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INOV Inovalon

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended
March 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                             to                            
Commission File Number 001-36841
_______________________________________________________
Inovalon Holdings, Inc.
(Exact name of registrant as specified in its charter)
_______________________________________________________
Delaware47-1830316
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
4321 Collington Road, 
Bowie,Maryland20716
(Address of principal executive offices)(Zip Code)
(301809-4000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name Of Each Exchange On Which Registered Ticker Symbol
Class A Common Stock, $0.000005 par value per share NASDAQ Global Select Market INOV
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     No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes     No 
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 accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company
         Emerging growth company
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. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No 
As of April 17, 2020, the registrant had 76,119,253 shares of Class A common stock outstanding and 79,270,861 shares of Class B common stock outstanding.
 



INOVALON HOLDINGS, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2020
TABLE OF CONTENTS



PART I—FINANCIAL INFORMATION
Item 1.    Consolidated Financial Statements
INOVALON HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and par value amounts)
 March 31,
2020
 December 31,
2019
ASSETS 
  
Current assets: 
  
Cash and cash equivalents$182,875
 $93,094
Accounts receivable (net of allowances of $2,451 at March 31, 2020 and $3,351 at December 31, 2019)129,050
 139,514
Prepaid expenses and other current assets24,606
 20,141
Income tax receivable8,112
 4,488
Total current assets344,643
 257,237
Non-current assets: 
  
Property, equipment and capitalized software, net146,798
 147,741
Operating lease right-of-use assets42,894
 45,053
Goodwill955,881
 955,881
Intangible assets, net480,906
 483,041
Other assets25,750
 19,681
Total assets$1,996,872
 $1,908,634
LIABILITIES AND STOCKHOLDERS’ EQUITY 
  
Current liabilities: 
  
Accounts payable and accrued expenses$31,947
 $34,845
Accrued compensation19,872
 35,135
Other current liabilities28,676
 26,298
Deferred revenue17,663
 13,664
Credit facilities9,800
 9,800
Operating lease liabilities8,116
 8,085
Finance lease liabilities2,569
 2,533
Total current liabilities118,643
 130,360
Non-current liabilities: 
  
Credit facilities, less current portion980,639
 883,937
Operating lease liabilities, less current portion49,033
 49,690
Finance lease liabilities, less current portion11,600
 12,266
Other liabilities84,066
 46,529
Deferred income taxes86,150
 97,693
Total liabilities1,330,131
 1,220,475
Commitments and contingencies (Note 7)


 


Stockholders’ equity: 
  
Common stock, $0.000005 par value, 900,000,000 shares authorized, zero shares issued and outstanding at each of March 31, 2020 and December 31, 2019, respectively
 
Class A common stock, $0.000005 par value, 750,000,000 shares authorized; 90,875,472 shares issued and 76,255,297 shares outstanding at March 31, 2020; 90,327,728 shares issued and 75,707,553 shares outstanding at December 31, 20191
 1
Class B common stock, $0.000005 par value, 150,000,000 shares authorized; 79,270,861 shares issued and outstanding at March 31, 2020; 79,369,411 shares issued and outstanding at December 31, 2019
 
Preferred stock, $0.0001 par value, 100,000,000 shares authorized, zero shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively
 
Additional paid-in-capital640,861
 636,461
Retained earnings276,628
 278,246
Treasury stock, at cost, 14,620,175 shares at March 31, 2020 and December 31, 2019, respectively(199,817) (199,817)
Other comprehensive loss(50,932) (26,732)
Total stockholders’ equity666,741
 688,159
Total liabilities and stockholders’ equity$1,996,872
 $1,908,634
See notes to consolidated financial statements.

1


INOVALON HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per-share amounts)
 Three Months Ended
March 31,
 2020 2019
Revenue$154,187
 $145,491
Expenses:   
Cost of revenue(1)
41,043
 37,203
Sales and marketing(1)
15,159
 13,526
Research and development(1)
7,104
 8,201
General and administrative(1)
53,883
 53,623
Depreciation and amortization27,934
 27,047
Total operating expenses145,123
 139,600
Income from operations9,064
 5,891
Other income and (expenses):   
Interest income290
 610
Interest expense(14,560) (16,542)
Other expense, net(22) (11)
Loss before taxes(5,228) (10,052)
Benefit from income taxes(3,545) (1,729)
Net loss$(1,683) $(8,323)
Net loss attributable to common stockholders, basic and diluted$(1,683) $(8,323)
Net loss per share attributable to common stockholders, basic and diluted:   
Basic net loss per share$(0.01) $(0.06)
Diluted net loss per share$(0.01) $(0.06)
Weighted average shares of common stock outstanding:   
Basic149,183
 147,774
Diluted149,183
 147,774
________________________________________________
(1)Includes stock-based compensation expense as follows:   
 Cost of revenue$165
 $77
 Sales and marketing620
 300
 Research and development453
 370
 General and administrative6,018
 4,492
 Total stock-based compensation expense$7,256
 $5,239

See notes to consolidated financial statements.

2


INOVALON HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)
 Three Months Ended
March 31,
 2020 2019
Net loss$(1,683) $(8,323)
Other comprehensive income (loss):   
Realized losses on cash flow hedges reclassified from accumulated other comprehensive income, net of tax of $(681) and $(170), respectively1,446
 359
Net change in unrealized losses on cash flow hedges, net of tax of $12,069 and $3,984, respectively(25,646) (8,424)
Net change in unrealized gains on available-for-sale investments, net of tax of $0 and $(5), respectively
 11
Comprehensive loss$(25,883) $(16,377)
See notes to consolidated financial statements.

3


INOVALON HOLDINGS, INC.
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, 202090,327,728
 $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 options23,183
 
 
 
 
 
 183
 
 
 183
Conversion Class B to Class A common stock98,550
 
 (98,550) 
 
 
 
 
 
 
Issuance of shares related to restricted stock units and awards, net of forfeitures574,082
 
 
 
 
 
 
 
 
 
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, 202090,875,472
 $1
 79,270,861
 $
 (14,620,175) $(199,817) $640,861
 $276,628
 $(50,932) $666,741
Balance—January 1, 201986,679,575
 $
 80,608,685
 $1
 (14,620,175) $(199,817) $618,674
 $270,471
 $(6,740) $682,589
Stock-based compensation expense
 
 
 
 
 
 5,163
 
 
 5,163
Conversion Class B to Class A common stock460,000
 
 (460,000) 
 
 
 
 
 
 
Issuance of shares related to restricted stock units and awards, net of forfeitures759,409
 
 
 
 
 
 
 
 
 
Shares withheld for employee taxes upon conversion of restricted stock(82,978) 
 
 
 
 
 (1,086) 
 
 (1,086)
Other comprehensive loss
 
 
 
 
 
 
 
 (8,054) (8,054)
Net loss
 
 
 
 
 
 
 (8,323) 
 (8,323)
Balance—March 31, 201987,816,006
 $
 80,148,685
 $1
 (14,620,175) $(199,817) $622,751
 $262,148
 $(14,794) $670,289
See notes to consolidated financial statements.

4


INOVALON HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 Three Months Ended
March 31,
 2020 2019
Cash flows from operating activities: 
  
Net loss$(1,683) $(8,323)
Adjustments to reconcile net loss to net cash provided by operating activities: 
  
Stock-based compensation expense7,256
 5,239
Depreciation14,980
 13,931
Amortization of intangibles12,954
 13,116
Amortization of debt issuance costs and debt discount1,151
 1,072
Deferred income taxes(181) (2,671)
Change in fair value of contingent consideration109
 379
Other(295) 1,129
Changes in assets and liabilities: 
  
Accounts receivable1,614
 (13,893)
Prepaid expenses and other current assets635
 (802)
Income taxes receivable(3,624) 2,830
Other assets(862) 19
Accounts payable and accrued expenses(2,844) 182
Accrued compensation(15,558) (3,602)
Other current and non-current liabilities(2,996) (2,056)
Deferred revenue3,443
 8,205
Net cash provided by operating activities14,099
 14,755
Cash flows from investing activities: 
  
Maturities of short-term investments
 5,164
Purchases of property and equipment(5,533) (3,796)
Investment in capitalized software(10,940) (7,626)
Net cash used in investing activities(16,473) (6,258)
Cash flows from financing activities: 
  
Proceeds from credit facility borrowings99,000
 
Repayment of credit facility borrowings(2,450) (2,450)
Payments for debt issuance costs(1,000) 
Proceeds from exercise of stock options183
 
Finance lease liabilities paid(631) (672)
Tax payments for equity award issuances(2,947) (1,086)
Net cash provided by (used in) financing activities92,155
 (4,208)
Increase in cash and cash equivalents89,781
 4,289
Cash and cash equivalents, beginning of period93,094
 115,591
Cash and cash equivalents, end of period$182,875
 $119,880
Supplemental cash flow disclosure: 
  
Income taxes paid (received), net$357
 $(1,931)
Interest paid13,092
 15,602
Non-cash transactions: 
  
Accruals for purchases of property and equipment1,606
 1,590
Accruals for investment in capitalized software1,440
 1,776
Accruals for purchase of intangible assets10,819
 
See notes to consolidated financial statements.

5


INOVALON HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared by Inovalon Holdings, Inc. (“Inovalon” or the “Company”) in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and as required by Rule 10-01 of Regulation S-X. Accordingly, the unaudited consolidated financial statements may not include all of the information and notes required by GAAP for audited financial statements. The year-end December 31, 2019 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’s management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of items of a normal and recurring nature, necessary to present fairly the Company’s financial position as of March 31, 2020, the results of operations, comprehensive income (loss), and stockholders’ equity, and cash flows for the three-month periods ended March 31, 2020 and 2019. The results of operations for the three month periods ended March 31, 2020 and 2019 are not necessarily indicative of the results to be expected for the full year. The preparation of 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’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”).
The accompanying unaudited consolidated financial statements include the accounts of Inovalon and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The Company’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.
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent clarifying guidance (“ASU 2016-13”). ASU 2016-13 replaced the incurred loss impairment method with a methodology that reflects the amortized cost basis net of expected credit losses that are calculated based on certain relevant information. The standard also amended the credit loss guidance for available-for-sale debt securities and requires the measurement and recognition of an expected allowance for credit losses for financial assets held at amortized cost. The Company adopted the requirements of the new standard on January 1, 2020 using the modified-retrospective approach and there was no material impact on the Company’s consolidated financial statements and notes disclosures.
In determining the estimate for expected credit losses, each quarter the Company evaluates historical loss rates for its trade receivables and unbilled receivables balance using an aging method and loss rate method and applies management judgment to determine the expected collectability of receivables. The Company considers various factors including historical invoice data, historical payment data, and days sales outstanding and considers other events that could impact future collectability. Additionally, the Company considers current economic conditions that could impact clients. While there may be fluctuations in macro-economic trends and regulatory changes, the Company believes historical trends are representative of collectability. Clients represent payer, pharmaceutical, and life science companies, along with provider networks. Due to the short-term nature of the Company’s standard payment terms and the low risk profile of clients the risk of loss reflects historical experience.
In the circumstance where a receivable is deemed uncollectable, the Company will reduce the allowance for expected credit loss by the same amount of the portion of the receivable being written off. As there is no standard definition for when a receivable is deemed uncollectable, the Company will use judgment to determine when all efforts of collection have been exhausted. If the Company subsequently receives consideration for a receivable that was previously written off, the Company would increase earnings by crediting credit loss expense.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to the Requirements for Fair Value Measurement. This update changes the fair value measurement disclosure requirements of ASC 820. The standard consists of removals, modifications, and additions to the existing disclosure requirements. The Company adopted the requirements of the new standard on January 1, 2020 and there was no material impact on the Company’s notes disclosures. Refer to “Note 6—Fair Value Measurements.”
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard

6


requires that an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. This guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the requirements of the new standard on January 1, 2020 and there was no material impact on the Company’s consolidated financial statements and notes disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This update removes certain exceptions and provides additional requirements that simplify the accounting for income taxes. This guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the standard is permitted. The Company adopted the requirements of the new standard on January 1, 2020 and there was no material impact on the Company’s consolidated financial statements and notes disclosures.
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’s consolidated financial statements and note disclosures, from those disclosed in the 2019 Form 10-K, that would be expected to impact the Company except for the following:
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-14 provides optional expedients and exceptions to simplify the accounting for contracts, hedging relationships, and other transactions affected by reference rate reform that meet certain criteria. The standard is applicable to contract modifications and hedging relationships entered into prior to or existing as of December 31, 2022 and allows for elections to be made at different points in time. During the first quarter of 2020, the Company elected to adopt the expedient in 848-50-25-2 to assert probability of the hedged interest transaction regardless of any expected modification in terms related to reference rate reform and applied the expedient in assessing hedge effectiveness without dedesignating the hedging relationship. The Company plans to adopt the remaining expedients as applicable when contracts are modified and will continue to evaluate the timing of adoption and impact on its consolidated financial statements.
2. REVENUE
The Company primarily derives its revenues through the sale or subscription licensing of its platform solutions and services. The following table disaggregates revenue by offering (in thousands):
 Three Months Ended
March 31,
 2020 2019
Platform solutions(1)
$140,617
 $129,952
Services(2)
13,570
 15,539
Total revenue$154,187
 $145,491
______________________________________
(1)Platform solutions include arrangements for technology-based offerings representing subscription-based cloud-based platform offerings and legacy platform solutions that are not cloud-based and not billed under a subscription-based contract structure.
(2)Services include advisory, implementation, and support services under time and materials, fixed price, or retainer-based contracts.
Contract Balances
The Company had an unbilled receivables balance of $27.4 million and $36.0 million as of March 31, 2020 and December 31, 2019, respectively. The decrease in the unbilled receivables balance was due to the timing of billings. Unbilled receivables are classified as accounts receivable on the consolidated balance sheet. The Company had deferred commissions of $12.9 million and $11.8 million as of March 31, 2020 and December 31, 2019, respectively. The Company had a deferred contract asset balance of $13.6 million and $5.8 million as of March 31, 2020 and December 31, 2019, respectively. Short-term and long-term deferred commissions and deferred contract assets are classified as prepaid expenses and other current assets and other assets on the consolidated balance sheet, respectively.
The Company had a deferred revenue balance of $17.7 million and $13.7 million, which is presented net of certain contract assets of $13.0 million and $11.4 million, as of March 31, 2020 and December 31, 2019, respectively. Revenue recognized during the three months ended March 31, 2020 that was included in the deferred revenue balance at the beginning of the year was $7.5 million.

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3. NET INCOME (LOSS) 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”) is computed by dividing net income (loss) 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”) and restricted stock awards (“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 Amended Plan. The Company considers issued and unvested RSAs to be participating securities as the holders of these RSAs have a non-forfeitable right to dividends in the event of the Company’s declaration of a dividend on shares of Class A and Class B common stock. Subsequent to the issuance of the participating securities, the Company applied the two-class method required in calculating net income (loss) 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.

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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
March 31,
 2020 2019
Basic 
  
Numerator: 
  
Net loss$(1,683) $(8,323)
Undistributed earnings allocated to participating securities
 
Net loss attributable to common stockholders—basic$(1,683) $(8,323)
Denominator: 
  
Weighted average shares used in computing net loss per share attributable to common stockholders—basic149,183
 147,774
Net loss per share attributable to common stockholders—basic$(0.01) $(0.06)
Diluted 
  
Numerator: 
  
Net loss attributable to common stockholders—diluted$(1,683) $(8,323)
Denominator: 
  
Number of shares used for basic EPS computation149,183
 147,774
Effect of dilutive securities
 
Weighted average shares used in computing net loss per share attributable to common stockholders—diluted149,183
 147,774
Net loss per share attributable to common stockholders—diluted$(0.01) $(0.06)

The computation of diluted EPS does not include certain awards, on a weighted average basis, because their inclusion would have an anti-dilutive effect on EPS. The awards excluded because of their anti-dilutive effect are as follows (in thousands):
 Three Months Ended
March 31,
 2020 2019
Awards excluded from the computation of diluted net loss per share because their inclusion would have been anti-dilutive
 10

4. LEASES
The Company 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 12 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 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.
The Company’s 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 asset class and lease term.
Finance lease right-of-use assets of $13.9 million are included in property, equipment, and capitalized software, net on the consolidated balance sheet.

9


The following table presents components of lease expense for the three months ended March 31, 2020 and March 31, 2019 (in thousands):
 Three Months Ended
March 31,
 2020 2019
Finance lease cost   
Amortization of right-of-use assets$492
 $550
Interest on lease liabilities107
 134
Operating lease cost2,718
 2,111
Variable lease cost403
 494
Sublease income(131) (317)
Total lease cost$3,589
 $2,972

Supplemental cash flow information related to leases for the three months ended March 31, 2020 and March 31, 2019 are as follows (in thousands):
 Three Months Ended
March 31,
 2020 2019
Cash paid for amounts included in the measurement of lease liabilities:   
Operating cash flows for operating leases$2,492
 $3,573
Operating cash flows for financing leases107
 134
Financing cash flows for financing leases631
 672
Right-of-use assets obtained in exchange for lease liabilities:   
Operating leases$
 $2,990

Supplemental balance sheet information related to leases as of March 31, 2020 and December 31, 2019 are as follows:
 March 31,
2020
 December 31,
2019
Weighted average remaining lease term:   
Operating leases5 years
 5 years
Financing leases8 years
 8 years
Weighted average discount rate:   
Operating leases4.8% 4.7%
Financing leases2.9% 3.0%

5. DEBT
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 March 31, 2020, the Company maintained a letter of credit of $1.0 million. On March 16, 2020, the Company utilized an existing revolving facility to borrow $99.0 million on its 2018 Revolving Facility. Although the Company does not have any immediate need for additional liquidity, this proactive drawdown was taken to increase its financial flexibility, including to ensure the availability of sufficient capital to deploy opportunistically from time to time, in light of unprecedented conditions due to the COVID-19 outbreak.
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% with an additional 25 basis point reduction upon achievement of a defined senior secured net leverage ratio. 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.

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At the option of the Company, the loans outstanding under the 2018 Term Facility will bear interest either at: (i) Adjusted LIBOR plus an applicable rate of 3.00% 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 1.0% and (iii) one-month Adjusted LIBOR plus 1.0%.
The following table discloses the outstanding debt at each balance date as follows (in thousands):
 March 31,
2020
 December 31,
2019
2018 Term Facility(1)
$891,439
 $893,737
2018 Revolving Facility99,000
 
Total Credit Facilities990,439
 893,737
Less: current portion9,800
 9,800
Non-current Credit Facilities$980,639
 $883,937
______________________________________
(1)The 2018 Term Facility is presented net of unamortized deferred financing fees and original issue discount (“OID”) of $23.9 million and $24.0 million as of March 31, 2020 and December 31, 2019, respectively.
The Company and its Restricted Subsidiaries (as defined in the 2018 Credit Agreement) are subject to certain affirmative and negative covenants under the 2018 Credit Agreement, and the 2018 Credit Agreement includes certain customary representations and warranties of the Company. As of March 31, 2020, the Company is in compliance with the covenants under the 2018 Credit Agreement.
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 March 31, 2020 (in thousands):
 Level 1 Level 2 Level 3 Total
Cash equivalents: 
  
  
  
Money market funds$42,063
 $
 $
 $42,063
Other current liabilities: 
  
  
  
Interest rate swaps
 (16,949) 
 (16,949)
Contingent consideration
 
 (3,828) (3,828)
Other liabilities       
Interest rate swaps
 (57,950) 
 (57,950)
Contingent consideration
 
 (13,071) (13,071)
Total$42,063
 $(74,899) $(16,899) $(49,735)
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, 2019 (in thousands):
 Level 1 Level 2 Level 3 Total
Cash equivalents: 
  
  
  
Money market funds$41,933
 $
 $
 $41,933
Other current liabilities: 
  
  
  
Interest rate swaps
 (8,354) 
 (8,354)
Contingent consideration
 
 (3,719) (3,719)
Other liabilities:       
Interest rate swaps
 (30,957) 
 (30,957)
Contingent consideration
 
 (13,071) (13,071)
Total$41,933
 $(39,311) $(16,790) $(14,168)

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

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prices that are corroborated by observable market data or quoted market prices for similar instruments. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs). The Company performs procedures to ensure that appropriate fair values are recorded such as comparing prices obtained from other sources.
The following table presents financial instruments measured at fair value using unobservable inputs (Level 3) (in thousands):
 
Fair Value Measurements Using
Unobservable Inputs
(Level 3)
 March 31,
2020
 December 31,
2019
Balance, beginning of period$(16,790) $(31,824)
Fair value adjustment(1)
17
 532
Accretion expense (recognized in general and administrative expenses)(126) (647)
Settlement of liability
 15,149
Total$(16,899) $(16,790)
______________________________________
(1)During 2019, the Company recognized an adjustment of $0.8 million in general and administrative expenses related to the change in fair value of contingent consideration, partially offset by an adjustment of $0.3 million recognized in goodwill, which was a purchase accounting adjustment attributable to the ABILITY Acquisition.
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 March 31, 2020 (in thousands):
 March 31,
2020
Carrying value$990,439
Fair value$903,158

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. During the first quarter of 2020, the Company elected to adopt the expedient in 848-50-25-2 to assert probability of the hedged interest transaction regardless of any expected modification in terms related to reference rate reform.
The interest rate swaps are recorded on the balance sheet at fair value as either assets or liabilities and any changes to the fair value are recorded through accumulated other comprehensive income and reclassified into interest expense in the same period in which the hedged transaction is recognized in earnings. Cash flows from interest rate swaps are reported in the same category as the cash flows from the items being hedged.
The following table presents the fair value of interest rate swaps on the balance sheet as of March 31, 2020 (in thousands):
 Liability Derivative
 Balance Sheet Location Fair Value
Interest rate swap contractOther current liabilities $(16,949)
Interest rate swap contractOther liabilities $(57,950)


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The following table presents the fair value of interest rate swaps on the balance sheet as of December 31, 2019 (in thousands):
 Liability Derivative
 Balance Sheet Location Fair Value
Interest rate swap contractOther current liabilities $(8,354)
Interest rate swap contractOther liabilities $(30,957)

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 three months ended March 31, 2020 and 2019 (in thousands):
Three Months Ended March 31, 2020 Gain (Loss) recognized in OCI Statement of Operations Location (Gain) Loss reclassified from OCI
Interest rate swap contract $(37,715) Interest expense $2,127
Three Months Ended March 31, 2019 Gain (Loss) recognized in OCI Statement of Operations Location (Gain) Loss reclassified from OCI
Interest rate swap contract $(12,408) Interest expense $529

The net amount of accumulated other comprehensive loss expected to be reclassified to interest expense in the next 12 months is $17.4 million.
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’s business, financial condition, results of operations, or cash flows will depend on a number of variables, including, for example, the timing and amount of such losses or damages (if any) and the structure and type of any such remedies. The Company’s management does not presently expect any litigation matters to have a material adverse impact on the consolidated financial statements of the Company.
There have been no significant or material developments to current legal proceedings, including the estimated effects on the Company’s consolidated financial statements and note disclosures, subsequent to the disclosure previously provided in Note 11 of the Notes to the Consolidated Financial Statements in the 2019 Form 10-K.
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our unaudited 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, 2019, as filed with the Securities and Exchange Commission (the “SEC”) on February 20, 2019 (the “2019 Form 10-K”). Unless we otherwise indicate or the context requires, references to the “Company,” “Inovalon,” “we,” “our,” and “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”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “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, are forward-looking statements. The words “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

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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 future financial performance, including our ability to continue and manage our growth;
our ability to retain our client 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 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, including recent changes in U.S. tax laws;
the ability to protect the privacy of our clients’ data and prevent security breaches;
the effect of current or future litigation;
the effect of competition on our business;
the efficacy of our platforms and toolsets;
the effects and potential effects of the COVID-19 pandemic 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 as a result of the COVID-19 pandemic;
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 2019 Form 10-K, under the heading Part I, Item 1A, “Risk Factors.”
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. 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 provider of cloud-based platforms empowering data-driven healthcare. Through the Inovalon ONE® Platform, Inovalon brings to the marketplace a national-scale capability to interconnect with the healthcare ecosystem, aggregate and analyze data in real-time, and empower the application of resulting insights to drive meaningful impact at the point of care. Leveraging its Platform, unparalleled proprietary datasets, and industry-leading subject matter expertise, Inovalon enables better care, efficiency, and financial performance across the healthcare ecosystem. From health plans and provider organizations, to pharmaceutical, medical device, and diagnostics companies, Inovalon’s unique achievement of value is delivered through the

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effective progression of “Turning Data into Insight, and Insight into Action®.” Supporting thousands of clients, including 24 of the top 25 U.S. health plans, 22 of the top 25 global pharma companies, 19 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 platforms and analytics are informed by data pertaining to more than 994,000 physicians, 558,000 clinical facilities, 315 million Americans, and 55 billion medical events.
We generate the substantial majority of our revenue through the sale or subscription licensing of our platform solutions, as well as revenue from related arrangements for advisory, implementation, and support services.
Recent Developments
COVID-19
The recent 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 COVID-19, in the first quarter of 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. 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 are conducting business with modifications to employee travel and employee work locations, among other modifications. In response to the pandemic and changes in telehealth-related and other policies and guidelines from the U.S. government, we launched data-driven and analytically informed telehealth capabilities within a number of our platform offerings in the first quarter of 2020. However, also as a result of the COVID-19 pandemic during the first quarter of 2020, we experienced a degree of softness with respect to certain of our services businesses and legacy offerings which is expected to continue through the second quarter of 2020 and begin resolving thereafter. We believe this softness is temporary and represents demand delays (not demand loss). Although we expect these businesses and offerings to experience a degree of “catch-up” following the COVID-19 impact period, we can provide no assurance that these demand delays will begin to resolve after the second quarter, nor can we provide any assurance that the demand delays will not result in permanent demand loss, or 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 impact has had and is likely to continue to have adverse effects on our clients, suppliers and third-party business partners. We expect that the effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods.
The extent to which COVID-19 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 II Item 1A. Risk Factors. 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.
 March 31,
 2020 2019
 (in thousands)
MORE2 Registry® dataset metrics(1)
 
  
Unique patient count(2)
315,610
 271,486
Medical event count(3)
55,092,985
 44,663,819
Trailing twelve-month Patient Analytics Months (PAM)(1)(4)
68,531,751
 51,768,491
____________________________________
(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 is indicative of our overall level of analytical activity and the underlying growth in our business, increases or decreases in these metrics do not necessarily correlate to proportional increases or decreases in revenue, or net income. For instance, although increased levels of analytical activity historically have corresponded to increases in revenue over the long term, differences in fees charged for different analytical packages exist and differences in how analytics trigger the applicability of our data-driven intervention platforms may result in increases in analytical activity that do not result in proportional increases in revenue, or net income (and vice versa). Accordingly, while we believe the presentation of these operating metrics is helpful to investors in understanding our business, these metrics have limitations and should not be considered as substitutes for analysis of our

15


financial results reported under generally accepted accounting principles (“GAAP”). In addition, we believe that other companies, including companies in our industry, do not present similar operating metrics and that there is no commonly accepted method of calculating these metrics, which may reduce their usefulness as comparative measures.
(2)
Unique patient count is defined as each unique, longitudinally matched, de-identified natural person represented in our MORE2 Registry® as of the end of the period presented.
(3)Medical event count is defined as the total number of discrete medical events as of the end of the period presented (for example, a discrete medical event typically results from the presentation of a patient to a physician for the diagnosis of diabetes and congestive heart failure in a single visit, the presentation of a patient to an emergency department for chest pain, etc.).
(4)PAM is defined as the sum of the analytical processes performed on each respective patient within patient populations covered by clients under contract. As used in the metric, an “analytical process” is a distinct set of data calculations undertaken by us which is initiated and completed within our platform solutions to examine a specific question such as whether a patient is believed to have a condition such as diabetes, or worsening of the disease, during a specific time period.
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, and our revenue mix of 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—as well as payment models and regulatory oversight requirements—have soared. In this setting, granular data has become critical to determining and improving quality and financial performance in healthcare. 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.

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Innovation and Platform Development.    Our business model is based upon our ability to deliver value to our clients through our platform solutions and related 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 platform solutions are deployed as summarized below (in thousands, except percentages).
 Three Months Ended
March 31,
 2020 2019
Investment in Innovation: 
  
Research and development(1)
$7,104
 $8,201
Capitalized software development(2)
10,432
 7,907
Research and development infrastructure investments(3)

 1,170
Total investment in innovation$17,536
 $17,278
As a percentage of revenue 
  
Research and development(1)
4% 6%
Capitalized software development(2)
7% 5%
Research and development infrastructure investments(3)
% 1%
Total investment in innovation11% 12%
_______________________________________
(1)Research and development primarily includes employee costs related to the development and enhancement of our service offerings.
(2)Capitalized software development includes capitalized costs incurred to develop and enhance functionality for our platform solutions.
(3)Research and development infrastructure investments include strategic capital expenditures related to hardware and software platforms under development or enhancement.
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 generally defined as modular, cloud-based solutions that utilize dynamic, high-speed cloud-based compute and storage, offer enhanced data visualization capabilities, and are tied to subscription-based contract structures where revenue is 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 expanded our offerings of cloud-based SaaS solutions enabled by the Inovalon ONE® Platform which utilize Artificial Intelligence and machine learning application. Legacy platform solutions are generally defined as solutions historically not cloud-based in nature and not tied to subscription-based contract structures. We believe subscription-based cloud-based platform offerings provide more advanced capabilities, higher value, and greater visibility to clients, as well as improved visibility, market differentiation, and financial performance for us. Over time, we expect that subscription-based cloud-based platform offerings will continue to represent 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 and being able to drive impact directly with providers and their patients. Concurrently, providers are also increasingly interested in access to more advanced analytical tools to support and improve their clinical and financial performance. Enhancing and expanding our industry connectivity with payer administrative systems, provider facilities, diagnostic systems, pharmacy systems, healthcare industry systems (e.g., electronic healthcare record systems, health information exchange systems, claims processing systems, decision support systems, etc.), and other healthcare clinical and business systems, offers the potential for increased differentiation in the healthcare marketplace as well as improved efficiency of our operations.
Client and Analytical Process Count Growth.    Our business is generally driven by the number of underlying patients for which our platform 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. We believe that PAM is indicative of our overall

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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’ 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 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 have limited predictable impact in the aggregate on our financial performance from quarter to quarter. However, quarter to quarter financial performance may increasingly vary from historical seasonal trends as we continue to expand into adjacent markets and increase the portion of our revenue generated from new offerings. Further, we also expect the impact of seasonality to decrease over time as we expand our mix of revenue generated from a subscription-based model. The 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), including as a result of the COVID-19 pandemic, inflation, and unemployment. Further, industry trends in federal and state laws and regulations, as well as emerging trends in private sector payment models, affect our clients’ businesses and their need for technologies and services to support these challenges. These factors have various effects on our business, and on occasion have resulted in the slowing or cessation of the decision-making process by clients adopting our technologies and services. On the other hand, changes in macro-economic trends and the industry landscape have accelerated the need for our technologies and services from time-to-time, particularly as regulators introduce complex requirements with which our clients must comply.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our unaudited consolidated financial statements, which have been prepared in accordance with GAAP. In connection with the preparation of our unaudited 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 consolidated financial statements. The accounting estimates used in the preparation of our unaudited 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 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 consolidated financial statements. For a more detailed discussion of our critical accounting policies, please refer to our 2019 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, including solutions offered through the myABILITY® software platform, and legacy platform solutions that are not cloud-based and not billed under a subscription-based contract structure. Our platform solutions revenue is driven primarily by cloud-based data connectivity, analytics, intervention, and visualization software that enables the identification and resolution of gaps in care, quality, utilization, compliance, and/or other gaps that may impact our clients’ achievement of greater healthcare quality and financial performance associated with value-based care. Revenue is predominantly based on the number of clients, the number of patients or similar relevant metrics (e.g., the number of prescriptions issued), the size of the client, the number of analytical services contracted for by a client and the contractually negotiated price of such services. Additionally, revenue is based

18


on the number of identified and/or resolved gaps in care, quality, utilization, compliance, and/or other gaps resulting from our analytical services at a contractually negotiated transactional price for each identified and/or resolved gap.
The majority of our platform solutions contracts contain a series of separately identifiable and distinct services that represent performance obligations that are satisfied over time. Revenue is allocated to platform solutions by determining the standalone selling price of each performance obligation. Revenue is generally recognized on our platform offerings over the contract term. For certain contracts, we have determined that we will recognize revenue 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, implementation and support services. Revenue from our services arrangements is generally provided under time and materials, fixed-price, or retainer-based contracts, based on agreed upon billing rates applied to direct labor hours expended plus the costs of other items used in the performance of the contract. We recognize revenue when we have the right to invoice the customer using the allowable practical expedient since the right to invoice the customer corresponds with the performance obligations completed. Revenues under fixed-price and retainer-based contracts are recognized ratably over the contract period or upon contract completion.
During the first quarter of 2020, we experienced a degree of softness with respect to certain of our services businesses and legacy offerings which is expected to continue through the second quarter of 2020 and begin resolving thereafter. We believe this softness is temporary and represents demand delays (not demand loss). Although we expect these businesses and offerings to experience a degree of “catch-up” following the COVID-19 impact period, we can provide no assurance that these demand delays will begin to resolve after the second quarter, nor can we provide any assurance that the demand delays will not result in permanent demand loss, or 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 may grow our headcount over time to capitalize on our market opportunities, we believe our increased investment in automation, electronic health record integration capabilities, and economies of scale in our operating model, will position us to grow our platform solutions revenue at a greater rate than our cost of revenue.
Sales and Marketing
Sales and marketing expense consists primarily of employee-related expenses, including salaries, benefits, commissions, discretionary incentive compensation, employment taxes, severance, and equity compensation costs for our employees engaged in sales, sales support, business development, and marketing. Sales and marketing expense also includes operating expenses for marketing programs, 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, although it may vary from period to period as a percentage of 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 include certain third-party consulting fees. Our research and development expense excludes any allocation of occupancy expense and depreciation and amortization.
We expect to continue our focus on developing new 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.

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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.
In the near term, we expect our general and administrative expense to continue to increase in absolute dollars to support business growth. Over the long term, we expect general and administrative expense to decrease as a percentage of revenue.
Depreciation and Amortization Expense
Our depreciation and amortization expense consists primarily of depreciation of fixed assets, amortization of capitalized software development costs, and amortization of acquisition-related intangible assets.
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 Facility (as defined below, under the heading Liquidity and Capital Resources—Debt) and related interest rate swaps.
We expect our interest expense to increase in connection with the debt commitment discussed in “Note 5—Debt” and to fluctuate in proportion to our outstanding principal balance under the 2018 Credit Facilities (as defined below, under the heading Liquidity and Capital Resources—Debt) and the prevailing London Interbank Offer Rate (“LIBOR”) interest rate. We expect this increase to be partially offset by the decrease in the effective interest rate as a result of the repricing of our 2018 Credit Facility.
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.
Our effective tax rate has decreased due to the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) which was signed into law on March 27, 2020 and includes modifications to the limitation on business interest expense and net operating loss provisions. We realized tax benefits related to several provisions of the CARES Act which favorably impacted our effective tax rate in the first quarter of 2020. Additionally, our 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 or deficiencies associated with stock-based compensation transactions.


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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
March 31,
 Change from
2019 to 2020
 2020 2019 $ %
Revenue$154,187
 $145,491
 $8,696
 6 %
Expenses:       
Cost of revenue(1)
41,043
 37,203
 3,840
 10 %
Sales and marketing(1)
15,159
 13,526
 1,633
 12 %
Research and development(1)
7,104
 8,201
 (1,097) (13)%
General and administrative(1)
53,883
 53,623
 260
  %
Depreciation and amortization27,934
 27,047
 887
 3 %
Total operating expenses145,123
 139,600
 5,523
 4 %
Income from operations9,064
 5,891
 3,173
 54 %
Other income and (expenses): 
  
  
  
Interest income290
 610
 (320) (52)%
Interest expense(14,560) (16,542) 1,982
 (12)%
Other expense, net(22) (11) (11) 100 %
Loss before taxes(5,228) (10,052) 4,824
 (48)%
Benefit from income taxes(3,545) (1,729) (1,816) 105 %
Net loss$(1,683) $(8,323) $6,640
 80 %
________________________________________________
(1)Includes stock-based compensation expense as follows:
 Cost of revenue$165
 $77
 $88
 114%
 Sales and marketing620
 300
 320
 107%
 Research and development453
 370
 83
 22%
 General and administrative6,018
 4,492
 1,526
 34%
 Total stock-based compensation expense$7,256
 $5,239
 $2,017
 38%
* Asterisk denotes not meaningful.

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The following table sets forth our consolidated statement of operations data for each of the periods presented as a percentage of revenue:
 Three Months Ended
March 31,
 2020 2019
Revenue100 % 100 %
Expenses:   
Cost of revenue27 % 26 %
Sales and marketing10 % 9 %
Research and development5 % 6 %
General and administrative35 % 37 %
Depreciation and amortization18 % 19 %
Total operating expenses95 % 97 %
Income from operations5 % 3 %
Other income and (expenses):   
Interest income*%
 *%
Interest expense(9)% (11)%
Other expense, net*%
 *%
Loss before taxes(4)% (8)%
Benefit from income taxes(2)% (1)%
Net loss(2)% (7)%
* Asterisk denotes not meaningful.
Comparison of the Three Months Ended March 31, 2020 and 2019
Revenue
Revenue for the three months ended March 31, 2020 was $154.2 million, an increase of $8.7 million, or 6%, compared with revenue of $145.5 million for the three months ended March 31, 2019. This increase was primarily attributable to an increase of $10.4 million in revenue contributed from new clients signed resulting from continued adoption of subscription-based platform offerings including cloud-based SaaS solutions enabled by the Inovalon ONE® Platform, which was partially offset by a decrease of $1.7 million in revenue from existing clients partially due to decreases related to certain services and legacy platform offerings resulting from COVID-19.
Cost of Revenue
During the three months ended March 31, 2020, cost of revenue increased by $3.8 million, or 10%, compared with the three months ended March 31, 2019. The increase in cost of revenue was primarily attributable to an increase in employee-related expense of $2.1 million and an increase in professional third-party costs of $1.7 million. Cost of revenue as a percentage of revenue was 27% and 26% for the three months ended March 31, 2020 and 2019, respectively.
Sales and Marketing
During the three months ended March 31, 2020, sales and marketing expense increased by $1.6 million, or 12%, compared with the three months ended March 31, 2019. The increase was primarily attributable to an increase in employee-related expense of $1.5 million. Sales and marketing expense as a percentage of revenue was 10% and 9% for the three months ended March 31, 2020 and 2019, respectively.
Research and Development
During the three months ended March 31, 2020, research and development expense decreased by $1.1 million, or 13%, compared with the three months ended March 31, 2019. The decrease was primarily attributable to a decrease in employee-related expense of $1.7 million and a decrease in integration costs of $0.7 million, which was partially offset by an increase in professional third-party costs of $1.2 million.
General and Administrative
During the three months ended March 31, 2020, general and administrative expenses increased by $0.3 million, flat compared with the three months ended March 31, 2019. The increase was primarily attributable to an increase in employee-related expense of $1.8 million and an increase in stock-based compensation of $1.5 million, which was partially offset by a decrease in transaction

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and integration costs of $2.2 million and a decrease in professional third-party costs of $0.5 million. General and administrative expense as a percentage of revenue was 35% and 37% for the three months ended March 31, 2020 and 2019, respectively.
Interest Expense
During the three months ended March 31, 2020, interest expense decreased by $2.0 million, compared with the three months ended March 31, 2019. The decrease in interest expense was primarily attributable to the repricing of our 2018 Credit Facility (as defined below, under the heading Liquidity and Capital Resources—Debt) which resulted in a decrease to the applicable interest rate margin by 0.005 basis points to 3.00%.
Benefit from Income Taxes
During the three months ended March 31, 2020, the benefit from income taxes was $3.5 million compared to $1.7 million for the three months ended March 31, 2019. Our effective tax rate for the three months ended March 31, 2020 was approximately 67.8%, compared with approximately 17.2% for the three months ended March 31, 2019. The change in our effective tax rate is primarily due to the impact of several provisions of the CARES Act which includes modifications to the limitation on business interest expense and net operating loss provisions, resulting in the recognition of a benefit in the current quarter.
Liquidity and Capital Resources
Sources of Liquidity
Our principal sources of liquidity have been cash generated by operating activities and proceeds from our 2018 Credit Facilities. Our cash generated from such means has been sufficient to fund our growth, including our capital expenditures. On March 16, 2020, we utilized an existing revolving facility to borrow $99.0 million on our 2018 Revolving Facility, the maximum amount remaining available under our 2018 Revolving Facility. Although we do not have any immediate need for additional liquidity, this proactive drawdown was taken to increase our financial flexibility, including to ensure the availability of sufficient capital to deploy opportunistically from time to time, in light of unprecedented conditions due to the COVID-19 outbreak.
As of March 31, 2020, our cash and cash equivalents totaled $182.9 million, compared with $93.1 million of cash and cash equivalents as of December 31, 2019. We believe our current cash, cash equivalents, expected cash generated by operating activities are sufficient to fund our operations, finance our strategic initiatives, and fund our investment in innovation and new service offerings, for the foreseeable future. There can be no assurance that we will continue to generate cash flows at or above current levels.
Debt
On April 2, 2018, we entered into a credit agreement (the “2018 Credit Agreement”) with a group of lenders and Morgan Stanley Senior Funding, Inc., as administrative agent, to provide a secured credit facility which is comprised of: (i) a term loan B facility with us as borrower in a total principal amount of $980.0 million (the “2018 Term Facility”); and (ii) a revolving credit facility with us as borrower in a total principal amount of up to $100.0 million (the “2018 Revolving Facility” together with the 2018 Term Facility, the “2018 Credit Facilities”). On February 11, 2020, we executed an amendment to the 2018 Credit Agreement to reprice the applicable interest rate margins on the 2018 Credit Facilities by 50 basis points to 3.00% with an additional 25 basis point reduction upon achievement of a defined senior secured net leverage ratio. As discussed above under “—Sources of Liquidity,” on March 16, 2020, we utilized an existing revolving facility to borrow $99.0 million on our 2018 Revolving Facility. In addition, as of March 31, 2020, we maintained a letter of credit of $1.0 million. 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.
As of March 31, 2020, we had outstanding indebtedness under the 2018 Term Facility and finance lease liabilities of $990.4 million and $14.2 million, respectively. As of December 31, 2019, we had outstanding indebtedness under the 2018 Term Facility and finance lease liabilities of $893.7 million and $14.8 million, respectively. The 2018 Term Facility has a seven-year term and is an amortizing facility with quarterly principal payments and monthly interest payments. Scheduled principal payments totaling $2.5 million and scheduled interest payments totaling $13.1 million were paid during the three months ended March 31, 2020. As of March 31, 2020, we were in compliance with the covenants under the 2018 Credit Agreement.
Cash Flows
Operating Cash Flow Activities
Cash provided by operating activities during the three months ended March 31, 2020 was $14.1 million, representing a decrease of $0.7 million compared with the three months ended March 31, 2019. The decrease in cash provided by operating activities was primarily driven by changes in working capital. The working capital changes were primarily attributable to improved collections, which were partially offset by employee-related compensation payments during the three months ended March 31, 2020. Contributing to cash provided by operations were increased earnings and decreased cash paid for interest due to our debt repricing.

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Investing Cash Flow Activities
Cash used in investing activities during the three months ended March 31, 2020 was $16.5 million compared with $6.3 million during the three months ended March 31, 2019. The change in cash used in investing activities was primarily driven by a decrease in sales and maturities of short-term investments of $5.2 million and an increase in capital expenditures of $5.1 million.
We make investments in innovation, including research and development expense, capital software development costs, and research and development infrastructure investments, on a recurring basis.
Financing Cash Flow Activities
Cash provided by financing activities during the three months ended March 31, 2020 was $92.2 million, compared with cash used in financing activities of $4.2 million during the three months ended March 31, 2019. The change in cash from financing activities was primarily due to the proceeds from the drawdown on our 2018 Revolving Facility, net of issuance costs.
Contractual Obligations
During the three months ended March 31, 2020, there have been no material changes, outside of the ordinary course of business, in our contractual obligations previously disclosed under the caption “Contractual Obligations” in our 2019 Form 10-K.
Off-Balance Sheet Arrangements
As of March 31, 2020, 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 of Presentation”, in the notes to our unaudited consolidated financial statements, included under Item 1 within this Quarterly Report on Form 10-Q and in “Note 2—Summary of Significant Accounting Policies,” in the notes to our consolidated financial statements, included under Item 15 within our 2019 Form 10-K.
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
Market risk includes risks that arise from changes in interest rates, equity prices and other market changes that affect market sensitive instruments. Our primary market risk exposure is related to changes in interest rates on our variable rate debt.
Variable Rate Debt Risk.    Our variable rate debt includes our 2018 Term Loan Facility and our 2018 Revolving Credit Facility. As of March 31, 2020, we had $1.0 billion of outstanding principal indebtedness under our 2018 Term Loan Facility at an effective interest rate of 3.75%. 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 $6.9 million annually, assuming that we do not enter into contractual hedging arrangements.
To mitigate the risk of a rise in interest rates, we entered into four interest rate swap transactions during 2018, which mature in March 2025, fixing the LIBOR component of the interest on a total of $700.0 million of our 2018 Term Facility at a weighted average rate of 2.8%. While we have and may continue to enter into agreements intending to limit our exposure to higher interest rates, any such agreements may not completely offset the risks of interest rate volatility or other risks inherent to interest rate swap transactions.
Item 4.    Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer (“CEO”) and chief financial officer (“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 March 31, 2020, 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’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended March 31, 2020 that have materially affected, or are reasonably

24


likely to materially affect, the Company’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.

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PART II—OTHER INFORMATION
Item 1.    Legal Proceedings
See “Note 7—Commitments and Contingencies” in the Notes to our unaudited 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”) of our 2019 Form 10-K for the year ended December 31, 2019. There have been no material changes to the risk factors previously disclosed in our 2019 Form 10-K other than the following:
Our business may be negatively affected by the ongoing COVID-19 pandemic and any future outbreaks of disease.
Our business, financial position, results of operations or cash flows may be affected by the ongoing global COVID-19 pandemic and the resulting volatility and uncertainty it has caused, and is likely to continue to cause, in the U.S. and international markets, including as a result of prolonged economic downturn or recession. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and recommended containment and mitigation measures worldwide. As a result, national, state and local authorities have recommended social distancing and imposed or are considering quarantine, shelter-in-place, curfew and similar isolation measures, including government orders and other restrictions on the conduct of business operations, which has resulted in significant unemployment levels, decreased productivity, decreases in certain non-COVID-19 healthcare activities and healthcare utilization. Such measures have had, and are likely to continue to have, adverse impacts on the U.S. economy of uncertain severity and duration and may negatively impact our ongoing operations, including our revenue and cash flow.
As a result of the ongoing COVID-19 pandemic, we have transitioned our workforce to a remote working model, which may result in us experiencing lower work efficiency and productivity, which in turn may adversely affect our business. As our employees and our business partners’ employees work from home and access our systems remotely, we may be subject to heightened security and privacy risks, including the risks of cyberattacks and privacy incidents. Furthermore, the pandemic has caused and is expected to continue to cause significant disruption of global financial markets, which may reduce or impair our ability to access capital (or access capital on terms that would be consistent with our expectations).
Our market opportunity estimates and growth forecasts are subject to increased uncertainty and are based on assumptions and estimates regarding, among other things, the length and ultimate impacts of the COVID-19 pandemic, that may not prove to be accurate. For example, during the first quarter of 2020, we experienced demand delays with respect to certain of our services businesses and legacy platform offerings. We believe these demand delays are a result of the impact of the COVID-19 pandemic and do not reflect permanent demand loss, however we can provide no assurance with respect to the length or degree of such delays, or that demand will return to historical levels in the post COVID-19 period. In addition, while the COVID-19 outbreak may provide us with new business opportunities, including telehealth product offerings, we may experience regulatory compliance, technology, staffing, and related business development risks associated with any new business opportunities if clients request, and we attempt to offer, these products and solutions on an expedited basis in support of COVID-19 efforts. Further, we may be unable to meet evolving demands of our clients by introducing new high-quality services or modifying our services to meet changing demands, and our services may become less attractive than services offered by our competitors, any of which may lead to loss of clients.
Any of the foregoing risks, or other unforeseen risks, may also adversely affect the businesses of our clients, suppliers or third-party business partners and vendors, which may in turn have a material adverse effect on our ability to conduct our business. For example, we may be unable to secure adequate personnel, obtain services, goods, technology, and intellectual property rights owned or controlled by third parties, and our clients may be unable to make payments on their contracts, in each case on the timelines expected or at all. Due to the uncertain and rapidly evolving nature of current conditions in the United States and around the world, we cannot reasonably estimate the length or severity of the COVID-19 pandemic or the related response, including the length of time it may take for normal economic and operating conditions to resume or the extent to which the disruption may materially and adversely impact our business, financial position, results of operations or cash flows.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Use of Proceeds from Registered Securities
None.
Purchases of Equity Securities by the Issuer or Affiliated Purchasers

26


The following table presents a summary of share repurchases made by the Company during the quarter ended March 31, 2020:
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
January 1 – January 31 
 $
 
 $
February 1 – February 29 
 
 
 
March 1 – March 31(1)
 43,233
 20.29
 43,233
 
Total 43,233
 $20.29
 43,233
 $
_______________________________________
(1)On March 3, 2020, we directed the administrator of the Company's Employee Stock Purchase Plan (“ESPP”) to purchase 43,233 shares of Class A common stock in the open market for a total of approximately $0.9 million, for issuance to the ESPP participants at a discounted price of $16.56 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. 
Item 3.    Defaults Upon Senior Securities
Not applicable.
Item 4.    Mine Safety Disclosures
Not applicable.
Item 5.    Other Information
None.

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Item 6.    Exhibits
EXHIBIT INDEX
Exhibit
Number
 Description of Document
31.1
*
   
31.2
*
   
32.1
**
   
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
*Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
_____________________________________
*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.

28


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.
    
Date: April 29, 2020INOVALON HOLDINGS, INC.
 By: /s/ KEITH R. DUNLEAVY, M.D.
   
Keith R. Dunleavy, M.D.
 Chief Executive Officer & Chairman
(Principal Executive Officer)
    
 By: /s/ JONATHAN R. BOLDT
   
Jonathan R. Boldt
 Chief Financial Officer
(Principal Financial Officer)

29