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EX-99.3 - EX-99.3 - Inovalon Holdings, Inc.a2226572zex-99_3.htm
EX-23.1 - EX-23.1 - Inovalon Holdings, Inc.a2226572zex-23_1.htm

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Exhibit 99.1

LOGO


 

 

 

 

Grant Thornton LLP
2010 Corporate Ridge, Suite 400
McLean, VA 22102-7838
T 703.847.7500
F 703.848.9580
www.GrantThornton.com


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Avalere Health, Inc. and Subsidiaries

        We have audited the accompanying consolidated financial statements of Avalere Health, Inc. (a Delaware corporation) and Subsidiaries, which comprise the consolidated balance sheet as of December 31, 2014, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements.

Management's responsibility for the financial statements

        Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's responsibility

        Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

        An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

        We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

1


Opinion

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Avalere Health, Inc. and Subsidiaries as of December 31, 2014, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

McLean, Virginia
March 26, 2015

2



Avalere Health, Inc. and Subsidiaries
Consolidated Balance Sheet

December 31,
  2014  

Assets

       

Current Assets

   
 
 

Cash and cash equivalents

  $ 9,035,367  

Accounts receivable, net

    15,656,209  

Prepaid expenses

    1,213,694  

Deferred tax asset—current portion

    1,888,949  

Total Current Assets

    27,794,219  

Property and Equipment, net

   
3,385,005
 

Other Assets

   
 
 

Notes receivable

    225,000  

Long-term investment

    500,000  

Other assets

    80,586  

Deferred tax asset—net of current portion

    4,536,820  

Total Other Assets

    5,342,406  

Total Assets

  $ 36,521,630  

Liabilities and Stockholders' Equity

       

Current Liabilities

   
 
 

Accounts payable and accrued expenses

  $ 629,787  

Accrued payroll and related expenses

    5,533,353  

Income tax payable

    50,544  

Deferred revenue

    4,327,679  

Vested incentive plan liability

    3,476,858  

Total Current Liabilities

    14,018,221  

Long-Term Liabilities

   
 
 

Deferred rent, net of current portion

    710,108  

Commitments and Contingencies

   
 
 

Stockholders' Equity

   
 
 

Series A Preferred Stock, $.01 par value; 200,000 shares authorized, issued and outstanding

    2,000  

Common stock, $.01 par value; 800,000 shares authorized; 300,000 shares issued and
outstanding

    3,000  

Additional paid-in capital

    26,490,734  

Accumulated deficit

    (4,702,433 )

Total Stockholders' Equity

    21,793,301  

Total Liabilities and Stockholders' Equity

  $ 36,521,630  

   

The accompanying notes are an integral part of these financial statements.

3



Avalere Health, Inc. and Subsidiaries
Consolidated Statement of Operations

December 31,
  2014  

Revenue

  $ 47,130,989  

Cost of Sales

   
16,619,308
 

Gross Profit

    30,511,681  

Operating Expenses:

   
 
 

Selling, general and administrative

    30,778,774  

Depreciation and amortization

    940,158  

Share-based payment benefit

    (59,827 )

Operating Loss

    (1,147,424 )

Other Income (Expenses):

   
 
 

Interest income

    5,244  

Other expenses, net

    (2,474 )

Total Other Income

    2,770  

Loss Before Income Taxes

    (1,144,654 )

Income Tax Benefit

   
(505,310

)

Net Loss

  $ (639,344 )

   

The accompanying notes are an integral part of these financial statements.

4


Avalere Health, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity

 
  Series A
Preferred Stock
   
   
   
   
   
 
 
  Common Stock    
   
   
 
 
  Additional Paid
In Capital
  Accumulated
Deficit
  Total
Stockholders'
Equity
 
 
  Shares   Amount   Shares   Amount  

Balance as of January 1, 2014

    200,000   $ 2,000     300,000   $ 3,000   $ 26,022,934   $ (4,063,089 ) $ 21,964,845  

Capital contribution

                    467,800         467,800  

Net loss

                        (639,344 )   (639,344 )

Balance as of December 31, 2014

    200,000   $ 2,000     300,000   $ 3,000   $ 26,490,734   $ (4,702,433 ) $ 21,793,301  

   

The accompanying notes are an integral part of these financial statements.

5



Avalere Health, Inc. and Subsidiaries
Consolidated Statement of Cash Flows

December 31,
  2014  

Cash Flows from Operating Activities

       

Net loss

  $ (639,344 )

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

       

Bad debt expense

    30,462  

Deferred taxes

    (419,785 )

Depreciation and amortization

    940,158  

Share-based payment benefit

    (59,827 )

Deferred rent

    (22,314 )

Changes in assets and liabilities:

       

Accounts receivable

    (1,229,774 )

Prepaid expenses and other assets

    (137,648 )

Accounts payable and accrued expenses

    (133,385 )

Accrued payroll and related expenses

    19,663  

Income tax payable/receivable

    (706,705 )

Deferred revenue

    845,299  

Net Cash Used in Operating Activities

    (1,513,200 )

Cash Flows from Investing Activities

       

Capital expenditures

    (1,992,816 )

Proceeds from the maturity of investments

    4,890,458  

Net Cash Provided by Investing Activities

    2,897,642  

Cash Flows from Financing Activities

       

Cash settlement of stock options

    (332,675 )

Net Cash Used in Financing Activities

    (332,675 )

Net Change in Cash and Cash Equivalents

    1,051,767  

Cash and Cash Equivalents, beginning of year

    7,983,600  

Cash and Cash Equivalents, end of year

  $ 9,035,367  

Supplemental Disclosure of Cash Flow Information:

       

Cash paid for taxes

  $ 562,799  

Non-cash Investing and Financing Activity:

       

Redemption of Restricted Stock Units by Related Party

  $ 467,800  

   

The accompanying notes are an integral part of these financial statements.

6



Avalere Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014

NOTE A—NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

        The accompanying consolidated financial statements include the operations of Avalere Health, Inc. and its wholly owned subsidiaries Avalere International, LLC and Avalere Health, LLC, as well as Avalere Capital, LLC, a wholly owned subsidiary of Avalere Health, LLC (collectively, the "Company"). The Company was incorporated in the State of Delaware on March 31, 2008 and provides strategy, research, and educational services and products to help improve the healthcare system.

Principles of Consolidation

        All significant intercompany balances and transactions have been eliminated in consolidation.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

        The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). These accounting principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of the contingent assets and liabilities in the Company's consolidated financial statements and accompanying notes. The Company believes that the estimates, judgments and assumptions upon which it relies are reasonable based upon information available to management at the time that such estimates, judgments and assumptions are made. Actual results could differ from these estimates.

Revenue Recognition

        The Company generates revenues from strategic advisory, analysis and educational services. The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered, the contract price is fixed or determinable, and collectability is reasonably assured. The Company enters into arrangements under time and materials, fixed-price, or retainer based contracts. Revenue for time and material contracts is recognized based upon contractually agreed upon billing rates applied to direct labor hours expended plus the costs of other items used in the performance of the contract. Revenue on certain fixed-price contracts is recognized using the proportional performance method. Performance is measured based on the ratio of labor hours incurred to total estimated labor hours. Revenues under certain other fixed-price and retainer based contracts are recognized ratably over the contract period or upon contract completion.

        Invoices to clients are generated in accordance with the terms of the applicable contract, which may not be directly related to the performance of services. Unbilled receivables are invoiced based upon the achievement of specific events as defined by each contract including deliverables and timetables. Unbilled receivables, if any, are classified as a current asset. Advanced billings to clients in excess of revenue earned are recorded as deferred revenue until the aforementioned revenue recognition criteria are met.

        Management believes that the accounts receivable net of the allowance reported in these consolidated financial statements are fully realizable based upon the nature of their clients and the Company's history of collections. Management evaluates accounts receivable on an ongoing basis to

7



Avalere Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2014

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

assess collectability. To the extent identified accounts receivable are deemed to be at risk, management records an allowance for doubtful accounts.

Cash and Cash Equivalents

        The Company considers cash and cash equivalents to be all highly liquid investments with an original or remaining maturity of three months or less when purchased.

Property and Equipment

        Property and equipment consists of furniture, fixtures, computers, equipment, capitalized software and leasehold improvements. Property and equipment are recorded at cost. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from three (3) to fifteen (15) years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term. Maintenance and repairs are charged to expense as incurred.

Internally Developed Software

        The Company capitalizes certain costs incurred in connection with developing or obtaining internal use software. Costs for internal use software that are incurred in the preliminary project stage and in the post-implementation or operation stage are expensed as incurred. Costs incurred during the application development stage are capitalized and amortized over the estimated useful life, which is generally three years. For the year ended December 31, 2014 the Company capitalized approximately $700,000 in software development costs.

Fair Value of Financial Instruments

        The fair value of financial instruments is defined as the amount at which the instrument could be exchanged in a current transaction between market participants. Cash equivalents, accounts receivable, accounts payable, and accrued expenses reported in the balance sheet at carrying amounts approximate their respective fair values due to the relatively short maturities.

        Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value.

8



Avalere Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2014

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Hierarchical levels, directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1—   Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. There are no assets or liabilities classified as Level 1.

Level 2—

 

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.

Level 3—

 

Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Concentrations of Credit Risk

        Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash and cash equivalents in reputable financial institutions. At times, the balances may exceed federally insured limits, however, management believes that because such amounts are held with high credit quality financial institutions the Company is not exposed to any significant risk.

Impairment of Long-Lived Assets

        The Company evaluates whether current events or circumstances indicate that the carrying value of its long-lived assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of future undiscounted cash flows produced by the long-lived assets is compared to the carrying value to determine whether an impairment exists. If an asset is determined to be impaired, the Company will write-down the asset to its fair value based on the present value of estimated expected future cash flows. No impairment was identified for any of the Company's long-lived assets during 2014.

Share-based Payments

        The Company recognizes share-based payment expense related to restricted stock awards and stock options, on a straight-line basis over the requisite service period, which is generally the vesting period. Compensation expense is based on the estimated fair value of these instruments and the estimated number of shares ultimately expected to vest. The fair value of stock options and restricted stock awards is estimated based on the fair value of a share of the Company's common stock at the grant date. The Company has elected to use the Black-Scholes-Merton option pricing model to determine the fair value of stock options.

        The Company has a demonstrated practice of settling restricted stock and option awards via cash upon termination prior to the employee bearing the risks and rewards of stock ownership, generally assumed to be a period no shorter than 6 months from the date of vesting. Accordingly, the Company

9



Avalere Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2014

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

classifies all share-based awards as liabilities which requires a remeasurement of the fair value for all outstanding awards, at each reporting period.

Income Taxes

        Income taxes are provided for in accordance with the asset and liability method. Deferred taxes are provided for carryforwards and temporary differences in the basis of assets and liabilities that are recognized in different periods for financial and tax reporting purposes. A valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be recognized.

        The Company recognizes the financial statement benefit of an income tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant taxing authority.

        The Company is subject to income taxes in the U.S. federal jurisdiction, and various state and local jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local tax examinations by tax authorities for the years before 2010. The Company is not currently under examination by any taxing authorities.

        The accrual of interest and penalties is a direct result of the amount of the unrecognized tax benefits recorded in the financial statements. The Company recognizes and computes interest expense by applying the applicable statutory rate of interest to the difference between the amount of the tax position recognized in the financial statements and the position taken on the tax returns. Interest is calculated from the original due date of the federal or state return, which includes the benefit of the tax position, to the end of the current fiscal year. The Company's policy is to record interest as an increase in income taxes payable and a corresponding increase to the income tax provision.

Advertising and Promotion Costs

        Advertising and promotion costs are expensed as incurred. During the year ended December 31, 2014, the Company expensed $534,481 as advertising and promotion costs.

Recent Accounting Pronouncements

        Changes to US GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("ASUs") to the FASB's Accounting Standards Codification ("ASC"). The Company considers the applicability and impact of all ASUs.

        On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes existing revenue recognition guidance. ASU 2014-09 outlines a single set of comprehensive principles for recognizing revenue under US GAAP. Among other things, it requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a specific point in time or over time. These concepts, as well as other aspects of ASU 2014-09, may change the method and/or timing of revenue recognition for certain of the Company's contracts. ASU 2014-09 will be effective January 1, 2018, and may be applied either

10



Avalere Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2014

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

retrospectively or through the use of a modified-retrospective method. The Company is currently evaluating both methods of adoption, as well as the potential effect ASU 2014-09 will have on the Company's balance sheet, results of operations and cash flows.

Subsequent Events

        The Company evaluated all events or transactions through March 26, 2015, the date the consolidated financial statements were available to be issued. The Company is not aware of any subsequent events which require recognition or disclosure in the consolidated financial statements.

NOTE C—ACCOUNTS RECEIVABLE, NET

 
  2014  

Billed receivables

  $ 11,982,938  

Unbilled receivables

    3,775,653  

    15,758,591  

Allowance for doubtful accounts

    (102,382 )

  $ 15,656,209  

NOTE D—PROPERTY AND EQUIPMENT, NET

        Property and equipment, net, is summarized by major classifications as follows:

 
  2014  

Computers, equipment and software

  $ 4,977,922  

Furniture and fixtures

    1,161,493  

Leasehold improvements

    816,770  

    6,956,185  

Less accumulated depreciation

    (3,571,180 )

Total

  $ 3,385,005  

        For the year ended December 31, 2014, depreciation expense was $940,158. Expenditures for repairs and maintenance are charged against operations when incurred.

NOTE E—CREDIT FACILITY

        In January 2012, the Company established a line of credit for $3,000,000 with a financial institution which is secured by substantially all of the Company's assets. The line of credit bears interest at an annual rate of 2.50% plus LIBOR and is payable monthly (the effective interest rate at December 31, 2014 was 2.671%). In December 2014 the Company renewed the line of credit with the bank under substantially the same terms and conditions and extended the maturity date to December 31, 2015. As of December 31, 2014, there were no outstanding borrowings on the credit facility.

11



Avalere Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2014

NOTE F—COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

        The Company leases certain office space and equipment under operating lease agreements. Certain leases are subject to rent escalations and some of the office space was subleased to tenants. Future minimum lease payments under non-cancelable operating leases as of December 31, 2014 were as follows:

Years ending December 31,
   
 

2015

  $ 1,773,707  

2016

    1,813,187  

2017

    1,853,709  

2018

    1,895,192  

2019

    1,937,370  

  $ 9,273,165  

        Rent expense for the year ended December 31, 2014 was $2,098,629. There was no income from subleases in 2014.

Employment Agreements

        The Company has employment agreements with all its executives that outline the terms of their employment. The agreements also provide for specified salaries and benefits which extend through the term of the agreements.

Legal Proceedings and Claims

        Various legal proceedings and claims generally incidental to the normal course of business are brought against the Company from time to time. The Company believes that the final outcome of such proceedings and claims will not have a material adverse effect on its financial position, results of operations or cash flows.

NOTE G—EMPLOYEE BENEFIT PLAN

        The Company has a defined contribution retirement plan for all employees. Under this 401(k) retirement plan, employees can make voluntary contributions to the retirement program in the form of salary reductions. Additionally, the Company matches 100% of employee deferrals up to 5% of qualifying compensation for all eligible participants. There is a one year waiting period for eligibility from date of hire. Participants are fully vested in both the employee deferral and employer contributions upon meeting eligibility requirements. For the year ended December 31, 2014, Company retirement plan contributions were $1,019,856.

12



Avalere Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2014

NOTE H—EQUITY INCENTIVE PLAN

        In 2008, the Company adopted the 2008 Equity Incentive Plan (the Plan) to which Company employees, officers, directors and any other individuals providing services to or for the Company are eligible as participants. Under the Plan, a maximum of 142,500 shares of common stock may be granted.

Stock Options

        Stock options granted are subject to individual stock option agreements, which can include various vesting schedules and terms. The contractual period for stock options granted as Incentive Stock Options is ten years. Currently, options granted under the Plan vest annually over a four year period from the date of grant. Options are exercisable only to the extent that they are vested per the terms of the individual stock option agreements.

        The Company has established a historical practice of net cash settling stock options for terminating employees. Accordingly, effective January 1, 2013, the Company began accounting for stock option grants as liability awards. The fair value of outstanding option grants as of December 31, 2014 was approximately $2.6 million. During fiscal year 2014, the Company issued formal communication to stock option holders that the Company has no obligation to settle such instruments for cash upon termination of employment. As such, the Company regularly monitors the classification of such instruments to ensure liability treatment is still appropriate.

        The Company used the following assumptions for purposes of determining the fair value of option grants using the Black-Scholes option pricing model:

Year ending December 31,
  2014  

Dividend yield

    %

Volatility

    39.17 %

Risk-free interest rate

    1.94 %

Expected life of options (in years)

    6.25  

        A discussion of management's methodology for developing some of the assumptions used in the valuation model follows:

    Dividend Yield—The Company has never declared or paid dividends and has no plans to do so in the foreseeable future.

    Expected Volatility—Volatility is a measure of the amount by which a financial variable such as share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses an estimated volatility based on the average volatility of a number of comparable companies, along with other factors deemed relevant by management.

    Risk-Free Interest Rate—This is the U.S. Treasury rate for the week of each option grant during the year, having a term that most closely resembles the expected life of the option.

    Expected Life of the Option Term—This is a period of time that the options granted are expected to remain unexercised. Options granted during the year have a minimum term of ten years. The Company estimated the expected life of the option term to be 6.25 years, based on the simplified method permitted for equity incentive plans that are not considered complex.

13



Avalere Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2014

NOTE H—EQUITY INCENTIVE PLAN (Continued)

    Expected Forfeiture Rate—The forfeiture rate is the estimated percentage of options granted that is expected to be forfeited or cancelled on an annual basis before becoming fully vested. The Company estimates the forfeiture rate based on turnover data for the past year, with further consideration given to the class of employees to whom the options were granted. The forfeiture rate was 8.76% for 2014.

        As of December 31, 2014, the Company had $2,780,644 of total unrecognized compensation cost related to non-vested awards granted under the Plan. Compensation for such awards was a benefit of $6,427 for 2014. Compensation (benefit) expense includes the change in fair of options outstanding during the respective periods.

        The following table summarizes the activity of the Company's stock options under the Plan:

 
  Total   Weighted-
Average
Exercise
Contractual
Price
 

January 1, 2014

    54,050   $ 146.16  

Granted

    38,200     211.20  

Forfeited/cancelled

    (18,000 )   185.51  

December 31, 2014

    74,250   $ 175.53  

        The grant date fair value for 2014 stock option grants was $78.79 per share.

        The following table summarizes information about stock options outstanding at December 31, 2014:

 
  Options Outstanding   Options Exercisable  
Year
  Number of
Options
Outstanding
  Weighted-
Average
Remaining
Contractual Life
  Weighted-
Average
Exercise
Price
  Total
Number
Exercisable
 

2014

    74,250     4.84   $ 175.53     4,875  

Restricted Stock Units

        Restricted stock units (RSU) awards are issued pursuant to the Plan. The Company's RSU grants are accounted for using the liability method and are included in vested incentive plan liability on the accompanying consolidated balance sheets. Share based payment expenses related to the RSUs are based on the price of the Company's common stock, and is recognized on a straight-line basis over the requisite service period. The Company's RSU awards are subject to certain repurchase rights after issuance. The RSU grants generally vest ratably over a four year period. There were no grants of RSUs for the year ended December 31, 2014. RSUs outstanding as of December 31, 2014 were fully vested, accordingly compensation expense disclosed below relates to the change in estimated fair value.

        A fair value adjustment to compensation expense of $53,400 was recognized as share-based benefit for RSU awards outstanding for the year ended December 31, 2014.

14



Avalere Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2014

NOTE H—EQUITY INCENTIVE PLAN (Continued)

        RSUs of 2,750 shares were repurchased by the Company's founder in 2014 for $467,800. Such amounts represent the estimated fair value of such shares on the date of repurchase. Upon repurchase the Company exchanged the outstanding share and reclassified the fair value to additional paid-in capital.

NOTE I—INCOME TAXES

        The Company's income tax benefit comprised the following for the year ended December 31, 2014:

 
  2014  

Current tax:

       

Federal

  $ (71,507 )

State

    (14,018 )

    (85,525 )

Deferred tax:

       

Federal

    (310,712 )

State

    (109,073 )

    (419,785 )

Total income tax benefit

  $ (505,310 )

        A reconciliation of the Company's effective tax rate to the Federal Statutory rate is as follows for the year ended December 31, 2014:

 
  2014  

Federal tax at statutory rate

    34.00 %

State taxes

    7.17  

Share-based compensation

    5.86  

Meals and entertainment

    (2.67 )

Other

    (0.21 )

    44.15 %

15



Avalere Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2014

NOTE I—INCOME TAXES (Continued)

        Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities were as follows at December 31, 2014:

 
  2014  

Deferred tax assets:

       

Allowance for bad debt

  $ 41,550  

Accrued vacation

    389,614  

Incentive plan

    359,750  

Stock options

    114,196  

Deferred compensation

    1,162,574  

Amortization, net

    4,080,928  

Deferred rent

    215,147  

Federal & state NOL

    1,305,533  

Other

    224,407  

Total deferred tax assets

    7,893,699  

Deferred tax liabilities:

   
 
 

Investment activity

    (150,016 )

Depreciation

    (829,425 )

Other

    (488,489 )

Total deferred liabilities

    (1,467,930 )

Net deferred tax assets

  $ 6,425,769  

        The realization of deferred tax assets is dependent upon generation of future taxable income during those periods in which temporary differences become deductible and/or credits can be utilized. Management has considered the level of historical taxable income, the scheduled reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income. Based on these considerations, management believes it is more likely than not that the Company will realize the benefit of the net deferred tax assets.

NOTE J—STOCKHOLDERS' EQUITY

Common Stock

        The Company has 800,000 shares of common stock authorized and 300,000 shares of common stock outstanding with a par value of $0.01. The holders of common stock are entitled to one vote in respect to each share held for the election of board of directors and on all matters submitted to a vote of the stockholders of the Company.

Series A Convertible Participating Preferred Stock

        The Company has 200,000 shares of preferred stock authorized, all of which is designated as Series A Convertible Participating Preferred Stock ("Series A Preferred Stock"). As of December 31,

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Avalere Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2014

NOTE J—STOCKHOLDERS' EQUITY (Continued)

2014 the Company has 200,000 shares of Series A Preferred Stock issued and outstanding. The holder of the Series A Preferred Stock has various rights and preferences. Any shares of Series A Preferred Stock may be converted at any time, upon the vote to so convert such shares by the holders of at least a majority of the shares outstanding. Upon completion of an underwritten public offering of common stock with gross proceeds of at least $50 million, the Series A Preferred Stock automatically converts to common shares at the then effective Conversion Rate.

        Each issued and outstanding share of Series A Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock such preferred is converted. The Series A Preferred Stock is entitled to certain veto rights as defined in the agreement.

        From and after the date of first issuance of the Series A Preferred Stock, in preference to the holders of any other junior stock, the holders are entitled to receive, when and if declared by the Board of Directors, out of funds legally available cumulative dividends per share equal to 8% per annum. The holder of Series A Preferred Stock shall be entitled to participate in dividends on common stock or junior stock, when and if declared by the Board of Directors, based on the number of shares of common stock held on an as-if converted basis. As of December 31, 2014, the Board of Directors has declared no dividends. As of December 31, 2014, cumulative dividends to date were $14,289,915, calculated at 8% per annum on a compounded daily basis.

        In the event of any liquidation, dissolution, or winding up of the Company, including a merger, acquisition, or sale of assets, the holder of Series A Preferred Stock is entitled to the greater (i) the stated Value of Series A Preferred Stock, plus an amount equal to any declared and unpaid participating dividends, plus an amount equal to any accrued but unpaid cumulative dividends at 8%, plus a participation in any amounts payable to common stock on an as-converted basis or an amount equal; or (ii) the amount per share the holders of Series A Preferred Stock would receive if all shares had converted to common stock immediately prior to such liquidation. To the extent that the aforementioned calculated value is greater than 300% of the stated value of the Series A Preferred Stock the liquidation preference is limited to 300% of the stated value (approximately $60 million). The liquidation value is also subject to certain other adjustments as defined in the governing documents of the 2008 incorporation.

        Effective March 31, 2013, the holder of Series A Preferred Stock may provide written notice to the Company of their intent to redeem their respective shares upon a majority vote of the class to the extent that such redemption shall not violate any applicable provisions of the Delaware General Corporation Law. The redemption value is equal to a price per share equal to the greater of (i) the current Series A Preferred Stock liquidation preference or (ii) the fair market value of such shares of Series A Preferred Stock. Further, in the event of a notification to redeem, the Company may elect to redeem the preferred stock in three equal annual installments.

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QuickLinks

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Avalere Health, Inc. and Subsidiaries Consolidated Balance Sheet
Avalere Health, Inc. and Subsidiaries Consolidated Statement of Operations
Avalere Health, Inc. and Subsidiaries Consolidated Statement of Cash Flows
Avalere Health, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2014