UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                             to                            
Commission File Number 001-36841
_______________________________________________________
INOVALON HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
_______________________________________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
47-1830316
(I.R.S. Employer
Identification No.)
4321 Collington Road,
Bowie, Maryland
(Address of principal executive offices)
20716
(Zip Code)
(301) 809-4000
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x     No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x     No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
 
Accelerated filer  o
 
Non-accelerated filer  o
  (Do not check if a
smaller reporting company)
 
Smaller reporting company  o
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o     No  x
As of July 28, 2017, the registrant had 63,313,515 shares of Class A common stock outstanding and 82,498,213 shares of Class B common stock outstanding.
 

Table of Contents

INOVALON HOLDINGS, INC.
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

PART I—FINANCIAL INFORMATION
Item 1.     Condensed Consolidated Financial Statements
INOVALON HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value amounts)
 
June 30,
2017
 
December 31,
2016
 
(Unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
192,012

 
$
127,683

Short-term investments
339,536

 
445,315

Accounts receivable (net of allowances of $5,817 and $5,865 at June 30, 2017 and December 31, 2016, respectively)
95,698

 
85,591

Prepaid expenses and other current assets
10,851

 
12,100

Income tax receivable
7,837

 
15,165

Total current assets
645,934

 
685,854

Non-current assets:
 

 
 

Property, equipment and capitalized software, net
86,898

 
76,420

Goodwill
185,559

 
184,557

Intangible assets, net
96,027

 
103,549

Other assets
5,277

 
2,964

Total assets
$
1,019,695

 
$
1,053,344

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
26,134

 
$
16,474

Accrued compensation
14,052

 
15,211

Other current liabilities
8,973

 
9,468

Deferred revenue
11,860

 
11,850

Deferred rent
1,118

 
1,016

Credit facilities
37,500

 
30,000

Capital lease obligation
117

 
115

Total current liabilities
99,754

 
84,134

Non-current liabilities:
 

 
 

Credit facilities, less current portion
213,750

 
236,250

Capital lease obligation, less current portion
155

 
215

Deferred rent
911

 
1,457

Other liabilities
15,007

 
13,158

Deferred income taxes
32,312

 
34,553

Total liabilities
361,889

 
369,767

Commitments and contingencies (Note 5)


 


Stockholders' equity:
 

 
 

Common stock, $0.000005 par value, 900,000,000 shares authorized, zero shares issued and outstanding at each of June 30, 2017 and December 31, 2016, respectively
—

 
—

Class A common stock, $0.000005 par value, 750,000,000 shares authorized; 75,164,389 shares issued and 63,958,397 shares outstanding at June 30, 2017; 72,271,298 shares issued and 64,786,705 shares outstanding at December 31, 2016
—

 
—

Class B common stock, $0.000005 par value, 150,000,000 shares authorized; 82,498,213 shares issued and outstanding at June 30, 2017; 83,303,628 shares issued and outstanding at December 31, 2016
1

 
1

Preferred stock, $0.0001 par value, 100,000,000 shares authorized, zero shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
—

 
—

Additional paid-in-capital
526,363

 
516,300

Retained earnings
283,215

 
274,087

Treasury stock, Class A common stock, at cost, 11,205,992 and 7,508,985 shares at June 30, 2017 and December 31, 2016, respectively
(151,404
)
 
(106,231
)
Other comprehensive loss
(369
)
 
(580
)
Total stockholders' equity
657,806

 
683,577

Total liabilities and stockholders' equity
$
1,019,695

 
$
1,053,344


See notes to condensed consolidated financial statements.

1
Table of Contents

INOVALON HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per-share amounts)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
110,578

 
$
123,825

 
$
218,884

 
$
226,482

Expenses:
 
 
 
 
 
 
 
Cost of revenue(1)
37,198

 
43,214

 
75,483

 
85,137

Sales and marketing(1)
8,849

 
6,116

 
16,436

 
12,675

Research and development(1)
7,282

 
7,711

 
15,070

 
13,643

General and administrative(1)
35,874

 
31,461

 
71,719

 
68,013

Depreciation and amortization
12,479

 
8,496

 
24,964

 
16,890

Total operating expenses
101,682

 
96,998

 
203,672

 
196,358

Income from operations
8,896

 
26,827

 
15,212

 
30,124

Other income and (expenses):
 
 
 
 
 

 
 

Realized losses on short-term investments
—

 
(1
)
 
—

 
(5
)
(Loss) Gain on disposal of equipment
(138
)
 
—

 
(138
)
 
534

Interest income
1,342

 
1,532

 
2,680

 
2,974

Interest expense
(1,519
)
 
(1,245
)
 
(2,932
)
 
(2,504
)
Income before taxes
8,581

 
27,113

 
14,822

 
31,123

Provision for income taxes
3,095

 
10,862

 
5,694

 
12,507

Net income
$
5,486

 
$
16,251

 
$
9,128

 
$
18,616

Net income attributable to common stockholders, basic and diluted
$
5,338

 
$
16,179

 
$
8,913

 
$
18,537

Net income per share attributable to common stockholders, basic and diluted:
 
 
 
 
 
 
 
Basic net income per share
$
0.04

 
$
0.11

 
$
0.06

 
$
0.12

Diluted net income per share
$
0.04

 
$
0.11

 
$
0.06

 
$
0.12

Weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
Basic
142,632

 
151,712

 
143,680

 
151,497

Diluted
143,072

 
152,706

 
144,123

 
152,548

________________________________________________
(1)
Includes stock-based compensation expense as follows:
 
 
 

 
 
 
 
 
Cost of revenue
$
410

 
$
121

 
$
715

 
$
240

 
Sales and marketing
505

 
152

 
895

 
306

 
Research and development
307

 
499

 
580

 
741

 
General and administrative
2,525

 
1,364

 
5,154

 
2,941

 
Total stock-based compensation expense
$
3,747

 
$
2,136

 
$
7,344

 
$
4,228


See notes to condensed consolidated financial statements.

2
Table of Contents

INOVALON HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
5,486

 
$
16,251

 
$
9,128

 
$
18,616

Other comprehensive income:
 
 
 
 
 
 
 
Realized losses on short-term investments reclassified from accumulated other comprehensive income, net of tax of $0, ($1), $0 and ($2), respectively
—

 
—

 
—

 
3

Net change in unrealized gains on available-for-sale investments, net of tax of $136, ($1,242), $272 and ($1,802), respectively
35

 
133

 
211

 
2,518

Comprehensive income
$
5,521

 
$
16,384

 
$
9,339

 
$
21,137


See notes to condensed consolidated financial statements.

3
Table of Contents

INOVALON HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Six Months Ended
June 30,
 
2017
 
2016
Cash flows from operating activities:
 

 
 

Net income
$
9,128

 
$
18,616

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Stock-based compensation expense
7,344

 
4,228

Depreciation
17,442

 
13,236

Amortization of intangibles
7,522

 
3,654

Amortization of premiums on short-term investments
1,017

 
1,752

Realized losses on short-term investments
—

 
5

Tax payments for equity award issuances
—

 
95

Deferred income taxes
(2,513
)
 
(654
)
Excess tax benefits from stock-based compensation
—

 
(1,068
)
Loss (Gain) on disposal of equipment
138

 
(534
)
Changes in assets and liabilities:
 

 
 

Accounts receivable
(10,107
)
 
(13,467
)
Prepaid expenses and other current assets
683

 
(960
)
Income taxes receivable
7,328

 
9,471

Other assets
(2,313
)
 
56

Accounts payable
5,660

 
(7,655
)
Accrued compensation
112

 
(228
)
Other liabilities
114

 
5,262

Deferred rent
(446
)
 
(352
)
Deferred revenue
10

 
949

Net cash provided by operating activities
41,119

 
32,406

Cash flows from investing activities:
 

 
 

Sales and maturities of short-term investments
105,245

 
164,767

Purchases of short-term investments
—

 
(132,157
)
Purchases of property and equipment
(9,180
)
 
(8,263
)
Investment in capitalized software
(15,394
)
 
(8,849
)
Net cash provided by investing activities
80,671

 
15,498

Cash flows from financing activities:
 

 
 

Repurchase of common stock
(45,173
)
 
—

Repayment of credit facility borrowings
(15,000
)
 
(7,500
)
Proceeds from exercise of stock options
3,016

 
4,415

Capital lease obligations paid
(58
)
 
(31
)
Tax payments for equity award issuances
(246
)
 
(95
)
Excess tax benefits from stock-based compensation
—

 
1,068

Net cash used in financing activities
(57,461
)
 
(2,143
)
Increase in cash and cash equivalents
64,329

 
45,761

Cash and cash equivalents, beginning of period
127,683

 
114,034

Cash and cash equivalents, end of period
$
192,012

 
$
159,795

Supplementary cash flow disclosure:
 

 
 

Cash paid during the period for:
 

 
 

Income taxes, net of refunds
$
379

 
$
3,594

Interest
2,840

 
2,380

Non-cash investing activities:
 

 
 

Accruals for purchases of property, equipment
4,773

 
376

Accruals for investment in capitalized software
1,302

 
226

   
See notes to condensed consolidated financial statements.

4
Table of Contents

INOVALON HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared by Inovalon Holdings, Inc. (the "Company") 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 condensed consolidated financial statements may not include all of the information and notes required by GAAP for audited financial statements. The year-end December 31, 2016 condensed 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 condensed 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 June 30, 2017 , the results of operations and comprehensive income for the three and six month periods ended June 30, 2017 and 2016 , and cash flows for the six months ended June 30, 2017 and 2016 . The results of operations for the three and six month periods ended June 30, 2017 and 2016 are not necessarily indicative of the results to be expected for the full year. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, and related disclosures, as of the date of the financial statements, and the amounts of revenue and expenses reported during the period. Actual results could differ from estimates. The information contained herein should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 (the "2016 Form 10-K").
The accompanying unaudited condensed consolidated financial statements include the accounts of Inovalon Holdings, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The Company'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 2016 Form 10-K, that would be expected to impact the Company except for the following:
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09,  Revenue from Contracts with Customers and subsequent clarifying guidance ("ASU 2014-09"). This revenue recognition guidance supersedes existing GAAP guidance, including most industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance identifies five steps to apply in achieving this principle. ASU 2014-09 is effective for fiscal years beginning after December 15, 2017. ASU 2014-09 may be applied either retrospectively or through the use of a modified-retrospective method. The Company is in the process of finalizing our contract review at which point, the Company will evaluate the method of adoption, the impact to the consolidated financial statements, changes to our systems and internal control over financial reporting in response to the new standard. The Company anticipates that this standard may have a material impact on the consolidated financial statements with respect to additional disclosures related to qualitative and quantitative information concerning the nature, amount, timing, and any uncertainty of revenue and cash flows from contracts with customers, the capitalization of costs of commissions, upfront contract costs, and other contract acquisition-based and contract fulfillment costs on the consolidated balance sheets. The Company expects to make a determination as to the timing and method of adoption in the second half of 2017 and will adopt the requirements of the new standard in the first quarter of 2018.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new standard narrows the definition of a business and provides a framework for evaluation. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
  In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. This ASU will be applied prospectively and is effective for annual or interim goodwill

5

impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
2. NET INCOME PER SHARE (in thousands, except per share amounts)
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. 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.
The Company has issued RSAs under the 2015 Omnibus Incentive Plan. The Company considers issued and unvested RSAs to be participating securities as the holders of these RSAs have a non-forfeitable right to dividends in the event of the Company'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.
The following table reconciles the weighted average shares outstanding for basic and diluted EPS for the periods indicated:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Basic
 

 
 

 
 
 
 
Numerator:
 

 
 

 
 
 
 
Net income
$
5,486

 
$
16,251

 
$
9,128

 
$
18,616

Undistributed earnings allocated to participating securities
(148
)
 
(72
)
 
(215
)
 
(79
)
Net income attributable to common stockholders
$
5,338

 
$
16,179

 
$
8,913

 
$
18,537

Denominator:
 

 
 

 
 
 
 
Weighted average shares used in computing net income per share attributable to common stockholders—basic
142,632

 
151,712

 
143,680

 
151,497

Net income per share attributable to common stockholders—basic
$
0.04

 
$
0.11

 
$
0.06

 
$
0.12

Diluted
 

 
 

 
 
 
 
Numerator:
 

 
 

 
 
 
 
Net income attributable to common stockholders
$
5,338

 
$
16,179

 
$
8,913

 
$
18,537

Denominator:
 

 
 

 
 
 
 
Number of shares used for basic EPS computation
142,632

 
151,712

 
143,680

 
151,497

Effect of dilutive securities
440

 
994

 
443

 
1,051

Weighted average shares used in computing net income per share attributable to common stockholders—diluted
143,072

 
152,706

 
144,123

 
152,548

Net income per share attributable to common stockholders—diluted
$
0.04

 
$
0.11

 
$
0.06

 
$
0.12


6

The computation of diluted EPS does not include certain unvested awards, on a weighted average basis, for the three and six months ended June 30, 2017 and 2016 , respectively, because their inclusion would have an anti-dilutive effect on EPS. The awards excluded because of their anti-dilutive effect are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Awards excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive
135

 
116

 
213

 
131

3. SHORT-TERM INVESTMENTS (in thousands)
As of June 30, 2017 , short-term investments consisted of the following:
 
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
Available-for-sale securities:
 

 
 

 
 

 
 

Corporate notes and bonds
$
291,494

 
$
65

 
$
(454
)
 
$
291,105

U.S. agency obligations
27,857

 
3

 
(53
)
 
27,807

U.S. treasury securities
20,736

 
—

 
(112
)
 
20,624

Total available-for-sale securities
$
340,087

 
$
68

 
$
(619
)
 
$
339,536

As of December 31, 2016 , short-term investments consisted of the following:
 
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
Available-for-sale securities:
 

 
 

 
 

 
 

Corporate notes and bonds
$
349,571

 
$
36

 
$
(918
)
 
$
348,689

U.S. agency obligations
34,864

 
22

 
(78
)
 
34,808

U.S. treasury securities
53,681

 
6

 
(100
)
 
53,587

Commercial paper
6,312

 
—

 
(3
)
 
6,309

Certificates of deposit
1,921

 
1

 
—

 
1,922

Total available-for-sale securities
$
446,349

 
$
65

 
$
(1,099
)
 
$
445,315

The following table summarizes the estimated fair value of our short-term investments, designated as available-for-sale and classified by the contractual maturity date of the securities as of the dates shown:
 
June 30,
2017
 
December 31,
2016
Due in one year or less
$
192,204

 
$
176,696

Due after one year through three years
147,332

 
268,619

Total
$
339,536

 
$
445,315

The Company has certain available-for-sale securities in a gross unrealized loss position. The Company reviews its debt securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. The Company considers factors such as the length of time and extent to which the market value has been less than the cost, the financial position and near-term prospects of the issuer and the Company's intent to sell, or whether it is more likely than not the Company will be required to sell the investment before recovery of the investment's amortized-cost basis. If the Company determines that an other-than-temporary decline exists, or if write downs related to credit losses are necessary, in one of these securities, the unrealized losses attributable to the respective investment would be reclassified to realized losses on short-term investments within the statement of operations. There were no impairments considered other-than-temporary as of June 30, 2017 .

7

The following table shows the fair values and the gross unrealized losses of available-for-sale securities that were in a gross unrealized loss position, as of June 30, 2017 , aggregated by investment category:
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
Corporate notes and bonds
$
225,931

 
$
(454
)
U.S. agency obligations
17,795

 
(53
)
U.S. treasury securities
20,624

 
(112
)
 
$
264,350

 
$
(619
)
4. FAIR VALUE MEASUREMENTS (in thousands)
The following table presents the fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 :
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash Equivalents:
 

 
 

 
 

 
 

Money market funds
$
61,707

 
$
—

 
$
—

 
$
61,707

Short-term investments:
 

 
 

 
 

 
 

Corporate notes and bonds
—

 
291,104

 
—

 
291,104

U.S. agency obligations
—

 
27,808

 
—

 
27,808

U.S. treasury securities
—

 
20,624

 
—

 
20,624

Certificates of deposit
—

 
—

 
—

 
—

Liabilities:
 

 
 

 
 

 
 

Contingent consideration
—

 
—

 
(13,900
)
 
(13,900
)
Total
$
61,707

 
$
339,536

 
$
(13,900
)
 
$
387,343

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, 2016 :
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash Equivalents:
 

 
 

 
 

 
 

Money market funds
$
44,108

 
—

 
—

 
$
44,108

Short-term investments:
 

 
 

 
 

 
 

Corporate notes and bonds
—

 
348,689

 
—

 
348,689

U.S. agency obligations
—

 
34,808

 
—

 
34,808

U.S. treasury securities
—

 
53,587

 
—

 
53,587

Commercial paper
—

 
6,309

 
—

 
6,309

Certificates of deposit
—

 
1,922

 
—

 
1,922

Other Current Liabilities:
 

 
 

 
 

 
 

Contingent consideration
—

 
—

 
(12,600
)
 
(12,600
)
Total
$
44,108

 
$
445,315

 
$
(12,600
)
 
$
476,823

The Company determines the fair value of its security holdings based on pricing from its pricing vendors. The valuation techniques used to measure the fair value of financial instruments having Level 2 inputs were derived from non-binding consensus prices that are corroborated by observable market data or quoted market prices for similar instruments. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs). The Company performs procedures to ensure that appropriate fair values are recorded such as comparing prices obtained from other sources.

8

The following table presents our financial instruments measured at fair value using unobservable inputs (Level 3):
 
Fair Value
Measurements Using
Unobservable Inputs
(Level 3)
 
June 30,
2017
 
December 31,
2016
Balance, beginning of period
$
(12,600
)
 
$
(2,300
)
Accretion expense (recognized in general and administrative expenses)
(1,300
)
 
(706
)
Settlement (payment) of liability
—

 
3,006

Contingent consideration attributable to Creehan acquisition
—

 
(12,600
)
Total
$
(13,900
)
 
$
(12,600
)
5. COMMITMENTS AND CONTINGENCIES (in thousands)
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 condensed consolidated financial statements of the Company.
On June 24, 2016, a purported securities class action complaint ( Xiang v. Inovalon Holdings, Inc., et.al ., No. 1:16-cv-04923) was filed in the United States District Court for the Southern District of New York against the Company, certain officers, directors and underwriters in the Company's initial public offering (the "Complaint"). The Complaint was brought on behalf of a purported class consisting of all persons or entities who purchased shares of the Company's Class A common stock pursuant or traceable to the Registration Statement relating to the Company's initial public offering on February 18, 2015. The Complaint asserted violations of Sections 11 and 15 of the Securities Act based on allegedly false or misleading statements and omissions with respect to, among other things, the Company's revenues from sales in the city and state of New York and the Company's effective tax rate. The Complaint sought certification as a class action and unspecified compensatory damages plus interest and attorneys' fees. On June 28, 2016, a nearly identical complaint was filed in the same court captioned Patel v. Inovalon Holdings, Inc., et. al ., No. 1:16-cv-05065. On July 5, 2016, the court consolidated the Xiang and Patel actions. On September 20, 2016, the court appointed a lead plaintiff and lead counsel. On December 21, 2016, lead plaintiff filed a consolidated class action complaint (the "Amended Complaint") purporting to assert violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended, based on allegedly false or misleading statements and omissions with respect to substantially the same topics as alleged in the Complaint. On February 21, 2017, and as required by the court's individual practices, the Company invoked the pre-motion process required prior to filing a motion to dismiss. On May 23, 2017, the court issued a decision and order construing the pre-motion letter submitted by the defendants as a motion to dismiss, granting dismissal of the Section 12 claims against the individual defendants, but denying dismissal of the remaining claims. On June 6, 2017, defendants filed a joint motion for reconsideration and supporting memorandum of law seeking reconsideration of the court’s decision and arguing that plaintiff’s claims are time-barred. Also on June 6, 2017, defendants submitted a letter to the court requesting, in the alternative to the motion for reconsideration, a pre-motion conference concerning defendants’ anticipated motion for certification of an interlocutory appeal to resolve a controlling question of law. The motion for reconsideration and letter seeking a pre-motion conference are both still pending before the court. On July 11, 2017, the Company and its officers and directors filed their answer to the Amended Complaint denying that plaintiffs are entitled to any relief. On July 28, 2017, the court issued a decision and order denying both the motion for reconsideration and defendant’s request for an interlocutory appeal. In light of, among other things, the early stage of the litigation, the Company is unable to predict the outcome of these consolidated actions and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from this proceeding.
On February 16, 2017, an order was entered unsealing a relator's civil False Claims Act qui tam complaint in the matter of U.S. ex rel. Benjamin Poehling , individually (Civil Action No: 11-cv-0258-A). The action was filed on October 27, 2011 in the Western District of New York. The case names 15 defendants, one of which is MedAssurant, Inc., the Company's former name, and cites the allegedly fraudulent submission of claims for and alleged false statements relating to risk adjustment

9

payments under the federal Medicare program as the basis for the suit. The Company was not aware prior to February 16, 2017, that it was named as one of 15 defendants in this case until the complaint was unsealed. On May 16, 2017, the plaintiff and the U.S. government filed amended complaints. The Company was not named as a defendant in the amended complaints filed on May 16, 2017.
On June 29, 2017, Virginia Rodriquez filed a putative shareholder derivative suit in the Supreme Court of the State of New York, County of Westchester, against certain of the Company’s present and former directors and officers (the “Derivative Complaint”). The Company was named as a nominal defendant. The Derivative Complaint makes allegations similar to the allegations in the securities class action Amended Complaint described above and asserts claims for breach of fiduciary duty, unjust enrichment, abuse of control and gross mismanagement, and seeks unspecified damages, an order directing the Company "to reform and improve" certain corporate governance and internal procedures, restitution from the defendants and disgorgement of all profits, benefits and other compensation received and costs and disbursements incurred in connection with the action, including attorneys' fees. The Company is a nominal defendant in the derivative action and, in light of, among other things, the early stage of the litigation, the Company is unable to predict the outcome of this action and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from this proceeding.
6. BUSINESS COMBINATIONS (in thousands, except share amounts)
Creehan Acquisition
On October 3, 2016, the Company completed its acquisition of Creehan Holding Co., Inc. ("Creehan"). Creehan, through its subsidiary Creehan & Company Corporation, is a leading provider of specialty pharmacy software solutions to the pharmaceutical industry. Pursuant to the terms of the Stock Purchase Agreement between the Company and Creehan (the "Stock Purchase Agreement"), Creehan became a wholly owned subsidiary of Inovalon.
Pursuant to the terms of the Stock Purchase Agreement, Inovalon acquired all of the issued and outstanding capital stock of Creehan for an aggregate purchase price of $130 million , which was comprised of $120 million in cash and $10 million in shares of Class A common stock of the Company. The Company completed the acquisition of Creehan through the use of cash on hand and the issuance of 651,355 shares of Class A common stock, subject to resale restrictions. Certain components, which are referred to below as contingent consideration, of the aggregate purchase price are subject to the achievement of financial performance objectives. The Company acquired Creehan for the assembled workforce, technology platform, client base, and to accelerate entry into the specialty pharmacy software market. Transaction costs in connection with the acquisition are expensed as incurred and are included in general and administrative expenses. The results of operations related to Creehan are included in our consolidated statements of operations beginning from the date of acquisition.
A summary of the preliminary composition of the stated purchase price and fair value of the stated purchase price is as follows:
Share Purchase Agreement purchase price
$
130,000

Working capital adjustment
755

Subtotal
130,755

Fair value adjustments:
 

Marketability restrictions on equity consideration
(2,236
)
Contingent consideration probability of achievement adjustment. 
(12,400
)
Post-acquisition compensation expense
(5,952
)
Total fair value purchase price
$
110,167

During the six months ended June 30, 2017, the Company finalized the working capital adjustment resulting in an increase to goodwill of approximately $1 million from the initial purchase price allocation. After adjusting for this difference the composition of the fair value of the consideration transferred is as follows:
Cash
$
89,370

Issuance of Class A common stock
7,764

Working capital adjustment payable
433

Contingent consideration
12,600

Total fair value purchase price
$
110,167


10

Recording of Assets Acquired and Liabilities Assumed
Preliminary estimates of fair value included in the consolidated financial statements, in conformity with ASC No. 820, Fair Value Measurements and Disclosures , represent the Company's best preliminary estimates and preliminary valuations. In accordance with ASC No. 805, Business Combinations , the preliminary allocation of the consideration value is subject to adjustment until the Company has completed its analysis, but not to exceed one year after the date of acquisition, which was October 3, 2016, to provide the Company with the time to complete the valuation of its assets and liabilities. As of June 30, 2017, the Company was in the process of reviewing its assumptions related to (a) the finalization of assumptions used to determine the fair value of acquired deferred revenue liabilities, and (b) the finalization of estimates of tax related matters. If the previously identified matters are significant, changes to the Company's allocation of the consideration value to assets acquired and liabilities assumed could result as well as changes concerning amortization expense and revenue.
The following table summarizes the preliminary purchase price allocation to assets acquired and liabilities assumed, including identification of measurement period adjustments:
 
Preliminary
Recorded
Value
Cash and cash equivalents
$
861

Accounts receivable
9,048

Other current assets
171

Property, equipment and capitalized software
641

Intangible assets(1)
50,900

Goodwill(2)
51,989

Total assets acquired
113,610

Current liabilities
(1,007
)
Deferred revenue
(2,436
)
Total liabilities assumed
(3,443
)
Net assets acquired
$
110,167

______________________________________
(1)
Identifiable intangible assets were measured using a combination of an income approach and a market approach.
(2)
Goodwill is the excess of the consideration transferred over the net assets recognized and represents the future economic benefits, primarily as a result of other assets acquired that could not be individually identified and separately recognized. Goodwill is not amortized. The goodwill attributable to the Creehan acquisition is deductible for tax purposes.
The amounts preliminarily attributed to identified intangible assets are summarized in the table below:
 
Weighted
Average
Useful Life
 
Recorded
Value
Customer relationships
8 years
 
$
36,500

Tradename
4 years
 
4,000

Technology
4 years
 
8,800

In-process Research and Development
indefinite
 
1,600

Total intangible assets
 
 
$
50,900

The following table summarizes the activity related to the carrying value of our goodwill during the six months ended June 30, 2017 :
Goodwill as of January 1, 2017
$
184,557

Measurement period adjustments
1,002

Goodwill as of June 30, 2017
$
185,559

7. STOCKHOLDERS' EQUITY (in thousands, except share amounts and share price)
Treasury Stock —On May 4, 2016, the Company announced that its Board of Directors authorized a program to repurchase up to $100 million of Inovalon's Class A common stock through December 31, 2016. Repurchases under the

11

Company's share repurchase program have been made in open-market or privately negotiated transactions. The Company has and expects to continue to fund repurchases through a combination of cash on hand, cash generated by operations and sales of short-term investments, if needed. On November 2, 2016, the Company announced that its Board of Directors authorized an expansion of the share repurchase program to repurchase up to an additional $100 million of shares of Inovalon's Class A Common Stock (bringing the total to $200 million ) through December 31, 2017. The share repurchase program does not obligate the Company to acquire any particular amount of Class A common stock.
During the three months ended June 30, 2017 , the Company repurchased 1,555,606 shares of Class A common stock for an aggregate cost of $19,789 at an average cost of $12.72 per share, excluding commissions. During the six months ended June 30, 2017 , the Company repurchased 3,697,007 shares of Class A common stock, for an aggregate cost of $45,173 at an average cost of $12.22 per share, excluding commissions. At June 30, 2017 , approximately $48,596 remained available to repurchase shares under the share repurchase program. Shares that are repurchased under the repurchase program were recorded as treasury stock, based on the stock trading dates, and are available for future issuance, until retired.
8. SUBSEQUENT EVENTS
Business Combination — On July 6, 2017, the Company completed the acquisition of ComplexCare Solutions, Inc. ("CCS"). CCS is a company which provides technology-enabled interventions and member engagement coordination services for a number of payers and employers throughout the United States. The Company acquired CCS for approximately $3 million in cash and the assumption of a similar amount of debt.


12

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 condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission (the "SEC") on February 23, 2017 (the "2016 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;
•
the effect of the concentration of our revenue among our top clients;
•
our ability to innovate and adapt our platforms and toolsets;
•
the effects of regulations applicable to us, including regulations relating to data protection and data privacy;
•
the effects of consolidation in the healthcare industry;
•
the ability to successfully integrate our acquisitions and the ability of the acquired business to perform as expected;
•
the ability to enter into new agreements with existing or new platforms, products, and solutions in the timeframes expected, or at all;
•
the successful implementation and adoption of new platforms, products and solutions;
•
the effects of changes in tax legislation for jurisdictions within which we operate;
•
the ability to protect the privacy of our clients' data and prevent security breaches;
•
the continuation of our share repurchase program;
•
the effect of current or future securities class action and other litigation;
•
the effect of competition on our business; and
•
the efficacy of our platforms and toolsets.
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 2016 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

13
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achievements. We are under no duty to, and we disclaim any obligation to, update any of these forward- looking statements after the date of this Quarterly Report or to conform these statements to actual results or revised expectations.
Overview
We are a leading technology company providing an integrated, cloud-based platform, referred to as the Inovalon ONE™ Platform, empowering a data-driven transformation from volume-based to value-based models throughout the healthcare industry. Leveraging large-scale data interconnectivity capabilities, large proprietary data sets, advanced analytics, data-driven intervention systems, and deep subject matter expertise, we enable the assessment and improvement of clinical and quality outcomes and financial performance across the healthcare ecosystem. From health plans and provider organizations, to pharmaceutical, medical device, and diagnostics companies, our unique achievement of value is delivered through the effective progression of Turning Data into Insight and Insight into Action® by utilizing the powerful combination of capabilities, flexibility, and performance offered by the Inovalon ONE™ Platform. Providing technology and services that support nearly 500 healthcare organizations, Inovalon's capabilities are informed by data pertaining to more than 858,000 physicians, 377,000 clinical facilities, and more than approximately 230 million individuals.
We generate the substantial majority of our revenue through the sale or subscription licensing of our cloud-based data analytics, intervention and reporting platforms and related support services.
Quarterly Key Metrics
We review certain metrics quarterly, including the key metrics shown in the table below. We believe that these metrics are indicative of our overall level of analytical activity and the underlying growth in our business.
 
June 30,
 
2017
 
2016
 
(in thousands)
MORE 2  Registry® dataset metrics(1)
 

 
 

Unique patient count(2)(5)
230,000

 
137,490

Medical event count(3)(5)
30,000,000

 
11,755,048

Trailing 12 month Patient Analytics Months (PAM)(1)(4)
31,226,926

 
24,267,703

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

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(5)
As of June 30, 2017, the Company was processing large unique patient count and medical event count dataset transmissions. For this reason, the determination of the June 30, 2017 unique patient count and medical event count amounts vary from historical calculation methodologies, and represent estimates pending final MORE 2 Registry® dataset incorporation and processing.
Trends and Factors Affecting Our Future Performance
A number of factors influence our growth and performance. We see many of these factors as being more quantitatively driven, such as the rate of growth of the underlying data counts within our datasets, the ongoing investment in innovation, the number of statement of work contracts maintained by us, and our level of analytical activity. Additionally, there are several factors that influence our growth and performance that are less quantitatively driven, including seasonality, macro-economic forces, and trends within healthcare (such as payment models, incentivization, and regulatory oversight), that can be driven by changes in federal and state laws and regulations, as well as private sector market forces.
Growth of Datasets.     Healthcare costs in the United States have been increasing significantly for many years. This rise in healthcare costs has driven a broad transition from consumption-based payment models to quality and value-based payment models across the healthcare landscape. As a result, the specific disease and comorbidity status, clinical and quality outcomes, resource utilization, and care details of the individual patient have become increasingly relevant to the various constituents across the healthcare delivery system. Concurrently, the count and complexity of diseases, diagnostics, and treatments — 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 MORE 2 Registry® is our largest principal dataset and serves as a proxy for our general growth of datasets within Inovalon. The growth of our datasets that inform our analytical capabilities and comparative analytics is a key aspect of our provision of value to our clients and is indicative of our overall growth and capabilities.
Innovation and Platform Development.     Our business model is based upon our ability to deliver value to our clients through the combination of advanced, cloud-based data analytics and data-driven intervention platforms 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, and bring these capabilities to market in an enterprise scale. Our continued ability to innovate our platform and bring differentiated capabilities to market is an important aspect of our business success.
Our investment in innovation includes costs for research and development, capitalized software development, and capital expenditures related to hardware and software platforms on which our data analytics and data-driven interventions capabilities are deployed as summarized below (in thousands, except percentages).
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Investment in Innovation:
 

 
 

 
 
 
 
Research and development(1)
$
7,282

 
$
7,711

 
$
15,070

 
$
13,643

Capitalized software development(2)
8,793

 
6,232

 
14,933

 
11,532

Research and development infrastructure investments(3)
5,828

 
2,600

 
9,586

 
2,979

Total investment in innovation
$
21,903

 
$
16,543

 
$
39,589

 
$
28,154

As a percentage of revenue
 

 
 

 
 
 
 
Research and development(1)
7
%
 
6
%
 
7
%
 
6
%
Capitalized software development(2)
8
%
 
5
%
 
7
%
 
5
%
Research and development infrastructure investments(3)
5
%
 
2
%
 
4
%
 
1
%
Total investment in innovation
20
%
 
13
%
 
18
%
 
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 data analytics and data-driven intervention platforms.
(3)
Research and development infrastructure investments include strategic capital expenditures related to hardware and software platforms under development or enhancement.

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Data Analytics and Data-Driven Intervention Mix.     Our business and operational models are highly scalable and leverage variable costs to support revenue generating activities. Our data analytic service costs are less variable in nature and require lower incremental capital expenditures. As a result, following initial development and deployment investments, our big data analytics platform and data technology capabilities allow us to process significant volumes of transactions with lower incremental costs. Conversely, our data-driven intervention costs are generally variable in nature and require incremental costs to generate additional revenue. As a result, the mix of our data analytics and data interventions activities affects our financial performance.
Client and Analytical Process Count Growth.     Our business is generally driven by the number of underlying patients for which our analytics and data-driven intervention platforms are being utilized. As such, we track the number of analytical processes that we run on patients each month in fulfillment of our client contracts, as totaled for the trailing 12 months. This metric is referred to as the Trailing 12 month Patient Analytical Months, or PAM. We believe that PAM is indicative of our overall level of analytical activity, and we expect our period-to-period comparisons of our PAM to be indicative of underlying growth of our business, although changes in levels of analytical activity do not always directly translate to changes in financial performance of our business. Differences in fees charged for different analytical packages exist and differences in how analytics trigger the applicability of our data-driven intervention platforms may result in increases in analytical activity that do not result in proportional increases in revenue, 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 seasonality reflected in both revenue and cost of revenue differences during the year. Regulatory impact of data submission deadlines in, for example, March, June, September, and January drive 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 predictably impact financial performance from quarter to quarter. Finally, quarter to quarter financial performance may increasingly vary from historical seasonal trends as we further expand into adjacent markets and increase the portion of our revenue generated from new offerings.
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. 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.
Shift to Fully Automated Data-Driven Intervention Platform Services.     We view the decreased proportion of revenue derived from partially automated data-driven intervention platform services as a positive reflection of our cloud-based interconnectivity and automation capabilities. The proportion of our revenue derived from pure data analytics and fully automated data-driven intervention platform services revenue is expected to continue to expand over time as a percentage of total revenue as a result of our continued expansion of our cloud-based interconnectivity technologies and the continued expansion of interconnectivity within the healthcare landscape. In order to drive value for our clients and serve them irrespective of their level of connectivity, we continue to provide cloud-based partially automated data-driven intervention platform services, converting the performance of such services to cloud-based fully automated data-driven intervention platform services wherever possible. As the healthcare infrastructure becomes more interconnected and our integration and interconnectivity technologies continue to expand, we believe that we will be able to achieve more rapid implementation, and greater value impact, at more efficient costs.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. In connection with the preparation of our unaudited condensed consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors we believe to be relevant at the time we prepare our unaudited condensed consolidated financial statements. The accounting estimates used in the preparation of our unaudited condensed consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as our operating environment changes. On a

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regular basis, we review the accounting policies, assumptions, and evaluate and update our assumptions, estimates, and judgments to ensure that our unaudited condensed consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Critical accounting policies are those policies that affect our more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements. For a more detailed discussion of our critical accounting policies, please refer to our 2016 Form 10-K.
Components of Results of Operations
Revenue
We earn revenue primarily through the sale or subscription licensing of our cloud-based data analytics, data-driven intervention platform services, our advisory services and business intelligence solutions.
Our cloud-based data analytics services are performed either at the beginning of a data-driven intervention process, which typically aligns with regulatory submission deadlines, or on a monthly basis, depending on the particular client's needs. Cloud-based data analytics revenue is driven primarily by the number of identified gaps in care, quality, data integrity, and financial performance identified in a client's dataset, the number of unique patients in a client's dataset, a minimum data analytics processing fee, and a contractually negotiated transactional price for each identified gap or unique patient. Subscription licensing revenue is driven primarily by the number of clients, the number of unique patients in a client's population dataset, the number of analytical services contracted for by a client, and the contractually negotiated price of such services.
Cloud-based data-driven intervention platform service revenue represents revenue that is generated from fully automated processes (i.e., those processes that require no material variable-based labor components) and partially automated processes (i.e., those processes that require a degree of variable-based labor components). As many of our analytical capabilities are designed to identify gaps in care, quality, utilization, compliance, and/or other gaps that may impact our clients' achievement of greater healthcare quality and financial performance, our cloud-based data driven intervention platform services revenue is driven primarily by the results of our cloud-based data analytics processes and our clients' desire to utilize our cloud-based data-driven intervention platforms to resolve such identified gaps. Informed by our analytics, our cloud-based data-driven intervention platforms are designed to enable the resolution of specific gaps through the aggregation of specific data or achievement of specific impact. Revenue from our intervention platform utilization is generally driven by the quantity and type of completed interventions enabled by our platform, and a contractually negotiated transactional price for each such intervention.
Advisory service and business intelligence solutions revenue represents revenue that is generated from strategic advisory, analysis and educational services. Revenue from our advisory services arrangements is generally provided under time and materials, fixed-price, or retainer-based contracts, based on contractually negotiated prices for each such arrangement.
Cost of Revenue
Cost of revenue consists primarily of expenses for employees who provide direct contractual services to our clients, including salaries, benefits, discretionary incentive compensation, employment taxes, severance, and equity compensation costs. Cost of revenue also includes expenses associated with the integration, and verification of data and other service costs incurred to fulfill our revenue contracts. Cost of revenue does not include allocated amounts for occupancy expense and depreciation and amortization. Many of the elements of our cost of revenue are relatively variable and semi-variable, and can be reduced in the near-term to help offset any decline in our revenue.
Our business and operational models are designed to be highly scalable and leverage variable costs to support revenue generating activities. While we expect to grow our headcount over time to capitalize on our market opportunities, we believe our increased investment in automation, electronic health record integration capabilities, and economies of scale in our operating model, will position us to grow our cloud-based data analytics and cloud-based data-driven intervention platform services revenue at a greater rate than our cost of revenue, over time, excluding the impact of stock-based compensation expense.
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 increase as we strategically invest to expand our business. We expect to hire additional sales personnel and related support personnel to capture an increasing amount of our market opportunity. As we scale our sales and marketing activities in the short to medium term, we expect these expenses to increase in both absolute dollars and as a percentage of revenue.
Research and Development
Research and development expense (one component of our investment in innovation) consists primarily of employee-related expenses, including salaries, benefits, discretionary incentive compensation, employment taxes, severance, and equity compensation costs for our software developers, engineers, analysts, project managers, and other employees engaged in the development and enhancement of our service offerings. Research and development expense also includes certain third party consulting fees. Our research and development expense excludes any allocation of occupancy expense and depreciation and amortization.
We expect to continue our focus on developing new 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, communications, and facilities maintenance), professional fees, consulting fees, insurance, travel, and other expenses. Our general and administrative expense excludes depreciation and amortization.
We expect our general and administrative expense to increase in absolute dollars driven by the expansion of our business and increases in stock-based compensation expense. However, we expect general and administrative expense, as a percentage of revenue, to decrease over time.
Depreciation and Amortization Expense
Our depreciation and amortization expense consists primarily of depreciation of fixed assets, amortization of capitalized software development costs, and amortization of acquisition-related intangible assets.
We expect our depreciation and amortization expense to increase as we expand our business organically and through acquisitions.
Interest Income
Interest income represents interest earned 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 Credit Facilities (as defined below, under the heading "Liquidity and Capital Resources—Debt").
We expect our interest expense to fluctuate in proportion to the outstanding principal balance of the Credit Facilities and the prevailing LIBOR interest rate.
Provision for Income Taxes
Provision for income taxes consists of federal and state income taxes in the United States and foreign income taxes from the territory of Puerto Rico, including deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and excess tax benefits or deficiencies derived from exercises of stock options and vesting of restricted stock.
We expect that our effective tax rate may fluctuate due to the recognition of excess tax benefits and tax deficiencies associated with adopting ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . Excluding discrete items impacting the effective tax rate, we are expecting our long-term tax rate to reflect the applicable statutory rates.

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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
June 30,
 
Change from
2016 to 2017
 
Six Months Ended
June 30,
 
Change from
2016 to 2017
 
2017
 
2016
 
$
 
%
 
2017
 
2016
 
$
 
%
Revenue
$
110,578

 
$
123,825

 
$
(13,247
)
 
(11
)%
 
$
218,884

 
$
226,482

 
$
(7,598
)
 
(3
)%
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue(1)
37,198

 
43,214

 
(6,016
)
 
(14
)%
 
75,483

 
85,137

 
(9,654
)
 
(11
)%
Sales and marketing(1)
8,849

 
6,116

 
2,733

 
45
 %
 
16,436

 
12,675

 
3,761

 
30
 %
Research and development(1)
7,282

 
7,711

 
(429
)
 
(6
)%
 
15,070

 
13,643

 
1,427

 
10
 %
General and administrative(1)
35,874

 
31,461

 
4,413

 
14
 %
 
71,719

 
68,013

 
3,706

 
5
 %
Depreciation and amortization
12,479

 
8,496

 
3,983

 
47
 %
 
24,964

 
16,890

 
8,074

 
48
 %
Total operating expenses
101,682

 
96,998

 
4,684

 
5
 %
 
203,672

 
196,358

 
7,314

 
4
 %
Income from operations
8,896

 
26,827

 
(17,931
)
 
(67
)%
 
15,212

 
30,124

 
(14,912
)
 
(50
)%
Other income and (expenses):
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Realized losses on short-term investments
—

 
(1
)
 
*

 
*%

 
—

 
(5
)
 
*

 
*%

(Loss) Gain on disposal of equipment
(138
)
 
—

 
*

 
*%

 
(138
)
 
534

 
*

 
*%

Interest income
1,342

 
1,532

 
(190
)
 
(12
)%
 
2,680

 
2,974

 
(294
)
 
(10
)%
Interest expense
(1,519
)
 
(1,245
)
 
(274
)
 
22
 %
 
(2,932
)
 
(2,504
)
 
(428
)
 
17
 %
Income before taxes
8,581

 
27,113

 
(18,532
)
 
(68
)%
 
14,822

 
31,123

 
(16,301
)
 
(52
)%
Provision for income taxes
3,095

 
10,862

 
(7,767
)
 
(72
)%
 
5,694

 
12,507

 
(6,813
)
 
(54
)%
Net income
$
5,486

 
$
16,251

 
$
(10,765
)
 
(66
)%
 
$
9,128

 
$
18,616

 
$
(9,488
)
 
(51
)%
________________________________________________
(1)
Includes stock-based compensation expense as follows:
 
 
 
 
 
 
 
Cost of revenue
$
410

 
$
121

 
$
289

 
239
 %
 
$
715

 
$
240

 
$
475

 
198
 %
 
Sales and marketing
505

 
152

 
353

 
232
 %
 
895

 
306

 
589

 
192
 %
 
Research and development
307

 
499

 
(192
)
 
(38
)%
 
580

 
741

 
(161
)
 
(22
)%
 
General and administrative
2,525

 
1,364

 
1,161

 
85
 %
 
5,154

 
2,941

 
2,213

 
75
 %
 
Total stock-based compensation expense
$
3,747

 
$
2,136

 
$
1,611

 
75
 %
 
$
7,344

 
$
4,228

 
$
3,116

 
74
 %
* 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
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Revenue
100
 %
 
100
 %
 
100
 %
 
100
 %
Expenses:
 
 
 
 
 
 
 
Cost of revenue
34
 %
 
35
 %
 
34
 %
 
38
 %
Sales and marketing
8
 %
 
5
 %
 
8
 %
 
6
 %
Research and development
7
 %
 
6
 %
 
7
 %
 
6
 %
General and administrative
32
 %
 
25
 %
 
33
 %
 
30
 %
Depreciation and amortization
11
 %
 
7
 %
 
11
 %
 
7
 %
Total operating expenses
92
 %
 
78
 %
 
93
 %
 
87
 %
Income from operations
8
 %
 
22
 %
 
7
 %
 
13
 %
Other income and (expenses):
 
 
 
 
 
 
 
Realized losses on short-term investments
—
 %
 
—
 %
 
—
 %
 
—
 %
(Loss) Gain on disposal of equipment
—
 %
 
—
 %
 
—
 %
 
—
 %
Interest income
1
 %
 
1
 %
 
1
 %
 
1
 %
Interest expense
(1
)%
 
(1
)%
 
(1
)%
 
(1
)%
Income before taxes
8
 %
 
22
 %
 
7
 %
 
13
 %
Provision for income taxes
3
 %
 
9
 %
 
3
 %
 
5
 %
Net income
5
 %
 
13
 %
 
4
 %
 
8
 %
Comparison of the Three and Six Months Ended June 30, 2017 and 2016
Revenue
During the three months ended June 30, 2017 , revenue decreased by approximately $13.2 million , or 11% , compared with the three months ended June 30, 2016 . The decrease was primarily attributable to a net decrease of approximately $23.7 million in revenue from existing clients, partially offset by an increase in revenue from new clients of approximately $10.5 million.
During the six months ended June 30, 2017 , revenue decreased by approximately $7.6 million , or 3% , compared with the six months ended June 30, 2016 . The decrease was primarily attributable to a net decrease of approximately $30.1 million in revenue from existing clients, partially offset by an increase in revenue from new clients of approximately $22.5 million.
Cost of Revenue
During the three months ended June 30, 2017 , cost of revenue decreased by approximately $6.0 million , or 14% , compared with the three months ended June 30, 2016 . The decrease in cost of revenue was primarily attributable to technology-enabled platform efficiency initiatives and the composition of a greater volume of data-driven analytics as a percentage of revenue. Cost of revenue as a percentage of revenue was 34% and 35% for the three months ended June 30, 2017 and 2016 , respectively.
During the six months ended June 30, 2017 , cost of revenue decreased by approximately $9.7 million , or 11% , compared with the six months ended June 30, 2016 . The decrease in cost of revenue was primarily attributable to technology-enabled platform efficiency initiatives and the composition of a greater volume of data-driven analytics as a percentage of revenue. Cost of revenue as a percentage of revenue was 34% and 38% for the six months ended June 30, 2017 and 2016 , respectively.
Sales and Marketing
During the three months ended June 30, 2017 , sales and marketing expenses increased by approximately $2.7 million , or 45% , compared with the three months ended June 30, 2016 . During the six months ended June 30, 2017 , sales and marketing expenses increased by approximately $3.8 million , or 30% , compared with the six months ended June 30, 2016 . These increase s were primarily attributable to our investment in the growth of our sales team, related sales infrastructure tools, and marketing programs. The growth of our sales and marketing team was driven by our investment in new sales personnel to focus on adding new clients and capturing an increased amount of market opportunity.

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Research and Development
During the three months ended June 30, 2017 , research and development expense decreased by approximately $0.4 million , or 6% , compared with the three months ended June 30, 2016 . The decrease was primarily attributable to an increased emphasis on enhanced functionality and additional development of the Company's platforms including the Inovalon ONE™ Platform, resulting in an increase to capitalized software projects.
During the six months ended June 30, 2017 , research and development expense increased by approximately $1.4 million , or 10% , compared with the six months ended June 30, 2016 . The increase was primarily attributable to incremental growth in employee-related expenses necessary to support our on-going investment in innovation and platform development compared to the prior period, which was partially offset by enhanced functionality and additional development of the Company's platforms including the Inovalon ONE™ Platform, resulting in an increase to capitalized software projects.
General and Administrative
During the three months ended June 30, 2017 , general and administrative expenses increased by approximately $4.4 million , or 14% , compared with the three months ended June 30, 2016 . The increase was primarily attributable to incremental expenses of $2.4 million attributable to the acquisition of Creehan and an increase of $1.2 million related to stock-based compensation.
During the six months ended June 30, 2017 , general and administrative expenses increased by approximately $3.7 million , or 5% , compared with the six months ended June 30, 2016 . The increase was primarily attributable to incremental expenses of $5.2 million attributable to the acquisition of Creehan, and an increase of $2.2 million related to stock-based compensation, partially offset by a decline in payroll related expenses attributable to our initiative to streamline administrative infrastructure.
Depreciation and Amortization
During the three months ended June 30, 2017 , depreciation and amortization expense increased by approximately $4.0 million , or 47% , compared with the three months ended June 30, 2016 . The increase was primarily attributable to approximately $0.8 million of incremental amortization of capitalized software, and $1.9 million of amortization of intangible assets related to the acquisition of Creehan.
During the six months ended June 30, 2017 , depreciation and amortization expense increased by approximately $8.1 million , or 48% , compared with the six months ended June 30, 2016 . The increase was primarily attributable to approximately $2.1 million of incremental amortization of capitalized software, and $3.9 million of amortization of intangible assets related to the acquisition of Creehan.
(Loss) Gain on Disposal of Equipment
During the three months ended June 30, 2017 , we incurred a loss of $0.1 million related to the disposal of equipment. During the three months ended June 30, 2016 , there were no equipment disposals.
During the six months ended June 30, 2017 , we incurred a loss of $0.1 million related to the disposal of equipment. During the six months ended June 30, 2016 , we replaced certain data-center equipment. The replacement of the equipment was covered under our insurance and the cost of our replacement equipment was reimbursed by our insurance carrier. As a result, the disposal and replacement of the equipment resulted in a gain of $0.5 million during the six months ended June 30, 2016 .
Interest Income
During the three months ended June 30, 2017 , interest income decreased by approximately $0.2 million , compared with the three months ended June 30, 2016 . During the six months ended June 30, 2017 , interest income decreased by approximately $0.3 million , compared with the six months ended June 30, 2016 . A portion of our available-for-sale short-term investments have been used to fund strategic initiatives such as the acquisition of Creehan and the share repurchase program. The decrease in our interest income was primarily attributable to the decline in the overall value of our available-for-sale short term investment portfolios that resulted in a decrease in earnings derived from our available-for-sale short-term investments.
Interest Expense
During the three months ended June 30, 2017 , interest expense increased by approximately $0.3 million , compared with the three months ended June 30, 2016 . During the six months ended June 30, 2017 , interest expense increased by approximately $0.4 million , compared with the six months ended June 30, 2016 . The increase in interest expense was primarily attributable to an increase in the interest rate on our Term Loan Facility (as defined below under the heading "Liquidity and Capital Resources—Debt") which is variable and fluctuates alongside changes to LIBOR.

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Provision for Income Taxes
During the three months ended June 30, 2017 , provision for income taxes decreased by approximately $7.8 million , or 72% , compared to the three months ended June 30, 2016 . During the six months ended June 30, 2017 , provision for income taxes decreased by approximately $6.8 million , or 54% , compared to the six months ended June 30, 2016 . The decrease in income taxes was primarily attributable to a decrease in income before taxes.
Our effective tax rate for the three months ended June 30, 2017 was approximately 36.1% , as compared to approximately 40.1% for the three months ended June 30, 2016 . Our effective tax rate for the six months ended June 30, 2017 was approximately 38.4% , as compared to approximately 40.2% for the six months ended June 30, 2016 . The decrease in our effective tax rate was primarily attributable to excess tax benefit related to equity events.
Liquidity and Capital Resources
Sources of Liquidity
Our principal sources of liquidity have been cash generated by operating activities, proceeds from our initial public offering and proceeds from our Credit Facilities. Our cash generated from such means has been sufficient to fund our growth, including our capital expenditures. As of June 30, 2017 , our cash, cash equivalents and short-term investments totaled $531.5 million , of which $339.5 million represented short-term, available-for-sale, investment grade, domestic debt-securities, compared to $743.9 million of cash, cash equivalents, and short-term investments as of June 30, 2016 , of which $584.1 million represented short-term, available-for-sale, investment grade, domestic debt-securities.
We believe our current cash, cash equivalents, and short-term investments balance, expected cash generated by operating activities and availability of cash under our Credit Facilities are sufficient to fund our operations, finance our strategic initiatives, fund our investment in innovation and new service offerings, and fund our share repurchase program, for the foreseeable future. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our Credit Facilities.
Debt
On September 19, 2014, we entered into a Credit and Guaranty Agreement with a group of lenders including Goldman Sachs Bank USA, as administrative agent (the "Credit Agreement"). The terms of the Credit Agreement provide-for credit facilities in the aggregate maximum principal amount of $400.0 million, consisting of a senior unsecured term loan facility in the original principal amount of $300.0 million (the "Term Loan Facility") and a senior unsecured revolving credit facility in the maximum principal amount of $100.0 million (the "Revolving Credit Facility" and, together with the Term Loan Facility, the "Credit Facilities").
As of June 30, 2017 , we had outstanding indebtedness under the Term Loan Facility and capital lease obligations of approximately $251.3 million and approximately $0.3 million , respectively. As of June 30, 2016 , we had outstanding indebtedness under the Term Loan Facility and capital lease obligations of approximately $273.8 million and approximately $0.4 million , respectively. No amounts were outstanding under the Revolving Credit Facility as of June 30, 2017 or June 30, 2016 . The Term Loan Facility has a five-year term and is an amortizing facility with principal payments quarterly and interest payments monthly. Scheduled principal payments totaling $15.0 million and scheduled interest payments totaling approximately $2.8 million were paid during the six months ended June 30, 2017 . As of June 30, 2017 , we were in compliance with the covenants under the Credit Agreement.
Cash Flows
Operating Cash Flow Activities
Cash provided by operating activities during the six months ended June 30, 2017 was approximately $41.1 million , representing an increase in cash inflow of approximately $8.7 million compared with the six months ended June 30, 2016 . Cash provided by operating activities was driven by net income of approximately $9.1 million , as adjusted for the exclusion of non-cash expenses totaling approximately $31.0 million and approximately $1.0 million related to the effect of changes in working capital and other balance sheet accounts.
Investing Cash Flow Activities
Cash provided by investing activities during the six months ended June 30, 2017 was approximately $80.7 million compared with approximately $15.5 million during the six months ended June 30, 2016 . Cash provided by investing activities was primarily due to proceeds generated from sales and maturities of available-for-sale securities of approximately $105.2 million , partially offset by approximately $24.6 million of investments in property and equipment and capitalized software.

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We make investments in innovation, including research and development expense, capital software development costs, and research and development infrastructure investments, on a recurring basis. We expect our investment in innovation to increase in the foreseeable future to support our continued growth and new service offerings.
Financing Cash Flow Activities
Cash used in financing activities during the six months ended June 30, 2017 was approximately $57.5 million , compared with approximately $2.1 million during the six months ended June 30, 2016 . Cash used in financing activities was primarily due to approximately $45.2 million related to share repurchases and approximately $15.0 million for the repayment of Credit Facility borrowings.
We have funded and expect to continue to fund repurchases of shares of Class A common stock under our share repurchase program through a combination of cash on hand, cash generated by operations and sales of short-term investments, if needed. During the six months ended June 30, 2017 , the Company repurchased an aggregate of 3,697,007 shares of Class A common stock for an aggregate cost of $45.2 million or an average purchase cost of $12.22 per share, excluding commissions. As of June 30, 2017 , the Company had repurchased an aggregate of 11,205,992 shares of Class A common stock for approximately $151.4 million or an average cost of $13.51 per share, excluding commissions. As of June 30, 2017 , approximately $48.6 million remained available to repurchase shares under the share repurchase program. The share repurchase program does not obligate us to acquire any particular amount of Class A common stock.
Contractual Obligations
During the six months ended June 30, 2017 , 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 2016 Form 10-K.
Off-Balance Sheet Arrangements
As of June 30, 2017 , 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 condensed 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 2016 Form 10-K.
Item 3.     Quantitative and Qualitative Disclosures About Market Risk
Variable Rate Debt Risk.     Our variable rate debt includes our Term Loan Facility and our Revolving Credit Facility. As of June 30, 2017 , we had $251.3 million outstanding under our Term Loan Facility at an effective interest rate of approximately 2.2%. As a result, if market interest rates were to increase by 1.0%, or 100 basis points, interest expense would decrease future earnings and cash flows, net of estimated tax benefits, by approximately $1.5 million annually, assuming that we do not enter into contractual hedging arrangements. As of June 30, 2017 , there was no balance outstanding on the Revolving Credit Facility.
Marketable Securities Risk.     We had short-term investment portfolios, including cash held in money market funds, totaling approximately $401.2 million as of June 30, 2017 . This amount was invested primarily in marketable securities including corporate notes and bonds, U.S. agency obligations, U.S. treasury securities and money market funds. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes.
Our short-term investments are subject to market risk due to changes in interest rates, which could affect our results of operations. Fixed rate securities may have their market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fluctuate due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However because we classify our marketable securities as "available-for-sale," no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary.
An immediate increase of 100-basis points in interest rates would have resulted in an approximate $2.5 million market value reduction in our investment portfolio as of June 30, 2017 . An immediate decrease of 100-basis points in interest rates would have increased the market value by approximately $2.5 million as of June 30, 2017 . This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. Fluctuations in the value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in accumulated other comprehensive income (loss), and are realized only if we sell the underlying securities prior to their maturity.

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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 June 30, 2017 , 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 six months ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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Table of Contents

PART II—OTHER INFORMATION
Item 1.    Legal Proceedings
See "Note 5—Commitments and Contingencies" in the Notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 within this Quarterly Report on Form 10-Q.
Item 1A.    Risk Factors
For a discussion of potential risks and uncertainties related to our Company see the information in Part I, Item 1A ("Risk Factors") of our 2016 Form 10-K for the year ended December 31, 2016 . There have been no material changes to the risk factors previously disclosed in our 2016 Form 10-K.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Use of Proceeds from Registered Securities
On February 18, 2015, we completed our initial public offering ("IPO") of 22,222,222 shares of Class A common stock and, upon the underwriters' exercise of their option to purchase additional shares, issued an additional 3,142,581 shares of Class A common stock for a total of 25,364,803 shares issued. All of the shares issued in the IPO were primary shares offered by us as none of our stockholders sold any shares in the IPO. The offering price of the shares sold in the IPO was $27.00 per share, resulting in net proceeds to us, after underwriters' discounts and commissions and other expenses payable by us, of $639.1 million. All of the shares were sold pursuant to our registration statement on Form S-1, as amended (File No. 333-201321), that was declared effective by the SEC on February 11, 2015. Goldman, Sachs & Co., Morgan Stanley & Co. LLC, and Citigroup Global Markets Inc. acted as joint book-running managers for the IPO and as representatives of the underwriters. The principal purposes of our IPO were to create a public market for our Class A common stock and thereby enable future access to the public equity markets by us and our stockholders, and obtain additional capital. On September 1, 2015, we used approximately $126.2 million of the net proceeds from the IPO to complete the acquisition of Avalere Health, Inc. On October 1, 2016, we committed $120.0 million as partial consideration for our acquisition of Creehan. Through June 30, 2017 , in aggregate, we have used approximately $151.4 million of the net proceeds from the IPO to repurchase outstanding Class A common shares under our share repurchase program. We intend to use the remaining net proceeds to us from our IPO for working capital and other general corporate purposes; other than funding the share repurchase program, we do not currently have any specific uses of the remaining net proceeds. Additionally, we may use a portion of the remaining net proceeds for additional acquisitions of complementary businesses, technologies, or other assets, or to repay outstanding indebtedness.
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 June 30, 2017:
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(1)
April
739,246

 
$
12.16

 
739,246

 
$
59,394,911

May
493,238

 
13.26

 
493,238

 
52,852,233

June
323,122

 
13.17

 
323,122

 
48,596,387

Total
1,555,606

 
$
12.72

 
1,555,606

 
$
48,596,387

_______________________________________
(1)
On May 4, 2016, we announced that our Board of Directors authorized a program to repurchase up to $100 million of Inovalon's Class A common stock through December 31, 2016. On November 2, 2016, we announced that our Board of Directors authorized an expansion of the share repurchase program to repurchase up to an additional $100 million of shares of Inovalon's Class A common stock (bringing the total to $200 million) through December 31, 2017. As of June 30, 2017 , the Company had repurchased 11,205,992 shares at an average purchase price of $13.51 per share for a total purchase price

25
Table of Contents

of approximately $151.4 million under this program. The Company intends to use a combination of cash on hand, cash generated by operations and sales of short-term investments to fund additional repurchases under this program through open market or privately negotiated transactions.
Item 3.    Defaults Upon Senior Securities
Not applicable.
Item 4.    Mine Safety Disclosures
Not applicable.
Item 5.    Other Information
None.

26
Table of Contents

Item 6.    Exhibits
EXHIBIT INDEX
Exhibit
Number
 
Description of Document
10.1

*
 
 
 
10.2

*
 
 
 
10.3

*
 
 
 
31.1

*
 
 
 
31.2

*
 
 
 
32.1

**
 
 
 
32.2

**
  
 
 
101.INS

*
XBRL Instance Document
  
 
 
101.SCH

*
XBRL Taxonomy Extension Schema
  
 
 
101.CAL

*
XBRL Taxonomy Extension Calculation Linkbase
  
 
 
101.DEF

*
XBRL Taxonomy Extension Definition Linkbase
  
 
 
101.LAB

*
XBRL Taxonomy Extension Label Linkbase
  
 
 
101.PRE

*
XBRL Taxonomy Extension Presentation Linkbase
_____________________________________
*
Filed herewith.
**
This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended (Securities Act), or the Exchange Act.

27
Table of Contents

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: August 3, 2017
INOVALON HOLDINGS, INC.
 
By:
 
/s/ KEITH R. DUNLEAVY, M.D.
 
 
 
Keith R. Dunleavy, M.D.
  Chief Executive Officer & Chairman
(Principal Executive Officer)
 
 
 
 
 
By:
 
/s/ CHRISTOPHER E. GREINER
 
 
 
Christopher E. Greiner
  Chief Financial & Operating Officer
(Principal Financial Officer)


28


Exhibit 10.1

G88723KE01I001.JPG
 
INOVALON HOLDINGS, INC.
2015 OMNIBUS INCENTIVE PLAN

NON-EMPLOYEE DIRECTOR’S RESTRICTED STOCK UNIT
DEFERRAL ELECTION FORM
As a non-employee Director of Inovalon Holdings, Inc. (the “Company”), you may use this form (the “Deferral Election Form”) to elect to defer all or a portion of the Restricted Stock Units (“RSUs”) that may be granted to you in 201[ ] under the Inovalon Holdings, Inc. 2015 Omnibus Incentive Plan (the “Plan”). If you elect to so defer any such RSUs, the Shares issuable pursuant to the RSUs that are subject to your election will be issued in accordance with the terms of this Deferral Election Form and your elections hereunder, notwithstanding anything to the contrary in the RSU Award Agreement. Except as otherwise provided in this Deferral Election Form, your RSUs will remain subject to all terms of the Plan, the RSU Award Agreement and related notice of award, and any procedures adopted by the Committee pertaining to the RSUs or your deferral election (collectively, the “Governing Documents”), which terms are incorporated herein by reference. Capitalized terms used in this Deferral Election Form but not defined have the meanings assigned to those terms in the Plan.
NOTE : If you fail to timely return this Deferral Election Form on or before December 31, 201[ ], you will be deemed to have elected not to defer any portion of the RSUs that may be granted to you. Your prior year’s election (if any) will not carry over.
 
1.
 
    Name  (please print): ___________________________________________________________
 
 
2.
 
I elect to defer ___ __ % of the RSUs that are granted to me by the Company in 201[ ] (the “Covered RSUs”) in respect of my future services as a non-employee Director.
 
 
3.
 
Date or event that will trigger issuance of Shares with respect to any Covered RSUs that vest (select only one):*
 
 
 
 
 
[ ]
The fixed date of _______________________ ______, 202__ (the date selected must be no earlier than January 1, 202[ ]) or, if earlier, upon my separation from service (as defined in Section 409A of the Code) with the Company for any reason, including death.
 
 
 
 
 
[ ]
Upon my separation from service (as defined in Section 409A of the Code) with the Company for any reason, including death.
 
 
 
4.
 
Form of distribution of Shares issuable with respect to any Covered RSUs that are vested as of the distribution date or event selected under Item 3, above (select only one): *
 
 
 




 
 
[ ]
Lump sum distribution of Shares.
 
 
 
 
 
[ ]
Equal annual installments of shares of Common Stock over a fixed period of ____ years (not to exceed five (5)), commencing within sixty (60) days after the distribution date or event selected under Item 3, above, with subsequent installments within sixty (60) days of each anniversary thereof. Each installment payment is to be treated as a right to a separate payment for purposes of Section 409A of the Code. **
 
*
  If a distribution of Shares is to be made on the date selected under Item 3 above (or an anniversary of the date selected, in the case of installments), the distribution will be made on the date selected (or the applicable anniversary of the date selected, in the case of installments) or, if such date is a weekend or bank holiday, the first day thereafter that is not a weekend or bank holiday. If a distribution of Shares is to be made on the date of your separation from service (or an anniversary of the date of your separation from service, in the case of installments), the distribution will be made within sixty (60) days after the date of your separation from service (or the applicable anniversary of the date of your separation from service, in the case of installments). If the sixty (60) day period described in the preceding sentence spans calendar years, you may not designate the year in which the distribution occurs; the distribution date will be determined by the Company.
 
 
**
Notwithstanding your election to receive installments, in the event of your separation from service on the date of, or within twelve (12) months after, a Corporate Transaction or Change in Control (provided the Corporate Transaction or Change in Control constitutes a change in control event for purposes of Section 409A of the Code), Shares issuable pursuant to any vested and unsettled Covered RSUs will be issued to, as applicable, you or your designated beneficiary or estate in a single lump sum distribution within sixty (60) days after the date of your separation from service. If the sixty (60) day period described in the preceding sentence spans calendar years, you may not designate the year in which the distribution occurs; the distribution date will be determined by the Company.

The undersigned hereby elects to defer receipt of the RSUs specified in this Deferral Election Form in accordance with the Governing Documents and the elections set forth above. The undersigned acknowledges that this election will become irrevocable with respect to the Covered RSUs on December 31, 201[ ].

Director Signature : ____________________________
 
Date : _____________________
 
You must return this form on or before December 31, 201[ ] to:

Inovalon Holdings, Inc., Attn: Corporate Secretary, 4321 Collington Road, Bowie, MD 20716
Fax: 301.809.4045 // Electronic Mail:





Exhibit 10.2

G88723KE01I001.JPG
 
INOVALON HOLDINGS, INC.
2015 OMNIBUS INCENTIVE PLAN
NOTICE OF RESTRICTED STOCK UNIT AWARD
You (the “Grantee”) have been granted an award of restricted stock units (the “Restricted Stock Units”, the “Units” or the “Award”), subject to the terms and conditions of this Notice of Restricted Stock Unit Award (the “Notice”), the Inovalon Holdings, Inc. 2015 Omnibus Incentive Plan, as amended from time to time (the “Plan”) and the Restricted Stock Unit Agreement (the “Agreement”) attached hereto, as follows. Unless otherwise defined in this Notice, capitalized terms will have the same meaning as given to them in the Plan.

Date of Award
 
 
 
 
 
 
 
Vesting Commencement Date
 
 
 
 
 
 
 
Total Number of Restricted
Stock Units Awarded
 
 
 

Vesting Schedule :
Subject to Grantee’s Continuous Service and other limitations set forth in this Notice, the Agreement and the Plan, the Units will “vest” in accordance with the following schedule (the “Vesting Schedule”):
100% of the Shares (rounding up for any fractional shares) will vest on the first anniversary date of the Date of Award.
However, in the event of a Corporate Transaction:
(a)
for the Units that are Assumed or Replaced as part of the Corporate Transaction, the Units will become fully vested immediately upon termination of Grantee’s Continuous Service if, within 12 months after the Corporate Transaction, the Continuous Service is terminated by the successor company or the Company without Cause or voluntarily by Grantee with Good Reason.
(b)
for the Units that are neither Assumed nor Replaced, the Units will automatically become fully vested immediately prior to the specified effective date of the Corporate Transaction, provided that Grantee’s Continuous Service has not terminated prior to this date.

In addition, in the event of a Change of Control, the Units will become fully vested immediately upon termination of Grantee’s Continuous Service if, within 12 months after the Corporate Transaction, the Continuous Service is terminated by the Company without Cause or voluntarily by Grantee with Good Reason.




During any authorized leave of absence, the vesting of the Units as provided in this Notice will be suspended (to the extent permitted under Section 409A of the Code) after the leave of absence exceeds a period of three (3) months. Vesting of the Units will resume upon Grantee’s termination of the leave of absence and return to service to the Company or a Related Entity. The Vesting Schedule of the Units will be extended by the length of the suspension.
For purposes of this Notice and the Agreement, the term “vest” will mean, with respect to any Units, that the Units are no longer subject to forfeiture to the Company. If Grantee would become vested in a fraction of a Unit, the Unit will not vest until Grantee becomes vested in the entire Unit.
Except as provided above in connection with a Corporate Transaction or a Change in Control, vesting will cease upon the date Grantee terminates Continuous Service for any reason, including death or Disability, and any unvested Units held by Grantee upon the termination of Grantee’s Continuous Service will immediately be forfeited and deemed reconveyed to the Company and the Company will thereafter be the legal and beneficial owner of the reconveyed Units and will have all rights and interest in or related to these Units without further action by Grantee.
The Award will be subject to the provisions of Section 11 of the Plan in the event of a Corporate Transaction or Change in Control. The Award will be subject to Section 10 of the Plan in the event of certain changes in capitalization.
GRANTEE ACKNOWLEDGES AND AGREES THAT THE UNITS WILL VEST, IF AT ALL, ONLY DURING THE PERIOD OF GRANTEE’S CONTINUOUS SERVICE OR AS OTHERWISE SPECIFICALLY PROVIDED HEREIN (AND NOT DUE TO GRANTEE’S BEING HIRED, BEING GRANTED THIS AWARD OR ACQUIRING SHARES UNDER THIS NOTICE). GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS NOTICE, THE AGREEMENT, NOR IN THE PLAN, WILL CONFER UPON GRANTEE ANY RIGHT WITH RESPECT TO CONTINUATION OF GRANTEE’S CONTINUOUS SERVICE, NOR WILL IT INTERFERE IN ANY WAY WITH GRANTEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE GRANTEE’S CONTINUOUS SERVICE AT ANY TIME, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. GRANTEE ACKNOWLEDGES THAT UNLESS GRANTEE HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY OR A COMPANY RELATED ENTITY TO THE CONTRARY, GRANTEE’S STATUS IS AT WILL.
Grantee acknowledges receipt of a copy of the Plan and the Agreement, represents that he or she is familiar with the terms and provisions of both, and hereby accepts the Award subject to all of the terms and provisions this Notice, the Plan and the Agreement. Grantee has reviewed this Notice, the Agreement and the Plan in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice and fully understands all provisions of this Notice, the Agreement and the Plan. Grantee further agrees and acknowledges that this Award is a non-elective arrangement pursuant to Section 409A of the Code and that, because of this Award is a non-elective arrangement, Grantee cannot elect to defer the receipt of Shares under this Award.
Grantee further acknowledges that, from time to time, the Company may be in a “blackout period” and/or subject to applicable federal securities laws that could subject Grantee to liability for engaging in any transaction involving the sale of the Company’s Shares. Grantee further acknowledges and agrees that, prior to the sale of any Shares acquired under this Award, it is Grantee’s responsibility, and not the Company’s, to determine whether or not the sale of Shares will subject Grantee to liability under insider trading rules or other applicable federal securities laws.




The Company may, in its sole discretion, decide to deliver this Notice, the Agreement, the Plan and the Plan prospectus (collectively, the “Plan Documents”) by electronic means or request Grantee’s consent to participate in the Plan by electronic means. Grantee hereby consents to receive these documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
Grantee acknowledges that Grantee has access to the Company’s intranet and has received either paper or electronic copies of the Plan Documents.
Grantee hereby agrees that all questions of interpretation and administration relating to this Notice, the Plan and the Agreement will be resolved by the Administrator in accordance with Section 7 of the Agreement. Grantee further agrees to the venue and jurisdiction selection in accordance with Section 10 of the Agreement. Grantee further agrees to notify the Company upon any change in his or her residence address indicated in this Notice.

[Signatures on Next Page]





IN WITNESS WHEREOF, the Company and the Grantee have executed this Notice and agree that the Award is to be governed by the terms and conditions of this Notice, the Plan and the Agreement.
 
 
 
INOVALON HOLDINGS, INC.
 
 
 
a Delaware Corporation
 
 
 
 
 
Dated:
 
 
By:
 
 
 
 
 
 
 
 
 
Name:
Keith R. Dunleavy, MD
 
 
 
 
 
 
 
 
Title:
Chief Executive Officer
 
 
 
 
 
 
 
 
"Grantee"
 
 
 
 
 
Dated:
 
 
Signed:
 
 
 
 
 
 
 
 
Grantee's Address:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

        





G88723KE01I001.JPG
 
INOVALON HOLDINGS, INC.
2015 OMNIBUS INCENTIVE PLAN
RESTRICTED STOCK UNIT AGREEMENT
1.
Issuance of Units . Inovalon Holdings, Inc., a Delaware corporation (the “Company”), hereby issues to Grantee (the “Grantee”) named in the Notice of Restricted Stock Unit Award (“Notice”) an award (the “Award”) of the Total Number of Restricted Stock Units Awarded set forth in the Notice (“Units”), subject to the Notice, this Restricted Stock Unit Agreement (“Agreement”) and the terms and provisions of the Inovalon Holdings, Inc. 2015 Omnibus Incentive Plan, as amended from time to time (“Plan”), which is incorporated into this Agreement by this reference. Unless otherwise defined in this Agreement, capitalized terms will have the same meaning as given to them in the Plan.

2.
Transfer Restrictions . The Units may not be transferred in any manner other than by will or by the laws of descent and distribution.

3.
Conversion of Units and Issuance of Shares .

(a)
General . Subject to Sections 3(b) and 3(c) below, one share of Common Stock will, upon Vesting, be issuable for each Unit subject to the Award (“Shares”). Unless Grantee has elected to defer issuance of all or a portion of the Shares pursuant to a timely deferral election on a form provided by the Company (a “Deferral Election Form”) (in which case the Deferral Election Form will control the timing of issuance of any deferred Shares), immediately after Vesting, or as soon as administratively feasible, the Company will transfer the appropriate number of Shares to Grantee after satisfaction of any required tax or other withholding obligations. Any fractional Unit remaining after the Award is fully vested will be discarded and will not be converted into a fractional Share. Notwithstanding the foregoing, unless Grantee has elected to defer issuance of all or a portion of the Shares pursuant to a timely Deferral Election Form (in which case the Deferral Election Form will control the timing of issuance of any deferred Shares), the relevant number of Shares will be issued no later than sixty (60) days following vesting. Effective upon the consummation of a Corporate Transaction, the Award will terminate unless it is Assumed in connection with the Corporate Transaction.

(b)
Delay of Conversion . The conversion of the Units into Shares under Section 3(a) above may be delayed by the Company in the event the Company reasonably anticipates that the issuance of Shares would constitute a violation of federal securities laws or other Applicable Law. If the conversion of the Units into Shares is delayed by the provisions of this Section 3(b), the conversion of the Units into Shares will occur at the earliest date at which the Company reasonably anticipates issuing Shares will not cause a violation of federal securities laws or other Applicable Law. For purposes of this Section 3(b), the issuance of Shares that would cause inclusion in gross income or




the application of any penalty provision or other provision of the Code is not considered a violation of Applicable Law.

(c)
Delay of Issuance of Shares . The Company will delay the issuance of any Shares under this Section 3 or a deferral election form executed by Grantee to the extent necessary to comply with Section 409A(a)(2)(B)(i) of the Code (relating to payments made to certain “specified employees” of certain publicly-traded companies). In the event the Company does delay the issuance of any Shares under this Section 3, any Shares to which Grantee would otherwise be entitled during the six (6) month period following the date of Grantee’s termination of Continuous Service will be issuable on the first business day following the expiration of this six (6) month period.

4.
Right to Shares . Grantee will not have any right in, to or with respect to any of Shares (including any voting rights or rights with respect to dividends paid on the Common Stock) issuable under the Award until the Award is settled by the issuance of the Shares to Grantee.

5.
Taxes .

(a)
Tax Liability . Grantee is ultimately liable and responsible for all taxes owed by Grantee in connection with the Award, regardless of any action the Company or any Related Entity takes with respect to any tax withholding obligations that arise in connection with the Award. Neither the Company nor any Related Entity makes any representation or undertaking regarding the treatment of any tax withholding in connection with any aspect of the Award, including the grant, vesting, assignment, release or cancellation of the Units, the delivery of Shares, the subsequent sale of any Shares acquired by Grantee upon vesting and the receipt of any dividends or dividend equivalents by Grantee. The Company does not commit and is under no obligation to structure the Award to reduce or eliminate Grantee’s tax liability.

(b)
Payment of Withholding Taxes . Prior to any event in connection with the Award (e.g., vesting) that the Company determines may result in any tax withholding obligation, whether United States federal, state, local or non-U.S., including any social insurance, employment tax, payment on account or other tax-related obligation (the “Tax Withholding Obligation”), Grantee must arrange for the satisfaction of the minimum amount of the Tax Withholding Obligation in a manner acceptable to the Company. At any time not less than five (5) business days (or fewer number of business days as determined by the Administrator) before any Tax Withholding Obligation arises (e.g., a vesting date), Grantee may elect to satisfy Grantee’s Tax Withholding Obligation that the Company determines is sufficient by (i) wire transfer to such account as the Company may direct, (ii) delivery of a certified check payable to the Company, (iii) directing the Company to withhold from those Shares otherwise issuable to Grantee the whole number of Shares sufficient to satisfy the minimum applicable Tax Withholding Obligation or (iv) such other means as specified from time to time by the Administrator. Grantee acknowledges that the withheld Shares may not be sufficient to satisfy Grantee’s minimum Tax Withholding Obligation. Accordingly, Grantee agrees to pay to the Company or any Related Entity as soon as practicable, including through additional payroll withholding, any amount of the Tax Withholding Obligation that is not satisfied by the withholding of Shares described above. If Grantee does not make such arrangements, the Company may, at its sole election, satisfy Grantee’s Tax Withholding Obligation in accordance with clause (i) below.

(i)
By Sale of Shares . Grantee’s acceptance of this Award constitutes Grantee’s instruction and authorization to the Company and any brokerage firm determined acceptable to the Company




for this purpose to, upon the exercise of Company’s sole discretion, sell on Grantee’s behalf a whole number of Shares from those Shares issuable to Grantee as the Company determines to be appropriate to generate cash proceeds sufficient to satisfy the minimum applicable Tax Withholding Obligation (“Tax Obligation Sale”). These Shares will be sold on the day the Tax Withholding Obligation arises (e.g., a vesting date) or as soon thereafter as practicable. Grantee will be responsible for all broker’s fees and other costs related to a Tax Obligation Sale, and Grantee agrees to indemnify and hold the Company harmless from any losses, costs, damages, or expenses relating to any Tax Obligation Sale. To the extent the proceeds of a Tax Obligation Sale exceed Grantee’s minimum Tax Withholding Obligation, the Company agrees to pay the excess in cash to Grantee. Grantee acknowledges that the Company or its designee is under no obligation to arrange for a Tax Obligation Sale at any particular price, and that the proceeds of any Tax Obligation Sale may not be sufficient to satisfy Grantee’s minimum Tax Withholding Obligation. Accordingly, Grantee agrees to pay to the Company or any Related Entity as soon as practicable, including through additional payroll withholding, any amount of the Tax Withholding Obligation that is not satisfied by a Tax Obligation Sale.

The Company or a Related Entity also may satisfy any Tax Withholding Obligation by offsetting any amounts (including, but not limited to, salary, bonus and severance payments) payable to Grantee by the Company and/or a Related Entity. Furthermore, in the event of any determination that the Company has failed to withhold a sum sufficient to pay all withholding taxes due in connection with the Award, Grantee agrees to pay the Company the amount of the deficiency in cash within five (5) days after receiving a written demand from the Company to do so, whether or not Grantee is an employee of the Company at that time.
6.
Entire Agreement; Governing Law . The Notice, the Plan, this Agreement and, if applicable, any Deferral Election Form pertaining to this Award, constitute the entire agreement of the parties with respect to the subject matter of this Agreement and supersede in their entirety all prior undertakings and agreements of the Company and Grantee with respect to the subject matter of this Agreement, and may not be modified adversely to Grantee’s interest except by means of a writing signed by the Company and Grantee. The Notice, this Agreement and, if applicable, any Deferral Election Form pertaining to this Award, are to be construed in accordance with and governed by the internal laws of the State of Delaware without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of Delaware to the rights and duties of the parties. Should any provision of the Notice, the Plan, this Agreement or, if applicable, any Deferral Election Form pertaining to this Award, be determined for any reason to be illegal, invalid or unenforceable, it is the specific intent of the parties that the provision will be modified to the minimum extent necessary to make it or its application valid and enforceable and will be enforced to the fullest extent allowed by law and the other provisions of the Notice, the Plan, this Agreement and, if applicable, any Deferral Election Form pertaining to this Award, will nevertheless remain effective and will remain enforceable.

7.
Construction . The captions used in the Notice and this Agreement are inserted for convenience and will not be deemed a part of the Award for construction or interpretation. Except when otherwise indicated by the context, the singular will include the plural and the plural will include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

8.
Administration and Interpretation . Any question or dispute regarding the administration or interpretation of the Notice, the Plan, this Agreement or, if applicable, any Deferral Election Form pertaining to this Award, will be submitted by Grantee or by the Company to the Administrator. The resolution of the question or dispute by the Administrator will be final and binding on all persons.





9.
Venue and Jurisdiction . The parties agree that any suit, action, or proceeding arising out of or relating to the Notice, the Plan, this Agreement or, if applicable, any Deferral Election Form pertaining to this Award, will be brought in the United States District Court for Delaware (or should the court lack jurisdiction to hear the action, suit or proceeding, in a Delaware state court) and that the parties will submit to the jurisdiction of the court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any suit, action or proceeding brought in the court.

10.
Notices . Any notice required or permitted hereunder will be given in writing and will be deemed effectively given upon personal delivery, upon deposit for delivery by an internationally recognized express mail courier service or upon deposit in the United States mail by certified mail (if the parties are within the United States), with postage and fees prepaid, addressed to the other party at its address as shown in these instruments, or to any other address as a party may designate in writing from time to time to the other party.

11.
Language . If Grantee has received this Agreement or any other document related to the Plan translated into a language other than English and if the translated version is different than the English version, the English version will control, unless otherwise prescribed by Applicable Law.

12.
Amendment and Delay to Meet the Requirements of Section 409A . Grantee acknowledges that the Company, in the exercise of its sole discretion and without the consent of Grantee, may amend or modify this Agreement in any manner and delay the issuance of any Shares issuable pursuant to this Agreement to the minimum extent necessary to meet the requirements of Section 409A of the Code as amplified by any Treasury regulations or guidance from the Internal Revenue Service as the Company deems appropriate or advisable. In addition, the Company makes no representation that the Award will comply with Section 409A of the Code and makes no undertaking to prevent Section 409A of the Code from applying to the Award or to mitigate its effects on any deferrals or payments made in respect of the Units. Grantee is encouraged to consult a tax adviser regarding the potential impact of Section 409A of the Code.



END OF AGREEMENT







        
Exhibit 10.3
G88723KE01I001.JPG
 
Confidential
March 28, 2017
Via Hand Delivery
Joseph R. Rostock
[ADDRESS]
[ADDRESS]

Re:      Executive Separation Agreement and Release (the “Agreement”)

Dear Joe,
This confirms that your Chief Technology Officer Position (“CTO”) with Inovalon, Inc. and Inovalon Holdings, Inc. (collectively, the “Company”) will terminate effective March 28, 2017. If you agree to the terms and conditions in this Agreement, you will remain an employee of the Company through May 12, 2017 (the “Termination Date”). You will receive regular pay through that date.
The Company is prepared to enter into this Agreement with you, which provides you certain benefits to which you otherwise are not entitled, provided that you agree to all the terms set forth below.
1.      Severance . In addition to regular pay through May 12, 2017, the Company is prepared to make an additional payment to you, subject to the terms and conditions in this Agreement. Specifically, the Company will pay you $147,461.54, representing (i) an amount equivalent to 20 weeks of regular pay ($138,461.54) (the “Regular Pay”) and (ii) an additional payment of $9,000 (the “Additional Pay”) (the Regular Pay and the Additional Pay, collectively the “Severance Amount”), less applicable taxes and withholding. Provided that you have executed the Agreement, and the revocation period described in paragraph 15 below has already expired, the Regular Pay will be paid out over the course of 20 weeks in accordance with Company’s regular payroll schedule, and the Additional Pay will be paid out in equal increments beginning June 1, 2017 through October 31, 2017, in accordance with the Company’s regular payroll schedule.
Through March 28, 2017, you agree that you have fulfilled your current responsibilities to the Company as CTO. Although you will not be required to come into the office after March 28, you also agree that you will be available, upon request, through the Termination Date to assist with any transitional matters.
During the time period that you are receiving payments against the Severance Amount, if you are rehired by the Company, your severance pay will cease and you will not be paid the remaining portion of the Severance Amount. The Company will issue a Form W2 to you covering any payment of the Severance Amount.




2.      Unemployment Compensation . The Company agrees not to contest any claim you may make for unemployment compensation benefits based upon the fact of your termination. However, the Company reserves the right to make truthful statements to correct any inaccuracies.
3.      Benefit Continuation . If you currently participate in any Company health benefits plans, your current coverage will continue until the end of the month in which your employment terminates. You may elect to continue at your own expense your current group medical and/or dental insurance coverage for up to 18 months following the Termination Date, provided that you or your eligible dependents remain eligible for such coverage under the federal law known as the Consolidated Omnibus Reconciliation Act (COBRA). Except as provided herein, your right to any and all Company benefits will terminate on the Termination Date.
4.      Full and Complete Compensation . The payments and benefits described above satisfy and are in lieu of: (a) all obligations which the Company and/or any of the Inovalon Parties (defined in paragraph 6 below) may have owed to you or which may be owed to you; (b) all compensation, vacation pay, and benefits which may be owing to you; and (c) all claims which you may have against any of the Inovalon Parties (defined in paragraph 6 below) based on any act, conduct, policy, practice, or omission occurring prior to the date that you execute this Agreement. You agree you have received all payments (other than the benefits described in this Agreement) owed to you by the Company and the full benefit of, any policy of the Company or any agreement between you and any of the Inovalon Parties (defined below).
5.      Confidentiality. You will keep the terms of this Agreement confidential, except that you may disclose this Agreement to: (1) your spouse and your parents, provided they agree to keep the terms of this Agreement confidential; (2) your accountant or attorney, in which case, you agree not to waive any applicable privilege regarding that discussion; and (3) any other person to whom disclosure is necessary in order to comply with a legal duty , such as a duty that may arise under the Internal Revenue Service or Social Security regulations or statutes. You agree that if you (or anyone to whom you permissibly disclose the terms of this Agreement) disclose the terms, manner, amount, conditions and/or substance of this Agreement, you will be liable to the Company for liquidated damages in the amount of $5,000 for each disclosure, up to a maximum of $20,000. You agree that these liquidated damages in the amount above represent compensation, not a penalty, and although the Company’s damages for your breach of this paragraph are incapable of being accurately measured at this time, this liquidated damage amount is a reasonable estimation of damage to the Company in the event of such breach.
During your employment with Company you have had access to confidential Company and employee-related information. This Agreement, as well as the Employment Agreement that you executed on or about May 6, 2015 and fully incorporated herein, prohibits you from disclosing or using, either directly or indirectly, any confidential information of Company or its employees or retaining or removing any confidential information of Company or its employees. Additionally, you must return all confidential and proprietary information obtained during your employment with Company. Please be advised that your obligation not to disclose any proprietary and/or confidential information of Company continues after the Termination Date and you must not either directly or indirectly disclose any confidential or proprietary information of Company or its employees.
6.      General Release . You release, relinquish, and give up any and all claims, suits and causes of action, known or unknown, which you may have or hold against any of the Inovalon Parties in any way arising out of, relating to, or resulting from: (a) your employment with any of the Inovalon Parties or the termination thereof; (b) any fact, statement, or conduct made or occurring prior to the execution of this Agreement by you; (c) any employment or business custom, practice, or policy of any of the Inovalon Parties; or (d) any conduct or decision of any of the Inovalon Parties which in any way affected you, or discussions




leading up to and/or culminating in this Agreement, or your rights, if any, to any benefit due you under any pension plan based upon your service with the Company through the Termination Date.
This is a general release of all claims and you knowingly and voluntarily release and forever discharge Company, and its affiliates, subsidiaries, divisions, and related companies, and its and their present, former, and future successors and assignees, and all of its and their current, former, and future owners, officers, stockholders, employees, officers, attorneys, accountants, directors, assigns, and agents thereof, both individually and in their representative capacities, and insurers, Company employee benefit plans, programs, arrangements and their administrators, functionaries and fiduciaries (collectively, the “Inovalon Parties”), of any and from any and all claims, known and unknown, asserted and unasserted, foreseeable and unforeseeable which against the Inovalon Parties, you, your heirs, executors, administrators, successors, and assigns have or may have as of the date of the execution of this Agreement by you, including but not limited to, any alleged violation of: the National Labor Relations Act, as amended; Title VII of the Civil Rights Act of 1964, as amended; the Civil Rights Act of 1991, as amended; the Americans with Disabilities Act of 1990, as amended; the Family and Medical Leave Act, as amended; the Age Discrimination in Employment Act, as amended; the Occupational Safety and Health Act of 1990, as amended; the Maryland Occupational Safety and Health Laws, as amended; the Maryland Equal Pay Law, as amended; the Maryland Human Rights Act, as amended; and any other federal, state or local civil or human rights law or any other federal, state or local law, regulation or ordinance; any public policy, contract, tort, or common law; or any allegations for compensation, damages, costs, fees, or other expenses, including attorneys’ fees incurred in these matters. This general release may not be construed to waive any right that is not subject to waiver by private agreement, including without limitation, any claims arising under state unemployment insurance or workers compensation laws.
7.      No Current Filings . You affirm that, except for anonymous or confidential whistleblower complaints and reports of alleged violations of law to an appropriate government, you have not filed, caused to be filed, or presently are a party to any claim, complaint, or action against the Company in any forum or form. You further affirm that you have been paid and/or have received all leave (paid and unpaid), compensation, wages, bonuses, and/or benefits that are due to you, except as provided in this Agreement. You furthermore affirm that you have no known workplace injuries and have been provided and/or have not been denied any leave requested under the Family and Medical Leave Act. You have not been retaliated against for reporting any allegations of wrongdoing by the Company or its officers, including any allegations of corporate fraud.
8.      No Violations of Code of Conduct .      You acknowledge that the Company has encouraged you to report to the Company Chief Legal Officer, or through any of the available reporting avenues set up by the Company, any violations or suspected violations of the Inovalon Code of Business Conduct and Ethics as contained within the Inovalon Employee Handbook.
9.      Non-Admission . The foregoing payments and agreements are made without any admission as to fault, liability, wrongdoing or the validity of any other party’s position by you or any of the Inovalon Parties, all of who expressly deny any and all fault, liability or wrongdoing.
10.      Non-Disparagement . You agree not to make or authorize the making of any disparaging remarks, comments, or statements about the Company, including its present or former agents, employees, officers, or directors. The Company agrees not to make any disparaging remarks, comments, or statements about you and, as appropriate, will advise selected personnel to avoid disparaging comments about you. Nothing in this Agreement precludes you from discussing terms and conditions of employment or exercising rights protected under federal labor law.




11.      Return of Company Property . By signing this Agreement, you agree and acknowledge that you will return to the Company prior to your Termination Date all originals and copies of Company documents and all Company property, including without limitation, computer files, diskettes, database information, client information, sales documents, financial statements, budgets and forecasts, computers, keys, and corporate credit cards.
12.      Protected Rights .
(a)      Notwithstanding anything to the contrary in this Agreement, you understand that nothing in this Agreement is intended to prohibit you and you are not prohibited from reporting possible violations of law to, filing charges with, making disclosures protected under the whistleblower provisions of U.S. federal law or regulation, or participating in investigations of U.S. federal law or regulation by the U.S. Securities and Exchange Commission, National Labor Relations Board, Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, the U.S. Department of Justice, the U.S. Congress, any U.S. agency Inspector General or any other self-regulatory agencies or federal, state or local governmental agencies (collectively, “Government Agencies,” and each a “Government Agency”). Accordingly, you do not need the prior authorization of the Company to make any such reports or disclosures or otherwise communicate with Government Agencies and are not required to notify the Company that you have engaged in any such communications or made any such reports or disclosures. You agree, however, to waive any right to receive any monetary award resulting from such a report, charge, disclosure, investigation or proceeding, except that you may receive and fully retain any award from a whistleblower award program administered by a Government Agency.
(b) In addition, you are advised that 18 U.S.C. § 1833(b) states:
“An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that-(A) is made-(i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.”
Accordingly, you have the right to disclose in confidence trade secrets to Federal, State, and local government officials, or to an attorney, for the sole purpose of reporting or investigating a suspected violation of law. You also have the right to disclose trade secrets in a document filed in a lawsuit or other proceeding, but only if the filing is made under seal and protected from public disclosure. Nothing in this Agreement is intended to conflict with 18 U.S.C. § 1833(b) or create liability for disclosures of trade secrets that are expressly allowed by 18 U.S.C. § 1833(b).
13.      Agreement Void Upon Rehire . By signing this Agreement, you agree and acknowledge that if you accept employment with the Company or any other employer prior to your Termination Date, this Agreement will become null and void.
14.      Entire Agreement . This Agreement contains the entire agreement between us concerning the subject matter hereof and supersedes (except as set forth in paragraph 6) all prior oral and written communications and agreements between the parties concerning such subject matter. Neither this Agreement, nor any of its terms, may be waived, added to, changed or altered except in a writing signed by you and an authorized representative of Company.
15.      Specific Release of ADEA Claims . In further consideration of the payments and benefits provided to you in this Agreement, you hereby irrevocably and unconditionally fully and forever waive,




release and discharge the Company from any and all claims, whether known or unknown, from the beginning of time to the date of your execution of this Agreement arising under the Age Discrimination in Employment Act of 1967 (ADEA), as amended, and its implementing regulations. By signing this Agreement, you hereby acknowledge and confirm that: (i) you have read this Agreement in its entirety and understand all of its terms; (ii) you have been provided with information, attached hereto, as to the ages and job titles of individuals selected for the program in the decisional unit and the ages of individuals in the same job classification not selected for participation under the program; (iii) you have been advised of and have availed yourself of your right to consult with your attorney prior to executing this Agreement; (iv) you knowingly, freely and voluntarily assent to all of the terms and conditions set out in this Agreement including, without limitation, the waiver, release and covenants contained herein; (v) you are executing this Agreement, including the waiver and release, in exchange for good and valuable consideration in addition to anything of value to which you are otherwise entitled; (vi) you were given at least twenty-one (21) days to consider the terms of this Agreement and consult with an attorney of your choice, although you may sign it sooner if desired; (vii) you understand that you have seven (7) days from the date you sign this Agreement to revoke the release in this paragraph by delivering written notice of revocation to Patty Donnelly, Senior Vice President, Human Resources, at the address of the Company, 4321 Collington Road, Bowie, Maryland 20716; and (viii) you understand that the release contained in this paragraph does not apply to rights and claims under the ADEA or the Older Workers Benefits Protection Act that may arise after the date on which you sign this Agreement.

16.      Consultation with an Attorney . You have been advised to consult with your attorney before signing this Agreement. You agree, however, that Company shall not be required to pay any of your attorneys’ fees in this or any related matter and that the severance monies received pursuant to paragraph 1 are in full and complete settlement of all matters between you and the Company, including, but not limited to, attorneys’ fees and costs.
17.      Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Maryland, without regard to conflicts of laws or other principles which would seek to apply the laws of any other jurisdiction.
18.      At-Will Employment . By signing this Agreement, you acknowledge that you have been, at all times, an “at will” employee of the Company.
19.      Knowing and Voluntary . By signing this Agreement, you acknowledge that you have carefully read and fully understand all its provisions, and that you are signing it voluntarily. You also acknowledge that you are not relying on any representations by any representative of the Company concerning the meaning of any aspect of this Agreement.
20.      Severability .      Any provision of this Agreement which is held to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of prohibition or unenforceability, without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.

[Signature Page Follows]





Inovalon, Inc. and Inovalon Holdings, Inc.

By:
/s/ Joseph R. Rostock
 
By:
/s/ Shauna L. Vernal
 
Joseph R. Rostock
 
 
Shauna L. Vernal
 
 
 
 
Chief Legal Officer
 
 
 
 
 
Date: April 27, 2017
 
Date: April 27, 2017





EXHIBIT 31.1 

CERTIFICATION 

I, Keith R. Dunleavy, M.D., certify that:

        1.     I have reviewed this Quarterly Report on Form 10-Q of Inovalon Holdings, Inc.;

        2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

        3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

        4.     The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

        (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

        (b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

        (c)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

        (d)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

        5.     The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions):

       (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and

        (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

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

Date: August 3, 2017





EXHIBIT 31.2 

CERTIFICATION 

I, Christopher E. Greiner, certify that:

        1.     I have reviewed this Quarterly Report on Form 10-Q of Inovalon Holdings, Inc.;

        2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

        3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

        4.     The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

        (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

        (b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

        (c)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

        (d)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

        5.     The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions):

       (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and

        (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ CHRISTOPHER E. GREINER
Christopher E. Greiner
Chief Financial & Operating Officer
(Principal Financial Officer)

Date: August 3, 2017





EXHIBIT 32.1 

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 

        In connection with the Quarterly Report of Inovalon Holdings, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Keith R. Dunleavy, M.D., the Chief Executive Officer and Chairman of the Company, certify, to my knowledge, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.
the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and 

2.
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ KEITH R. DUNLEAVY, M.D.
Keith R. Dunleavy, M.D.
Chief Executive Officer & Chairman
(Principal Executive Officer)
Date: August 3, 2017








EXHIBIT 32.2 

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 

        In connection with the Quarterly Report of Inovalon Holdings, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Christopher E. Greiner, the Chief Financial and Operating Officer of the Company, certify, to my knowledge, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.
the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and 

2.
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ CHRISTOPHER E. GREINER
Christopher E. Greiner
Chief Financial & Operating Officer
(Principal Financial Officer)
Date: August 3, 2017