,426 |
| Amortization of intangibles | 41,000 | | | 40,855 | |
Amortization of premiums on short-term investments | 1,571 |
| | 2,502 |
| |
Realized gains on short-term investments | — |
| | (4 | ) | |
Tax payments for equity award issuances | — |
| | 95 |
| |
Amortization of debt issuance costs and debt discount | | Amortization of debt issuance costs and debt discount | 3,686 | | | 3,535 | |
Deferred income taxes | (1,540 | ) | | (3,110 | ) | Deferred income taxes | (9,464) | | | 5,717 | |
Excess tax benefits from stock-based compensation | — |
| | (1,135 | ) | |
Loss (Gain) on disposal of equipment | 381 |
| | (534 | ) | |
Change in fair value of contingent consideration | (2,900 | ) | | 706 |
| |
Bad debt expense | — |
| | 79 |
| |
| Change in fair value of acquisition-related contingent consideration | | Change in fair value of acquisition-related contingent consideration | — | | | 3,276 | |
Impairment charge | | Impairment charge | 2,954 | | | — | |
Other | | Other | 1,207 | | | 274 | |
Changes in assets and liabilities: | |
| | |
| Changes in assets and liabilities: | | | |
Accounts receivable | 5,259 |
| | 1,332 |
| Accounts receivable | (31,657) | | | 872 | |
Prepaid expenses and other current assets | 1,931 |
| | (3,604 | ) | Prepaid expenses and other current assets | (6,998) | | | 937 | |
Income taxes receivable | 11,174 |
| | 7,677 |
| Income taxes receivable | (15,738) | | | (9,461) | |
Other assets | (2,722 | ) | | 4,189 |
| Other assets | (112) | | | (941) | |
Accounts payable | 5,653 |
| | (5,903 | ) | |
Accounts payable and accrued expenses | | Accounts payable and accrued expenses | 2,939 | | | 4,331 | |
Accrued compensation | 1,346 |
| | 2,090 |
| Accrued compensation | (6,426) | | | 1,431 | |
Other liabilities | (4,210 | ) | | 5,866 |
| |
Deferred rent | (696 | ) | | (557 | ) | |
Other current and non-current liabilities | | Other current and non-current liabilities | 1,913 | | | (7,612) | |
Deferred revenue | (2,507 | ) | | 361 |
| Deferred revenue | (3,458) | | | (4,141) | |
Payment for acquisition-related contingent consideration | | Payment for acquisition-related contingent consideration | — | | | (160) | |
Net cash provided by operating activities | 80,948 |
| | 68,619 |
| Net cash provided by operating activities | 79,666 | | | 109,107 | |
Cash flows from investing activities: | |
| | |
| Cash flows from investing activities: | | | |
Maturities of short-term investments | 150,696 |
| | 248,998 |
| |
Sales of short-term investments | — |
| | 31,549 |
| |
Purchases of short-term investments | — |
| | (164,737 | ) | |
| Purchases of property and equipment | (17,544 | ) | | (11,267 | ) | Purchases of property and equipment | (13,954) | | | (18,221) | |
Investment in capitalized software | (21,741 | ) | | (14,220 | ) | Investment in capitalized software | (50,061) | | | (33,223) | |
Acquisitions, net of cash acquired of $1,535 | (3,490 | ) | | — |
| |
Net cash provided by investing activities | 107,921 |
| | 90,323 |
| |
Purchase of intangible assets | | Purchase of intangible assets | (12,348) | | | (10,819) | |
| Net cash used in investing activities | | Net cash used in investing activities | (76,363) | | | (62,263) | |
Cash flows from financing activities: | |
| | |
| Cash flows from financing activities: | | | |
Repurchase of common stock | (64,986 | ) | | (51,118 | ) | |
| Proceeds from credit facility borrowings | | Proceeds from credit facility borrowings | — | | | 99,000 | |
Repayment of credit facility borrowings | (22,500 | ) | | (11,250 | ) | Repayment of credit facility borrowings | (7,350) | | | (106,350) | |
Payments for debt issuance costs | | Payments for debt issuance costs | — | | | (1,000) | |
Proceeds from exercise of stock options | 3,781 |
| | 5,111 |
| Proceeds from exercise of stock options | 1,110 | | | 198 | |
Acquisition-related contingent consideration | — |
| | (2,300 | ) | |
Capital lease obligations paid | (84 | ) | | (31 | ) | |
Finance lease liabilities paid | | Finance lease liabilities paid | (3,173) | | | (2,372) | |
Tax payments for equity award issuances | (208 | ) | | (137 | ) | Tax payments for equity award issuances | (8,901) | | | (7,145) | |
Excess tax benefits from stock-based compensation | — |
| | 1,135 |
| |
Payment for acquisition-related contingent consideration | | Payment for acquisition-related contingent consideration | — | | | (2,173) | |
Net cash used in financing activities | (83,997 | ) | | (58,590 | ) | Net cash used in financing activities | (18,314) | | | (19,842) | |
Increase in cash and cash equivalents | 104,872 |
| | 100,352 |
| |
(Decrease) Increase in cash and cash equivalents | | (Decrease) Increase in cash and cash equivalents | (15,011) | | | 27,002 | |
Cash and cash equivalents, beginning of period | 127,683 |
| | 114,034 |
| Cash and cash equivalents, beginning of period | 123,880 | | | 93,094 | |
Cash and cash equivalents, end of period | $ | 232,555 |
| | $ | 214,386 |
| Cash and cash equivalents, end of period | $ | 108,869 | | | $ | 120,096 | |
Supplementary cash flow disclosure: | |
| | |
| |
Cash paid during the period for: | |
| | |
| |
Income taxes, net of refunds | $ | 725 |
| | $ | 10,014 |
| |
Interest | 4,416 |
| | 3,600 |
| |
Non-cash investing activities: | |
| | |
| |
Accruals for purchases of property, equipment | 8,295 |
| | 816 |
| |
Supplemental cash flow disclosure: | | Supplemental cash flow disclosure: | | | |
| Income taxes paid, net | | Income taxes paid, net | $ | 21,828 | | | $ | 1,022 | |
Interest paid | | Interest paid | 34,411 | | | 39,642 | |
Non-cash transactions: | | Non-cash transactions: | | | |
| Accruals for purchases of property and equipment | | Accruals for purchases of property and equipment | 2,726 | | | 2,070 | |
Accruals for investment in capitalized software | 3,892 |
| | 492 |
| Accruals for investment in capitalized software | 4,231 | | | 2,960 | |
Accruals for purchase of intangible assets | | Accruals for purchase of intangible assets | 1,587 | | | 3,450 | |
| Leasehold improvements paid by lessor | | Leasehold improvements paid by lessor | — | | | 305 | |
See notes to condensed consolidated financial statements.
INOVALON HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared by Inovalon Holdings, Inc. (the "Company"(“Inovalon” or the “Company”) in accordance with accounting principles generally accepted in the United States ("GAAP"(“GAAP”) for interim financial reporting and as required by Rule 10-01 of Regulation S-X. Accordingly, the unaudited condensed consolidated financial statements may not include all of the information and notes required by GAAP for audited financial statements. The year-end December 31, 2016 condensed2020 consolidated balance sheet data included herein was derived from audited financial statements but does not include all disclosures required by GAAP for complete financial statements. In the opinion of the Company'sCompany’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of items of a normal and recurring nature, necessary to present fairly the Company'sCompany’s financial position as of September 30, 2017,2021, the results of operations, and comprehensive income (loss), and stockholders’ equity for the three and nine monthnine-month periods ended September 30, 20172021 and 2016,2020 and cash flows for the nine monthsmonth period ended September 30, 20172021 and 2016.2020. The results of operations for the three and nine monthnine-month periods ended September September��30, 20172021 and 20162020 are not necessarily indicative of the results to be expected for the full year. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, and related disclosures, as of the date of the financial statements, and the amounts of revenue and expenses reported during the period. Actual results could differ from estimates. The information contained herein should be read in conjunction with the audited financial statements included in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 20162020 (the "2016“2020 Form 10-K"10-K”).
The accompanying unaudited condensed 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.
The Company'sCompany’s management considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements.
On August 19, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ocala Bidco, Inc., a Delaware corporation (“Parent”), and Ocala Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will merge with and into Inovalon (the “Merger”), with Inovalon continuing as the surviving corporation and a wholly owned subsidiary of Parent. See “Note 9—Merger Agreement” for additional information.
Recently Issued Accounting Standards
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company'sCompany’s consolidated financial statements and note disclosures, from those disclosed in the 20162020 Form 10-K, that would be expected to impact the Company.
2.REVENUE
The Company except forprimarily derives its revenues through the following:
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customerssale or subscription licensing of its platform solutions and subsequent clarifying guidance ("ASU 2014-09"). This revenue recognition guidance supersedes existing GAAP guidance, including most industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance identifies five stepsfollowing table disaggregates revenue by offering (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Platform solutions(1) | $ | 176,165 | | | $ | 145,862 | | | $ | 509,836 | | | $ | 433,627 | |
Services(2) | 16,065 | | | 15,515 | | | 50,009 | | | 44,152 | |
Total revenue | $ | 192,230 | | | $ | 161,377 | | | $ | 559,845 | | | $ | 477,779 | |
(1)Platform solutions include arrangements for technology-based offerings representing subscription-based cloud-based platform offerings, real-time accessibility of comprehensive patient-specific healthcare data and analytical insights through Inovalon DataStream™, and legacy platform solutions that are not cloud-based and not billed under a subscription-based contract structure.
(2)Services include advisory, implementation, and support services under time and materials, fixed price, or retainer-based contracts.
Contract Balances
As of September 30, 2021, the Company had contract assets of $95.8 million of which $72.6 million was included in accounts receivable, $10.1 million was included in prepaid expenses and other current assets, and $13.1 million was included in other assets on the consolidated balance sheets. As of December 31, 2020, the Company had contract assets of $63.0 million of which $40.2 million was included in accounts receivable, $7.6 million was included in prepaid expenses and other current assets, and $15.2 million was included in other assets on the consolidated balance sheets.
As of September 30, 2021, the Company had contract liabilities of $17.9 million, which is included in deferred revenue on the consolidated balance sheet and presented net of contract assets of $8.0 million. As of December 31, 2020, the Company had contract liabilities of $22.3 million, which is included in deferred revenue on the consolidated balance sheet and presented net of contract assets of $11.4 million. Revenue recognized during the three and nine months ended September 30, 2021 that was included in the deferred revenue balance at the beginning of the year was $3.4 million and $19.3 million, respectively.
Costs to apply in achieving this principle. ASU 2014-09 is effective for fiscal years beginning after December 15, 2017. ASU 2014-09 may be applied either retrospectively or through the use ofObtain a modified-retrospective method. Contract
The Company currently expects to adopthad a deferred commissions balance of $23.0 million and $18.9 million as of September 30, 2021 and December 31, 2020, respectively. Short-term and long-term deferred commissions are classified as prepaid expenses and other current assets and other assets on the new standard using a modified retrospective approach on January 1, 2018. The Company is currently evaluating the impacts of the application of the new standard to its existing customer contracts and will continue to review new contracts entered into prior to the adoption of the new standard. The Company is currently in the process of finalizing policies and implementing changes to our processes, including a process for future contract reviews, and internal control over financial reporting. The potential impacts of the new standard are still being assessed related to the accounting arrangements that include variable consideration, capitalization of costs of commissions that were previously expensed as incurred, upfront contract costs and contract fulfillment costs. The Company will provide additional disclosures as required by the new standard upon adoption.consolidated balance sheet, respectively.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new standard narrows the definition of a business and provides a framework for evaluation. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the requirements of the new standard in the fourth quarter of 2017 on a prospective basis.
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 and the Company early adopted the requirements of the new standard in the fourth quarter of 2017 as it performs its annual impairment analysis. The Company is in the process of evaluating each of its reporting units based on current and forecasted financial information and will finalize the valuations and impairment analysis during the fourth quarter of 2017.
2.3.NET INCOME PER SHARE
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. Basic earnings per share ("EPS"(“EPS”) is computed by dividing net income by the weighted average number of shares of common stock (Class A common stock and Class B common stock) outstanding during the period. Diluted EPS is computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding and potentially dilutive securities outstanding during the period under the treasury stock method. If the Company incurs a loss from continuing operations, diluted EPS is computed in the same manner as basic EPS. Potentially dilutive securities include stock options, restricted stock units ("RSUs"(“RSUs”) and restricted stock awards ("RSAs"(“RSAs”). 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 earnings per share if their effect would be anti-dilutive to EPS.
On February 18, 2015, the date of the completion of the Company’s IPO, the Company’s 2015 Omnibus Incentive Plan (the “2015 Plan”) became effective. The 2015 Plan provided for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), to the Company’s employees and any parent and subsidiary employees, and for the grant of non-qualified stock options, stock appreciation rights, restricted stock, RSAs, RSUs, dividend equivalent rights, cash-based awards (including annual cash incentives and long-term cash incentives), and any combination thereof to the Company’s employees, directors, and consultants and to employees, directors, and consultants of certain affiliated entities. At the Company’s annual meeting of stockholders held on June 5, 2019, the Company’s stockholders, upon the recommendation of the Board of Directors of the Company (the “Board”), approved the Amended and Restated 2015 Omnibus Incentive Plan (the “Amended Plan”), which was previously adopted by the Board on February 14, 2019, subject to the approval by the stockholders. The Amended Plan (i) increases the maximum number of shares of the Company’s Class A common stock available for issuance by 6,000,000 shares to a total of 13,335,430; (ii) removes the provisions regarding Section 162(m) of the Code that are no longer relevant due to recent changes to the Code pursuant to the Tax Cuts and Jobs Act of 2017, which eliminated the “performance-based compensation” exception to the deduction limitation under Section 162(m) of the Code; and (iii) extends the term of the Amended Plan until the tenth anniversary of the date of Board approval of the Amended Plan.
The Company has issued RSAs under the 2015 Omnibus IncentiveAmended 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. 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 following table reconciles the weighted average shares outstanding for basic and diluted EPS for the periods indicated (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Basic | | | | | | | |
Numerator: | | | | | | | |
Net income | $ | 11,735 | | | $ | 824 | | | $ | 30,471 | | | $ | 1,166 | |
Undistributed earnings allocated to participating securities | (325) | | | (24) | | | (817) | | | (36) | |
Net income attributable to common stockholders—basic | $ | 11,410 | | | $ | 800 | | | $ | 29,654 | | | $ | 1,130 | |
Denominator: | | | | | | | |
Weighted average shares used in computing net income per share attributable to common stockholders—basic | 150,873 | | | 149,720 | | | 150,624 | | | 149,474 | |
Net income per share attributable to common stockholders—basic | $ | 0.08 | | | $ | 0.01 | | | $ | 0.20 | | | $ | 0.01 | |
Diluted | | | | | | | |
Numerator: | | | | | | | |
Net income attributable to common stockholders—diluted | $ | 11,410 | | | $ | 800 | | | $ | 29,654 | | | $ | 1,130 | |
Denominator: | | | | | | | |
Number of shares used for basic EPS computation | 150,873 | | | 149,720 | | | 150,624 | | | 149,474 | |
Effect of dilutive securities | 79 | | | 183 | | | 104 | | | 176 | |
Weighted average shares used in computing net income per share attributable to common stockholders—diluted | 150,952 | | | 149,903 | | | 150,728 | | | 149,650 | |
Net income per share attributable to common stockholders—diluted | $ | 0.08 | | | $ | 0.01 | | | $ | 0.20 | | | $ | 0.01 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Basic | |
| | |
| | | | |
Numerator: | |
| | |
| | | | |
Net income | $ | 8,241 |
| | $ | 7,807 |
| | $ | 17,369 |
| | $ | 26,423 |
|
Undistributed earnings allocated to participating securities | (273 | ) | | (36 | ) | | (464 | ) | | (115 | ) |
Net income attributable to common stockholders | $ | 7,968 |
| | $ | 7,771 |
| | $ | 16,905 |
| | $ | 26,308 |
|
Denominator: | |
| | |
| | | | |
Weighted average shares used in computing net income per share attributable to common stockholders—basic | 141,226 |
| | 150,732 |
| | 142,861 |
| | 151,240 |
|
Net income per share attributable to common stockholders—basic | $ | 0.06 |
| | $ | 0.05 |
| | $ | 0.12 |
| | $ | 0.17 |
|
Diluted | |
| | |
| | | | |
Numerator: | |
| | |
| | | | |
Net income attributable to common stockholders | $ | 7,968 |
| | $ | 7,771 |
| | $ | 16,905 |
| | $ | 26,308 |
|
Denominator: | |
| | |
| | | | |
Number of shares used for basic EPS computation | 141,226 |
| | 150,732 |
| | 142,861 |
| | 151,240 |
|
Effect of dilutive securities | 473 |
| | 830 |
| | 466 |
| | 882 |
|
Weighted average shares used in computing net income per share attributable to common stockholders—diluted | 141,699 |
| | 151,562 |
| | 143,327 |
| | 152,122 |
|
Net income per share attributable to common stockholders—diluted | $ | 0.06 |
| | $ | 0.05 |
| | $ | 0.12 |
| | $ | 0.17 |
|
4. LEASES
The computationCompany determines whether a contract is or contains a lease at inception. At the lease commencement date, the Company records a liability for the lease obligation and a corresponding asset representing the right to use the underlying asset over the lease term. Leases with an initial term of diluted EPS does12 months or less are not recorded on the consolidated balance sheet and are recognized in expense using a straight-line basis for all asset classes. Variable lease payments are expensed as incurred, which primarily include maintenance costs, services provided by the lessor, and other charges reimbursed to the lessor.
The Company leases office space, data center facilities, printers, and equipment with remaining lease terms ranging from one year to twelve years, some of which contain renewal or purchase options. The exercise of these options is at the Company’s sole discretion. The Company has entered into sublease agreements for unoccupied leased office space and records sublease income netted against rent expense. Additionally, the Company is required to maintain a standby letter of credit in the amount of $1.0 million to satisfy the requirements of a certain awards,lease agreement.
Certain of the Company’s leases contain lease and non-lease components. The Company has elected the practical expedient under ASC 842-10-15-37 for all asset classes which allows companies to account for lease and non-lease components as a single lease component.
Certain Company leases do not contain an implicit rate of return, therefore an incremental borrowing rate was determined. The Company assessed which rate would be most reflective of a reasonable rate the Company would be able to borrow based on a weighted average basis,asset class and lease term.
Finance lease right-of-use assets of $20.4 million are included in property, equipment, and capitalized software, net on the consolidated balance sheet.
The following table presents components of lease expense for the three and nine months ended September 30, 20172021 and 2016, respectively, because their inclusion would have an anti-dilutive effect on EPS. The awards excluded because of their anti-dilutive effectSeptember 30, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Finance lease cost | | | | | | | |
Amortization of right-of-use assets | $ | 937 | | | $ | 907 | | | $ | 2,811 | | | $ | 2,660 | |
Interest on lease liabilities | 202 | | | 207 | | | 629 | | | 588 | |
Operating lease cost | 2,173 | | | 2,545 | | | 6,603 | | | 7,808 | |
| | | | | | | |
Variable lease cost | 310 | | | 415 | | | 913 | | | 1,192 | |
Sublease income | (130) | | | (212) | | | (474) | | | (556) | |
Total lease cost | $ | 3,492 | | | $ | 3,862 | | | $ | 10,482 | | | $ | 11,692 | |
Supplemental cash flow information related to leases for the nine months ended September 30, 2021 and September 30, 2020 are as follows (in thousands):
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2021 | | 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows for operating leases | $ | 5,121 | | | $ | 7,177 | |
Operating cash flows for financing leases | 630 | | | 587 | |
Financing cash flows for financing leases | 3,173 | | | 2,372 | |
Right-of-use assets obtained in exchange for lease liabilities(1): | | | |
Operating leases | $ | 676 | | | $ | (1,674) | |
Finance leases | — | | | 11,694 | |
(1)During the second quarter of 2020, the Company executed an amendment to an existing lease agreement resulting in the reclassification of certain lease components from an operating lease to a finance lease. As such, the Company recorded an adjustment to reduce the operating lease liability and the corresponding operating lease right-of-use asset and increase the finance lease liability and corresponding finance lease right-of-use asset.
Supplemental balance sheet information related to leases as of September 30, 2021 and December 31, 2020 are as follows:
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
Weighted average remaining lease term: | | | |
Operating leases | 8 years | | 4 years |
Financing leases | 8 years | | 8 years |
Weighted average discount rate: | | | |
Operating leases | 4.1 | % | | 4.1 | % |
Financing leases | 3.0 | % | | 3.0 | % |
5. DEBT
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Awards excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive | 42 |
| | 240 |
| | 138 |
| | 138 |
|
3.SHORT-TERM INVESTMENTS
On April 2, 2018, the Company entered into a credit agreement (the “2018 Credit Agreement”) with a group of lenders and Morgan Stanley Senior Funding, Inc. (“MSSF”), 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 2018 Revolving Facility will terminate on April 2, 2023 and the 2018 Term Facility will mature on April 2, 2025. As of September 30, 2017, short-term investments consisted2021, the Company had $100.0 million available to it consisting of $99.0 million on the 2018 Revolving Facility and a letter of credit of $1.0 million.
On February 11, 2020, the Company executed an amendment to the 2018 Credit Agreement to reprice the applicable interest rate margins on the 2018 Credit Facilities, resulting in a decrease to the applicable interest rate margin by 50 basis points to 3.00%. During the first quarter of 2021, the Company achieved a defined senior secured net leverage ratio which
resulted in an additional 25 basis point reduction to the applicable interest rate margin to 2.75%. Other material provisions under the 2018 Credit Agreement, including covenants, the maturity date of April 2, 2025, with respect to the 2018 Term Facility, and April 2, 2023, with respect to the 2018 Revolving Facility, and amount of debt available to the Company, remained unchanged by the repricing amendment.
At the option of the following (in thousands):
|
| | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Available-for-sale securities: | |
| | |
| | |
| | |
|
Corporate notes and bonds | $ | 257,468 |
| | $ | 61 |
| | $ | (313 | ) | | $ | 257,216 |
|
U.S. agency obligations | 15,322 |
| | — |
| | (55 | ) | | 15,267 |
|
U.S. treasury securities | 20,725 |
| | — |
| | (107 | ) | | 20,618 |
|
Total available-for-sale securities | $ | 293,515 |
| | $ | 61 |
| | $ | (475 | ) | | $ | 293,101 |
|
Company, the loans outstanding under the 2018 Term Facility will bear interest either at: (i) Adjusted LIBOR plus an applicable rate of 2.75% 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 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 December 31, 2016, 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 | $ | 349,571 |
| | $ | 36 |
| | $ | (918 | ) | | $ | 348,689 |
|
U.S. agency obligations | 34,864 |
| | 22 |
| | (78 | ) | | 34,808 |
|
U.S. treasury securities | 53,681 |
| | 6 |
| | (100 | ) | | 53,587 |
|
Commercial paper | 6,312 |
| | — |
| | (3 | ) | | 6,309 |
|
Certificates of deposit | 1,921 |
| | 1 |
| | — |
| | 1,922 |
|
Total available-for-sale securities | $ | 446,349 |
| | $ | 65 |
| | $ | (1,099 | ) | | $ | 445,315 |
|
1.0% and (iii) one-month Adjusted LIBOR plus 1.0%.The following table summarizesdiscloses the estimated fair value of our short-term investments, designatedoutstanding debt at each balance date as available-for-sale and classified by the contractual maturity date of the securities as of the dates shownfollows (in thousands):
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
2018 Term Facility(1) | $ | 883,407 | | | $ | 887,374 | |
| | | |
| | | |
| | | |
| | | |
Less: current portion | 9,800 | | | 9,800 | |
Non-current Credit Facilities | $ | 873,607 | | | $ | 877,574 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Due in one year or less | $ | 181,387 |
| | $ | 176,696 |
|
Due after one year through three years | 111,714 |
| | 268,619 |
|
Total | $ | 293,101 |
| | $ | 445,315 |
|
(1)The Company has certain available-for-sale securities in a gross unrealized loss 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 length2018 Term Facility is presented net of timeunamortized deferred financing fees and extent to which the market value has been less than the cost, the financial positionoriginal issue discount (“OID”) of $17.2 million and near-term prospects of the issuer and the Company's intent to sell, or whether it is more likely than not the Company will be required to sell the investment before recovery of the investment's amortized-cost basis. If the Company determines that an other-than-temporary decline exists, or if write downs related to credit losses are necessary, in one of these securities, the unrealized losses attributable to the respective investment would be reclassified to realized losses on short-term investments within the statement of operations. There were no impairments considered other-than-temporary$20.6 million as of September 30, 2017.
2021 and December 31, 2020, respectively.
The following table showsCompany and its Restricted Subsidiaries (as defined in the fair values2018 Credit Agreement) are subject to certain affirmative and negative covenants under the 2018 Credit Agreement, and the gross unrealized losses2018 Credit Agreement includes certain customary representations and warranties of available-for-sale securities that were in a gross unrealized loss position, asthe Company. As of September 30, 2017, aggregated by investment category (in thousands):2021, the Company is in compliance with the covenants under the 2018 Credit Agreement.
|
| | | | | | | |
| Estimated Fair Value | | Gross Unrealized Losses |
Corporate notes and bonds | $ | 186,286 |
| | $ | (313 | ) |
U.S. agency obligations | 15,267 |
| | (55 | ) |
U.S. treasury securities | 20,618 |
| | (107 | ) |
| $ | 222,171 |
| | $ | (475 | ) |
4.6.FAIR VALUE MEASUREMENTS
The following table presents the fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of September 30, 20172021 (in thousands):
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Cash Equivalents: | |
| | |
| | |
| | |
|
Money market funds | $ | 160,828 |
| | $ | — |
| | $ | — |
| | $ | 160,828 |
|
Short-term investments: | |
| | |
| | |
| | |
|
Corporate notes and bonds | — |
| | 257,216 |
| | — |
| | 257,216 |
|
U.S. agency obligations | — |
| | 15,267 |
| | — |
| | 15,267 |
|
U.S. treasury securities | — |
| | 20,618 |
| | — |
| | 20,618 |
|
Certificates of deposit | — |
| | — |
| | — |
| | — |
|
Liabilities: | |
| | |
| | |
| | |
|
Contingent consideration | — |
| | — |
| | (9,700 | ) | | (9,700 | ) |
Total | $ | 160,828 |
| | $ | 293,101 |
| | $ | (9,700 | ) | | $ | 444,229 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Cash equivalents: | | | | | | | |
Money market funds | $ | 42,100 | | | $ | — | | | $ | — | | | $ | 42,100 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other current liabilities: | | | | | | | |
Interest rate swaps | — | | | (18,765) | | | — | | | (18,765) | |
Contingent consideration | — | | | — | | | (14,810) | | | (14,810) | |
Other liabilities: | | | | | | | |
Interest rate swaps | — | | | (31,354) | | | — | | | (31,354) | |
Contingent consideration | — | | | — | | | (1,373) | | | (1,373) | |
Total | $ | 42,100 | | | $ | (50,119) | | | $ | (16,183) | | | $ | (24,202) | |
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, 20162020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Cash equivalents: | | | | | | | |
Money market funds | $ | 42,096 | | | $ | — | | | $ | — | | | $ | 42,096 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other current liabilities: | | | | | | | |
Interest rate swaps | — | | | (18,694) | | | — | | | (18,694) | |
Contingent consideration | — | | | — | | | (14,810) | | | (14,810) | |
Other liabilities: | | | | | | | |
Interest rate swaps | — | | | (51,659) | | | — | | | (51,659) | |
Contingent consideration | — | | | — | | | (1,373) | | | (1,373) | |
Total | $ | 42,096 | | | $ | (70,353) | | | $ | (16,183) | | | $ | (44,440) | |
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Cash Equivalents: | |
| | |
| | |
| | |
|
Money market funds | $ | 44,108 |
| | — |
| | — |
| | $ | 44,108 |
|
Short-term investments: | |
| | |
| | |
| | |
|
Corporate notes and bonds | — |
| | 348,689 |
| | — |
| | 348,689 |
|
U.S. agency obligations | — |
| | 34,808 |
| | — |
| | 34,808 |
|
U.S. treasury securities | — |
| | 53,587 |
| | — |
| | 53,587 |
|
Commercial paper | — |
| | 6,309 |
| | — |
| | 6,309 |
|
Certificates of deposit | — |
| | 1,922 |
| | — |
| | 1,922 |
|
Other Current Liabilities: | |
| | |
| | |
| | |
|
Contingent consideration | — |
| | — |
| | (12,600 | ) | | (12,600 | ) |
Total | $ | 44,108 |
| | $ | 445,315 |
| | $ | (12,600 | ) | | $ | 476,823 |
|
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 observableprevailing market data or quoted market prices for similar instruments.interest rates and discount rates to present value future cash flows based on the forward LIBOR yield curves. Such market rates or prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted rates or 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 rates or prices obtained from other sources.
The following table presents our financial instruments measured at fair value using unobservable inputs (Level 3) (in thousands):
| | | | | | | | | | | |
| Fair Value Measurements Using Unobservable Inputs (Level 3) |
| September 30, 2021 | | December 31, 2020 |
Balance, beginning of period | $ | (16,183) | | | $ | (16,790) | |
Fair value adjustment (recognized in general and administrative expenses) | — | | | (2,967) | |
Accretion expense (recognized in general and administrative expenses) | — | | | (109) | |
Settlement of liability | — | | | 3,683 | |
Total | $ | (16,183) | | | $ | (16,183) | |
2018 Credit Facilities
The Company records debt on the balance sheet at carrying value. The estimated fair value of the Company’s debt is determined based on Level 2 inputs including current market rates for similar types of borrowings. The following table presents the carrying value and fair value of the Company’s debt (including the current portion thereof) as of September 30, 2021 (in thousands):
| | | | | | | |
| September 30, 2021 | | |
Carrying value | $ | 883,407 | | | |
Fair value | $ | 882,303 | | | |
Interest Rate Swaps
In connection with the 2018 Credit Agreement, the Company entered into 4 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 interest rate swaps fix the LIBOR component of interest on $700.0 million of the 2018 Term Facility at a weighted average rate of approximately 2.8%. See “Note 5—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 (loss) 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.
The following table presents the location and amount of gains and losses on interest rate swaps included in other comprehensive income (“OCI”) and the statement of operations for the three and nine months ended September 30, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2021 | | Gain (Loss) recognized in OCI | | Statement of Operations Location | | (Gain) Loss reclassified from OCI |
Interest rate swap contract | | $ | (428) | | | Interest expense | | $ | 4,842 | |
Nine Months Ended September 30, 2021 | | Gain (Loss) recognized in OCI | | Statement of Operations Location | | (Gain) Loss reclassified from OCI |
Interest rate swap contract | | $ | 5,956 | | | Interest expense | | $ | 14,291 | |
|
| | | | | | | |
| Fair Value Measurements Using Unobservable Inputs (Level 3) |
| September 30, 2017 | | December 31, 2016 |
Balance, beginning of period | $ | (12,600 | ) | | $ | (2,300 | ) |
Accretion expense (recognized in general and administrative expenses) | 2,900 |
| | (706 | ) |
Settlement (payment) of liability | — |
| | 3,006 |
|
Contingent consideration attributable to Creehan acquisition | — |
| | (12,600 | ) |
Total | $ | (9,700 | ) | | $ | (12,600 | ) |
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2020 | | Gain (Loss) recognized in OCI | | Statement of Operations Location | | (Gain) Loss reclassified from OCI |
Interest rate swap contract | | $ | (88) | | | Interest expense | | $ | 4,700 | |
Nine Months Ended September 30, 2020 | | Gain (Loss) recognized in OCI | | Statement of Operations Location | | (Gain) Loss reclassified from OCI |
Interest rate swap contract | | $ | (45,997) | | | Interest expense | | $ | 10,867 | |
The net amount of accumulated other comprehensive loss expected to be reclassified to interest expense in the next 12 months is $18.9 million. 5.
7.COMMITMENTS AND CONTINGENCIES
Legal 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 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.
On June 24, 2016,September 30, 2021, a purported securities class actionstockholder of the Company, Robert Clasby, filed a complaint (Xiang v. Inovalon Holdings, Inc., et.al., No. 1:16-cv-04923) was filed in the United States District Court for the Southern District of New York against the Company certain officers, directors and underwriters in the Company's initial public offering (the "Complaint"). The Complaint was brought on behalf of a purported class consisting of all persons or entities who purchased shareseach member of the Company's Class A common stock pursuant or traceable to the Registration Statement relating to the Company's initial public offering on February 18, 2015. The Complaint asserted violations of Sections 11 and 15 of the Securities Act based on allegedly false or misleading statements and omissions with respect to, among other things, the Company's revenues from sales in the city and state of New York and the Company's effective tax rate. The Complaint sought certification as a class action and unspecified compensatory damages plus interest and attorneys' fees. On June 28, 2016, a nearly identical complaint was filed in the same courtCompany Board, captioned PatelRobert Clasby v. Inovalon Holdings, Inc., et. al. et al., Case No. 1:16-cv-05065.21-cv-08120 (the “Clasby Complaint”). On July 5, 2016,October 7, 2021, two different purported stockholders of the court consolidated the Xiang and Patel actions. On September 20, 2016, the court appointed a lead plaintiff and lead counsel. On December 21, 2016, lead plaintiffCompany each filed a consolidated class action complaint in the United States District Court for the Southern District of New York against the Company and each member of the Company Board, captioned Herbert Silverberg v. Inovalon Holdings, Inc., et al., Case No. 1:21-cv-08287 (the "Amended Complaint"“Silverberg Complaint”) purporting to assert violationsand Alex Ciccotelli v. Inovalon Holdings, Inc., et al., Case No. 1:21-cv-08288 (the “Ciccotelli Complaint”), respectively. On October 11, 2021, another purported stockholder of Sections 11, 12(a)(2)the Company filed a complaint in the United States District Court for the Eastern District of New York against the Company and each member of the Company Board, captioned Dee Claybrook v. Inovalon Holdings, Inc., et al., Case No. 1:21-cv-05665 (the “Claybrook Complaint”). The Clasby Complaint, Silverberg Complaint, Ciccotelli Complaint, and 15Claybrook Complaint collectively constitute the “Federal Court Complaints.” The Federal Court Complaints allege that the Company’s Schedule 14A filed September 17, 2021 (or October 8, 2021 in the case of the Securities Act of 1933, as amended, based on allegedly false or misleading statements and omissionsClaybrook Complaint) omits material information with respect to substantially the same topicsMerger and that, as allegeda result all defendants violated Section 14(a) of the Exchange Act. The Silverberg Complaint, Ciccotelli Complaint, and Claybrook Complaint also allege that all defendants violated Rule 14A-9 promulgated under the Exchange Act. The Clasby Complaint, Ciccotelli Complaint, and Claybrook Complaint additionally allege that each member of the Company Board violated Section 20(a) of the Exchange Act. The Federal Court Complaints seek (i) injunctive relief; (ii) rescissory damages; (iii) plaintiff’s attorneys’ and experts’ fees and costs; and (iv) other such relief that the court deems just and proper. The Ciccotelli Complaint, Clasby Complaint, and Claybrook Complaint additionally seek (i) rescission in the Complaint. On February 21, 2017,event the Merger Agreement and as required by the court's individual practices,transactions contemplated thereby, including the Merger, are consummated and, (ii) in the case of the Ciccotelli Complaint and Clasby Complaint a direction that the Company invoked the pre-motion process required prior to filingBoard issue a motion to dismiss. On May 23, 2017, the court issuedrevised Schedule 14A. The Ciccotelli Complaint and Claybrook Complaint additionally seek a decision and order construing the pre-motion letter submitted bydeclaration that the defendants as a motion to dismiss, granting dismissalviolated Sections 14(a) and 20(a) of the Section 12 claims against the individual defendants, but denying dismissalExchange Act, as well as Rule 14a-9 promulgated thereunder. Additionally, on October 21, 2021, purported stockholders of the remaining claims. On June 6, 2017, defendantsCompany, Steamfitters Local 449 Pension Fund and Steamfitters Local 449 Retirement Security Fund filed a joint motion for reconsideration and supporting memorandum of law seeking reconsideration of the court’s decision and arguing that plaintiff’s claims are time-barred. Also on June 6, 2017, defendants submitted a letter to the court requesting,complaint in the alternative to the motion for reconsideration, a pre-motion conference concerning defendants’ anticipated motion for certificationCourt of an interlocutory appeal to resolve a controlling question of law. On July 11, 2017, the Company and its officers and directors filed their answer to the Amended Complaint denying that plaintiffs are entitled to any relief. On July 28, 2017, the court issued a decision and order denying both the motion for reconsideration and defendant’s request for an interlocutory appeal. In light of, among other things, the early stage of the litigation, the Company is unable to predict the outcome of these consolidated actions and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from this proceeding.
On June 29, 2017, Virginia Rodriquez filed a putative shareholder derivative suit in the Supreme CourtChancery of the State of New York, County of Westchester,Delaware against certainthe Company, each member of the Company’s presentCompany Board, and former directorscertain other entities and officersindividuals captioned Steamfitters Local 449 Pension Fund and Steamfitters Local 449 Retirement Security Fund v. Inovalon Holdings, Inc., et al., C.A. No. 2021-0914-CM (the “Derivative Complaint”“Steamfitters Complaint”). On October 27, 2021, the Company publicly filed a Schedule 14A providing additional information on the Steamfitters Complaint and attaching as an annex thereto a copy of the Complaint, and on November 5, 2021, the Company publicly filed a Schedule 14A providing additional information on the Federal Court Complaints and the Steamfitters Complaint. The Company was named as a nominal defendant. The Derivative Complaint makes allegations similarrefers stockholders to the allegationsOctober 27 and November 5 Schedule 14A submissions for additional information. The Company believes the claims asserted in the securities class action AmendedFederal Court Complaints and in the Steamfitters Complaint described above and asserts claims for breach of fiduciary duty, are without merit.
unjust enrichment, abuse of control and gross mismanagement, and seeks unspecified damages, an order directingAdditional lawsuits may be filed against the Company, "to reform and improve" certain corporate governance and internal procedures, restitution from the defendants and disgorgement of all profits, benefits and other compensation received and costs and disbursements incurredCompany Board or the Company’s officers in connection with the action, including attorneys' fees. On September 12, 2017,Merger, which could prevent or delay completion of the Merger and result in substantial costs to the Company, and the individual defendants filed a joint motion to dismiss the Derivative Complaint solely, as directed by the court, on the basisincluding any costs associated with indemnification.
8.IMPAIRMENT CHARGE
Impairment of Incorporation, which motion is pending before the court. Long-Lived Assets—The Company reviews long-lived assets for events or changes in circumstances that would indicate potential impairment. If the Company determines that the carrying value of an asset may not be recoverable, an impairment charge is recorded. During the third quarter of 2021, the Company concluded it had a nominal defendant intriggering event that required an assessment for impairment for certain of its long-lived assets related to the derivative actiondiscontinuation of an internally developed software project. As the asset was determined to provide no future benefit, the Company recorded an impairment charge of $3.0 million.
9.MERGER AGREEMENT
On August 19, 2021, the Company entered into an Agreement and in lightPlan of among other things,Merger (the “Merger Agreement”) with Ocala Bidco, Inc., a Delaware corporation (“Parent”), and Ocala Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”). The Merger Agreement provides that, upon the early stageterms and subject to the satisfaction or waiver of the litigation,conditions set forth therein, Merger Sub will merge with and into Inovalon (the “Merger”), with Inovalon continuing as the Company is unable to predict the outcome of this actionsurviving corporation and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from this proceeding.
6.BUSINESS COMBINATIONS
ComplexCare Solutions Acquisition
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. In accordance with ASC No. 805, Business Combinations, the preliminary allocation of the consideration value is subject to adjustment until the Company has completed its analysis, but not to exceed one year after the date of acquisition. The total purchase price has been allocated on a preliminary basis to identifiable assets acquired and liabilities assumed based upon valuation procedures performed to-date. The Company acquired all of the capital stock of 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 $9.3 million of assets, including approximately $1.5 million of cash, and approximately $4.8 million of liabilities.
Creehan Acquisition
On October 3, 2016, the Company completed its acquisition of Creehan Holding Co., Inc. ("Creehan"). Creehan, through its subsidiary Creehan & Company Corporation, is a leading provider of specialty pharmacy software solutions to the pharmaceutical industry. Pursuant to the terms of the Stock Purchase Agreement between the Company and Creehan (the "Stock Purchase Agreement"), Creehan became a wholly owned subsidiary of Inovalon.Parent.
Pursuant to the terms of the Stock PurchaseMerger Agreement, Inovalon acquired allat the effective time of the Merger (the “Effective Time”) and as a result of the Merger, each share of common stock of Inovalon issued and outstanding capitalimmediately prior to the Effective Time will be cancelled and extinguished and, except with respect to (a) certain shares held by certain stockholders of Inovalon, including shares held by Dr. Dunleavy and certain holders of Inovalon’s Class B common stock who will, pursuant to one or more rollover agreements, exchange such shares for equity interests of Creehan for an aggregate purchase priceOcala Topco, LP, a Delaware limited partnership, (b) shares held by Parent or Merger Sub (or any of $130 million, which was comprisedtheir respective subsidiaries) in the treasury of $120 millionInovalon and (c) shares held by a stockholder who properly exercises and perfects appraisal of his, her or its shares under Delaware law, automatically converted into and thereafter represent the right to receive $41.00 in cash and $10 million in shares of Class A common stockwithout interest.
The proposed transactions constitute a “going-private transaction” under the rules of the Company.SEC. The Company completed the acquisition of Creehan through the use of cash on hand and the issuance of 651,355 shares of Class A common stock, subject to resale restrictions. Certain components, which are referred to below as contingent consideration,closing of the aggregate purchase price aretransactions contemplated by the Merger Agreement (including the Merger) is expected to occur in the fourth quarter of 2021, subject to the achievementsatisfaction or waiver (if such waiver is permissible under the Merger Agreement or under applicable law) of financial performance objectives. The Company acquired Creehan forcertain conditions set forth in the assembled workforce, technology platform, client base,Merger Agreement.
Additional information about the Merger Agreement and to accelerate entry into the specialty pharmacy software market. Transaction costsMerger is set forth in connectionthe Company's Definitive Proxy Statement on Schedule 14A filed with the acquisition are expensedSEC on October 15, 2021, and as incurredsupplemented on October 27, 2021 and are included in general and administrative expenses. The results of operations related to Creehan are included in our consolidated statements of operations beginning from the date of acquisition.November 5, 2021.
A summary of the final composition of the stated purchase price and fair value of the stated purchase price is as follows (in thousands):
|
| | | |
Share Purchase Agreement purchase price | $ | 130,000 |
|
Working capital adjustment | 755 |
|
Subtotal | 130,755 |
|
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 |
|
During the nine months ended September 30, 2017, the Company finalized the working capital adjustment 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 of the consideration transferred is as follows (in thousands):
|
| | | |
Cash | $ | 89,803 |
|
Issuance of Class A common stock | 7,764 |
|
Contingent consideration | 12,600 |
|
Total fair value purchase price | $ | 110,167 |
|
Recording of Assets Acquired and Liabilities Assumed
As of September 30, 2017, the Company had finalized the fair value of acquired assets, assumed liabilities and tax related matters. The following table summarizes the purchase price allocation to assets acquired and liabilities assumed, including identification of measurement period adjustments (in thousands):
|
| | | |
| Recorded Value |
Cash and cash equivalents | $ | 861 |
|
Accounts receivable | 9,048 |
|
Other current assets | 171 |
|
Property, equipment and capitalized software | 641 |
|
Intangible assets(1) | 50,900 |
|
Goodwill(2) | 51,362 |
|
Total assets acquired | 112,983 |
|
Current liabilities | (916 | ) |
Deferred revenue | (1,900 | ) |
Total liabilities assumed | (2,816 | ) |
Net assets acquired | $ | 110,167 |
|
| |
(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. |
The amounts attributed to identified intangible assets are summarized in the table below (in thousands):
|
| | | | | |
| Weighted Average Useful Life | | Recorded Value |
Customer relationships | 8 years | | $ | 36,500 |
|
Tradename | 4 years | | 4,000 |
|
Technology | 4 years | | 8,800 |
|
In-process Research and Development | indefinite | | 1,600 |
|
Total intangible assets | | | $ | 50,900 |
|
The following table summarizes the activity related to the carrying value of our goodwill during the nine months ended September 30, 2017 (in thousands):
|
| | | |
Goodwill as of January 1, 2017 | $ | 184,557 |
|
Measurement period adjustments | 375 |
|
Goodwill as of September 30, 2017 | $ | 184,932 |
|
7.STOCKHOLDERS' EQUITY
Treasury Stock—On May 4, 2016, the Company announced that its Board of Directors authorized a program to repurchase up to $100 million of Inovalon's Class A common stock through December 31, 2016. Repurchases under the Company's share repurchase program have been made in open-market or privately negotiated transactions. The Company has and expects to continue to fund 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 repurchase up to an additional $100 million of shares of Inovalon's Class A Common Stock (bringing the total to $200 million) through December 31, 2017. The share repurchase program does not obligate the Company to acquire any particular amount of Class A common stock.
During the three months ended September 30, 2017, the Company repurchased 1,538,497 shares of Class A common stock for an aggregate cost of $19.8 million at an average cost of $12.88 per share, excluding commissions. During the nine months ended September 30, 2017, the Company repurchased 5,235,504 shares of Class A common stock, for an aggregate cost of $65.0 million at an average cost of $12.41 per share, excluding commissions. At September 30, 2017, approximately $28.8 million remained available to repurchase shares under the share repurchase program. Shares that are repurchased under the repurchase program were recorded as treasury stock, based on the stock trading dates, and are available for future issuance, until retired.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016,2020, as filed with the Securities and Exchange Commission (the "SEC"“SEC”) on February 23, 201717, 2021 (the "2016“2020 Form 10-K"10-K”). Unless we otherwise indicate or the context requires, references to the "Company," "Inovalon," "we," "our,"“Company,” “Inovalon,” “we,” “our,” and "us"“us” refer to Inovalon Holdings, Inc. and its consolidated subsidiaries.
Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q 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 Quarterly 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, the timing and completion of the proposed Merger, and the effect of the announcement, pendency and completion of the proposed Merger on the value of our common stock are forward-looking statements. The words "believe," "may," "see," "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. 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 Quarterly 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 ability to complete the proposed Merger on the terms and timeline anticipated, or at all, and the effect of the announcement, pendency and completion of the Merger on our ability to maintain relationships with clients and other third parties, on management’s attention to ongoing business concerns, and other risks and uncertainties related to the proposed Merger that may affect future results;
•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 regulations applicable to us, including new and evolving regulations relating to data protection and data privacy;
•the effects of consolidation in the healthcare industry;
•the ability to successfully integrate our acquisitions, 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;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 continuation of our share repurchase program;
•the effect of current or future securities class action and other litigation;litigation, including stockholder litigation related to the proposed Merger;
•the effect of competition on our business; and
•the efficacy of our platforms and toolsets.toolsets;
•the effects and potential effects of the COVID-19 pandemic, or other future pandemics or large-scale diseases, on our business, cash flow, liquidity and results of operations due to, among other things, effects on the economy generally and on our customers, including:
•the possible effects of significant rising unemployment, the inability of consumers to timely pay our customers and the resulting potential inability of our customers to pay the fees under our contracts on time or in full;
•the delay in the contracting for services by our customers;
•potential other delays in the sales cycle for new customers and products; and
•other unforeseen impacts on our customers and potential customers and on our employees that could have a negative impact on us; 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 our 20162020 Form 10-K, under the heading Part I, Item 1A, "Risk“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. We are under no duty to, and we disclaim any obligation to, update any of these forward- looking statements after the date of this Quarterly Report or to conform these statements to actual results or revised expectations.
Overview
We are a leading technology company providingprovider of cloud-based platforms empowering a data-driven transformation from volume-based to value-based models throughout the healthcare industry.healthcare. Through the Inovalon ONE™ONE® Platform, Inovalon brings to the marketplace a national-scale capability to interconnect with the healthcare ecosystem, on a very large scale, aggregate and analyze data in petabyte volumesreal-time, and empower the application of resulting insights to arrivedrive meaningful impact at sophisticated insights in real-time, drive impact wherever it is analytically identified best to intervene, and intuitively visualize data and information to inform business strategy and execution.the point of care. Leveraging its platform capabilities, largePlatform, unparalleled proprietary data sets,datasets, and industry-leading subject matter expertise, Inovalon enables the assessment and improvement of clinical and quality outcomesbetter care, efficiency, and financial performance across the healthcare ecosystem. From health plans and provider organizations, to pharmaceutical, medical device, and diagnostics companies, Inovalon'sInovalon’s unique achievement of value is delivered through the effective progression of “Turning Data into Insight, and Insight into Action®.” ProvidingSupporting thousands of clients, including all 25 of the top 25 U.S. health plans, all 25 of the top 25 global pharma companies, 24 of the top 25 U.S. healthcare provider systems, and many of the leading pharmacy organizations, device manufacturers, and other healthcare industry constituents,Inovalon’s technology that supports nearly 500 healthcare organizations, Inovalon's platforms and analytics are informed by data pertaining to more than 903,000one million physicians, more than 385,000591,000 clinical facilities, 342 million Americans, and 231 million individuals.64 billion medical events.
We generate the substantial majority of our revenue through the sale or subscription licensing of our cloud-based data analytics, interventionplatform solutions, as well as revenue from related arrangements for advisory, implementation, and reporting platforms and related support services.
Merger Agreement
On August 19, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ocala Bidco, Inc., a Delaware corporation (“Parent”), and Ocala Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will merge with and into Inovalon (the “Merger”), with Inovalon continuing as the surviving corporation and a wholly owned subsidiary of Parent.
Pursuant to the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”) and as a result of the Merger, each share of common stock of Inovalon issued and outstanding immediately prior to the Effective Time will be cancelled and extinguished and, except with respect to (a) certain shares held by certain stockholders of Inovalon, including shares held by Dr. Dunleavy and certain holders of Inovalon’s Class B common stock who will, pursuant to one or more rollover agreements, exchange such shares for equity interests of Ocala Topco, LP, a Delaware limited partnership, (b) shares held by Parent or Merger Sub (or any of their respective subsidiaries) in the treasury of Inovalon and (c) shares held by a stockholder who properly exercises and perfects appraisal of his, her or its shares under Delaware law, automatically converted into and thereafter represent the right to receive $41.00 in cash without interest.
The proposed transactions constitute a “going-private transaction” under the rules of the SEC. The closing of the transactions contemplated by the Merger Agreement (including the Merger) is expected to occur in the fourth quarter of 2021, subject to the satisfaction or waiver (if such waiver is permissible under the Merger Agreement or under applicable law) of certain conditions set forth in the Merger Agreement.
Additional information about the Merger Agreement and the Merger is set forth in the Company's Definitive Proxy Statement on Schedule 14A filed with the SEC on October 15, 2021, and as supplemented on October 27, 2021 and November 5, 2021.
COVID-19
The outbreak of the novel coronavirus disease (“COVID-19”) was labeled a global pandemic by the World Health Organization in March 2020 and has led to material and adverse impacts on the U.S. and global economies and created widespread uncertainty. In response to the COVID-19 pandemic, during 2020, we implemented our “Pandemic Plan,” which included transitioning our workforce to a remote working model and performing drills to ensure the preparedness of our workforce and we launched data-driven and analytically informed telehealth capabilities within a number of our platform offerings. During 2020, certain services and legacy offerings experienced a degree of softness resulting from the COVID-19 pandemic, which were temporary and a significant portion of this softness represented demand delays (not demand loss). During 2021, we have continued to experience some impact from the COVID-19 pandemic in line with our expectations. Although we have experienced some recovery in our services offerings following the COVID-19 pandemic impact period, we can provide no assurance as to the timing of the peak of the pandemic and the ultimate impact of the pandemic on the U.S. and global economy and on our business. In addition, the COVID-19 pandemic has had and is likely to continue to have adverse effects on our clients, suppliers and third-party business partners. As of the date of this Quarterly Report, we have not experienced significant disruption in our operations as a result of the COVID-19 pandemic, and we are conducting business with modifications to employee travel and employee work locations, among other modifications.
The extent to which the COVID-19 pandemic impacts our business, operations, and financial results, including the duration and magnitude of such impact, will depend on numerous factors that the company may not be able to accurately predict, including those discussed in Part I, Item 1A, “Risk Factors” in our 2020 Form 10-K. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, clients, partners, and stockholders.
Quarterly Key Metrics
We review certain metrics quarterly, including the key metrics shown in the table below. We believe the key metrics illustrated in the table below are indicative of our overall level of analytical activity and our underlying growth in the business.
| | | | | | | | | | | |
| September 30, |
| 2021 | | 2020 |
| (in thousands) |
MORE2 Registry® dataset metrics(1) | | | |
Unique patient count(2) | 342,679 | | | 324,406 | |
Medical event count(3) | 64,932,598 | | | 58,273,049 | |
Trailing twelve-month Patient Analytics Months (PAM)(1)(4) | 75,053,635 | | | 71,962,615 | |
(1)MORE2 Registry® dataset metrics and Trailing twelve-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 areis indicative of our overall level of analytical activity and the underlying growth in our business.
|
| | | | | |
| September 30, |
| 2017 | | 2016 |
| (in thousands) |
MORE2 Registry® dataset metrics(1) | |
| | |
|
Unique patient count(2) | 230,916 |
| | 139,534 |
|
Medical event count(3) | 34,316,048 |
| | 11,965,465 |
|
Trailing 12 month Patient Analytics Months (PAM)(1)(4) | 36,624,786 |
| | 25,286,198 |
|
| |
(1) | MORE2 Registry® dataset metrics and Trailing 12 month PAM, each of which is presented in the table, are keybusiness, 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 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
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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"(“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.
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(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 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. |
(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.
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, including as a result of the COVID-19 pandemic, 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® 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 measurable 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 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).
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 | | 2021 | | 2020 | | 2021 | | 2020 |
Investment in Innovation: | |
| | |
| | | | | Investment in Innovation: | | | | | | | |
Research and development(1) | $ | 5,780 |
| | $ | 7,404 |
| | $ | 20,850 |
| | $ | 21,047 |
| Research and development(1) | $ | 9,569 | | | $ | 7,941 | | | $ | 27,437 | | | $ | 23,880 | |
Capitalized software development(2) | 9,637 |
| | 5,248 |
| | 24,570 |
| | 16,780 |
| Capitalized software development(2) | 15,237 | | | 12,733 | | | 47,521 | | | 34,235 | |
Research and development infrastructure investments(3) | 4,454 |
| | 512 |
| | 14,040 |
| | 3,491 |
| Research and development infrastructure investments(3) | — | | | — | | | 245 | | | — | |
Total investment in innovation | $ | 19,871 |
| | $ | 13,164 |
| | $ | 59,460 |
| | $ | 41,318 |
| Total investment in innovation | $ | 24,806 | | | $ | 20,674 | | | $ | 75,203 | | | $ | 58,115 | |
As a percentage of revenue | |
| | |
| | | | | As a percentage of revenue | | | | | | | |
Research and development(1) | 5 | % | | 7 | % | | 6 | % | | 6 | % | Research and development(1) | 5 | % | | 5 | % | | 5 | % | | 5 | % |
Capitalized software development(2) | 8 | % | | 5 | % | | 7 | % | | 5 | % | Capitalized software development(2) | 8 | % | | 8 | % | | 8 | % | | 7 | % |
Research and development infrastructure investments(3) | 4 | % | | 1 | % | | 5 | % | | 1 | % | Research and development infrastructure investments(3) | — | % | | — | % | | — | % | | — | % |
Total investment in innovation | 17 | % | | 13 | % | | 18 | % | | 12 | % | Total investment in innovation | 13 | % | | 13 | % | | 13 | % | | 12 | % |
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(1) | (1)Research and development primarily includes employee costs related to the development and enhancement of our service offerings. |
| |
(2) | Capitalized software development includes capitalized costs incurred to develop and enhance functionality for our data analytics and data-driven intervention platforms. |
| |
(3) | Research and development infrastructure investments include strategic capital expenditures related to hardware and software platforms under development or enhancement. |
Data Analytics and Data-Driven Intervention Mix. Our businessdevelopment primarily includes employee costs related to the development and operational modelsenhancement 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.
Mix of Subscription-Based Platform Offerings and Legacy Solutions. In 2018, we executed 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 highly scalablegenerally defined as modular, cloud-based solutions that utilize dynamic, high-speed cloud-based compute and leverage variable costsstorage, offer enhanced data visualization capabilities, and are tied to supportsubscription-based contract structures where revenue generating activities. Ouris 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. Additionally, we are continually expanding our offerings of cloud-based SaaS solutions enabled by the Inovalon ONE® Platform which utilize descriptive, predictive, and prescriptive analytics applying algorithmic, machine learning, and artificial intelligence methodologies combined with real-world data analytic service costsassets to empower our cloud-based solutions. Legacy platform solutions are less variablecontinuing to decrease as a percentage of total revenue and are generally 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. 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.
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 analytics and data interventions activities affects ourbeing 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 Analytics 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, or net income (and vice versa). Therefore, in situations in which a new engagement is initiated for analytical processes that have a higher than average fee rate, revenue could expand disproportionately faster than the increase in PAM. Likewise, if 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.
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. Finally,However, quarter to quarter financial performance may increasingly vary from historical seasonal trends as we furthercontinue 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 timing of new contract signings and their respective implementations can also lead to variances in our seasonal revenue performance.
Regulatory, Economic and Industry Trends. Our clients are affected, sometimes directly and sometimes counter-intuitively, by macro-economic trends such as economic growth (or economic recession), inflation, and unemployment. These macro-economic trends may also be impacted by the COVID-19 pandemic and the recent U.S. presidential election. 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.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. In connection with the preparation of our unaudited condensed consolidated financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors we believe to be relevant at the time we prepare our unaudited condensed consolidated financial statements. The accounting estimates used in the preparation of our unaudited condensed consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as our operating environment changes. On a regular basis, we review the accounting policies, assumptions, and evaluate and update our assumptions, estimates, and judgments to ensure that our unaudited condensed consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Critical accounting policies are those policies that affect our more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements. For a more detailed discussion of our critical accounting policies, please refer to our 20162020 Form 10-K.
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 platform offerings which utilize descriptive, predictive, and prescriptive analytics applying algorithmic, machine learning, and artificial intelligence methodologies combined with real-world data analytics, data-driven interventionassets to empower our cloud-based solutions. These include solutions offered through the myABILITY® software platform, services, our advisory servicesthe real-time accessibility of patient-specific healthcare data and business intelligence solutions.
analytical insights through Inovalon DataStream™, and legacy platform solutions that are not cloud-based and not billed under a subscription-based contract structure. Our cloud-based data analytics services are performed either at the beginning of a data-driven intervention process, which typically aligns with regulatory submission deadlines, or on a monthly basis, depending on the particular client's needs. Cloud-based data analyticsplatform solutions revenue is driven primarily by cloud-based data connectivity, analytics, intervention, and visualization software that enables the numberidentification and resolution of unique patients in a client's dataset, a minimum data analytics processing fee, the number 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, 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 service Additionally, revenue represents 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 a degreebased on the number of variable-based labor components). 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 cloud-based data analytics processes and our clients' desire to utilize our cloud-based data-driven intervention platforms to resolve such identified gaps. Informed by our analytics, our cloud-based data-driven 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.identified and/or resolved gap.
Advisory serviceThe majority of our platform solutions contracts contain a series of separately identifiable and business intelligencedistinct 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 when we have the right to invoice.
As our platform solutions are increasingly integrated into our clients’ operations, the timing and delivery of implementations vary.
Service revenue represents revenue that is generated from strategic advisory, analysisimplementation and educationalsupport services. Revenue from our advisory services arrangements is generally provided under time and materials, fixed-price, or retainer-based contracts, based on contractually negotiated prices for each such arrangement.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.
During 2020, certain services and legacy offerings experienced a degree of softness resulting from the COVID-19 pandemic, which were temporary and a significant portion of this softness represented demand delays (not demand loss). During 2021, we have continued to experience some impact from the COVID-19 pandemic in line with our expectations. Although we have experienced some recovery in our services offerings following the COVID-19 pandemic impact period, we can provide no assurance as to the timing of the peak of the pandemic and the ultimate impact of the pandemic on the U.S. and global economy and on our business.
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 cloud-based data analytics and cloud-based data-driven intervention platform servicessolutions revenue at a greater rate than our cost of revenue, over time, excluding the impact of stock-based compensation expense.revenue.
Sales and Marketing
Sales and marketing expense consists primarily of employee-related expenses, including salaries, benefits, commissions, discretionary incentive compensation, employment taxes, severance, and equity compensation costs for our employees engaged in sales, sales support, business development, and marketing. Sales and marketing expense also includes operating expenses for marketing programs, research, trade shows and brand messages, and public relations costs. Our sales and marketing expense excludes any allocation of occupancy expense and depreciation and amortization.
We expect our sales and marketing expenses to 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 includesinclude certain third partythird-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 product offerings and enhancing our existing 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.
WeIn the near term, we expect our general and administrative expense to continue to increase in absolute dollars driven byto support business growth. Over the expansion of our business and increases in stock-based compensation expense. However,long term, we expect general and administrative expense to decrease as a percentage of revenue, to decrease over time.
revenue.
Depreciation and Amortization Expense
Our depreciation and amortization expense consists primarily of depreciation of fixed assets, amortization of capitalized software development costs, amortization of intangible assets, and amortization of acquisition-related intangible assets.finance leases.
We expect our depreciation and amortization expense to increase as 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 represents interest incurred on our 2018 Credit Facilities (as defined below, underin “Note 5—Debt” in the heading "Liquiditynotes to our consolidated financial statements) and Capital Resources—Debt").related interest rate swaps.
We expect our interest expense to fluctuate in proportion to theour outstanding principal balance ofunder the 2018 Credit Facilities and the prevailing LIBORLondon Interbank Offer Rate (“LIBOR”) interest rate. Refer to “Note 5—Debt” in the notes to our consolidated financial statements.
Provision for (Benefit from) 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, and excess tax benefits or deficiencies derived from exercises of stock options and vesting of restricted stock.
We expect that ourOur effective tax rate may fluctuate in the future due to changes in pre-tax book income, the impact of future tax law changes, and recognition of excess tax benefits and taxor 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.transactions.
RESULTS OF OPERATIONS
The following table sets forth our consolidated statement of operations data for each of the periods presented (in thousands, except percentages):
| | | Three Months Ended September 30, | | Change from 2016 to 2017 | | Nine Months Ended September 30, | | Change from 2016 to 2017 | | Three Months Ended September 30, | | Change from 2020 to 2021 | | Nine Months Ended September 30, | | Change from 2020 to 2021 |
| 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % |
Revenue | $ | 115,855 |
| | $ | 105,013 |
| | $ | 10,842 |
| | 10 | % | | $ | 334,739 |
| | $ | 331,495 |
| | $ | 3,244 |
| | 1 | % | Revenue | $ | 192,230 | | | $ | 161,377 | | | $ | 30,853 | | | 19 | % | | $ | 559,845 | | | $ | 477,779 | | | $ | 82,066 | | | 17 | % |
Expenses: | | | | | | | | | | | | | | | | Expenses: | |
Cost of revenue(1) | 38,431 |
| | 35,433 |
| | 2,998 |
| | 8 | % | | 113,914 |
| | 120,570 |
| | (6,656 | ) | | (6 | )% | Cost of revenue(1) | 54,951 | | | 39,561 | | | 15,390 | | | 39 | % | | 151,013 | | | 117,365 | | | 33,648 | | | 29 | % |
Sales and marketing(1) | 7,929 |
| | 7,037 |
| | 892 |
| | 13 | % | | 24,365 |
| | 19,712 |
| | 4,653 |
| | 24 | % | Sales and marketing(1) | 21,098 | | | 14,898 | | | 6,200 | | | 42 | % | | 62,306 | | | 45,130 | | | 17,176 | | | 38 | % |
Research and development(1) | 5,780 |
| | 7,404 |
| | (1,624 | ) | | (22 | )% | | 20,850 |
| | 21,047 |
| | (197 | ) | | (1 | )% | Research and development(1) | 9,569 | | | 7,941 | | | 1,628 | | | 21 | % | | 27,437 | | | 23,880 | | | 3,557 | | | 15 | % |
General and administrative(1) | 36,283 |
| | 37,209 |
| | (926 | ) | | (2 | )% | | 108,002 |
| | 105,222 |
| | 2,780 |
| | 3 | % | General and administrative(1) | 55,389 | | | 54,865 | | | 524 | | | 1 | % | | 161,957 | | | 163,977 | | | (2,020) | | | (1) | % |
Depreciation and amortization | 13,550 |
| | 8,904 |
| | 4,646 |
| | 52 | % | | 38,514 |
| | 25,794 |
| | 12,720 |
| | 49 | % | Depreciation and amortization | 29,647 | | | 28,183 | | | 1,464 | | | 5 | % | | 87,988 | | | 86,749 | | | 1,239 | | | 1 | % |
Impairment charge | | Impairment charge | 2,954 | | | — | | | 2,954 | | | *% | | 2,954�� | | | — | | | 2,954 | | | *% |
| Total operating expenses | 101,973 |
| | 95,987 |
| | 5,986 |
| | 6 | % | | 305,645 |
| | 292,345 |
| | 13,300 |
| | 5 | % | Total operating expenses | 173,608 | | | 145,448 | | | 28,160 | | | 19 | % | | 493,655 | | | 437,101 | | | 56,554 | | | 13 | % |
Income from operations | 13,882 |
| | 9,026 |
| | 4,856 |
| | 54 | % | | 29,094 |
| | 39,150 |
| | (10,056 | ) | | (26 | )% | Income from operations | 18,622 | | | 15,929 | | | 2,693 | | | 17 | % | | 66,190 | | | 40,678 | | | 25,512 | | | 63 | % |
Other income and (expenses): | |
| | |
| | |
| | |
| | | | | | | | | Other income and (expenses): | | | | | | | | | | | | | | | |
Realized gains on short-term investments | — |
| | 9 |
| | * |
| | *% |
| | — |
| | 4 |
| | * |
| | *% |
| |
(Loss) Gain on disposal of equipment | (243 | ) | | — |
| | * |
| | *% |
| | (381 | ) | | 534 |
| | * |
| | *% |
| |
Interest income | 1,365 |
| | 1,450 |
| | (85 | ) | | (6 | )% | | 4,045 |
| | 4,424 |
| | (379 | ) | | (9 | )% | Interest income | 69 | | | 50 | | | 19 | | | 38 | % | | 166 | | | 436 | | | (270) | | | (62) | % |
Interest expense | (1,617 | ) | | (1,302 | ) | | (315 | ) | | 24 | % | | (4,549 | ) | | (3,806 | ) | | (743 | ) | | 20 | % | Interest expense | (12,999) | | | (13,648) | | | 649 | | | (5) | % | | (38,991) | | | (42,468) | | | 3,477 | | | (8) | % |
Income before taxes | 13,387 |
| | 9,183 |
| | 4,204 |
| | 46 | % | | 28,209 |
| | 40,306 |
| | (12,097 | ) | | (30 | )% | |
Provision for income taxes | 5,146 |
| | 1,376 |
| | 3,770 |
| | 274 | % | | 10,840 |
| | 13,883 |
| | (3,043 | ) | | (22 | )% | |
Other expense, net | | Other expense, net | (728) | | | (332) | | | (396) | | | 119 | % | | (768) | | | (502) | | | (266) | | | 53 | % |
Income (Loss) before taxes | | Income (Loss) before taxes | 4,964 | | | 1,999 | | | 2,965 | | | (148) | % | | 26,597 | | | (1,856) | | | 28,453 | | | 1,533 | % |
(Benefit from) Provision for income taxes | | (Benefit from) Provision for income taxes | (6,771) | | | 1,175 | | | * | | *% | | (3,874) | | | (3,022) | | | (852) | | | 28 | % |
Net income | $ | 8,241 |
| | $ | 7,807 |
| | $ | 434 |
| | 6 | % | | $ | 17,369 |
| | $ | 26,423 |
| | $ | (9,054 | ) | | (34 | )% | Net income | $ | 11,735 | | | $ | 824 | | | $ | 10,911 | | | *% | | $ | 30,471 | | | $ | 1,166 | | | $ | 29,305 | | | *% |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Includes stock-based compensation expense as follows: | | | | | | |
| Cost of revenue | $ | 474 |
| | $ | 94 |
| | $ | 380 |
| | 404 | % | | $ | 1,189 |
| | $ | 334 |
| | $ | 855 |
| | 256 | % |
| Sales and marketing | 561 |
| | 140 |
| | 421 |
| | 301 | % | | 1,456 |
| | 446 |
| | 1,010 |
| | 226 | % |
| Research and development | 349 |
| | 186 |
| | 163 |
| | 88 | % | | 929 |
| | 927 |
| | 2 |
| | — | % |
| General and administrative | 3,597 |
| | 1,704 |
| | 1,893 |
| | 111 | % | | 8,751 |
| | 4,645 |
| | 4,106 |
| | 88 | % |
| Total stock-based compensation expense | $ | 4,981 |
| | $ | 2,124 |
| | $ | 2,857 |
| | 135 | % | | $ | 12,325 |
| | $ | 6,352 |
| | $ | 5,973 |
| | 94 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Includes stock-based compensation expense as follows: | | | | | | |
| Cost of revenue | $ | 327 | | | $ | 156 | | | $ | 171 | | | 110 | % | | $ | 812 | | | $ | 474 | | | $ | 338 | | | 71 | % |
| Sales and marketing | 1,259 | | | 717 | | | 542 | | | 76 | % | | 3,333 | | | 2,089 | | | 1,244 | | | 60 | % |
| Research and development | 427 | | | 287 | | | 140 | | | 49 | % | | 1,110 | | | 1,009 | | | 101 | | | 10 | % |
| General and administrative | 6,403 | | | 6,853 | | | (450) | | | (7) | % | | 17,106 | | | 19,562 | | | (2,456) | | | (13) | % |
| Total stock-based compensation expense | $ | 8,416 | | | $ | 8,013 | | | $ | 403 | | | 5 | % | | $ | 22,361 | | | $ | 23,134 | | | $ | (773) | | | (3) | % |
* Asterisk denotes not meaningful.
The following table sets forth our consolidated statement of operations data for each of the periods presented as a percentage of revenue:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 | | 2021 | | 2020 | | 2021 | | 2020 |
Revenue | 100 | % | | 100 | % | | 100 | % | | 100 | % | Revenue | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Expenses: | | | | | | | | Expenses: | |
Cost of revenue | 33 | % | | 34 | % | | 34 | % | | 36 | % | Cost of revenue | 29 | % | | 25 | % | | 27 | % | | 25 | % |
Sales and marketing | 7 | % | | 7 | % | | 7 | % | | 6 | % | Sales and marketing | 11 | % | | 9 | % | | 11 | % | | 9 | % |
Research and development | 5 | % | | 7 | % | | 6 | % | | 6 | % | Research and development | 5 | % | | 5 | % | | 5 | % | | 5 | % |
General and administrative | 31 | % | | 35 | % | | 32 | % | | 32 | % | General and administrative | 29 | % | | 34 | % | | 29 | % | | 34 | % |
Depreciation and amortization | 12 | % | | 8 | % | | 12 | % | | 8 | % | Depreciation and amortization | 15 | % | | 17 | % | | 16 | % | | 18 | % |
Impairment charge | | Impairment charge | 2 | % | | — | % | | 1 | % | | — | % |
| Total operating expenses | 88 | % | | 91 | % | | 91 | % | | 88 | % | Total operating expenses | 91 | % | | 90 | % | | 89 | % | | 91 | % |
Income from operations | 12 | % | | 9 | % | | 9 | % | | 12 | % | Income from operations | 9 | % | | 10 | % | | 11 | % | | 9 | % |
Other income and (expenses): | | | | | | | | Other income and (expenses): | | | | | | | |
Realized gains on short-term investments | — | % | | *% |
| | — | % | | *% |
| |
(Loss) Gain on disposal of equipment | *% |
| | — | % | | *% |
| | *% |
| |
Interest income | 1 | % | | 1 | % | | 1 | % | | 1 | % | Interest income | *% | | *% | | *% | | *% |
Interest expense | (1 | )% | | (1 | )% | | (1 | )% | | (1 | )% | Interest expense | (7) | % | | (9) | % | | (7) | % | | (9) | % |
Income before taxes | 12 | % | | 9 | % | | 9 | % | | 12 | % | |
Provision for income taxes | 4 | % | | 1 | % | | 3 | % | | 4 | % | |
Other expense, net | | Other expense, net | *% | | *% | | *% | | *% |
Income (Loss) before taxes | | Income (Loss) before taxes | 3 | % | | 1 | % | | 5 | % | | — | % |
(Benefit from) Provision for income taxes | | (Benefit from) Provision for income taxes | (4) | % | | *% | | (1) | % | | (1) | % |
Net income | 8 | % | | 8 | % | | 6 | % | | 8 | % | Net income | 7 | % | | 1 | % | | 6 | % | | *% |
* Asterisk denotes not meaningful.
Comparison of the Three and Nine Months Ended September 30, 20172021 and 20162020
Revenue
Revenue for the three months ended September 30, 20172021 was approximately $115.9$192.2 million, an increase of 10%$30.9 million, or 19%, compared with revenue of approximately $105.0$161.4 million for the three months ended September 30, 2016.2020. This increase was primarily attributable to approximately $15.5an increase of $31.4 million, or 22%, in subscription-based platform revenue within the acquired businessesresulting from continued adoption of Creehansubscription-based platform offerings, and CCS, and approximately $2.4an increase of $0.6 million, or 4%, in services revenue, contributed from new clients signed, which was partially offset by a decrease of approximately $7.0$1.1 million, or 33%, in revenue from the 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.legacy revenue.
Revenue for the nine months ended September 30, 20172021 was approximately $334.7$559.8 million, an increase of 1%$82.1 million, or 17%, compared with revenue of approximately $331.5$477.8 million for the nine months ended September 30, 2016.2020. This increase was primarily attributable to approximately $30.4an increase of $79.0 million, or 19%, in subscription-based platform revenue within the acquired businessesresulting from continued adoption of Creehansubscription-based platform offerings, and CCS, and approximately $9.9an increase of $5.9 million, or 13%, in services revenue, contributed from new clients signed, which was partially offset by a decrease of approximately $37.1$2.8 million, or 23%, in revenue from the 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.legacy revenue.
Cost of Revenue
During the three months ended September 30, 2017,2021, cost of revenue increased by approximately $3.0$15.4 million, or 8%39%, compared with the three months ended September 30, 2016.2020. The increase in cost of revenue was primarily attributable to the combined incremental cost of revenue of $7.8 million attributable to the acquired businesses of Creehan and CCS,an increase in fulfillmentemployee-related and contract labor expense of $1.4$9.0 million and an increase in professional third-party costs of $0.8 million, which was partially offset by a decrease of employee-related expenses of $7.4 million driven by technology-enabled platform efficiency initiatives. Cost of revenue as a percentage of revenue was 33% and 34% for the three months ended September 30, 2017 and 2016, respectively.
During the nine months ended September 30, 2017, cost of revenue decreased by approximately $6.7 million, or 6%, compared with the nine months ended September 30, 2016. The decrease in cost of revenue was primarily attributable to a decrease of employee-related expenses of $24.7 million driven by technology-enabled platform efficiency initiatives, which was partially offset by the combined incremental cost of revenue of $13.9 million attributable to the acquired businesses of
Creehan and CCS, increase in fulfillment of $3.0 million, and increase in professional third-party costs of $1.0$5.8 million. Cost of revenue as a percentage of revenue was 34%29% and 36%25% for the three months ended September 30, 2021 and 2020, respectively.
During the nine months ended September 30, 2021, cost of revenue increased by $33.6 million, or 29%, compared with the nine months ended September 30, 2020. The increase in cost of revenue was primarily attributable to an increase in employee-related and contract labor expense of $20.5 million and an increase in professional third-party costs of $12.2 million. Cost of revenue as a percentage of revenue was 27% and 25% for the nine months ended September 30, 20172021 and 2016,2020, respectively.
Sales and Marketing
During the three months ended September 30, 2017,2021, sales and marketing expensesexpense increased by approximately $0.9$6.2 million, or 13%42%, compared with the three months ended September 30, 2016. 2020. The increase was primarily attributable to an increase in employee-related expense of $3.3 million, an increase in professional third-party costs of $1.5 million, and an increase in stock-based
compensation of $0.5 million. Sales and marketing expense as a percentage of revenue was 11% and 9% for the three months ended September 30, 2021 and 2020, respectively.
During the nine months ended September 30, 2017,2021, sales and marketing expensesexpense increased by approximately $4.7$17.2 million, or 24%38%, compared with the nine months ended September 30, 2016.2020. The increase was driven by our investmentprimarily attributable to expand our sales organizationan increase in employee-related expense of $11.7 million, an increase in professional third-party costs of $3.9 million, and partner team to focus on adding new clients and capturing an increased amountincrease in stock-based compensation of market opportunity.$1.2 million. Sales and marketing expense as a percentage of revenue was 7% for both the three months ended September 30, 201711% and 2016. Sales and marketing as a percentage of revenue was 7% and 6%9% for the nine months ended September 30, 20172021 and 2016,2020, respectively.
Research and Development
During the three months ended September 30, 2017,2021, research and development expense decreasedincreased by approximately $1.6 million, or 22%21%, compared with the three months ended September 30, 2016.2020. The decreaseincrease was primarily attributable to an increased focusincrease in professional third-party costs of development on the Inovalon ONE™ Platform, resulting in$0.9 million and an increase to capitalized software projects, which was partially offset by the incrementalin employee-related expense attributable to the acquired businesses of Creehan and CCS.$0.5 million.
During the nine months ended September 30, 2017,2021, research and development expense increased by $3.6 million, or 15%, compared with the nine months ended September 30, 2020. The increase was primarily attributable to an increase in professional third-party costs of $2.7 million and an increase in employee-related expense of $0.9 million.
General and Administrative
During the three months ended September 30, 2021, general and administrative expenses increased by $0.5 million, or 1%, compared with the three months ended September 30, 2020. The increase was primarily attributable to an increase in transaction costs related to the proposed Merger of $3.5 million, which was partially offset by an adjustment in the prior year to increase the fair value of contingent consideration that was not present in the current year resulting in a reduction of expense of $3.3 million. General and administrative expense as a percentage of revenue was 29% and 34% for the three months ended September 30, 2021 and 2020, respectively.
During the nine months ended September 30, 2021, general and administrative expenses decreased by approximately $0.2$2.0 million, or 1%, compared with the nine months ended September 30, 2016.2020. The decrease was primarily attributable to an increased focusadjustment in the prior year to increase the fair value of development oncontingent consideration that was not present in the Inovalon ONE™ Platform,current year resulting in an increase to capitalized software projects,a reduction of expense of $3.3 million and a decrease in stock-based compensation of $2.5 million, which was partially offset by incremental growthan increase in employee-related expenses necessary to support our on-going investment in innovation and the incremental expense attributable to the acquired businesses of Creehan and CCS.
General and Administrative
During the three months ended September 30, 2017, general and administrative expenses decreased by approximately $0.9 million, or 2%, compared with the three months ended September 30, 2016. The decrease was primarily attributable to a decrease of compensation expense related to compensatory contingent consideration that included earn-outs with continuing service requirements related to our acquisitions of approximately $4.3 million and a decrease related to contingent consideration accretion of approximately $4.3 million. The decrease in general and administrative expenses was partially offset by incremental expenses of approximately $8.0 milliontransaction costs related to the acquired businessesproposed Merger of Creehan and CCS.$3.5 million. General and administrative expense as a percentage of revenue was 31%29% and 35%34% for the three months ended September 30, 2017 and 2016, respectively.
During the nine months ended September 30, 2017, general2021 and administrative expenses increased by approximately $2.8 million, or 3%, compared with2020, respectively.
Impairment Charge
During the three and nine months ended September 30, 2016. The increase was primarily attributable to incremental expenses2021, we recorded an impairment charge of approximately $13.2$3.0 million related to the acquired businessesfor certain of Creehan and CCS and an increase of approximately $4.1 million related to stock-based compensation. The increase in general and administrative expense was partially offset by a decrease in compensation expense related to compensatory contingent consideration that includes earn-outs with continuing service requirements related to our acquisitions of approximately $9.7 million and a decrease of approximately $3.6 million related to contingent consideration accretion. General and administrative as a percentage of revenue was 32% for both the nine months ended September 30, 2017 and 2016.
Depreciation and Amortization
During the three months ended September 30, 2017, depreciation and amortization expense increased by approximately $4.6 million, or 52%, compared with the three months ended September 30, 2016. The increase was primarily attributable to approximately $2.0 million of amortization of acquired intangible assets and approximately $0.9 million of incremental amortization of capitalized software.
During the nine months ended September 30, 2017, depreciation and amortization expense increased by approximately $12.7 million, or 49%, compared with the nine months ended September 30, 2016. The increase was primarily attributable to approximately $5.9 million of amortization of acquired intangible assets, $3.1 million of incremental amortization of capitalized software, and approximately $0.3 million of depreciation of otherlong-lived assets related to the acquisition of Creehan.
(Loss) Gain on Disposal of Equipment
During the three months ended September 30, 2017, we incurred a loss of approximately $0.2 million related to the disposal of equipment. During the three months ended September 30, 2016, there were no equipment disposals.
During the nine months ended September 30, 2017, we incurred a loss of approximately $0.4 million related to the disposal of equipment. During the nine months ended September 30, 2016, we replaced certain data-center equipment. The replacement of the equipment was covered under our insurance and the cost of our replacement equipment was reimbursed by
our insurance carrier. As a result, the disposal and replacement of the equipment resulted in a gain of approximately $0.5 million during the nine months ended September 30, 2016.
Interest Income
During the three months ended September 30, 2017, interest income decreased by approximately $0.1 million, compared with the three months ended September 30, 2016. During the nine months ended September 30, 2017, interest income decreased by approximately $0.4 million, compared with the nine months ended September 30, 2016. A portion of our available-for-sale short-term investments have been used to fund strategic initiatives such as the acquisition of Creehan and the share repurchase program. The decrease in our interest income was primarily attributable to the decline in the overall value of our available-for-sale short term investment portfolios that resulted in a decrease in earnings derived from our available-for-sale short-term investments.internally developed software.
Interest Expense
During the three months ended September 30, 2017,2021, interest expense increaseddecreased by approximately $0.3$0.6 million, compared with the three months ended September 30, 2016.2020. During the nine months ended September 30, 2017,2021, interest expense increaseddecreased by approximately $0.7$3.5 million, compared with the nine months ended September 30, 2016.2020. The increasedecrease in interest expense was primarily attributable to an increase ina decrease to the applicable interest rate onmargin by 25 basis points to 2.75% upon meeting a certain leverage ratio target as defined in our Term Loan Facility2018 Credit Agreement (as defined below, under the heading "LiquidityLiquidity and Capital Resources—Debt") which is variableDebt) and fluctuates alongside changes to LIBOR.a decrease in principal debt balance resulting in lower interest.
(Benefit from) Provision for Income Taxes
During the three months ended September 30, 2017,2021, the benefit from income taxes was $6.8 million compared to the provision for income taxes increased by approximately $3.8of $1.2 million or 274%, compared to the three months ended September 30, 2016. Our effective tax rate for the three months ended September 30, 2017 was approximately 38.4%, as compared to approximately 15.0% for the three months ended September 30, 2016. During the three months ended September 30, 2016, we completed our 2015 federal and state tax returns. Through this process, we identified additional tax benefits that resulted in a lower effective tax rate for the three months ended September 30, 2016.
2020. During the nine months ended September 30, 2017, provision for2021, the benefit from income taxes decreased by approximatelywas $3.9 million compared to $3.0 million or 22%, compared tofor the nine months ended September 30, 2016.2020. Our effective tax rate for the nine months ended September 30, 20172021 was approximately 38.4%(14.6)%, as compared towith approximately 34.4%162.8% for the nine months ended September 30, 2016. During the nine months ended September 30, 2016, we completed2020. The change in our 2015 federal and state tax returns. Through this process, we identified additional tax benefits that resulted in a lower effective tax rate foris primarily due to the nine months ended September 30, 2016.change in income before taxes compared to the prior year, the impact of excess tax benefits associated with stock-based compensation, transaction costs related to the proposed Merger, and several provisions of the Coronavirus Aid, Relief and Economic Security Act, which was signed into law on March 27, 2020, and favorably impacted our effective tax rate in the first half of 2020.
Liquidity and Capital Resources
Sources of Liquidity
Our principal sources of liquidity have been cash generated by operating activities proceeds from our initial public offering and proceeds from our 2018 Credit Facilities. Our cash generated from such means has been sufficient to fund our growth, including our capital expenditures. As of September 30, 2017,2021, our cash and cash equivalents and short-term investments totaled $525.7$108.9 million, of which $293.1 million represented short-term, available-for-sale, investment grade, domestic debt-securities, compared to $713.3with $123.9 million of cash and cash equivalents and short-term investments as of September 30, 2016, of which $498.9 million represented short-term, available-for-sale, investment grade, domestic debt-securities.
December 31, 2020. We believe our current cash, cash equivalents, and short-term investments balance, expected cash generated by operating activities and availability of cash under our Credit Facilities are sufficient to fund our operations, finance our strategic initiatives, and fund our investment in innovation and new service offerings, and fund our share repurchase program, 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 Credit Facilities.levels.
Debt
On September 19, 2014,April 2, 2018, we entered into a credit agreement (the “2018 Credit and Guaranty AgreementAgreement”) with a group of lenders including Goldman Sachs Bank USA,and Morgan Stanley Senior Funding, Inc., as administrative agent, (the "Credit Agreement"). The terms ofproviding for (i) a term loan B facility with the Credit Agreement provide-for credit facilitiesCompany as borrower in the aggregate maximuma total principal amount of $400.0$980.0 million consisting of(the “2018 Term Facility”); and (ii) a senior unsecured term loanrevolving credit facility with the Company as borrower in the originala total principal amount of $300.0 million (the "Term Loan Facility") and a senior unsecured revolving credit facility in the maximum principal amount ofup to $100.0 million (the "Revolving Credit Facility"“2018 Revolving Facility” and, together with the 2018 Term Loan Facility, the "Credit Facilities"“2018 Credit Facilities”). As of September 30, 2021, we 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 September 30, 2017,2021, we had outstanding indebtedness under the 2018 Term Loan Facility and capitalfinance lease obligationsliabilities of approximately $243.8$883.4 million and approximately $0.2$26.5 million, respectively. As of September 30, 2016,December 31, 2020, we had outstanding
indebtedness under the 2018 Term Loan Facility and capitalfinance lease obligationsliabilities of approximately $270.0$887.4 million and approximately $0.4$29.7 million, respectively. No amounts were outstanding under the Revolving Credit Facility as of September 30, 2017 or September 30, 2016. The 2018 Term Loan Facility has a five-yearseven-year term and is an amortizing facility with quarterly principal payments and monthly interest payments. Scheduled principal payments totaling $22.5$7.4 million and scheduled interest payments totaling approximately $4.4$34.4 million were paid during the nine months ended September 30, 2017.2021. As of September 30, 2017,2021, we were in compliance with the covenants under the 2018 Credit Agreement.
See “Note 5—Debt” in the Notes to our unaudited consolidated financial statements included under Part I, Item 1 within this Quarterly Report on Form 10-Q for 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. Cash provided by operating activities during the nine months ended September 30, 20172021 was approximately $80.9$79.7 million, representing an increase in cash inflowa decrease of approximately $12.3$29.4 million compared with the nine months ended September 30, 2016. Cash2020. The decrease in cash provided by operating activities was driven by netan increase in cash paid for income of approximately $17.4 million, as adjusted for the exclusion of non-cash expenses totaling approximately $48.4 milliontaxes and approximately $15.2 million related to the effect of changes in working capital and other balance sheet accounts.non-cash expenses, which was partially offset by an increase in operating income.
Investing Cash Flow Activities
Cash provided by investing activities during the nine months ended September 30, 2017 was approximately $107.9 million compared with approximately $90.3 million during the nine months ended September 30, 2016. Cash provided by investing activities was primarily due to proceeds generated from maturities of available-for-sale securities of approximately $150.7 million, partially offset by approximately $39.3 million of investments in property and equipment and capitalized software.
We make investments in innovation, including research and development expense, capital software development costs, and research and development infrastructure investments, on a recurring basis. We expect our investment
Cash used in innovation toinvesting activities during the nine months ended September 30, 2021 was $76.4 million compared with $62.3 million during the nine months ended September 30, 2020. The change in cash used in investing activities was primarily driven by an increase in the foreseeable futurecapitalized software of $16.8 million, including investments related to support our continued growthcloud-based platform offerings, and new service offerings.an increase in purchases of intangible assets of $1.5 million, which was partially offset by a decrease in purchases of property and equipment of $4.3 million.
Financing Cash Flow Activities
Cash used in financing activities during the nine months ended September 30, 20172021 was approximately $84.0$18.3 million, compared with approximately $58.6cash used in financing activities of $19.8 million during the nine months ended September 30, 2016. Cash2020. The change in cash used in financing activities was primarily duedriven by a decrease related to approximately $65.0the payment of acquisition-related contingent consideration of $2.2 million, debt issuance costs of $1.0 million paid in the prior year, and an increase in proceeds from the exercise of stock options of $0.9 million, which was partially offset by increased payments of $1.8 million related to share repurchasesthe issuance of equity awards and approximately $22.5 million for the repaymentincreased payments of Credit Facility borrowings.finance lease liabilities of $0.8 million.
We have funded and expect to continue to fund repurchases
Table of shares of Class A common stock under our share repurchase program through a combination of cash on hand, cash generated by operations and sales of short-term investments, if needed. During the nine months ended September 30, 2017, the Company repurchased an aggregate of 5,235,504 shares of Class A common stock for an aggregate cost of $65.0 million or an average purchase cost of $12.41 per share, excluding commissions. As of September 30, 2017, the Company had repurchased an aggregate of 12,744,489 shares of Class A common stock for approximately $171.2 million or an average cost of $13.43 per share, excluding commissions. As of September 30, 2017, approximately $28.8 million remained available to repurchase shares under the share repurchase program. The share repurchase program does not obligate us to acquire any particular amount of Class A common stock.Contents Contractual Obligations
During the nine months ended September 30, 2017,2021, there have been no material changes, outside of the ordinary course of business, in our contractual obligations previously disclosed under the caption "Contractual Obligations"“Contractual Obligations” in our 20162020 Form 10-K.
Off-Balance Sheet Arrangements
As of September 30, 2017,2021, we did not have any off-balance sheet arrangements.
Recently Issued Accounting Standards
Recently issued accounting standards and their expected impact, if any, are discussed in Note 1, "Basis“Note 1—Basis of Presentation"Presentation”, in the notes to our unaudited condensed consolidated financial statements, included under Item 1 within this Quarterly Report on Form 10-Q and in Note 2, "Summary“Note 2—Summary of Significant Accounting Policies,"” in the notes to our consolidated financial statements, included under Item 15 within our 20162020 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Variable Rate Debt Risk. Our variable rate debt includesThere have been no material changes to our Term Loan Facility and our Revolving Credit Facility. As of September 30, 2017, we had $243.8 million outstanding under our Term Loan Facility at an effective interest rate of
approximately 2.5%. 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 $1.5 million annually, assuming that we do not enter into contractual hedging arrangements. As of September 30, 2017, there was no balance outstanding on the Revolving Credit Facility.
Marketable Securities Risk. We had short-term investment portfolios, including cash held in money market funds, totaling approximately $453.9 million as of September 30, 2017. This amount was invested primarily in marketable securities including corporate notes and bonds, U.S. agency obligations, U.S. treasury securities and money market funds. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes.
Our short-term investments are subject to market risk duesubsequent to changesthe previous disclosure 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 floating rate securities may produce less income than expected if interest rates fall. Due in part 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 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 $1.4 million market value reduction in our investment portfolio as of September 30, 2017. An immediate decrease of 100-basis points in interest rates would have increased the market value by approximately $2.0 million as of September 30, 2017. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. Fluctuations in the valuePart II—Item 7A (“Quantitative and Qualitative Disclosures About Market Risk”) 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 (loss), and are realized only if we sell the underlying securities prior to their maturity.2020 Form 10-K.
Item 4. 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 Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that, as of September 30, 2017,2021, 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.
Changes in Internal Control
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 ninethree months ended September 30, 20172021 that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting. In response to the COVID-19 pandemic, management has promoted social distancing and implemented work-from-home policies while maintaining historical internal control policies and procedures. These changes have not materially affected the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
See "Note 5—“Note 7—Commitments and Contingencies"Contingencies” in the Notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 within this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
For a discussion of potential risks and uncertainties related to our Company see the information in Part I, Item 1A ("(“Risk Factors"Factors”) of our 20162020 Form 10-K for the year ended December 31, 2016.10-K. There have been no material changes to the risk factors previously disclosed in our 20162020 Form 10-K.10-K other than the following:
Risks Related to the Merger
The consummation of the Merger is subject to a number of conditions, many of which are largely outside of the parties’ control, and, if these conditions are not satisfied or waived on a timely basis, the Merger Agreement may be terminated and the Merger may not be completed.
The Merger is subject to certain customary closing conditions, including: (i) requisite approval of the holders of Inovalon common stock; (ii) the receipt of specified regulatory approvals, or expiration or termination of the applicable waiting period, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and pursuant to the Committee of Foreign Investment in the United States; (iii) the absence of any order, litigation, injunction or similar proceeding that remains in effect or any action restraining, enjoining or otherwise prohibiting or making illegal the consummation of the Merger and the absence of any law that prohibits or otherwise makes illegal the consummation of the Merger; (iv) the accuracy of each party’s representations and warranties in the Merger Agreement (subject to materiality qualifiers); (v) the performance in all material respects by each party of all obligations required to be performed by it under the Merger Agreement; (vi) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement); and (vii) the delivery of an officers’ certificate by each party with respect to representation and warranties and performance of obligations under the Merger Agreement. The failure to satisfy all of the required conditions could delay the completion of the Merger by a significant period of time or prevent it from occurring. Any delay in completing the Merger could cause the parties to not realize some or all of the benefits that are expected to be achieved if the Merger is successfully completed within the expected timeframe. There can be no assurance that the conditions to closing of the Merger will be satisfied or waived or that the Merger will be completed within the expected timeframe or at all.
Failure to complete the Merger could adversely affect the stock price and future business and financial results of Inovalon.
There can be no assurance that the conditions to the closing of the Merger will be satisfied or waived or that the Merger will be completed. If the Merger is not completed within the expected timeframe or at all, the ongoing business of Inovalon could be adversely affected and Inovalon will be subject to a variety of risks and possible consequences associated with the failure to complete the Merger, including the following:
•upon termination of the Merger Agreement under specified circumstances, Inovalon is required to pay Parent a termination fee of $176,385,000;
•Inovalon will incur certain transaction costs, including legal, accounting, financial advisor, filing, printing and mailing fees, regardless of whether the Merger closes;
•under the Merger Agreement, Inovalon is subject to certain restrictions on the conduct of its business prior to the closing of the Merger, which may adversely affect its ability to execute certain of its business strategies;
•Inovalon may lose key employees during the period in which Inovalon and Parent are pursuing the Merger, which may adversely affect Inovalon in the future if it is not able to hire and retain qualified personnel to replace departing employees; and
•the proposed Merger, whether or not it closes, will divert the attention of certain management and other key employees of Inovalon from ongoing business activities, including the pursuit of other opportunities that could be beneficial to Inovalon as an independent company.
If the Merger is not completed, these risks could materially affect the business and financial results of Inovalon and its stock price, including to the extent that the current market price of Inovalon common stock is positively affected by a market assumption that the Merger will be completed.
While the Merger is pending, Inovalon will be subject to business uncertainties and certain contractual restrictions that could adversely affect the business and operations of Inovalon.
In connection with the pending Merger, some clients, vendors or other third parties of Inovalon may react unfavorably, including by delaying or deferring decisions concerning their business relationships or transactions with Inovalon, which could
adversely affect the revenues, earnings, funds from operations, cash flows and expenses of Inovalon, regardless of whether the Merger is completed. In addition, due to certain restrictions in the Merger Agreement on the conduct of business prior to completing the Merger, Inovalon may be unable (without the other party’s prior written consent), during the pendency of the Merger, to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial and may cause Inovalon to forego certain opportunities it might otherwise pursue. In addition, the pendency of the Merger may make it more difficult for Inovalon to effectively retain and incentivize key personnel and may cause distractions from Inovalon's strategy and day-to-day operations for its current employees and management.
Inovalon will incur substantial transaction fees and Merger-related costs in connection with the Merger that could adversely affect the business and operations of Inovalon if the Merger is not completed.
Inovalon expects to incur non-recurring transaction fees, which include legal and advisory fees and substantial Merger-related costs associated with completing the Merger, and which could adversely affect the business operations of Inovalon if the Merger is not completed.
The termination fee and restrictions on solicitation contained in the Merger Agreement may discourage other companies from trying to acquire Inovalon.
The Merger Agreement prohibits Inovalon’s solicitation of proposals relating to alternative transactions to the Merger and restricts Inovalon’s ability to participate in any discussions or negotiations with, or furnish nonpublic information to, any third party with respect to any such transaction, subject to certain limited exceptions. The Merger Agreement also contains certain termination rights, including, but not limited to, the right of (i) Inovalon to terminate the Merger Agreement to accept a Superior Proposal (as defined in the Merger Agreement) or (ii) Parent to terminate the Merger Agreement upon an Adverse Recommendation Change (as defined in the Merger Agreement), in each case, subject to and in accordance with the terms and conditions of the Merger Agreement, and provides that, upon termination of the Merger Agreement by Inovalon or Parent as set forth above, Inovalon will be required to pay Parent (or one or more of its designees) a termination fee of $176,385,000 in cash. Upon termination of the Merger Agreement by Inovalon or Parent under specified conditions, Parent will be required to pay Inovalon a termination fee of $368,805,000 in cash. The termination fees and restrictions could discourage other companies from trying to acquire Inovalon even though those other companies might be willing to offer greater value to Inovalon stockholders than Parent has offered in the Merger.
Litigations on Inovalon, Parent, or the members of their respective boards, could prevent or delay the completion of the Merger or result in the payment of damages following completion of the Merger.
It is a condition to the Merger that no injunction or other order preventing the consummation of the Merger shall have been issued by any court of competent jurisdiction or other governmental authority of competent jurisdiction and remain in effect. As of the date of this Quarterly Report on Form 10-Q, five lawsuits have been filed by purported Inovalon stockholders challenging the Merger or the other transactions contemplated by the Merger Agreement, which have named Inovalon and/or members of the Inovalon board as defendants. It is possible that additional lawsuits may be filed by Parent stockholders or Inovalon stockholders challenging the Merger. The outcome of such lawsuits cannot be assured, including the amount of costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation of these claims. If plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the Merger on the agreed-upon terms, such an injunction may delay the consummation of the Merger in the expected timeframe, or may prevent the Merger from being consummated at all. Whether or not any plaintiff’s claim is successful, this type of litigation can result in significant costs and divert management’s attention and resources from the closing of the Merger and ongoing business activities, which could adversely affect the operation of Inovalon’s businesses.
Uncertainty about the Merger may adversely affect the relationships between Inovalon and its clients, vendors and employees, whether or not the Merger is completed.
In response to the announcement of the Merger, existing or prospective clients, vendors and other third party relationships of Inovalon may delay, defer or cease providing goods or services, delay or defer other decisions concerning Inovalon, refuse to extend credit to Inovalon, or otherwise seek to change the terms on which they do business with Inovalon. Any such delays or changes to terms could materially harm the business of Inovalon or, if the Merger is completed, the combined company.
In addition, as a result of the Merger, current and prospective employees could experience uncertainty about their future with Inovalon or the combined company. These uncertainties may impair the ability of Inovalon to retain, recruit or motivate key management, technical and other personnel.
If the Merger is not consummated by January 16, 2022, either Inovalon or Parent may terminate the Merger Agreement.
Either Inovalon or Parent may terminate the Merger Agreement if the Merger has not been consummated by January 16, 2022. However, this termination right will not be available to a party if that party failed to fulfill its obligations under the
Merger Agreement and that failure was the principal cause of, or directly resulted in, the failure to consummate the Merger on time. In the event the Merger Agreement is terminated by either party due to the failure of the Merger to close by January 16, 2022, Inovalon will have incurred significant costs and will have diverted significant management focus and resources from other strategic opportunities and ongoing business activities without realizing the anticipated benefits of the Merger.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Use of Proceeds from Registered Securities
On February 18, 2015, we completed our initial public offering ("IPO") of 22,222,222 shares of Class A common stock and, upon the underwriters' exercise of their option to purchase additional shares, issued an additional 3,142,581 shares of Class A common stock for a total of 25,364,803 shares issued. All of the shares issued in the IPO were primary shares offered by us as none of our stockholders sold any shares in the IPO. The offering price of the shares sold in the IPO was $27.00 per share, resulting in net proceeds to us, after underwriters' discounts and commissions and other expenses payable by us, of $639.1 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 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 Health, Inc. On October 1, 2016, we committed $120.0 million as partial consideration for our acquisition of Creehan. Through September 30, 2017, in aggregate, we have used approximately $171.2 million of the net proceeds from the IPO to repurchase outstanding Class A common shares under our share repurchase program. We intend to use the remaining net proceeds to us from our IPO for working capital and other general corporate purposes; other than funding the share repurchase program, we do not currently have any specific uses of the remaining net proceeds. Additionally, we may use a portion of the remaining net proceeds for additional acquisitions of complementary businesses, technologies, or other assets, or to repay outstanding indebtedness.None.
Purchases of Equity Securities by the Issuer or Affiliated Purchasers
The following table presents a summary of share repurchases made by the Company during the quarter ended September 30, 2017:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares (or approximate dollar value) that May Yet be Purchased under the Plans or Programs |
July 1 – July 31 | | — | | | $ | — | | | — | | | $ | — | |
August 1 – August 31 | | — | | | — | | | — | | | — | |
September 1 – September 30(1) | | 26,208 | | | 40.52 | | | 26,208 | | | — | |
Total | | 26,208 | | | $ | 40.52 | | | 26,208 | | | $ | — | |
_______________________________________ |
| | | | | | | | | | | | | |
Period | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares (or approximate dollar value) that May Yet be Purchased under the Plans or Programs(2) |
July | 867,936 |
| | $ | 12.76 |
| | 867,936 |
| | $ | 37,523,608 |
|
August | 628,808 |
| | 12.98 |
| | 628,808 |
| | 29,363,187 |
|
September(1) | 74,428 |
| | 13.90 |
| | 74,428 |
| | 28,783,049 |
|
Total | 1,571,172 |
| | $ | 12.90 |
| | 1,571,172 |
| | $ | 28,783,049 |
|
| |
(1) | On September 1, 2017, we directed the administrator of the Company's Employee Stock Purchase Plan ("ESPP") to purchase 32,675 shares of Class A common stock in the open market for a total of approximately $0.5 million, for issuance to the ESPP participants at a discounted price of $11.52 per share. The Company may, in its discretion, based on market conditions, relative transaction costs and the Company's need for additional capital, continue to instruct the plan |
(1)On September 2, 2021, we directed the administrator of the Company's Employee Stock Purchase Plan (“ESPP”) to purchase 26,208 shares of Class A common stock in the open market for a total of approximately $1.1 million, for issuance to the ESPP participants at a discounted price of $34.72 per share. The Company may, in its discretion, based on market conditions, relative transaction costs and the Company's 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.
| |
(2) | On May 4, 2016, we announced that our Board of Directors authorized a program to repurchase up to $100 million of Inovalon's Class A common stock through December 31, 2016. On November 2, 2016, we announced that our Board of Directors authorized an expansion of the share repurchase program to repurchase up to an additional $100 million of shares of Inovalon's Class A common stock (bringing the total to $200 million) through December 31, 2017. As of September 30, 2017, the Company had repurchased 12,744,489 shares at an average purchase price of $13.43 per share for a total purchase price of approximately $171.2 million under this program. The Company intends to use a combination of cash on hand, cash generated by operations and sales of short-term investments to fund additional repurchases under this program through open market or privately negotiated transactions. |
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
EXHIBIT INDEX
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Exhibit Number
| | Description of Document |
31.12.1 |
| * | |
| | |
31.1 | | * | |
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31.2 |
| * | |
| | |
32.1 |
| ** | |
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32.2 |
| ** | |
| | |
101.INS | * | * | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
| | |
101.SCH | * | * | Inline XBRL Taxonomy Extension Schema Document |
| | |
101.CAL | * | * | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF | * | * | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101.LAB | * | * | Inline XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE | * | * | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
*104 | Filed herewith.* | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
| |
** | 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. |
* 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.
SIGNATURES
Pursuant to the requirements 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.
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| | | |
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Date: November 2, 20179, 2021 | INOVALON HOLDINGS, INC. |
| By: | | /s/ KEITH R. DUNLEAVY, M.D. |
| | | Keith R. Dunleavy, M.D. Chief Executive Officer & Chairman (Principal Executive Officer) |
| | | |
| By: | | /s/ CHRISTOPHER E. GREINERJONATHAN R. BOLDT |
| | | Christopher E. GreinerJonathan R. Boldt
Chief Financial & Operating Officer (Principal Financial Officer)
|