Company Quick10K Filing
Inovalon Holdings
Price16.39 EPS0
Shares149 P/E798
MCap2,439 P/FCF61
Net Debt816 EBIT50
TEV3,255 TEV/EBIT65
TTM 2019-09-30, in MM, except price, ratios
10-Q 2021-03-31 Filed 2021-04-28
10-K 2020-12-31 Filed 2021-02-17
10-Q 2020-09-30 Filed 2020-10-28
10-Q 2020-06-30 Filed 2020-07-29
10-Q 2020-03-31 Filed 2020-04-29
10-K 2019-12-31 Filed 2020-02-19
10-Q 2019-09-30 Filed 2019-10-30
10-Q 2019-06-30 Filed 2019-07-31
10-Q 2019-03-31 Filed 2019-05-01
10-K 2018-12-31 Filed 2019-02-20
10-Q 2018-09-30 Filed 2018-11-07
10-Q 2018-06-30 Filed 2018-08-01
10-Q 2018-03-31 Filed 2018-05-08
10-K 2017-12-31 Filed 2018-02-21
10-Q 2017-09-30 Filed 2017-11-02
10-Q 2017-06-30 Filed 2017-08-03
10-Q 2017-03-31 Filed 2017-05-04
10-K 2016-12-31 Filed 2017-02-23
10-Q 2016-09-30 Filed 2016-11-03
10-Q 2016-06-30 Filed 2016-08-04
10-Q 2016-03-31 Filed 2016-05-05
10-K 2015-12-31 Filed 2016-02-26
10-Q 2015-09-30 Filed 2015-11-05
10-Q 2015-06-30 Filed 2015-08-06
10-Q 2015-03-31 Filed 2015-05-08
10-K 2014-12-31 Filed 2015-03-31
8-K 2020-10-28
8-K 2020-07-29
8-K 2020-06-17
8-K 2020-04-29
8-K 2020-02-19
8-K 2020-02-11
8-K 2020-01-14
8-K 2019-12-01
8-K 2019-10-30
8-K 2019-07-31
8-K 2019-06-05
8-K 2019-05-01
8-K 2019-02-20
8-K 2019-02-20
8-K 2019-01-12
8-K 2019-01-01
8-K 2018-11-07
8-K 2018-08-01
8-K 2018-06-06
8-K 2018-05-08
8-K 2018-04-19
8-K 2018-04-02
8-K 2018-03-06
8-K 2018-02-20
8-K 2018-01-08

INOV 10Q Quarterly Report

Part I - Financial Information
Item 1. Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex-311x03312021.htm
EX-31.2 ex-312x03312021.htm
EX-32.1 ex-321x03312021.htm
EX-32.2 ex-322x03312021.htm

Inovalon Holdings Earnings 2021-03-31

Balance SheetIncome StatementCash Flow
2.01.61.20.80.40.02013201520172020
Assets, Equity
0.20.10.10.0-0.0-0.12013201520172020
Rev, G Profit, Net Income
0.80.40.0-0.3-0.7-1.12013201520172020
Ops, Inv, Fin

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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 endedMarch 31, 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)
_________________________________________________________________________
Delaware47-1830316
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
4321 Collington Road,
Bowie,Maryland20716
(Address of principal executive offices)(Zip Code)
(301809-4000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName Of Each Exchange On Which Registered
Class A Common Stock, $0.000005 par value per shareINOVNASDAQ 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 filerAccelerated filerNon-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No 
As of April 16, 2021, the registrant had 77,812,168 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 MONTHS ENDED MARCH 31, 2021
TABLE OF CONTENTS
  Page


Table of Contents
PART I—FINANCIAL INFORMATION
Item 1.    Consolidated Financial Statements
INOVALON HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and par value amounts)
 March 31,
2021
December 31,
2020
ASSETS  
Current assets:  
Cash and cash equivalents$128,630 $123,880 
Accounts receivable (net of allowances of $2,502 at March 31, 2021 and $2,700 at December 31, 2020)
144,764 148,003 
Prepaid expenses and other current assets29,977 26,529 
Income tax receivable26,847 24,664 
Total current assets330,218 323,076 
Non-current assets:  
Property, equipment and capitalized software, net173,283 168,113 
Operating lease right-of-use assets34,279 35,355 
Goodwill955,881 955,881 
Intangible assets, net440,275 452,558 
Other assets32,060 36,415 
Total assets$1,965,996 $1,971,398 
LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current liabilities:  
Accounts payable and accrued expenses$47,484 $52,998 
Accrued compensation26,743 40,860 
Other current liabilities42,178 39,835 
Deferred revenue15,517 10,854 
Credit facilities9,800 9,800 
Operating lease liabilities6,547 5,968 
Finance lease liabilities4,021 3,963 
Total current liabilities152,290 164,278 
Non-current liabilities:  
Credit facilities, less current portion876,241 877,574 
Operating lease liabilities, less current portion40,209 40,807 
Finance lease liabilities, less current portion24,582 25,759 
Other liabilities40,152 54,350 
Deferred income taxes102,801 99,916 
Total liabilities1,236,275 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 March 31, 2021 and December 31, 2020, respectively
  
Class A common stock, $0.000005 par value, 750,000,000 shares authorized; 92,242,152 shares issued and 77,621,977 shares outstanding at March 31, 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; 78,331,591 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively
  
Preferred stock, $0.0001 par value, 100,000,000 shares authorized, zero shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively
  
Additional paid-in-capital
657,852 655,444 
Retained earnings
310,046 300,890 
Treasury stock, at cost, 14,620,175 shares at March 31, 2021 and December 31, 2020, respectively
(199,817)(199,817)
Other comprehensive loss(38,361)(47,804)
Total stockholders’ equity729,721 708,714 
Total liabilities and stockholders’ equity$1,965,996 $1,971,398 
See notes to consolidated financial statements.
1

Table of Contents
INOVALON HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per-share amounts)
 Three Months Ended
March 31,
 20212020
Revenue$177,176 $154,187 
Expenses:
Cost of revenue(1)
44,397 41,043 
Sales and marketing(1)
19,474 15,159 
Research and development(1)
8,519 7,104 
General and administrative(1)
53,025 53,883 
Depreciation and amortization28,431 27,934 
Total operating expenses153,846 145,123 
Income from operations23,330 9,064 
Other income and (expenses):
Interest income46 290 
Interest expense(13,128)(14,560)
Other expense, net(2)(22)
Income (Loss) before taxes10,246 (5,228)
Provision for (Benefit from) income taxes1,090 (3,545)
Net income (loss)$9,156 $(1,683)
Net income (loss) attributable to common stockholders, basic and diluted$8,910 $(1,683)
Net income (loss) per share attributable to common stockholders, basic and diluted:
Basic net income (loss) per share$0.06 $(0.01)
Diluted net income (loss) per share$0.06 $(0.01)
Weighted average shares of common stock outstanding:
Basic150,302 149,183 
Diluted150,454 149,183 
________________________________________________
(1)Includes stock-based compensation expense as follows: 
Cost of revenue$221 $165 
Sales and marketing938 620 
Research and development320 453 
General and administrative4,184 6,018 
Total stock-based compensation expense$5,663 $7,256 
See notes to consolidated financial statements.
2

Table of Contents
INOVALON HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)
 Three Months Ended
March 31,
 20212020
Net income (loss)$9,156 $(1,683)
Other comprehensive income (loss):
Realized losses on cash flow hedges reclassified from accumulated other comprehensive income, net of tax of $(1,501) and $(681), respectively
3,178 1,446 
Net change in unrealized gains (losses) on cash flow hedges, net of tax of $(2,950) and $12,069, respectively
6,265 (25,646)
Comprehensive income (loss)$18,599 $(25,883)
See notes to consolidated financial statements.
3

Table of Contents
INOVALON HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands, except share amounts)
Issued Class A Common StockIssued Class B Common StockTreasury StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal Stockholders’ Equity
 SharesAmountSharesAmountSharesAmount
Balance—January 1, 202191,617,450 $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 loss
— — — — — — — — 9,443 9,443 
Net income— — — — — — — 9,156 — 9,156 
Balance—March 31, 202192,242,152 $1 78,331,591 $ (14,620,175)$(199,817)$657,852 $310,046 $(38,361)$729,721 

Issued Class A Common StockIssued Class B Common StockTreasury StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive (Loss) IncomeTotal Stockholders’ Equity
 SharesAmountSharesAmountSharesAmount
Balance—January 1, 202090,327,728 $1 79,369,411 $ (14,620,175)$(199,817)$636,461 $278,246 $(26,732)$688,159 
Stock-based compensation expense
— — — — — — 7,164 — — 7,164 
Exercise of stock 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, 202090,875,472 $1 79,270,861 $ (14,620,175)$(199,817)$640,861 $276,628 $(50,932)$666,741 
See notes to consolidated financial statements.
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INOVALON HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 Three Months Ended
March 31,
 20212020
Cash flows from operating activities:  
Net income (loss)$9,156 $(1,683)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:  
Stock-based compensation expense5,663 7,256 
Depreciation15,019 14,980 
Amortization of intangibles13,412 12,954 
Amortization of debt issuance costs and debt discount1,217 1,151 
Deferred income taxes(1,568)(181)
Change in fair value of acquisition-related contingent consideration 109 
Other(171)(295)
Changes in assets and liabilities:  
Accounts receivable3,928 1,614 
Prepaid expenses and other current assets(3,798)635 
Income taxes receivable(2,183)(3,624)
Other assets3,020 (862)
Accounts payable and accrued expenses(3,257)(2,844)
Accrued compensation(15,668)(15,558)
Other current and non-current liabilities1,909 (2,996)
Deferred revenue5,757 3,443 
Net cash provided by operating activities32,436 14,099 
Cash flows from investing activities:  
Purchases of property and equipment(4,448)(5,533)
Investment in capitalized software(13,988)(10,940)
Purchase of intangible assets(2,556) 
Net cash used in investing activities(20,992)(16,473)
Cash flows from financing activities:  
Proceeds from credit facility borrowings 99,000 
Repayment of credit facility borrowings(2,450)(2,450)
Payments for debt issuance costs (1,000)
Proceeds from exercise of stock options1,110 183 
Finance lease liabilities paid(1,119)(631)
Tax payments for equity award issuances(4,235)(2,947)
Net cash (used in) provided by financing activities(6,694)92,155 
Increase in cash and cash equivalents4,750 89,781 
Cash and cash equivalents, beginning of period123,880 93,094 
Cash and cash equivalents, end of period$128,630 $182,875 
Supplemental cash flow disclosure:  
Income taxes paid, net$1,489 $357 
Interest paid10,390 13,092 
Non-cash transactions:  
Accruals for purchases of property and equipment7,050 1,606 
Accruals for investment in capitalized software9,103 1,440 
Accruals for purchase of intangible assets1,125 10,819 
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 March 31, 2021, the results of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the three-month periods ended March 31, 2021 and 2020. The results of operations for the three-month periods ended March 31, 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.
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
March 31,
 20212020
Platform solutions(1)
$161,619 $140,617 
Services(2)
15,557 13,570 
Total revenue$177,176 $154,187 
______________________________________
(1)Platform solutions include arrangements for technology-based offerings representing subscription-based cloud-based platform offerings, real-time accessibility of comprehensive patient-specific healthcare data and analytical insights through Inovalon DataStream™, and legacy platform solutions that are not cloud-based and not billed under a subscription-based contract structure.
(2)Services include advisory, implementation, and support services under time and materials, fixed price, or retainer-based contracts.
Contract Balances
As of March 31, 2021, the Company had contract assets of $73.1 million of which $55.3 million was included in accounts receivable, $6.8 million was included in prepaid expenses and other current assets, and $11.0 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.
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As of March 31, 2021, the Company had contract liabilities of $30.3 million, which is included in deferred revenue on the consolidated balance sheet and presented net of contracts assets of $14.8 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 contracts assets of $11.4 million. Revenue recognized during the three months ended March 31, 2021 that was included in the deferred revenue balance at the beginning of the year was $10.1 million.
Costs to Obtain a Contract
The Company had a deferred commissions balance of $19.9 million and $18.9 million as of March 31, 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 (LOSS) PER SHARE
Holders of all outstanding classes of common stock participate ratably in earnings on an identical per share basis as if all shares were a single class. Basic earnings per share (“EPS”) is computed by dividing net income (loss) by the weighted average number of shares of common stock (Class A common stock and Class B common stock) outstanding during the period. Diluted EPS is computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding and potentially dilutive securities outstanding during the period under the treasury stock method. If the Company incurs a loss from continuing operations, diluted EPS is computed in the same manner as basic EPS. Potentially dilutive securities include stock options, restricted stock units (“RSUs”) and restricted stock awards (“RSAs”). Under the treasury stock method, dilutive securities are assumed to be exercised at the beginning of the periods and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Securities are excluded from the computations of diluted earnings per share if their effect would be anti-dilutive to EPS.
On February 18, 2015, the date of the completion of the Company’s IPO, the Company’s 2015 Omnibus Incentive Plan (the “2015 Plan”) became effective. The 2015 Plan provided for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), to the Company’s employees and any parent and subsidiary employees, and for the grant of non-qualified stock options, stock appreciation rights, restricted stock, RSAs, RSUs, dividend equivalent rights, cash-based awards (including annual cash incentives and long-term cash incentives), and any combination thereof to the Company’s employees, directors, and consultants and to employees, directors, and consultants of certain affiliated entities. At the Company’s annual meeting of stockholders held on June 5, 2019, the Company’s stockholders, upon the recommendation of the Board of Directors of the Company (the “Board”), approved the Amended and Restated 2015 Omnibus Incentive Plan (the “Amended Plan”), which was previously adopted by the Board on February 14, 2019, subject to the approval by the stockholders. The Amended Plan (i) increases the maximum number of shares of the Company’s Class A common stock available for issuance by 6,000,000 shares to a total of 13,335,430; (ii) removes the provisions regarding Section 162(m) of the Code that are no longer relevant due to recent changes to the Code pursuant to the Tax Cuts and Jobs Act of 2017, which eliminated the “performance-based compensation” exception to the deduction limitation under Section 162(m) of the Code; and (iii) extends the term of the Amended Plan until the tenth anniversary of the date of Board approval of the Amended Plan.
The Company has issued RSAs under the Amended Plan. The Company considers issued and unvested RSAs to be participating securities as the holders of these RSAs have a non-forfeitable right to dividends in the event of the Company’s declaration of a dividend on shares of Class A and Class B common stock. Subsequent to the issuance of the participating securities, the Company applied the two-class method required in calculating net income (loss) per share of Class A and Class B common stock. Under the two-class method, net income (loss) attributable to common stockholders is determined by allocating undistributed earnings, calculated as net income (loss), less earnings attributable to participating securities. The net income (loss) 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 (loss) attributable to common stockholders is allocated on a proportionate basis. If the Company incurs a loss from continuing operations, losses are not allocated to participating securities.
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The following table reconciles the weighted average shares outstanding for basic and diluted EPS for the periods indicated (in thousands, except per share amounts):
 Three Months Ended
March 31,
 20212020
Basic  
Numerator:  
Net income (loss)$9,156 $(1,683)
Undistributed earnings allocated to participating securities(246) 
Net income (loss) attributable to common stockholders—basic$8,910 $(1,683)
Denominator:  
Weighted average shares used in computing net income (loss) per share attributable to common stockholders—basic150,302 149,183 
Net income (loss) per share attributable to common stockholders—basic$0.06 $(0.01)
Diluted  
Numerator:  
Net income (loss) attributable to common stockholders—diluted$8,910 $(1,683)
Denominator:  
Number of shares used for basic EPS computation150,302 149,183 
Effect of dilutive securities152  
Weighted average shares used in computing net income (loss) per share attributable to common stockholders—diluted150,454 149,183 
Net income (loss) per share attributable to common stockholders—diluted$0.06 $(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 $22.2 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 months ended March 31, 2021 and March 31, 2020 (in thousands):
Three Months Ended
March 31,
20212020
Finance lease cost
Amortization of right-of-use assets$937 $492 
Interest on lease liabilities219 107 
Operating lease cost2,214 2,718 
Variable lease cost348 403 
Sublease income(213)(131)
Total lease cost$3,505 $3,589 
Supplemental cash flow information related to leases for the three months ended March 31, 2021 and March 31, 2020 are as follows (in thousands):
Three Months Ended
March 31,
20212020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases$1,649 $2,492 
Operating cash flows for financing leases221 107 
Financing cash flows for financing leases1,119 631 
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases$584 $ 
Supplemental balance sheet information related to leases as of March 31, 2021 and December 31, 2020 are as follows:
March 31,
2021
December 31,
2020
Weighted average remaining lease term:
Operating leases4 years4 years
Financing leases8 years8 years
Weighted average discount rate:
Operating leases4.1 %4.1 %
Financing leases3.0 %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 March 31, 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 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
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Agreement, the ABR is the higher of: (i) the rate that MSSF as administrative agent announces from time to time as its prime or base commercial lending rate, as in effect from time to time, (ii) the Federal Funds Effective Rate plus ½ of 1.0% and (iii) one-month Adjusted LIBOR plus 1.0%.
The following table discloses the outstanding debt at each balance date as follows (in thousands):
 March 31,
2021
December 31,
2020
2018 Term Facility(1)
$886,041 $887,374 
Less: current portion9,800 9,800 
Non-current Credit Facilities$876,241 $877,574 
______________________________________
(1)The 2018 Term Facility is presented net of unamortized deferred financing fees and original issue discount (“OID”) of $19.5 million and $20.6 million as of March 31, 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 March 31, 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 March 31, 2021 (in thousands):
 Level 1Level 2Level 3Total
Cash equivalents:    
Money market funds$42,097 $ $ $42,097 
Other current liabilities:    
Interest rate swaps (18,659) (18,659)
Contingent consideration  (14,810)(14,810)
Other liabilities:
Interest rate swaps (37,812) (37,812)
Contingent consideration  (1,373)(1,373)
Total$42,097 $(56,471)$(16,183)$(30,557)
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 1Level 2Level 3Total
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)$(44,440)
The Company determines the fair value of its security holdings based on pricing from its pricing vendors. The valuation techniques used to measure the fair value of financial instruments having Level 2 inputs were derived from prevailing market interest rates and discount rates to present value future cash flows based on the forward LIBOR yield curves. Such market rates or prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted rates or prices that are observable either directly or indirectly (Level 2 inputs). The Company performs procedures to ensure that appropriate fair values are recorded such as comparing rates or prices obtained from other sources.
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The following table presents financial instruments measured at fair value using unobservable inputs (Level 3) (in thousands):
 Fair Value Measurements Using
Unobservable Inputs
(Level 3)
 March 31,
2021
December 31,
2020
Balance, beginning of period$(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 March 31, 2021 (in thousands):
 March 31,
2021
Carrying value$886,041 
Fair value$877,180 
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 months ended March 31, 2021 and 2020 (in thousands):
Three Months Ended March 31, 2021Gain (Loss) recognized in OCIStatement of Operations Location(Gain) Loss reclassified from OCI
Interest rate swap contract$9,215 Interest expense$4,679 
Three Months Ended March 31, 2020Gain (Loss) recognized in OCIStatement of Operations Location(Gain) Loss reclassified from OCI
Interest rate swap contract$(37,715)Interest expense$2,127 
The net amount of accumulated other comprehensive loss expected to be reclassified to interest expense in the next 12 months is $18.8 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
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condition, results of operations, or cash flows will depend on a number of variables, including, for example, the timing and amount of such losses or damages (if any) and the structure and type of any such remedies. The Company’s management does not presently expect any litigation matters to have a material adverse impact on the consolidated financial statements of the Company.
There have been no significant or material developments to current legal proceedings, including the estimated effects on the Company’s consolidated financial statements and note disclosures, subsequent to the disclosure previously provided in Note 11 of the Notes to the Consolidated Financial Statements in the 2020 Form 10-K.
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 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, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “see,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
Factors that may cause actual results to differ from expected results include, among others:
our future financial performance, including our ability to continue and manage our growth;
our ability to retain our client base and sell additional services to them;
the effect of the concentration of our revenue among our top clients;
our ability to innovate and adapt our platforms and toolsets;
the effects of regulations applicable to us, including 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;
the effect of competition on our business;
the efficacy of our platforms and toolsets;
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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.
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, 580,000 clinical facilities, 336 million Americans, and 62 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.
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 we believe are temporary and that a significant portion of this softness represents 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 and we continue to expect some degree of additional “catch-up” in our legacy offerings following the COVID-19 pandemic impact period, we can provide no assurance that demand delays experienced will not result in permanent demand loss, or as to the timing of the peak of the pandemic and the ultimate impact of the pandemic on the U.S. and global economy and on our business. In addition, the COVID-19 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.
 March 31,
 20212020
 (in thousands)
MORE2 Registry® dataset metrics(1)
  
Unique patient count(2)
336,355 315,610 
Medical event count(3)
62,745,949 55,092,985 
Trailing twelve-month Patient Analytics Months (PAM)(1)(4)
72,287,954 68,531,751 
____________________________________
(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 determining and improving quality and financial performance in healthcare. Our MORE2 Registry® is our largest principal
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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
March 31,
 20212020
Investment in Innovation:  
Research and development(1)
$8,519 $7,104 
Capitalized software development(2)
16,320 10,432 
Research and development infrastructure investments(3)
101 — 
Total investment in innovation$24,940 $17,536 
As a percentage of revenue  
Research and development(1)
%%