FORM 10-K
(Mark One)
2023
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InnovAge Holding Corp.
Corp.(Exact name of registrant as specified in its charter)
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Delaware | 81-0710819 | ||||
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(844) (844) 803-8745(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Act:
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Common Stock, $0.001 par value | INNV |
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Securities registered pursuant to Section 12(g) of the Securities Act: None.
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•the viability of our growth strategy;
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our status as a “controlled company”;
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administered set of Medicare and Medicaid benefits, which often results in uncoordinated care delivered in silos. Our vertically integrated care model and full-risk contracts incentivize us to coordinate and proactively manage all aspects of a participant’s health. Costs under the PACE program are estimated to be 13%15% lower on average than for a comparable dual-eligible population aged 65 and older under Medicaid, based on an analysis of most recently available data by the National PACE Association in November 2020, and our costs are estimated to be approximately 8% lower on a weighted average basis than costs for comparable fee-for-service Medicare beneficiaries, based on our analysis of the most recent Dartmouth Atlas data from 2017.July 2023. Importantly, we believe we can deliver significantly better health outcomes. Our care model reduces unnecessary or avoidable medical spend. Based on an analysis performed using the data most recently available datato us from 2018, we estimate that across our mature markets, our participants on average have 16% fewer hospital admissions and 73% fewer low- to medium-severity emergency room visits relative to a comparable Medicare fee-for-service population with similar risk scores for which data is available. In addition, as of June 30, 2021,2023, our participants had a 28%12% lower 30-day hospital readmission rate compared
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high-frequency users of healthcare services. Based on InnovAge data as of June 30, 2021,2023, the typical InnovAge participant had, on average, eighteleven chronic conditions and, based on ourthe data most recently available datato us from a 20182021 modified health outcomes survey, required, on average, assistance with threetwo or more activities of daily living (“ADLs”). A lack of coordination across providers can have severe consequences given the high occurrence of chronic illnesses and other underlying health issues in this population.
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to Medicare. Our comprehensive care model and globally capitated payments are designed to cover participants from enrollment until the end of life, including coverage for participants requiring hospice and palliative care.
According to CMS, healthcare spending in the U.S. was greater than $3.6 trillion in 2018, and Medicare and Medicaid combined accounted for greater than $1.3 trillion spent on the care of approximately 125 million individuals. In 2018, there were approximately 12 million individuals simultaneously enrolled in Medicare and Medicaid that we estimate accounted for approximately $464 billion, representing 34% of combined Medicare and Medicaid spend.
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Based on historical results for the year ended June 30, 20212023 and our experience and industry knowledge, we estimate an average annual revenue opportunity of $95,000$107,000 per participant ($7,900(or $8,900 PMPM) and a total addressable market opportunity of $210$235 billion, based on our estimated market of approximately 2.2 million PACE eligible in the United States in 2021,2022, as described above. Of these estimated PACE eligible participants, only approximately 57,00070,000 are enrolled in a PACE program, based on an August 2021a July 2023 report from the National PACE Association, and over the next sevenfive years, the National PACE Association is targeting a PACE enrollment increase at a CAGRcompound annual growth rate (“CAGR”) of approximately 17%21%. As a result, we believe that, subject to our ability to effectively execute our growth strategy, we have a substantial runway for growth by bringingopportunity to bring our comprehensive value-based model of care to more frail, dual-eligible seniors across the country.
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health, regardless of what is traditionally covered by insurance. As a result, our capabilities are not limited to what we are able to offer inside of our centers.
During the COVID-19 pandemic, we developed our telehealth capabilities, with almost half of our provider visits and almost one quarter of IDT visits provided to our participants remotely during the year ended June 30, 2021. The COVID-19 pandemic has highlighted the strength and adaptability of the InnovAge Platform and our community-based care delivery model. Though the COVID-19 pandemic has altered the mix of settings where we deliver care, our multimodal approach ensures our participants continue to receive the care they need.
| health, such as: •Economic stability •Transportation •Physical environment •Community and social context •Food and nutrition •Health literacy •Fitness |
Our technology suite.
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Our Track Record of Profitable Growth
We have a record of driving profitable growthare regularly subject to, and achieving compelling unit economics. For the fiscal years ended June 30,will continue to be subject to, various routine and non-routine governmental inspections, reviews and audits. Starting in 2021, we underwent federal and 2020, our consolidated Center-level Contribution Margin, expressed as a percentage of revenue, was 27.3% and 24.9%, respectively, and all ofstate audits in our centers had a positive Center-level Contribution Margin. Ourin Sacramento, California, Colorado and New Mexico. Based on deficiencies detected in the audits related to participant provision of services, which can be categorized as care delivery and management, care coordination and documentation of care, CMS and regulatory authorities in the states of California and Colorado suspended new enrollments at our Sacramento center in
We have demonstrated an ability to scale successfully, expanding our model to a network of 18 centers in five states, which provided care for approximately 6,850 participants during the year ended June 30, 2021. As of June 30 2021, our eligible participant penetration rate was, on average, 13% across our existing markets,and/or pursuing tuck-in acquisitions and as the only designated PACE provider in most of the MSAs that we serve, we believe there is significant runway for further growth.
We believe our track record of successfully operating across different markets gives us an advantage when opening centers in existing and new geographies. We aim to grow the InnovAge Platform by substantially increasing the number of centers we operate in new and existing markets to positively impact the lives of more frail, dual-eligible seniors and drive long-term value for our key stakeholders: participants and their families, government payors and providers.
partnerships.
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Our participants “Win” by enjoying a better participant experience, improved health outcomes and remaining in their homes and communities for longer. We leverage our differentiated care delivery model to improve the health of our participants and help them avoid unnecessary hospitalizations and nursing home care. We enable our participants to remain in their homes as long as possible and age independently. As a result, as of June 2021, over30, 2023, approximately 90% of our participants livelived in their preferred setting: their home or community. OurWe believe our care model also delivers superiorbetter clinical outcomes: our participants have fewer hospital admissions, fewer low- to medium-severity emergency room visits and lower 30-day hospital readmission rates. Based on our analysis as of June 30, 2021, our participants live, on average, 1.4 years longer than comparable populations who choose nursing home care, based on a report by HHS dated June 27, 2017. Our care model is not “one size fits all,” it is customized to the unique needs of each participant. This approach leads to high levels ofparticipant, which benefits participant health and increases participant satisfaction with our program.
Our Competitive Advantages
We are the leading healthcare delivery platform by number of participants focused on providing all-inclusive, capitated care to high-cost, dual-eligible seniors. Our size and scale confer significant competitive advantages that further differentiate us in the marketplace.
Visionary leadership team with mission-focused culture.The members of our world-class senior leadership team, led by our President and Chief Executive Officer, Maureen Hewitt, have considerable years of healthcare experience. Ms. Hewitt and the senior leadership team’s commitment have fostered a mission-focused, participant-centered culture that drives our leading performance in managing frail dual-eligible seniors. In 2016, Ms. Hewitt led the conversion of InnovAge from a not-for-profit entity to a for-profit entity, which allowed us to access the required capital to grow our footprint nationally and reach more participants. Since the for-profit conversion, the number of participants under our care grew 119% from the fiscal year ended June 30, 2016 to the fiscal year ended June 30, 2021. In the same period, our total
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revenues grew 173%, reflecting a 22% CAGR, and our revenue grew organically at a 15% CAGR, which excludes contribution from acquired centers.
Our robust operating platform.We have standardized and streamlined our operations across markets and have invested meaningfully in the corporate infrastructure needed to drive participant satisfaction, manage healthcare costs and improve clinical outcomes at scale. Because of our scale, we have been able to invest in dedicated, well-staffed teams for all of our corporate and market-level functions. As a result, our physicians can focus on providing care and are not as burdened with additional administrative demands. Our scale also enables us to make large, organization-wide investments in sales and marketing, technology and clinical infrastructure. We leverage established technology solutions to drive improvements in our operations. We have developed robust internal marketing and referral source development capabilities, including significant investments in digital marketing. Our regulatory expertise and de novo development engine differentiate us from other providers. Importantly, we have a robust compliance infrastructure and team. These platform advantages, coupled with our mission-focused culture, give us confidence in our ability to drive growth and bring our participant-centered care model to more frail, dual-eligible seniors.
Our ability to recruit and retain participants.Our ability to recruit and retain participants has resulted in 10% annual, organic census growth over the last four years. Despite our high levels of participant satisfaction, awareness of the PACE model among potential participants and their families has historically remained low. Based on August 2021 information from the National PACE Association and data from the U.S. Census Bureau from 2018, we estimate that approximately 3% of patients who are PACE-eligible are currently enrolled in a PACE program. We continually invest in targeted sales and marketing capabilities to improve awareness of our program among potential eligible participants. We take a multichannel approach to sales and marketing, relying on a mix of traditional provider referral sources in the community as well as leveraging targeted digital marketing. We have realigned our marketing strategy to focus more on digital channels during the COVID-19 pandemic and to reach those searching for senior care alternatives. We are proud of the fact that the friends and family of our participants remain one of our largest referral sources. We believe our average referral conversion rate of 39.1% across all referral sources, calculated using the last two quarters of our fiscal year, is a testament to the value and attractiveness of our model. We experience very low levels of voluntary disenrollment, averaging 5% annually over the last three fiscal years, suggesting participants are highly satisfied with their care.
Access to capital.Although most companies in the broader managed healthcare industry operate as for-profit entities, the vast majority of our direct competitors are not-for-profit entities, which we believe limits their ability to access capital. Federal restrictions on for-profit PACE providers existed until 2015. We believe we are one of only a few for-profit PACE providers in the country and are the largest PACE-focused operator by number of participants. We are an early adopter of the for-profit PACE structure in a market with limited precedents. As a result, we have devoted resources to engaging with our non-profit community partners, some of which are unaccustomed to working with for-profit organizations, to familiarize them with our business model.
As part of our growth-oriented mindset, we have strategically deployed our capital to achieve scale and make the PACE care delivery model accessible to more frail, dual-eligible seniors. We believe our ability to attract investors and access capital will accelerate our growth plans and provides flexibility to simultaneously invest in sales and marketing efforts, de novo centers and strategic acquisitions, all of which will further solidify our leadership position in a fragmented, growing market.
We have a first mover advantage in an industry with high barriers to entry.Our industry has high barriers to entry driven by regulatory complexity, operating model complexity and to the cost associated with opening new locations. Furthermore, state and federal governments typically restrict the number of providers who can operate in a designated market service area, often allowing only a single provider per metropolitan statistical area (“MSA”). We believe this dynamic creates significant first-mover advantages in new markets and ample runway for future growth. We have invested
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significant time and resources in partnering with state and federal governments to launch operations in new MSAs. We believe that each new program we build reinforces our competitive position.
We are built to scale nationally.We have proven our ability to execute our model in multiple geographies, as evidenced by the strength of our center-level performance across markets. In all of our markets, our de novo centers opened in the last seven years generated positive Center-level Contribution Margins in fewer than 12 months of operation. This consistent performance highlights the predictability of our model and gives us the conviction to continue investing in building centers, hiring top-tier talent and attracting participants in new markets in order to drive long-term value creation.
We are one of the few providers operating a globally capitated care model. We have a long track record of successfully managing medical risk, driven by the strength of our operational playbook as well as our risk pool. We believe that we have created a repeatable, data-driven playbook to expand our brand and operations across the United States, and we have made substantial investments to support each key component of our approach. The fundamental aspects of our expansion playbook include deep regulatory knowledge, a disciplined approach to site selection, a targeted sales and marketing approach, a concerted effort to recruit and develop talent, scalable underlying clinical technology and an efficient, uniform operating model.
We have invested in multimodal care delivery capabilities.The COVID-19 pandemic has highlighted the advantages of our multimodal care delivery capabilities. The COVID-19 pandemic has disrupted traditional channels of care delivery and created barriers to accessing care for many dual-eligible seniors. Our investment in in-home and virtual care capabilities outside of the four walls of our care centers has enabled us to execute on each participant’s care plan without disruption. We believe the adaptability of our model and our ability to effectively engage our participants in numerous ways, without negatively impacting our capitation revenue, differentiates us from other care providers.
Our Growth Strategy
For the fiscal year ended June 30, 2023, our participant census was approximately 6,400 across our 17 centers in five states. We are now able to enroll participants at all of our centers and are gradually increasing enrollments in our Sacramento, California center and in our centers in Colorado. We also intend to increase the utilization of capacity at our existing centers.
of
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Reinvest in the InnovAge Platform to optimize performance
We believe that our ongoing investment in the InnovAge Platform drives greater efficiency across our business, creating a virtuous cycle that allows us to continue providing necessary care to our participants. Our platform is the largest among PACE providers based on participants served and one of the most geographically diverse.
suspension, termination or exclusion of our participation in government payor programs;
•loss of our licenses required to operate healthcare facilities or administer prescription drugs in the states in which we operate; •criminal or civil liability, fines, damages or monetary penalties for violations of healthcare fraud and abuse laws, including the federal Anti-Kickback Statute, Civil Monetary Penalties Law, the False Claims Act (“FCA”) and/or state analogs to these federal enforcement authorities, or other regulatory requirements; •enforcement actions by governmental agencies and/or state law claims for monetary damages by patients or employees relating to breach of, impermissible use or disclosure of, or other incident relating to protected health information (“PHI”) and other types of personal data or personally identifiable information (collectively, “PII” and, together with PHI, “PHI/PII”) that we collect, use, and disclose, in violation of federal or state health privacy laws, including, for example and without limitation, the Health Insurance Portability and Accountability Act of 1996, as amended by HIPAA, the CCPA as amended by the California Privacy Rights Act of 2020 (“CPRA”), other state data privacy and security laws, and the Privacy Act of 1974; •mandated changes to our practices or procedures that significantly increase operating expenses or decrease our revenue; •imposition of and compliance with corporate integrity agreements that could subject us to ongoing audits and reporting requirements as well as increased scrutiny of our business practices which could lead to potential fines, among other things; •termination of various relationships and/or contracts related to our business, including joint venture arrangements, contracts with government payors, and real estate leases or contracts with clinical providers; • |
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We expect that our industry will continue to be subject to substantial regulation, the scope and effect of which are difficult to predict. Our activities have been and could continue to be subject to investigations, audits and inquiries by various government and regulatory agencies with whom we contract at any time in the future. See Item 1A. Risk Factors, “Risks“Risks Related to Regulation.”Federal and State Regulation of PACE ProvidersWe are subject to a complex array of federal and state laws, regulations, and guidance, including legal requirements directly applicable to PACE providers as well as Medicare and Medicaid laws and regulations. These laws and guidancesguidance relate to our organizational structure, governance, fiscal soundness, marketing activities, participant enrollment and disenrollment, charges to participants, provision of healthcare and other services to participants, care planning activities, service delivery settings and maintenance of centers, participant rights, employment and contractual arrangements with health carehealthcare providers and other staff, quality assessment and performance improvement activities, participant grievances and appeals, medical records documentation, compliance program activities, and other aspects of our operations and financing. As a PACE provider that provides qualified prescription drug coverage, we are also subject to Medicare laws, regulations, and requirements applicable to Medicare Part D plan sponsors.As aThe regulations and contractual requirements applicable to PACE provider, weproviders are complex and our centers are subject to change, making it necessary for us to invest significant resources in complying with these requirements. Scrutiny through federal and state government audits, by oversight and enforcement and the highly technical regulatory scheme in which we operate require us to allocate significant resources to our compliance efforts. In addition, new centers that we may acquire in the future may have less developed compliance and quality infrastructures, which may require us to allocate additional resources to making any required enhancements.CMS and state agencies, whichregulatory authorities regularly audit our performance to determine our compliance with CMS’s regulations and our contracts with CMS and state authorities, and to assess the quality of the services we provide to our participants. Such audits have in the past, orand may in the future, result in the identification of deficiencies in connection with our compliance with regulatory requirements, participant quality of care, care plan development and implementation, grievance and appeal processes, clinicians acting outside of their scope of practice, and other issues. See Item 1A. Risk Factors, “Risks“Risks Related to Regulation” for a description of certain current audits.recent audits in the States of California, Colorado, and New Mexico. We expect these audits to continue in the future. In addition to risks associated with audits of our current centers, we also face risks associated with new centers that we may acquire in the future, which may not have developed the same compliance and quality infrastructure that we currently have in place. Issues identified through these audits can result in corrective action plans, civil monetary penalties, enrollment suspensions, and other financial penalties and enforcement actions, in addition to loss of our contracts with CMS and state agencies.The regulations and contractual requirements applicable to PACE providers are complex and subject to change, making it necessary for us to invest significant resources in complying with these requirements. Scrutiny through federal and state government audits, oversight and enforcement and the highly technical regulatory scheme mean that our compliance efforts in this area will continue to require significant resources. CMS and state regulatory authorities regularly audit our performance to determine our compliance with CMS’s regulations and our contracts with CMS and to assess the quality of the services we provide to our participants. Whether identified through thesesuch audits or other avenues, our failure to comply with the federal and state laws applicable to our business has and may continue to result in significant or material retroactive adjustments to and/or withholding of capitation payments, fines, criminal liability, civil monetary penalties, requirements to make significant changes to our operations, corrective action plans, CMS imposed sanctions (including suspension or exclusion from participation in government programs), loss of contracts, or cessation of our services.Licensing LawsWe, our healthcare professionals, and our centers are subject to various state and local licensure and certification requirements in connection with our provision of health carehealthcare and other services. Specifically, in some of the states in which we operate, we are required to maintain licensure or certification as an adult day health center, home health or home care provider, diagnostic and treatment center, pharmacy provider, clinical laboratory and/or other type of facility, and our employedaffiliated physicians and other clinicians also must be licensed or certified, as applicable, in the states in which they are providing services. We, our healthcare professionals and our centers are also subject to a variety of other state laws and regulations, relating to, among other things, the quality of medical care, equipment, privacy of health information, physician relationships, and qualifications of our personnel, and operating policies and procedures.our operations. In addition12
to state requirements, we, and/orour centers, and our healthcare professionals are in some cases subject to federal licensing and certification requirements, such as certification or waiver under the Clinical Laboratory Improvement Amendments of 1988 for performing limited laboratory testingservices and Drug Enforcement Administration registrationregistrations for writing prescriptions forprescribing, storing, and dispensing controlled substances. In addition, certain of the states where we currently operate or may choose to operate in the future regulate the operations and financial condition of risk bearing providers. These regulations can includeproviders and impose capital requirements, licensing or certification, governance controls, and other similar matters.obligations. While the states in which we operate do not currently impose these regulations on entities solely bearing risk under the PACE
solvency in the future; further, states in which we expand in the future may impose similar requirements on our operations.
The consequences associated with violating corporate practice of medicine laws vary by state and may result in physicians being subject to disciplinary action, as well as forfeiture of revenues from government payors for services rendered. For lay entities, violations may also bring both civil and, in more extreme cases, criminal liability for engaging in medical practice without a license. Some of the relevant laws, regulations and agency interpretations in states with corporate practice of medicine restrictions have been subject to limited judicial and regulatory interpretation. In limited cases, courts have required companies to divest or reorganize structures deemed to violate corporate practice restrictions. Moreover, state laws are subject to change. Any allegations or findings that we have violated these laws could have a material adverse impact on our reputation, business, results of operations and financial condition.
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Federal criminal penalties for the violation of the federal Anti-Kickback Statute include imprisonment, fines and exclusion of the provider from future participation in federal healthcare programs, including Medicare and Medicaid. Violations of the federal Anti-Kickback Statute are punishable by imprisonment for up to ten years, fines of up to $100,000 per kickback or both. Larger fines can be imposed upon corporations under the provisions of the U.S. Sentencing Guidelines and the Alternate Fines Statute. Individuals and entities convicted of violatinga criminal violation of the federal Anti-Kickback Statute are subject to mandatory exclusion from participation in Medicare, Medicaid, and other federal healthcare programs for a minimum of five years in the case of criminal conviction.years. Civil penalties for violation of the Anti-Kickback Statute include up to $104,330$112,131 in monetary penalties per violation, repaymentsfines, or penalties of up to three times the total payments between the parties to the arrangement and potential exclusion from participation in Medicare and Medicaid. Court decisions have held that the statute may be violated even if only one purpose of remuneration is to induce referrals. The Affordable Care Act (the “ACA”) amended the federal Anti-Kickback Statute to clarify the intent that is required to prove a violation. Under the statute as amended, the defendant does not need to have actual knowledge of the federal Anti-Kickback Statute or have the specific intent to violate it. In addition, the ACA amended the federal Anti-Kickback Statute to provide that any claims for items or services resulting from a violation of the federal Anti-Kickback Statute are considered false or fraudulent for purposes of the FCA.
FCA, which is further discussed below.
As noted in the examples above, we have endeavored to structure our business arrangements to fit within applicable federal Anti-Kickback Statute safe harbors and to otherwise operate in material compliance with the federal Anti-Kickback Statute and state analogs. Many of our arrangements are structured to provide for compensation that is fair market value for services actually rendered and in a manner that does not reflect the volume or value of referrals generated between the parties. In structuring our relationships with providers, including our physician partners, and other healthcare entities, we endeavor to comply with the regulatory requirements of such safe harbors and exceptions.If any of our business transactions or arrangements, including those described above, were found to violate the federal Anti-Kickback Statute, we could face, among other things, criminal, civil or administrative sanctions, including possible exclusion from participation in Medicare, Medicaid and other state and federal healthcare14
programs and FCA liability. Any findings that we have violated these laws could have a material adverse impact on our business, results of operations, financial condition, cash flows, reputation and stock price.
to the Stark Law prohibition.
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The federal government has used the FCA to prosecute a wide variety of alleged false claims and fraud allegedly perpetrated against Medicare and state healthcare programs, including but not limited to coding errors, billing for services not rendered, the submission of false cost or other reports, billing for services at a higher payment rate than appropriate, billing under a comprehensive code as well as under one or more component codes included in the comprehensive code, billing for care that is not considered medically necessary and false reporting of risk-adjusted diagnostic codes. Thecodes, encounter data or other information used to determine capitated payments. As noted above, the ACA provides that claims for payment that are tainted by a violation of the federal Anti-Kickback Statute (which could include, for example, illegal incentives or remuneration in exchange for enrollment or referrals) are false for purposes of the FCA. In addition, amendments to the FCA and Social Security Act impose severe penalties for the knowing and improper retention of overpayments from government payors. This could be relevant to our business the extent we received improperreceive payments on account of RAF determinations that are based on improper or erroneous records or reports. Failure to return overpayments could subject us to liability under the FCA, exclusion from government healthcare programs and penalties under the federal Civil Monetary Penalty Statute.
claim.
Under Section 6031 of the Deficit Reduction Act of 2005, as amended, if a state enacts a false claims act that is at least as stringent as the federal statute and that also meets certain other requirements, the state will be eligible to receive a greater share of any monetary recovery obtained pursuant to certain actions brought under the state’s false claims act. As a result, more states are expected to enact laws that are similar to the federal FCA in the future along with a corresponding increase in state false claims enforcement efforts.
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We could be exposed to a wide range of allegations to which the federal Civil Monetary Penalty Statute would apply. We perform monthly checks on our employees and certain affiliates and vendors using government databases to confirm that these individuals have not been excluded from federal programs or otherwise ineligible for payment. We have also implemented processes to ensure that we do not make payments to contracted or noncontracted providers listed on CMS’s preclusion list nor make payments for drugs prescribed by individuals on the preclusion list. However, should an individual or entity be excluded, on the preclusion list, or otherwise ineligible for payment and we fail to detect it, a federal agency could require us to refund amounts attributable to all claims or services performed or sufficiently linked to such individual or entity. Due to this area of risk and the possibility of other allegations being brought against us, we cannot foreclose the possibility that we could face allegations of noncompliance with the Civil Monetary Penalty Statute that have the potential for a material adverse impact on our business, results of operations and financial condition.
The federal regulations promulgated under
under HIPAA.
In addition to HIPAA, we
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Healthcare Reform Efforts
While there may be significant changes to the healthcare environment in the future, the specific changes and their timing are not yet apparent. Specifically, changes in Medicare and Medicaid could lower PACE rates or increase our expenses. Proposed December 27, 2022, the PACE Final Rule proposed rule included many changes to the current PACE regulations, including consideration of past performance when evaluating PACE organizations’ applications to offer a new PACE program or expand an existing PACE program. While such changes were not implemented for 2024, we anticipate many such provisions affecting PACE organizations may be addressed for fiscal year 2025 by CMS. Any failure to successfully implement strategic initiatives that respond to future legislative, regulatory, and executive changes could have a material adverse effect on government-sponsored PACE programs, our business, results of operations and financial condition.CMS and state Medicaid agencies also routinely adjust the RAF which is central to payment under PACE and Managed Medicaid programs in which we participate. The monetary “coefficient” values associated with diseases that we manage in our population are subject to change by CMS and state agencies. Such changes could have a material adverse effect on our financial condition. See Item 1A. Risk Factors, “Risks Related to Our Business — Our records and submissions to government payors may contain inaccurate or unsupportable information regarding risk adjustment scores of participants, which could cause us to overstate or understate our revenue and subject us to payment obligations or penalties.”Other RegulationsOur operations are subject to various state hazardous waste and non-hazardous medical waste disposal laws. These laws do not classify as hazardous most of the waste produced from medical services. Occupational Safety and Health Administration regulations require employers to provide workers who are occupationally subject to blood or other potentially infectious materials with prescribed protections. These regulatory requirements apply to all18
healthcare facilities, including our community centers, and require employers to make a determination as to which employees may be exposed to blood or other potentially infectious materials and to have in effect a written exposure control plan. In addition, employers are required to provide or employ hepatitis B vaccinations, personal protective equipment and other safety
Impact of COVID-19
The rapid spread of COVID-19 around the world and throughout the United States has altered the behavior of businesses and people, with significant negative effects on federal, state and local economies, the duration of which is unknown at this time. The virus has and continues to disproportionately impact older adults, especially those with chronic illnesses, which describes our participants. To date, we have experienced or expect to experience the following impacts on our business model due to COVID-19.
Care Model. Though the COVID-19 pandemic altered the mix of settings where we deliver care, our multimodal model ensured that our participants continued to receive the care they needed. We closed all our centers in March 2020 and transitioned to a 100% in-home and virtual care model that allowed for seamless delivery of care while increasing participant visit volume and maintaining continuity of care. Our telehealth solution received high satisfaction among participants, caregivers and IDTs. In February 2021, as the prevalence of COVID-19 decreased in the communities we serve, we began re-opening our centers using a phased approach to ensure the safety of both our staff and participants. In addition, community assisted living and skilled nursing facilities began to open to allow in-person visits by all members of our IDT. By June 2021, we fully opened all our centers and transitioned to a predominantly in-person, center-based care model, supplemented by telehealth. We expect telehealth care delivery to remain a part of our ongoing care model.
Growth. As a result of the COVID-19 pandemic, at the end of March 2020, we pivoted to a virtual enrollment model due to safety concerns for our employees and participants and to comply with local government ordinances. We also realigned our marketing strategy to increase our focus on digital channels during the COVID-19 pandemic and to reach those searching for senior care alternatives. During our fiscal fourth quarter, as we continue to recover from the pandemic, enrollment growth continued to improve and has returned to pre-COVID levels. We continue to build on our media strategy targeting lower funnel media tactics that have built a strong pipeline of digital leads for enrollment.
Revenue. Our revenue is capitated and not determined by the number of times we interact with our participants face-to-face. As of June 30, 2021, we had not experienced a decline in revenue as a result of the COVID-19 pandemic. The capitation payments we receive from Medicare are risk-adjusted based on documented encounters and diagnosed conditions. Government payors require that participants’ health issues be documented annually regardless of the permanence of the underlying causes. Historically, this documentation has been required to be completed during an in-person visit with a participant, but due to COVID-19 and going forward, CMS is now allowing documentation of conditions identified during qualifying telehealth visits with participants. Thus far, we have been able to document the health conditions of our participants during telehealth visits as well as we did during in-person visits prior to COVID-19; however, any issues with documenting such conditions could adversely impact Medicare RAF scores and our resulting revenue for future periods.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into legislation. The CARES Act, in addition to other provisions, provided for the temporary suspension of the automatic 2%
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reduction of Medicare claim reimbursements (sequestration) for the period of May 1, 2020 through December 31, 2021, which positively impacted our revenue during the year ended June 30, 2021.
Expenses. For the year ended June 30, 2021, as compared to the year ended June 30, 2020, on a PMPM basis, our internal care delivery costs decreased, while our external provider costs increased, as further described in Results of Operations, in part due to the impact of COVID-19 on our care delivery costs as we executed our participants’ care plans through a different mix of care settings. On a PMPM basis, we did not experience material changes in our aggregate participant-related care expenses
The United States continues to experience supply chain issues with respect to personal protective equipment (“PPE”) and other medical supplies used to prevent transmission of COVID-19. During the years ended June 30, 2021 and 2020, we acquired significantly greater quantities of medical supplies at significantly higher prices than pre-pandemic rates to ensure the safety of our employees and our participants. Costs related to PPE medical supplies represented approximately 0.6% and 2.1% of our total cost of care for the years ended June 30, 2021 and 2020, respectively. While the price of PPE may remain higher than historical levels for the foreseeable future, we do not expect these incremental costs to be material as a percentage of our total expenses.
See Item 1A. Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.
Trademarks and Intellectual Property
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In addition, the retrospective capitation payments we receive for each participant are determined by a participant’s RAF score, which is calculated twice per year and is based on the evolving acuity and chronic conditions of a participant. We estimate and accrue for the expected true-up payments of our participants. Though no assurances can be made in the future, we have historically used our best estimate for accruing for this payment, and we received net positive true-up payments during the fiscal years ended June 30, 20212023 and 2020.2022. Historically, these true-up payments typically occur between May and August, but the timing of these payments is determined by CMS, and we have neither visibility nor control over the timing of such payments.
InnovAge is a mission-driven organization, focused on providing its participants with improved quality of care and allowing them to live in their homes for as long as safely possible, all while reducing the overutilization of our hospitals and nursing homes. In terms of diversity, our senior management team strives to be a reflection of the communities it serves. Our employees drive our mission and share core values, many of whom have cared for an aging relative, that both stem from and define our culture and which plays a critical role in our execution at all levels in our organization. Our values are used in candidate screening and in employee evaluations to help reinforce their importance in our organization.
As of June 30, 2021,2023, we had approximately 1,8002,100 employees, including 1,200 clinical professionals. This count excludes contractors.professionals (excluding contract labor). We consider our relationship with our employees to be good. None of our employees are unionized or party to a collective bargaining agreement.
and a smaller reporting company
Anquarter.
•not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”); • |
As a result,requirement to present only two years of audited financial statements, plus unaudited condensed consolidated financial statements for any interim period and related discussion in the information that we provide tosection titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;
the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
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for the adoption of new or revised financial accounting standards under the JOBS Act until we are no longer an emerging growth company. Our election to use the phase-in periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the longer phase-in periods permitted under the JOBS Act and who will comply with new or revised financial accounting standards. If we were to subsequently elect instead to comply with public company effective dates, such election would be irrevocable pursuant to the JOBS Act.
Item 1A. Risk FactorsOur business, results of operations, and financial condition are subject to numerous risks and uncertainties. You should carefully consider the following risk factors before making a decision to invest in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us. If any of the following risks occur, our business, financial condition, operating results and prospects could be materially and adversely affected. You should read these risk factors in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and our consolidated financial statements and related notes in Item 8 of this Annual Report on Form 10-K.Summary of Risk FactorsThere are a number of risks related to our business, regulation, our indebtedness and our common stock that you should consider. You should carefully consider all the information presented in this section. Some of the principal risks related to our business include the following:●Under our PACE contracts, we assume all of the risk that the cost of providing services will exceed our compensation. Approximately 99.5% of our revenue for each of the years ended June 30, 2021 and 2020 is derived from capitation agreements with government payors in which we receive fixed PMPM fees. To the extent that our participants require more care than is anticipated and/or the cost of care increases, aggregate fixed capitation payments may be insufficient to cover the costs associated with treatment. If, in aggregate, our expenses exceed the underlying capitation payment received, we will not be able to fund operations and pursue acquisitions.●Our revenues and operations are dependent upon a limited number of government payors, particularly Medicare and Medicaid. When aggregating the revenue associated with Medicare and Medicaid by state, Colorado, California and Virginia accounted for a total of approximately 82.6% and 81.5% of our capitation revenue for the years ended June 30, 2021 and 2020, respectively. A majority of our revenues will continue to be derived from a limited number of key government payors, which may terminate their contracts with us upon the occurrence of certain events. The sudden loss of any of our government contracts or the renegotiation of any of our contracts could adversely affect our operating results and limit our ability to expand into new markets.●Reductions in PACE reimbursement rates or changes in the rules governing PACE programs could have a material adverse effect on our financial condition and results of operations. We receive a substantial portion of our revenue through the PACE program, which accounted for 99.6% and 99.5% of our revenue for the years ended June 30, 2021 and 2020, respectively. As a result, our operations are dependent on government funding levels for PACE programs. Any changes that limit or reduce general PACE rates could have a material adverse effect on our business, results of operations, financial•Our growth strategy may not prove viable. Our ability to grow depends upon a number of factors, including future audits, investigations and remediation efforts, recruiting new participants, finding suitable geographies that have aging populations and viable rate structures, entering into government payor arrangements in new jurisdictions, ensuring compliance with regulatory and contractual requirements, identifying appropriate locations or existing centers, purchasing centers or obtaining leases, completing build-outs of new centers within proposed timelines and budgets and hiring members of our IDTs and other employees. Additionally, our growth strategy is dependent upon our ability to identify and successfully complete acquisitions.22
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Risks Related to Our Business
Under our PACE contracts, we assume all of the risk that the cost of providing services will exceed our compensation.compensation
. Approximately 99.5%99.8% and 99.7% of our revenue for each of the years ended June 30, 2023 and 2022, respectively, was derived from capitation agreements with government payors in which we receive fixed PMPM fees. To the extent that our participants require more care than is anticipated and/or the cost of care increases, aggregate fixed capitation payments may be insufficient to cover the costs associated with treatment. If, in aggregate, our expenses exceed the underlying capitation payment received, we will not be able to fund operations and pursue growth.
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Medicare payments, including payments to PACE organizations, by two percent2% per year for a period of years. Subsequent legislation extended these cuts through 2030, but legislation enacted in 2020 suspended thewhich cuts during the pandemic. Currently, the 2% cuts under sequestration are scheduled to be reinstated in 2022, which once reinstated will negatively impact our revenue. We cannot predict what other deficit reduction, other payment reduction or budget enforcement initiatives may be proposed by Congress, which could impact our business, including whether Congress will attempt to increase, restructure or suspend sequestration or the impact sequestration, other payment reductions or budget enforcement initiatives may have on our business.
sequestration.
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occurred after November 2, 2015.$27,018 per claim. There is a high potential for substantial penalties in connection with any alleged FCA violations.
us that the plans believe are attributable to risk adjustment data.
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In addition, as part of past attempts to repeal, replace or modify the ACA and as a means to reduce the federal budget deficit, there have in recent years been congressional efforts to move Medicaid from an open-ended program with coverage and benefits set by the federal government to one in which states receive a fixed amount of federal funds, either through block grants or per capita caps, and have more flexibility to determine benefits, eligibility or provider payments. If those changes are implemented, we cannot predict whether the amount of fixed federal funding to the states will be based on current payment amounts, or if it will be based on lower payment amounts, which would negatively impact those states that expanded their Medicaid programs in response to the ACA. We expect state and federal efforts to reduce healthcare spending to continue for the foreseeable future.
The severity, magnitude
Even though to date, the COVID-19 pandemic has not materially adversely impacted our revenue or expenses, adverse market conditions resulting from the COVID-19 pandemic may materially and adversely affect our business and the value of our common stock. Numerous state and local jurisdictions, including some markets where we operate, have and could continue to impose, and others in the future may impose, travel bans and restrictions, “shelter-in-place” orders or shutdowns, quarantines, curfews, executive orders and similar government orders and restrictions for their residents to control the spread of the virus that causes COVID-19. Such orders or restrictions have resulted in largely remote operations at our headquarters and centers, work stoppages among some vendors and suppliers, slowdowns and delays, travel restrictions and cancellation of events and have restricted the ability of our front-line outreach teams to host and attend community events, among other effects, thereby significantly impacting our operations. In addition, the COVID-19 virus disproportionately impacts older adults, especially those with chronic illnesses, which describes many of our participants.
The COVID-19 pandemic has significantly increased demand for our telehealth and in-home offerings. The telehealth market is relatively new, and it is uncertain whether it will achieve and sustain high levels of demand, consumer acceptance and market adoption. By June 2021, we fully opened all our centers and transitioned to a predominantly in-person, center-based care model, supplemented by telehealth. We expect telehealth care delivery to remain a part of our ongoing care model. If our participants do not perceive the benefits of telehealth services, or if our services are not competitive, it could have a material adverse effect on our business, financial condition or results of operations. Similarly, individual and healthcare industry concerns or negative publicity regarding participant confidentiality and privacy in the context of telehealth could limit market acceptance of such healthcare services. In addition, some of our participants may be unable to use the telehealth technology on their own. Because some of our participants may not be comfortable with a team member coming to their home to deliver face-to-face care or entering with a device to assist with using our telehealth services, participants may be reluctant to seek necessary care given their inability to use telehealth services, coupled with preference to stay at home due to the continuing risks of the COVID-19 pandemic. This could have the effect of deferring healthcare costs that we will need to incur at later periods and may also affect the health of participants who defer treatment, which may cause our costs to increase in the future.
Due to the COVID-19 pandemic, we may not be able to document the health conditions of our participants as completely as we have in the past.
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well as we did during in-person visits prior to COVID-19; however, anyAny issues with documenting such conditions, such as those that could be presented during a pandemic or epidemic, could adversely impact our ability to accurately record Medicare RAF scores and our resulting revenue for future periods.may result in adjustments to revenues. See “Risk Factors—Item 1A. Risk Factors “—Risks Related to Our Business—Our records and submissions to government payors may contain inaccurate or unsupportable information regarding risk adjustment scores of participants, which could cause us to overstate or understate our revenue and subject us to repayment obligations or penalties.”
On March 27, 2020,
As of June 30, 2021, we incurred $8.3 million of COVID-19 related costs, $4.8 million of whichcash flows. In addition, the technology related to the year ended June 30, 2021. Itproducts critical to the services we provide is uncertain whethersubject to new developments which may result in the availability of superior products. If we are not able to access superior products or new medical products, including biopharmaceuticals or medical devices, on a cost-effective basis or if suppliers are not able to fulfill our COVID-19 related expenses will continuerequirements for such products, we could face attrition with respect to increase,our participants or health care providers and other personnel and other negative consequences which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
The extent and continued impact of the COVID-19 pandemic on our business will depend on certain developments, including: the duration and spread of the outbreak, including virus variants; government responses to the pandemic, including responses to state budget shortfalls; the impact on our participants and enrollment; the availability, effectiveness and receipt of vaccines by our participants and our employees; the impact on participant, industry or employee events; and the effect on our supply chains, all of which continue to be uncertain and are difficult to fully predict. Because of our business model, the full impact of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial condition until future periods.
We began operating as a for-profit company in 2016 and have limited operating history as a for-profit company. Accordingly, our historical and recent financial and business results may not be representative of what they may be in the future.Table
ofWe were originally formed in 2007 as a not-for-profit company and converted to a for-profit company in 2016. Due to our relatively limited operating history as a for-profit company, our historical and recent financial and business results may not be representative of what they may be in the future. We have encountered and will continue to encounter significant risks and uncertainties frequently experienced by growing companies in rapidly changing and highly regulated industries, such as determining appropriate investments for our limited resources, competition from other providers, acquiring and retaining participants, hiring, integrating, training and retaining skilled Contents
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personnel, unforeseen expenses and challenges in forecasting accuracy. Although we have successfully expanded our footprint outside of Colorado and our other existing geographies and intend to continue to expand into new geographies, we cannot provide assurance that any new centers we open, centers that we acquire, or new geographies we enter will be successful. If we are unable to increase participant enrollment, successfully manage our external provider costs or successfully expand into new geographies, our revenue and our ability to sustain profitability could be impaired. If we make acquisitions to expand our footprint, we may experience operational difficulties or challenges with integrating and realizing the benefits of such acquisitions and we may need to expend resources to ensure such centers are operating in compliance with regulatory and contractual requirements, as well as any corrective action plans. Additional risks include, but are not limited to, our ability to effectively manage growth, process, store, protect and use personal data in compliance with governmental regulations and contractual obligations and manage our obligations as a provider of healthcare services under Medicare, Medicaid and PACE. If our assumptions regarding these and other similar risks and uncertainties, which we use to plan our business, are incorrect or change as we gain more experience operating a for-profit business or due to changes in our industry, or if we do not address these challenges successfully, our operating and financial results could differ materially from our expectations and our reputation and business could suffer materially.
We expect to continue to increase our headcount and to hire or contract with more physicians, nurses and other specialized medical personnel in the future as we grow our business and open or acquire new centers. We will need to continue to hire, train and manage additional qualified information technology, operations and marketing staff, and improve and maintain our technology and information systems to properly manage our growth. If our new hires perform poorly, if we are unsuccessful in hiring, training, managing and integrating these new employees, if we are not successful in retaining our existing employees, or if we are unable to provide the care and services that our participants require in compliance with regulatory requirements our business may be adversely affected.
Our growth strategy may not prove viable, and we may not realize expected results.
Our business strategy is to grow rapidly by expanding our network of centers and is significantly dependent on adding center capacity in our existing markets, expanding into new geographies by developing de novo centers, executing on tuck-in acquisitions, recruiting new participants and directly contracting with government payors, such as Medicare and Medicaid. We seek growth opportunities both organically and through acquisitions, the availability and success of which may be impacted by factors outside of our control. Our ability to grow organically depends upon a number of factors, including recruiting new participants, finding suitable geographies that have aging populations and viable rate structures, entering into government payor arrangements in new jurisdictions, ensuring compliance with regulatory and contractual requirements, identifying appropriate facilities, purchasing facilities or obtaining leases, completing build-outs of new facilities within proposed timelines and budgets and hiring members of our IDTs and other employees. We cannot guarantee that we will be successful in pursuing our growth strategy. If we fail to evaluate and execute new business opportunities properly, we may not achieve anticipated benefits and may incur increased costs.
Our growth strategy involves a number of risks and uncertainties, including that:
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There can be no assurance that we will be able to successfully capitalize on growth opportunities, which may negatively impact our business model, revenues, results of operations and financial condition.
If we are unable to attract new participants, our revenue growth will be adversely affected.
To increase our revenue, our business strategy is to expand the number of centers and participants in our network. In order to support such growth, we must continue to recruit and retain a sufficient number of new participants both within our existing centers and in new centers. Our ability to do so depends in large part on the success of our sales and marketing efforts, which are subject to various federal and state laws and regulations that impact marketing. We are focused on frail, dual-eligible senior population and face competition from other healthcare providers and payors in the recruitment of potential participants. Therefore, we must demonstrate that our services provide a viable solution for potential participants. If we are unable to convince the frail, dual-eligible senior population of the benefits of the InnovAge Platform or if potential or existing participants prefer the healthcare provider model of one of our competitors, we may not be able to effectively implement our growth strategy, which depends on our ability to attract new participants. Participant enrollment for PACE is ongoing each month and require states to verify eligibility, a process which can result in delays in enrollment. Our inability to identify and recruit new eligible participants and retain existing participants would harm our ability to execute our growth strategy and may have a material adverse effect on our business operations and financial position.
We conduct a significant percentage of our operations in the State of Colorado and, as a result, we are particularly susceptible to anyregulatory issues and reduction in budget appropriations for our services or any other adverse developments in that state.
contracts, and materially adversely impact our results.
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competencies and continue to effectively train and manage our employees. We will be unable to manage our business effectively if we are unable to alleviate the strain on resources caused by growth in a timely and successfulefficient manner. As our participant base grows following the lifting of sanctions in the states of California and Colorado, we will need to maintain the best practices we developed during our recent audits. If we fail to effectively manage our anticipatedpotential growth and change or fail to ensure that the level of care and services provided by our employees complies with regulatory and contractual requirements, the qualityand levels of our services may suffer, which could negatively affectpatient service and satisfaction, our brand and reputation, harmcould suffer, adversely affecting our ability to attract and retain participants and employees and lead to the need for corrective actions.
In addition, as we expand our business, it
The healthcare industry is highly competitive.
harmed.
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face competitors with greater knowledge of such local markets. We anticipate that further geographic expansion will require us to make a substantial investment of management time, capital and/or other resources. There can be no assurance that we will be able to continue to successfully expand our operations in any new geographic markets.
Our overall business results may suffer from an economic downturn.
During periods of high unemployment, including as a result of the COVID-19 pandemic, governmental entities often experience budget deficits as a result of increased costs and lower than expected tax collections. These budget deficits at federal, state and local government entities have decreased, and may continue to decrease, spending for health and human service programs, including Medicare, Medicaid, PACE and similar programs, which represent nearly all of the payor sources for our centers.
Security breaches, loss of data and other disruptions have in the past and could in the future compromise sensitive information related to our business or our participants, or prevent us from accessing critical information and expose us to liability, and could adversely affect our business and our reputation.
In the ordinary course of our business, we create, receive, maintain, transmit, collect, store, use, disclose, share and process (collectively, “Process”) sensitive data, including protected health information (“PHI”) and other types of personal data or personally identifiable information (collectively, “PII” and, together with PHI, “PHI/PII”) relating to our employees, participants and others. We also Process and contract with third-party service providers to Process sensitive information, including PHI/PII, confidential information and other proprietary business information. We manage and maintain PHI/PII and other sensitive data and information using our on premise systems, and we plan to implement cloud-based computing center systems in the future. Third-party service providers that serve our participants may Process PHI/PII data either in their own on-site systems, at managed or co-located data centers, or in the cloud.
We are highly dependent on information technology networks and systems, including the internet, to securely Process PHI/PII and other sensitive data and information. Security breaches of this infrastructure, whether ours or of our third-party service providers, including physical or electronic break-ins, computer viruses, ransomware, attacks by hackers and similar breaches, and employee or contractor error, negligence or malfeasance, have occurred in the past, and have in the past and could in the future, create system disruptions, shutdowns or unauthorized access, acquisition, use, disclosure or modifications of such data or information, and could cause PHI/PII to be accessed, acquired, used, disclosed or modified without authorization, to be made publicly available, or to be further accessed, acquired, used or disclosed.
We use third-party service providers for important aspects of the Processing of employee and participant PHI/PII and other confidential and sensitive data and information, and therefore rely on third parties to manage functions that have material cybersecurity risks. Because of the sensitivity of the PHI/PII and other sensitive data and information that we and our service providers Process, the security of our technology platform and other aspects of our services, including those provided or facilitated by our third-party service providers, are important to our operations and business strategy. We have implemented certain administrative, physical and technological safeguards to address these risks; however, such policies and procedures may not address certain HIPAA requirements or address situations that could lead to increased privacy or security risks, and agreements with contractors and other third-party service providers who handle this PHI/PII and other sensitive data and information for us. However, some PACE organizations that we have acquired in the past or may acquire in the future may not have implemented such agreements with their third-party service providers, which may expose us to legal claims or proceedings, liability, and penalties. The organizations that we have acquired, or may acquire, may not have in place all of the required agreements, and to the extent we terminate contracts with such third-party service providers, we may not be able to ensure that the relevant PHI/PII of our participants is maintained in compliance with HIPAA. The training that we provide to our workforce and measures taken to protect our systems, the systems of our contractors or third-party service providers, or more generally the PHI/PII or other sensitive data or information that we or our contractors or third-party service providers Process may not adequately protect us from the risks associated with Processing sensitive data and information. We may be required to expend significant capital and other resources to protect against security breaches, to safeguard the privacy, security, and confidentiality of PHI/PII and other sensitive data and information, to investigate, contain, remediate, and mitigate actual or potential security breaches, and/or to
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report security breaches to participants, employees, regulators, media, credit bureaus, and other third parties in accordance with applicable law and to offer complimentary credit monitoring, identity theft protection, and similar services to participants and/or employees where required by law or otherwise appropriate. Despite our implementation of security measures, cyber-attacks are becoming more sophisticated, and frequent, and we or our third-party service providers may be unable to anticipate these techniques or to implement adequate protective measures against them or to prevent additional attacks. Our information technology networks and systems used in our business, as well as those of our service providers, may experience an increase in attempted cyber-attacks, seeking to take advantage of shifts to employees working remotely, as a result of the COVID-19 pandemic or otherwise, using their household or personal internet networks. The success of any of these attempts could substantially impact our platform, and the privacy, security, or confidentiality of the PHI/PII and other sensitive data and information contained therein or otherwise Processed in the ordinary course of our business operations, and could ultimately harm our reputation and our business. In addition, any actual or perceived security incident or breach may cause us to incur increased expenses to improve our security controls and to remediate security vulnerabilities. We exercise limited control over our third-party service providers and, in the case of some third-party service providers, may not have evaluated the adequacy of their security measures, which increases our vulnerability to problems with services they provide.
A security breach, security incident, or privacy violation that leads to unauthorized use, disclosure, access, acquisition, loss or modification of, or that prevents access to or otherwise impacts the confidentiality, security, or integrity of, participant or employee information, including PHI/PII that we or our third-party service providers Process, could harm our reputation, compel us to comply with breach notification laws, cause us to incur significant costs for investigation, containment, remediation, mitigation, fines, penalties, settlements, notification to individuals, regulators, media, credit bureaus, and other third parties, complimentary credit monitoring, identity theft protection, training and similar services to participants and/or employees where required by law or otherwise appropriate, for measures intended to repair or replace systems or technology and to prevent future occurrences. We may also be subject to potential increases in insurance premiums, resulting in increased costs or loss of revenue.
If we or our third-party service providers are unable to prevent or mitigate security breaches, security incidents or privacy violations in the future, or if we or our third-party service providers are unable to implement satisfactory remedial measures with respect to known or future security incidents, or if it is perceived that we have been unable to do so, our operations could be disrupted, we may be unable to provide access to our systems, and we could suffer a loss of participants, loss of reputation, adverse impacts on participant and investor confidence, financial loss, governmental investigations or other actions, regulatory or contractual penalties, and other claims and liability. In addition, security breaches and incidents and other compromise or inappropriate access to, or acquisition or processing of, PHI/PII or other sensitive data or information can be difficult to detect, and any delay in identifying such breaches or incidents or in providing timely notification of such incidents may lead to increased harm and increased penalties.
Any such security breach or incident or interruption of our systems or those of any of our third-party service providers could compromise our networks or data security processes, and PHI/PII or other sensitive data and information could be made inaccessible or could be compromised, used, accessed, or acquired by unauthorized parties, publicly disclosed, lost or stolen. Any such interruption in access, compromise, use, improper access, acquisition, disclosure or other loss of information could result in legal claims or proceedings and/or liability or penalties under laws and regulations that protect the privacy, confidentiality, or security of PHI/PII, including, without limitation, HIPAA, the CCPA, other state PHI/PII privacy, security, or consumer protection laws, and state breach notification laws. Unauthorized access, loss or dissemination of PHI/PII could also disrupt our operations, including our ability to perform our services, access, collect, process, and prepare company financial information, provide information about our current and future services and engage in other participant and clinician education and outreach efforts.
Any such incident could also result in the compromise of our proprietary information, which could adversely affect our business and competitive position. While we maintain insurance covering certain security and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability and in any event, insurance coverage would not address the reputational damage that could result from a security incident.
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In February 2021, we became aware that a former third-party service provider of acquired organizations was the victim of a ransomware attack that occurred in December 2020. We understand that this attack resulted in the unauthorized access and exfiltration of the PHI/PII of over 2,000 of our current and former participants. The third-party service provider engaged outside counsel and a forensic investigator to assist. To date, the service provider has reported this incident to affected participants, their personal representatives or their next of kin, the U.S. Department of Health and Human Rights Office for Civil Rights (“OCR”), media outlets, state regulators, and others, as required. Participants affected by the incident have been offered the opportunity to enroll in credit monitoring service at the service provider’s expense. To date, the service provider has advised that they have not received any reports or concerns regarding misuse or potential identity theft issues. However, it is possible that OCR and/or state regulators could nonetheless initiate investigations of the Company and/or the former third-party service provider in connection with the incident, that the Company could be subject to civil penalties, resolution agreements, monitoring or similar agreements, or third-party claims against the Company, including class-action lawsuits. Although this attack was against a former third-party service-provider, we remain responsible under HIPAA for our participant’s PHI/PII, and any failure on our part to comply with HIPAA in connection with such data could subject us to civil penalties, resolution agreements, monitoring or similar agreements or other enforcement action. The Company confirmed that this former third-party service provider has removed the PHI/PII of our participants from its servers, and the service provider has advised that all vulnerabilities in its environment and lack of security controls have been resolved. In addition, future incidents of this nature that could occur with respect to our systems or the systems of our third-party service providers, as well as any other security incident or other misuse or disclosure of our participant or other data could lead to improper use or disclosure of Company information, including PHI/PII obtained from our participants, and information from employees. Any such incident or misuse of data could harm our reputation, lead to legal exposure, divert management attention and resources, increase our operating expenses due to the employment of consultants and third party experts and the purchase of additional security infrastructure, and/or subject us to liability, resulting in increased costs and loss of revenue. The perception that we do not adequately protect the privacy of information of our participants could inhibit our growth and damage our reputation.
We may be subject to legal proceedings, enforcement actions and litigation, malpractice and privacy disputes, which are costly to defend and could materially harm our business and results of operations.
We may be party to lawsuits and legal proceedings in the normal course of business. These matters are often expensive and disruptive to normal business operations. We may face allegations, lawsuits and regulatory inquiries, requests for information, audits and investigations regarding care and services provided to participants, the FCA, data privacy, security, labor and employment, consumer protection or intellectual property. We may also face allegations or litigation related to our acquisitions, securities issuances or business practices, including public disclosures about our business. Litigation and regulatory proceedings may be protracted and expensive, and the results are difficult to predict. Certain of these matters may include speculative claims for substantial or indeterminate amounts of damages and include claims for injunctive relief. Additionally, our litigation costs could be significant. Adverse outcomes with respect to litigation or any of these legal proceedings may result in significant settlement costs or judgments, penalties, fines and sanctions. In the event of compliance issues, sanctions could include civil monetary penalties, corrective action plans (as is the case currently with respect to our Sacramento, California center), monitoring, contract termination, and/or CMS and/or Medicaid agencies suspending or restricting enrollment with us, which could negatively impact our geographical expansion and revenue growth. We may also become subject to periodic audits, which would likely increase our regulatory compliance costs and may require us to change our business practices, which could negatively impact our revenue growth. Managing legal proceedings, regulatory inquiries, litigation and audits, even if we achieve favorable outcomes, is time-consuming and diverts management’s attention from our business.
The results of regulatory proceedings, investigations, inquiries, litigation, claims, and audits cannot be predicted with certainty, and determining reserves for pending litigation and other legal, regulatory and audit matters requires significant judgment. There can be no assurance that our expectations will prove correct, and even if these matters are resolved in our favor or without significant cash settlements, these matters, and the time and resources necessary to litigate or resolve them, could harm our reputation, business, financial condition, results of operations and the market price of our common stock.
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We also may be subject to lawsuits under the FCA and comparable state laws for submitting allegedly fraudulent, inadequately supported or otherwise inappropriate bills for services to the Medicare and Medicaid programs. These lawsuits, which may be initiated by government authorities as well as private party relators, can involve significant monetary damages, fines, attorney fees and the award of bounties to private plaintiffs who successfully bring these suits, as well as to the government programs. In recent years, government oversight and law enforcement have become increasingly active and aggressive in investigating and taking legal action against potential fraud and abuse.
In July 2021, we received a civil investigative demand (“CID”) from the Attorney General for the State of Colorado. The CID requests information and documents regarding Medicaid billing, patient services and referrals at InnovAge’s Colorado program. We are currently unable to predict the outcome of this investigation. See Item 3, Legal Proceedings.
Furthermore, our business exposes us to potential medical malpractice, professional negligence or other related actions or claims that are inherent in the provision of healthcare services. While the industry has not seen an increase in the number of claims of this nature due to the impact of the COVID-19 pandemic, this remains a possibility due to the relatively lengthy claim development inherent in professional liability claims. These claims, with or without merit, could cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our core business, harm our reputation and adversely affect our ability to attract and retain participants, any of which could have a material adverse effect on our business, financial condition and results of operations.
Although we maintain third-party professional liability insurance coverage, it is possible that claims against us may exceed the coverage limits of our insurance policies. Even if any professional liability loss is covered by an insurance policy, these policies typically have substantial deductibles for which we are responsible. Professional liability claims in excess of applicable insurance coverage could have a material adverse effect on our business, financial condition and results of operations. In addition, any professional liability claim brought against us, with or without merit, could result in an increase of our professional liability insurance premiums. Insurance coverage varies in cost and can be difficult to obtain, and we cannot guarantee that we will be able to obtain insurance coverage in the future on terms acceptable to us or at all. If our costs of insurance and claims increase, then our earnings could decline.
Our business depends on our ability to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems.
Our business is highly dependent on maintaining effective information systems as well as the integrity and timeliness of the data we use to serve our participants, support our care teams and operate our business. Because of the large amount of data that we collect and manage, it is possible that hardware or software failures or errors in our systems could result in data loss or corruption or cause the information that we collect to be incomplete or contain significant inaccuracies. If our data were found to be inaccurate or unreliable due to fraud or other error, or if we, or any of the third-party service providers we engage, were to fail to maintain information systems and data integrity effectively, we could experience operational disruptions that may impact our participants and providers and hinder our ability to provide services, retain and attract participants, manage our participant risk profiles, establish reserves, report financial results timely and accurately and maintain regulatory compliance, among other things.
Our information technology strategy and execution are critical to our continued success. We must continue to invest in long-term solutions that will enable us to anticipate participant needs and expectations, enhance the participant experience, act as a differentiator in the market and protect against cybersecurity risks and threats. Our success is dependent, in large part, on maintaining the effectiveness of existing technology systems and continuing to deliver technology systems that support our business processes in a cost-efficient and resource-efficient manner, including through maintaining relationships with third-party providers of technology. Increasing regulatory and legislative changes will place additional demands on our information technology infrastructure that could have a direct impact on resources available for other projects tied to our strategic initiatives. In addition, recent trends toward greater participant engagement in health care require new and enhanced technologies, including more sophisticated applications for mobile devices. Connectivity among technologies is becoming increasingly important. Our failure to effectively invest in and properly maintain the uninterrupted operation and data integrity of our
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information technology and other business systems could adversely affect our results of operations, financial position and cash flow.
A failure to accurately estimate incurred but not reported medical expenses or the risk scores of our participants could adversely affect our results of operations.
External provider costs include estimates of future medical claims that have been incurred by the participant but for which the provider has not yet billed. These claim estimates are made utilizing actuarial methods and are continually evaluated and adjusted by management, based upon our historical claims experience and other factors, including an independent assessment by a nationally recognized actuarial firm. Positive or negative adjustments, if necessary, are made when the assumptions used to determine our claims liability change and when actual claim costs are ultimately determined.
Due to certain uncertainties associated with the factors used in these estimates and changes in the patterns and rates of medical utilization, materially different amounts could be reported in our financial statements for a particular period under different conditions or using different, but still reasonable, assumptions. It is possible that our estimates of this type of claim may be excessive or inadequate in the future and we may be obligated to repay certain amounts to CMS. In such event, our results of operations could be adversely impacted. Further, the inability to estimate these claims accurately may also affect our ability to take timely corrective actions, further exacerbating the extent of any adverse effect on our results of operations.
In addition, our operational and financial results will experience some variability depending upon the time of year in which they are measured. For example, medical costs vary seasonally depending primarily on the weather because certain illnesses, such as the influenza virus, are far more prevalent during colder months of the year. It is still uncertain if the virus that causes COVID-19 will follow seasonal patterns and whether, as a result, the seasonality of our results will change in the future. Historically, we have seen higher levels of per-participant medical costs in the second and third quarters of our fiscal year.
Our use of “open source” software could adversely affect our ability to offer our services and subject us to possible litigation.
We may use open source software in connection with our services. Companies that incorporate open source software into their technologies have, from time to time, faced claims challenging the use of open source software and/or compliance with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or claiming noncompliance with open source licensing terms. Such litigation could be costly and time consuming, divert the attention of management, and the outcomes may not be favorable. While the use of open source software may reduce development costs and speed up the development process, it may also present certain risks that may be greater than those associated with the use of third-party commercial software. For example, open source software is generally provided without any warranties or other contractual protections regarding infringement or the quality of the code, including the existence of security vulnerabilities.
We lease approximately half of our centers and may experience risks relating to lease termination, lease expense escalators, lease extensions and special charges.
We currently lease eight of our 18 centers. Our leases typically have terms of nine years, and generally provide for renewal or extension options for an average total potential term of approximately 25 years. Each of our lease agreements provides that the lessor may terminate the lease, subject to applicable cure provisions, for a number of reasons, including the defaults in any payment of rent, taxes or other payment obligations or the breach of any other covenant or agreement in the lease. If a lease agreement is terminated, there can be no assurance that we will be able to enter into a new lease agreement on similar or better terms or at all.
Our lease obligations often include annual fixed rent escalators ranging between 2% and 3%. These escalators could impact our ability to satisfy certain obligations and financial covenants. If the results of our operations do not increase at or above the escalator rates, it would place an additional burden on our results of operations, liquidity and financial position.
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As we continue to expand and have leases with different start dates, it is likely that some number of our leases will expire each year. Our lease agreements often provide for renewal or extension options. There can be no assurance that these rights will be exercised in the future or that we will be able to satisfy the conditions precedent to exercising any such renewal or extension. In addition, if we are unable to renew or extend any of our leases, we may lose all of the facilities subject to that master lease agreement. If we are not able to renew or extend our leases at or prior to the end of the existing lease terms, or if the terms of such options are unfavorable or unacceptable to us, our business, financial condition and results of operation could be adversely affected.
Leasing facilities pursuant to binding lease agreements may limit our ability to exit markets. For instance, if one facility under a lease becomes unprofitable, we may be required to continue operating such facility or, if allowed by the landlord to close such facility, we may remain obligated for the lease payments on such facility. We could incur special charges relating to the closing of such facility, including lease termination costs, impairment charges and other special charges that would reduce our profits and could have a material adverse effect on our business, financial condition or results of operations.
Our failure to pay the rent or otherwise comply with the provisions of any of our lease agreements could result in an “event of default” under such lease agreement and also could result in a cross default under other lease agreements and agreements for our indebtedness. Upon an event of default, remedies available to our landlords generally include, without limitation, terminating such lease agreement, repossessing and reletting the leased properties and requiring us to remain liable for all obligations under such lease agreement, including the difference between the rent under such lease agreement and the rent payable as a result of reletting the leased properties, or requiring us to pay the net present value of the rent due for the balance of the term of such lease agreement. The exercise of such remedies could have a material adverse effect on our business, financial position, results of operations and liquidity.
If certain of our suppliers do not meet our needs, if there are material price increases on supplies, if we are not reimbursed or adequately reimbursed for medical products we purchase or if we are unable to effectively access new technology or medical products, it could negatively impact our ability to effectively provide the services we offer and could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We have significant suppliers that may be the sole or primary source of products critical to the services we provide, or to which we have committed obligations to make purchases, sometimes at particular prices. If any of these suppliers do not meet our needs for the products they supply, including in the event of a product recall, shortage or dispute, and we are not able to find adequate alternative sources, or if we experience material price increases from these suppliers that we are unable to mitigate, it could have a material adverse impact on our business, results of operations, financial condition and cash flows. In addition, the technology related to the products critical to the services we provide is subject to new developments which may result in the availability of superior products. If we are not able to access superior products or new medical products, including biopharmaceuticals or medical devices, on a cost-effective basis or if suppliers are not able to fulfill our requirements for such products, including PPE, we could face attrition with respect to our participants or health care providers and other personnel and other negative consequences which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture and our business may be harmed.
We believe that our culture has been and will continue to be a critical contributor to our success. We expect to continue to hire additional personnel as we expand, and we believe our corporate culture has been crucial in our success and our ability to attract highly skilled personnel. If we do not continue to develop our corporate culture or maintain and preserve our core values as we grow and evolve, we may be unable to foster the innovation, curiosity, creativity, focus on execution, teamwork and the facilitation of critical knowledge transfer and knowledge sharing we believe we need to support our growth. Moreover, liquidity available to our employee shareholders following our IPO could lead to disparities of wealth among our employees, which could adversely impact relations among
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employees and our culture generally. Our anticipated headcount growth may result in a change of corporate culture, which could harm our business.
Competition for physicians and other clinical personnel or other factors could increase our labor costs and adversely affect our revenue, profitability and cash flows.
If our
Negative publicity regarding
Negative publicity regarding the managed healthcare industry generally,financial position and cash flow.
Our centers have been and may be negatively impacted by public health emergencies, such as the COVID-19 pandemic, weather and other factors beyond our control.
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displacement of our participants, employees and care teams, or force certain of our centers to close temporarily. Our insurance coverage may not compensate us for losses that may occur in the event of an earthquake or other significant natural disaster. In certain geographic areas, we have a large concentration of centers that may be simultaneously affected by pandemics,health emergencies, such as the COVID-19 pandemic, adverse weather conditions or other events. Our future operating results may be adversely affected by these and other factors that disrupt the operation of our centers.
If we fail
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In addition to the above, PACE contracts also impose complex and extensive requirements upon our operations.
As state agencies promulgate additional regulations applicable to PACE and issue sub-regulatory guidance, we will have to allocate sufficient resources to ensure compliance with both federal and state regulations.
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•criminal or civil liability, fines, damages or monetary penalties for violations of healthcare fraud and abuse laws, including the Anti-Kickback Statute, Civil Monetary Penalties Statute and FCA, or other failures to meet regulatory requirements;
•enforcement actions by governmental agencies or state attorneys general and/or state law claims for monetary damages by patients or employees who believe their PHI/PII has been impermissibly used or disclosed or not properly safeguarded, or their rights with respect to PHI/PII have been protected, in violation of federal or state health privacy laws, including, for example and without limitation, HIPAA, CCPA as amended by the CPRA, and the Privacy Act of 1974;
aware or have been ordered by the presiding court not to discuss or disclose.
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regulations could have a material adverse impact on our business, results of operations, financial condition, cash flows, and reputation.
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Penalties for violations of the corporate practice of medicine vary by state and may result in physicians being subject to disciplinary action, as well as forfeiture of revenues from payors for services rendered. For business entities, such as us, violations may also bring both civil and, in more extreme cases, criminal liability for engaging in medical practice without a license.
A business associate is any person or entity (other than members of a covered entity’s workforce) that performs a service for or on behalf of a covered entity involving the use or disclosure of protected health information.
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must record it in a log and notify HHS at least annually. Breaches affecting more than 500 residents in the same state or jurisdiction must also be reported to the local media.
Looking ahead, it is possible that the ADPPA, a landmark federal privacy bill with significant bipartisan support, may gain traction. Although ADPPA would not apply to health data covered by HIPAA, it would apply to other health data, such as health data controlled by certain entities in the digital health space.
We face inspections, reviews, audits and investigations under federal and state government programs and contracts. These audits could require corrective actions or have adverse findings that may negatively affect our business, including our results of operations, liquidity, financial condition and reputation.
As a result of our PACE contracts with CMS and state government agencies, state licenses, and participation in Medicaid, we are routinely subject to, or may be subject to in the future, various governmental inspections, reviews, audits, requests for information and investigations to verify our compliance with requirements of these programs and applicable laws and regulations, assess the quality of the services we are providing to our participants, and evaluate the accuracy of the risk adjustment data we have submitted to the government.
As previously disclosed, on May 26, 2021, the Colorado Department of Health Care Policy & Financing(“HCPF”)and the Colorado Department of Public Health and Environment (“CDPHE”) initiated a joint audit of our Colorado PACE centers, and on June 21, 2021, CMS also initiated a separate focused desk audit of our Colorado PACE program. We received preliminary findings from CMS and HCPF/CDPHE in July 2021 and expect to receive final reports from the agencies in early 2022. With respect to these three audits, to date, none of the agencies have indicated that they intend to suspend or otherwise curtail our programs, and we have not been notified of corrections that are
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required to be implemented prior to issuance of the final reports. However, we cannot guarantee the outcome of these audits until we receive the respective final reports from each agency.
In addition, as previously disclosed, on May 10, 2021, CMS began a routine, scheduled audit of our Sacramento, California center. On September 17, 2021, we were notified that CMS had determined to suspend new enrollments at our Sacramento center based on deficiencies detected in the audit related to participant quality of care. The suspension will remain in effect until CMS determines that we have remediated the deficiencies to its satisfaction. We are currently working to develop a corrective action plan. In addition, we have a right to provide a written rebuttal and/or request a hearing to appeal CMS’ decision. At this time, we are assessing these options and cannot guarantee the outcome of this process. If CMS is not satisfied with proposed or implemented corrective actions, we could be subject to additional sanctions.
Inspections, reviews, audits, requests for information or investigations with adverse findings, can result in:
We may be required to refund amounts we have been paid and/or pay fines and penalties as a result of these inspections, reviews, audits, requests for information and investigations. Any of the results noted above could have a material adverse effect on our business and operating results. Furthermore, the legal, document production and other costs associated with complying with these inspections, reviews, audits, requests for information or investigations could be significant.
Risks Related to Our Indebtedness
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Our level of indebtedness may place us at a competitive disadvantage to our competitors that are not as highly leveraged. Fluctuations in interest rates can increase borrowing costs. Increases in interest rates may directly impact the amount of interest we are required to pay and reduce earnings accordingly. In addition, developments in tax policy, such as the disallowance of tax deductions for interest paid on outstanding indebtedness, could have an adverse effect on our liquidity and our business, financial conditions and results of operations.
We may not be able to generate sufficient cash flow to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful.
Our ability to make scheduled payments or to refinance outstanding debt obligations depends on our financial and operating performance, which will be affected by prevailing economic, industry and competitive conditions and by financial, business and other factors beyond our control. We may not be able to maintain a sufficient level of cash flow from operating activities to permit us to pay the principal, premium, if any, and interest on our indebtedness. Any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in penalties or defaults, which would also harm our ability to incur additional indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or seek to restructure or refinance our indebtedness. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such cash flows and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service obligations. If we cannot meet our debt service obligations, the holders of our indebtedness may accelerate such indebtedness and, to the extent such indebtedness is secured, foreclose on our assets. In such an event, we may not have sufficient assets to repay all of our indebtedness.
We may be unable to refinance our indebtedness.
We may need to refinance all or a portion of our indebtedness before maturity. There can be no assurance that we will be able to obtain sufficient funds to enable us to repay or refinance our debt obligations on commercially reasonable terms, or at all.
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The restrictive covenants in the 2021 Credit Agreement require us to satisfy certain financial condition tests. Our ability to satisfy those tests can be affected by events beyond our control.
•unable to raise additional debt or equity financing to operate during general economic or business downturns; or
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In addition, if we issue additional equity to raise capital, your interest in the Company will be diluted.
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complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, the Principal Shareholders may have an interest in pursuing acquisitions, divestitures and other transactions that, in itstheir judgment, could enhance itstheir investment, even though such transactions might involve risks to you.
•the requirement that a majority of our Board consist of independent directors;
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attractive as a result of any choice we make to reduce disclosure, there may be a less active trading market for our common stock and the market price for our common stock may be more volatile.
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of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.
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Our certificate of incorporation contains a provision that provides us with protections similar to Section 203 of the DGCL, and prevents us from engaging in a business combination with a person (excluding the Principal Shareholders and any of their direct or indirect transferees and any group as to which such persons are a party) who acquires at least 85% of our common stock for a period of three years from the date such person acquired such common stock, unless Board or shareholder approval is obtained prior to the acquisition. These provisions could discourage, delay or prevent a transaction involving a change in control of our Company. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and cause us to take other corporate actions you desire, including actions that you may deem advantageous, or negatively affect the trading price of our common stock. In addition, because our Board is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our shareholders to replace current members of our management team.
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of incorporation further provides that any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the provisions of our certificate of incorporation described above; however, our stockholdersshareholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. The forum selection provisions in our certificate of incorporation may have the effect of discouraging lawsuits against us or our directors and officers and may limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us. If the enforceability of our forum selection provision were to be challenged, we may incur additional costs associated with resolving such a challenge. While we currently have no basis to expect any such challenge would be successful, if a court were to find our forum selection provision to be inapplicable or unenforceable, we may incur additional costs associated with having to litigate in other jurisdictions, which could have an adverse effect on our business, financial condition and results of operations and result in a diversion of the time and resources of our employees, management and Board.
Our quarterly operating results are likely
These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our shares to fluctuate substantially. Fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares and may otherwise negatively affect the market price and liquidity of our shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes institutedinstitute securities class action litigation against the company that issued the stock. If anySuch lawsuits have been filed against the Company. The outcome of our shareholders brought a lawsuit against us, we couldthese proceedings is unknown. See Part I, Item 3 “Legal Proceedings” for more information. We incur substantial costs defending the lawsuit.against these lawsuits. Such a lawsuit couldlawsuits also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.
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A significant portion of our total outstanding shares may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.
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Future offerings of debt or equity securities by us may materially adversely affect the market price of our common stock.
ofWe expect to make significant investments in growing our business and increasing our participant base, expanding our operations, hiring additional employees and operating as a public company. As a result of these increased expenditures, we may not succeed in increasing our revenue sufficiently to maintain our current profit margins. To date, we have financed our operations principally from the sale of our equity, revenue from our participant services and the incurrence of indebtedness. We may not continue to generate positive cash flow from Contents
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operations, access sufficient capital or sustain our current levels of profitability in any given period, and our limited operating history as a for-profit company may make it difficult for you to rely on our historical results as indicative of future performance
We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing and highly regulated industries, including increasing expenses as we continue to grow our business. We expect our operating expenses to increase over the next several years as we continue to hire additional personnel, expand our operations and infrastructure, and continue to expand to reach more participants. In addition to the expected costs to grow our business, we also are incurring and expect to incur additional legal, accounting and other expenses as a newly public company. These investments may be more costly than we expect, and if we do not achieve the benefits anticipated from these investments, or if the realization of these benefits is delayed, our profitability could decline in future periods. If our growth rate were to decline significantly or become negative, it could adversely affect our financial condition and results of operations. If we are not able to maintain positive cash flow in the long term, we may require additional financing, which may not be available on favorable terms or at all and/or which would be dilutive to our stockholders. If we are unable to successfully address these risks and challenges as we encounter them, our business, results of operations and financial condition would be adversely affected. Accordingly, we may not be able to maintain our current levels of profitability, and we may incur losses in the future, which could negatively impact the value of our common stock.
Disruptions in our disaster recovery systems or business continuity planning could limit our ability to operate our business effectively.
Changes
We depend on our senior management team and other key employees, and the loss of one or more of these employees or an inabilityability to attract and retain other highly skilled employees could harm our business.participants.
Our success depends largely upon the continued services of our senior management team and other key employees. We rely on our leadership team in the areas of operations, provision of medical services, information technology and security, marketing, and general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. Our employment agreements with our executive officers and other key personnel do not require them to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time. The loss, whether as a result of voluntary termination or illness, of one or more of the members of our senior management team, or other key employees, could harm our business. In particular, the loss of the services of our President and Chief Executive Officer, Maureen Hewitt, could significantly delay or prevent the achievement of
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our strategic objectives. Changes in our executive management team may also cause disruptions in, and harm to, our business.
We must attract, retain and contract with highly qualified personnel in order to execute our growth plan.
Competition for highly qualified personnel is intense, especially for physicians and other medical professionals who are experienced in providing care services to older adults. We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications or contracting with physicians to provide care for our participants. Many of the companies and healthcare providers with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies or healthcare providers, their former employees may attempt to assert that these employees or we have breached certain legal obligations, potentially resulting in time-consuming and expensive litigation. If we fail to attract new personnel, fail to retain and motivate our current personnel, or fail to contract with qualified physicians, our business and future growth prospects could be harmed.
option.
Although
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financial condition.such period. Regardless of the outcome, litigation has the potential to have an adverse impact on us due to any related defense and settlement costs, diversion of management resources, and other factors.
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“INNV.”
Stock Performance Graph
The following performance graph and related information shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended, and shall not be incorporated by reference into any registration statement or other document filed by us with the SEC, whether made before or after the date of this Annual Report on Form 10-K, regardless of any general incorporation language in such filing, except as shall be expressly set forth by specific reference in such filing.
The following graph and related information shows a comparison of the change in the cumulative total return for our common stock, the Nasdaq Health Care Index, and the S&P 500 Index between March 4, 2021 (the date our common stock commenced trading on Nasdaq) through June 30, 2021. All values assume an initial investment of $100 and
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reinvestment of any dividends. The comparisons are based on historical data and are not indicative of, nor intended to forecast, the future performance of our common stock.
Recent Sales of Unregistered Securities
Use of Proceeds from Registered Securities
On March 8, 2021, we completed the initial public offering (“IPO”) of our common stock pursuant to a Registration Statement on Form S-1 (File No. 333-252853) (“Registration Statement”), which was declared effective on March 3, 2021. The Company sold 18,995,901 shares of common stock, including the partial exercise of the underwriters’ option to purchase additional shares of common stock at the IPO price of $21.00 per share. The managing underwriters of the IPO were J.P. Morgan Securities LLC, Barclays Capital Inc., Goldman Sachs & Co. LLC and Citigroup Global Markets Inc.
In aggregate, the shares issued in the IPO generated $373.6 million in net proceeds, which amount is net of $23.9 million in underwriters’ discounts and commissions and offering costs of $1.4 million. No offering expenses were paid directly or indirectly to any of our officers or directors (or their associates) or persons owning 10% or more of any class of our equity securities or to any other affiliates.
During the year ended June 30, 2021, we used the net proceeds of the IPO, together with proceeds from our 2021 Credit Agreement, to repay all borrowings outstanding under the 2016 Credit Agreement and to fund the related prepayment fees and expenses and to satisfy an earn-out arrangement in connection with the acquisition of NewCourtland. There was no material change in the expected use of the net proceeds from the IPO as described in the Registration Statement.
[Reserved]
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thereto included elsewhere in this Annual Report on Form 10-K. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Our historical results are not necessarily indicative of the results that may occur in the future and actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and in the sections entitled “Risk Factors” and “Forward-Looking Statements” included in this Annual Report on Form 10-K.
During the year ended June 30, 2023, the Company consolidated its Germantown LIFE center with its Allegheny and Henry Avenue LIFE centers in Pennsylvania.
InnovAge aims
Impact of COVID-19
The rapid spread of COVID-19 around the world and throughout the United States has altered the behavior of businesses and people, with significant negative effects on federal, state and local economies, the duration of which continues to be unknown at this time. The virus has and continues to disproportionately impact older adults, especially those with chronic illnesses, which describes our participants. To date, we have experienced or expect to experience the following impacts on our business model due to COVID-19.
Care Model. Though the COVID-19 pandemic altered the mix of settings where we deliver care, our multimodal model ensured that our participants continued to receive the care they needed. We closed all our centers in March 2020 and transitioned to a 100% in-home and virtual care model that allowed for seamless delivery of care while increasing participant visit volume and maintaining continuity of care. Our telehealth solution received high satisfaction among participants, caregivers and IDTs. In February 2021, as the prevalence of COVID-19 decreased in the communities we serve, we began re-opening our centers using a phased approach to ensure the safety of both our staff and participants. In addition, community assisted living and skilled nursing facilities began to open to allow in-person visits by all members
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of our IDT. By June 2021, we fully opened all our centersDuring fiscal year 2023, the U.S. and transitioned to a predominantly in-person, center-based care model, supplemented by telehealth. We expect telehealth care delivery to remain aglobal economies experienced adverse macroeconomic effects in part of ourresulting from the ongoing care model.
Growth. As a resulteffects of the COVID-19 pandemic, atas discussed in more detail below. In fiscal year 2022 and 2023, in response to high levels of inflation, we implemented various mitigation strategies to reduce costs of operation, including consolidating services and price negotiations with providers and vendors. While inflationary pressures eased significantly during the endsecond half of March 2020,fiscal year 2023, high inflation is expected to continue through the remainder of the calendar year. The effects of inflation, after accounting for these mitigation strategies, were immaterial to our financial results for fiscal year 2023. Although we pivotedexpect to a virtual enrollment modelcontinue mitigation efforts in fiscal year 2024, there can be no assurance that our strategies will be sufficient.
Revenue. Our revenue is capitated anddo not determined by the number of times we interact with our participants face-to-face. As of June 30, 2021, we had not experienced a decline in revenuebelieve material census attrition will occur as a result of the COVID-19 pandemic. The capitation payments we receive from Medicare are risk-adjusted based on documented encounters and diagnosed conditions. Government payors require that participants’ health issues be documented annually regardlessexpiration of the permanencepublic health emergency declarations and the resumption of Medicaid’s redetermination of beneficiary eligibility. The frailty level of PACE participants coupled with the underlying causes. Historically, this documentation has been required to be completed during an in-person visit withcomplexity of Medicaid services needed, results in a participant, but due to COVID-19 and going forward, CMS is now allowing documentation of conditions identified during qualifying telehealth visits with participants. Thus far, we have been able to document the health conditions of our participants during telehealth visits as well as we did during in-person visits prior to COVID-19; however, any issues with documenting such conditions could adversely impact Medicare RAF scores and our resulting revenue for future periods.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into legislation. The CARES Act, in addition to other provisions, provided for the temporary suspension of the automatic 2% reduction of Medicare claim reimbursements (sequestration) for the period of May 1, 2020 through December 31, 2021, which positively impacted our revenue during the year ended June 30, 2021.
Expenses. For the year ended June 30, 2021, ascomprehensive financial qualifications review compared to the more traditional Medicaid-only population. Throughout the public health emergency, the Company continued to complete annual Medicaid redeterminations. This process enables the Company to monitor eligibility, assist with the redetermination process, address potential issues with eligibility in real time, and track future renewal dates. While we do not believe that the expiration of these emergency declarations will have a material impact to our financial results, we continue to evaluate how the expiration of these emergency declarations may affect our business outlook.
The United States continues to experience supply chain issues with respect to personal protective equipment (“PPE”) and other medical supplies used to prevent transmission of COVID-19. During the years ended June 30, 2021 and 2020, we acquired significantly greater quantities of medical supplies at significantly higher prices than pre-pandemic rates to ensure the safety of our employees and our participants. Costs related to PPE medical supplies represented approximately 0.6% and 2.1% of our total cost of care for fiscal year 2023, further impacted by additional staffing related to compliance and remediation efforts. These increases resulted in increased cost of care for fiscal year 2023 compared to fiscal year 2022 as discussed in “Results of Operations” below. We continue to assess key roles and benchmarks to market while monitoring trends in the years ended June 30, 2021 and 2020, respectively. While the price of PPE may remain higher than historical levels for the foreseeable future, we do not expect these incremental costs to be material as a percentage of our total expenses.
See Item 1A. Risk Factors included in Part I of this Annual Report on Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on our business.
labor market.
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Components of Results of Operations
Revenue
Capitation Revenue. In order to provide comprehensive services to manage the totality of a participant’s medical care across all settings, we receive fixed or capitated fees per participant that are paid monthly by Medicare,
65
Medicaid, Veterans Affairs (“VA”) and private pay sources. The concentration of capitation revenue from our various payors was:
| 2023 | 2022 | ||||||||||
| Medicaid | 54 | % | 54 | % | |||||||
| Medicare | 46 | % | 46 | % | |||||||
| Private pay and other | *% | *% | |||||||||
| Total | 100 | % | 100 | % | |||||||
| | | | | |
|
| 2021 |
| 2020 |
|
Medicaid |
| 53 | % | 55 | % |
Medicare |
| 47 | % | 44 | % |
Private pay and other |
| * | % | 1 | % |
Total |
| 100 | % | 100 | % |
** denotes less than 1%
Other Service Revenue. Other service revenue primarily consists of revenues derived from fee-for-service arrangements, state food grants, rent revenues and management fees. We generatePrior to June 30, 2022, we generated fee-for-service revenue from providing home-care services to non-PACE patients in their homes, for which we bill the patient or their insurance plan on a fee-for-service basis. We no longer offer in-home care services to non-PACE patients. For a discussion
External Provider Costs. External provider costs consist primarily of the costs for medical care provided by non-InnovAge providers. We separate external provider costs into four categories: inpatient (e.g., hospital), housing (e.g., assisted living)living and skilled nursing facility), outpatient and pharmacy. In aggregate, external provider costs represent the largest portion of our expenses.
Cost of Care, Excluding Depreciation and Amortization. Cost of care, excluding depreciation and amortization, includes the costs we incur to operate our care delivery model. This includes costs related to IDTs, salaries, wages and benefits for IDT and other center-level staff, participant transportation, medical supplies, occupancy, insurance and other operating costs. IDT employees include medical doctors, registered nurses, social workers, physical, occupational, and speech therapists, nursing assistants, and transportation workers. Center-levelOther center-level employees include clinic managers, dieticians, activity assistants and certified nursing assistants. Cost of care excludes any expenses associated with sales and marketing activities incurred at a local level as well as any allocation of our corporate, general and administrative expenses. A portion of our cost of care, is fixed relative to the number of participants we serve, such as occupancy and insurance expenses. The remainder of our cost of care, including our employee-related costs, is directly related to the number of participants cared for in a center. The remainder of our cost of care is fixed relative to the number of participants we serve, such as occupancy and insurance expenses. As a result, as revenue increases due to census growth, cost of care, excluding depreciation and amortization, typicallymoderately decreases as a percentage of revenue. As we open new centers, we expect cost of care, excluding depreciation and amortization, to increase in absolute dollars due to higher census and facility related costs.
Sales and Marketing. Sales and marketing expenses consist of employee-related expenses, including salaries, commissions, and employee benefits costs, for all employees engaged in marketing, sales, community outreach and sales support. These employee-related expenses capture all costs for both our field-based and corporate sales and marketing teams. Sales and marketing expenses also include local and centralized advertising costs, as well as the infrastructure required to support our marketing efforts. We expect these costs to increase in absolute dollars over time as we continue to grow our participant census. We evaluate our sales and marketing expenses relative to our
66
participant growth and will invest more heavily in sales and marketing from time-to-time to the extent we believe such investment can accelerate our growth without negatively affecting profitability.
Corporate, General and Administrative Expenses. Corporate, general and administrative expenses include employee-related expenses, including salaries and related costs. In addition, general and administrative expenses include all corporate technology and occupancy costs associated with our regional corporate offices.office. We expect our general and administrative expenses to increase in absolute dollars following the closing of this offering due to the additional legal, accounting, insurance, investor relations and other costs that we incur as a public company, as well as other costs associated with compliance and continuing to grow our business. However, we anticipate general and administrative expenses to decrease as a percentage of revenue over the long term, although such expenses may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses.
Depreciation and Amortization. Depreciation and amortization expenses are primarily attributable to our buildings and leasehold improvements and our equipment and vehicles. Depreciation and amortization are recorded using the straight-line method over the shorter of estimated useful life or lease terms, to the extent the assets are being leased.
Equity Loss. Equity loss relates to our equity method investment in InnovAge Sacramento, which began operations in July 2020 and subsequently became a consolidated entity effective January 1, 2021.
Other Operating Expenses (Income). Other operating expenses (income) consists of the payment and re-measurement of contingent consideration to fair value relating to our acquisition of NewCourtland.
For more information relating to the components of our results of operations, see Results of Operations below and Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in this Annual Report on Form 10-K for more detailed information regarding our critical accounting policies.
67
Results of Operations
| | | | | | |
|
| Year ended June 30, | ||||
|
| 2021 |
| 2020 | ||
| | in thousands | ||||
Revenues | | |
|
| |
|
Capitation revenue | | $ | 635,322 | | $ | 564,834 |
Other service revenue | |
| 2,478 | |
| 2,358 |
Total revenues | |
| 637,800 | |
| 567,192 |
Expenses | |
|
| |
|
|
External provider costs | |
| 309,317 | |
| 272,832 |
Cost of care, excluding depreciation and amortization | |
| 154,403 | |
| 153,056 |
Sales and marketing | |
| 22,236 | |
| 19,001 |
Corporate, general and administrative | |
| 132,333 | |
| 58,481 |
Depreciation and amortization | |
| 12,294 | |
| 11,291 |
Equity loss | |
| 1,343 | |
| 678 |
Other operating expense | |
| 18,211 | |
| 920 |
Total expenses | |
| 650,137 | |
| 516,259 |
Operating Income (Loss) | | $ | (12,337) | | $ | 50,933 |
| | | | | | |
Other Income (Expense) | |
|
| |
|
|
Interest expense, net | |
| (16,787) | |
| (14,619) |
Loss on extinguishment of debt | |
| (14,479) | |
| — |
Gain on equity method investment | | | 10,871 | | | — |
Other expense | |
| (2,237) | |
| (681) |
Total other expense | |
| (22,632) | |
| (15,300) |
Income (Loss) Before Income Taxes | |
| (34,969) | |
| 35,633 |
Provision for Income Taxes | |
| 9,771 | |
| 9,868 |
Net Income (Loss) | | $ | (44,740) | | $ | 25,765 |
Less: net loss attributable to noncontrolling interests | |
| (754) | |
| (513) |
Net Income (Loss) Attributable to InnovAge Holding Corp. | | $ | (43,986) | | $ | 26,278 |
| Year Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| in thousands | |||||||||||
| Revenues | |||||||||||
| Capitation revenue | $ | 686,836 | $ | 696,998 | |||||||
| Other service revenue | 1,251 | 1,642 | |||||||||
| Total revenues | 688,087 | 698,640 | |||||||||
| Expenses | |||||||||||
| External provider costs | 374,528 | 383,046 | |||||||||
| Cost of care, excluding depreciation and amortization | 212,271 | 180,222 | |||||||||
| Sales and marketing | 19,627 | 24,201 | |||||||||
| Corporate, general and administrative | 115,637 | 101,653 | |||||||||
| Depreciation and amortization | 15,419 | 13,924 | |||||||||
| Total expenses | 737,482 | 703,046 | |||||||||
| Operating Loss | (49,395) | (4,406) | |||||||||
| Other Income (Expense) | |||||||||||
| Interest expense, net | (1,522) | (2,526) | |||||||||
| Other income (expense) | 124 | (305) | |||||||||
| Total other expense | (1,398) | (2,831) | |||||||||
| Loss Before Income Taxes | (50,793) | (7,237) | |||||||||
| Provision (Benefit) for Income Taxes | (7,241) | 723 | |||||||||
| Net Loss | (43,552) | (7,960) | |||||||||
| Less: net loss attributable to noncontrolling interests | (2,879) | (1,439) | |||||||||
| Net Loss Attributable to InnovAge Holding Corp. | $ | (40,673) | $ | (6,521) | |||||||
| Loss Before Income Taxes as a % of revenue | (7.4) | % | (1.0) | % | |||||||
| Net Loss as a % of revenue | (6.3) | % | (1.1) | % | |||||||
| Year Ended June 30, | $ Change | % Change | |||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| in thousands | |||||||||||||||||||||||
| Capitation revenue | $ | 686,836 | $ | 696,998 | $ | (10,162) | (1.5) | % | |||||||||||||||
| Other service revenue | 1,251 | 1,642 | (391) | (23.8) | % | ||||||||||||||||||
| Total revenues | $ | 688,087 | $ | 698,640 | $ | (10,553) | (1.5) | % | |||||||||||||||
Revenues
| | | | | | | | | | | | |
| | Year ended June 30, |
|
| |
|
|
| ||||
|
| 2021 |
| 2020 |
| $ Change |
| % Change | ||||
| | in thousands | | |||||||||
|
| |
|
| |
|
| |
|
|
| |
Capitation revenue | | $ | 635,322 | | $ | 564,834 | | $ | 70,488 |
| 12.5 | % |
Other service revenue | |
| 2,478 | |
| 2,358 | |
| 120 |
| 5.1 | % |
Total revenues | | $ | 637,800 | | $ | 567,192 | | $ | 70,608 |
| 12.4 | % |
Capitation revenue. Capitation revenue was $635.3$686.8 million for the year ended June 30, 2021, an increase2023, a decrease of $70.5$10.2 million, or 12.5%1.5%, compared to $564.8$697.0 million for the year ended June 30, 2020.2022. This increasedecrease was driven by (i) an increase in capitation rates and (ii) a 6.1% increase6.6% decrease in member months (as defined below).below under “Key Business Metrics and non-GAAP Measures – Total member months”) partially offset by a 5.5% increase in capitation rates. The decrease in member months is primarily due to disenrollments and our inability to enroll new participants at our Sacramento, California center for the majority of the year ended June 30, 2023 as a result of sanctions, minimally offset by the ramp up of enrollments at our Colorado centers as we resumed the enrollment process in the third quarter of 2023. The increase in capitation rates was primarily driven by the net effect of (a) an annual increase in both Medicaid capitation rates as determined by the States and Medicare capitation rates due to (1)as a 5.3% increase in averageresult of increased risk score and (2)county rates partially offset by the temporary suspensionreinstatement of the automatic 2% reduction of Medicare claim reimbursements (sequestration) beginning May 1, 2020 and, to a lesser extent, (b) an increase in Medicaid rates across the majority of our markets.
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| Year Ended June 30, | $ Change | % Change | |||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
in thousands | |||||||||||||||||||||||
| External provider costs | $ | 374,528 | $ | 383,046 | $ | (8,518) | (2.2) | % | |||||||||||||||
| Cost of care, excluding depreciation and amortization | 212,271 | 180,222 | 32,049 | 17.8 | % | ||||||||||||||||||
| Sales and marketing | 19,627 | 24,201 | (4,574) | (18.9) | % | ||||||||||||||||||
| Corporate, general and administrative | 115,637 | 101,653 | 13,984 | 13.8 | % | ||||||||||||||||||
| Depreciation and amortization | 15,419 | 13,924 | 1,495 | 10.7 | % | ||||||||||||||||||
| Total operating expenses | $ | 737,483 | $ | 703,046 | $ | 34,437 | 4.9 | % | |||||||||||||||
Other service revenue. Other service revenue was $2.5External provider costs. External provider costs were $374.5 million for the year ended June 30, 2021, an increase2023, a decrease of $0.1$8.5 million, or 5.1%2.2%, from $2.4compared to $383.0 million for the year ended June 30, 2020.
Expenses
| | | | | | | | | | | | |
| | Year ended June 30, |
|
| |
|
|
| ||||
|
| 2021 |
| 2020 |
| $ Change |
| % Change | ||||
| | in thousands |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |
External provider costs | | $ | 309,317 | | $ | 272,832 | | $ | 36,485 |
| 13.4 | % |
Cost of care (excluding depreciation and amortization) | | | 154,403 | | | 153,056 | | | 1,347 |
| 0.9 | % |
Sales and marketing | | | 22,236 | | | 19,001 | | | 3,235 |
| 17.0 | % |
Corporate, general, and administrative | | | 132,333 | | | 58,481 | | | 73,852 |
| 126.3 | % |
Depreciation and amortization | | | 12,294 | | | 11,291 | | | 1,003 |
| 8.9 | % |
Equity loss |
| | 1,343 |
| | 678 |
| | 665 |
| 98.1 | % |
Other operating expenses | |
| 18,211 | |
| 920 | |
| 17,291 |
| 1,879.5 | % |
Total operating expenses |
| $ | 650,137 |
| $ | 516,259 |
| $ | 133,878 |
| 25.9 | % |
External provider costs. External provider costs were $309.3 million for the year ended June 30, 2021, an increase of $36.5 million, or 13.4%, compared to $272.8 million for the year ended June 30, 2020.2022. The increase isdecrease was primarily driven by (i) a decrease of $25.2 million, or 6.6% in member months partially offset by an increase of 6.8%$16.7 million, or 4.7%, in cost per participant and (ii) an increase of 6.1% in member months.participant. The increase in cost per participant is primarily driven by the net effect of ana $13.7 million increase in pharmacy expenses, inpatient expenses (due to theassociated with increased cost of COVID-19 admissions),assisted living and outpatient expenses,nursing facility utilization and unit cost partially offset by a decrease$3.2 million reduction in specialist expenses due to the lower utilization during the pandemic.
inpatient cost per admit associated with fewer COVID admissions.
security, (v) $1.3 million in supplies, travel and mileage, and (vi) $1.0 million in de novo rent expense.
Sales and marketing. Sales and marketing expenses were $22.2$19.6 million for the year ended June 30, 2021, an increase2023, a decrease of $3.2$4.6 million, or 17.0%18.9%, compared to $19.0$24.2 million for the year ended June 30, 2020,2022, primarily due to an increase(i) a $1.7 million reduction in (i) employee compensationmarketing spend and benefits due to an increase$2.0 million reduction in FTEs and (ii) costs associated with certain new advertising campaignsfewer headcount within the sales department, both as a result of sanctions in our Colorado and Sacramento, California centers and (ii) a $0.9 million reduction in sales commissions expense due to raise PACE awareness and accelerate growth.
the deferral of commissions.
Corporate, general and administrative. administrative expenses. Corporate, general and administrative expenses were $132.3$115.6 million for the year ended June 30, 2021,2023, an increase of $73.9$14.0 million, or 126.3%,13.8% compared to $58.5$101.7 million for the year ended June 30, 2020.2022. The increase was primarily due to the fees incurred(i) a $11.0 million increase in employee compensation and benefits as athe result of an increase in headcount to support compliance and bolster organizational capabilities, (ii) $3.8 million in third party costs associated with implementing our core provider initiatives, assessing our risk-bearing payer capabilities, and strengthening organizational capabilities including the Apax Transaction (as defined below)transition to a new electronic medical record ("EMR"), (iii) $4.5 million in legal spend, and (iv) $4.9 million in software license and maintenance expense, inclusive of Epic license fees. These increases in cost were partially offset by (i) a $2.8 million reduction in bad debt expense, (ii) $1.2 million reduction in insurance expense, and (iii) $4.1 million in executive severance and recruiting recognized during the IPO. In connection with the Apax Transaction, $45.4 million was recorded related to the cancellation of 16,994,975 common stock options outstanding under the Company’s 2016 Equity Incentive Plan and $13.1 million of transaction related costs were recorded as corporate, general and administrative expenses. In connection with the IPO transaction, $1.5 million of transaction costs were recorded as corporate, general and administrative expenses.
year ended June 30, 2022.
Depreciation and amortization. Depreciation and amortization expenses are primarily attributable to our buildings and leasehold improvements and our equipment and vehicles. Depreciation and amortization are recorded using the straight-line method over the shorter of estimated useful life or lease terms, to the extent the assets are being leased. Depreciation and amortization expense was $12.3$15.4 million for the year ended June 30, 2021,2023, an increase of $1.0$1.5 million, or 8.9%10.7%, compared to $11.3$13.9 million for the year ended June 30, 2020. This increase is due to an2022. The increase in depreciation expense aswas a result of capital additions in the normal course of business.
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Equity loss. Equity loss was $1.3 million for the year ended June 30, 2021, an increase of $0.7 million compared to $0.7 million for the year ended June 30, 2020. Our equity loss relates to our equity method investment in InnovAge Sacramento, which began operations in July 2020 and subsequently became a consolidated entity effective January 1, 2021.
Other operating expenses. Other operating expenses were $18.2 million for the year ended June 30, 2021, an increase of $17.3 million compared to $0.9 million for the year ended June 30, 2020 primarily due to the payment of $20.0 million, and related change in fair value of contingent consideration, made under the acquisition agreement of the NewCourtland LIFE Program during the year ended June 30, 2021. There were no such payments during the year ended June 30, 2020.
Other Income (Expense)
| | | | | | | | | | | | |
| | Year ended June 30, |
|
| |
|
|
| ||||
|
| 2021 |
| 2020 |
| $ Change |
| % Change | ||||
| | in thousands |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |
Interest expense, net |
| $ | (16,787) |
| $ | (14,619) |
| $ | (2,168) |
| (14.8) | % |
Loss on extinguishment of debt | | | (14,479) | | | — | | | (14,479) | | N/A | |
Gain on equity method investment | | | 10,871 | | | — | | | 10,871 | | N/A | |
Other expense | |
| (2,237) | |
| (681) | |
| (1,556) |
| (228.5) | % |
Total other expense |
| $ | (22,632) |
| $ | (15,300) |
| $ | (7,332) |
| (47.9) | % |
| Year Ended June 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
in thousands | |||||||||||||||||||||||
| Interest expense, net | $ | (1,522) | $ | (2,526) | $ | 1,004 | (39.7)% | ||||||||||||||||
| Other income (expense) | 124 | (305) | 429 | (140.7)% | |||||||||||||||||||
| Total other expense | $ | (1,398) | $ | (2,831) | $ | 1,433 | (50.6)% | ||||||||||||||||
Interest expense, net. Interest expense, net, consists primarily of interest payments on our outstanding borrowings, net of interest income earned on our cash and cash equivalents and restricted cash. Interest expense, net was $16.8$1.5 million for the year ended June 30, 2021, an increase2023, a decrease of $2.2$1.0 million, or 14.8%39.7%, compared to $14.6$2.5 million for the year ended June 30, 2020.2022. The increasedecrease was primarily due to (i) a higher average outstanding debt balance and (ii) to a lesser extent, a higher average interest rate. For additional information regarding our outstanding indebtedness, see Note 10 to our consolidated financial statements.
Loss on extinguishmentincome of debt. We recognized a loss on extinguishment$3.4 million from money market funds offsetting interest expense of debt of $14.5$4.9 million forduring the year ended June 30, 2021 and no loss on extinguishment of debt for2023. Interest income during the year ended June 30, 2020. On July 27, 2020, we amended and restated our 2016 Credit Agreement, which led to an extinguishment of debt for certain lenders and a modification of debt for other lenders. The total debt structure extinguishment for certain lenders led to the write-off of $1.0 million in debt issuance costs. On March 8, 2021, we entered into the 2021 Credit Agreement, which led to an extinguishment of debt of $13.5 million, including $6.0 million of a prepayment penalty.
Gain on equity method investment. We recognized a gain on equity method investment of $10.9 million for the year ended June 30, 2021, which2022 was related to InnovAge Sacramento becoming a consolidated entity as of January 1, 2021.
negligible.
Other. Other expense was $2.2 million for the year ended June 30, 2021, an increase of $1.6 million, or 228.5%, compared to $0.7 million for the year ended June 30, 2020, due primarily to an amendment of the warrants issued by the Company to Adventist Health System/West (“Sacramento Warrants”) resulting in additional expense of $2.3 million in 2021.
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A valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized. Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination based on the technical merits of the position. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalty expense associated with uncertain tax positions as a component of provision for income taxes.
For more information relating to our accounting policies, see Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in this Annual Report on Form 10-K.
71
| Year Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| dollars in thousands | |||||||||||
| Key Business Metrics: | |||||||||||
Centers(a) | 17 | 18 | |||||||||
Census(a)(b) | 6,400 | 6,650 | |||||||||
Total Member Months(b) | 77,370 | 82,820 | |||||||||
| Non-GAAP Measures: | |||||||||||
Center-level Contribution Margin(c) | $ | 101,288 | $ | 135,372 | |||||||
Center-level Contribution Margin as a % of revenue(c) | 14.7 | % | 19.4 | % | |||||||
Adjusted EBITDA(c) | $ | (1,261) | $ | 34,253 | |||||||
Adjusted EBITDA Margin(c) | (0.2) | % | 4.9 | % | |||||||
| | | | | | | | |
| | Year ended June 30, | ||||||
|
| 2021 | | 2020 | ||||
| | dollars in thousands | ||||||
Key Business Metrics: | |
|
|
| |
|
| |
Centers(a) | |
| 18 |
| |
| 16 | |
Census(a)(b) | |
| 6,850 |
| |
| 6,400 | |
Total Member Months(a) | |
| 79,430 |
| |
| 74,900 | |
| | | | | | | | |
Center-level Contribution Margin | | $ | 174,080 | | | $ | 141,304 | |
Center-level Contribution Margin as a % of revenue | |
| 27.3 | % | |
| 24.9 | % |
| |
| |
| |
| | |
Non-GAAP Measures: | | | | | | | | |
Adjusted EBITDA(c) |
| $ | 85,333 |
| | $ | 65,909 | |
Adjusted EBITDA Margin(c) | |
| 13.4 | % | |
| 11.7 | % |
72
and $141.3$135.4 million for the years ended June 30, 20212023 and 2020,2022, respectively. The decrease in Center-level Contribution
| June 30, 2023 | June 30, 2022 | ||||||||||||||||||||||||||||||||||
| in thousands | PACE | All other(1) | Totals | PACE | All other(1) | Totals | |||||||||||||||||||||||||||||
| Center-Level Contribution Margin | 100,948 | 340 | 101,288 | 135,451 | (79) | 135,372 | |||||||||||||||||||||||||||||
Overhead costs(2) | 135,264 | — | 135,264 | 125,948 | (94) | 125,854 | |||||||||||||||||||||||||||||
| Depreciation and amortization | 14,959 | 460 | 15,419 | 13,491 | 433 | 13,924 | |||||||||||||||||||||||||||||
| Equity loss | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Other operating (income) expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Interest expense, net | 1,342 | 180 | 1,522 | 2,335 | 191 | 2,526 | |||||||||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Gain on equity method investment | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Other expense (income) | (124) | — | (124) | 305 | — | 305 | |||||||||||||||||||||||||||||
| Income (Loss) Before Income Taxes | $ | (50,493) | $ | (300) | $ | (50,793) | $ | (6,628) | $ | (609) | $ | (7,237) | |||||||||||||||||||||||
and Adjusted EBITDA Margin
A reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, for each of the periods is as follows:
| | | | | | |
| | Year ended June 30, | ||||
|
| 2021 |
| 2020 | ||
|
| in thousands | ||||
| | | | | | |
Net income (loss) |
| $ | (44,740) |
| $ | 25,765 |
Interest expense, net | |
| 16,787 | |
| 14,619 |
Depreciation and amortization | |
| 12,294 | |
| 11,291 |
Provision for income tax | |
| 9,771 | |
| 9,868 |
Stock-based compensation | |
| 1,664 | |
| 543 |
Rate determination(a) | |
| (2,158) | |
| (3,372) |
M&A diligence, transaction and integration(b) | |
| 67,606 | |
| 2,718 |
Business optimization(c) | |
| 1,829 | |
| 1,171 |
EMR implementation(d) | |
| 461 | |
| 1,078 |
Special employee bonus(e) | | | — | | | 1,278 |
Gain on consolidation of equity investee(f) | |
| (10,871) | |
| — |
Financing-related(g) | |
| 14,479 | |
| 30 |
Contingent consideration(h) | |
| 18,211 | |
| 920 |
Adjusted EBITDA | | $ | 85,333 | | $ | 65,909 |
73
Adjusted EBITDA margin
implementation. Adjusted EBITDA margin is Adjusted EBITDA expressed as a percentage of our total revenue less any exceptional, one-time revenue items. Inrevenue.
| Year Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| in thousands | |||||||||||
| Net Loss | $ | (43,552) | $ | (7,960) | |||||||
| Interest expense, net | 1,522 | 2,526 | |||||||||
| Depreciation and amortization | 15,419 | 13,924 | |||||||||
| Provision (benefit) for income tax | (7,241) | 723 | |||||||||
| Stock-based compensation | 4,993 | 3,739 | |||||||||
Executive severance and recruitment(a) | — | 4,123 | |||||||||
Litigation costs and settlement(b) | 9,782 | 4,436 | |||||||||
M&A and de novo center development(c) | 1,134 | 1,764 | |||||||||
Business optimization(d) | 10,535 | 8,955 | |||||||||
EMR implementation(e) | 6,147 | 2,023 | |||||||||
| Adjusted EBITDA | $ | (1,261) | $ | 34,253 | |||||||
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seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected.
On May 13, 2016, we entered into a credit agreement with Capital One Financial Corporation (together with all amendments thereto, the “2016 Credit Agreement”). In March 2020, we borrowed $25.0 million under the revolving credit facility to ensure sufficient funds available due to the uncertainty relating to the COVID-19 pandemic and for general corporate purposes. Those borrowings were repaid in full in connection with the entry into the 2021 Credit Agreement (as defined and discussed below) and the closing of our IPO.
On March 8, 2021, concurrently with the closing of the IPO, the Company entered into a new credit agreement (the “2021 Credit Agreement”) that replaced the 2016 Credit Agreement.
Any outstanding
| Total | Next 12 Months | Beyond 12 Months | |||||||||||||||
| in thousands | |||||||||||||||||
Long-term debt (excluding interest)(1) | $ | 69,784 | $ | 3,796 | $ | 65,988 | |||||||||||
Operating leases(2) | 27,675 | 4,882 | 22,793 | ||||||||||||||
| Finance leases (excluding interest) | 20,793 | 5,970 | 14,823 | ||||||||||||||
| Total | $ | 118,252 | $ | 14,648 | $ | 103,604 | |||||||||||
| | | | | | | | | |
|
| Year ended June 30, | |
| | ||||
| | 2021 |
| 2020 | | $ Change | |||
|
| in thousands | |||||||
| | | | | | | |
|
|
Net cash provided by (used in) operating activities | | $ | (7,548) | | $ | 43,828 | | $ | (51,376) |
Net cash used in investing activities | |
| (19,541) | |
| (11,691) | | | (7,850) |
Net cash provided by financing activities | |
| 116,224 | |
| 21,232 | | | 94,992 |
Net change in cash, cash equivalents and restricted cash | | $ | 89,135 | | $ | 53,369 | | $ | 35,766 |
| Year Ended June 30, | $ Change | ||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| in thousands | |||||||||||||||||
| Net cash provided by (used in) operating activities | $ | 20,236 | $ | 27,302 | $ | (7,066) | |||||||||||
| Net cash used in investing activities | (69,521) | (40,238) | (29,283) | ||||||||||||||
| Net cash used in financing activities | (7,896) | (6,318) | (1,578) | ||||||||||||||
| Net change in cash, cash equivalents and restricted cash | $ | (57,181) | $ | (19,254) | $ | (37,927) | |||||||||||
Operating Activities.The change in net cash provided by (used in) operating activities was primarily due to the net effect of (i) a decrease in net income (loss)loss of $70.5$43.6 million for the year ended June 30, 2023 compared to a net loss of $8.0 million during the prior year, as described further above, (ii) the $14.5 million loss on extinguishment of long-term debt recognized during 2021, as described further above, with no loss recognized in 2020, (iii) the $10.9 million gain on equity method investment recognized during 2021, as described further above, with no gain recognized in 2020, (iv) an increase of $7.2$28.1 million in the change in accounts payable and accrued expensesdeferred revenue during fiscal year 2023 due to timing of payments and the impactreceived, (iii) a decrease of the completion of HCPF’s reconciliation, as described below, (v) an increase of $7.1$17.7 million in the change in accounts receivable, includingnet of allowance primarily due to timing for the impactreceipt of the completionpayments in 2023, and (iv) a net decrease in working capital primarily attributable to payments for operating leases and reported and estimated claims.
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In fiscal year 2021, the Company and the Colorado Department of Health Care Policy & Financing (“HCPF”) completed the reconciliation for fiscal years 2018 and 2019. The reconciliation resulted in a reduction of accounts receivable of $17.0 million and due to Medicaid of $13.6 million, which was recorded in fiscal year 2021. The Company does not expect adjustments related to the reconciliation to be significant in future periods.activities.
Investing Activities. The increase in net cash used in investingfinancing activities was primarily due to an increase in cash used of $5.7 million for growth-related capital expenditures.
Financing activities. The increase in net cash provided by financing activities was primarily due to the net effect of (i) an increase in cash provided of $370.5 million related to the net proceeds received from our IPO, (ii) a decrease in cash provided of $160.7 million due to higher net repaymentsprincipal payments on long-term debt, (iii) a decrease in cash provided of $77.6 million related to treasury stock purchasesfinance leases.
Contractual Obligations and Commitments
Our principal commitments consist of repayments of long-term debt and obligations under operating and capital leases. The following table summarizes our contractual obligations as of June 30, 2021:
| | | | | | | | | | | | | | | | | | | | | |
| | Payments due by period | |||||||||||||||||||
|
| 2022 |
| 2023 | | 2024 |
| 2025 |
| 2026 |
| Thereafter | | Total | |||||||
| | in thousands | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
|
|
Long-term debt (excluding interest)(1) | | $ | 3,790 | | $ | 3,793 | | $ | 3,796 | | $ | 3,799 | | $ | 60,052 | | $ | 2,137 | | $ | 77,367 |
Operating leases(2) | |
| 3,550 | |
| 4,289 | |
| 3,926 | |
| 3,450 | |
| 3,371 | |
| 13,909 | | | 32,495 |
Capital leases (excluding interest) | |
| 2,074 | |
| 2,163 | |
| 1,783 | |
| 1,116 | |
| 133 | |
| — | | | 7,269 |
Total | | $ | 9,414 | | $ | 10,245 | | $ | 9,505 | | $ | 8,365 | | $ | 63,556 | | $ | 16,046 | | $ | 117,131 |
(1) Represents principal amounts related to the credit agreements.
(2) We have not adopted ASU 2016-02, which requires lessees to recognize almost all of their leases on the balance sheet. We will be adopting this guidance for the annual reporting period beginning July 1, 2022, and interim reporting periods within the annual reporting period beginning July 1, 2023. See Note 2 “Summary of Significant Accounting Policies--Recent Accounting Pronouncements” to our consolidated financial statements included in this Annual Report on Form 10-K
Off Balance Sheet Arrangements
We did not have any off balance sheet arrangements as of June 30, 2021.
JOBS Act
We qualify as an “emerging growth company” pursuant to the provisions of the Jumpstart Our Business Startups (“JOBS”) Act and a “smaller reporting company” as defined by the Exchange Act. For as long as we are an “emerging growth company” or a “smaller reporting company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” or “smaller reporting companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, only being required to present two years of audited financial statements, plus unaudited condensed consolidated financial statements for applicable interim periods and the related discussion in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, exemptions from the requirements of holding non-binding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation.
76
growth company. Our election to use the phase-in periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the longer phase-in periods permitted under the JOBS Act and who will comply with new or revised financial accounting standards. If we were to subsequently elect instead to comply with public company effective dates, such election would be irrevocable pursuant to the JOBS Act.
Revenue recognition
Revenue for the year ended June 30, 2020 is presented under Accounting Standards Codification (“ASC”) 605,
In May 2014, the FASB issuedaccordance with Accounting Standards Update (“ASU”) 2014-09, (“ASU 2014-09”), and has since issued various amendments which provide additional clarification and implementation guidance, to Topic 606,
Capitation revenue
Our PACE operating unit provides comprehensive health carehealthcare services to participants on the basis of estimated PMPM amounts we expect to be entitled to receive from the capitated fees per participant that are paid monthly by Medicare, Medicaid, the VA, and private pay sources. We recognize capitation revenues based on the estimated PMPM transaction price to transfer the service for a distinct increment of the series (i.e. month). We recognize revenue in the month in which participants are entitled to receive comprehensive care benefits during the contract term. Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the PACE program, and Medicare rates can fluctuate throughout the
77
contract based on the acuity of each individual participant. In certain contracts, PMPM rates also include “risk adjustments” based on various factors.
Capitation revenues may be subject to adjustment as a result of examination by government agencies or contractors. The audit process anddifferent from the resolution of significant related matters often are not finalized until several years after the services are rendered. Any adjustments resulting from these examinations are recorded in the period we are notified of them.
At times, we accept participants into the program pending final authorization from Medicaid.estimated risk scores. If Medicaid coverage is later denied and there are no alternative resources available to payour accrual estimates for services, the participant is disenrolled. Costs incurred on behalf of such participants were nominal in the fiscal years endedrisk scores at June 30, 2021 and 2020.
2023 were to differ by 5%, the impact on revenues would be approximately $0.5 million.
For our capitation revenue arrangements, we record revenue on a gross basis, as we are acting as a principal in providing for or overseeing comprehensive care for our participants.
A component For purposes of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviewsannual goodwill impairment assessment, the operating results of that component. We haveCompany has identified three reporting units for evaluating goodwill impairment.
ASC 350, Intangibles—Goodwill and Other (“ASC 350”), allows entities to first use a qualitative approach to test goodwill for impairment. When the reporting units where we perform the quantitative goodwill impairment are tested, we compare the fair value of the reporting unit, which we primarily determine using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill. Management estimates and assumptions are used when we determine fair value using widely accepted valuation techniques, including discounted cash flow. These techniques are also used when assigning the purchase price to acquired assets and liabilities. These types of analyses require us to make assumptions and estimates regarding industry and economic factors and the profitability of future business strategies. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss.units. There were no indicators of impairment identified and no goodwill impairments recorded during the years ended June 30, 20212023 and 2020.
78
Additionally, the customer relationships represent the estimated values of customer relationships of acquired businesses and have definite lives. We amortize these intangible assets on a straight-line basis over their ten-year estimated useful life. ASC 360, Property, Plant, and Equipment (“(“ASC 360”), provides guidance for impairment related to definite life assets including, customer relationships, for which we reviewed for impairment in conjunction with long-lived assets. We test for recoverability of the customer relationships whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. There were noChanges in assumptions concerning future financial results or other underlying assumptions could have a significant impact on the determination of the fair value. Judgment is also required in determining the intangible asset impairments recorded during the years ended June 30, 2021 and 2020.
asset’s useful life.
| | | | | | | | | | | | | | | |
| | Expenses Recorded for the Fiscal Years Ended June 30, | |||||||||||||
| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | |||||
| | in thousands | |||||||||||||
Claims incurred year: | | | | | | | | | | | | | | | |
FY 2017 | | $ | 102,832 | | | | | | | | | | | | |
FY 2018 | | | | | $ | 123,821 | | | | | | | | | |
FY 2019 | | | | | | | | $ | 171,128 | | | | | | |
FY 2020 | | | | | | | | | | | $ | 211,381 | | | |
FY 2021 | | | | | | | | | | | | | | $ | 234,070 |
Total | | $ | 102,832 | | $ | 123,821 | | $ | 171,128 | | $ | 211,381 | | $ | 234,070 |
Pharmacy expense | | | | | | | | | | | | | | | 75,247 |
External provider costs | | | | | | | | | | | | | | $ | 309,317 |
| | | | | | | | | | | | | | | |
| | Cumulative Actual Incurred Claims for the Fiscal Years Ended June 30, | |||||||||||||
| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | |||||
| | in thousands | |||||||||||||
Claims incurred year: | | | | | | | | | | | | | | | |
FY 2017 | | $ | 101,386 | | $ | 101,386 | | $ | 101,386 | | $ | 101,386 | | $ | 101,376 |
FY 2018 | | | | | | 119,687 | | | 119,687 | | | 119,687 | | | 119,862 |
FY 2019 | | | | | | | | | 173,047 | | | 173,061 | | | 172,855 |
FY 2020 | | | | | | | | | | | | 210,512 | | | 205,633 |
FY 2021 | | | | | | | | | | | | | | | 239,207 |
Total | | $ | 101,386 | | $ | 221,073 | | $ | 394,120 | | $ | 604,646 | | $ | 838,933 |
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| Expenses Recorded for the Fiscal Years Ended June 30, | |||||||||||||||||||||||||||||
| 2019 | 2020 | 2021 | 2022 | 2023 | |||||||||||||||||||||||||
| in thousands | |||||||||||||||||||||||||||||
| Claims incurred year: | |||||||||||||||||||||||||||||
| FY 2019 | $ | 171,128 | |||||||||||||||||||||||||||
| FY 2020 | $ | 211,381 | |||||||||||||||||||||||||||
| FY 2021 | $ | 234,070 | |||||||||||||||||||||||||||
| FY 2022 | $ | 299,432 | |||||||||||||||||||||||||||
| FY 2023 | $ | 291,988 | |||||||||||||||||||||||||||
| Total | $ | 171,128 | $ | 211,381 | $ | 234,070 | $ | 299,432 | $ | 291,988 | |||||||||||||||||||
| Pharmacy expense | 82,541 | ||||||||||||||||||||||||||||
| External provider costs | $ | 374,529 | |||||||||||||||||||||||||||
| Cumulative Actual Incurred Claims for the Fiscal Year Ended June 30, | |||||||||||||||||||||||||||||
| 2019 | 2020 | 2021 | 2022 | 2023 | |||||||||||||||||||||||||
| in thousands | |||||||||||||||||||||||||||||
| Claims incurred year: | |||||||||||||||||||||||||||||
| FY 2019 | $ | 173,047 | $ | 173,061 | $ | 172,855 | $ | 172,802 | $ | 172,555 | |||||||||||||||||||
| FY 2020 | 210,512 | 205,633 | 205,550 | 205,301 | |||||||||||||||||||||||||
| FY 2021 | 239,207 | 238,488 | 204,792 | ||||||||||||||||||||||||||
| FY 2022 | 291,315 | 333,752 | |||||||||||||||||||||||||||
| FY 2023 | 285,118 | ||||||||||||||||||||||||||||
| Total | $ | 173,047 | $ | 383,573 | $ | 617,695 | $ | 908,155 | $ | 1,201,518 | |||||||||||||||||||
| Cumulative Actual Paid Claims for the Fiscal Year Ended June 30, | |||||||||||||||||||||||||||||
| 2019 | 2020 | 2021 | 2022 | 2023 | |||||||||||||||||||||||||
| in thousands | |||||||||||||||||||||||||||||
| Claims incurred year: | |||||||||||||||||||||||||||||
| FY 2019 | $ | 144,943 | $ | 173,048 | $ | 172,855 | $ | 172,803 | $ | 172,555 | |||||||||||||||||||
| FY 2020 | 179,616 | 205,601 | 205,550 | 205,301 | |||||||||||||||||||||||||
| FY 2021 | 205,356 | 238,476 | 204,792 | ||||||||||||||||||||||||||
| FY 2022 | 252,665 | 333,748 | |||||||||||||||||||||||||||
| FY 2023 | 241,770 | ||||||||||||||||||||||||||||
| Total | $ | 144,943 | $ | 352,664 | $ | 583,812 | $ | 869,494 | $ | 1,158,166 | |||||||||||||||||||
| Other claims-related liabilities | (353) | ||||||||||||||||||||||||||||
| Reported and estimated claims | $ | 42,999 | |||||||||||||||||||||||||||
| | | | | | | | | | | | | | | |
| | Cumulative Actual Paid Claims for the Fiscal Years Ended June 30, | |||||||||||||
| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | |||||
| | in thousands | |||||||||||||
Claims incurred year: | | | | | | | | | | | | | | | |
FY 2017 | | $ | 88,020 | | $ | 101,572 | | $ | 101,450 | | $ | 101,386 | | $ | 101,376 |
FY 2018 | | | | | | 109,022 | | | 119,759 | | | 119,687 | | | 119,862 |
FY 2019 | | | | | | | | | 144,943 | | | 173,048 | | | 172,855 |
FY 2020 | | | | | | | | | | | | 179,616 | | | 205,601 |
FY 2021 | | | | | | | | | | | | | | | 205,356 |
Total | | $ | 88,020 | | $ | 210,594 | | $ | 366,152 | | $ | 573,737 | | $ | 805,050 |
Other claims-related liabilities | | | | | | | | | | | | | | | (649) |
Reported and estimated claims | | | | | | | | | | | | | | $ | 33,234 |
Stock-based compensation
ASC 718, Compensation—Stock Compensation (“ASC 718”) requires the measurement of the cost of the employee services received in exchange for an award of equity instruments based on the grant-date fair value or, in certain circumstances, the calculated value of the award. We maintained the 2016 Equity Incentive Plan pursuant to which various stock-based awards may be granted to employees, directors, consultants, and advisers.
Under our 2016 Equity Incentive Plan, we were able to reward employees with various types of awards, including but not limited to stock options on a service-based or performance-based schedule. We have elected to account for forfeitures as they occur.
2016 Equity Incentive Plan
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model, which requires inputs based on certain subjective assumptions, including fair value of the underlying common stock, the expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option, and our expected dividend yield.
Changes in these assumptions can materially affect the estimate of fair value and ultimately how much stock-based compensation expense is recognized, and the resulting change in fair value, if any, is recognized in our statement of operations and comprehensive loss during the period the related services are rendered.
These inputs are subjective and generally require significant analysis and judgment to develop.
For service-vesting awards, we recognize stock-based compensation expense over the requisite service period, which is generally the vesting period of the respective award, on a straight-line basis. For performance-vesting awards, we recognize stock-based compensation expense when it is probable that the performance condition will be achieved. We will analyze if a performance condition is probable for each reporting period through the settlement date for awards subject to performance vesting. For service-vesting awards, we recognize stock-based compensation expense over the requisite service period for each separately vesting portion of the awards as if the award was, in substance, multiple awards.
The 2016 Equity Incentive Plan was canceled in July 2020 and we subsequently established the 2020 Equity Incentive Plan, as described below, pursuant to which interests in TCO Group Holdings, L.P. in the form of Class B Units were granted to employees, directors, consultants, and advisers.
2020 Equity Incentive Plan
Profits Interests Units
The Company uses the Monte Carlo option model to determine the fair value of the granted profits interests units, which requires inputs based on certain subjective assumptions, including fair value of the underlying common stock, the
80
expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option, and our expected dividend yield.
Changes in these assumptions can materially affect the estimate of fair value and ultimately how much stock-based compensation expense is recognized, and the resulting change in fair value, if any, is recognized in our statement of operations and comprehensive loss during the period the related services are rendered.
These inputs are subjective and generally require significant analysis and judgment to develop.
We concluded that the performance-vesting units are subject to a market condition and assessed the market condition as part of the determination of the grant date fair value. For performance-vesting units, we recognized unit-based compensation expense when it was probable that the performance condition would be achieved. We will analyze if a performance condition was probable for each reporting period through the settlement date for units subject to performance vesting. For service-vesting units, we will recognize unit-based compensation expense over the requisite service period for each separately vesting portion of the profits interest as if the unit was, in-substance, multiple units.
Restricted Stock Units
We recognize expense related to restricted stock units based on their grant-date fair values, which is based upon the closing share price of the Company’s common stock on the date of grant. We recognize stock-based compensation expense, using the straight-line method, as a charge to operations over the vesting period based on the grant-date fair value of outstanding awards, which may differ from the fair value of such awards on any given date.
Recent Accounting Pronouncements
As of June 30, 2022, we had total outstanding debt of $71.3 million in principal amount under the Term Loan Facility and $2.3 under the Convertible Term Loan. As of June 30, 2023 and 2022, the interest rate on the Term Loan Facility was 6.95% and 3.83%, respectively.
81
Inflation risk
Report of Independent Registered Public Accounting Firm (PCAOB ID: 34) |
| ||||
| |||||
| |||||
| |||||
| |||||
| |||||
(b) Supplementary Data
The information required by Item 302 of Regulation S-K has been omitted as we have elected to early adopt the changes to Item 302 contained in SEC Release No. 33-10890.
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12, 2023
83
| | | | | | |
|
| June 30, |
| June 30, | ||
| | 2021 | | 2020 | ||
| | in thousands | ||||
Assets | | | | | | |
Current Assets |
| |
|
| |
|
Cash and cash equivalents | | $ | 201,466 | | $ | 112,904 |
Restricted cash | |
| 2,234 | |
| 1,661 |
Accounts receivable, net of allowance ($4,350 – June 30, 2021 and $6,384 – June 30, 2020) | |
| 32,582 | |
| 46,312 |
Prepaid expenses | |
| 9,249 | |
| 4,311 |
Income tax receivable | |
| 5,401 | |
| 1,743 |
Total current assets | |
| 250,932 | |
| 166,931 |
Noncurrent Assets | |
|
| |
|
|
Property and equipment, net | |
| 142,715 | |
| 102,494 |
Investments | |
| 2,645 | |
| 2,645 |
Deposits and other | |
| 3,877 | |
| 3,003 |
Equity method investments | |
| 848 | |
| 13,245 |
Goodwill | |
| 124,217 | |
| 116,139 |
Other intangible assets, net | |
| 6,518 | |
| 5,177 |
Total noncurrent assets | |
| 280,820 | |
| 242,703 |
Total assets | | $ | 531,752 | | $ | 409,634 |
Liabilities and Stockholders' Equity | |
|
| |
|
|
Current Liabilities | |
|
| |
|
|
Accounts payable and accrued expenses | | $ | 32,361 | | $ | 28,875 |
Reported and estimated claims | |
| 33,234 | |
| 30,291 |
Due to Medicaid and Medicare | | | 7,101 | | | 12,244 |
Current portion of long-term debt | |
| 3,790 | |
| 1,938 |
Current portion of capital lease obligations | |
| 2,079 | |
| 1,496 |
Contingent consideration | |
| — | |
| 1,789 |
Total current liabilities | |
| 78,565 | |
| 76,633 |
Noncurrent Liabilities | |
|
| |
|
|
Deferred tax liability, net | |
| 15,700 | |
| 9,282 |
Capital lease obligations | |
| 5,190 | |
| 4,091 |
Other noncurrent liabilities | |
| 2,758 | |
| 1,446 |
Long-term debt, net of debt issuance costs | |
| 71,574 | |
| 210,432 |
Total liabilities | |
| 173,787 | |
| 301,884 |
Commitments and Contingencies (See Note 12) | |
|
| |
|
|
Stockholders’ Equity | |
|
| |
|
|
Common stock, $0.001 par value; 500,000,000 authorized as of June 30, 2021 and 2020; 135,516,513 and 132,718,461 issued shares as of June 30, 2021 and June 30, 2020, respectively | |
| 136 | |
| 133 |
Additional paid-in capital | |
| 323,760 | |
| 36,338 |
Retained earnings | |
| 11,250 | |
| 64,737 |
Less: Treasury stock; 0 and 102,030 shares of common stock at $0.0 and $1.89 per share as of June 30, 2021 and June 30, 2020, respectively | |
| — | |
| (193) |
Total InnovAge Holding Corp. | |
| 335,146 | |
| 101,015 |
Noncontrolling interests | |
| 22,819 | |
| 6,735 |
Total stockholders’ equity | |
| 357,965 | |
| 107,750 |
Total liabilities and stockholders’ equity | | $ | 531,752 | | $ | 409,634 |
June 30,
2023June 30,
2022in thousands Assets Current Assets Cash and cash equivalents $ 127,249 $ 184,429 Short-term investments 46,213 — Restricted cash 16 17 Accounts receivable, net of allowance ($4,161 – June 30, 2023 and $3,403 – June 30, 2022) 24,344 35,907 Prepaid expenses 17,145 13,842 Income tax receivable 262 6,761 Total current assets 215,229 240,956 Noncurrent Assets Property and equipment, net 192,188 176,260 Operating lease assets 21,210 — Investments 5,493 5,493 Deposits and other 3,823 2,812 Goodwill 124,217 124,217 Other intangible assets, net 5,198 5,858 Total noncurrent assets 352,129 314,640 Total assets $ 567,358 $ 555,596 Liabilities and Stockholders' Equity Current Liabilities Accounts payable and accrued expenses $ 54,935 $ 50,562 Reported and estimated claims 42,999 38,454 Due to Medicaid and Medicare 9,142 9,130 Income tax payable 1,212 — Current portion of long-term debt 3,795 3,793 Current portion of finance lease obligations 4,722 3,368 Current portion of operating lease obligations 3,530 — Deferred revenue 28,115 — Total current liabilities 148,450 105,307 Noncurrent Liabilities Deferred tax liability, net 6,236 17,761 Finance lease obligations 13,114 9,440 Operating lease obligations 18,828 — Other noncurrent liabilities 1,086 1,134 Long-term debt, net of debt issuance costs 64,844 68,210 Total liabilities 252,558 201,852 Commitments and Contingencies (See Note 9) Redeemable Noncontrolling Interests (See Note 4) 12,708 15,278 Stockholders’ Equity Common stock, $0.001 par value; 500,000,000 authorized as of June 30, 2023 and 2022; 135,639,845 and 135,532,811 issued shares as of June 30, 2023 and June 30, 2022, respectively 136 136 Additional paid-in capital 332,107 327,499 Retained earnings (deficit) (35,944) 4,729 Total InnovAge Holding Corp. 296,299 332,364 Noncontrolling interests 5,793 6,102 Total stockholders’ equity 302,092 338,466 Total liabilities and stockholders’ equity $ 567,358 $ 555,596
84
| | | | | | |
| | Year Ended June 30, | ||||
|
| 2021 | | 2020 | ||
| | in thousands, except per share amounts | ||||
Revenues |
| | | | | |
Capitation revenue | | $ | 635,322 | | $ | 564,834 |
Other service revenue | |
| 2,478 | |
| 2,358 |
Total revenues | |
| 637,800 | |
| 567,192 |
Expenses | |
|
| |
|
|
External provider costs | |
| 309,317 | |
| 272,832 |
Cost of care, excluding depreciation and amortization | |
| 154,403 | |
| 153,056 |
Sales and marketing | |
| 22,236 | |
| 19,001 |
Corporate, general and administrative | |
| 132,333 | |
| 58,481 |
Depreciation and amortization | |
| 12,294 | |
| 11,291 |
Equity loss | |
| 1,343 | |
| 678 |
Other operating expense | |
| 18,211 | |
| 920 |
Total expenses | |
| 650,137 | |
| 516,259 |
Operating Income (Loss) | |
| (12,337) | |
| 50,933 |
| | | | | | |
Other Income (Expense) | |
|
| |
|
|
Interest expense, net | |
| (16,787) | |
| (14,619) |
Loss on extinguishment of debt | |
| (14,479) | | | — |
Gain on equity method investment | | | 10,871 | | | — |
Other expense | |
| (2,237) | |
| (681) |
Total other expense | |
| (22,632) | |
| (15,300) |
Income (Loss) Before Income Taxes | |
| (34,969) | |
| 35,633 |
Provision for Income Taxes | |
| 9,771 | |
| 9,868 |
Net Income (Loss) | |
| (44,740) | |
| 25,765 |
Less: net loss attributable to noncontrolling interests | |
| (754) | |
| (513) |
Net Income (Loss) Attributable to InnovAge Holding Corp. | | $ | (43,986) | | $ | 26,278 |
| | | | | | |
Weighted-average number of common shares outstanding - basic | |
| 123,618,702 | |
| 132,616,431 |
Weighted-average number of common shares outstanding - diluted | |
| 123,618,702 | |
| 135,233,630 |
| | | | | | |
Net income (loss) per share - basic | | $ | (0.36) | | $ | 0.20 |
Net income (loss) per share - diluted | | $ | (0.36) | | $ | 0.19 |
| Year Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| in thousands, except per share amounts | |||||||||||
| Revenues | |||||||||||
| Capitation revenue | $ | 686,836 | $ | 696,998 | |||||||
| Other service revenue | 1,251 | 1,642 | |||||||||
| Total revenues | 688,087 | 698,640 | |||||||||
| Expenses | |||||||||||
| External provider costs | 374,528 | 383,046 | |||||||||
| Cost of care, excluding depreciation and amortization | 212,271 | 180,222 | |||||||||
| Sales and marketing | 19,627 | 24,201 | |||||||||
| Corporate, general and administrative | 115,637 | 101,653 | |||||||||
| Depreciation and amortization | 15,419 | 13,924 | |||||||||
| Total expenses | 737,482 | 703,046 | |||||||||
| Operating Loss | (49,395) | (4,406) | |||||||||
| Other Income (Expense) | |||||||||||
| Interest expense, net | (1,522) | (2,526) | |||||||||
| Other income (expense) | 124 | (305) | |||||||||
| Total other expense | (1,398) | (2,831) | |||||||||
| Loss Before Income Taxes | (50,793) | (7,237) | |||||||||
| Provision (Benefit) for Income Taxes | (7,241) | 723 | |||||||||
| Net Loss | (43,552) | (7,960) | |||||||||
| Less: net loss attributable to noncontrolling interests | (2,879) | (1,439) | |||||||||
| Net Loss Attributable to InnovAge Holding Corp. | $ | (40,673) | $ | (6,521) | |||||||
Weighted-average number of common shares outstanding - basic | 135,593,824 | 135,519,970 | |||||||||
Weighted-average number of common shares outstanding - diluted | 135,593,824 | 135,519,970 | |||||||||
| Net loss per share - basic | $ | (0.30) | $ | (0.05) | |||||||
| Net loss per share - diluted | $ | (0.30) | $ | (0.05) | |||||||
85
| | | | | | | | | | | | | | | | | | | | | | |
|
| |
| | |
| Additional |
| Retained |
|
|
|
| |
|
| |
|
| | ||
| | Capital Stock | | Paid-in | | Earnings | | Treasury Stock | | Noncontrolling | | | | |||||||||
| | Shares | | Amount | | Capital | | (Deficit) | | Shares | | Amount | | Interests | | Total | ||||||
| | in thousands, except share amounts | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Balances, June 30, 2019 |
| 132,718,461 | |
| 133 | |
| 35,795 | |
| 38,459 |
| 102,030 | |
| (193) | |
| 7,248 | |
| 81,442 |
Grants of stock options and stock option expense |
| — | |
| — | |
| 543 | |
| — |
| — | |
| — | |
| — | |
| 543 |
Net income (loss) |
| — | |
| — | |
| — | |
| 26,278 |
| — | |
| — | |
| (513) | |
| 25,765 |
| | | | | | | | | | | | | | | | | | | | | | |
Balances, June 30, 2020 |
| 132,718,461 | | $ | 133 | | $ | 36,338 | | $ | 64,737 |
| 102,030 | | $ | (193) | | $ | 6,735 | | $ | 107,750 |
Treasury stock transaction |
| — | |
| — | |
| — | |
| — |
| 16,095,819 | |
| (77,603) | |
| — | |
| (77,603) |
Treasury stock retirement | | (16,197,849) | | | (16) | | | (77,780) | | | | | (16,197,849) | | | 77,796 | | | — | | | — |
Stock option cancellation |
| — | |
| — | |
| — | |
| (9,501) |
| — | |
| — | |
| — | |
| (9,501) |
Time based awards- option cancellation |
| — | |
| — | |
| (29,175) | |
| — |
| — | |
| — | |
| — | |
| (29,175) |
Stock-based compensation |
| — | |
| — | |
| 1,664 | |
| — |
| — | |
| — | |
| — | |
| 1,664 |
Reclassification of warrant liability | | — | | | — | | | 2,264 | | | — | | — | | | — | | | — | | | 2,264 |
Capital contribution |
| — | |
| — | |
| 20,000 | |
| — |
| — | |
| — | |
| — | |
| 20,000 |
Initial public offering of common stock, net of offering costs of $28,445 | | 18,995,901 | | | 19 | | | 370,449 | | | — | | — | | | — | | | — | | | 370,468 |
Consolidation of equity method investment | | — | | | — | | | — | | | — | | — | | | — | | | 16,838 | | | 16,838 |
Net loss |
| — | |
| — | |
| — | |
| (43,986) |
| — | |
| — | |
| (754) | |
| (44,740) |
| | | | | | | | | | | | | | | | | | | | | | |
Balances, June 30, 2021 |
| 135,516,513 | | $ | 136 | | $ | 323,760 | | $ | 11,250 |
| — | | $ | — | | $ | 22,819 | | $ | 357,965 |
| Capital Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Noncontrolling Interests | Total Permanent Stockholders' Equity | Redeemable Noncontrolling Interests (Temporary Equity) | Net Loss | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| in thousands, except share amounts | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances, June 30, 2021 | 135,516,513 | $ | 136 | $ | 323,760 | $ | 10,663 | $ | 6,420 | $ | 340,979 | $ | 16,986 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | 16,298 | — | 3,739 | — | — | 3,739 | — | ||||||||||||||||||||||||||||||||||||||||
| Adjustment to redemption value | — | — | — | 587 | — | 587 | (587) | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (6,521) | (318) | (6,839) | (1,121) | (7,960) | |||||||||||||||||||||||||||||||||||||||
| Balances, June 30, 2022 | 135,532,811 | $ | 136 | $ | 327,499 | $ | 4,729 | $ | 6,102 | $ | 338,466 | $ | 15,278 | ||||||||||||||||||||||||||||||||||
| Balances, June 30, 2022 | 135,532,811 | $ | 136 | $ | 327,499 | $ | 4,729 | $ | 6,102 | $ | 338,466 | $ | 15,278 | — | |||||||||||||||||||||||||||||||||
| Stock-based compensation | 107,034 | — | 4,608 | — | — | 4,608 | — | ||||||||||||||||||||||||||||||||||||||||
| Adjustment to redemption value | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (40,673) | (309) | (40,982) | (2,570) | (43,552) | |||||||||||||||||||||||||||||||||||||||
| Balances, June 30, 2023 | 135,639,845 | $ | 136 | $ | 332,107 | $ | (35,944) | $ | 5,793 | $ | 302,092 | $ | 12,708 | $ | |||||||||||||||||||||||||||||||||
86
| | | | | | |
| | Year Ended June 30, | ||||
| | 2021 | | 2020 | ||
|
| in thousands | ||||
Operating Activities | | | | | | |
Net income (loss) | | $ | (44,740) | | $ | 25,765 |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | |
|
| |
|
|
Loss on disposal of assets | |
| 18 | |
| 1,039 |
Provision for uncollectible accounts | |
| 8,637 | |
| 6,204 |
Depreciation and amortization | |
| 12,294 | |
| 11,291 |
Gain on equity method investment | | | (10,871) | | | — |
Loss on extinguishment of long-term debt | |
| 14,479 | |
| — |
Amortization of deferred financing costs | |
| 1,056 | |
| 550 |
Stock-based compensation | |
| 1,664 | |
| 543 |
Deferred income taxes | |
| 6,418 | |
| 3,173 |
Loss in equity of nonconsolidated entities | |
| 1,343 | |
| 678 |
Change in fair value of warrants | |
| 2,264 | |
| — |
Change in fair value of contingent consideration | | | — | | | 920 |
Changes in operating assets and liabilities, net of acquisitions | |
|
| |
|
|
Accounts receivable, net | |
| 5,879 | |
| (1,202) |
Prepaid expenses | |
| (4,987) | |
| (1,062) |
Income tax receivable | |
| (3,658) | |
| 1,952 |
Deposits and other | |
| (874) | |
| 1,063 |
Accounts payable and accrued expenses | |
| 6,137 | |
| (1,013) |
Reported and estimated claims | |
| 2,613 | |
| 2,045 |
Due to Medicaid and Medicare | |
| (5,220) | |
| (8,120) |
Deferred revenue | |
| — | |
| 2 |
Net cash provided by (used in) operating activities | |
| (7,548) | |
| 43,828 |
Investing Activities | |
|
| |
|
|
Purchases of property and equipment | |
| (17,541) | |
| (11,844) |
Proceeds from sales of property and equipment | |
| — | |
| 169 |
Proceeds from net working capital settlements | |
| — | |
| 1,129 |
Purchase of long term investment | |
| — | |
| (1,145) |
Purchase of intangible assets | |
| (2,000) | |
| — |
Net cash used in investing activities | | $ | (19,541) | | $ | (11,691) |
Financing Activities |
| | | | | |
Distributions to owners | | $ | (9,500) | | $ | — |
Capital contributions | |
| 20,000 | |
| — |
Payments on capital lease obligations | |
| (1,788) | |
| (1,834) |
Proceeds from long-term debt | | | 375,000 | | | 25,000 |
Principal payments on long-term debt | |
| (512,660) | |
| (1,934) |
Payment of financing costs and debt premiums | |
| (14,896) | |
| — |
Proceeds from initial public offering of common stock | |
| 370,468 | |
| — |
Treasury stock purchases | |
| (77,603) | |
| — |
Payments under acquisition agreements | |
| (3,622) | |
| — |
Payments related to option cancellation | | | (29,175) | | | — |
Net cash provided by financing activities | |
| 116,224 | |
| 21,232 |
| | | | | | |
INCREASE IN CASH, CASH EQUIVALENTS & RESTRICTED CASH | |
| 89,135 | |
| 53,369 |
CASH, CASH EQUIVALENTS & RESTRICTED CASH, BEGINNING OF PERIOD | |
| 114,565 | |
| 61,196 |
CASH, CASH EQUIVALENTS & RESTRICTED CASH, END OF PERIOD | | $ | 203,700 | | $ | 114,565 |
| | | | | | |
Supplemental Cash Flows Information | |
|
| |
|
|
Interest paid | | $ | 18,030 | | $ | 11,551 |
Income taxes paid | | $ | 7,048 | | $ | 4,745 |
Property and equipment included in accounts payable | | $ | 1,327 | | $ | 1,348 |
Property and equipment purchased under capital leases | | $ | 3,493 | | $ | 1,399 |
| Year Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| in thousands | |||||||||||
| Operating Activities | |||||||||||
| Net loss | $ | (43,552) | $ | (7,960) | |||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities | |||||||||||
| Loss on disposal of assets | 1,107 | 305 | |||||||||
| Provision for uncollectible accounts | 3,340 | 6,181 | |||||||||
| Depreciation and amortization | 15,419 | 13,924 | |||||||||
| Operating lease rentals | 4,604 | — | |||||||||
| Amortization of deferred financing costs | 429 | 429 | |||||||||
| Stock-based compensation | 4,608 | 3,739 | |||||||||
| Deferred income taxes | (11,525) | 2,061 | |||||||||
| Other | 167 | — | |||||||||
| Changes in operating assets and liabilities, net of acquisitions | |||||||||||
| Accounts receivable, net | 8,223 | (9,506) | |||||||||
| Prepaid expenses | (3,303) | (4,667) | |||||||||
| Income tax receivable | 6,499 | (1,360) | |||||||||
| Deposits and other | (1,263) | (475) | |||||||||
| Accounts payable and accrued expenses | 34,901 | 17,381 | |||||||||
| Reported and estimated claims | 4,545 | 5,221 | |||||||||
| Due to Medicaid and Medicare | 12 | 2,029 | |||||||||
| Income taxes payable | 1,212 | — | |||||||||
| Operating lease liabilities | (5,187) | — | |||||||||
| Net cash provided by operating activities | 20,236 | 27,302 | |||||||||
| Investing Activities | |||||||||||
| Purchases of property and equipment | (23,354) | (38,238) | |||||||||
| Purchases of short-term investments | (46,167) | — | |||||||||
| Purchase of cost method investment | — | (2,000) | |||||||||
| Net cash used in investing activities | $ | (69,521) | $ | (40,238) | |||||||
| Financing Activities | |||||||||||
| Payments for finance lease obligations | (4,103) | (2,528) | |||||||||
| Principal payments on long-term debt | (3,793) | (3,790) | |||||||||
| Net cash used in financing activities | (7,896) | (6,318) | |||||||||
| DECREASE IN CASH, CASH EQUIVALENTS & RESTRICTED CASH | (57,181) | (19,254) | |||||||||
| CASH, CASH EQUIVALENTS & RESTRICTED CASH, BEGINNING OF PERIOD | 184,446 | 203,700 | |||||||||
| CASH, CASH EQUIVALENTS & RESTRICTED CASH, END OF PERIOD | $ | 127,265 | $ | 184,446 | |||||||
| Supplemental Cash Flows Information | |||||||||||
| Interest paid | $ | 3,997 | $ | 1,474 | |||||||
| Income taxes paid | $ | 13 | $ | 84 | |||||||
| Property and equipment included in accounts payable | $ | 882 | $ | 2,135 | |||||||
| Property and equipment purchased under capital leases | $ | 9,131 | $ | 8,067 | |||||||
87
During the third quarter ended March 31, 2023, the Company consolidated its Germantown LIFE center with its Allegheny and Henry Avenue LIFE centers in Pennsylvania.Note 1:BusinessInnovAge Holding Corp. (formerly, TCO Group Holdings, Inc.) (the “Company”) and certain wholly owned subsidiaries were formed as for-profit corporations effective May 13, 2016, for the purpose of purchasing all the outstanding common stock of Total Community Options, Inc. d/b/a InnovAge, which was formed in May 2007. In connection with this purchase, Total Community Options, Inc. and certain of its subsidiaries converted from not-for-profit organizations to for-profit corporations, and Total Community Options Foundation, Inc. (“Foundation”) and Johnson Adult Day Program, Inc. (“Johnson”), both not-for-profit organizations, separated from Total Community Options, Inc. In connection with our initial public offering (“IPO”), which occurred in March 2021, we changed the name of our company from TCO Group Holdings, Inc. to InnovAge Holding Corp.InnovAge Holding Corp. and its subsidiaries which(the “Company”), are headquartered in Denver, Colorado, have a strong record of innovation, quality, and sensitivity to the needs of participants and staff.Colorado. The Company oversees, and in many cases directly provides,fulfills a broad range of medical and ancillary services for seniors in need of care and support to safely live independently in their homes and communities, including in-home care services (skilled, unskilled and personal care); in-center services such as primary care, physical therapy, occupational therapy, speech therapy, dental services, mental health and psychiatric services, meals, and activities; transportation to the Program of All-Inclusive Care for the Elderly (“PACE”) center and third-party medical appointments; and care management. The Company manages its business as 1one reportable segment, PACE.As of June 30, 2021,2023, the Company served approximately 6,8506,400 PACE participants, making it the largest PACE provider in the United States of America (the U.S.) based upon participants served, and operates 1817 PACE centers across Colorado, California, New Mexico, Pennsylvania and Virginia.PACE is a fully-capitated managed care program, which serves the frail elderly, and predominantly dual-eligible, population in a community-based service model. InnovAge is obligated to provide, and participants receive, all needed healthcare services through an all-inclusive, coordinated model of care, and the Company is at risk for 100% of healthcare costs incurred with respect to the care of its participants. PACE programs receive capitation payments directly from Medicare Parts C and D, Medicaid, Veterans Administration (“VA”), and private pay sources. Additionally, under the Medicare Prescription Drug Plan, the Centers for Medicare and Medicaid Services (“CMS”) share part of the risk for providing prescription medication to the Company’s participants.On March 3, 2021, the Company’s Registration Statement on Form S-1 with respect to the Company’s IPO of shares of common stock, par value $0.001 per share, was declared effective by the Securities and Exchange Commission (“SEC”). The Company’s common stock began trading on March 4, 2021is traded on the Nasdaq Stock Market LLC (“NASDAQ”) under the ticker symbol “INNV”.On March 8, 2021, we completed our IPO in which we issued and sold 16,666,667 shares of our common stock at an offering price of $21.00 per share. In addition, the underwriters had the option to purchase 2,500,000 additional shares of common stock, and on March 9, 2021, the underwriters exercised the option to purchase 2,329,234 shares of common stock. We received net proceeds of $370.5 million, after deducting underwriting discounts and commissions of $23.9 million and deferred offering costs of $4.5 million. Deferred, direct offering costs were capitalized and consisted of fees and expenses incurred in connection with the sale of our common stock in the IPO, including the legal, accounting, printing and other offering related costs. Upon completion of the IPO, these deferred offering costs were reclassified from current assets to stockholders’ equity and recorded against the net proceeds from the offering.88
Note 2:Summary of Significant Accounting PoliciesBasis of Preparation and Principles of ConsolidationThe accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and variable interest entities (VIEs) for which it is the primary beneficiary and entities for which it is the controlling general partner. All intercompany accounts and transactions have been eliminated in consolidation.Use of EstimatesThe preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used in accounting for, among other things, the allowance for uncollectible accounts; useful lives of property and equipment and the valuation of goodwill and intangible assets; risk-score adjustments to participant revenues; reported and estimated claims; accruals; the determination of assumptions for stock-based compensation costs; deferred taxes, including the determination of a need for a valuation allowance; valuation of the contingent consideration; legal contingencies, including medical malpractice claims; the determination of fair value of net assets acquired in a business combination; and other fair value measurements. Actual results may differ from previously estimated amounts.Cash and Cash EquivalentsCash and cash equivalents consist of cash and financial instruments issued by major financial institutions that have an original maturity of less than three months. Amounts are reported in the consolidated balance sheets at cost, which approximates fair value.The Company’s cash and cash equivalents are deposited with high credit quality financial institutions and are primarily in demand deposit accounts. The FDIC insurance coverage is $250,000 on the aggregate of interest bearing and non-interest bearing accounts.75InvestmentsInvestmentsCost method investments do not have a readily determinable fair value and are carried at cost, less impairment plus or minus any changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Investments are evaluated for impairment each reporting period using a qualitative assessment of impairment indicators. If impairment indicators are present, the investment will be written down to its fair value and the difference between its fair value and carrying value will be recorded in net income. No impairment indicators were present for the fiscal year ended June 30, 2021. The Company had investments of $2.6 million as of both June 30, 2021 and 2020. See Note 7 for more information.Restricted CashRestricted cash includes (1) cash held in certificates of deposit of $2.2 million and collateral for letters of credit of $1.6 million as of June 30, 2021 and 2020, respectively, and (2) cash held for participants who have established a personal-needs account to pay for nonmedical personal expenses, payment of which only occurs upon participant authorization, in the amount of approximately $0.02 million as of both June 30, 2021 and 2020. The Company records a related deposit liability for any participant contributions to these personal-needs accounts in accounts payable and accrued expenses in the consolidated balance sheets.89
Accounts Receivable
The Company provides comprehensive health care services to participants on the basis of capitated or fixed fees per participant that are paid monthly by Medicare, Medicaid, the VA, and private pay sources. The concentration of net receivables from participants and third-party payers as of June 30, 2021 and 2020 was as follows:
| | | | | |
|
| 2021 |
| 2020 |
|
Medicaid |
| 60 | % | 72 | % |
Medicare |
| 20 | % | 12 | % |
Private pay and other |
| 20 | % | 16 | % |
Total |
| 100 | % | 100 | % |
The Company records accounts receivable at net realizable value, which includes an allowance for estimated uncollectible accounts. The allowance for uncollectible accounts reflects the Company’s best estimate of probable losses considering eligibility, historical experience, and existing economic conditions. Accounts are written off as bad debts when they are deemed uncollectible based upon individual credit evaluations and specific circumstances underlying the accounts. The balance of the allowance for uncollectible accounts was $4.4 million as of June 30, 2021, compared to $6.4 million as of June 30, 2020.
In fiscal year 2021, the Company and the Colorado Department of Health Care Policy & Financing (“HCPF”) completed the reconciliation for fiscal years 2018 and 2019. The reconciliation resulted in a reduction of accounts receivable of $17.0 million and due to Medicaid of $13.6 million, which was recorded in fiscal year 2021. The Company does not expect adjustments related to the reconciliation to be significant in future periods.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are recorded using the straight-line method over the shorter of estimated useful lives or lease terms, if the assets are being leased.
Property and equipment were comprised of the following as of June 30:
| | | | | | | | |
|
| Estimated |
| | |
| | |
dollars in thousands | | Useful Lives | | 2021 | | 2020 | ||
Land |
| N/A | | $ | 11,980 | | $ | 8,580 |
Buildings and leasehold improvements |
| 10 - 40 years | |
| 104,724 | |
| 79,514 |
Software |
| 3 - 5 years | |
| 13,316 | |
| 11,387 |
Equipment and vehicles |
| 3 - 7 years | |
| 35,341 | |
| 28,814 |
Construction in progress |
| N/A | |
| 22,130 | |
| 7,069 |
|
| | |
| 187,491 | | | 135,364 |
Less accumulated depreciation and amortization |
| | |
| (44,776) | |
| (32,870) |
Total property and equipment, net | | | | $ | 142,715 | | $ | 102,494 |
Depreciation of $11.6 million and $10.6 million was recorded during the fiscal years ended June 30, 2021 and 2020, respectively. Land is not depreciated, and construction in progress is not depreciated until ready for service. Costs of enhancements or modifications that substantially extend the capacity or useful life of an asset are capitalized and depreciated accordingly. Ordinary repairs and maintenance are expensed as incurred.
During fiscal year 2020, the Company terminated the lease agreement at our Roosevelt Pennsylvania location, which resulted in a write off of leasehold improvements of $1.1 million which is disclosed within other income (expense) on the consolidated statement of operations.
The costs of acquiring or developing internal-use software, including directly related payroll costs for internal resources, are capitalized. Software maintenance and training costs are expensed in the period incurred.
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Interest is capitalized on construction projects, including internal-use software development projects, while in progress. During the fiscal years ended June 30, 2021 and 2020, the Company capitalized interest of approximately $1.0 million and $0.1 million, respectively.
When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the consolidated balance sheets, and the resulting gain or loss, if any, is reflected in the consolidated statements of operations. Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. NaN impairment charges were recorded in the fiscal years ended June 30, 2021 or 2020.
Equity Method Investments
The Company uses the equity method to account for investments in entities that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. The Company’s investments in these nonconsolidated entities is reflected in the Company’s consolidated balance sheets under the equity method, and the Company’s proportionate net income (loss), if any, is included in the Company’s consolidated statements of operations as equity income (loss).
2022. See Note 4 “Cost and Equity Method Investments” for more information.
| dollars in thousands | Estimated Useful Lives | 2023 | 2022 | ||||||||||||||
| Land | N/A | $ | 11,970 | $ | 11,980 | ||||||||||||
| Buildings and leasehold improvements | 10 - 40 years | 124,263 | 122,076 | ||||||||||||||
| Software | 3 - 5 years | 26,656 | 16,264 | ||||||||||||||
| Equipment and vehicles | 3 - 7 years | 57,754 | 47,546 | ||||||||||||||
| Construction in progress | N/A | 42,223 | 35,479 | ||||||||||||||
| 262,865 | 233,345 | ||||||||||||||||
| Less accumulated depreciation and amortization | (70,677) | (57,085) | |||||||||||||||
| Total property and equipment, net | $ | 192,188 | $ | 176,260 | |||||||||||||
2022.
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Reported and Estimated Claims
Contingent Consideration
The Company records contingent consideration at the time of agreement and records changes in the fair value of contingent consideration each reporting period in the consolidated statements of operations as a component of other operating expense (income).
During the year ended June 30, 2021, we paid contingent consideration relating to our acquisition of NewCourtland, as defined and described in Note 4. During the year ended June 30, 2020, we paid contingent consideration related to (i) the acquisition of Riverside and (ii) acquisition of Charlottesville, each as defined and described in Note 4. There are 0 amounts outstanding related to contingent consideration as of June 30, 2021.
Treasury Stock
Treasury stock purchases are accounted for under the cost method where the entire cost of the acquired stock is recorded as treasury stock. Gains and losses on the subsequent reissuance of shares are credited or charged to paid-in-capital in excess of par value using the average-cost method.
The Company’s PACE operating segment provides comprehensive health care services to participants on the basis of fixed or capitated fees per participant that are paid monthly by Medicare, Medicaid, the VA, and private pay sources. Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the PACE program. The PACE state contracts between us and the respective state Medicaid administering agency are amended annually each June 30 in all states other than California and Pennsylvania, which contract on a calendar-year basis. New agreements have been executed for the periods (i) January 1, 2021 through December 31, 2021 for California and (ii) July 1, 2021 through June 30, 2022 for all other states except Pennsylvania, for which we are currently operating in good standing under the 2020 amended agreement while the agency finalizes its 2021 amendment. Capitation payments are recognized as revenue in the period in which the services are provided.
Capitation payments received for PACE participants under Medicare Advantage plans are subject to retroactive premium risk adjustments based upon various factors. The Company estimates the amount of current-year adjustments in revenues. As final settlements are determined by CMS, we record any corresponding retroactive adjustments.
Capitation revenues may be subject to adjustment as a result of examination by government agencies or contractors.
The audit process and the resolution of significant related matters as a result of these examinations often are not finalized until several years after the services are rendered. Any adjustments resulting from these examinations are recorded in the period the Company is notified of them.
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At times, the Company accepts participants into the program pending final authorization from Medicaid. If Medicaid coverage is later denied and there are no alternative resources available to pay for services, the participant is disenrolled. Any costs incurred on behalf of these participants were nominal in the fiscal years ended June 30, 2021 and 2020.
Adoption of ASC 606, Revenue from Contracts with Customers
ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”)requires companies to exercise more judgment and recognize revenue using a five-step process. The Company adopted ASC 606 using the modified retrospective method for all contracts effective July 1, 2020. Under the modified retrospective method, the Company applied ASC 606 to contracts that were not complete as of July 1, 2020 and recognized the cumulative effect of initially applying the standard as an adjustment to the opening balance of accumulated deficit. Prior periods were not adjusted. No cumulative-effect adjustment in retained earnings was recorded as the adoption of ASC 606 did not materially impact the Company’s consolidated financial statements or results of operations.
Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performed the following five steps: (i) Identify the contract(s) with a customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance obligations in the contract; and (v) Recognize revenue as the entity satisfies a performance obligation.
Revenues for the year ended June 30, 2020 were presented under ASC 605, Revenue Recognition (“ASC 605”). Under ASC 605, the Company recognized revenue when all of the following criteria were met: Persuasive evidence of an arrangement exists; the sales price is fixed or determinable; collection is reasonably assured; and services have been rendered.
Capitation Revenue and Accounts Receivable
Our capitation revenue relates to contracts with participants in which our performance obligation is to provide healthcare services to the participants. Revenues are recorded during the period our obligations to provide healthcare services are satisfied as noted below within each service type. The Company contracts directly with Medicare and Medicaid on a PMPM basis. We receive 100% of the pooled capitated payment to directly provide or manage the healthcare needs of our participants.
Fees are recorded gross in revenues because the Company is acting as a principal in providing for or overseeing comprehensive care provided to the participants. Neither the Company nor any of its affiliates is a registered insurance company because state law in the states in which it operates does not require such registration for risk-bearing providers.
In general, a participant enrolls in the PACE program and is considered a customer of InnovAge. The Company considers all contracts with participants as a single performance obligation to provide comprehensive medical, health, and social services that integrate acute and long-term care. The Company identified that contracts with customers in the PACE program have similar performance obligations and therefore groups them into one portfolio. This performance obligation is satisfied as the Company provides comprehensive care to its participants.
Our revenues are based on the estimated per member, per month (“PMPM”) amounts we expect to be entitled to receive from the capitated fees per participant that are paid monthly by Medicare, Medicaid, the VA, and private pay sources. Medicaid and Medicare capitation revenues are based on per-member, per-montha per member, per month (“PMPM”) capitation rates under the PACE program. VA is included in “Private Pay and other” and is also capitated. Private pay includes direct payments from participants who do not qualify for the full capitated rate and have to pay all orFor a portiondiscussion of the capitated rate.
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The Company disaggregates capitation revenue from the following sources for the year ended June 30:
| | | | | |
|
| 2021 |
| 2020 |
|
Medicaid |
| 53 | % | 55 | % |
Medicare |
| 47 | % | 44 | % |
Private pay and other |
| * | % | 1 | % |
Total |
| 100 | % | 100 | % |
* Less than 1%
The Company determined the transaction price for these contracts is the amount we expect to be entitled to, which is the most likely amount. For certain capitation payments, the Company is subject to retroactive premium risk adjustments based on various factors. The Company estimates the amount of the adjustment and records it monthly on a straight-line basis. These adjustments are not expected to be material.
Our accounts receivable as of June 30, 2021 and 2020 is primarily from capitation revenue arrangements.
The capitation revenues are recognized based on the estimated PMPM transaction price to transfer the service for a distinct increment of the series (i.e. month). We recognize revenue in the month in which participants are entitled to receive comprehensive care benefits during the contract term. As the period between the time of service and time of payment is typically one year or less, the Company elected the practical expedient under ASC 606-10-32-18 and did not adjust for the effects of a significant financing component.
The Company also provides prescription drug benefits in accordance with Medicare Part D. Monthly payments received from CMS and the participants represent the bid amount for providing prescription drug coverage. The portion received from CMS is subject to risk sharing through Medicare Part D risk-sharing corridor provisions. These risk-sharing corridor provisions compare costs targeted in the Company’s bid to actual prescription drug costs. The Company estimates and records a monthly adjustment to Medicare Part D revenues associated with these risk-sharing corridor provisions. Medicare Part D comprised (i) 12% and 11% of capitation revenues for the years ended June 30, 2021 and 2020, respectively, and (ii) 21% and 19% of external provider costs for the years ended June 30, 2021 and 2020, respectively.
Other Service Revenue and Accounts Receivable
Other service revenue is comprised of rents earned related to Senior Housing and other fee for service revenue. Other service revenue was 0.4% of total revenue for each of the years ended June 30, 2021 and 2020. Accounts receivable related to other service revenue were not significant as of both June 30, 2021 and 2020, respectively.
Remaining Performance Obligations
As our performance obligations relate to contracts with a duration of one year or less, the Company elected the optional exemption in ASC 606-10-50-14(a). Therefore, the Company is not required to disclose the transaction price for the remaining performance obligations at the end of the reporting period or when the Company expects to recognize revenue. The Company had minimal unsatisfied performance obligations at the end of the reporting periods as our participants have received services through the end of the reporting period.
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to change, as well as government review. Failure to comply with these laws can expose the entity to significant regulatory action, including fines, penalties, and exclusion from the Medicare and Medicaid programs.
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Professional Liability Claims
9 “Commitments and Contingencies”.
10 “Stock-based Compensation”.
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has both the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity. The primary beneficiary is required to consolidate the VIE. SH1InnovAge Senior Housing Thornton, LLC (“SH1”) and PWD, each as defined and described in Note 5,Pinewood Lodge, LLC (“PWD”) are considered to be VIEs. The Company is not considered the primary beneficiary of PWD but is considered the primary beneficiary of SH1.
Coronavirus Disease ("COVID-19") Pandemic
In March 2020,
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into legislation. The CARES Act provided for $100.0 billion of funding to healthcare providers, including hospitals on the front lines of the COVID-19 pandemic. Under the CARES Act, the state of Pennsylvania signed into law the Act 24 of 2020, which allocates $10.0 million of funding from the federal CARES Act to managed long-term care organizations. Funding from the Act 24 of 2020 was required to be used to cover necessary COVID-19 related costs incurred between March 1, 2020 and November 30, 2020 for entities in operation as of March 31, 2020. Our Pennsylvania centers were granted $1.0 million of funding from Act 24. During the year ended June 30, 2020, we recognized $0.7 million of such funds as a reduction of expense within our consolidated statement of operations, with the remaining $0.3 million recognized during the year ended June 30, 2021. The CARES Act also provided for the temporary suspension of the automatic 2% reduction of Medicare claim reimbursements (sequestration) for the period of May 1, 2020 through December 31, 2021.
effective dates.
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09 (“ASU 2014-09”), and has since issued various amendments which provide additional clarification and implementation guidance to Topic 606, Revenue from Contracts with Customers, which superseded revenue recognition guidance in ASC 605. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
This guidance is effective for the annual reporting period beginning July 1, 2020, and interim reporting periods within the annual reporting period beginning July 1, 2021. Effective July 1, 2020, the Company adopted ASU 2014-09 using the modified retrospective method applied to those contracts which were not completed as of June 30, 2020. As a result of electing the modified retrospective adoption approach, results for reporting periods beginning after July 1, 2020 are presented under ASC 606. There was no material impact upon the adoption of ASC 606, therefore the Company did not record any adjustments to retained earnings at July 1, 2020 or for any periods previously presented.
Non-employee Awards
In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07), which simplifies the accounting for share-based payments granted to nonemployees for goods and services. The effective date for this amendment is for fiscal years beginning after December 15, 2019. Early adoption is permitted, but no earlier than a reporting entity’s adoption date of ASC 606. The
96
Company adopted ASC 606 and ASU 2018-07 on July 1, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements.
Codification Improvements
In July 2018, the FASB issued ASU 2018-09, Codification Improvements (“ASU 2018-09”), which made minor amendments to the codification in order to correct errors, eliminate inconsistencies and provide clarifications in current guidance. ASU 2018-09 amends Subtopics 470-50, Debt Modifications and Extinguishments, and 718-40, Compensation-Stock Compensation-Income Taxes, among other Topics amended within the update. Several of the Topics within the ASU were effective immediately upon issuance of ASU 2018-09, however, some amendments require transition guidance which is effective for nonpublic business entities for fiscal years after beginning after December 15, 2019. The Company adopted the new guidance on July 1, 2020, noting no impact on its consolidated financial statements and related disclosures.
Fair Value Measurements
In August 2018, the FASB issued ASC 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with partial early adoption permitted for eliminated disclosures. The method of adoption varies by the disclosure. The Company adopted the new guidance on June 1, 2020, noting no impact on its consolidated financial statements and related disclosures.
Recent Accounting Pronouncements Not Yet Adopted
Leases
In February 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU 2016-02 Leases( (“ASU 2016-02)2016-02”), which was intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees will beare required to recognize a right-of-use (“ROU”) asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than 12 months. Additionally, this guidance will requirerequires enhanced disclosures to help investors and other financial statement users to better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. The guidance should be applied under a modified retrospective transition approach for leases existing at the beginning of the earliest comparative period presented in the adoption-period financial statements. Any leases that expire before the initial application date will not require any accounting adjustment. In June 2020, the FASB issued ASU 2020-05 Revenue from contracts with customers (Topic 606) and leases (Topic 842)— – Effective dates for certain entities which deferred the new lease standard effective date for the Company to interim periods beginning after December 15, 2022,2021, with early adoption permitted.
recognition of operating lease liabilities and ROU assets of $25.1 million and $23.6 million, respectively, while our accounting for capital leases (now referred to as finance leases) remained substantially unchanged. The impact of adopting Topic 842 was not material to our Statements of Operations and Statements of Cash Flows. See Note 6, “Leases.”
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Income Taxes
In December 2019, the FASB issued ASU 2019-12, “Income Taxes Topic 740-Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application of Topic 740. This guidance is effective for fiscal years beginning after December 15, 2020, including interim periods therein, and early adoption is permitted. Adoption of ASU 2019-12 is not expected to have a material effect on the Company’s consolidated financial statements.
We do not expect that any other recently issued accounting guidance will have a significant effect on our condensed consolidated financial statements.
Equity Owner Transaction
On July 27, 2020, Revenue Recognition
Concurrently with the entryPACE program have similar performance obligations and therefore groups them into the Agreement,one portfolio. This performance obligation is satisfied as the Company amended and restatedprovides comprehensive care to its 2016 Credit Agreement (as defined below), see Note 10 for further discussion. A portion ofparticipants.
Additionally, as part of the Agreement, the Company executed an Option Cancellation Agreement (the “Cancellation Agreement”), which canceled the Company’s common stock option awards of 16,994,975 grantedprivate pay sources. Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the 2016 Equity Incentive PlanPACE program. VA is included in “Private Pay and other” and is also capitated. Private pay includes direct payments from participants who do not qualify for $74.6 million. Such cancellation resulted in a settlement of the awards. Vesting of the contingent performance-based awards was not deemed probable at the time of the settlement resulting in the settlement of the contingent performance-based awards being recorded as Corporate, generalfull capitated rate and administrative. Vesting of the time vesting awards was deemed probable at the time of the settlement resulting inhave to pay all or a portion of the settlementcapitated rate.
| 2023 | 2022 | ||||||||||
| Medicaid | 54 | % | 54 | % | |||||||
| Medicare | 46 | % | 46 | % | |||||||
| Private pay and other | *% | *% | |||||||||
| Total | 100 | % | 100 | % | |||||||
As partcapitation revenues for each of the transaction,years ended June 30, 2023 and 2022, respectively, and (ii) 23% and 23% of external provider costs for the Company incurred $22.6 million in transaction costs, of which $13.1 million was recognized as Corporate, general and administrative expense and $9.5 million was recognized as a distribution to owner as the costs were paid on behalf of the owners.
Capital Contribution
On October 15, 2020, Finback Pace, LP contributed $20.0 million for an investment in the LP, which in turn contributed the funds to the Company.
Note 4:Acquisitions
Other than the consolidation of InnovAge Sacramento, which we accounted for as a step-acquisition and is described in Note 6, there were 0 acquisitions executed during the fiscal years 2020 or 2021.
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Payments Pursuant to Acquisition Agreements
During the fiscal year ended June 30, 2023 and 2022, respectively.
| 2023 | 2022 | ||||||||||
| Medicaid | 61 | % | 70 | % | |||||||
| Medicare | 29 | % | 22 | % | |||||||
| Private pay and other | 10 | % | 8 | % | |||||||
| Total | 100 | % | 100 | % | |||||||
| 2023 | 2022 | ||||||||||
| in thousands | |||||||||||
| Cost method investments | $ | 4,645 | $ | 4,645 | |||||||
| Equity method investments | 848 | 848 | |||||||||
| Total investments | $ | 5,493 | $ | 5,493 | |||||||
Company’s investment is $2.6 million which represents the maximum exposure to loss. The investment does not have a readily determinable fair value and the Company has elected to record the investment at cost, less impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. During the fiscal yearperiod ended June 30, 2019, the Company finalized the acquisition of 2 Virginia PACE centers formerly part of Riverside Healthcare Association, Inc.’s PACE Program (“Riverside”). The Company paid a base purchase2023 and 2022, there were no observable price of $6.8 million, subject to certain net working capital and closing adjustments. The Company finalized the net working capital and closing adjustment calculations during the fiscal year ended June 30, 2020, which resulted in the Company paying an additional $0.3 million to Riverside.
During the fiscal year ended June 30, 2019, the Company finalized the acquisition of Charlottesville Area Retirement Services, Inc. (“Charlottesville”). The Company paid a base purchase price of $5.26 million, subject to certain net working capital and closing adjustments. The Company finalized the net working capital and closing adjustment calculations during the fiscal year ended June 30, 2020, which resulted in the Company paying an additional $0.3 million to Charlottesville.
Note 5:Variable Interest Entity
changes or impairments.
| | | | | | |
|
| 2021 |
| 2020 | ||
| | in thousands | ||||
Assets | | | | | | |
Cash and cash equivalents | | $ | 431 | | $ | 435 |
Accounts receivable | |
| — | |
| 1 |
Prepaid expenses and other | |
| 5 | |
| 7 |
Property, plant and equipment, net | |
| 10,164 | |
| 10,501 |
Deposits and other, net | |
| 390 | |
| 376 |
Liabilities | | | | | | |
Accounts payable and accrued expenses | |
| 219 | |
| 199 |
Current portion long-term debt | |
| 40 | |
| 38 |
Noncurrent liabilities | |
| 454 | |
| 454 |
Long-term debt, net of debt issuance costs | |
| 3,827 | |
| 3,901 |
Note 6:Nonconsolidated Entities
Prior to January 1, 2021, the Company had 2 nonconsolidated equity method investments; PWD and
| 2023 | 2022 | ||||||||||
| in thousands | |||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 648 | $ | 526 | |||||||
| Accounts receivable | — | — | |||||||||
| Prepaid expenses and other | 1 | 5 | |||||||||
| Property, plant and equipment, net | 9,933 | 10,404 | |||||||||
| Deposits and other, net | 402 | 395 | |||||||||
| Liabilities | |||||||||||
| Accounts payable and accrued expenses | 266 | 256 | |||||||||
| Current portion long-term debt | — | 43 | |||||||||
| Deferred revenue | 2 | — | |||||||||
| Noncurrent liabilities | 454 | 454 | |||||||||
| Long-term debt, net of debt issuance costs | 3,784 | 3,784 | |||||||||
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On March 18, 2019, in connection with the formation of InnovAge Sacramento theis a joint venture with Adventist Health System/West (“Adventist”) and Eskaton Properties, Incorporated (“Eskaton”),. On March 18, 2019, in connection with the formation of InnovAge Sacramento, the Company contributed $9.0 million in cash and land valued at $4.2 million for a 59.9% membership interest in the joint venture, InnovAge Sacramento. Further,venture. Adventist contributed $5.8 million in cash and Eskaton contributed $3.0 million in cash for membership interests of 26.41%26.4% and 13.69%13.7%, respectively. TheIn fiscal year 2021, the Company made an additional contribution of $52,000 to obtainand obtained an additional 0.1% membership interest in the joint venture. With the acquisition of the additional 0.1% membership interest,venture, which resulted in the Company obtainedobtaining control ofand consolidating InnovAge Sacramento effectiveas of January 1, 2021. Accordingly, beginning January 1, 2021, the results of InnovAge Sacramento are included in our consolidated results of operations.
At These put rights held by the consummationnoncontrolling interests of the JV Agreement, the Company issued to Adventist, warrants (the “Sacramento Warrants”) to purchase 5% of the Company’s issued and outstanding common stock, par value $0.001 at an exercise price equal to the fair market value per share at the time of exercise of this warrant. The Sacramento Warrants fully vest on the exercise date, which is defined as the date on which Adventist has made aggregate capital contributions in an amount greater than $25.0 million to one or more joint venture entities in which Adventist and the Company hold equity (the “Investment Threshold”).
On February 9, 2021, the Company entered into an amendment agreement with our joint venture partner Adventistare required to amend the Sacramento Warrants.be presented as temporary equity. The amendment removes the Investment Threshold requirement and grants Adventist the right to purchase up to $15.0redeemable noncontrolling interest of $12.7 million of the Company’s common stockwas recorded at an exercise price equal to the IPO price. The warrant is exercisable for one year beginning on the date of the consummation of the IPO. Ascarrying value as of June 30, 2021, Adventist had not exercised any warrants.
At inception, the Sacramento Warrants were initially determined to be equity-based payments to nonemployees and as such the measurement date for these warrants was considered to be the date when the Investment Threshold is reached. At the time of the amendment, due to the removal of the Investment Threshold, the warrants were evaluated under ASC 815-40, Contracts in an Entity’s Own Equity, which resulted in a liability classification from the date of the amendment through completion of our IPO, due to the variable amount of shares which could be issued. Upon completion of the IPO, the number of shares to be issued were no longer variable, which resulted in the warrants being recorded in equity. In 2021, we recorded a charge of $2.3 million, representing the fair value of the warrants from inception through the date of completion of the IPO, in other income (expense) in the condensed consolidated statement of operations.
Effective January 1, 2021, we obtained control of InnovAge Sacramento through acquisition of an additional 0.1% membership interest, which we consider to be a step acquisition, whereby the Company re-measured the previously held equity method investment to fair value. This resulted in a gain on consolidation of $10.9 million, which is recorded in gain on equity method investment in the condensed consolidated statement of operations. The fair value of the previously held equity investments was determined using a discounted cash flow model.
We accounted for the transaction as a business combination, which requires that we record the assets acquired and liabilities assumed at fair value. The amount by which the purchase price exceeds the fair value of the net assets acquired is recorded as goodwill.
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The fair value of the assets acquired and net liabilities assumed in the step acquisition are as follows as of January 1, 2021:
| | | |
|
| January 1, | |
|
| 2021 | |
Assets: | | in thousands | |
Cash | | $ | 646 |
Accounts receivable | | | 786 |
Property and equipment, net | | | 30,667 |
Goodwill | | | 8,078 |
Total assets | |
| 40,177 |
| | | |
Liabilities: | |
|
|
Accounts payable | |
| 530 |
Reported and estimated claims | | | 330 |
Due to Medicaid and Medicare | | | 77 |
Capital leases | | | 428 |
Other liabilities | |
| 48 |
Total liabilities | | $ | 1,413 |
The following table sets forth the results of InnovAge Sacramento for the six months ended December 31, 2020. The results of InnovAge Sacramento are consolidated beginning January 1, 2021.
| | | |
|
| Six Months Ended | |
| | December 31, 2020 | |
|
| in thousands | |
Revenue: | | | |
Total revenue | | $ | 2,297 |
Less: members’ interest | |
| 921 |
The Company’s interest | |
| 1,376 |
Cost of operations: | |
|
|
Total cost of operations | |
| 4,538 |
Less: members’ interest | |
| 1,820 |
The Company’s interest | |
| 2,718 |
The Company’s interest in net loss | | $ | (1,342) |
Note 7:Investments
On June 14, 2019, the Company invested $1.5 million in DispatchHealth Holdings, Inc., ("DispatchHealth") through the purchase of a portion of its outstanding Series B Preferred Stock. On April 2, 2020, the Company invested an additional $1.1 million through the purchase of a portion of its outstanding Series C Preferred Stock. The investment does not have a readily determinable fair value and the Company has elected to record the investment at cost, less impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. During the period ended June 30, 2021 and 2020, there were 0 observable price changes.
in thousands 2021 2020 Balance as of beginning of period $ 116,139 $ 117,268 Adjustments(a) — (1,129) Goodwill acquired during the period 8,078 - Balance as of end of period $ 124,217 $ 116,139 Intangible assets consisted of the following as of June 30: in thousands 2021 2020 Definite-lived intangible assets $ 6,600 $ 6,600 Indefinite-lived intangible assets 2,000 — Total intangible assets 8,600 6,600 Accumulated amortization (2,082) (1,423) Balance as of end of period $ 6,518 $ 5,177 in thousands Amortization Expense 2022 $ 660 2023 660 2024 660 2025 660 2026 660 2022. June 30, June 30, 2021 2020 in thousands Equipment $ 13,302 $ 9,845 Less accumulated depreciation (7,081) (4,829) Total capital leases $ 6,221 $ 5,016 2023. Operating Leases Capital Leases Minimum Lease in thousands Obligations Payments 2022 $ 2,524 $ 3,550 2023 2,468 4,289 2024 1,941 3,926 2025 1,169 3,450 2026 134 3,371 Thereafter — 13,909 Total 8,236 $ 32,495 Less amount representing interest (967) Total minimum lease payments 7,269 Less current maturities 2,079 Noncurrent maturities $ 5,190 June 30, June 30, 2021 2020 in thousands Senior secured borrowings: Term Loan Facility $ 75,000 $ 187,625 Revolving Credit Facility — 25,000 Convertible term loan 2,367 2,401 Total debt 77,367 215,026 Less unamortized debt issuance costs 2,003 2,656 Less current maturities 3,790 1,938 Noncurrent maturities $ 71,574 $ 210,432 2021 Credit Agreement effective interest rate. Aggregate maturities of our debt as of June 30, Long-term debt in thousands Year ending June 30: 2022 $ 3,790 2023 3,793 2024 3,796 2025 3,799 2026 60,052 Thereafter 2,137 Total debt $ 77,367 2023. incurred. Year ended June 30, 2021 2020 in thousands Stock options (a) $ 45,387 $ 543 Profits interests units 1,629 — Restricted stock units 35 — Total stock-based compensation expense $ 47,051 $ 543 2020 Expected volatility 34.9% - 39.3 % Expected life (years) 5.8 - 6.2 Interest rate 0.51% - 1.8 % Dividend yield — % Weighted-average fair value $ 0.48 Fair value of underlying stock $ 4.82 Weighted Average Number of Option average remaining Time-based option awards options price range exercise price term (in years) Outstanding balance, June 30, 2020 8,497,488 $1.00 - $2.35 $ 1.26 6.76 Canceled (8,497,488) $1.00 - $2.35 $ 1.26 6.76 Outstanding balance, June 30, 2021 — Weighted Average Number of average remaining Performance-based option awards options exercise price term (in years) Outstanding balance, June 30, 2020 8,497,488 $ 0.78 6.76 Canceled (8,497,488) $ 0.78 6.76 Outstanding balance, June 30, 2021 — units outstanding as of June 30, 2023. The assumptions under the Monte Carlo model related to the profits interests units, presented on a weighted-average basis, are provided below: Number of Weighted average Time-based unit awards units grant date fair value Outstanding balance, June 30, 2020 — $ — Granted 6,686,568 $ 1.28 Forfeited (99,307) $ 1.17 Outstanding balance, June 30, 2021 6,587,261 $ 1.28 Number of Weighted average Performance-based unit awards units grant date fair value Outstanding balance, June 30, 2020 — $ — Granted 6,322,569 $ 0.57 Forfeited (99,307) $ 0.44 Outstanding balance, June 30, 2021 6,223,262 $ 0.57 Certain awards under this plan vest upon achieving specific share price performance criteria and are determined to have performance-based vesting conditions. Weighted average Number of grant-date fair Restricted stock units awards value per share Outstanding balance, June 30, 2020 — $ — Granted 48,470 $ 22.87 Outstanding balance, June 30, 2021 48,470 $ 22.87 Year ended June 30, 2021 2020 in thousands Statutory rate $ (7,343) $ 7,483 IRC Section 162(m) limitation (a) 12,526 — Transaction costs (b) 2,770 — Change in valuation allowance 1,500 (128) Permanent adjustments 306 268 Prior year true-up and other (227) 347 Income from entities not subject to taxation 66 108 State tax 173 1,790 Provision for income taxes $ 9,771 $ 9,868 Provision for income taxes consisted of the following for the years ended June 30, Year ended June 30, 2021 2020 in thousands Current: Federal $ 2,710 $ 5,382 State 642 1,313 Total current tax expense 3,352 6,695 Deferred: Federal 5,342 2,349 State 1,077 824 Total deferred tax expense 6,419 3,173 Total provision for income taxes $ 9,771 $ 9,868 2022: 2022: Year ended June 30, 2021 2020 in thousands Deferred tax assets: Amortization $ 2,241 $ 2,033 State net operating losses 1,887 387 Transaction costs 1,092 1,204 Provision for uncollectible accounts 1,112 1,644 Accrued vacation 979 984 Reported and estimated claims 941 889 Stock-based compensation 428 856 Accrued bonuses 65 38 Total deferred tax assets 8,745 8,035 Valuation allowance (1,887) (387) Deferred tax assets, net of valuation allowance 6,858 7,648 Deferred tax liabilities: Goodwill (9,934) (8,057) Depreciation (7,394) (8,053) Equity investment (3,222) (6) Prepaid expenses (2,008) (814) Total deferred tax liabilities (22,558) (16,930) Net deferred tax liability $ (15,700) $ (9,282) 2022, respectively which do not expire. The Company had 2022. The Company evaluates performance and allocates capital resources to each segment based on an operating model that is designed to maximize the quality of care provided and profitability. The Company does not review assets by segment and therefore assets by segment are not disclosed below. For the periods presented, all of the Company’s long-lived assets were located in the U.S. and all revenue was earned in the U.S. June 30, 2021 June 30, 2020 in thousands PACE All other(1) Totals PACE All other(1) Totals Capitation revenue $ 635,322 $ — $ 635,322 $ 564,834 $ — $ 564,834 Other service revenue 294 2,184 2,478 343 2,015 2,358 Total revenues 635,616 2,184 637,800 565,177 2,015 567,192 External provider costs 309,317 — 309,317 272,832 — 272,832 Cost of care, excluding depreciation and amortization 151,412 2,991 154,403 149,637 3,419 153,056 Center-Level Contribution Margin 174,887 (807) 174,080 142,708 (1,404) 141,304 Overhead costs(2) 154,607 (38) 154,569 77,482 — 77,482 Depreciation and amortization 11,951 343 12,294 10,506 785 11,291 Equity loss 1,343 — 1,343 677 1 678 Other operating (income) expense 18,211 — 18,211 918 2 920 Interest expense, net 16,595 192 16,787 14,357 262 14,619 Loss on extinguishment of debt 14,479 — 14,479 — — — Gain on equity method investment (10,871) — (10,871) — — — Other expense (income) 2,237 — 2,237 567 114 681 Income (Loss) Before Income Taxes $ (33,665) $ (1,304) $ (34,969) $ 38,201 $ (2,568) $ 35,633 The following table sets forth the computation of basic and diluted net loss per common share: Year ended June 30, in thousands, except share values 2021 2020 Net income (loss) attributable to InnovAge Holding Corp. $ (43,986) $ 26,278 Weighted average common shares outstanding (basic) 123,618,702 132,616,431 EPS (basic) $ (0.36) $ 0.20 Dilutive shares — 2,617,199 Weighted average common shares outstanding (diluted) 123,618,702 135,233,630 EPS (diluted) $ (0.36) $ 0.19 2023. (a) (2)FINANCIAL STATEMENT SCHEDULES Exhibit No. Description Power of Attorney Signature Title /s/ President and Chief Executive Officer /s/ Chief Financial Officer (principal financial officer and principal accounting officer) /s/ John Ellis Bush Director John Ellis Bush /s/ James Carlson Director Andrew Cavanna /s/ Director /s/ Edward Kennedy, Jr. Director Edward Kennedy, Jr. /s/ Thomas Scully Director Thomas Scully /s/ Teresa Sparks Director Marilyn Tavenner /s/ Richard Zoretic Director Richard ZoreticNote 8:5: Goodwill and Intangible AssetsGoodwill represents the excess of cost over the fair value of net assets acquired. Goodwill amounted to $124.2 million at each of June 30, 2023 and June 30, 2022. The Company did not have any acquisitions resulting in goodwill during the year ended June 30, 2023 and 2022. Goodwill is not amortized.Pursuant to ASC 350, “Intangibles — Goodwill and Other,” we review the recoverability of goodwill annually as of April 1 or whenever significant events or changes occur which might impair the recovery of recorded amounts. For purposes of the annual goodwill impairment assessment, the Company has identified 3three reporting units. There were no indicators of impairment identified and 0 goodwill impairments recorded during the yearsyear ended June 30, 20212023 and 2020.10183The following summarizes the changes in goodwill for the fiscal years ended June 30:(a)The adjustment in fiscal year 2020 related to the final net working capital settlement for acquisitions that occurred during the fiscal year ended June 30, 2019.in thousands 2023 2022 Definite-lived intangible assets Customer relationships $ 6,600 $ 6,600 Indefinite-lived intangible assets Permits 2,000 2,000 Total intangible assets 8,600 8,600 Accumulated amortization (3,402) (2,742) Balance as of end of period $ 5,198 $ 5,858 Intangible assets with a finite useful life continue to be amortized over their useful lives. The Company recorded amortization expense of $0.7 million and $0.6 million for each of the years ended June 30, 20212023 and 2020,2022, respectively.The total expected future annual amortization expense for the next 5 years ended June 30, is as follows:in thousands Amortization Expense 2024 $ 660 2025 660 2026 660 2027 630 2028 — We review the recoverability of other intangible assets in conjunction with long-lived assets whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. There were 0no intangible asset impairments recorded during the years ended June 30, 20212023 and 2020.Note 9:6: LeasesPropertyLeasing Arrangements as LesseeThe Company leases certain property and equipment includes property under various capital leases. Thesethird-party operating and finance lease agreements. The Company determines if an arrangement is or contains a lease at the lease inception date by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. The leases are noncancelable and expire on various terms from 2023 through 2032. We determine if an arrangement is a lease upon commencement of the contract. If an arrangement is determined to be a long-term lease (greater than 12 months), we recognize an ROU asset and lease liability based on the present value of the future minimum lease payments over the lease term at the commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Our lease terms may also include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.We have expiration dates ranging from July 2021elected to September 2025, varying interest rates,apply the short-term lease exception for contracts that have a lease term of twelve months or less and generallydo not include an option to purchase the equipmentunderlying asset. Therefore, we do not recognize a ROU asset or lease liability for such contracts. We recognize short-term lease payments as expense on a straight-line basis over the lease term. Variable lease payments that do not depend on an index or rate are recognized as expense. Certain leases include escalations based on inflation indexes and fair market value adjustments. Operating lease liabilities are calculated using the prevailing index or rate at fair valuelease commencement for such leases.On March 20, 2023, we consolidated our Germantown center in Pennsylvania with two of our existing centers. Upon consolidation, we terminated our Germantown center lease and recognized lease termination costs of $0.6 million. Lease termination costs are included in other income (expense) on our consolidated statements of operations.84The following table presents the components of our ROU assets and their classification in our Balance Sheet at June 30, 2023.Component of Lease Balances Balance Sheet Line Items Year Ended June 30, in thousands Assets: Operating lease assets Operating lease assets $ 21,210 Finance lease assets Property and equipment, net 16,378 Total leased assets $ 37,588 The following table presents the endcomponents of our lease cost and the underlying lease period. The Company’s capital leases included the following:Certainclassification of the Company’s property and equipment is leased under operating leases. Total rental expense under operating leases was $4.5 million and $4.8 millionsuch costs in our Statement of Operations for the year ended June 30, 20212023.Component of Lease Cost Statement of Operations Line Items Year Ended June 30, in thousands Operating lease cost Cost of care excluding depreciation and amortization and Corporate, general and administrative $ 4,642 Finance lease expense: Amortization of leased assets Depreciation and amortization 3,080 Interest on lease liabilities Interest expense, net 1,255 Variable lease cost Cost of care excluding depreciation and amortization and Corporate, general and administrative 82 Short-term lease cost Cost of care excluding depreciation and amortization and Corporate, general and administrative 108 Total lease expense: $ 9,167 The following table includes the weighted-average lease terms and 2020, respectively.102Future minimum lease payments related to (i) capital leases having initial terms of more than one yeardiscount rates for operating and (ii) non-cancelable operatingfinance leases as of June 30, 2021 were as follows:Weighted average remaining lease term: June 30,
2023Operating leases 7.9 years Finance leases 3.9 years Weighted average discount rate June 30,
2023Operating leases 6.60 % Finance leases 7.80 % The following table includes the future maturities of lease payments for operating leases and finance leases for periods subsequent to June 30, 2023.85Table of Contentsin thousands Operating Lease Finance Lease Total 2024 $ 4,882 $ 5,970 $ 10,852 2025 4,356 5,270 9,626 2026 4,283 4,245 8,528 2027 3,981 3,549 7,530 2028 3,140 1,759 4,899 Thereafter 7,033 — 7,033 Total lease payments 27,675 20,793 48,468 Less liability accretion / imputed interest (5,317) (2,957) (8,274) Total lease liabilities 22,358 17,836 40,194 Less: Current lease liabilities 3,530 4,722 8,252 Total long-term lease liabilities $ 18,828 $ 13,114 $ 31,942 The following table includes the future maturities of minimum rental payments that are required to be paid under all non-cancelable operating and capital lease obligations, prior to the adoption of ASC 842:in thousands Operating Lease Capital Lease 2023 $ 4,873 $ 4,405 2024 4,581 3,909 2025 4,122 3,126 2026 4,061 2,092 2027 3,764 1,393 Thereafter 10,265 535 Total minimum rental payments 31,666 15,460 Less: Amount representing interest (2,652) Subtotal 12,808 Current portion 3,368 Long-term portion $ 9,440 Note 10:7: Long-term DebtThe components of our long-term debt are as follows:2016 Credit AgreementThe Company originally entered into a senior secured borrowing agreement (the “2016 Credit Agreement”) on May 13, 2016, that consisted of a senior secured term loan for $75.0 million and a revolving credit facility for $20.0 million. The 2016 Credit Agreement was subsequently amended on May 2, 2019 to increase the senior secured term loan to $190.0 million and a revolving credit facility for $30.0 million and a delayed draw term loan facility (“DDTL”) for $45.0 million. The senior secured term loan and the DDTL had a maturity date of May 2, 2025, and the revolving credit facility had a maturity date of May 2, 2024.On July 27, 2020, the Company amended and restated the 2016 Credit Agreement once again to increase the senior secured term loan to $300.0 million, the revolving credit facility to $40.0 million and to terminate the DDTL. The maturity date of the revolving credit facility was extended to July 27, 2025, the senior secured term loan was extended to July 27, 2026, and there were updates to certain covenants contained in the existing credit agreement. Principal was paid each calendar quarter in an amount equal to 0.25% of the aggregate outstanding principal amount.The structure of the amendment to the 2016 Credit Agreement as amended on July 27, 2020 led to an extinguishment of debt for certain lenders and a modification of debt for other lenders. The total debt structure extinguishment for certain lenders was $57.1 million which led to the write off of $1.0 million in debt issuance costs which was recorded in loss on extinguishment of debt for the year ended June 30, 2021. The total debt structure that was modified was $250.0 million, while the new debt issued was $50.0 million, which resulted in $9.1 million of debt issuance costs being capitalized.103June 30,
2023June 30,
2022in thousands Senior secured borrowings: Term Loan Facility $ 67,500 $ 71,250 Convertible term loan 2,284 2,327 Total debt 69,784 73,577 Less unamortized debt issuance costs 1,145 1,574 Less current maturities 3,795 3,793 Noncurrent maturities $ 64,844 $ 68,210 86On March 8, 2021, concurrently with the closing of the IPO, the Company entered into a new credit agreement (the “2021 Credit Agreement”) that replaced the 2016 Credit Agreement.its prior credit agreement. The 2021 Credit Agreement consists of a senior secured term loan (the “Term Loan Facility”) of $75.0 million principal amount and a revolving credit facility (the “Revolving Credit Facility”) of $100.0 million maximum borrowing capacity. As of June 30, 2023, we had no borrowings outstanding under the facility. The remaining capacity under the Revolving Credit Facility as of June 30, 2023 was $97.2 million, subject to (i) any issued amounts under our letters of credit, which as of June 30, 2023 was $2.8 million, and (ii) applicable covenant compliance restrictions and any other conditions precedent to borrowing. The maturity date of each of the Term Loan Facility and the Revolving Credit Facility is March 8, 2026. Loans under the 2021 Credit Agreement are secured by substantially all of the Company’s assets. Principal on the Term Loan Facility is paid each calendar quarter beginning September 2021 in an amount equal to 1.25% of the initial term loan on closing date. Proceeds of the Term Loan Facility, together with proceeds from the IPO, were used to repay amounts outstanding under the 2016 Credit Agreement.The structure of the 2021 Credit Agreement led to a 2.0% prepayment fee as the cancellation of the 2016 Credit Agreement occurred prior to the first anniversary of the July 27, 2020 amendment of the 2016 Credit Agreement, an extinguishment of debt for certain lenders, and a modification of debt for other lenders. The total prepayment fee was $6.0 million and is recorded in loss on extinguishment of debt in the consolidated statements of operations. The total debt structure extinguishment for certain lenders was $250.0 million which led to the write off of $7.5 million in debt issuance costs which was recorded in loss on extinguishment of debt for the year ended June 30, 2021. The total debt structure that was modified was $25.0 million related to each of the term loan and the revolver, while the new debt issued was $50.0 million related to the term loan and $75.0 million related to the revolver. This resulted in $2.1 million of debt issuance costs being capitalized.Outstanding principal amounts under the 2021 Credit Agreement accrue interest at a variable interest rate. As of June 30, 2021,2023 and 2022, the interest rate on the Term Loan Facility was 1.84%. As of June 30, 2020, the interest rate on the senior secured term loan under the 2016 Credit Agreement was 6.0%. Prior to the entry into the 2021 Credit Agreement, the revolving credit facility fee accrued at 0.5%.6.95% and 3.83%, respectively. Under the terms of the 2021 Credit Agreement, the Revolving Credit Facility fee accrues at 0.25% of the average daily unused amount and is paid quarterly.During the year ended U.S.-dollar LIBOR ceased to be published on June 30, 2020,2023. As such, during fiscal year 2023, the Company borrowed $25.0 million underprospectively adjusted the revolving credit facility at aneffective interest rate of 3.94%, to ensure sufficient funds available duringfor debt and now utilizes SOFR as the unknown time of the COVID-19 pandemic and for general corporate purposes. The Company repaid all outstanding amounts on the revolving credit facility and as of June 30, 2021 had 0 outstanding borrowings. The remaining capacity under the Revolving Credit Facility as of June 30, 2021 was $100.0 million, subject to (i) any issued amounts under our letters of credit, which as of June 30, 2021 was $2.1 million, and (ii) applicable covenant compliance restrictions and any other conditions precedent to borrowing.The 2021 Credit Agreement requires the Company to meet certain operational and reporting requirements, including, but not limited to, a secured net leverage ratio. Additionally, annual capital expenditures and permitted investments, including acquisitions, are limited to amounts specified in the 2021 Credit Agreement. The 2021 Credit Agreement also provides certain restrictions on dividend payments and other equity transactions and requires the Company to make prepayments under specified circumstances. The Company was in compliance with the covenants of the 2021 Credit Agreement and the 2016 Credit Agreement as of June 30, 20212023 and 2020,2022, respectively.The deferred financing costs related to the Term Loan of $2.0 million are amortized over the term of the underlying debt and unamortized amounts have been offset against long-term debt in the consolidated balance sheets. Total amortization of deferred financing costs was $1.1$0.4 million and $0.6$0.4 million for the yearyears ended June 30, 20212023 and 2020,2022, respectively.Convertible Term LoanOn June 29, 2015, SH1 entered into a convertible term loan. Monthly principal and interest payments of $0.02 million commenced on September 1, 2015, and the loan bears interest at an annual rate of 6.68%. The remaining principal balance is due upon maturity, which is August 20, 2030. The loan is secured by a deed of trust to Public Trustee, assignment of leases and rents, security agreements, and SH1’s fixture filing.10420212023 were as follows:Long-term
debtin thousands Year ending June 30: 2024 $ 3,796 2025 3,799 2026 60,052 2027 56 2028 60 Thereafter 2,021 Total debt $ 69,784 Note 11:8: Fair Value MeasurementsFair value is defined as the price that would be received from selling an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market87participants at the measurement date. A fair value hierarchy was established that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources outside the reporting entity. Unobservable inputs are inputs that reflect the Company’s own assumptions based on market data and assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The sensitivity to changes in inputs and their impact on fair value measurements can be significant.The three levels of inputs that may be used to measure fair value are:Level 1Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement dateLevel 2Quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the assets or liabilitiesLevel 3Unobservable inputs to the valuation techniques that are significant to the fair value measurements of the assets or liabilitiesRecurring MeasurementsEffective August 7, 2018,The following table shows the Company finalized the acquisitionCompany’s cash, cash equivalents and marketable securities by significant investment category as of NewCourtland in Pennsylvania. The Company paid a base purchase price of $30.0 million, subject to certain net working capital and closing adjustments plus contingent consideration of up to $20.0 million. Such contingent consideration will be paid over a specified period if certain conditions outlined in the Securities Purchase Agreement are met. These conditions are based upon the performance of the PACE centers acquired in the NewCourtland acquisition for the two fiscal years following the acquisition, as well as potential payments to be made in the event of the Company being acquired, selling substantially all of its assets, or selling equity securities pursuant to an effective registration statement under the Securities Act of 1933. If all of the contingent consideration of $20.0 million is paid, the lease payments in certain real estate leases between the Company and NewCourtland are reduced from their current amounts and allow the Company to exercise its option to purchase the leased buildings at fair market value, after the initial term of the lease.On March 8, 2021, we completed our IPO, which satisfied the condition that the Company sell equity securities pursuant to an effective registration statement. Accordingly, $20.0 million of contingent consideration was paid under the terms of the Securities Purchase Agreement.There are 0 amounts of contingent consideration outstanding after the $20.0 million payment.105Changes in fair value resulted in immaterial amounts recorded in other operating (income) expense within the consolidated statement for the fiscal years ended June 30, 2021 and 2020.in thousands Amortized Cost Fair Value Cash and Cash Equivalents Short-term Investments Cash $ 49,775 $ 49,775 $ 49,775 $ — Level 1 Money market funds 77,474 77,474 77,474 — Mutual funds 46,170 46,213 — 46,213 Total $ 173,419 $ 173,462 $ 127,249 $ 46,213 There were 0no transfers in and out of Level 3 during the fiscal yearyears ended June 30, 20212023 and 2020.2022. The Company’s policy is to recognize transfers as of the actual date of the event or change in circumstances.Nonrecurring MeasurementsIn addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company records certain assets and liabilities at fair value on a nonrecurring basis. No such amounts were recorded during the years ended June 30, 2021 or 2020.Note 12:9: Commitments and ContingenciesProfessional LiabilityThe Company pays fixed premiums for annual professional liability insurance coverage under a claims-made policy. Under such policy, only claims made and reported to the insurer are covered during the policy term, regardless of when the incident giving rise to the claim occurred. The Company records claim liabilities and expected recoveries, if any, at gross amounts. The Company is not currently aware of any unasserted claims or unreported incidents that are expected to exceed medical malpractice insurance coverage limits.LitigationFrom time to time in the normal course of business, the Company is involved in or subject to legal proceedings related to its business. The Company regularly evaluates the status of claims and legal proceedings in which it is involved in order to assess whether a loss is probable or there is a reasonable possibility that a loss may have been incurred, and to determine if accruals are appropriate. The Company expenses legal costs as such costs are incurredCivil Investigative DemandsIn July 2021, the Company received a civil investigative demand from the Attorney General for the State of Colorado under the Colorado Medicaid False Claims Act. The demand requests information and documents regarding Medicaid billing, patient services and referrals in connection with the Company’s PACE program in Colorado. We continue to fully cooperate with the Attorney General and produce the requested information and documentation. We are currently unable to predict the outcome of this investigation.88In February 2022, the Company received a civil investigative demand from the Department of Justice (“DOJ”) under the Federal False Claims Act on similar subject matter. The demand requests information and documents regarding audits, billing, orders tracking, and quality and timeliness of patient services in connection with the Company’s PACE programs in the states where the Company operates (California, Colorado, New Mexico, Pennsylvania, and Virginia). In December 2022, the Company received a supplemental civil investigative demand requesting supplemental information on the same matters. The Company continues to fully cooperate with the DOJ and produce the requested information and documentation. We are currently unable to predict the outcome of this investigation.Stockholder LawsuitsOn October 14, 2021, and subsequently amended on June 21, 2022, the Company was named as a defendant in a putative class action complaint filed in the District Court for the District of Colorado on behalf of individuals who purchased or acquired shares of the Company’s common stock during a specified period (the "Securities Action"). Through the complaint, plaintiffs are asserting claims against the Company, certain of the Company’s officers and directors, Apax Partners, L.P., Welsh, Carson, Anderson & Stowe and the underwriters in the Company’s IPO, alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 for making allegedly inaccurate and misleading statements and omissions in connection with the Company’s IPO and subsequent earnings calls and public filings, and seeking compensatory damages, among other things. On September 13, 2022, the Company and the officer and director defendants and Apax Partners, L.P. and Welsh, Carson, Anderson & Stowe filed a motion to dismiss the amended complaint for failure to state a claim upon which relief can be granted.On April 20, 2022, the Board of Directors of the Company received a books and records demand pursuant to Section 220 of the Delaware General Corporation Law, from a purported stockholder of the Company, Brian Hall, in connection with the stockholder’s investigation of, among other matters, potential breaches of fiduciary duty, mismanagement, self-dealing, corporate waste or other violations of law by the Company’s Board with respect to these matters. We are currently unable to predict the outcome of this matter. On May 15, 2023, Mr. Hall filed a lawsuit in the Delaware Court of Chancery asserting derivative claims for breach of fiduciary duty against certain of the Company’s current and former officers and directors generally relating to alleged failures by the defendants to take remedial actions to address the matters that resulted in sanctions by CMS at certain of the Company’s centers, and alleged misstatements in the Company’s public filings relating to those matters. On June 28, 2023, upon stipulation of the parties, the court entered an order staying the litigation pending the resolution of the motion to dismiss in the Securities Action or upon fifteen days’ notice by any party to the litigation. We are currently unable to predict the outcome of this matters.Other MattersIn the third fiscal quarter of 2023, the Company agreed to settle a wage and hour class action lawsuit in the State of California for a cash payment of $1.2 million. The agreement is subject to court approval.Because the results of legal proceedings and claims are inherently unpredictable and uncertain, we are currently unable to predict whether the legal proceedings we are involved in will, either individually or in the aggregate, have a material adverse effect on our business, financial condition, or cash flows. The outcomes of legal proceedings and claims could be material to the Company’s operating results for any particular period, depending in part, upon the operating results of such period. Regardless of the outcome, litigation has the potential to have an adverse impact on us due to any related defense and settlement costs, diversion of management resources, and other factors.Note 13:10: Stock-based CompensationA summary of our aggregate share-based compensation expense is set forth below. Stock-based compensation expense is included in corporate, general and administrative expenses on our consolidated statements of operations.Year ended June 30, 2023 2022 in thousands Stock options $ 1,010 $ 719 Profits interests units 867 1,162 Restricted stock units 3,116 1,858 Total stock-based compensation expense $ 4,993 $ 3,739 89Table (a)The amount for 2021 relates to stock-based compensation expense recognized as a result of the Cancellation Agreement transaction, as defined and described below.of Contents2016 Equity Incentive PlanThe Company maintained the 2016 Equity Incentive Plan pursuant to which various stock-based awards may be granted to employees, directors, consultants, and advisers. The total number of shares of the Company’s common stock106that was authorized under the 2016 Equity Incentive Plan was 17,836,636, of which a total of 16,994,976 awards were granted. The 2016 Equity Incentive Plan provided for the following general vesting terms:a)Half vested over time (“Time Vesting Awards”). Time Vesting Awards vested on the first anniversary of the grant date in the range of 25% to 62.5%, and the remaining Time Vesting Awards vest ratably on a semiannual basis thereafter through the fourth anniversary of the grant date.b)Half vested upon the attainment of certain performance-based criteria measured at the time the Company experiences a liquidity event, as defined by the 2016 Equity Incentive Plan (“Contingent Performance-Based Awards”).Stock options were exercisable over a period of time not to exceed 10 years from the date of grant.Cancellation of Stock Option Awards Under 2016 Equity Incentive PlanOn July 27, 2020, the Company, Ignite Aggregator LP, and the equity holders of the Company entered into a Securities Purchase Agreement, and in conjunction therewith, the Company amended and restated the 2016 Credit Agreement. A portion of the proceeds from the 2016 Credit Agreement were used by the Company to repurchase 16,095,819 shares of its common stock from the certain members of management, the Board of Directors, and members of our equity partner. Additionally, as part of the 2016 Credit Agreement, the Company executed the Cancellation Agreement, as defined in Note 3, with each of the 2016 Equity Incentive Plan option holders, pursuant to which the Company’s 16,994,976 common stock options which were granted under the 2016 Equity Incentive Plan, were cancelled. The Cancellation Agreement resulted in the option holders receiving the same amount of cash that they would have received had they exercised their options, participated in the repurchase described above and sold their remaining shares. The 2016 Equity Plan was cancelled and replaced with the 2020 Equity Incentive Plan as described below.The Company utilized the Black-Scholes option-pricing model to determine the fair value of stock options on the date of grant. This model derives the fair value of stock options based on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rate, and dividend yield. The Company’s expected volatility was based on the historical volatility of similar publicly traded companies deemed by the Company to be its peers. The risk-free interest rate assumption was based upon the Federal Reserve Board’s Treasury Constant Maturities for the expected term ofProfits InterestsTCO Group Holdings, L.P. (the “LP”), the Company’s stock option awards,largest shareholder and prior to the selected dividend yield assumption was determined in view ofIPO, the Company’s historical and estimated dividend payout. The Company has no reason to believe thatparent, maintains the expected volatility of its stock price would differ significantly from the historical volatility of its peers. The Company used the simplified method to calculate the expected term for the time vesting awards. The expected term for the contingent performance-based awards was the contractual term.The Company estimated the fair value of stock options granted using the following weighted-average assumptions:107A summary of the stock option activity for the year ended June 30, 2021 was as follows:2020TCO Group Holdings, L.P. Equity Incentive PlanProfits InterestsThe LP maintains the 2020 (the “2020 Equity Incentive PlanPlan”) pursuant to which interests in the LP in the form of Class B Units (profits interests) may be granted to employees, directors, consultants, advisers, and advisers.other services providers (including partners) of the LP or any of its affiliates, including the Company. A maximum number of 16,162,177 Class B Units are authorized for grant under the 2020 Equity Incentive Plan. Both performance-based and time-based units were issued under the plan. As of June 30, 2021,2023, a total of 13,009,137 profits interests units have been granted under the 2020 Equity Incentive Plan.These profits interests representedrepresent profits interest ownership in the LP tied solely to the accretion, if any, in the value of the LP following the date of issuance of such profits interests. Profits interests participatedparticipate in any increase of LP value related to their profits interests after thea hurdle value had beenrate is achieved and, for performance-based units, the LP profits interests receivedreceive the agreed-upon return on their invested capital.capital and internal rate of return, as applicable. The hurdle valuerate per unit is $5.49 for both the performance-based and time-based units.Each award of profits interests unit containsis subject to the following material terms:(i)(i)The profits interests receive distributions (other than tax distributions) only upon a liquidity event, as defined, that exceed a threshold equivalent to the fair value of the LP, as determined by the Company’s Board of Directors, at the grant date.(ii)A portion of the units vest over a period of continuous employment or service (service-vesting units) while the other portion of the units only vest based on the level of aggregate multiple of invested capital and internal rate of return achieved by Ignite Aggregator LP, one of the limited partners of the LP, upon a change of control of the Company (performance-vesting units).performance-vestingprofits interests receive distributions (other than tax distributions) only upon a liquidity event, as defined, that exceeds a threshold equivalent to the fair value of the LP, as determined by the LP’s Board of Directors, at the grant date.(ii)A portion of the units vest over a period of continuous employment or service (time-based units) while the other portion of the units only vest based on the level of aggregate multiple of invested capital and, with respect to certain grants of profits interests, internal rate of return achieved by Ignite Aggregator LP, one of the limited partners of the LP, upon a change of control of the Company (performance-based units).The performance-based units are subject to a market condition, which the Company incorporatedincorporates as part of its determination of the grant date fair value of the units.The Company useduses the Monte Carlo option model to determine the fair value of the granted profits interests units.units at the time of the grant. As thesethe awards outstanding as of June 30, 2023, were granted prior to our IPO, the stock price was based on the priceprices realized in the equity owner transaction.transactions prior to being publicly traded. Expected stock price volatility was based on consideration of indications observed from several publicly traded peer companies. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the unit. The dividend yield percentage is 0zero because the Company neither currently pays dividends nor intends to do so during the expected term. The expected term of the units represents the time the units are expected to be outstanding. The1082021 Expected volatility 44 % Expected life (years) - time vesting units 1.8 Interest rate 0.16 % Dividend yield — % Weighted-average fair value $ 1.28 Fair value of underlying stock $ 5.49 90A summary of profits interests activity for the year ended June 30, 20212023, was as follows:Time-based unit awards Number of
unitsWeighted average
grant date fair valueUnvested balance, June 30, 2022 2,158,072 $ 1.28 Granted — $ — Forfeited (49,654) $ 1.28 Vested (844,081) $ 1.28 Unvested balance, June 30, 2023 1,264,337 $ 1.28 Performance-based unit awards Number of
unitsWeighted average
grant date fair valueUnvested balance, June 30, 2022 2,217,865 $ 0.57 Granted — $ — Forfeited (99,307) $ 0.57 Vested — $ — Unvested balance, June 30, 2023 2,118,558 $ 0.57 The total unrecognized compensation cost related to profits interests units outstanding as of June 30, 20212023 was $10.3$2.1 million, comprised (i) $6.8$0.9 million related to time-based unit awards expected to be recognized over a weighted-average period of 1.21.8 years and (ii) $3.5$1.2 million related to performance-based unit awards, which will be recorded when it is probable that the performance-based criteria will be met.2021 Omnibus Incentive PlanIn March 2021, the compensation committee of our Board of Directors approved the InnovAge Holding Corp. 2021 Omnibus Incentive Plan (“2021 Omnibus Incentive Plan”), pursuant to which various stock-based awards may be granted to employees, directors, consultants, and advisers. The total number of shares of the Company’s common stock authorized under the 2021 Omnibus Incentive Plan is 14,700,000. The Company has issued time-based restricted stock units under this plan to its employees which generally vest or vested (i) on March 4, 2023, the second anniversary of the grant date, or (ii) over a three-year period with one-thirdone-third vesting on each anniversary of the date of grant. Certaingrant, or (iii) at other vesting periods have also109been used.dates. The grant date fair value of restricted stock units areis based on the closing market price of our common stock on the date of grant.Restricted Stock UnitsA summary of time-based vesting restricted stock units activity for the year ended June 30, 20212023, was as follows:Restricted stock units - time based Number of
awardsWeighted
average
grant-date fair
value per shareOutstanding balance, June 30, 2022 476,768 $ 9.69 Forfeited (236,344) $ 5.19 Vested (194,337) $ 6.29 Granted 1,827,707 $ 6.49 Outstanding balance, June 30, 2023 1,873,794 $ 10.10 The total unrecognized compensation cost related to time-based restricted stock units outstanding as of June 30, 20212023, was $1.1$9.4 million and is expected to be recognized over a weighted-average period of 2.22.3 years.91A summary of the amendment and restatement of the 2016 Credit Agreement, a portion of the proceeds were used by the Company to repurchase 16,095,819 shares of its commonperformance-based vesting restricted stock from certain members of management, our Board of Directors and our equity partner, at $4.82 per share. As a result ofunits activity for the repurchase, $77.6 million was recorded as Treasury stock, see Note 3 for further discussion. In March 2021, the Company retired all outstanding shares of Treasury stock and at June 30, 2021 there were 0 shares of treasury stock outstanding. NaN repurchases were made in fiscal year ended June 30, 2021.2023, was as follows:Restricted stock units - performance based Number of
awardsWeighted
average
grant-date fair
value per shareOutstanding balance, June 30, 2022 258,767 $ 5.18 Forfeited — $ — Vested — $ — Granted — $ — Outstanding balance, June 30, 2023 258,767 $ 5.18 The fair value of the performance-based restricted stock units and performance-based stock options granted during the year ended June 30, 2022, was based upon a Monte Carlo option pricing model using the assumptions in the following table:2022 Expected volatility 34.5 % Expected term (in years) 5.0 Interest rate 1.56 % Dividend yield 0 % Weighted-average fair values $ 5.18 Fair value of underlying stock $ 7.89 The total unrecognized compensation cost related to performance-based vesting restricted stock units outstanding as of June 30, 2023, was $0.8 million and is expected to be recognized over a weighted-average period of 2.4 years.Nonqualified Stock OptionsA summary of time-based vesting stock option activity for the year ended June 30, 2023, was as follows:Stock options - time based Number of
awardsWeighted
average
grant-date fair
value per shareOutstanding balance, June 30, 2022 554,499 $ 1.61 Granted 162,162 $ 0.80 Forfeited — $ — Exercised — $ — Expired — $ — Outstanding balance, June 30, 2023 716,661 $ 1.43 Exercisable balance, June 30, 2023 207,936 $ 0.21 The total unrecognized compensation costs related to time-based vesting stock options outstanding as of June 30, 2023, was $0.4 million and is expected to be recognized over a weighted-average period of 1.8 years.92The fair value of the time-based stock options granted during the year ended June 30, 2023, was based upon the Black-Scholes option pricing model using the assumptions in the following table:2023 Expected volatility 34.5 % Weighted-average expected life (years) - time vesting units 2.9 Interest rate 1.56 % Dividend yield 0 % Weighted-average fair values $ 0.80 Fair value of underlying stock $ 3.70 A summary of performance-based vesting stock option activity for the year ended June 30, 2023, was as follows:Stock options - performance based Number of
awardsWeighted
average
grant-date fair
value per shareOutstanding balance, June 30, 2022 776,299 $ 3.08 Granted — $ — Forfeited — $ — Vested — $ — Outstanding balance, June 30, 2023 776,299 $ 3.08 The fair value of the performance-based stock options granted during the year ended June 30, 2022, was based upon a Monte Carlo option pricing model using the assumptions in the table above under the ‘Restricted Stock Units’ heading.The total unrecognized compensation cost related to performance-based vesting stock options outstanding as of June 30, 2023, was $1.4 million and is expected to be recognized over a weighted-average period of 2.4 years.Note 15:11: Income TaxesThe Company’s effective income tax rate for the years ended June 30, 20212023 and 20202022 was (27.9%)14.3% and 28%(10.0%), respectively, which differed from the amount computed by applying the applicable U.S. federal statutory corporate income tax rate of 21% in each period as a result of the following factors:Year ended June 30, 2023 2022 in thousands Statutory rate $ (10,667) $ (1,520) IRC Section 162(m) limitation (a) 588 506 Change in valuation allowance 4,297 2,738 Permanent adjustments 457 662 Prior year true-up and other 157 389 Income from entities not subject to taxation 605 302 State tax (2,678) (2,354) Provision for income taxes $ (7,241) $ 723 (a)(a)Reflects the permanent addback for the Section 162(m) limitation, which limits the deduction of compensation for the 5 highest paid officers to $1,000,000.(b)Amount relates to transaction costs incurred as a result of the July 27, 2020 transaction between us, an affiliate of Apax Partners and our then existing equity holders entering into a Securities Purchase Agreement (the “Apax Transaction”).11020212023 and 2020:Year ended June 30, 2023 2022 in thousands Current: Federal $ 3,709 $ (998) State 575 (339) Total current tax expense 4,284 (1,337) Deferred: Federal (10,263) 1,408 State (1,262) 652 Total deferred tax expense (11,525) 2,060 Total provision for income taxes $ (7,241) $ 723 The significant components of deferred tax assets and liabilities were as follows for the years ended June 30, 20212023 and 2020:Year ended June 30, 2023 2022 in thousands Deferred tax assets: Amortization $ 629 $ 686 Federal net operating losses 17,147 3,083 State net operating losses 5,701 4,048 Provision for uncollectible accounts 1,114 869 Accrued vacation 835 828 Reported and estimated claims 1,164 1,025 Stock-based compensation 449 185 Accrued bonuses 582 102 Interest Expense 791 496 Lease liability 6,784 — Other — 6 Total deferred tax assets 35,196 11,328 Valuation allowance (8,347) (4,050) Deferred tax assets, net of valuation allowance 26,849 7,278 Deferred tax liabilities: Goodwill (6,697) (9,108) Depreciation (13,137) (8,430) Equity investment (5,019) (5,429) Prepaid expenses (1,792) (2,072) ROU asset (6,436) — Other (4) — Total deferred tax liabilities (33,085) (25,039) Net deferred tax liability $ (6,236) $ (17,761) 94Table ofCarryforwardsThe Company had state net operating loss carryforwards of $30.9$117.9 million and $15.0$73.1 million at June 30, 20212023 and 2020,2022, respectively, which will begin to expire in 2037 if not utilized. Included in this is a city net operating loss which will begin to expire in 2025 if not utilized. Additionally, the Company has 0 federal net operating loss carryforwards of $81.7 million and $14.7 million as of June 30, 20212023 and 2020.Valuation AllowanceThe Company has provided $1.9$8.3 million and $0.4$4.1 million at June 30, 20212023 and June 30, 2020,2022, respectively, as a valuation allowance against its deferred tax assets for federal and state net operating losses and state 163(j) interest expense limitations where there is not sufficient positive evidence to substantiate that these deferred tax assets will be realized at a more-likely-than-not level of assurance.Other111OtherThe CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of the employer portion of social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. The Company continues to examine the impacts that the CARES Act may have on its business. As a result of the CARES Act, it is anticipated that the Company will fully utilize all interest expense with no additional disallowed interest expense through June 30, 2021. While several other CARES Act provisions may impact the Company, there have not been any significant impacts noted through June 30, 2021.0no uncertain tax positions at June 30, 20212023 and 2020.The Company files income tax returns as a consolidated group, excluding SH1 and InnovAge Sacramento, in the U.S. federal jurisdiction and various states and is subject to examination by taxing authorities in all of those jurisdictions. From time to time, the Company’s tax returns are reviewed or audited by U.S. federal and various U.S. state-taxing authorities.The Company believes that adjustments, if any, resulting from these reviews or audits would not be material, individually or in the aggregate, to the Company’s consolidated financial position, results of operations, or liquidity. The Company is subject to income tax examinations by U.S. federal and state jurisdictions for the period ended June 30, 20182020 and forward. The Company is subject to income tax examinations by California, Colorado and New Mexico state jurisdictions for the period ended June 30, 20172019 and forward.Note 16:12: Related PartiesPWD VIE. Pursuant to the PWD Amended and Restated Agreement of Limited Partnership, Continental Community Housing, the general partner of PWD and our wholly-owned subsidiary (the “General Partner”), helped fund operating deficits and shortfalls of PWD in the form of a loan (the “PWD Loan”). At June 30, 2021 and 2020, $0.7 million and $0.6 million, respectively, was recorded in Deposits and other. The PWD Loan does not accrue interest. Additionally, the General Partner is paid an administration fee of $35,000 per year. At each of June 30, 2023 and 2022, $0.7 million was recorded in Deposits and other.Note 17:13: Segment ReportingThe Company applies ASC Topic 280, “Segment Reporting,” which establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about operations, major customers and the geographies in which the entity holds material assets and reports revenue. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the Company’s chief executive officer, who is the chief operating decision maker (“CODM”), and for which discrete financial information is available. The Company has determined that it has 5five operating segments, 3three of which are related to the Company’s PACE offering. The PACE-related operating segments are based on 3three geographic divisions, which are West, Central, and East. Due to the similar economic characteristics, nature of services, and customers, we have aggregated our West, Central, and East operating segments into 1one reportable segment for PACE. The Company’s remaining 2two operating segments relate to Homecare and Senior Housing, which are immaterial operating segments, and are shown below as “Other” along with certain corporate unallocated expenses.As of June 30, 2021,2023, the Company served approximately 6,8506,400 PACE participants, making it the largest PACE provider in the U.S. based upon participants served, and operated 1817 PACE centers across Colorado, California, New Mexico, Pennsylvania and Virginia. PACE, an alternative to nursing homes, is a managed care, capitated program, which serves the frail elderly in a community-based service model. Participants receive all medical services through a comprehensive, consolidated model of care. Capitation payments are received from Medicare parts C and D; Medicaid; VA, and private pay sources. The Company is at risk for all health and allied care costs incurred with respect to the care of its participants, although it does negotiate discounted rates with its provider network consisting of hospitals, nursing homes, assisted living facilities, and medical specialists. Additionally, under the Medicare Prescription Drug Plan, the CMS shareshares part of the risk for providing prescription medication to the Company’s participants.11295The Company’s management uses Center-level Contribution Margin as the measure for assessing performance of its segments. Center-level Contribution Margin is defined as total segment revenues less external provider costs and cost of care (excluding depreciation and amortization). The Company allocates corporate level expenses to its segments with a majority of the allocation going to the PACE segment.The following table summarizes the operating results regularly provided to the CODM by reportable segment for the twelve months ended:June 30, 2023 June 30, 2022 in thousands PACE All other(1)Totals PACE All other(1)Totals Capitation revenue $ 686,836 $ — $ 686,836 $ 696,998 $ — $ 696,998 Other service revenue 347 904 1,251 403 1,239 1,642 Total revenues 687,183 904 688,087 697,401 1,239 698,640 External provider costs 374,528 — 374,528 383,046 — 383,046 Cost of care, excluding depreciation and amortization 211,707 564 212,271 178,904 1,318 180,222 Center-Level Contribution Margin 100,948 340 101,288 135,451 (79) 135,372 Overhead costs(2)135,264 — 135,264 125,948 (94) 125,854 Depreciation and amortization 14,959 460 15,419 13,491 433 13,924 Equity loss — — — — — — Other operating (income) expense — — — — — — Interest expense, net 1,342 180 1,522 2,335 191 2,526 Loss on extinguishment of debt — — — — — — Gain on equity method investment — — — — — — Other expense (income) (124) — (124) 305 — 305 Income (Loss) Before Income Taxes $ (50,493) $ (300) $ (50,793) $ (6,628) $ (609) $ (7,237) (1)(1)Center-level Contribution Margin from segments below the quantitative thresholds are attributable to 2 operating segments of the Company. Those segments consist of Homecare and Senior Housing. Neither of those segments has ever met any of the quantitative thresholds for determining reportable segments.(2)Overhead consists of the Sales and marketing and Corporate, general and administrative financial statement line items.Note 18:14: Earnings per ShareBasic earnings (loss) per share (“EPS”) is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding options and other equity awards, using the treasury stock method and the average market price of the Company’s common stock during the applicable period. When a loss from continuing operations exists, all dilutive securities and potentially dilutive securities are anti-dilutive and are therefore excluded from the computation of diluted earnings per share. When net income from continuing operations exists, performance-based units, are omitted from the calculation of diluted EPS until it is determined that the performance criteria has been met at the end of the reporting period. As of June 30, 2020,2023 and 2022, there were 8,084,2431,035,066 performance-based awards excluded from the calculation of diluted EPS.11396Year ended June 30, in thousands, except share values 2023 2022 Net income (loss) attributable to InnovAge Holding Corp. $ (40,673) $ (6,521) Weighted average common shares outstanding (basic) 135,593,824 135,519,970 EPS (basic) $ (0.30) $ (0.05) Dilutive shares — — Weighted average common shares outstanding (diluted) 135,593,824 135,519,970 EPS (diluted) $ (0.30) $ (0.05) Note 19:15: Subsequent EventIn August 2021,The Company has evaluated subsequent events through September 12, 2023, the Company acquired a minority interest equal to 806,481 shares ofdate on which the outstanding common stock of Jetdoc, Inc. (“Jetdoc”), a telehealth and virtual urgent care app dedicated to effectively connecting users with medical professionals, for cash consideration of $2.0 million.11497Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREItem 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresUnder the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of June 30, 2021.Management’s Annual Report on Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, management has conducted an assessment, including testing, using the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control — Integrated Framework (2013 Framework). The Company’s internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Based on our assessment under the criteria established in Internal Control — Integrated Framework (2013 Framework) issued by the COSO, management has concluded that the Company maintained effective internal control overfinancial reporting as of June 30, 2023.This Form 10-K does not include an attestation report on internal controls over financial reporting of the Company's registered public accounting firm. Additionally, our auditors will not be required to formally opine on the effectiveness of our internal control over financial reporting pursuant to Section 404 until we are no longer an “emerging growth company” as defined in the JOBS Act.Changes to our Internal Control over Financial ReportingThere were no material changes in our internal control over financial reporting during the quarter ended June 30, 20212023 that hashave materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Inherent Limitation on the Effectiveness of Internal ControlThe effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.Management’s Annual Report on Internal Control Over Financial ReportingThis annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our registered public accounting firm due to a transition period established by rules of the SEC for newly public companies. Additionally, our independent registered public accounting firm is not and will not be required to report on the effectiveness of our internal control over financial reporting pursuant to Section 404 until we cease to be an “emerging growth company” as defined in the JOBS Act.Item 9B. OTHER INFORMATIONNot applicable11598During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) and (c) of Regulation S-K.Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONSNone99Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEItem 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this item, other than the information regarding the code of ethics and business conduct set forth below, will be set forth in the Proxy Statement relating to our 2022upcoming Annual Meeting of StockholdersShareholders (the “Proxy Statement”), which is expected to be filed with the Securities and Exchange Commission (the “SEC”) within 120 days of the fiscal year ended June 30, 2021,2023, and is incorporated in this Annual Report by reference.Code of EthicsWe have adopted a written Code of Ethics that applies to our directors, executive officers and employees, including our Chief Executive Officer, Chief Financial Officer and officers responsible for financial reporting. A current copy of the code is publicly available under “Governance” on the Investor Relations section of our website, www.investor.innovage.com.https://investor.innovage.com. Any substantive amendments to or waivers from the Code of Ethics (to the extent applicable to our Chief Executive Officer, Chief Financial Officer or officers responsible for financial reporting) will be disclosed on this page of the Company’s website.Item 11.EXECUTIVE COMPENSATIONItem 11. EXECUTIVE COMPENSATIONThe information required by this item will be set forth in the Proxy Statement, which is expected to be filed with the SEC no later than 120 days after the end of our fiscal year ended June 30, 2021,2023, and is incorporated in this Annual Report by reference.Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSItem 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by this item will be set forth in the Proxy Statement, which is expected to be filed with the SEC no later than 120 days after the end of our fiscal year ended June 30, 2021,2023, and is incorporated in this Annual Report by reference.Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEItem 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item will be set forth in the Proxy Statement, which is expected to be filed with the SEC no later than 120 days after the end of our fiscal year ended June 30, 2021,2023, and is incorporated in this Annual Report by reference.Item 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESItem 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item will be set forth in the Proxy Statement, which is expected to be filed with the SEC no later than 120 days after the end of our fiscal year ended June 30, 2021,2023, and is incorporated in this Annual Report by reference.116100Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULESThe following documents are filed as part of this Annual Report on Form 10-K:(a) (1)FINANCIAL STATEMENTSThe financial statements required under this Item begin on page 7769 of this Annual Report on Form 10-K.All schedules are omitted because the required information is either inapplicable or presented within the consolidated financial statements or related notes.(a) (3)EXHIBITSExhibit IndexExhibits not filed herewith are incorporated by reference to exhibits previously filed with the SEC, as reflected in the table below.3.13.1 3.23.2 4.1*4.1 4.24.2 4.3§*4.4§10.110.210.2 11710.310.3* 10.4 10.4+10.5+ 10.5§+10.6+ 10110.7+ 10.6+10.8+ 10.9+ 10.10+ 10.11+ 10.12+ 10.13+ 10.14+ 10.15+ 10.7+10.16+ 10.17+ 10.18+ 10.8+10.19+ 10.9§+10.20+* 10.21+ 10.10§+10.22+ 21*21* 23*23* 24*24* 31.1*31.1* 31.2*31.2* 32.1†10232.1† 32.2†32.2† 101.INS*101.INS* Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) 101.SCH*101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL*101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF*101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 118101.LAB*101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document 104104 Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) +Management contract or compensatory plan or arrangement*Filed herewith†Furnished (and not filed) herewith pursuant to Item 601(b)(32)(ii) of the SEC’s Regulation S-K§Exhibits and schedules have been omitted pursuant to Item 601(a)(5) of the SEC’s Regulation S-K and will be provided on a supplemental basis to the SEC upon request.Item 16. FORM 10-K SUMMARYNone.119103Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.Date: September 22, 2021Date: September 12, 2023 INNOVAGE HOLDING CORP. By: /s/ Benjamin C. Adams Name: Benjamin C. Adams Title: Chief Financial Officer INNOVAGE HOLDING CORP.By:/s/ Barbara Gutierrez Name:Barbara GutierrezTitle:Chief Financial OfficerAttorney.KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Maureen Hewitt, Barbara GutierrezPatrick Blair, Benjamin C. Adams and Nicole D’Amato, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with any and all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of September 22, 2021.12, 2023.Maureen Hewittand Director (principal executive officer)Maureen HewittBarbara GutierrezBarbara GutierrezDirector, Chair of the Board James Carlson /s/ Andrew Cavanna Caroline DechertCaroline Dechert/s/ Pavithra MaheshDirectorPavithra MaheshDirector Teresa Sparks /s/ Marilyn Tavenner /s/ Sean TraynorDirectorSean Traynor