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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	September 30, 2021
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)

_________________________________________________________________________


Delaware		47-1830316
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
4321 Collington Road,
Bowie,	Maryland	20716
(Address of principal executive offices)		(Zip Code)

(301) 809-4000

Registrant’s telephone number, including area code

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

Title of Each Class

Trading Symbol

Name Of Each Exchange On Which Registered

Class A Common Stock, $0.000005 par value per share

INOV

NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 October 31, 2021, the registrant had 77,165,256 shares of Class A common stock outstanding and 78,081,076 shares of Class B common stock outstanding.

Table of Contents

INOVALON HOLDINGS, INC.

FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (unaudited)	1
	Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020	1
	Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020	2
	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2021 and 2020	3
	Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26

PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30

SIGNATURES		31

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)


	September 30, 2021		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	108,869	$	123,880

Accounts receivable (net of allowances of $3,175 at September 30, 2021 and $2,700 at December 31, 2020)	180,584		148,003
Prepaid expenses and other current assets	36,447		26,529
Income tax receivable	40,402		24,664
Total current assets	366,302		323,076
Non-current assets:
Property, equipment and capitalized software, net	174,035		168,113
Operating lease right-of-use assets	31,071		35,355
Goodwill	955,881		955,881
Intangible assets, net	422,941		452,558
Other assets	34,464		36,415
Total assets	$	1,984,694	$	1,971,398
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	44,890	$	52,998
Accrued compensation	34,618		40,860
Other current liabilities	42,769		39,835
Deferred revenue	9,956		10,854
Credit facilities	9,800		9,800
Operating lease liabilities	7,143		5,968
Finance lease liabilities	3,460		3,963
Total current liabilities	152,636		164,278
Non-current liabilities:
Credit facilities, less current portion	873,607		877,574
Operating lease liabilities, less current portion	37,825		40,807
Finance lease liabilities, less current portion	23,089		25,759
Other liabilities	33,329		54,350
Deferred income taxes	96,927		99,916
Total liabilities	1,217,413		1,262,684
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 September 30, 2021 and December 31, 2020, respectively	—		—
Class A common stock, $0.000005 par value, 750,000,000 shares authorized; 92,813,948 shares issued and 78,193,773 shares outstanding at September 30, 2021; 91,617,450 shares issued and 76,997,275 shares outstanding at December 31, 2020	1		1
Class B common stock, $0.000005 par value, 150,000,000 shares authorized; 78,081,076 shares issued and outstanding at September 30, 2021; 78,331,591 shares issued and outstanding at December 31, 2020	—		—
Preferred stock, $0.0001 par value, 100,000,000 shares authorized, zero shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively	—		—
Additional paid-in-capital	669,767		655,444
Retained earnings	331,361		300,890
Treasury stock, at cost, 14,620,175 shares at September 30, 2021 and December 31, 2020, respectively	(199,817)		(199,817)
Other comprehensive loss	(34,031)		(47,804)
Total stockholders’ equity	767,281		708,714
Total liabilities and stockholders’ equity	$	1,984,694	$	1,971,398

See notes to consolidated financial statements.

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INOVALON HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per-share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	$	192,230	$	161,377	$	559,845	$	477,779
Expenses:
Cost of revenue(1)	54,951		39,561		151,013		117,365
Sales and marketing(1)	21,098		14,898		62,306		45,130
Research and development(1)	9,569		7,941		27,437		23,880
General and administrative(1)	55,389		54,865		161,957		163,977
Depreciation and amortization	29,647		28,183		87,988		86,749
Impairment charge	2,954		—		2,954		—

Total operating expenses	173,608		145,448		493,655		437,101
Income from operations	18,622		15,929		66,190		40,678
Other income and (expenses):
Interest income	69		50		166		436
Interest expense	(12,999)		(13,648)		(38,991)		(42,468)
Other expense, net	(728)		(332)		(768)		(502)
Income (Loss) before taxes	4,964		1,999		26,597		(1,856)
(Benefit from) Provision for income taxes	(6,771)		1,175		(3,874)		(3,022)
Net income	$	11,735	$	824	$	30,471	$	1,166
Net income attributable to common stockholders, basic and diluted	$	11,410	$	800	$	29,654	$	1,130
Net income per share attributable to common stockholders, basic and diluted:
Basic net income per share	$	0.08	$	0.01	$	0.20	$	0.01
Diluted net income per share	$	0.08	$	0.01	$	0.20	$	0.01
Weighted average shares of common stock outstanding:
Basic	150,873		149,720		150,624		149,474
Diluted	150,952		149,903		150,728		149,650

________________________________________________


(1)	Includes stock-based compensation expense as follows:
	Cost of revenue	$	327	$	156	$	812	$	474
	Sales and marketing	1,259		717		3,333		2,089
	Research and development	427		287		1,110		1,009
	General and administrative	6,403		6,853		17,106		19,562
	Total stock-based compensation expense	$	8,416	$	8,013	$	22,361	$	23,134

See notes to consolidated financial statements.

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INOVALON HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income	$	11,735	$	824	$	30,471	$	1,166
Other comprehensive income (loss):
Realized losses on cash flow hedges reclassified from accumulated other comprehensive income, net of tax of $(1,554), $(1,503), $(4,587), and $(3,477) respectively	3,288		3,197		9,704		7,390
Net change in unrealized gains (losses) on cash flow hedges, net of tax of $137, $42, $(1,887), and $14,734, respectively	(291)		(46)		4,069		(31,263)



Comprehensive income (loss)	$	14,732	$	3,975	$	44,244	$	(22,707)

See notes to consolidated financial statements.

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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, 2021	91,617,450	$	1	78,331,591	$	—	(14,620,175)	$	(199,817)	$	655,444	$	300,890	$	(47,804)	$	708,714
Stock-based compensation expense	—	—		—	—		—	—		5,533		—		—		5,533
Exercise of stock options	165,311	—		—	—		—	—		1,110		—		—		1,110
Conversion of Class B to Class A common stock	—	—			—		—	—		—		—		—		—
Issuance of shares related to restricted stock units and awards, net of forfeitures	619,090	—		—	—		—	—		—		—		—		—
Shares withheld for employee taxes upon conversion of restricted stock	(159,699)	—		—	—		—	—		(4,235)		—		—		(4,235)
Other comprehensive income	—	—		—	—		—	—		—		—		9,443		9,443
Net income	—	—		—	—		—	—		—		9,156		—		9,156
Balance—March 31, 2021	92,242,152	$	1	78,331,591	$	—	(14,620,175)	$	(199,817)	$	657,852	$	310,046	$	(38,361)	$	729,721
Stock-based compensation expense	—	—		—	—		—	—		8,176		—		—		8,176
Exercise of stock options	—	—		—	—		—	—		—		—		—		—
Conversion of Class B to Class A common stock	250,515	—		(250,515)	—		—	—		—		—		—		—
Issuance of shares related to restricted stock units and awards, net of forfeitures	281,030	—		—	—		—	—		—		—		—		—
Shares withheld for employee taxes upon conversion of restricted stock	(107,107)	—		—	—		—	—		(3,301)		—		—		(3,301)
Other comprehensive income	—	—		—	—		—	—		—		—		1,333		1,333
Net income	—	—		—	—		—	—		—		9,580		—		9,580
Balance—June 30, 2021	92,666,590	$	1	78,081,076	$	—	(14,620,175)	$	(199,817)	$	662,727	$	319,626	$	(37,028)	$	745,509
Stock-based compensation expense	—	—		—	—		—	—		8,405		—		—		8,405
Exercise of stock options	—	—		—	—		—	—		—		—		—		—
Conversion Class B to Class A common stock	—	—		—	—		—	—		—		—		—		—
Issuance of shares related to restricted stock units and awards, net of forfeitures	189,466	—		—	—		—	—		—		—		—		—
Shares withheld for employee taxes upon conversion of restricted stock	(42,108)	—		—	—		—	—		(1,365)		—		—		(1,365)
Other comprehensive income	—	—		—	—		—	—		—		—		2,997		2,997
Net income	—	—		—	—		—	—		—		11,735		—		11,735
Balance—September 30, 2021	92,813,948	$	1	78,081,076	$	—	(14,620,175)	$	(199,817)	$	669,767	$	331,361	$	(34,031)	$	767,281

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INOVALON HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

(Unaudited, in thousands, except share amounts)


	Issued Class A Common Stock			Issued Class B Common Stock			Treasury Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Shares	Amount		Shares	Amount		Shares	Amount
Balance—January 1, 2020	90,327,728	$	1	79,369,411	$	—	(14,620,175)	$	(199,817)	$	636,461	$	278,246	$	(26,732)	$	688,159
Stock-based compensation expense	—	—		—	—		—	—		7,164		—		—		7,164
Exercise of stock options	23,183	—		—	—		—	—		183		—		—		183
Conversion of Class B to Class A common stock	98,550	—		(98,550)	—		—	—		—		—		—		—
Issuance of shares related to restricted stock units and awards, net of forfeitures	574,082	—		—	—		—	—		—		—		—		—
Shares withheld for employee taxes upon conversion of restricted stock	(148,071)	—		—	—		—	—		(2,947)		—		—		(2,947)
Other comprehensive loss	—	—		—	—		—	—		—		—		(24,200)		(24,200)
Adjustment to retained earnings for adoption of ASC 326	—	—		—	—		—	—		—		65		—		65
Net loss	—	—		—	—		—	—		—		(1,683)		—		(1,683)
Balance—March 31, 2020	90,875,472	$	1	79,270,861	$	—	(14,620,175)	$	(199,817)	$	640,861	$	276,628	$	(50,932)	$	666,741
Stock-based compensation expense	—	—		—	—		—	—		7,757		—		—		7,757
Exercise of stock options	—	—		—	—		—	—		—		—		—		—
Conversion of Class B to Class A common stock	—	—		—	—		—	—		—		—		—		—
Issuance of shares related to restricted stock units and awards, net of forfeitures	(40,849)	—		—	—		—	—		—		—		—		—
Shares withheld for employee taxes upon conversion of restricted stock	(124,672)	—		—	—		—	—		(2,163)		—		—		(2,163)
Other comprehensive loss	—	—		—	—		—	—		—		—		(2,824)		(2,824)
Net income	—	—		—	—		—	—		—		2,025		—		2,025
Balance—June 30, 2020	90,709,951	$	1	79,270,861	$	—	(14,620,175)	$	(199,817)	$	646,455	$	278,653	$	(53,756)	$	671,536
Stock-based compensation expense	—	—		—	—		—	—		7,912		—		—		7,912
Exercise of stock options	2,104	—		—	—		—	—		15		—		—		15
Conversion Class B to Class A common stock	939,270	—		(939,270)	—		—	—		—		—		—		—
Issuance of shares related to restricted stock units and awards, net of forfeitures	175,185	—		—	—		—	—		—		—		—		—
Shares withheld for employee taxes upon conversion of restricted stock	(85,702)	—		—	—		—	—		(2,035)		—		—		(2,035)
Other comprehensive income	—	—		—	—		—	—		—		—		3,151		3,151
Net income	—	—		—	—		—	—		—		824		—		824
Balance—September 30, 2020	91,740,808	$	1	78,331,591	$	—	(14,620,175)	$	(199,817)	$	652,347	$	279,477	$	(50,605)	$	681,403

See notes to consolidated financial statements.

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INOVALON HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities:
Net income	$	30,471	$	1,166
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense	22,361		23,134
Depreciation	46,988		45,894
Amortization of intangibles	41,000		40,855
Amortization of debt issuance costs and debt discount	3,686		3,535
Deferred income taxes	(9,464)		5,717

Change in fair value of acquisition-related contingent consideration	—		3,276
Impairment charge	2,954		—
Other	1,207		274
Changes in assets and liabilities:
Accounts receivable	(31,657)		872
Prepaid expenses and other current assets	(6,998)		937
Income taxes receivable	(15,738)		(9,461)
Other assets	(112)		(941)
Accounts payable and accrued expenses	2,939		4,331
Accrued compensation	(6,426)		1,431
Other current and non-current liabilities	1,913		(7,612)
Deferred revenue	(3,458)		(4,141)
Payment for acquisition-related contingent consideration	—		(160)
Net cash provided by operating activities	79,666		109,107
Cash flows from investing activities:



Purchases of property and equipment	(13,954)		(18,221)
Investment in capitalized software	(50,061)		(33,223)
Purchase of intangible assets	(12,348)		(10,819)

Net cash used in investing activities	(76,363)		(62,263)
Cash flows from financing activities:

Proceeds from credit facility borrowings	—		99,000
Repayment of credit facility borrowings	(7,350)		(106,350)
Payments for debt issuance costs	—		(1,000)
Proceeds from exercise of stock options	1,110		198
Finance lease liabilities paid	(3,173)		(2,372)
Tax payments for equity award issuances	(8,901)		(7,145)
Payment for acquisition-related contingent consideration	—		(2,173)
Net cash used in financing activities	(18,314)		(19,842)
(Decrease) Increase in cash and cash equivalents	(15,011)		27,002
Cash and cash equivalents, beginning of period	123,880		93,094
Cash and cash equivalents, end of period	$	108,869	$	120,096
Supplemental cash flow disclosure:

Income taxes paid, net	$	21,828	$	1,022
Interest paid	34,411		39,642
Non-cash transactions:


Accruals for purchases of property and equipment	2,726		2,070
Accruals for investment in capitalized software	4,231		2,960
Accruals for purchase of intangible assets	1,587		3,450

Leasehold improvements paid by lessor	—		305

See notes to consolidated financial statements.

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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, 2020 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 September 30, 2021, the results of operations, comprehensive income (loss), and stockholders’ equity for the three and nine-month periods ended September 30, 2021 and 2020 and cash flows for the nine month period ended September 30, 2021 and 2020. The results of operations for the three and nine-month periods ended September 30, 2021 and 2020 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, 2020 (the “2020 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.

On August 19, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ocala Bidco, Inc., a Delaware corporation (“Parent”), and Ocala Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will merge with and into Inovalon (the “Merger”), with Inovalon continuing as the surviving corporation and a wholly owned subsidiary of Parent. See “Note 9—Merger Agreement” for additional information.

Recently Issued Accounting Standards

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements and note disclosures, from those disclosed in the 2020 Form 10-K, that would be expected to impact the Company.

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 September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Platform solutions(1)	$	176,165	$	145,862	$	509,836	$	433,627
Services(2)	16,065		15,515		50,009		44,152
Total revenue	$	192,230	$	161,377	$	559,845	$	477,779

______________________________________

(1)Platform solutions include arrangements for technology-based offerings representing subscription-based cloud-based platform offerings, real-time accessibility of comprehensive patient-specific healthcare data and analytical insights through Inovalon DataStream™, and legacy platform solutions that are not cloud-based and not billed under a subscription-based contract structure.

(2)Services include advisory, implementation, and support services under time and materials, fixed price, or retainer-based contracts.

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Contract Balances

As of September 30, 2021, the Company had contract assets of $95.8 million of which $72.6 million was included in accounts receivable, $10.1 million was included in prepaid expenses and other current assets, and $13.1 million was included in other assets on the consolidated balance sheets. As of December 31, 2020, the Company had contract assets of $63.0 million of which $40.2 million was included in accounts receivable, $7.6 million was included in prepaid expenses and other current assets, and $15.2 million was included in other assets on the consolidated balance sheets.

As of September 30, 2021, the Company had contract liabilities of $17.9 million, which is included in deferred revenue on the consolidated balance sheet and presented net of contract assets of $8.0 million. As of December 31, 2020, the Company had contract liabilities of $22.3 million, which is included in deferred revenue on the consolidated balance sheet and presented net of contract assets of $11.4 million. Revenue recognized during the three and nine months ended September 30, 2021 that was included in the deferred revenue balance at the beginning of the year was $3.4 million and $19.3 million, respectively.

Costs to Obtain a Contract

The Company had a deferred commissions balance of $23.0 million and $18.9 million as of September 30, 2021 and December 31, 2020, respectively. Short-term and long-term deferred commissions are classified as prepaid expenses and other current assets and other assets on the consolidated balance sheet, respectively.

3. NET INCOME PER SHARE

Holders of all outstanding classes of common stock participate ratably in earnings on an identical per share basis as if all shares were a single class. Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of shares of common stock (Class A common stock and Class B common stock) outstanding during the period. Diluted EPS is computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding and potentially dilutive securities outstanding during the period under the treasury stock method. If the Company incurs a loss from continuing operations, diluted EPS is computed in the same manner as basic EPS. Potentially dilutive securities include stock options, restricted stock units (“RSUs”) 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 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 September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Basic
Numerator:
Net income	$	11,735	$	824	$	30,471	$	1,166
Undistributed earnings allocated to participating securities	(325)		(24)		(817)		(36)
Net income attributable to common stockholders—basic	$	11,410	$	800	$	29,654	$	1,130
Denominator:
Weighted average shares used in computing net income per share attributable to common stockholders—basic	150,873		149,720		150,624		149,474
Net income per share attributable to common stockholders—basic	$	0.08	$	0.01	$	0.20	$	0.01
Diluted
Numerator:
Net income attributable to common stockholders—diluted	$	11,410	$	800	$	29,654	$	1,130
Denominator:
Number of shares used for basic EPS computation	150,873		149,720		150,624		149,474
Effect of dilutive securities	79		183		104		176
Weighted average shares used in computing net income per share attributable to common stockholders—diluted	150,952		149,903		150,728		149,650
Net income per share attributable to common stockholders—diluted	$	0.08	$	0.01	$	0.20	$	0.01

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.

Certain Company leases do not contain an implicit rate of return, therefore an incremental borrowing rate was determined. The Company assessed which rate would be most reflective of a reasonable rate the Company would be able to borrow based on asset class and lease term.

Finance lease right-of-use assets of $20.4 million are included in property, equipment, and capitalized software, net on the consolidated balance sheet.

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The following table presents components of lease expense for the three and nine months ended September 30, 2021 and September 30, 2020 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Finance lease cost
Amortization of right-of-use assets	$	937	$	907	$	2,811	$	2,660
Interest on lease liabilities	202		207		629		588
Operating lease cost	2,173		2,545		6,603		7,808

Variable lease cost	310		415		913		1,192
Sublease income	(130)		(212)		(474)		(556)
Total lease cost	$	3,492	$	3,862	$	10,482	$	11,692

Supplemental cash flow information related to leases for the nine months ended September 30, 2021 and September 30, 2020 are as follows (in thousands):


	Nine Months Ended September 30,
	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	5,121	$	7,177
Operating cash flows for financing leases	630		587
Financing cash flows for financing leases	3,173		2,372
Right-of-use assets obtained in exchange for lease liabilities(1):
Operating leases	$	676	$	(1,674)
Finance leases	—		11,694

______________________________________

(1)During the second quarter of 2020, the Company executed an amendment to an existing lease agreement resulting in the reclassification of certain lease components from an operating lease to a finance lease. As such, the Company recorded an adjustment to reduce the operating lease liability and the corresponding operating lease right-of-use asset and increase the finance lease liability and corresponding finance lease right-of-use asset.

Supplemental balance sheet information related to leases as of September 30, 2021 and December 31, 2020 are as follows:


	September 30, 2021		December 31, 2020
Weighted average remaining lease term:
Operating leases	8 years		4 years
Financing leases	8 years		8 years
Weighted average discount rate:
Operating leases	4.1	%	4.1	%
Financing leases	3.0	%	3.0	%

5. DEBT

On April 2, 2018, the Company entered into a credit agreement (the “2018 Credit Agreement”) with a group of lenders and Morgan Stanley Senior Funding, Inc. (“MSSF”), as administrative agent, providing for (i) a term loan B facility with the Company as borrower in a total principal amount of $980.0 million (the “2018 Term Facility”); and (ii) a revolving credit facility with the Company as borrower in a total principal amount of up to $100.0 million (the “2018 Revolving Facility” and, together with the 2018 Term Facility, the “2018 Credit Facilities”). The 2018 Revolving Facility will terminate on April 2, 2023 and the 2018 Term Facility will mature on April 2, 2025. As of September 30, 2021, the Company had $100.0 million available to it consisting of $99.0 million on the 2018 Revolving Facility and a letter of credit of $1.0 million.

On February 11, 2020, the Company executed an amendment to the 2018 Credit Agreement to reprice the applicable interest rate margins on the 2018 Credit Facilities, resulting in a decrease to the applicable interest rate margin by 50 basis points to 3.00%. During the first quarter of 2021, the Company achieved a defined senior secured net leverage ratio which

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resulted in an additional 25 basis point reduction to the applicable interest rate margin to 2.75%. Other material provisions under the 2018 Credit Agreement, including covenants, the maturity date of April 2, 2025, with respect to the 2018 Term Facility, and April 2, 2023, with respect to the 2018 Revolving Facility, and amount of debt available to the Company, remained unchanged by the repricing amendment.

At the option of the Company, the loans outstanding under the 2018 Term Facility will bear interest either at: (i) Adjusted LIBOR plus an applicable rate of 2.75% or (ii) the Alternate Base Rate (“ABR”) plus an applicable margin. The Company may elect interest periods of one, two, three or six months for Adjusted LIBOR borrowings. As set forth in the 2018 Credit Agreement, the ABR is the higher of: (i) the rate that MSSF as administrative agent announces from time to time as its prime or base commercial lending rate, as in effect from time to time, (ii) the Federal Funds Effective Rate plus ½ of 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):


	September 30, 2021		December 31, 2020
2018 Term Facility(1)	$	883,407	$	887,374




Less: current portion	9,800		9,800
Non-current Credit Facilities	$	873,607	$	877,574

______________________________________

(1)The 2018 Term Facility is presented net of unamortized deferred financing fees and original issue discount (“OID”) of $17.2 million and $20.6 million as of September 30, 2021 and December 31, 2020, 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 September 30, 2021, 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 September 30, 2021 (in thousands):


	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	42,100	$	—	$	—	$	42,100








Other current liabilities:
Interest rate swaps	—		(18,765)		—		(18,765)
Contingent consideration	—		—		(14,810)		(14,810)
Other liabilities:
Interest rate swaps	—		(31,354)		—		(31,354)
Contingent consideration	—		—		(1,373)		(1,373)
Total	$	42,100	$	(50,119)	$	(16,183)	$	(24,202)

The following table presents the fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 (in thousands):


	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	42,096	$	—	$	—	$	42,096






Other current liabilities:
Interest rate swaps	—		(18,694)		—		(18,694)
Contingent consideration	—		—		(14,810)		(14,810)
Other liabilities:
Interest rate swaps	—		(51,659)		—		(51,659)
Contingent consideration	—		—		(1,373)		(1,373)
Total	$	42,096	$	(70,353)	$	(16,183)	$	(44,440)

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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 prevailing market interest rates and discount rates to present value future cash flows based on the forward LIBOR yield curves. Such market rates or prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted rates or prices that are observable either directly or indirectly (Level 2 inputs). The Company performs procedures to ensure that appropriate fair values are recorded such as comparing rates or prices obtained from other sources.

The following table presents financial instruments measured at fair value using unobservable inputs (Level 3) (in thousands):


	Fair Value Measurements Using Unobservable Inputs (Level 3)
	September 30, 2021		December 31, 2020
Balance, beginning of period	$	(16,183)	$	(16,790)
Fair value adjustment (recognized in general and administrative expenses)	—		(2,967)
Accretion expense (recognized in general and administrative expenses)	—		(109)
Settlement of liability	—		3,683
Total	$	(16,183)	$	(16,183)

2018 Credit Facilities

The Company records debt on the balance sheet at carrying value. The estimated fair value of the Company’s debt is determined based on Level 2 inputs including current market rates for similar types of borrowings. The following table presents the carrying value and fair value of the Company’s debt (including the current portion thereof) as of September 30, 2021 (in thousands):


	September 30, 2021
Carrying value	$	883,407
Fair value	$	882,303

Interest Rate Swaps

In connection with the 2018 Credit Agreement, the Company entered into four interest rate swaps during the second quarter of 2018, each of which mature in March 2025, to mitigate the risk of a rise in interest rates. These interest rate swaps mitigate the exposure on the variable component of interest on the Company’s 2018 Credit Facility. The interest rate swaps fix the LIBOR component of interest on $700.0 million of the 2018 Term Facility at a weighted average rate of approximately 2.8%. See “Note 5—Debt” for additional information. These interest rate swaps are designated as cash flow hedges and are deemed highly effective under ASC 815, Derivatives and Hedging. The interest rate swaps are recorded on the balance sheet at fair value as either assets or liabilities and any changes to the fair value are recorded through accumulated other comprehensive income (loss) and reclassified into interest expense in the same period in which the hedged transaction is recognized in earnings. Cash flows from interest rate swaps are reported in the same category as the cash flows from the items being hedged.

The following table presents the location and amount of gains and losses on interest rate swaps included in other comprehensive income (“OCI”) and the statement of operations for the three and nine months ended September 30, 2021 and 2020 (in thousands):


Three Months Ended September 30, 2021	Gain (Loss) recognized in OCI		Statement of Operations Location	(Gain) Loss reclassified from OCI
Interest rate swap contract	$	(428)	Interest expense	$	4,842
Nine Months Ended September 30, 2021	Gain (Loss) recognized in OCI		Statement of Operations Location	(Gain) Loss reclassified from OCI
Interest rate swap contract	$	5,956	Interest expense	$	14,291

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Three Months Ended September 30, 2020	Gain (Loss) recognized in OCI		Statement of Operations Location	(Gain) Loss reclassified from OCI
Interest rate swap contract	$	(88)	Interest expense	$	4,700
Nine Months Ended September 30, 2020	Gain (Loss) recognized in OCI		Statement of Operations Location	(Gain) Loss reclassified from OCI
Interest rate swap contract	$	(45,997)	Interest expense	$	10,867

The net amount of accumulated other comprehensive loss expected to be reclassified to interest expense in the next 12 months is $18.9 million.

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.

On September 30, 2021, a purported stockholder of the Company, Robert Clasby, filed a complaint in the United States District Court for the Southern District of New York against the Company and each member of the Company Board, captioned Robert Clasby v. Inovalon Holdings, Inc., et al., Case No. 1:21-cv-08120 (the “Clasby Complaint”). On October 7, 2021, two different purported stockholders of the Company each filed a complaint in the United States District Court for the Southern District of New York against the Company and each member of the Company Board, captioned Herbert Silverberg v. Inovalon Holdings, Inc., et al., Case No. 1:21-cv-08287 (the “Silverberg Complaint”) and Alex Ciccotelli v. Inovalon Holdings, Inc., et al., Case No. 1:21-cv-08288 (the “Ciccotelli Complaint”), respectively. On October 11, 2021, another purported stockholder of the Company filed a complaint in the United States District Court for the Eastern District of New York against the Company and each member of the Company Board, captioned Dee Claybrook v. Inovalon Holdings, Inc., et al., Case No. 1:21-cv-05665 (the “Claybrook Complaint”). The Clasby Complaint, Silverberg Complaint, Ciccotelli Complaint, and Claybrook Complaint collectively constitute the “Federal Court Complaints.” The Federal Court Complaints allege that the Company’s Schedule 14A filed September 17, 2021 (or October 8, 2021 in the case of the Claybrook Complaint) omits material information with respect to the Merger and that, as a result all defendants violated Section 14(a) of the Exchange Act. The Silverberg Complaint, Ciccotelli Complaint, and Claybrook Complaint also allege that all defendants violated Rule 14A-9 promulgated under the Exchange Act. The Clasby Complaint, Ciccotelli Complaint, and Claybrook Complaint additionally allege that each member of the Company Board violated Section 20(a) of the Exchange Act. The Federal Court Complaints seek (i) injunctive relief; (ii) rescissory damages; (iii) plaintiff’s attorneys’ and experts’ fees and costs; and (iv) other such relief that the court deems just and proper. The Ciccotelli Complaint, Clasby Complaint, and Claybrook Complaint additionally seek (i) rescission in the event the Merger Agreement and the transactions contemplated thereby, including the Merger, are consummated and, (ii) in the case of the Ciccotelli Complaint and Clasby Complaint a direction that the Company Board issue a revised Schedule 14A. The Ciccotelli Complaint and Claybrook Complaint additionally seek a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act, as well as Rule 14a-9 promulgated thereunder. Additionally, on October 21, 2021, purported stockholders of the Company, Steamfitters Local 449 Pension Fund and Steamfitters Local 449 Retirement Security Fund filed a complaint in the Court of Chancery of the State of Delaware against the Company, each member of the Company Board, and certain other entities and individuals captioned Steamfitters Local 449 Pension Fund and Steamfitters Local 449 Retirement Security Fund v. Inovalon Holdings, Inc., et al., C.A. No. 2021-0914-CM (the “Steamfitters Complaint”). On October 27, 2021, the Company publicly filed a Schedule 14A providing additional information on the Steamfitters Complaint and attaching as an annex thereto a copy of the Complaint, and on November 5, 2021, the Company publicly filed a Schedule 14A providing additional information on the Federal Court Complaints and the Steamfitters Complaint. The Company refers stockholders to the October 27 and November 5 Schedule 14A submissions for additional information. The Company believes the claims asserted in the Federal Court Complaints and in the Steamfitters Complaint are without merit.

Additional lawsuits may be filed against the Company, the Company Board or the Company’s officers in connection with the Merger, which could prevent or delay completion of the Merger and result in substantial costs to the Company, including any costs associated with indemnification.

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8. IMPAIRMENT CHARGE

Impairment of Long-Lived Assets—The Company reviews long-lived assets for events or changes in circumstances that would indicate potential impairment. If the Company determines that the carrying value of an asset may not be recoverable, an impairment charge is recorded. During the third quarter of 2021, the Company concluded it had a triggering event that required an assessment for impairment for certain of its long-lived assets related to the discontinuation of an internally developed software project. As the asset was determined to provide no future benefit, the Company recorded an impairment charge of $3.0 million.

9. MERGER AGREEMENT

Pursuant to the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”) and as a result of the Merger, each share of common stock of Inovalon issued and outstanding immediately prior to the Effective Time will be cancelled and extinguished and, except with respect to (a) certain shares held by certain stockholders of Inovalon, including shares held by Dr. Dunleavy and certain holders of Inovalon’s Class B common stock who will, pursuant to one or more rollover agreements, exchange such shares for equity interests of Ocala Topco, LP, a Delaware limited partnership, (b) shares held by Parent or Merger Sub (or any of their respective subsidiaries) in the treasury of Inovalon and (c) shares held by a stockholder who properly exercises and perfects appraisal of his, her or its shares under Delaware law, automatically converted into and thereafter represent the right to receive $41.00 in cash without interest.

The proposed transactions constitute a “going-private transaction” under the rules of the SEC. The closing of the transactions contemplated by the Merger Agreement (including the Merger) is expected to occur in the fourth quarter of 2021, subject to the satisfaction or waiver (if such waiver is permissible under the Merger Agreement or under applicable law) of certain conditions set forth in the Merger Agreement.

Additional information about the Merger Agreement and the Merger is set forth in the Company's Definitive Proxy Statement on Schedule 14A filed with the SEC on October 15, 2021, and as supplemented on October 27, 2021 and November 5, 2021.

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, 2020, as filed with the Securities and Exchange Commission (the “SEC”) on February 17, 2021 (the “2020 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, our objectives for future operations, the timing and completion of the proposed Merger, and the effect of the announcement, pendency and completion of the proposed Merger on the value of our common stock are forward-looking statements. The words “believe,” “may,” “see,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

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

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•our ability to complete the proposed Merger on the terms and timeline anticipated, or at all, and the effect of the announcement, pendency and completion of the Merger on our ability to maintain relationships with clients and other third parties, on management’s attention to ongoing business concerns, and other risks and uncertainties related to the proposed Merger that may affect future results;

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

•our ability to retain our client base and sell additional services to them;

•the effect of the concentration of our revenue among our top clients;

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

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

•the effects of consolidation in the healthcare industry;

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

•the ability to enter into new agreements with existing or new platforms, products, and solutions in the timeframes expected, or at all;

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

•the effects of changes in tax legislation for jurisdictions within which we operate, 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, including stockholder litigation related to the proposed Merger;

•the effect of competition on our business;

•the efficacy of our platforms and toolsets;

•the effects and potential effects of the COVID-19 pandemic, or other future pandemics or large-scale diseases, on our business, cash flow, liquidity and results of operations due to, among other things, effects on the economy generally and on our customers, including:

•the possible effects of significant rising unemployment, the inability of consumers to timely pay our customers and the resulting potential inability of our customers to pay the fees under our contracts on time or in full;

•the delay in the contracting for services by our customers;

•potential other delays in the sales cycle for new customers and products; and

•other unforeseen impacts on our customers and potential customers and on our employees that could have a negative impact on us; and

•the timing and size of business realignment and restructuring charges.

Forward-looking statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from those anticipated by such statements. These factors include, among other factors, those set forth in our 2020 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.

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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 effective progression of “Turning Data into Insight, and Insight into Action®.” Supporting thousands of clients, including all 25 of the top 25 U.S. health plans, all 25 of the top 25 global pharma companies, 24 of the top 25 U.S. healthcare provider systems, and many of the leading pharmacy organizations, device manufacturers, and other healthcare industry constituents, Inovalon’s technology platforms and analytics are informed by data pertaining to more than one million physicians, 591,000 clinical facilities, 342 million Americans, and 64 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.

Merger Agreement

On August 19, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ocala Bidco, Inc., a Delaware corporation (“Parent”), and Ocala Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will merge with and into Inovalon (the “Merger”), with Inovalon continuing as the surviving corporation and a wholly owned subsidiary of Parent.

COVID-19

The outbreak of the novel coronavirus disease (“COVID-19”) was labeled a global pandemic by the World Health Organization in March 2020 and has led to material and adverse impacts on the U.S. and global economies and created widespread uncertainty. In response to the COVID-19 pandemic, during 2020, we implemented our “Pandemic Plan,” which included transitioning our workforce to a remote working model and performing drills to ensure the preparedness of our workforce and we launched data-driven and analytically informed telehealth capabilities within a number of our platform offerings. During 2020, certain services and legacy offerings experienced a degree of softness resulting from the COVID-19 pandemic, which were temporary and a significant portion of this softness represented demand delays (not demand loss). During 2021, we have continued to experience some impact from the COVID-19 pandemic in line with our expectations. Although we have experienced some recovery in our services offerings following the COVID-19 pandemic impact period, we can provide no assurance as to the timing of the peak of the pandemic and the ultimate impact of the pandemic on the U.S. and global economy and on our business. In addition, the COVID-19 pandemic has had and is likely to continue to have adverse effects on our clients, suppliers and third-party business partners. As of the date of this Quarterly Report, we have not experienced significant disruption in our operations as a result of the COVID-19 pandemic, and we are conducting business with modifications to employee travel and employee work locations, among other modifications.

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The extent to which the COVID-19 pandemic impacts our business, operations, and financial results, including the duration and magnitude of such impact, will depend on numerous factors that the company may not be able to accurately predict, including those discussed in Part I, Item 1A, “Risk Factors” in our 2020 Form 10-K. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, clients, partners, and stockholders.

Quarterly Key Metrics

We review certain metrics quarterly, including the key metrics shown in the table below. We believe the key metrics illustrated in the table below are indicative of our overall level of analytical activity and our underlying growth in the business.


	September 30,
	2021	2020
	(in thousands)
MORE2 Registry® dataset metrics(1)
Unique patient count(2)	342,679	324,406
Medical event count(3)	64,932,598	58,273,049
Trailing twelve-month Patient Analytics Months (PAM)(1)(4)	75,053,635	71,962,615

____________________________________

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

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

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

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

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

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determining and improving quality and financial performance in healthcare. Our MORE2 Registry® is our largest principal dataset and serves as a proxy for our general growth of datasets within Inovalon. The growth of our datasets that inform our analytical capabilities and comparative analytics is a key aspect of our provision of value to our clients and is indicative of our overall growth and capabilities.

Innovation and Platform Development. Our business model is based upon our ability to deliver value to our clients through 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 September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Investment in Innovation:
Research and development(1)	$	9,569		$	7,941		$	27,437		$	23,880
Capitalized software development(2)	15,237			12,733			47,521			34,235
Research and development infrastructure investments(3)	—			—			245			—
Total investment in innovation	$	24,806		$	20,674		$	75,203		$	58,115
As a percentage of revenue
Research and development(1)	5		%	5		%	5		%	5		%
Capitalized software development(2)	8		%	8		%	8		%	7		%
Research and development infrastructure investments(3)	—		%	—		%	—		%	—		%
Total investment in innovation	13		%	13		%	13		%	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 are continually expanding our offerings of cloud-based SaaS solutions enabled by the Inovalon ONE® Platform which utilize descriptive, predictive, and prescriptive analytics applying algorithmic, machine learning, and artificial intelligence methodologies combined with real-world data assets to empower our cloud-based solutions. Legacy platform solutions are continuing to decrease as a percentage of total revenue and 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. 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

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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 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), inflation, and unemployment. These macro-economic trends may also be impacted by the COVID-19 pandemic and the recent U.S. presidential election. Further, industry trends in federal and state laws and regulations, as well as emerging trends in private sector payment models, affect our clients’ 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 2020 Form 10-K.

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Components of Results of Operations

Revenue

We earn revenue primarily through the sale or subscription licensing of our platform solutions, as well as revenue from related arrangements for advisory, implementation, and support services.

Platform solutions include arrangements for technology-based offerings representing subscription-based cloud-based platform offerings which utilize descriptive, predictive, and prescriptive analytics applying algorithmic, machine learning, and artificial intelligence methodologies combined with real-world data assets to empower our cloud-based solutions. These include solutions offered through the myABILITY® software platform, the real-time accessibility of patient-specific healthcare data and analytical insights through Inovalon DataStream™, and legacy platform solutions that are not cloud-based and not billed under a subscription-based contract structure. 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 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 2020, certain services and legacy offerings experienced a degree of softness resulting from the COVID-19 pandemic, which were temporary and a significant portion of this softness represented demand delays (not demand loss). During 2021, we have continued to experience some impact from the COVID-19 pandemic in line with our expectations. Although we have experienced some recovery in our services offerings following the COVID-19 pandemic impact period, we can provide no assurance as to the timing of the peak of the pandemic and the ultimate impact of the pandemic on the U.S. and global economy and on our business.

Cost of Revenue

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

Our business and operational models are designed to be highly scalable and leverage variable costs to support revenue generating activities. While we 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.

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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.

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, 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, amortization of intangible assets, and amortization of finance leases.

We expect our depreciation and amortization expense to increase as we expand our business organically and through acquisitions.

Interest Income

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

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

Interest Expense

Interest expense represents interest incurred on our 2018 Credit Facilities (as defined in “Note 5—Debt” in the notes to our consolidated financial statements) and related interest rate swaps.

We expect our interest expense to fluctuate in proportion to our outstanding principal balance under the 2018 Credit Facilities and the prevailing London Interbank Offer Rate (“LIBOR”) interest rate. Refer to “Note 5—Debt” in the notes to our consolidated financial statements.

Provision for (Benefit from) Income Taxes

Provision for income taxes consists of federal and state income taxes in the United States and foreign income taxes from the territory of Puerto Rico, including deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and excess tax benefits or deficiencies derived from exercises of stock options and vesting of restricted stock.

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 September 30,				Change from 2020 to 2021				Nine Months Ended September 30,				Change from 2020 to 2021
	2021		2020		$		%		2021		2020		$		%
Revenue	$	192,230	$	161,377	$	30,853	19	%	$	559,845	$	477,779	$	82,066	17	%
Expenses:
Cost of revenue(1)	54,951		39,561		15,390		39	%	151,013		117,365		33,648		29	%
Sales and marketing(1)	21,098		14,898		6,200		42	%	62,306		45,130		17,176		38	%
Research and development(1)	9,569		7,941		1,628		21	%	27,437		23,880		3,557		15	%
General and administrative(1)	55,389		54,865		524		1	%	161,957		163,977		(2,020)		(1)	%
Depreciation and amortization	29,647		28,183		1,464		5	%	87,988		86,749		1,239		1	%
Impairment charge	2,954		—		2,954		*%		2,954		—		2,954		*%

Total operating expenses	173,608		145,448		28,160		19	%	493,655		437,101		56,554		13	%
Income from operations	18,622		15,929		2,693		17	%	66,190		40,678		25,512		63	%
Other income and (expenses):
Interest income	69		50		19		38	%	166		436		(270)		(62)	%
Interest expense	(12,999)		(13,648)		649		(5)	%	(38,991)		(42,468)		3,477		(8)	%
Other expense, net	(728)		(332)		(396)		119	%	(768)		(502)		(266)		53	%
Income (Loss) before taxes	4,964		1,999		2,965		(148)	%	26,597		(1,856)		28,453		1,533	%
(Benefit from) Provision for income taxes	(6,771)		1,175		*		*%		(3,874)		(3,022)		(852)		28	%
Net income	$	11,735	$	824	$	10,911	*%		$	30,471	$	1,166	$	29,305	*%

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(1)	Includes stock-based compensation expense as follows:
	Cost of revenue	$	327	$	156	$	171	110	%	$	812	$	474	$	338	71	%
	Sales and marketing	1,259		717		542		76	%	3,333		2,089		1,244		60	%
	Research and development	427		287		140		49	%	1,110		1,009		101		10	%
	General and administrative	6,403		6,853		(450)		(7)	%	17,106		19,562		(2,456)		(13)	%
	Total stock-based compensation expense	$	8,416	$	8,013	$	403	5	%	$	22,361	$	23,134	$	(773)	(3)	%

* Asterisk denotes not meaningful.

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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 September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	100	%	100	%	100	%	100	%
Expenses:
Cost of revenue	29	%	25	%	27	%	25	%
Sales and marketing	11	%	9	%	11	%	9	%
Research and development	5	%	5	%	5	%	5	%
General and administrative	29	%	34	%	29	%	34	%
Depreciation and amortization	15	%	17	%	16	%	18	%
Impairment charge	2	%	—	%	1	%	—	%

Total operating expenses	91	%	90	%	89	%	91	%
Income from operations	9	%	10	%	11	%	9	%
Other income and (expenses):
Interest income	*%		*%		*%		*%
Interest expense	(7)	%	(9)	%	(7)	%	(9)	%
Other expense, net	*%		*%		*%		*%
Income (Loss) before taxes	3	%	1	%	5	%	—	%
(Benefit from) Provision for income taxes	(4)	%	*%		(1)	%	(1)	%
Net income	7	%	1	%	6	%	*%

* Asterisk denotes not meaningful.

Comparison of the Three and Nine Months Ended September 30, 2021 and 2020

Revenue

Revenue for the three months ended September 30, 2021 was $192.2 million, an increase of $30.9 million, or 19%, compared with revenue of $161.4 million for the three months ended September 30, 2020. This increase was primarily attributable to an increase of $31.4 million, or 22%, in subscription-based platform revenue resulting from continued adoption of subscription-based platform offerings, and an increase of $0.6 million, or 4%, in services revenue, which was partially offset by a decrease of $1.1 million, or 33%, in legacy revenue.

Revenue for the nine months ended September 30, 2021 was $559.8 million, an increase of $82.1 million, or 17%, compared with revenue of $477.8 million for the nine months ended September 30, 2020. This increase was primarily attributable to an increase of $79.0 million, or 19%, in subscription-based platform revenue resulting from continued adoption of subscription-based platform offerings, and an increase of $5.9 million, or 13%, in services revenue, which was partially offset by a decrease of $2.8 million, or 23%, in legacy revenue.

Cost of Revenue

During the three months ended September 30, 2021, cost of revenue increased by $15.4 million, or 39%, compared with the three months ended September 30, 2020. The increase in cost of revenue was primarily attributable to an increase in employee-related and contract labor expense of $9.0 million and an increase in professional third-party costs of $5.8 million. Cost of revenue as a percentage of revenue was 29% and 25% for the three months ended September 30, 2021 and 2020, respectively.

During the nine months ended September 30, 2021, cost of revenue increased by $33.6 million, or 29%, compared with the nine months ended September 30, 2020. The increase in cost of revenue was primarily attributable to an increase in employee-related and contract labor expense of $20.5 million and an increase in professional third-party costs of $12.2 million. Cost of revenue as a percentage of revenue was 27% and 25% for the nine months ended September 30, 2021 and 2020, respectively.

Sales and Marketing

During the three months ended September 30, 2021, sales and marketing expense increased by $6.2 million, or 42%, compared with the three months ended September 30, 2020. The increase was primarily attributable to an increase in employee-related expense of $3.3 million, an increase in professional third-party costs of $1.5 million, and an increase in stock-based

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compensation of $0.5 million. Sales and marketing expense as a percentage of revenue was 11% and 9% for the three months ended September 30, 2021 and 2020, respectively.

During the nine months ended September 30, 2021, sales and marketing expense increased by $17.2 million, or 38%, compared with the nine months ended September 30, 2020. The increase was primarily attributable to an increase in employee-related expense of $11.7 million, an increase in professional third-party costs of $3.9 million, and an increase in stock-based compensation of $1.2 million. Sales and marketing expense as a percentage of revenue was 11% and 9% for the nine months ended September 30, 2021 and 2020, respectively.

Research and Development

During the three months ended September 30, 2021, research and development expense increased by $1.6 million, or 21%, compared with the three months ended September 30, 2020. The increase was primarily attributable to an increase in professional third-party costs of $0.9 million and an increase in employee-related expense of $0.5 million.

During the nine months ended September 30, 2021, research and development expense increased by $3.6 million, or 15%, compared with the nine months ended September 30, 2020. The increase was primarily attributable to an increase in professional third-party costs of $2.7 million and an increase in employee-related expense of $0.9 million.

General and Administrative

During the three months ended September 30, 2021, general and administrative expenses increased by $0.5 million, or 1%, compared with the three months ended September 30, 2020. The increase was primarily attributable to an increase in transaction costs related to the proposed Merger of $3.5 million, which was partially offset by an adjustment in the prior year to increase the fair value of contingent consideration that was not present in the current year resulting in a reduction of expense of $3.3 million. General and administrative expense as a percentage of revenue was 29% and 34% for the three months ended September 30, 2021 and 2020, respectively.

During the nine months ended September 30, 2021, general and administrative expenses decreased by $2.0 million, or 1%, compared with the nine months ended September 30, 2020. The decrease was primarily attributable to an adjustment in the prior year to increase the fair value of contingent consideration that was not present in the current year resulting in a reduction of expense of $3.3 million and a decrease in stock-based compensation of $2.5 million, which was partially offset by an increase in transaction costs related to the proposed Merger of $3.5 million. General and administrative expense as a percentage of revenue was 29% and 34% for the nine months ended September 30, 2021 and 2020, respectively.

Impairment Charge

During the three and nine months ended September 30, 2021, we recorded an impairment charge of $3.0 million for certain of our long-lived assets related to internally developed software.

Interest Expense

During the three months ended September 30, 2021, interest expense decreased by $0.6 million, compared with the three months ended September 30, 2020. During the nine months ended September 30, 2021, interest expense decreased by $3.5 million, compared with the nine months ended September 30, 2020. The decrease in interest expense was primarily attributable to a decrease to the applicable interest rate margin by 25 basis points to 2.75% upon meeting a certain leverage ratio target as defined in our 2018 Credit Agreement (as defined below, under the heading Liquidity and Capital Resources—Debt) and a decrease in principal debt balance resulting in lower interest.

(Benefit from) Provision for Income Taxes

During the three months ended September 30, 2021, the benefit from income taxes was $6.8 million compared to the provision for income taxes of $1.2 million for the three months ended September 30, 2020. During the nine months ended September 30, 2021, the benefit from income taxes was $3.9 million compared to $3.0 million for the nine months ended September 30, 2020. Our effective tax rate for the nine months ended September 30, 2021 was approximately (14.6)%, compared with approximately 162.8% for the nine months ended September 30, 2020. The change in our effective tax rate is primarily due to the change in income before taxes compared to the prior year, the impact of excess tax benefits associated with stock-based compensation, transaction costs related to the proposed Merger, and several provisions of the Coronavirus Aid, Relief and Economic Security Act, which was signed into law on March 27, 2020, and favorably impacted our effective tax rate in the first half of 2020.

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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. As of September 30, 2021, our cash and cash equivalents totaled $108.9 million, compared with $123.9 million of cash and cash equivalents as of December 31, 2020. We believe our current cash, cash equivalents, and 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, 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”). As of September 30, 2021, we had $100.0 million available to us consisting of $99.0 million under the 2018 Revolving Facility and a letter of credit of $1.0 million.

As of September 30, 2021, we had outstanding indebtedness under the 2018 Term Facility and finance lease liabilities of $883.4 million and $26.5 million, respectively. As of December 31, 2020, we had outstanding indebtedness under the 2018 Term Facility and finance lease liabilities of $887.4 million and $29.7 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 $7.4 million and scheduled interest payments totaling $34.4 million were paid during the nine months ended September 30, 2021. As of September 30, 2021, we were in compliance with the covenants under the 2018 Credit Agreement.

See “Note 5—Debt” in the Notes to our unaudited consolidated financial statements included under Part I, Item 1 within this Quarterly Report on Form 10-Q for additional information.

Cash Flows

Operating Cash Flow Activities

Cash provided by operating activities consisted of net income adjusted for certain non-cash items, including depreciation and amortization, stock-based compensation, and deferred income taxes, as well as the effect of changes in working capital and other activities. Cash provided by operating activities during the nine months ended September 30, 2021 was $79.7 million, representing a decrease of $29.4 million compared with the nine months ended September 30, 2020. The decrease in cash provided by operating activities was driven by an increase in cash paid for income taxes and changes in working capital and non-cash expenses, which was partially offset by an increase in operating income.

Investing Cash Flow Activities

We make investments in innovation, including research and development expense, capital software development costs, and research and development infrastructure investments, on a recurring basis.

Cash used in investing activities during the nine months ended September 30, 2021 was $76.4 million compared with $62.3 million during the nine months ended September 30, 2020. The change in cash used in investing activities was primarily driven by an increase in capitalized software of $16.8 million, including investments related to our cloud-based platform offerings, and an increase in purchases of intangible assets of $1.5 million, which was partially offset by a decrease in purchases of property and equipment of $4.3 million.

Financing Cash Flow Activities

Cash used in financing activities during the nine months ended September 30, 2021 was $18.3 million, compared with cash used in financing activities of $19.8 million during the nine months ended September 30, 2020. The change in cash used in financing activities was driven by a decrease related to the payment of acquisition-related contingent consideration of $2.2 million, debt issuance costs of $1.0 million paid in the prior year, and an increase in proceeds from the exercise of stock options of $0.9 million, which was partially offset by increased payments of $1.8 million related to the issuance of equity awards and increased payments of finance lease liabilities of $0.8 million.

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Contractual Obligations

During the nine months ended September 30, 2021, there have been no material changes, outside of the ordinary course of business, in our contractual obligations previously disclosed under the caption “Contractual Obligations” in our 2020 Form 10-K.

Off-Balance Sheet Arrangements

As of September 30, 2021, we did not have any off-balance sheet arrangements.

Recently Issued Accounting Standards

Recently issued accounting standards and their expected impact, if any, are discussed in “Note 1—Basis 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 2020 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our market risk subsequent to the previous disclosure in Part II—Item 7A (“Quantitative and Qualitative Disclosures About Market Risk”) of our 2020 Form 10-K.

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 September 30, 2021, our disclosure controls and procedures were designed at a reasonable assurance level to ensure that material information relating to Inovalon Holdings, Inc., including its consolidated subsidiaries, is made known to our CEO and CFO by others within those entities, particularly during the period in which this report was being prepared and that our disclosure controls and procedures were effective in providing reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control

There have been no changes in the Company’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 September 30, 2021 that have materially affected, or are reasonably 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 2020 Form 10-K. There have been no material changes to the risk factors previously disclosed in our 2020 Form 10-K other than the following:

Risks Related to the Merger

The consummation of the Merger is subject to a number of conditions, many of which are largely outside of the parties’ control, and, if these conditions are not satisfied or waived on a timely basis, the Merger Agreement may be terminated and the Merger may not be completed.

The Merger is subject to certain customary closing conditions, including: (i) requisite approval of the holders of Inovalon common stock; (ii) the receipt of specified regulatory approvals, or expiration or termination of the applicable waiting period, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and pursuant to the Committee of Foreign Investment in the United States; (iii) the absence of any order, litigation, injunction or similar proceeding that remains in effect or any action restraining, enjoining or otherwise prohibiting or making illegal the consummation of the Merger and the absence of any law that prohibits or otherwise makes illegal the consummation of the Merger; (iv) the accuracy of each party’s representations and warranties in the Merger Agreement (subject to materiality qualifiers); (v) the performance in all material respects by each party of all obligations required to be performed by it under the Merger Agreement; (vi) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement); and (vii) the delivery of an officers’ certificate by each party with respect to representation and warranties and performance of obligations under the Merger Agreement. The failure to satisfy all of the required conditions could delay the completion of the Merger by a significant period of time or prevent it from occurring. Any delay in completing the Merger could cause the parties to not realize some or all of the benefits that are expected to be achieved if the Merger is successfully completed within the expected timeframe. There can be no assurance that the conditions to closing of the Merger will be satisfied or waived or that the Merger will be completed within the expected timeframe or at all.

Failure to complete the Merger could adversely affect the stock price and future business and financial results of Inovalon.

There can be no assurance that the conditions to the closing of the Merger will be satisfied or waived or that the Merger will be completed. If the Merger is not completed within the expected timeframe or at all, the ongoing business of Inovalon could be adversely affected and Inovalon will be subject to a variety of risks and possible consequences associated with the failure to complete the Merger, including the following:

•upon termination of the Merger Agreement under specified circumstances, Inovalon is required to pay Parent a termination fee of $176,385,000;

•Inovalon will incur certain transaction costs, including legal, accounting, financial advisor, filing, printing and mailing fees, regardless of whether the Merger closes;

•under the Merger Agreement, Inovalon is subject to certain restrictions on the conduct of its business prior to the closing of the Merger, which may adversely affect its ability to execute certain of its business strategies;

•Inovalon may lose key employees during the period in which Inovalon and Parent are pursuing the Merger, which may adversely affect Inovalon in the future if it is not able to hire and retain qualified personnel to replace departing employees; and

•the proposed Merger, whether or not it closes, will divert the attention of certain management and other key employees of Inovalon from ongoing business activities, including the pursuit of other opportunities that could be beneficial to Inovalon as an independent company.

If the Merger is not completed, these risks could materially affect the business and financial results of Inovalon and its stock price, including to the extent that the current market price of Inovalon common stock is positively affected by a market assumption that the Merger will be completed.

While the Merger is pending, Inovalon will be subject to business uncertainties and certain contractual restrictions that could adversely affect the business and operations of Inovalon.

In connection with the pending Merger, some clients, vendors or other third parties of Inovalon may react unfavorably, including by delaying or deferring decisions concerning their business relationships or transactions with Inovalon, which could

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adversely affect the revenues, earnings, funds from operations, cash flows and expenses of Inovalon, regardless of whether the Merger is completed. In addition, due to certain restrictions in the Merger Agreement on the conduct of business prior to completing the Merger, Inovalon may be unable (without the other party’s prior written consent), during the pendency of the Merger, to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial and may cause Inovalon to forego certain opportunities it might otherwise pursue. In addition, the pendency of the Merger may make it more difficult for Inovalon to effectively retain and incentivize key personnel and may cause distractions from Inovalon's strategy and day-to-day operations for its current employees and management.

Inovalon will incur substantial transaction fees and Merger-related costs in connection with the Merger that could adversely affect the business and operations of Inovalon if the Merger is not completed.

Inovalon expects to incur non-recurring transaction fees, which include legal and advisory fees and substantial Merger-related costs associated with completing the Merger, and which could adversely affect the business operations of Inovalon if the Merger is not completed.

The termination fee and restrictions on solicitation contained in the Merger Agreement may discourage other companies from trying to acquire Inovalon.

The Merger Agreement prohibits Inovalon’s solicitation of proposals relating to alternative transactions to the Merger and restricts Inovalon’s ability to participate in any discussions or negotiations with, or furnish nonpublic information to, any third party with respect to any such transaction, subject to certain limited exceptions. The Merger Agreement also contains certain termination rights, including, but not limited to, the right of (i) Inovalon to terminate the Merger Agreement to accept a Superior Proposal (as defined in the Merger Agreement) or (ii) Parent to terminate the Merger Agreement upon an Adverse Recommendation Change (as defined in the Merger Agreement), in each case, subject to and in accordance with the terms and conditions of the Merger Agreement, and provides that, upon termination of the Merger Agreement by Inovalon or Parent as set forth above, Inovalon will be required to pay Parent (or one or more of its designees) a termination fee of $176,385,000 in cash. Upon termination of the Merger Agreement by Inovalon or Parent under specified conditions, Parent will be required to pay Inovalon a termination fee of $368,805,000 in cash. The termination fees and restrictions could discourage other companies from trying to acquire Inovalon even though those other companies might be willing to offer greater value to Inovalon stockholders than Parent has offered in the Merger.

Litigations on Inovalon, Parent, or the members of their respective boards, could prevent or delay the completion of the Merger or result in the payment of damages following completion of the Merger.

It is a condition to the Merger that no injunction or other order preventing the consummation of the Merger shall have been issued by any court of competent jurisdiction or other governmental authority of competent jurisdiction and remain in effect. As of the date of this Quarterly Report on Form 10-Q, five lawsuits have been filed by purported Inovalon stockholders challenging the Merger or the other transactions contemplated by the Merger Agreement, which have named Inovalon and/or members of the Inovalon board as defendants. It is possible that additional lawsuits may be filed by Parent stockholders or Inovalon stockholders challenging the Merger. The outcome of such lawsuits cannot be assured, including the amount of costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation of these claims. If plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the Merger on the agreed-upon terms, such an injunction may delay the consummation of the Merger in the expected timeframe, or may prevent the Merger from being consummated at all. Whether or not any plaintiff’s claim is successful, this type of litigation can result in significant costs and divert management’s attention and resources from the closing of the Merger and ongoing business activities, which could adversely affect the operation of Inovalon’s businesses.

Uncertainty about the Merger may adversely affect the relationships between Inovalon and its clients, vendors and employees, whether or not the Merger is completed.

In response to the announcement of the Merger, existing or prospective clients, vendors and other third party relationships of Inovalon may delay, defer or cease providing goods or services, delay or defer other decisions concerning Inovalon, refuse to extend credit to Inovalon, or otherwise seek to change the terms on which they do business with Inovalon. Any such delays or changes to terms could materially harm the business of Inovalon or, if the Merger is completed, the combined company.

In addition, as a result of the Merger, current and prospective employees could experience uncertainty about their future with Inovalon or the combined company. These uncertainties may impair the ability of Inovalon to retain, recruit or motivate key management, technical and other personnel.

If the Merger is not consummated by January 16, 2022, either Inovalon or Parent may terminate the Merger Agreement.

Either Inovalon or Parent may terminate the Merger Agreement if the Merger has not been consummated by January 16, 2022. However, this termination right will not be available to a party if that party failed to fulfill its obligations under the

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Merger Agreement and that failure was the principal cause of, or directly resulted in, the failure to consummate the Merger on time. In the event the Merger Agreement is terminated by either party due to the failure of the Merger to close by January 16, 2022, Inovalon will have incurred significant costs and will have diverted significant management focus and resources from other strategic opportunities and ongoing business activities without realizing the anticipated benefits of the Merger.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Use of Proceeds from Registered Securities

None.

Purchases of Equity Securities by the Issuer or Affiliated Purchasers

The following table presents a summary of share repurchases made by the Company during the quarter ended September 30, 2021:


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares (or approximate dollar value) that May Yet be Purchased under the Plans or Programs
July 1 – July 31	—	$	—	—	$	—
August 1 – August 31	—	—		—	—
September 1 – September 30(1)	26,208	40.52		26,208	—
Total	26,208	$	40.52	26,208	$	—

_______________________________________

(1)On September 2, 2021, we directed the administrator of the Company's Employee Stock Purchase Plan (“ESPP”) to purchase 26,208 shares of Class A common stock in the open market for a total of approximately $1.1 million, for issuance to the ESPP participants at a discounted price of $34.72 per share. The Company may, in its discretion, based on market conditions, relative transaction costs and the Company's need for additional capital, continue to instruct the plan administrator to make semi-annual open market purchases of Class A common stock for ESPP participants to coincide with the ESPP's designated semi-annual purchase dates.

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
2.1		Agreement and Plan of Merger, dated August 19, 2021, by and among Inovalon Holdings, Inc., Ocala Bidco, Inc. and Ocala Merger Sub, Inc. (Incorporated by reference from Exhibit 2.1 to the current report on Form 8-K filed August 19, 2021).

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

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

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

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

101.INS	*	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.

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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: November 9, 2021	INOVALON HOLDINGS, INC.
	By:	/s/ KEITH R. DUNLEAVY, M.D.
		Keith R. Dunleavy, M.D. Chief Executive Officer & Chairman (Principal Executive Officer)

	By:	/s/ JONATHAN R. BOLDT
		Jonathan R. Boldt Chief Financial Officer (Principal Financial Officer)

Inovalon Holdings, Inc. 10-Q