Docoh
Loading...

INNV InnovAge Holding

Filed: 8 Feb 21, 4:57pm
As filed with the Securities and Exchange Commission on February 8, 2021
No. 333-                              
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INNOVAGE HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware800081-0710819
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)
8950 E. Lowry Boulevard
Denver, CO 80230
Telephone: (844) 803-8745
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Maureen Hewitt
President and Chief Executive Officer
8950 E. Lowry Boulevard
Denver, CO 80230
Telephone: (844) 803-8745
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies of all communications, including communications sent to agent for service, should be sent to:
Robert M. Hayward, P.C.
Robert E. Goedert, P.C.
Craig J. Garvey
Kirkland & Ellis LLP
300 North LaSalle
Chicago, IL 60654
(312) 862-2000
Arthur D. Robinson, Esq.
Jean Park, Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
(212) 455-2000
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: ☐
If this Form is filed to registered additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated Filer
Non-accelerated filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Title of each class of securities to be registered
Proposed maximum
aggregate offering
Price(1)(2)
Amount of
registration fee
Common Stock, par value $0.001 per share$100,000,000$10,910
(1) Includes the aggregate offering price of shares of common stock subject to the underwriters’ option to purchase additional shares.
(2) Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. The preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer and sale is not permitted.
Subject to Completion. Dated                 , 2021
           shares
[MISSING IMAGE: lg_innovage-4clr.jpg]
Common stock
This is an initial public offering of InnovAge Holding Corp. We are selling                 shares of our common stock.
Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price will be between $      and $      per share. We have applied to list our common stock on the Nasdaq Global Select Market under the symbol “INNV.”
We are an “emerging growth company” as defined under the federal securities laws, and as such, we have elected to comply with certain reduced reporting requirements for this prospectus and may elect to do so in future filings.
See “Risk Factors” beginning on page 27 to read about factors you should consider before buying shares of our common stock.
Immediately after this offering, our equity sponsors, Apax Partners and Welsh, Carson, Anderson and Stowe (collectively, our “Sponsors”), will beneficially own, through TCO Group Holdings, L.P. (the “Selling Stockholder”), the investment vehicle of the Sponsors, approximately    % of our common stock (or    % of our outstanding common stock if the underwriters’ option to purchase additional shares from the Sponsors through the Selling Stockholder is exercised in full). As a result, assuming an offering size as set forth above, we expect to be a “controlled company” within the meaning of the corporate governance standards of Nasdaq. See “Management—Controlled Company Status.”
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
Per shareTotal
Initial public offering price$$
Underwriting discount(1)$$
Proceeds, before expenses, to InnovAge Holding Corp.$$
(1)
See “Underwriting (Conflicts of Interest)” for a description of compensation payable to the underwriters.
Our Sponsors, through the Selling Stockholder, have granted the underwriters the option for a period of 30 days after the date of this prospectus to purchase from the Selling Stockholder up to an additional                 shares of our common stock at the initial public offering price less the underwriting discount.
The underwriters expect to deliver the shares of common stock against payment in New York, New York on                 , 2021. We will not receive any proceeds from the sale of shares of our common stock by our Sponsors.
J.P. MorganBarclaysGoldman Sachs & Co. LLCCitigroup
Baird William Blair Piper Sandler Capital One Securities
 Loop Capital Markets Siebert Williams Shank Roberts & Ryan
Prospectus dated                 , 2021.

 
Table of contents
Page
1
27
63
65
66
67
Capitalization68
Dilution70
72
75
Business109
Management136
143
152
154
157
161
168
170
175
185
Experts185
185
F-1
We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may provide you. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.
For investors outside of the United States, neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about, and to observe any restrictions relating to, this offering and the distribution of this prospectus outside of the United States.
Through and including                           , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
 
i

 
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. For a more complete understanding of us and this offering, you should read and carefully consider the entire prospectus, including the more detailed information set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes. Some of the statements in this prospectus are forward-looking statements. See “Forward-Looking Statements.”
Unless the context otherwise requires, the terms “InnovAge,” the “Company,” “our company,” “we,” “us” and “our” in this prospectus refer to InnovAge Holding Corp. and, where appropriate, its consolidated subsidiaries. The term “Sponsors” refers to the investment funds affiliated with Apax Partners (“Apax”) and Welsh, Carson, Anderson & Stowe (“WCAS”), respectively.
Overview
We are the leading healthcare delivery platform by number of participants focused on providing all-inclusive, capitated care to high-cost, dual-eligible seniors. We directly address two of the most pressing challenges facing the U.S. healthcare industry: rising costs and poor outcomes. Our patient-centered care delivery approach meaningfully improves the quality of care our participants receive, while keeping them in their homes for as long as safely possible and reducing over-utilization of high-cost care settings such as hospitals and nursing homes. Our patient-centered approach is led by our interdisciplinary care teams, who design, manage and coordinate each participant’s personalized care plan. We directly manage and are responsible for all healthcare needs and associated costs for our participants. We directly contract with government payors, such as Medicare and Medicaid, and do not rely on third-party administrative organizations or health plans. We believe our model aligns with how healthcare is evolving, namely (1) the shift toward value-based care, in which coordinated, outcomes-driven, high-quality care is delivered while reducing unnecessary spend, (2) eliminating excessive administrative costs by contracting directly with the government, (3) focusing on the patient experience and (4) addressing social determinants of health.
We deliver our patient-centered care through the InnovAge Platform.   The InnovAge Platform consists of (1) our Interdisciplinary Care Teams (“IDTs”) and (2) our community-based care delivery model. The key attributes of the InnovAge Platform include:

Our participant focus.   Our model is focused on caring for frail, high-cost, dual-eligible seniors. We define dual-eligible seniors as individuals who are 55+ and qualify for benefits under both Medicare and Medicaid. Our target participant population is the frail, nursing home-eligible subset of dual-eligible seniors to whom we refer as “high-cost, dual-eligibles” given their high healthcare acuity and the associated high level of spend. Our participants are among the most frail and medically complex individuals in the U.S. healthcare system. The typical InnovAge participant has, on average, nine chronic conditions and requires, on average, assistance with three or more Activities of Daily Living (“ADLs”), defined as basic tasks that must be accomplished daily for an individual to thrive. As a result, the average InnovAge participant has a Medicare risk adjustment factor (“RAF”) of 2.53. A higher RAF score indicates poorer health and higher predicted health care costs. The average InnovAge participant’s RAF is over 2.3 times higher than the 1.08 RAF of the average Medicare fee-for-service non-dual enrollee according to a 2019 analysis.

Our interdisciplinary care teams.   Our IDTs are the core of our comprehensive clinical model. They design, manage and coordinate all aspects of each participant’s customized care plan. Our IDT structure is designed to enhance access to care for our participants and eliminate the information silos and gaps in care that often occur in traditional fee-for-service models. We are responsible for the totality of our participants’ medical and social needs, including primary and specialist care, in-home care, hospital visits, nutrition, transportation to our care centers and other medical appointments, pharmacy and behavioral health support.
 
1

 

The composition of our IDTs reflects our comprehensive mandate and the complexity of our participants’ care needs. Each IDT convenes, at minimum, experts across at least 11 disciplines, from the primary care physician to the social worker, who are collectively responsible for managing all aspects of our participant’s care.

Our care plans seek to mitigate challenges presented by participants’ social determinants of health. We provide food, transportation and in-home assistance to remove barriers to accessing care and promote a safe in-home living environment for our participants.

Our community-based care delivery model.   Our model delivers care across a continuum of community-based settings. Our multimodal approach leverages our care centers, the participant’s home, and telehealth to deliver comprehensive care to our participants in the most appropriate and cost-effective setting, while enabling participants to live in their homes and communities. The InnovAge Platform is designed to be a higher touch care model compared to many of our peers, and our providers interact with our participants daily across multiple settings. As an example, a representative participant (1) visits the center approximately six times per month (prior to the COVID-19 pandemic), (2) receives daily in-home support and (3) has 24/7 virtual access to an IDT member. Each care plan is individualized by the IDT to include a set of interactions tailored to each participant’s needs. We believe our high-touch, integrated approach results in high-quality care and better outcomes for our participants.

Our direct contracting relationships with federal and state governments.   We directly contract with government payors, such as Medicare and Medicaid, through the Program of All-Inclusive Care for the Elderly (“PACE”) and receive a capitated payment to manage the totality of a participant’s medical care. The capitated payment model gives us flexibility to invest in a comprehensive care delivery model, which delivers value-added services that are not typically covered in a fee-for-service environment. As a result of our direct contracts with government payors, we capture 100% of the premium and do not rely on administrative intermediaries, such as health plans, to recruit participants or administer our contracts. Our model is designed to generate savings for federal and state governments compared to the nursing home alternative. For the year ended June 30, 2020, approximately 99.5% of our total revenue was derived from capitation agreements with government payors. We have developed strong relationships with Medicare and Medicaid agencies through our participation in PACE and believe we are well positioned to participate in future direct contracting opportunities with government payors.
According to the Centers for Medicare & Medicaid Services (“CMS”), healthcare spending in the United States 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. Our focus is on the most frail, complex subset of dual-eligible seniors who represent some of the highest-cost individuals in the U.S. healthcare system. Based on our estimated market of approximately 2.2 million PACE-eligibles in the United States, we estimate that our total addressable market is approximately $200 billion. Currently, only approximately 55,000 individuals among the 2.2 million nursing home-eligible, dual-eligible seniors we target receive care from a PACE provider, based on a November 2020 report from the National PACE Association. Over the next eight years, the National PACE Association is targeting a PACE enrollment increase at a compound annual growth rate (“CAGR”) of approximately 17%.
We believe the traditional fee-for-service reimbursement model in healthcare does not adequately incentivize providers to efficiently manage this complex population. Dual-eligible seniors must navigate a disjointed, separately 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% lower on average than for a comparable dual-eligible population aged 65 and older under Medicaid,
 
2

 
based on an analysis of available data by the National PACE Association as of 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. Importantly, we believe we deliver significantly better health outcomes. Our care model reduces unnecessary or avoidable medical spend. 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, our participants have a 25% lower 30-day hospital readmission rate compared to a frail, dual-eligible or disabled waiver population. In addition to reducing spend, we also focus on ensuring our participants are satisfied and receive high-quality care. Our participant satisfaction, based on a survey of a random sample of participants and administered by an independent third party as of June 30, 2020, is 89%. Our participants live, on average, 1.5 years longer than comparable populations who choose nursing home care, based on a U.S. Department of Health and Human Services (“HHS”) report dated June 27, 2017.
We believe the InnovAge Platform has enabled us to create a healthcare model where all constituencies involved—participants, their families, providers and government payors—“Win.”

Participants.   We enable our participants to remain in their homes and communities and age independently. We leverage our differentiated care delivery model to improve the health of our participants, avoid unnecessary hospitalizations and nursing home stays, and greatly improve our participants’ experience with the healthcare system.

Families.   By taking over many aspects of care, such as transportation to appointments, we reduce the caregiving burden on participants’ family members. We believe families receive “peace of mind” knowing their loved ones are well taken care of and that they have a clear point of contact with our IDTs.

Providers.   We enable our providers to focus on taking care of patients by providing them with meaningful clinical and administrative support.

Government payors.   We provide government payors with fiscal certainty through our capitated payment arrangements and reduced medical and social costs for frail, high-cost, dual-eligible seniors. Costs under the PACE program are estimated to be 13% lower on average than for a comparable dual-eligible population aged 65 and older under Medicaid, 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.
We believe our strong value proposition to each constituency translates into a superior economic model. We directly contract with Medicare and Medicaid on a per member, per month (“PMPM”) basis, which creates recurring revenue streams and provides significant visibility into our revenue growth trajectory. We receive 100% of the pooled capitated payment to directly provide or manage the healthcare needs of our participants. By proactively providing high-quality care and addressing risks related to social determinants of health, we have demonstrated our ability to reduce avoidable utilization of high-cost care settings, such as hospitals and nursing homes. As a result, we create a surplus that can be used to invest in refining our care model and providing even greater social supports for our participants. These investments further improve participants’ experiences and health outcomes, which we believe will result in more savings that will drive our profitable growth. The virtuous cycle we have created enables us to consistently deliver high-quality care, achieve high participant satisfaction and retention, and attract new participants. We believe that continuing to drive medical cost savings over a growing participant census will deliver an even greater surplus to our organization, enabling us to invest in more participant programs, evolve our care model, enhance our technology and fund new centers.
We have a record of driving profitable growth and achieving compelling unit economics. For the fiscal year ended June 30, 2020, all of our centers had a positive Center-level Contribution Margin, and our mature de novo centers opened in the last six years have generated positive Center-level Contribution Margins in
 
3

 
fewer than 12 months of operation. For a discussion of Center-level Contribution Margin, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key business metrics and non-GAAP measures—Center-level contribution margin.” For a discussion of our mature de novo centers opened in the last six years, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Key Factors Affecting Our Performance—Our Ability to Build De Novo Centers within Existing and New Markets.”
We have demonstrated an ability to scale successfully, expanding our model to a network of 16 centers in five states, which provided care for approximately 6,400 participants during the year ended June 30, 2020. As of December 2020, our eligible participant penetration rate is, on average, 13% across our existing markets, and as the only designated PACE provider in most of the MSAs that we serve, we believe there is significant runway for further growth. For the fiscal years ended June 30, 2019 and 2020, our total revenues were $465.6 million and $567.2 million, respectively, representing a year-over-year growth rate of 22%. For the fiscal years ended June 30, 2019 and 2020, our net income was $19.1 million and $25.8 million, respectively, representing a year-over-year growth rate of 35.1%, while Adjusted EBITDA was $51.7 million and $65.9 million, respectively, representing a year-over-year growth rate of 27.6%. Over the same period, our net income margin expanded from 4.1% to 4.5% and Adjusted EBITDA margin expanded from 11.1% to 11.7%. For the six months ended December 31, 2019 and 2020, our total revenues were $269.9 and $309.9, respectively, representing a period-over-period growth rate of 14.8%. For the six months ended December 31, 2019 and 2020, our net income was $5.8 million and $(40.2) million, respectively, while Adjusted EBITDA was $25.4 million and $45.7 million, respectively, representing a period over period growth rate of 80.1%. Over the same period, our net income margin changed from 2.1% to (13.0)% and Adjusted EBITDA Margin expanded from 9.4% to 14.8%. See “—Summary Consolidated Financial Data” for a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, and the definitions of Adjusted EBITDA and Adjusted EBITDA margin. Our experience driving profitable growth and expanding geographically underscores our confidence in our ability to successfully execute on the growth opportunities ahead. We intend to substantially increase the number of centers we operate in new and existing markets to bring our innovative care model to more frail, high-cost, dual-eligible seniors and their families across the country.
[MISSING IMAGE: tm2037889d4-tbl_trajec4clr.jpg]
Industry Challenges
Unsustainable and rising healthcare costs
Healthcare spending in the United States has grown at approximately 5% per year from 2013 to 2018, and in 2018 represented $3.6 trillion of annual spend, or 17.7% of U.S. GDP. The overall growth rate of healthcare spending is expected to accelerate due to the aging population. Furthermore, the government’s share of total healthcare spend through programs such as Medicare and Medicaid is expected to grow from
 
4

 
approximately 37% today to more than 40% as early as 2025, indicating faster growth in government-sponsored healthcare than the overall market.
Government healthcare spend is disproportionally concentrated in the dual-eligible population, who typically suffer from multiple chronic conditions and require long-term services and supports. In 2018, dual-eligible seniors represented 20% and 18% of the Medicare and Medicaid populations, respectively, but we estimate that they accounted for 34% and 35% of spending, respectively, in these programs. Medicare and Medicaid spend on average three times more per capita on a dual-eligible senior than a Medicare-only senior. Improved care management of dual-eligible seniors is critical to reducing the rapid growth in government healthcare spending in the United States.
Highly fragmented, uncoordinated healthcare system
The U.S. healthcare system is complex and highly fragmented, resulting in piecemeal care delivery across different providers who each lack a complete picture of the patient. Furthermore, this dynamic often makes the healthcare system difficult for patients to navigate. Primary, acute, behavioral and long-term care providers need to work together to effectively manage a patient’s care, yet, today, they work in silos. This lack of care coordination can result in missed or inaccurate diagnoses, gaps in care, unnecessary spend and ultimately sub-optimal patient outcomes.
High-cost, dual-eligible seniors are at high risk of falling through the cracks of the U.S. healthcare system. Few government-sponsored programs other than PACE bring together the Medicare and Medicaid benefit for these individuals, creating further barriers to delivering coordinated care. Dual-eligible beneficiaries are among the most medically complex, high-frequency users of healthcare services. The typical InnovAge participant has, on average, nine chronic conditions and requires, on average, assistance with three or more 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.
Prevalence of wasteful spending and sub-optimal outcomes
A 2019 study, published in the Journal of the American Medical Association, estimated that approximately 25% of all annual healthcare spending is for unnecessary services, excessive administrative costs, fraud and other inefficiencies creating waste. At current spending levels, this represents approximately $760 billion to $935 billion of wasteful spending. Furthermore, CMS’s national healthcare expenditure data indicate that in 2018, approximately 8.4% of healthcare spending was for administrative activities and health insurance expenditures, representing approximately $306 billion of healthcare spending that is not tied to the direct provision of care.
In 2019, based on projections made by the Office of the Actuary of CMS, hospital care was estimated to be the largest category of healthcare spending in the United States, representing 33% of the total spend. Proper management of chronic conditions and targeted interventions to mitigate challenges presented by social determinants of health can significantly reduce the incidence of acute episodes, which are the main driver of emergency room visits and hospitalization among the dual-eligible senior population. Healthcare spending on nursing care facilities and continuing care retirement communities reached approximately $175 billion in 2019, based on projections made by the Office of the Actuary of CMS. Similar to spend on hospitals and other high-acuity care settings, we believe many of these dollars can ultimately be saved by providing proactive treatment and investing in proper medical and social supports to enable frail seniors to live in their homes and communities.
Despite high levels of spending, the U.S. healthcare system struggles to produce better health outcomes and delivers low levels of patient and provider satisfaction. Life expectancy in the United States was 78.7 years in 2018, compared to 82.4 years in comparable developed countries, and patient satisfaction with the healthcare system is low.
 
5

 
Payment structures are evolving to address healthcare issues
Policymakers and healthcare experts generally acknowledge that the fee-for-service model is not designed to deliver on the “triple aim” of providing low-cost, high-quality care while improving the patient experience. Historically, healthcare delivery was oriented around reactive care for acute events, which resulted in the development of a fee-for-service payment model. By linking payments to the volume of encounters and pricing for higher complexity interventions, the fee-for-service model does not incentivize providers to practice preventative medicine or manage patients in lower cost settings. Rather, many policymakers and healthcare experts believe it unintentionally creates the opposite result—acute, episodic care delivered in high-cost settings that unnecessarily drive up the total cost of healthcare.
High-cost, dual-eligible seniors require proactive, coordinated care plans to address their medical acuity, need for long term support and risks related to social determinants of health. Without personalized, patient-centered care that removes barriers to treatment, high-cost, dual-eligible seniors would continue to over-utilize healthcare in higher-cost settings, such as emergency rooms and nursing homes.
Government payors have responded by incentivizing a transition to value-based reimbursement models for dual-eligible seniors. A recent example of this has been the growth of the PACE program.
PACE is a government-sponsored, provider-led managed care program focused on enabling frail dual-eligible seniors who qualify to live in a nursing home to age independently in their homes. PACE providers receive a monthly risk-adjusted payment for each participant (PMPM) directly from Medicare and Medicaid to manage the totality of medical care an enrolled participant needs. Fully capitated models, such as PACE, incentivize organizations to better manage chronic conditions to avoid high-cost acute episodes and to invest in services that fall outside the scope of a fee-for-service model. These services, such as care coordination and ancillary support to remove barriers created by social determinants of health, can have a significant impact on a participant’s overall health.
InnovAge manages participants that are, on average, more complex and medically fragile than other Medicare-eligible patients, including those in Medicare Advantage (“MA”) programs. As a result, we receive larger payments for our participants compared to MA participants. This is driven by two factors: (1) we manage a higher acuity population, with an average RAF score of 2.53 compared to an average RAF score of 1.08 for Medicare fee-for-service non-dual enrollees; and (2) we manage Medicaid spend in addition 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.
The successful clinical approaches of PACE helped inform certain aspects of the Center for Medicare and Medicaid Innovation’s recently announced Direct Contracting Program set to begin in 2021. The Direct Contracting Program aims to create value-based payment arrangements directly with provider groups for their current Medicare fee-for-service patients. By transitioning from fee-for-service arrangements to value-based payments, CMS expects healthcare providers will be financially incentivized to simultaneously improve quality while lowering the cost of care and focusing on patient experience, as is done in PACE today.
Legacy healthcare delivery infrastructure has been slow to transition from fee-for-service to value-based care models
In order for the shift to value-based payment models to drive meaningful results, we believe there must be a corresponding shift in care delivery models. While there has been significant investment by providers, payors and technology companies in developing solutions to enable higher-quality and lower-cost care, the healthcare industry is still heavily reliant on fee-for-service reimbursement models.
The novel coronavirus disease (“COVID-19”) pandemic has amplified several flaws in the current legacy healthcare delivery system. Traditional healthcare providers have faced dwindling fee-for-service visits in light of stay-at-home orders, government restrictions and general patient fear of medical settings. This has not only reduced revenues for traditional providers, but has strained their ability to provide necessary care for
 
6

 
their patients. Patients with chronic conditions in the fee-for-service system have found themselves unable to access care because the broader healthcare system could not rapidly shift services from institutions to home-based environments. Patients in long-term care facilities, such as nursing homes, have found themselves in an even worse position. The highly contagious nature of the virus that causes COVID-19 combined with the higher mortality rate in frail seniors created devastating conditions that led to many avoidable deaths. As of December 4, 2020, 5% of all U.S. COVID-19 cases could be linked to long-term care facilities, according to The New York Times, but those cases translated into 38% of all U.S. COVID-19-related deaths.
Providers that operate comprehensive value-based models, like us, were better positioned to quickly pivot their care delivery approach to safely treat patients in virtual and home-based settings without losing any revenue. We believe the COVID-19 pandemic has further highlighted the need for integrated, multimodal value-based care delivery models.
Our Market Opportunity
We have designed the InnovAge Platform to bring high-touch, comprehensive, value-based care to frail, high-cost, dual-eligible seniors, who are among the most medically complex patients in the U.S. healthcare system. We are one of the largest healthcare platforms focused on frail, dual-eligible seniors, and we serve participants primarily through PACE. We have built the largest PACE-focused operation in the country based on number of participants; we are twice the size of our closest PACE-focused competitor, more than 30 times larger than the typical PACE operator and the only for-profit PACE operator with a footprint in three or more states. Given our scale and track record of success across geographies, we believe we are well-positioned to capitalize on a significant market opportunity to provide care to frail, high-cost, dual-eligible seniors.
Our care model targets the most complex, frail subset of the dual-eligible senior population. Our target market is estimated at approximately 2.2 million, representing seniors who we believe are dually eligible for Medicare and Medicaid and meet the nursing home eligibility criteria for PACE. We prioritize high-density urban and suburban areas, where there are sizable numbers of frail dual-eligible seniors who would benefit most from our program. We leverage the InnovAge Platform to provide comprehensive, coordinated healthcare to enable our frail, nursing home-eligible seniors to live independently in their homes and communities. According to a 2011 study by the National Conference of State Legislatures and the AARP Public Policy Institute, 90% of people over age 65 want to stay in their home for as long as possible, and the InnovAge Platform empowers seniors to age independently in their own homes, on their own terms, for as long as possible.
Based on our experience and industry knowledge, we estimate an average annual revenue opportunity of $90,000 per participant ($7,500 PMPM). Based on our estimated market of approximately 2.2 million PACE eligibles in the United States, we estimate that our annual total addressable market is approximately $200 billion. Of these estimated PACE eligibles, only approximately 55,000 are enrolled in a PACE program, based on a November 2020 report from the National PACE Association. Historically, most of our participants received healthcare under fee-for-service Medicare and Medicaid prior to enrolling in our model. Over the next eight years, the National PACE Association is targeting a PACE enrollment increase at a CAGR of approximately 17%. As a result, we believe we have a substantial runway for growth by bringing our comprehensive value-based model of care to more frail, dual-eligible seniors across the country.
In addition to the sizable whitespace opportunity for growth in our market, a 2020 study conducted by The Commonwealth Fund found that the PACE model could effectively serve other high-cost, high-need populations, such as young adults with developmental or physical disabilities and adults with behavioral health conditions.
The InnovAge Platform:
Improving outcomes and reducing costs for high-cost, dual-eligible seniors
Our patient-centered approach is tailored to address the complex medical and social needs of our frail dual-eligible senior population. We leverage the InnovAge Platform to deliver comprehensive, highly coordinated
 
7

 
healthcare to our participants. The InnovAge Platform consists of (1) our interdisciplinary care teams and (2) our community-based care delivery model.
Our interdisciplinary care teams
The IDT structure is core to our clinical model. Our IDTs design, manage and coordinate all aspects of each participant’s unique care plan and function as the core group of care providers to our participants.
[MISSING IMAGE: tm2037889d1-fc_partici4c.jpg]
Our IDT structure is designed to enhance access to care for our participants and eliminate information silos and gaps in care that frequently occur in a fee-for-service model. We are responsible for all of our participants’ medical care, and we coordinate care delivery across multiple settings. We deliver individualized care for each participant that addresses his or her specific medical conditions and social determinants of health. We deliver or manage primary and specialist care, in-home care, hospital visits, nutrition, transportation to our care centers and to other medical appointments, pharmacy and behavioral health. We leverage a technology suite, which we believe is powered by industry-leading clinical and operational information technology solutions to collect and analyze data, streamline IDT workflows and empower our teams with timely participant insights that improve outcomes.
Each IDT convenes, at a minimum, experts across at least 11 disciplines to collectively manage the complex care needs of each participant. The IDTs meet multiple times per week to discuss each participant’s care plan and closely monitor key clinical metrics to ensure each participant receives optimal treatment based on his or her current conditions.
Our community-based care delivery model
Our high-touch model delivers care across a continuum of community-based settings. Our multimodal approach leverages (1) the care center, (2) the home and (3) virtual care capabilities to deliver comprehensive care to our participants. Our capitated payment model gives us the flexibility to invest in care coordination, transportation and other services to mitigate challenges presented by participants’ social determinants of 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.
Our community-based care centers.   Our purpose-built community-based care centers are designed for the specific needs of our target population and serve as a medical and social hub for our participants. Our
 
8

 
participants often spend the full day in these centers receiving medical treatment, meals and physical therapy and socializing with peers. Our care centers are larger than those of most other comparable care organizations and include dedicated spaces for medical care, physical therapy, behavioral health and dentistry, in addition to day-rooms and dining spaces for socialization among our participants. We incorporate population-specific design elements, such as grab bars and rounded hallways, to accommodate the frailty and the prevalence of dementia among our participant population. The size and design of our centers enable us to deliver a significant portion of our participants’ care in one location, simplifying the healthcare experience for participants and their families.
[MISSING IMAGE: tm2037889d1-ph_1houses4clr.jpg]
Our in-home care capabilities.   Our in-home care capabilities enable our participants to live safely in their homes and avoid nursing homes to the extent safely possible. We directly deliver or manage all skilled and unskilled care a participant may require to live independently at home. Additionally, we have dedicated strategic partnerships with “hospital-at-home” providers to deliver acute care in-home when appropriate. In
 
9

 
addition, we manage transportation not only to our centers but also to all third-party medical appointments. During the year prior to the COVID-19 pandemic, through February 29, 2020, in an average month, we provided over 61,000 one-way trips. Our capitated payment model gives us the flexibility to invest in home modifications, such as grab bars and shower chairs, to reduce falls and make the home safer for our seniors. We believe our presence in our participants’ homes gives us real-time insight into our participants’ health and enables us to positively influence many environmentally-driven social determinants of health.
Our virtual care capabilities.   Our virtual care capabilities give us the flexibility to deliver medical care and social services virtually when appropriate. Our physicians are equipped with several telehealth platforms to provide virtual care and utilize the option best suited for each individual participant’s preferences and needs. Our aim is to make virtual care access simple and convenient for our participants. In situations where a participant lacks access to a device or is unable to use telehealth technology on their own, we provide them with a device or dispatch a team member to their home to assist.
During the COVID-19 pandemic, we developed our telehealth capabilities to conduct more than 12,000 remote provider appointments, more than 62,500 telehealth visits, and more than 203,000 wellness phone calls as of November 22, 2020. 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.
Addressing social determinants of health.   We believe a key element of the success of our care delivery model is the provision of services that mitigate challenges presented by participants’ social determinants of health. According to America’s Health Insurance Plans (“AHIP”), social determinants of health are responsible for more than 70% of a person’s health. We designed our care delivery model to address the following areas:

Economic stability

Transportation

Physical environment

Community and social context

Food and nutrition

Health literacy

Fitness
Our technology suite
Our technology suite supports our ability to deliver consistent, high-quality care to our participants at scale. Our fully capitated care model is operationally complex; it requires coordination among dozens of different providers per participant, real-time integration of clinical data from disparate sources and predictive analytics to enable effective interventions. We license a suite of third-party clinical technologies that we use to create a comprehensive view of our participants’ health, empowering our IDTs to make optimal care decisions. We leverage what we believe to be industry-leading reporting and predictive analytics solutions to collect and analyze data, stratify our population and uncover actionable participant insights.
Our impact
Our care model has consistently demonstrated sound quality outcomes, consistent financial returns and high participant satisfaction scores.

Improving clinical outcomes and reducing unnecessary utilization.   Our care model is designed to proactively manage chronic conditions, which reduces unnecessary acute episodes, and to treat participants in the most appropriate care setting. 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
 
10

 
scores for which data is available. In addition, our participants have a 25% lower 30-day hospital readmission rate compared to a frail, dual-eligible or disabled waiver population from 2016 to 2019.

Reduction in cost.   The InnovAge Platform consistently lowers healthcare costs for the government, as described below:

Medicaid:   The capitation rates paid by Medicaid are designed to result in cost savings relative to expenditures that would otherwise be paid for a comparable nursing facility-eligible population not enrolled under the PACE program. On average, costs under the PACE program are estimated to be 13% lower than for a comparable dual-eligible population aged 65 and older under Medicaid.

Medicare:   We estimate that our program costs are approximately 8% lower on a weighted average basis than costs for comparable fee-for-service Medicare beneficiaries.

Families and individuals:   The majority of our participants and their families pay little to no out-of-pocket costs for our care.

Increased longevity.   Our participants live, on average, 1.5 years longer than comparable populations who choose nursing home care.

Participant satisfaction.   Our participants are highly satisfied with our service. Our participant satisfaction, based on a survey of a random sample of participants and administered by an independent third party as of June 30, 2020, was 89%.
Our track record of profitable growth
We have a record of driving profitable growth and achieving compelling unit economics. For the fiscal year ended June 30, 2020 and the six months ended December 31, 2020, our consolidated Center-level Contribution Margin, expressed as a percentage of revenue, was 24.9% and 27.3%, respectively, and all of our centers had a positive Center-level Contribution Margin (other than our expansion center in Pennsylvania, which opened in November 2020). Our mature de novo centers opened in the last six years have generated positive Center-level Contribution Margins in fewer than 12 months of operation.
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 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.
Our Value Proposition
We believe that the InnovAge Platform has enabled us to create a healthcare model where all constituencies involved, including participants, their families, providers and government payors, have the ability to “Win.” Therefore, we “Win” through a virtuous cycle that promotes growth and drives our financial results.
Our participants “Win” by enjoying a better patient 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 and age independently. As a result, over 90% of our participants live in their preferred setting: their home or community. Our care model also delivers superior clinical outcomes: our participants have fewer hospital admissions, fewer low- to medium-severity emergency room visits and lower 30-day hospital readmission rates. Our participants live, on average, 1.5 years longer than comparable populations who choose nursing home care, based on the HHS report 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 of participant satisfaction with our program.
 
11

 
Families “Win” as we reduce their caregiving burden and provide “peace of mind”
We significantly reduce the caregiving burden on the families of our participants. Our model handles all transportation to and from medical appointments and center visits, helps participants with ADLs, and creates social outlets for participants to reduce isolation. Most importantly, we believe we offer “peace of mind” to our participants’ families who know their loved one’s complex needs are cared for. “Friends and family” of participants remain one of our largest referral sources for recruiting new participants.
Our providers “Win” as they are able to focus on improving the lives of their patients
We enable our providers to focus on taking care of patients by providing them with meaningful clinical and administrative support. We remove the pressure of trying to optimize visit volume by rewarding quality, not quantity, of care. We estimate that our providers (1) have a smaller number of participants to care for and spend more time with each participant than providers in similar care organizations, and (2) benefit from the support of a multidisciplinary team.
Government payors “Win” through fiscal certainty and lower costs
We provide fiscal certainty through our capitated payment arrangements and reduce the cost of both medical and long-term support and services for high-cost, dual-eligible seniors. Costs under the PACE program are estimated to be 13% lower on average than for a comparable dual-eligible population aged 65 and older under Medicaid, based on an analysis of available data by the National PACE Association as of 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.
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. We are twice the size of our closest PACE-focused competitor and more than 30 times larger than the typical PACE operator. 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 an average of 20 years of healthcare experience. Together, they have built one of the best run businesses in the healthcare provider industry. In 2016, Ms. Hewitt had the vision to convert InnovAge from a not-for-profit entity to a for-profit entity. This conversion allowed us to increase our agility in the marketplace and 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 106.0% from the fiscal year ended June 30, 2016 to the fiscal year ended June 30, 2020. In the same period, our total revenues grew 143%, reflecting a 25% CAGR, and our revenue grew organically at a 16% CAGR, which excludes contribution from acquired centers.
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. Our team is diverse and purpose-built to represent the communities we serve. Additionally, the majority of our senior leaders have had direct experience as a primary caregiver for a loved one. Our senior leadership team’s firsthand experiences providing care for elderly family members drives a dedicated commitment to our mission.
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
 
12

 
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 patient-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 12% 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. We estimate that approximately 3% of patients who are PACE-eligible are currently enrolled in a PACE program. Our scale enables us to invest in targeted sales and marketing capabilities to improve awareness of our program among potential eligible participants, which accelerates census growth. 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. For example, we increased the mix of marketing dollars spent on search engine advertising from 5% to 17% of our total media budget, helping to drive 145% year-over-year web traffic growth and over 20% year-over-year referral growth from this channel (each with respect to July through November 2020 as compared to the same period in 2019). 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 38.5% across all referral sources 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 two fiscal years, suggesting participants are highly satisfied with their care.
We have a diverse mix of referral sources as presented in the chart below, with an average referral conversion rate, as of September 30, 2020, of approximately 40% across all channels.
[MISSING IMAGE: tm2037889d4-pc_referral4c.jpg]
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 remain one of only five for-profit PACE providers in the country and are the largest multistate 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
 
13

 
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. As a result, we have attracted private investments from leading financial institutions and, upon completion of this offering, we expect we will be the largest publicly traded healthcare provider focused on serving 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 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 mature de novo centers opened in the last six 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, which is more diversified than other PACE organizations. 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 capitated revenue, differentiates us from other care providers.
Our Growth Strategy
Increase participant enrollment and capacity within existing centers

We have driven 12% annual, organic census growth over the last four years.

For the fiscal year ended June 30, 2020, our participant census was approximately 6,400 across our 16 centers in five states.
 
14

 

Inclusive of two additional centers opened after June 30, 2020 and our in-progress and potential center expansion efforts, our centers are expected to have an average maximum capacity of 800 participants and are expected to be able to serve a total of approximately 14,500 participants, which we believe leaves ample runway to increase the number of participants we serve within our current footprint.
Build de novo centers

We have a successful track record of building de novo centers and have five new opportunities in our pipeline for development in the next 24 months, including three in two new states.

Given that our mature de novo centers opened in the last six years, on average, (1) required approximately $10 million to $20 million of upfront capital to build with less than 12 months to generate positive Center-level Contribution Margin, and (2) generate approximately $10 million to $20 million of annual Center-level Contribution Margin, we believe de novo centers generate compelling long-term unit economics and robust internal rates of return.

We have demonstrated the portability of our platform across different geographies and have a prioritized list of target markets that we believe are optimal environments to launch the InnovAge Platform.

Our approach to de novo developments includes building centers to our experience-based specifications, with flexibility for future center expansion factored into the blueprints where possible.
Execute tuck-in acquisitions

We believe we are the logical acquiror in a fragmented market made up of mostly small local operators.

Over the past two fiscal years, we have acquired and integrated three PACE organizations, expanding into one new state and four new markets through those acquisitions.

By bringing acquired organizations under the InnovAge Platform, we are able to realize significant census growth, and improve operational efficiency and care delivery post-integration.

We believe there is a robust landscape of potential tuck-in acquisitions to supplement our organic growth, and that our known track record for improving and integrating acquired businesses while continuing to prioritize patient care positions us as the acquirer of choice in this market.
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 growing.

We plan to continually invest in technology improvements and seek to unlock new insights through enhanced data analytics capabilities that will advance our care model.

We believe our investments will ultimately result in better health outcomes and lower medical costs for participants. As we continue to reduce medical costs, we expect to generate incremental savings that can be reinvested to support continuous improvement of the InnovAge Platform.
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 disproportionately impacts 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 has altered the mix of settings where we deliver care, our multimodal model has ensured our participants continue to receive the care they need. As a result of the
 
15

 
COVID-19 pandemic, we have transitioned much of our care to in-home and telehealth services, while increasing participant visit volume and maintaining continuity of care. In addition to increased telehealth and in-home care, we repurposed our existing infrastructure and workforce to support care delivery during the COVID-19 pandemic. As an example, we leveraged our transportation infrastructure that normally drives participants to the centers to instead deliver food to participants in their homes, making over 117,000 deliveries since our centers were closed in March 2020.
Growth.   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 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.
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, 2020, we had not experienced a decline in revenue as a result of the COVID-19 pandemic.
Expenses.   We experienced higher center level contribution margins during the COVID-19 pandemic as a result of lower center-level cost of care. While we retained and, in many cases, repurposed our center-based staff to deliver care to participants in-home and via telemedicine as a result of the pandemic, the closure of our centers resulted in reduced transportation and facility operating costs. We did not experience material changes in our aggregate external provider costs as a result of the nondeferrable nature of most of our participants’ third-party medical needs.
For more detail on the impact of the COVID-19 pandemic on our business, see the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of COVID-19.”
Summary of Risks Related to Our Business, Regulation, Our Indebtedness, Our Common Stock and This Offering
There are a number of risks related to our business, regulation, our indebtedness, this offering and our common stock that you should consider before you decide to participate in this offering. You should carefully consider all the information presented in the section entitled “Risk Factors” in this prospectus. 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 99.2% and 99.5% of our revenue for the years ended June 30, 2019 and 2020, respectively, and approximately 99.5% of our revenue for the six months ended December 31, 2019 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 81.5% and 81.8% of our capitation revenue for the year ended June 30, 2020 and the six months ended December 31, 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
 
16

 
portion of our revenue through the PACE program, which accounted for 99.2% and 99.5% of our revenue for the years ended June 30, 2019 and 2020, respectively, and for 99.5% of our revenue for the six months ended December 31, 2019 and 2020. 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 condition and cash flows, restrict our ability to continue providing high quality care to our participants and limit our opportunities for growth.

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.   The submission of erroneous data could result in inaccurate revenue and risk adjustment payments, which may be subject to correction or retroactive adjustment in later periods. CMS may audit PACE organizations’ risk adjustment data submissions. We could be required to refund a portion of the revenue that we received, which refund, depending on its magnitude, could have a material adverse effect on our business, results of operations, financial condition and cash flows. Moreover, substantial changes in the risk adjustment mechanism, including changes that result from enforcement or audit actions, could materially affect our capitated reimbursement.

Non-renewal or termination of capitation agreements with government payors could have a material adverse effect on our business, results of operations, financial condition and cash flows.   If we enter into capitation contracts with unfavorable economic terms, or a capitation contract is adjusted to include unfavorable terms, we could suffer losses with respect to such contract. In addition, some states in which we operate undergo periodic reconciliations with respect to enrollments that present a risk to our business, results of operations, financial condition and cash flows.

If we fail to adhere to all of the complex government laws and regulations that apply to our business, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and stock price.   Our operations are subject to extensive federal, state and local government laws and regulations. The various laws and regulations that apply to our operations are often subject to varying interpretations and additional laws and regulations potentially affecting providers continue to be promulgated that may impact us. A violation or departure from any of the legal requirements implicated by our business may result in, among other things, government audits, decreased payment rates, significant fines and penalties, the potential loss of certification, recoupment efforts, voluntary repayments, exclusion from governmental healthcare programs, and reputational harm, each of which could have a material adverse effect on our results of operations and our ability to grow our business.

Our existing indebtedness could adversely affect our business and growth prospects.   As of December 31, 2020, we had $299.3 million outstanding under the Term Loan Facility and none outstanding under the Revolving Credit Facility (each as defined herein). As discussed under the section entitled “Recent developments — Entry into new credit facilities,” we expect to repay and terminate our existing Term Loan Facility and Revolving Credit Facility and replace them with the New Credit Facilities (defined herein). Our indebtedness may (1) limit funds otherwise available for financing our capital expenditures and pursuing our growth strategies by requiring us to dedicate a portion of our cash flows from operations to the repayment of debt and the interest on this debt, and (2) increase our vulnerability to rising interest rates. Our level of indebtedness may place us at a competitive disadvantage to our competitors that are not as highly leveraged. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds.

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
 
17

 
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. 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 adversely impact our ability to incur additional indebtedness to fund our operating results or to support our growth strategies.

Our Sponsors control us, and their interests may conflict with ours or yours in the future.   Immediately after this offering, our Sponsors will beneficially own approximately    % of our common stock, or    % if the underwriters’ exercise in full their option to purchase additional shares from TCO Group Holdings, L.P. (the “Selling Stockholder”), which means that, based on their combined percentage voting power held after the offering, the Sponsors together will control the vote of all matters submitted to a vote of our shareholders, which will enable them to control the election of the members of the Company board of directors (the “Board”) and all other corporate decisions. Accordingly, for such period of time, the Sponsors will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers, decisions on whether to raise future capital and amending our charter and bylaws, which govern the rights attached to our common stock.

An active, liquid trading market for our common stock may not develop, which may limit your ability to sell your shares.   The initial public offering price will be determined by negotiations between us and the underwriters and may not be indicative of market prices of our common stock that will prevail in the open market after the offering. The failure of an active and liquid trading market to develop and continue would likely have a material adverse effect on the value of our common stock, which may impair our ability to raise capital to pursue our growth strategies, to continue to fund operations and to pursue acquisitions using our shares as consideration.
These and other risks are more fully described in the section entitled “Risk Factors” in this prospectus. If any of these risks actually occurs, our business, financial condition, results of operations, cash flows and prospects could be materially and adversely affected. As a result, you could lose all or part of your investment in our common stock.
Recent developments
Entry into new credit facilities
We anticipate entering into a new $      million      -year term loan (the “New Term Loan Facility”) and $      million           -year revolving credit facility (the “New Revolver” and together with the New Term Loan Facility, the “New Credit Facilities”). Interest on our New Term Loan Facility is expected to bear interest at a rate of                 (or a similar index for foreign currency borrowings) plus a margin that ranges from           basis points to           basis points, and borrowings under our New Revolver are expected to bear interest at a rate of                 (or a similar index for foreign currency borrowings) plus a margin that ranges from      basis points to           basis points, with a           floor of    %. Together with proceeds from this offering and borrowings under the New Term Loan Facility, we expect to repay all outstanding indebtedness under our existing Term Loan Facility and terminate the existing Credit Agreement. We expect to enter into the New Credit Facilities shortly after the closing of this offering; however, there can be no assurance that we will be able to enter into the New Credit Facilities on the terms described herein or at all. The closing of this offering is not contingent upon the effectiveness of the New Credit Facilities; however, entry into the New Credit Facilities is conditioned on the consummation of this offering. For more information relating to the New Credit Facilities, see the section entitled “Description of certain indebtedness.”
Our Sponsors
We have a valuable relationship with our Sponsors, Apax and WCAS, which initially invested in the Company in 2020 and 2016, respectively. Immediately following this offering, our Sponsors will beneficially
 
18

 
own approximately    % of our common stock (or    % of our outstanding common stock if the underwriters’ option to purchase additional shares from the Sponsors is exercised in full). We will enter into a Director Nomination Agreement with the Sponsors that provides the Sponsors the right to designate: (i) all of the nominees for election to our Board for so long as the Sponsors collectively beneficially own at least 40% of the total number of shares of the Company's common stock collectively beneficially owned by the Sponsors upon completion of this offering (and the exercise of any option of the underwriters to purchase additional shares), as adjusted for any reorganization, recapitalization, stock dividend, stock split, reverse stock split or similar changes in the Company’s capitalization (the “Original Amount”); (ii) 40% of the nominees for election to our Board for so long as they collectively beneficially own less than 40% but at least 30% of the Original Amount; (iii) 30% of the nominees for election to our Board for so long as they collectively beneficially own less than 30% but at least 20% of the Original Amount; (iv) 20% of the nominees for election to our board for so long as the Sponsors collectively beneficially own less than 20% but at least 10% of the Original Amount; and (v) one of the nominees for election to our Board for so long as the Sponsors collectively beneficially own at least 5% of the Original Amount, which could result in representation on our Board that is disproportionate to our Sponsors’ beneficial ownership. If the investment vehicle through which the Sponsors hold their investment is dissolved after this offering, then each of Apax and WCAS will be permitted to nominate (i) up to three directors so long as it owns at least 25% of the Original Amount, (ii) up to two directors so long as it owns at least 15% of the Original Amount and (iii) one director so long as it owns at least 5% of the Original Amount, which could result in representation on our Board that is disproportionate to each of our Sponsors’ beneficial ownership. See “Certain Relationships and Related Party Transactions—Related Party Transactions—Director Nomination Agreement.”
Apax Partners
Apax is a leading global private equity advisory firm. For more than four decades, Apax has built specialist expertise across four industry sectors: Tech, Services, Healthcare and eConsumer. To date, Apax has raised and advised funds with aggregate commitments of more than $60 billion.
The Apax funds have a strong track record of investing in the healthcare sector, having committed 7.6 billion euro of equity and completed approximately 90 investments across multiple geographies, including the U.S., Europe and Asia. Apax is able to draw on its decades of investment experience and global reach to identify attractive opportunities in the healthcare sector. Apax’s healthcare team is focused on four core sub-sectors: Medical Technology, Pharmaceuticals, Healthcare IT and Healthcare Services. Selected healthcare investments include Trizetto Corporation, Encompass Health, Kepro, Neuraxpharm, Unilabs, Vyaire, Candela, Genex, and Acelity.
Welsh, Carson, Anderson & Stowe
For over 40 years, WCAS has partnered with outstanding management teams to build leading healthcare and technology companies. WCAS has raised funds with aggregate commitments of approximately $27.0 billion. WCAS partners with healthcare companies that add value to the system by reducing costs and improving the quality of care. WCAS has made over 90 platform investments in the healthcare space representing more than $9.0 billion. Selected current and past healthcare investments related to InnovAge include Universal American, Matrix Medical, Ardent Healthcare, MultiPlan, naviHealth, CareSource and Partners in Primary Care.
General Corporate Information
InnovAge Holding Corp. was founded as a for-profit corporation in May 2016 for the purposes of purchasing all of the outstanding common stock of Total Community Options, Inc., which was formed in May 2007 as a not-for-profit. In connection with this offering, we changed the name of our company from TCO Group Holdings, Inc. to InnovAge Holding Corp. Our principal executive office is located at 8950 E. Lowry Boulevard, Denver, CO 80230. Our telephone number is (844) 803-8745. Our website address is www.InnovAge.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider any information contained on,
 
19

 
or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock. We are a holding company and all of our business operations are conducted through our subsidiaries.
This prospectus includes our trademarks and service marks such as “InnovAge,” which are protected under applicable intellectual property laws and are the property of us or our subsidiaries. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names.
Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year following the fifth anniversary of the completion of this offering, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (3) the date on which we are deemed to be a large accelerated filer or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. We will be deemed to be a “large accelerated filer” at such time that we (a) have an aggregate worldwide market value of common equity securities held by non-affiliates of $700.0 million or more as of the last business day of our most recently completed second fiscal quarter, (b) have been required to file annual and quarterly reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) for a period of at least 12 months and (c) have filed at least one annual report pursuant to the Exchange Act.
An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

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”);

a 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 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; and

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
We have elected to take advantage of certain of the reduced disclosure obligations regarding financial statements (such as not being required to provide audited financial statements for the fiscal year ended June 30, 2018 or five years of Selected Consolidated Financial Data) and executive compensation in this prospectus and expect to elect to take advantage of other reduced burdens in future filings. As a result, the information that we provide to our shareholders may be different than you might receive from other public reporting companies in which you hold equity interests.
 
20

 
In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We intend to take advantage of the longer phase-in periods 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.
 
21

 
THE OFFERING
Common stock offered
          shares.
Option to purchase additional shares from the Selling Stockholder
          shares.
Common stock to be outstanding after this offering
          shares.
Use of proceeds
We estimate that our net proceeds from this offering will be approximately $      million assuming an initial public offering price of $      per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us.
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our shareholders. We intend to use (i) approximately $      million of the net proceeds of this offering, together with proceeds from our New Credit Facilities, to repay all borrowings outstanding under the Term Loan Facility (as defined herein) (which borrowings had an interest rate of 7.75% as of December 31, 2020) and to fund the related prepayment fees and expenses, and (ii) $20.0 million of the net proceeds to satisfy an earn-out arrangement in connection with the August 2018 acquisition of NewCourtland LIFE Program in Pennsylvania (“NewCourtland”), and the remainder of such net proceeds will be used for general corporate purposes, including working capital, operating expenses and capital expenditures. See “Use of Proceeds” for additional information.
We will not receive any proceeds from the sale of the shares of our common stock by our Sponsors if the underwriters’ option to purchase additional shares is exercised.
Controlled company
After this offering, assuming an offering size as set forth in this section, an investment vehicle affiliated with our Sponsors will beneficially own approximately    % of our common stock (or    % of our common stock if the underwriters’ option to purchase additional shares from the Sponsors, through the Selling Stockholder, is exercised in full). As a result, we expect to be a controlled company within the meaning of the corporate governance standards of          . See “Management—Controlled Company Status.”
Risk factors
Investing in our common stock involves a high degree of risk. See “Risk Factors” elsewhere in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.
Conflicts of interest
Affiliates of Capital One Securities, Inc. hold approximately $190.5 million of the aggregate principal amount of the
 
22

 
existing Term Loan Facility, which will be repaid and terminated in connection with this offering. As a result, affiliates of Capital One Securities, Inc. will receive approximately      % of the net proceeds of this offering. See “Use of Proceeds.” Accordingly, Capital One Securities, Inc. is deemed to have a conflict of interest within the meaning of Rule 5121 (“Rule 5121”) of the Financial Industry Regulatory Authority, Inc. (“FINRA”). Therefore, this offering is being made in compliance with the requirements of Rule 5121. Pursuant to that rule, the appointment of a "qualified independent underwriter" is not required in connection with this offering as the members primarily responsible for managing the public offering do not have a conflict of interest, are not affiliates of any member that has a conflict of interest and meet the requirements of paragraph (f)(12)(E) of Rule 5121. Pursuant to FINRA Rule 5121, Capital One Securities, Inc. will not confirm sales of our common stock to any account over which it exercises discretionary authority without the prior written approval of the customer. For more information, see “Underwriting (Conflicts of Interest).”
Proposed trading symbol
“INNV.”
The number of shares of common stock to be outstanding following this offering is based on             shares of common stock outstanding as of December 31, 2020 and excludes           shares of common stock reserved for future issuance under our 2021 Omnibus Incentive Plan (the “2021 Plan”), which will be adopted in connection with this offering.
Unless otherwise indicated, all information in this prospectus assumes:

the filing of our amended and restated certificate of incorporation and the adoption of our bylaws, each in connection with the closing of this offering; and

no exercise by the underwriters of their option to purchase up to            additional shares of common stock from the Sponsors, through the Selling Stockholder.
 
23

 
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize our consolidated financial data. The summary consolidated statement of operations data for the years ended June 30, 2019 and 2020 and the summary consolidated balance sheet dated as of June 30, 2020 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The summary consolidated statement of operations data for the six months ended December 31, 2019 and 2020 and the summary consolidated balance sheet data as of December 31, 2020 are derived from our unaudited interim consolidated financial statements that are included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments that are necessary for the fair statement of our unaudited interim consolidated financial statements.
Our historical results are not necessarily indicative of the results that may be expected in any future periods, and our results for any interim period are not necessarily indicative of results that may be expected for any full year. You should read the summary historical financial data below in conjunction with the sections titled “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.
Year ended
June 30,
Six months ended
December 31,
(dollars in thousands, except share and per
share amounts)
2019202020192020
Revenues
Capitation revenue$461,766$564,834$268,550$308,459
Other service revenue3,8642,3581,3801,418
Total revenues465,630567,192269,930309,877
Expenses
External provider costs222,232272,832133,365148,826
Cost of care (excluding depreciation and
amortization)
132,770153,05675,18076,357
Sales and marketing16,46019,0019,7778,743
Corporate, general and administrative48,25058,48128,38987,306
Depreciation and amortization8,99611,2915,5415,951
Equity loss678401,342
Other operating (income) expenses(2,753)920(150)(1,011)
Total expenses425,955516,259252,142327,514
Operating Income39,67550,93317,788(17,637)
Other Income (Expense)
Interest expense, net(9,594)(14,619)(8,926)(12,186)
Loss on extinguishment of debt(3,144)(991)
Other(1,549)(681)(978)44
Total other expense(14,287)(15,300)(9,904)(13,133)
Income (loss) before income taxes25,38835,6337,884(30,770)
Provision for income taxes6,3179,8682,0879,423
Net Income (Loss)$19,071$25,765$5,797$(40,193)
Less: net loss attributable to noncontrolling
interests
(507)(513)(246)(243)
Net Income (Loss) Attributable to the Company$19,578$26,278$6,043$(39,950)
Weighted-average number of common shares
outstanding — basic
132,315,101132,616,431132,616,431130,214,967
 
24

 
Year ended
June 30,
Six months ended
December 31,
(dollars in thousands, except share and per
share amounts)
2019202020192020
Weighted-average number of common shares outstanding — diluted134,034,459135,233,630133,174,001130,214,967
Net Income per share — basic$0.15$0.20$0.05$(0.31)
Net Income per share — diluted$0.15$0.19$0.05$(0.31)
Pro Forma Per Share Data(1):
Pro forma net income (loss) per share:
Basic$      $
Diluted$      $
Pro forma weighted-average shares used in computing net income (loss) per share:
Basic
Diluted
Non-GAAP Financial Data:
Adjusted EBITDA(2)
$51,662$65,909$25,361$45,673
Adjusted EBITDA margin(2)
11.1%11.7%9.4%14.8%
June 30, 2020December 31, 2020
(dollars in thousands)ActualActualAs adjusted(3)(4)
Consolidated Balance Sheets Data (at period end):
Cash and cash equivalents$112,904$77,321$          
Working capital(5)
90,29830,659
Total assets409,634374,707
Long-term debt, net of debt issuance costs (including current portion)212,370293,144
Total stockholders’ equity107,750(31,289)
(1)   Unaudited pro forma per share information gives effect to our sale of           shares of common stock in this offering at an assumed initial public offering price of $      per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus.
(2)   Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures of operating performance monitored by management that are not defined under GAAP and that do not represent, and should not be considered as, an alternative to net income or net income margin, respectively, as determined by GAAP. We define Adjusted EBITDA as net income adjusted for interest expense, depreciation and amortization, and provision for income tax as well as addbacks for non-recurring expenses or exceptional items, including charges relating to management equity compensation, final determination of rates, M&A diligence, transaction and integration, business optimization, EMR transition, special employee bonuses, financing-related fees and contingent consideration. Adjusted EBITDA margin is Adjusted EBITDA expressed as a percentage of our total revenue less any exceptional, one-time revenue items. In the year ended June 30, 2020, we recognized a final determination of certain rates for capitation payments from the State of California in the amount of approximately $3.4 million, and in the six months ended December 31, 2020, we recognized the CMS settlement payment related to End-Stage Renal Disease beneficiaries for calendar years 2010 through 2020 in the amount of approximately $2.2 million, each of which is deducted from total revenue for the specified period solely for purposes of calculating the corresponding Adjusted EBITDA margin. We believe that Adjusted EBITDA and Adjusted EBITDA margin are appropriate measures of operating performance because the metrics eliminate the impact of revenue and expenses that do not relate to our ongoing business performance, allowing us to more effectively evaluate our operating performance and compare the results of our operations from period to period. We use Adjusted EBITDA and Adjusted EBITDA margin to understand and evaluate our core operating performance and trends.
Each of Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools and should not be considered in isolation from, or as a substitute for, the analysis of other GAAP financial measures, including net income and net income margin. Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net income (loss) and our other GAAP results. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by the types of items excluded from the calculation of Adjusted EBITDA. Our use of the term Adjusted EBITDA varies from others in our industry.
 
25

 
A reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, for each of the periods indicated is as follows:
Years ended
June 30,
Six months
ended December 31,
(dollars in thousands)2019202020192020
Net income$19,071$25,765$5,797$(40,193)
Interest expense, net9,59414,6198,92612,186
Depreciation and amortization8,99611,2915,5415,951
Provision for income tax6,3179,8682,0879,423
Management equity plan727543272572
Rate determination(a)(3,372)(2,158)
M&A diligence, transaction and integration(b)2,5282,7181,46558,784
Business optimization(c)4541,171232859
EMR transition(d)1,078638269
Special employee bonuses(e)3,1271,278523
Financing-related(f)3,6013030991
Contingent consideration(g)(2,753)920(150)(1,011)
Adjusted EBITDA$51,662$65,909$25,361$45,673
(a) For the fiscal year ended June 30, 2020, this reflects the final determination of certain rates for capitation payments from the State of California of approximately $3.4 million relating to the fiscal years ended June 30, 2016, 2017, 2018 and 2019, all of which we consider non-recurring. For the six months ended December 31, 2020, this reflects the CMS settlement payment of approximately $2.2 million related to End-Stage Renal Disease beneficiaries for calendar years 2010 through 2020.
(b) Reflects costs associated with due diligence, transaction and integration expenses for acquisitions explored or completed of approximately $2.5 million and $2.7 million for the years ended June 30, 2019 and 2020, respectively. For the six months ended December 31, 2020, primarily reflects such expenses related to the July 27, 2020 transaction between us, an affiliate of Apax and our existing equity holders entering into a securities purchase agreement (the "Apax Transaction") in the amount of approximately $58.8 million, relating to $42.2 million from the cancellation of options and the redemption of shares, $1.8 million relates to transaction specific bonuses, and $13.1 million of transaction fees and expenses, along with $1.7 million relating to payroll taxes and other administrative items.
(c) Reflects charges related to business optimization initiatives. Such charges relate to one-time investments in projects designed to enhance our technology systems and improve the efficiency of our operations.
(d) Reflects non-recurring expenses relating to the transition to a new electronic medical record vendor.
(e) Reflects non-recurring special bonuses paid to certain of our employees relating to shareholder dividend transactions that occurred in fiscal years 2018 and 2019.
(f) With respect to the fiscal year ended June 30, 2019, such amount includes $0.5 million related to fees and expenses incurred in connection with amendments to our Credit Agreement and $3.1 million related to a loss on extinguishment of debt incurred in connection with the refinancing of the Credit Agreement. With respect to fiscal year ended June 30, 2020 and the six months ended December 31, 2019, the amount reflects fees and expenses incurred in connection with amendments to our Credit Agreement. With respect to the six months ended December 31, 2020, the amount reflects a loss on extinguishment of debt incurred in connection with the refinancing of our Credit Agreement.
(g) Reflects fair value adjustment relating to the contingent consideration associated with our acquisition of NewCourtland.
(3)   Reflects our sale of           shares of common stock in this offering at an assumed initial public offering price of $      per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us and reflecting the use of proceeds as described under “Use of Proceeds.”
(4)   A $1.00 increase or decrease in the assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease each of cash and cash equivalents, working capital, total assets and total stockholders’ equity on an as adjusted basis by approximately $      million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us.
Each 1,000,000 increase or decrease in the number of shares offered would increase or decrease each of cash and cash equivalents, working capital, total assets and total stockholders’ equity on an as adjusted basis by approximately $      million, assuming that the assumed initial public offering price per share for the offering remains at $      , which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us.
(5)   We define working capital as current assets less current liabilities.
 
26

 
Risk factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes thereto, 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. In that event, the price of our common stock could decline, and you could lose all or part of your investment. The ongoing COVID-19 pandemic may also have the effect of heightening many of the risks described in this “Risk Factors” section.
Because of the following factors, as well as other factors affecting our businesses, financial condition, operating results and prospects, past financial performance should not be considered a reliable indicator of future performance, and investors should not rely on historical trends to anticipate trends or results in the future.
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.
Approximately 99.2% and 99.5% of our revenue for each of the years ended June 30, 2019 and 2020, respectively, and approximately 99.5% of our revenue for the six months ended December 31, 2019 and 2020 is derived from capitation agreements with government payors in which we receive fixed PMPM fees. While there are variations specific to each agreement, we generally contract with government payors to receive a fixed per member per month fee to provide or manage all healthcare services a participant may require while assuming financial responsibility for the totality of our participants’ healthcare expenses. This type of contract is often referred to as an “at-risk” or a “capitation” contract. 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 medical costs and expenses exceed the underlying capitation payment received, we will not be able to correspondingly increase our capitated payment and we could suffer losses with respect to such agreements.
Changes in our anticipated ratio of medical expense to revenue can significantly impact our financial results. Accordingly, the failure to adequately predict and control medical costs and expenses and to make reasonable estimates and maintain adequate accruals for incurred but not reported claims, could have a material adverse effect on our business, results of operations, financial condition and cash flows. Additionally, the Medicare and Medicaid expenses of our participants may be outside of our control in the event that participants take certain actions that increase such expenses, such as emergency room visits or preventable hospital admissions.
Historically, our medical costs and expenses as a percentage of revenue have fluctuated. Factors that may cause medical expenses to exceed estimates include:

the health status of participants requiring higher levels of care, such as nursing home care or higher incidents of hospitalization;

higher than expected utilization of new or existing healthcare services;

more frequent catastrophic medical cases (e.g. transplants);

an increase in the cost of healthcare services and supplies, whether as a result of inflation, wage increases, purchases of vaccines and personal protective equipment (“PPE”) as a result of the COVID-19 pandemic or otherwise;

changes to mandated benefits or other changes in healthcare laws, regulations and practices;
 
27

 

increased costs attributable to specialist physicians, hospitals and ancillary providers;

changes in the demographics of our participants and medical trends;

contractual or claims disputes with providers, hospitals or other service providers;

the occurrence of catastrophes, major epidemics or pandemics or acts of terrorism; and

the reduction of government payor payments.
Our revenues and operations are dependent upon a limited number of government payors, particularly Medicare and Medicaid.
Our operations are dependent on a limited number of government payors, particularly Medicare and Medicaid, with whom we directly contract to provide services to participants. We generally manage our contracts on a state by state basis, entering into a separate contract in each state. When aggregating the revenue associated with Medicare and Medicaid by state, Colorado, California and Virginia accounted for a total of approximately 81.5% and 81.8% of our capitation revenue for the year ended June 30, 2020 and the six months ended December 31, 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. In the ordinary course of business, we engage in active discussions and renegotiations with government payors in respect of the services we provide and the terms of our agreements. As the states respond to market dynamics and financial pressures, and as government payors make strategic budgetary decisions in respect of the programs in which they participate, certain government payors may seek to renegotiate or terminate their agreements with us. Any reduction in the budgetary appropriations for our services, whether as a result of fiscal constraints due to recession, emergency situations such as the COVID-19 pandemic, changes in policy or otherwise, could result in a reduction in our capitated fee payments and possibly loss of contracts. These discussions could result in reductions to the fees and changes to the scope of services contemplated by our original contracts and consequently could negatively impact our revenues, business and prospects. See “—A pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide, including the ongoing outbreak of COVID-19, could adversely affect our business” and “—We conduct a significant percentage of our operations in the State of Colorado and, as a result, we are particularly susceptible to any reduction in budget appropriations for our services or any other adverse developments in that state.”
Because we rely on a limited number of government-funded agencies, namely CMS and state Medicaid agencies, for a significant portion of our revenues, we depend on federal funding, as well as the financial condition of the states in which we operate, and each state’s commitment to its participation in the PACE program. Government-funded healthcare programs in the states in which we operate face a number of risks, including higher than expected health care costs and lack of predictability of tax basis and budget needs. If the financial condition of the states in which we operate declines, our credit risk could increase.
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 99.2% and 99.5% of our revenue for the years ended June 30, 2019 and 2020, and approximately 99.5% of our revenue for the six months ended December 31, 2019 and 2020. As a result, our operations are dependent on government funding levels for PACE programs. Any changes that limit or reduce general PACE funding, such as reductions in or limitations of reimbursement amounts or rates under programs, reductions in funding of programs, expansion of benefits, services or treatments under programs without adequate funding, could have a material adverse effect on our business, results of operations, financial condition and cash flows.
The PACE programs and their respective reimbursement rates, payment structures and rules are subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive
 
28

 
adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the PACE rates at which we are compensated for our services. Budget pressures can lead federal and state governments to reduce or place limits on reimbursement rates and payment structures under PACE. Implementation of these and other types of measures has in the past and could in the future result in substantial reductions in our revenue and operating margins. The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and the Consolidated Appropriations Act, 2021, temporarily suspended the Medicare sequestration payment adjustment from May 1, 2020 through December 31, 2020, which would have otherwise reduced payments to PACE programs by 2%, but extended sequestration through 2030. We cannot predict what other deficit reduction, other payment reduction or budget enforcement initiatives may be proposed by Congress, whether Congress will attempt to restructure or suspend sequestration or the impact sequestration, other payment reductions or budget enforcement initiatives may have on our business.
Each year, CMS establishes the Medicare PACE benchmark payment rates by county for the following calendar year. Because a substantial portion of our revenue is through the PACE program, any negative changes to the PACE benchmark payment rates could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, our PACE revenues may become volatile in the future, which could have a material adverse impact on our business, results of operations, financial condition and cash flows.
Reductions in reimbursement rates could have a material, adverse effect on our financial condition and results of operations or even result in rates that are insufficient to cover our operating expenses. For example, our external provider costs are driven by rates set by Medicare and Medicaid, which are outside of our control and may be negotiated in a manner unfavorable to us. Additionally, any delay or default by state governments in funding our capitated payments could materially and adversely affect our business, financial condition and results of operations.
Recent legislative, judicial and executive efforts to enact further healthcare reform legislation have caused the future state of reforms under the Affordable Care Act (the “ACA”) and many core aspects of the current U.S. healthcare system to be unclear. While specific changes and their timing are not yet apparent, enacted reforms and future legislative, regulatory, judicial, or executive changes, particularly any changes to the PACE program, could have a material adverse effect on our business, results of operations, financial condition and cash flows.
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.
The claims and encounter records that we submit to government payors impact data that support the Medicare RAF scores attributable to participants. These RAF scores determine the payment we are entitled for the provision of medical care to such participants. The data submitted to CMS is based on diagnosis codes and medical charts that our employed, contracted, and noncontracted providers identify, record and prepare. CMS may periodically audit PACE organizations’ risk adjustment submissions. The submission of inaccurate, incomplete or erroneous data could result in inaccurate revenue and risk adjustment payments, which may be subject to correction or retroactive adjustment in later periods. This corrected or adjusted information may be reflected in financial statements for periods subsequent to the period in which the revenue was recorded. We might also need to refund a portion of the revenue that we received, which refund, depending on its magnitude, could have a material adverse effect on our business, results of operations, financial condition and cash flows. 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. From time to time, we may experience reconciliation issues as government payors modify or adopt new systems which may be reflected as provision for bad debt in our financial statements.
 
29

 
If CMS seeks repayment from us for payment adjustments as a result of its audits, we could also be subject to liability for penalties for inaccurate or unsupportable RAF scores provided by us or our providers. In addition, we could be liable for penalties to the federal government under the False Claims Act (the “FCA”) that range from $5,500 to $11,000 (periodically adjusted for inflation) for each false claim, plus up to three times the amount of damages caused by each false claim, which can be as much as the amounts received directly or indirectly from the government for each such false claim. Most recently, on June 19,2020, the Department of Justice issued a final rule announcing adjustments to FCA penalties, under which the per claim penalty range increases to a range from $11,665 to $23,331 for penalties assessed after June 19, 2020, so long as the underlying conduct occurred after November 2, 2015. There is a high potential for substantial penalties in connection with any alleged FCA violations.
Elements of the risk adjustment mechanism continue to be challenged, reevaluated, and revised by the U.S. Department of Justice, the HHS Office of the Inspector General (“HHS OIG”), and CMS. For example, CMS has indicated that payment adjustments will not be limited to errors identified in the sampled population, but that the error rate identified in the sample may also be extrapolated to all risk adjusted payments made under the PACE contract being audited. CMS has described its audit process as plan-year specific and stated that it will not extrapolate audit results for plan years prior to 2011. Because CMS has not stated otherwise, there is a risk that payment adjustments made as a result of one plan year’s audit would be extrapolated to prior plan years after 2011. In addition, proposed regulations relating to the Risk Adjustment Data Validation Audit (“RADV audit”) and extrapolation methodology have been outstanding since 2018 and may result in additional changes in recoupments arising from RADV audits.
There can be no assurance that a PACE organization will not be randomly selected or targeted for review by CMS or that the outcome of such a review will not result in a material adjustment in our revenue and profitability, even if the information we submitted to CMS is accurate and supportable. Substantial changes in the risk adjustment mechanism, including changes that result from enforcement or audit actions, could materially affect our capitated reimbursement.
Non-renewal or termination of capitation agreements with government payors could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Under most of our capitation agreements with government payors, the state is generally permitted to adjust certain terms of the agreements from time to time. If a government payor exercises its right to adjust certain terms of the agreements, we are generally allowed a period of time to object to such adjustment. If we enter into capitation contracts with unfavorable economic terms, or a capitation contract is adjusted to include unfavorable terms, we could suffer losses with respect to such contract. In addition, some states in which we operate undergo periodic reconciliations with respect to enrollments that present a risk to our business, results of operations, financial condition and cash flows.
Our contracts with government payors may be terminated to the extent that state or federal funds are not appropriated at sufficient levels to fund our contracts or PACE programs in general. Certain of our contracts are terminable immediately upon the occurrence of certain events. Government payors may terminate, suspend or cancel our contracts, in whole or in part, for cause in the event of our noncompliance with the terms, conditions or responsibilities under the contracts, or if we are debarred or suspended from providing services by state or federal government authorities. CMS may also impose sanctions for noncompliance with regulatory or contractual requirements, including the suspension of enrollment of participants, the occurrence of which would adversely affect our operating results and our ability to pursue our growth strategies. If any of our contracts with government payors are terminated or if the government payors seek to renegotiate their contract rates with us, we may suffer a significant loss of revenue, which may adversely affect our operating results.
State and federal efforts to reduce healthcare spending could adversely affect our financial condition and results of operations.
Most of our participants are dually-eligible, meaning they are qualified for coverage under both Medicare and Medicaid when enrolled in our PACE program, and nearly all our revenue is derived from government
 
30

 
payors. Medicaid is a joint federal and state funded program for healthcare services for the low income as well as certain higher-income individuals who qualify for nursing home level of care. Under broad federal criteria, states establish rules for eligibility, services and payment. PACE programs are administered at the state level and are financed by both state and federal funds. Medicaid spending has increased rapidly in recent years, becoming a significant component of state budgets. This, combined with slower state revenue growth, has led both the federal government and many states to institute measures aimed at controlling the growth of Medicaid spending, and in some instances reducing aggregate Medicaid spending. Due to budget constraints, including those resulting from the COVID-19 pandemic, we may experience negative Medicaid capitated rate payment pressure from certain states where we operate, such as Colorado, where we conduct a significant percentage of our operations.
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.
A pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide, including the ongoing outbreak of COVID-19, could adversely affect our business.
The severity, magnitude and duration of the current COVID-19 pandemic is uncertain and rapidly changing. 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. Additionally, any future pandemic, epidemic or outbreak of an infectious disease may adversely affect our business if one of the geographies we serve is affected by the outbreak, particularly at the onset of any such outbreak before response protocols have been developed. Specifically, if our participants fall ill due to an outbreak, we may experience a high level of unexpected deaths, increased costs, and other effects, including a loss of revenue, negative publicity, litigation and inquiries from government regulators.
Adverse market conditions resulting from the spread of the virus that causes COVID-19 could materially and adversely affect our business and the value of our common stock. Numerous state and local jurisdictions, including all markets where we operate, have imposed, 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 and temporarily 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. Although our pivot to telehealth services has been a useful tool for providing remote care during the COVID-19 pandemic, the COVID-19 pandemic has limited our ability to provide in-person care. 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 lack access
 
31

 
to telehealth devices, such as cell phones and/or computers, or 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 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. Further, as a result of the COVID-19 pandemic, we may experience slowed growth or a decline in new participants.
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. Medicare pays capitation using a “risk adjustment model,” which compensates providers based on the health status (acuity) of each individual participant. Participants with higher RAF scores necessitate larger capitated payments, and those with lower RAF scores necessitate smaller capitated payments. Medicare requires that a participant’s health issues be documented annually regardless of the permanence of the underlying causes. Historically, this documentation was required to be completed during an in-person visit with a participant, but CMS is now allowing documentation of conditions identified during qualifying telehealth visits with participants. However, given the disruption caused by the COVID-19 pandemic and the limitations relating to assessing the health needs of our participants through telehealth services described above, it is unclear whether we will be able to document the health conditions of our participants as comprehensively as we have historically, which may adversely impact our revenue in future periods. See “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, the CARES Act was signed into law. The CARES Act provides for $100.0 billion in funding for healthcare providers, including hospitals on the front lines of the COVID-19 pandemic, and subsequent COVID-19 economic relief legislation authorized additional funding to be distributed to healthcare providers. The state of Pennsylvania enacted Act 24 of 2020 (“Act 24”), which allocates $10.0 million in federal CARES Act funding to Managed Long Term Care Organizations to cover COVID-19 related costs. Our Pennsylvania centers were granted $1.0 million of funding from Act 24. As of June 30, 2020, we recognized $0.7 million of such funds and for the six months ended December 31, 2020, we recognized the remaining funds of $0.3 million. As a result of receiving this funding, we may be subject to audits and oversight by the federal government and Pennsylvania regulators, and there is no guarantee that the funds we received could not be subject to recoupment. Recipients are not required to repay these funds, provided that they attest to and comply with certain terms and conditions, including not using funds received to reimburse expenses or losses that other sources are obligated to reimburse, as well as certain audit and reporting requirements.
As of June 30, 2020, we incurred $3.5 million of COVID-19 related costs, and for the six months ended December 31, 2020, we incurred an additional $2.4 million of COVID-19 related costs. We expect our COVID-19 related expenses to continue to increase, 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; 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 are uncertain and cannot be predicted. 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.
To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of amplifying many of the other risks described in this “Risk Factors” section, including but not
 
32

 
limited to those relating to our ability to raise additional capital or generate sufficient cash flows necessary to fulfill our obligations under our existing indebtedness or to expand our operations.
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.
We 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 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.
 
33

 
Our growth strategy involves a number of risks and uncertainties, including that:

we may not be able to successfully enter into contracts with government payors and/or other healthcare providers on terms favorable to us or at all. In addition, we compete for government payor relationships with other potential players, some of whom may have greater resources than we do. This competition may intensify due to the ongoing consolidation in the healthcare industry, which may increase our costs to pursue such opportunities;

we may not be able to recruit or retain a sufficient number of new participants to execute our growth strategy, and we may incur substantial costs to recruit new participants and we may be unable to recruit a sufficient number of new participants to offset those costs;

we may not be able to identify optimal target markets for our de novo centers, have difficulty entering into our prioritized list of markets, or the de novo centers we build may require more capital than expected and not yield anticipated returns;

we may not be able to hire sufficient numbers of physicians and other clinical staff, particularly on account of heightened demand for healthcare platforms on account of the COVID-19 pandemic;

when expanding our business into new states, we may be required to comply with laws and regulations that may differ from states in which we currently operate; and

we may have difficulty identifying appropriate acquisition targets, or make investments in acquisitions that we are unable to effectively integrate, involve associated risks or liabilities that we are unable to uncover in advance, or that require greater resources than anticipated.
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 any reduction in budget appropriations for our services or any other adverse developments in that state.
For the fiscal year ended June 30, 2020, 29.4% of our total revenues were derived from contracts with government agencies in the State of Colorado. Accordingly, any reduction in Colorado’s budgetary appropriations for our services, whether as a result of fiscal constraints due to recession, emergency situations such as the COVID-19 pandemic, changes in policy or otherwise, could result in a reduction in our capitated fee payments and possibly the loss of contracts. We recently completed negotiations relating to the capitated fee rates with government payors in the State of Colorado, which resulted in a low-single digit
 
34

 
rate decrease applicable for the fiscal year ending June 30, 2021. This rate decrease was the result of COVID‑ 19-related budget pressure borne by the State of Colorado.
If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service and participant satisfaction or adequately address competitive challenges.
We have experienced, and may continue to experience, rapid growth and organizational change, which has placed, and may continue to place, significant demands on our management and our operational and financial resources. For example, we completed our conversion from a not-for-profit to a for-profit organization in 2016. Additionally, our organizational structure may become more complex as we expand our operational, financial and management controls, as well as our reporting systems and procedures as a public company. We may require significant capital expenditures and the allocation of valuable management resources to grow and evolve in these areas. We must effectively increase our headcount, ensure our personnel have the necessary licenses and 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 successful manner. If we fail to effectively manage our anticipated 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 quality of our services may suffer, which could negatively affect our brand and reputation, harm 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 is important that we continue to maintain high levels of patient service and satisfaction. As our participant base continues to grow, we will need to expand our services and personnel to provide personalized participant care. If we are not able to continue to provide high quality healthcare that meets PACE requirements and generates high levels of participant satisfaction, our reputation, as well as our business, results of operations and financial condition would be adversely affected.
The healthcare industry is highly competitive.
We compete directly with national, regional and local providers of healthcare for participants and clinical providers. We also compete directly with payors and other alternate managed care programs for participants. There are many other companies and individuals currently providing healthcare services, many of which have been in business longer and/or have substantially more resources. Given the regulatory environment, there may be high barriers to entry for PACE providers; however, since there are relatively modest capital expenditures required for providing healthcare services, there are less substantial financial barriers to entry in the healthcare industry generally. Other companies could enter the healthcare industry in the future and divert some or all of our business. Our ability to compete successfully varies from location to location and depends on a number of factors, including the number of payors who run competitive programs in the local market, our local reputation for quality participant care, the commitment and expertise of our medical staff or contracted health care providers, our local service offerings and community programs, the cost of care in each locality, and the physical appearance, location and condition of our centers. If we are unable to attract participants to our centers our revenue and profitability will be adversely affected. Some of our competitors may have greater brand recognition and be more established in their respective communities than we are, and may have greater financial and other resources than we have. Further, our current or potential competitors may be acquired by third parties with greater available resources. Competing providers may also offer different programs or services than we do, which, combined with the foregoing factors, may result in our competitors being more attractive to our current participants, potential participants and referral sources. Furthermore, while we budget for routine capital expenditures at our centers to keep them competitive in their respective markets, to the extent that competitive forces cause those expenditures to increase in the future, our financial condition may be negatively affected. In addition, our contracts with government payors are not exclusive for PACE programs in California, and competitors in California could seek to establish contracts with the state Medicaid agency and CMS to serve PACE eligibles in our service areas. For example, the service area for our Sacramento, California center, opened July 1, 2020, overlaps with
 
35

 
an existing PACE program in the region. Additionally, as we expand into new geographies, we may encounter competitors with stronger local community relationships or brand recognition, which could give those competitors an advantage in attracting new participants. Individual physicians, physician groups and companies in other healthcare industry segments, some of which have greater financial, marketing and staffing resources, may become competitors in providing health care services, and this competition may have a material adverse effect on our business operations and financial position.
Our presence is currently limited to Colorado, California, New Mexico, Pennsylvania and Virginia, and we may not be able to successfully establish a presence in new geographic markets.
We currently operate in Colorado, California, New Mexico, Pennsylvania and Virginia, and we recently announced plans to begin providing our services in Florida and Kentucky. For the fiscal year ended June 30, 2020, a majority of our revenue was driven by our businesses in Colorado. As a result, our exposure to many of the risks described herein are not mitigated by a diversification of geographic focus. To continue to expand our operations to other regions of the United States, we will have to devote resources to identifying and exploring such perceived opportunities. Thereafter, we will have to, among other things, recruit and retain qualified personnel, develop new centers and establish new relationships or contracts with physicians and other healthcare and services providers. In addition, we will be required to comply with laws and regulations of states that may differ from the ones in which we currently operate, and could 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 could compromise sensitive information related to our business or our participants, or prevent us from accessing critical information and expose us to liability, which 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, can 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 or acquired without authorization or to be made publicly available. 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
 
36

 
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 implement certain administrative, physical and technological safeguards to address these risks, such as by requiring contractors and other third-party service providers who handle this PHI/PII and other sensitive data and information for us to enter into agreements that contractually obligate them to use reasonable efforts to safeguard such PHI/PII and other sensitive data and information. 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 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. Our information technology networks and systems used in our business may experience an increase in attempted cyber-attacks, seeking to take advantage of shifts to employees working remotely using their household or personal internet networks and to leverage fears promulgated by the COVID-19 pandemic. 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, 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, potential increases in insurance premiums, resulting in increased costs or loss of revenue. If we are unable to prevent or mitigate such security breaches, security incidents or privacy violations or to implement satisfactory remedial measures, 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
 
37

 
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, the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (the “HITECH Act”), and their implementing regulations (collectively, “HIPAA”), the California Consumer Privacy Act (“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.
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, 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.
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.
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. The number of claims of
 
38

 
this nature may increase on account of the impact of the COVID-19 pandemic. 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 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.
 
39

 
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. We typically expect to see 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 approximately half of our centers. Our leases are typically on terms ranging from four to 15 years, with multiple extension options. 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.
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
 
40

 
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 this offering could lead to disparities of wealth among our employees, which could adversely impact relations among employees and our culture in general. Our anticipated headcount growth and our transition from a private company to a public company may result in a change to our 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.
Our operations are dependent on the efforts, abilities and experience of our physicians and clinical personnel. We compete with other healthcare providers, primarily hospitals and other facilities, in attracting physicians, nurses and medical staff to support our centers, and recruiting and retaining qualified management and support personnel responsible for the daily operations of each of our centers. In some markets, the lack of
 
41

 
availability of clinical personnel, such as nurses and mental health professionals, has become a significant operating issue facing all healthcare providers, which situation has been further exacerbated by the COVID-19 pandemic. This shortage may require us to continue to enhance wages and benefits to recruit and retain qualified personnel or to contract for more expensive temporary personnel. For the years ended June 30, 2019 and 2020 and the six months ended December 31, 2019 and 2020, our total center-level employee costs represented 20.7% and 19.1%, respectively, and 19.7% and 18.0%, respectively, of our revenue. We also depend on the available labor pool of semi-skilled and unskilled workers in each of the markets in which we operate.
If our labor costs increase, we may not be able to offset these increased costs. Because the vast majority of our revenue consists of prospective monthly capitated, or fixed, payments per participant, our ability to pass along increased labor costs is limited. In particular, if labor costs rise at an annual rate greater than our net annual consumer price index basket update from Medicare, our results of operations and cash flows will likely be adversely affected. Any union activity at our centers that may occur in the future could contribute to increased labor costs. Certain proposed changes in federal labor laws and the National Labor Relations Board’s modification of its election procedures could increase the likelihood of employee unionization attempts. Although none of our employees are currently represented by a collective bargaining agreement, to the extent a significant portion of our employee base unionizes, it is possible our labor costs could increase materially. Our failure to recruit and retain or contract with qualified management and medical personnel, or to control our labor costs, could have a material adverse effect on our business, prospects, results of operations and financial condition.
Negative publicity regarding the managed healthcare industry generally could adversely affect our results of operations or business.
Negative publicity regarding the managed healthcare industry generally, or the PACE program in particular, may result in increased regulation and legislative review of industry practices that further increase our costs of doing business and adversely affect our results of operations or business by:

requiring us to change our integrated healthcare services model;

increasing the regulatory, including compliance, burdens under which we operate, which, in turn, may negatively impact the manner in which we provide services and increase our costs of providing services;

adversely affecting our ability to market our products or services through the imposition of further regulatory restrictions or guidelines regarding the manner in which plans and providers market to PACE enrollees; or

adversely affecting our ability to attract and retain participants.
Our centers may be negatively impacted by pandemics, such as the COVID-19 pandemic, weather and other factors beyond our control.
Our results of operations may be adversely impacted by adverse conditions affecting our centers, including severe weather events such as tornadoes, hurricanes and widespread winter storms, earthquakes, public health concerns such as contagious disease outbreaks, epidemics and pandemics, such as the COVID-19 pandemic, violence or threats of violence or other factors beyond our control that cause disruption in provision of participant services, 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, 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.
 
42

 
Risks related to regulation
If we fail to adhere to all of the complex government laws and regulations that apply to our business, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and stock price.
Our operations are subject to extensive federal, state and local government laws and regulations, such as:

Medicare, Medicaid, and PACE statutes and regulations;

federal and state anti-kickback laws, which prohibit, among other things, the knowing and willful offer, payment, solicitation or receipt of any bribe, kickback or remuneration, whether in cash or in kind, for referring an individual, in return for ordering, leasing, purchasing or recommending or arranging for or to induce the referral of an individual or the ordering, purchasing or leasing of items or services covered, in whole or in part, by federal healthcare programs, such as Medicare and Medicaid, or by any payor;

the federal Ethics in Patient Referral Act (“Stark Law”), which, subject to limited exceptions, prohibits physicians from referring Medicare or Medicaid patients to an entity for the provision of certain “designated health services” if the physician or a member of such physician’s immediate family has a direct or indirect financial relationship (including an ownership interest or a compensation arrangement) with an entity, and prohibit the entity from billing Medicare or Medicaid for such “designated health services”;

state self-referral prohibition statutes, which generally follow the federal self-referral prohibition statute, but may apply to a smaller subset of financial relationships with physicians or a different set of services;

the federal civil and criminal false claims laws, including the FCA and associated regulations, which impose civil and criminal penalties through governmental, whistleblower or qui tam actions, on individuals or entities for, among other things, knowingly submitting false or fraudulent claims for payment to the government or knowingly making, or causing to be made, a false statement in order to have a claim paid. When an entity is determined to have violated the FCA, the government may impose civil fines and penalties ranging from $11,665 to $23,331 for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs;

state false claims laws, which generally follow the FCA and apply to claims submitted to state healthcare programs, and state health insurance fraud laws that impose penalties for the submission of false or fraudulent claims by providers to commercial insurers or other payors of healthcare services;

the federal Civil Monetary Penalties Statute and associated regulations, which impose civil fines for, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows or should know such remuneration is likely to influence the beneficiary’s selection of a particular provider or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies, and which authorize assessments and program exclusion for various forms of fraud and abuse involving the Medicare and Medicaid programs;

the federal health care fraud statute and its implementing regulations, which created federal criminal laws that prohibit, among other things, executing or attempting to execute a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

federal and state laws regarding the Processing, protection, retention or destruction of health information or PHI/PII (e.g., HIPAA, CCPA) and the storage, handling, shipment, disposal and/or dispensing of pharmaceuticals and blood products and other biological materials, and many other applicable state and federal laws and requirements;

state and federal statutes and regulations that govern workplace health and safety;
 
43

 

federal and state laws and policies that require healthcare providers to maintain licensure, certification or accreditation to provide services to patients or to enroll and participate in the Medicaid programs, to report certain changes in their operations to the agencies that administer these programs and, in some cases, to re-enroll in these programs when changes in direct or indirect ownership occur;

federal and state scope of practice and other laws pertaining to the provision of services by qualified health care providers; and

federal and state laws pertaining to the provision of services by nurse practitioners and physician assistants in certain settings, including physician supervision of those services.
In addition to the above, federal and state manuals, guidance, coverage policies, and PACE contracts also impose complex and extensive requirements upon our operations. Moreover, the various laws, regulations and agency guidance that apply to our operations are often subject to varying interpretations, and additional laws and regulations potentially affecting healthcare organizations continue to be promulgated. A violation or departure from any of the legal requirements implicated by our business may result in, among other things, government audits, decreased payment rates, significant fines and penalties, the potential loss of licensure or certification, recoupment efforts, voluntary repayments, exclusion from governmental healthcare programs, corrective action plans, monitoring and reputational harm. These legal requirements are civil, criminal and administrative in nature depending on the law or requirement.
We endeavor to comply with all legal requirements. We further endeavor to structure all of our relationships with physicians, providers, and other third parties to comply with state and federal anti-kickback and physician referral laws and other applicable healthcare laws. We utilize considerable resources to monitor laws and regulations and implement necessary changes. However, the laws and regulations in these areas are complex, changing and often subject to varying interpretations, and any failure to satisfy applicable laws and regulations could have a material adverse impact on our business, results of operations, financial condition, cash flows and reputation. We may face penalties, including penalties under the FCA, for failure to report and return government overpayments within 60 days of when the overpayment is identified and quantified. Additionally, the federal government has used the FCA to prosecute a wide variety of alleged false claims and fraud allegedly perpetrated against Medicare, Medicaid and other federally funded health care programs. Moreover, amendments to the federal Anti-Kickback Statute in the ACA make claims tainted by Anti-Kickback Statute violations subject to liability under the FCA, including qui tam or whistleblower suits. Given the high volume of claims processed by our various operating units, the potential is high for substantial penalties in connection with any alleged FCA violations.
In addition to the provisions of the FCA, the federal government can use several criminal statutes to prosecute persons who are alleged to have submitted false or fraudulent claims for payment to the federal government.
If any of our operations are found to violate these or other government laws or regulations, we could suffer severe consequences that would have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and stock price, including:

suspension, termination or exclusion of our participation in government payment programs;

refunds of amounts received in violation of law or applicable payment program requirements dating back to the applicable statute of limitation periods;

loss of our licenses required to operate healthcare facilities, complete certain limited lab testing 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 Stark Law, Anti-Kickback Statute, Civil Monetary Penalties Statute and FCA, or other failures to meet regulatory requirements;
 
44

 

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, and the Privacy Act of 1974;

mandated changes to our practices or procedures that significantly increase operating expenses;

imposition of and compliance with corporate integrity agreements, monitoring agreements or corrective action plans that could subject us to ongoing audits and reporting requirements as well as increased scrutiny of our billing and 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, real estate leases and consulting agreements; and

harm to our reputation, which could negatively impact our business relationships, affect our ability to attract and retain participants and healthcare professionals, affect our ability to obtain financing and decrease access to new business opportunities, among other things.
We are, from time to time, and may in the future be, a party to various lawsuits, demands, claims, governmental investigations, and audits (including investigations or other actions resulting from our obligation to self-report suspected violations of law) and other legal matters. Responding to subpoenas, requests for information, investigations and other lawsuits, claims and legal proceedings as well as defending ourselves in such matters will require management’s attention and cause us to incur significant legal expense. Negative findings or terms and conditions that we might agree to accept as part of a negotiated resolution of such matters could result in, among other things, substantial financial penalties or awards against us, substantial payments made by us, harm to our reputation, required changes to our business practices, exclusion from future participation in the Medicare, Medicaid and other healthcare programs and, in certain cases, criminal penalties, any of which could have a material adverse effect on our business. It is possible that criminal proceedings may be initiated against us and/or individuals in our business in connection with investigations by the federal government. The results of such lawsuits cannot be predicted and because qui tam suits are filed under seal, we could be subject to suits of which we are not aware.
We, our healthcare professionals and the facilities in which we operate are subject to various federal, state and local licensing, certification and other laws and regulations, relating to, among other things, the quality of medical care, equipment, privacy of health information, physician relationships, personnel and operating policies and procedures. Failure to comply with these licensing and certification laws, regulations and standards could result in cessation of our services, prior payments by government payors being subject to recoupment, corrective action plans, the suspension of participant enrollment or requirements to make significant changes to our operations and can give rise to civil or, in extreme cases, criminal penalties. We routinely take the steps we believe are necessary to retain or obtain all requisite licensure and operating authorities. While we endeavor to comply with federal, state and local licensing and certification laws and regulations and standards as we interpret them, the laws and regulations in these areas are complex, changing and often subject to varying interpretations. Any failure to satisfy applicable laws and regulations could have a material adverse impact on our business, results of operations, financial condition, cash flows and reputation.
If we are unable to effectively adapt to changes in the healthcare industry, including changes to laws and regulations regarding or affecting U.S. healthcare reform, our business may be harmed.
Due to the importance of the healthcare industry in the lives of all Americans, federal, state, and local legislative bodies frequently pass legislation and administrative agencies promulgate regulations relating to healthcare reform or that affect the healthcare industry. As has been the trend in recent years, it is reasonable to assume that there will continue to be increased government oversight and regulation of the healthcare
 
45

 
industry in the future. We cannot assure our stockholders as to the ultimate content, timing or effect of any new healthcare legislation or regulations, nor is it possible at this time to estimate the impact of potential new legislation or regulations on our business.
Since nearly all of our revenue is derived from government payors, we are always subject to regulatory changes. For example, as a result of the 2020 U.S. presidential and congressional elections, there are renewed and reinvigorated calls for healthcare reform, which could cause significant uncertainty in the U.S. healthcare market. We cannot predict with certainty what impact any federal and state healthcare reforms will have on us, but such changes could impose new and/or more stringent regulatory requirements on our activities or result in reduced capitated payments, any of which could adversely affect our business, financial condition, and results of operations.
It is possible that future legislation enacted by Congress or state legislatures, or regulations promulgated by regulatory authorities at the federal or state level, could adversely affect our business or could change the operating environment of our community centers. It is possible that the changes to Medicare, Medicaid or other governmental healthcare program reimbursement policies may serve as precedent to possible changes in other government payors’ programs in a manner that adversely impacts the capitation payment arrangements with us. Similarly, changes in private payor reimbursement policies could lead to adverse changes in Medicare, Medicaid and other governmental healthcare programs, which could have a material adverse effect on our business, financial condition and results of operations.
While we believe that we have structured our agreements and operations in material compliance with applicable healthcare laws and regulations, there can be no assurance that regulators will agree with our approach or that we will be able to successfully address changes in the current legislative and regulatory environment. We believe that our business operations materially comply with applicable healthcare laws and regulations. However, some of the healthcare laws and regulations applicable to us are subject to limited or evolving interpretations, and a review of our business or operations by a court, law enforcement or a regulatory authority might result in a determination that could have a material adverse effect on us. Furthermore, the healthcare laws and regulations applicable to us may be amended or interpreted in a manner that could have a material adverse effect on our business, prospects, results of operations and financial condition.
Laws regulating the corporate practice of medicine could restrict the manner in which we are permitted to conduct our business, and the failure to comply with such laws could subject us to penalties or require a restructuring of our business.
Some of the states in which we currently operate have laws that prohibit business entities, such as us, from practicing medicine, employing physicians to practice medicine, exercising control over medical decisions by physicians or engaging in certain arrangements, such as fee-splitting, with physicians (such activities generally referred to as the “corporate practice of medicine”). In some states these prohibitions are expressly stated in a statute or regulation, while in other states the prohibition is a matter of judicial or regulatory interpretation. For example, in Pennsylvania, the statutes that pertain to the employment of health care practitioners by health care facilities do not explicitly include a PACE organization in the list of health care facilities by which a health care practitioner may be employed. Other states in which we may operate in the future may also generally prohibit the corporate practice of medicine. While we endeavor to comply with state corporate practice of medicine laws and regulations as we interpret them, the laws and regulations in these areas are complex, changing, and often subject to varying interpretations. The interpretation and enforcement of these laws vary significantly from state to state.
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 to 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.
 
46

 
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. State laws or regulations prohibiting the corporate practice of medicine may contemplate the employment of physicians by certain types of entities, but may not provide a specific exemption for PACE organizations. State laws and regulations are subject to change. Regulatory authorities and other parties may assert that our employment of physicians in some states means that we are engaged in the prohibited corporate practice of medicine. If this were to occur, we could be subject to civil and/or criminal penalties, our agreements with physicians could be found legally invalid and unenforceable (in whole or in part) or we could be required to restructure our arrangements with respect to the physicians that care for our participants, in each case in one or more of the jurisdictions in which we operate. Any of these outcomes may have a material adverse effect on our business, results of operations, financial condition, cash flows and reputation.
Our use, disclosure, and other Processing of PHI/PII is subject to HIPAA, CCPA and other federal and state privacy and security regulations, and our failure to comply with those laws and regulations or to adequately secure the information we hold could result in significant liability or reputational harm and, in turn, a material adverse effect on our participant base and revenue.
Numerous state and federal laws and regulations govern the collection, dissemination, use, disclosure, destruction, retention, privacy, confidentiality, security, availability, integrity and other Processing of PHI/PII. These laws and regulations include HIPAA. HIPAA establishes a set of national privacy and security standards for the protection of PHI by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services.
HIPAA requires covered entities, such as ourselves, and their business associates to develop and maintain policies and procedures with respect to PHI that is used or disclosed, including the adoption of administrative, physical and technical safeguards to protect such information. HIPAA also implemented the use of standard transaction code sets and standard identifiers that covered entities must use when submitting or receiving certain electronic healthcare transactions, including activities associated with the billing and collection of healthcare claims.
HIPAA imposes mandatory penalties for certain violations. Under a notice of enforcement discretion issued by the Trump Administration, penalties for violations of HIPAA and its implementing regulations start at $100 (not adjusted for inflation) per violation and are not to exceed $50,000 (not adjusted for inflation) per violation, subject to a cap of $1.5 million (not adjusted for inflation) for violations of the same standard in a single calendar year. However, a single breach incident can result in violations of multiple standards. It is not clear if President-Elect Biden’s Administration will continue to use these annual penalty limits or if the incoming Administration will revert to a $1.5 million cap (not adjusted for inflation) for each category of HIPAA violation. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts may award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI.
In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities and business associates for compliance with the HIPAA Privacy and Security Standards. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty fine paid by the violator.
HIPAA further requires that individuals be notified of any unauthorized acquisition, access, use or disclosure of their unsecured PHI that compromises the privacy or security of such information, with certain exceptions related to unintentional or inadvertent use or disclosure by employees or authorized individuals. HIPAA specifies that such notifications must be made “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach.” If a breach affects 500 individuals or more, it must be
 
47

 
reported to HHS without unreasonable delay, and in no case later than 60 calendar days after discovery, and HHS will automatically investigate the breach and post the name of the entity on its public breach portal. If a breach involves fewer than 500 people, the covered entity 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.
In addition to HIPAA, numerous other federal and state laws and regulations protect the confidentiality, privacy, availability, integrity and security of PHI/PII. State statutes and regulations vary from state to state, and these laws and regulations in many cases are more restrictive than, and may not be preempted by, HIPAA and its implementing rules. These laws and regulations are often uncertain, contradictory, and subject to changing or differing interpretations, and we expect new laws, rules and regulations regarding privacy, data protection, and information security to be proposed and enacted in the future. For example, the CCPA provides certain exceptions for PHI, but is still applicable to certain PII we Process in the ordinary course of our business. The effects of the CCPA are wide-ranging and afford consumers certain rights with respect to PII, including a private right of action for data breaches involving certain personal information of California residents. The California voters also passed, on November 3, 2020, the California Privacy Rights Act, or CPRA, which will come into effect on January 1, 2023, and will expand the rights of consumers under the CCPA and create a new enforcement agency. As new data security laws are implemented, we may not be able to timely comply with such requirements, or such requirements may not be compatible with our current processes. Changing our processes could be time consuming and expensive, and failure to implement required changes in a timely manner could subject us to liability for non-compliance. Consumers may also be afforded a private right of action for certain violations of privacy laws. This complex, dynamic legal landscape regarding privacy, data protection, and information security creates significant compliance issues for us and potentially restricts our ability to Process data and may expose us to additional expense, adverse publicity and liability. While we believe we have implemented data privacy and security measures in an effort to comply with applicable laws and regulations, and we have implemented measures to require our third-party service providers to maintain reasonable data privacy and security measures, we cannot guarantee that these efforts will be adequate, and we may be subject to cybersecurity, ransomware or other security incidents. Further, it is possible that laws, rules and regulations relating to privacy, data protection, or information security may be interpreted and applied in a manner that is inconsistent with our practices or those of our third-party service providers. If we or these third parties are found to have violated such laws, rules or regulations, it could result in regulatory investigations, litigation awards or settlements, government-imposed fines, orders requiring that we or these third parties change our or their practices, or criminal charges, which could adversely affect our business. Complying with these various laws and regulations could cause us to incur substantial costs or require us to change our business practices, systems and compliance procedures in a manner adverse to our business.
We also publish statements to our participants that describe how we handle and protect PHI. If federal or state regulatory authorities or private litigants consider any portion of these statements to be untrue, we may be subject to claims of deceptive practices, which could lead to significant liabilities and consequences, including, without limitation, costs of responding to investigations, defending against litigation, settling claims, and complying with regulatory or court orders. Any of the foregoing consequences could seriously harm our business and our financial results.
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.
 
48

 
We also periodically conduct internal audits and reviews of our regulatory compliance. An adverse inspection, review, audit, request for information or investigation could result in:

refunding amounts we have been paid by the government;

state or federal agencies imposing corrective action plans, fines, penalties, training, policies and procedures, and other requirements or sanctions on us;

temporary suspension of payments;

debarment or exclusion from participation in federal health care programs;

self-disclosure of violations to applicable regulatory authorities;

damage to our reputation;

the revocation of a facility’s license;

enrollment sanctions that may impede our ability to expand; and

loss of certain rights under, or termination of, our contracts with government payors.
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. If adverse inspections, reviews, audits, requests for information or investigations occur and any of the results noted above occur, it 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
Our existing indebtedness could adversely affect our business and growth prospects.
As of December 31, 2020, we had $299.3 million outstanding under the Term Loan Facility and none outstanding under the Revolving Credit Facility, each of which is governed by the Credit Agreement (as defined herein). We anticipate entering into a new $     million New Term Loan Facility and $     million New Revolver in connection with the consummation of this offering and expect to repay all outstanding indebtedness under our existing Term Loan Facility and terminate our existing Credit Agreement. Our indebtedness, or any additional indebtedness we may incur, could require us to divert funds identified for other purposes for debt service, impairing our liquidity position. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we will be able to take any of these actions on a timely basis, or on terms satisfactory to us or at all.
Our indebtedness and the cash flow needed to satisfy our debt have important consequences, including:

limiting funds otherwise available for financing our capital expenditures and pursuing our growth strategies by requiring us to dedicate a portion of our cash flows from operations to the repayment of debt and the interest on this debt;

making us more vulnerable to rising interest rates; and

making us more vulnerable in the event of a downturn in our business.
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. See “Description of Certain Indebtedness.”
 
49

 
We expect to use cash flow from operations to meet current and future financial obligations, including funding our operations, debt service requirements and capital expenditures necessary to grow and maintain our businesses. The ability to make these payments depends on our financial and operating performance, which is subject to prevailing economic, industry and competitive conditions and to certain financial, business, economic and other factors beyond our control.
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.
The terms of the Credit Agreement restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
The Credit Agreement contains a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests, including restrictions on our ability to:

incur additional indebtedness or other contingent obligations;

create liens;

make investments, acquisitions, loans and advances;

consolidate, merge, liquidate or dissolve;

sell, transfer or otherwise dispose of our assets;

pay dividends on our equity interests or make other payments in respect of capital stock; and

materially alter the business we conduct.
You should read the discussion under the heading “Description of Certain Indebtedness” for further information about these covenants.
 
50

 
The restrictive covenants in the Credit Agreement require us to satisfy certain financial condition tests. Our ability to satisfy those tests can be affected by events beyond our control.
A breach of the covenants or restrictions under the Credit Agreement could result in an event of default under such document. Such a default may allow the creditors to accelerate the related debt and terminate all commitments to extend credit thereunder and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In the event the holders of our indebtedness accelerate the repayment, we may not have sufficient assets to repay that indebtedness or be able to borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms acceptable to us. As a result of these restrictions, we may be:

limited in how we conduct our business;

unable to raise additional debt or equity financing to operate during general economic or business downturns; or

unable to compete effectively or to take advantage of new business opportunities.
These restrictions, along with restrictions that may be contained in agreements evidencing or governing other future indebtedness, may affect our ability to grow in accordance with our growth strategy.
Our failure to raise additional capital or generate cash flows necessary to expand our operations and invest in participant services in the future could reduce our ability to compete successfully and harm our results of operations.
We may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms or at all. If we raise additional equity financing, our security holders may experience significant dilution of their ownership interests. If we engage in additional debt financing, we may be required to accept terms that restrict our operational flexibility and our ability to incur additional indebtedness, force us to maintain specified liquidity or other ratios or restrict our ability to pay dividends or make acquisitions. In addition, the covenants in our Credit Agreement may limit our ability to obtain additional debt, and any failure to adhere to these covenants could result in penalties or defaults that could further restrict our liquidity or limit our ability to obtain financing. If we need additional capital and cannot raise it on acceptable terms, or at all, we may not be able to, among other things:

develop and enhance our participant services;

continue to expand our business either by increasing enrollment or building de novo centers;

hire, train and retain employees;

respond to competitive pressures or unanticipated working capital requirements; or

pursue acquisition opportunities.
In addition, if we issue additional equity to raise capital, your interest in us will be diluted.
Risks related to our common stock and this offering
Our Sponsors control us, and their interests may conflict with ours or yours in the future.
Immediately following this offering, our Sponsors will beneficially own approximately    % of our common stock, or    % if the underwriters exercise in full their option to purchase additional shares from the Sponsors, through the Selling Stockholder, which means that, based on their combined percentage voting power held after the offering, the Sponsors together will control the vote of all matters submitted to a vote of our shareholders, which will enable them to control the election of the members of the Board and all other corporate decisions. This concentration of ownership may delay, deter or prevent acts that would be favored by our other stockholders. The interests of the Sponsors may not always coincide with our interests
 
51

 
or the interests of our other stockholders. Even when the Sponsors cease to own shares of our stock representing a majority of the total voting power, for so long as the Sponsors continue to own a significant percentage of our stock, the Sponsors will still be able to significantly influence the composition of our Board and the approval of actions requiring shareholder approval. Accordingly, for such period of time, the Sponsors will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers, decisions on whether to raise future capital and amending our charter and bylaws, which govern the rights attached to our common stock. In particular, for so long as the Sponsors continue to own a significant percentage of our stock, the Sponsors will be able to cause or prevent a change of control of us or a change in the composition of our Board and could preclude any unsolicited acquisition of us. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of us and ultimately might affect the market price of our common stock. In addition, this concentration of ownership may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders.
In addition, in connection with this offering, we will enter into a Director Nomination Agreement with the Sponsors that provides the Sponsors the right to designate: (i) all of the nominees for election to our Board for so long as they collectively beneficially own at least 40% of the Original Amount; (ii) 40% of the nominees for election to our Board for so long as they collectively beneficially own less than 40% but at least 30% of the Original Amount; (iii) 30% of the nominees for election to our Board for so long as they collectively beneficially own less than 30% but at least 20% of the Original Amount; (iv) 20% of the nominees for election to our Board for so long as the Sponsors collectively beneficially own less than 20% but at least 10% of the Original Amount; and (v) one of the nominees for election to our Board for so long as the Sponsors collectively beneficially own at least 5% of the Original Amount. If the investment vehicle through which the Sponsors hold their investment is dissolved after this offering, then each of Apax and WCAS will be permitted to nominate (i) up to three directors so long as it owns at least 25% of the Original Amount, (ii) up to two directors so long as it owns at least 15% of the Original Amount and (iii) one director so long as it owns at least 5% of the Original Amount. The Sponsors may also assign such right to their affiliates. The Director Nomination Agreement will also provide for certain consent rights for each of the Sponsors so long as such stockholder owns at least 5% of the Original Amount, including for any increase to the size of our Board. Additionally, the Director Nomination Agreement will also prohibit us from increasing or decreasing the size of our Board without the prior written consent of the Sponsors for so long as either of our Sponsors holds at least 5% of the total outstanding voting power. See “Certain Relationships and Related Party Transactions—Director Nomination Agreement” for more details with respect to the Director Nomination Agreement.
The Sponsors and their affiliates engage in a broad spectrum of activities, including investments in the healthcare industry generally. In the ordinary course of their business activities, the Sponsors and their affiliates may engage in activities where their interests conflict with our interests or those of our other shareholders, such as investing in or advising businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. Our certificate of incorporation to be effective in connection with the closing of this offering will provide that neither the Sponsors, any of their affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both her or his director and officer capacities) or its affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. The Sponsors also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, the Sponsors may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to you.
 
52

 
Upon listing of our shares on Nasdaq, we will be a “controlled company” within the meaning of the rules of Nasdaq and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections as those afforded to stockholders of companies that are subject to such governance requirements.
After completion of this offering, the Sponsors together will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of Nasdaq. Under these rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

the requirement that a majority of our Board consist of independent directors;

the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.
Following this offering, we intend to utilize these exemptions. As a result, we may not have a majority of independent directors on our Board, our Compensation, Nominating and Governance Committee may not consist entirely of independent directors and our Compensation, Nominating and Governance Committee may not be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
We are an “emerging growth company” and we expect to elect to comply with reduced public company reporting requirements, which could make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we are eligible for certain exemptions from various public company reporting requirements. These exemptions include, but are not limited to, (i) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (ii) reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, (iii) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved, (iv) not being required to provide audited financial statements for the fiscal year ended June 30, 2018, or five years of Selected Consolidated Financial Data in this prospectus and (v) an extended transition period to comply with new or revised accounting standards applicable to public companies. We could be an emerging growth company for up to five years after the first sale of our common stock pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”). However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue exceeds $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we would cease to be an emerging growth company prior to the end of such five-year period. We have made certain elections with regard to the reduced disclosure obligations regarding executive compensation in this prospectus and may elect to take advantage of other reduced disclosure obligations in future filings. In addition, we will choose to take advantage of the extended transition period to comply with new or revised accounting standards applicable to public companies. As a result, the information that we provide to holders of our common stock may be different than you might receive from other public reporting companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive as a result of reliance on these exemptions. If some investors find our common stock less attractive as a
 
53

 
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.
The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer an “emerging growth company.”
As a public company, we will incur legal, accounting and other expenses that we did not previously incur. We will become subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act, the listing requirements of Nasdaq and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires that we file annual, quarterly and current reports with respect to our business, financial condition and results of operations. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert our management’s attention from implementing our growth strategy, which could prevent us from improving our business, financial condition and results of operations. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. In addition, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage. These additional obligations could have a material adverse effect on our business, financial condition and results of operations.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of our management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and there could be a material adverse effect on our business, financial condition and results of operations.
As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal controls over financial reporting in order to comply with Section 404 of the Sarbanes-Oxley Act. We may not complete our analysis of our internal controls over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in us and, as a result, the value of our common stock. In addition, because of our status as an emerging growth company, you will not be able to depend on any attestation from our independent registered public accountants as to our internal controls over financial reporting for the foreseeable future.
When we become a public company following this initial public offering, we will be required by Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal controls over financial reporting in our second annual report following the completion of this offering. This assessment will need to include disclosure of any material weaknesses identified by management in our internal controls over financial reporting. We will also be required to disclose changes
 
54

 
made in our internal controls and procedures on a quarterly basis. To comply with these requirements, we may need to undertake various costly and time-consuming actions, such as implementing new controls and procedures and hiring additional accounting or internal audit staff. The process of designing and implementing internal controls over financial reporting required to comply with this requirement will be time-consuming, costly and complicated. If during the evaluation and testing process we identify one or more other material weaknesses in our internal controls over financial reporting, our management will be unable to assert that our internal controls over financial reporting is effective. In addition, if we fail to achieve and maintain the adequacy 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.
Even if our management concludes that our internal controls over financial reporting is effective, our independent registered public accounting firm may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed. However, our independent registered public accounting firm will not be required to attest formally to the effectiveness of our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the filing of our second annual report following the completion of this offering or the date we are no longer an “emerging growth company,” as defined in the JOBS Act. Accordingly, you will not be able to depend on any attestation concerning our internal controls over financial reporting from our independent registered public accountants for the foreseeable future.
The existence of any material weaknesses or significant deficiency in internal controls over financial reporting would require management to devote significant time and incur significant expenses to remediate any such issue and management may not be able to remediate the issue in a timely manner. The existence of any material weaknesses or significant deficiency could cause us to reissue our financial statements, fail to meet reporting deadlines or undermine shareholders’ confidence in our reported financial statements, all of which could materially and adversely impact our stock price.
We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or with adequate compliance, our independent registered public accounting firm may issue an adverse opinion due to ineffective internal controls over financial reporting, and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results of operations and cash flows.
Our executive management team does not have experience managing a public company.
Our executive management team does not have experience managing a publicly-traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage us as a public company that is subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, results of operations and financial condition.
Provisions of our corporate governance documents could make an acquisition of us more difficult and may prevent attempts by our shareholders to replace or remove our current management, even if beneficial to our shareholders.
In addition to the Sponsors’ beneficial ownership of a combined     % of our common stock after this offering (or    % if the underwriters exercise in full their option to purchase additional shares from the
 
55

 
Sponsors), our Director Nomination Agreement, certificate of incorporation and bylaws to be effective in connection with the closing of this offering and the Delaware General Corporation Law (the “DGCL”), contain provisions that could make it more difficult for a third party to acquire us without the consent of our Board or the Sponsors, even if doing so might be beneficial to our shareholders. Among other things, these provisions:

allow us to authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without shareholder approval, and which may include supermajority voting, special approval, dividend, or other rights or preferences superior to the rights of shareholders;

provide for a classified board of directors with staggered three-year terms;

prohibit shareholder action by written consent from and after the date on which the Sponsors beneficially own, in the aggregate, less than 35% of our common stock then outstanding;

provide that, from and after the date on which the Sponsors beneficially own less than 50% of our common stock then outstanding, any amendment, alteration, rescission or repeal of our bylaws by our shareholders will require the affirmative vote of the holders of at least 6623% in voting power of all the then-outstanding shares of our stock entitled to vote thereon, voting together as a single class; and

establish advance notice requirements for nominations for elections to our Board or for proposing matters that can be acted upon by shareholders at shareholder meetings, provided, however, that at any time when a Sponsor beneficially owns, in the aggregate, at least 5% of our common stock then outstanding, such advance notice procedure will not apply to that Sponsor.
Our certificate of incorporation to be effective in connection with the closing of this offering will contain a provision that provides us with protections similar to Section 203 of the DGCL, and will prevent us from engaging in a business combination with a person (excluding the Sponsors 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. See “Description of Capital Stock—Anti-Takeover Effects of Our Certificate of Incorporation and Our Bylaws.” 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.
These and other provisions in our certificate of incorporation, bylaws and Delaware law could make it more difficult for shareholders or potential acquirers to obtain control of our Board or initiate actions that are opposed by our then-current Board, including delay or impede a merger, tender offer or proxy contest involving our company. The existence of these provisions could negatively affect the price of our common stock and limit opportunities for you to realize value in a corporate transaction.
For information regarding these and other provisions, see “Description of Capital Stock.”
Our certificate of incorporation will designate the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our shareholders and the federal district courts of the United States as the exclusive forum for litigation arising under the Securities Act, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us.
Pursuant to our certificate of incorporation to be effective in connection with the closing of this offering, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the United States District Court for the District of Delaware) will, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any
 
56

 
derivative action or proceeding brought on behalf of us, (ii) any action asserting a claim of breach of fiduciary duty owed by, or other wrongdoing by, any our directors, officers, employees or agents to us or our stockholders, creditors or other constituents, or a claim of aiding and abetting any such breach of fiduciary duty, (iii) any action asserting a claim against the us or any of our directors or officers or other employees arising pursuant to any provision of the DGCL or our certificate of incorporation or our Bylaws (as either may be amended, restated, modified, supplemented or waived from time to time), (iv) any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or our bylaws, (v) any action asserting a claim against us or any of our directors or officers or other employees governed by the internal affairs doctrine or (vi) any action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL. Our certificate of incorporation will also provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. However, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce a duty or liability created by the Securities Act or the rules and regulations thereunder; accordingly, we cannot be certain that a court would enforce such provision. Our certificate of incorporation will further provide 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 stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. See “Description of Capital Stock—Forum Selection.” 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.
If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment.
The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. Based on an assumed initial public offering price of $      per share, the mid-point of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $      per share, representing the difference between our as adjusted net tangible book value per share after giving effect to this offering and the initial public offering price. In addition, purchasers of common stock in this offering will have contributed    % of the aggregate price paid by all purchasers of our common stock but will own only approximately    % of our common stock outstanding after this offering. See “Dilution” for more detail.
An active, liquid trading market for our common stock may not develop, which may limit your ability to sell your shares.
Prior to this offering, there was no public market for our common stock. Although we have applied to list our common stock on Nasdaq under the symbol “INNV,” an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price will be determined by negotiations between us and the underwriters and may not be indicative of market prices of our common stock that will prevail in the open market after the offering. A public trading market having the desirable characteristics of depth, liquidity and orderliness depends upon the existence of willing buyers and sellers at any given time, such existence being dependent upon the individual decisions of buyers and sellers over
 
57

 
which neither we nor any market maker has control. The failure of an active and liquid trading market to develop and continue would likely have a material adverse effect on the value of our common stock. The market price of our common stock may decline below the initial public offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all. An inactive trading market may also impair our ability to raise capital to continue to fund operations by issuing shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.
Our operating results and stock price may be volatile, and the market price of our common stock after this offering may drop below the price you pay.
Our quarterly operating results are likely to fluctuate in the future. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could subject the market price of our shares to wide price fluctuations regardless of our operating performance. Our operating results and the trading price of our shares may fluctuate in response to various factors, including:

market conditions in our industry or the broader stock market;

actual or anticipated fluctuations in our quarterly financial and operating results;

introduction of new solutions or services by us or our competitors;

issuance of new or changed securities analysts’ reports or recommendations;

sales, or anticipated sales, of large blocks of our stock;

additions or departures of key personnel;

regulatory or political developments;

litigation and governmental investigations;

changing economic conditions;

investors’ perception of us and our prospects;

events beyond our control such as weather, public health events, such as the COVID-19 pandemic, and war; and

any default on our indebtedness.
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 instituted securities class action litigation against the company that issued the stock. If any of our shareholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.
A significant portion of our total outstanding shares are restricted from immediate resale but 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.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have     outstanding shares of common stock based on the number of shares outstanding as of      , 2021. This includes shares that we are selling in this offering, which may be resold in the public market immediately. Following
 
58

 
the consummation of this offering, shares that are not being sold in this offering will be subject to a 180-day lock-up period provided under lock-up agreements executed in connection with this offering described in “Underwriting” and restricted from immediate resale under the federal securities laws as described in “Shares Eligible for Future Sale.” All of these shares will, however, be able to be resold after the expiration of the lock-up period, as well as pursuant to customary exceptions thereto or upon the waiver of the lock-up agreement by            on behalf of the underwriters. We also intend to register shares of common stock that we may issue under our equity compensation plans. After this offering, we will have an aggregate of      shares of common stock reserved for issuance under our equity compensation plans, and issuances pursuant to such plans will cause additional dilution. Once we register these shares, they can be freely sold in the public market upon issuance, subject to vesting, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them.
As further described in “Certain Relationships and Related Party Transactions—Registration Rights Agreement,” we entered into a registration rights agreement with our Sponsors, which requires us to effect the registration of Sponsors’ shares in certain circumstances following the expiration of the 180-day lock-up.
Because we have no current plans to pay regular cash dividends on our common stock following this offering, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.
We do not anticipate paying any regular cash dividends on our common stock following this offering. Any decision to declare and pay dividends in the future will be made at the discretion of our Board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur. Therefore, any return on investment in our common stock is solely dependent upon the appreciation of the price of our common stock on the open market, which may not occur. See “Dividend Policy” for more detail.
If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, our stock price and trading volume could decline.
The trading market for our shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our stock price could decline.
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.
Our certificate of incorporation will authorize us to issue one or more series of preferred stock. Our Board will have the authority to determine the preferences, limitations and relative rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our shareholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our common stock at a premium to the market price, and materially adversely affect the market price and the voting and other rights of the holders of our common stock.
 
59

 
Future offerings of debt or equity securities by us may materially adversely affect the market price of our common stock.
In the future, we may attempt to obtain financing or to further increase our capital resources by issuing additional shares of our common stock or offering debt or other equity securities, including senior or subordinated notes, debt securities convertible into equity or shares of preferred stock. In addition, we may seek to expand operations in the future to other markets which we would expect to finance through a combination of additional issuances of equity, corporate indebtedness and/or cash from operations.
Issuing additional shares of our common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock or both. Upon liquidation, holders of such debt securities and preferred shares, if issued, and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our common stock. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred shares, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk that our future offerings may reduce the market price of our common stock and dilute their stockholdings in us. See “Description of Capital Stock.”
We may allocate the net proceeds from this offering in ways that you and other shareholders may not approve.
Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the section titled “Use of Proceeds.” Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment, and the failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in a variety of capital preservation investments, including short-term, investment-grade and interest-bearing instruments. These investments may not yield a favorable return to our shareholders. If we do not invest or apply the net proceeds from this offering in ways that enhance shareholder value, we may fail to achieve expected results, which could cause our stock price to decline.
General risk factors
If we are not able to maintain and enhance our reputation and brand recognition, our business and results of operations will be harmed.
We believe that maintaining and enhancing the InnovAge reputation and its brand recognition is critical to our relationships with our stakeholders and to our ability to attract new participants. The promotion of our brand may require us to make substantial investments, and we anticipate that, as our market becomes increasingly competitive, these marketing initiatives may become increasingly difficult and expensive. Our marketing activities may not be successful or yield increased revenue, and to the extent that these activities yield increased revenue, the increased revenue may not offset the expenses we incur and our results of operations could be harmed. We have made efforts to protect our brand through trademark registration, but we cannot guarantee that these efforts will prevent third parties from infringing our trademarks or using trademarks confusingly similar to ours, nor can we guarantee we will be successful in obtaining or maintaining trademark registrations that we believe are important to our business. If we cannot stop third parties from using trademarks confusingly similar to ours, patients and others could be confused and our reputation could be harmed. In addition, any factor that diminishes our reputation or that of our
 
60

 
management, including failing to meet the expectations of or provide quality medical care for our participants, adverse cyber or data security events, or any adverse publicity or litigation involving or surrounding us, one of our centers or our management, could harm our brand and make it substantially more difficult for us to attract new participants. Similarly, because our existing participants and their families often act as references for us with prospective new participants, any existing participant or family member of a participant that questions the quality of our care could impair our ability to secure additional new participants. In addition, negative publicity resulting from any adverse government payor audit could injure our brand and reputation. If we do not successfully maintain and enhance our reputation and brand recognition, our business may not grow and we could lose our relationships with participants, which would harm our business, results of operations and financial condition.
We are likely to experience increased expenditures in the future.
We 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 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 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.
Our information technology systems facilitate our ability to conduct our business. While we have disaster recovery systems and business continuity plans in place, any disruptions in our disaster recovery systems or the failure of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively monitor and control our operations. Despite our implementation of a variety of security measures, our information technology systems could be subject to physical or electronic break-ins, ransomware and other cybersecurity incidents and similar disruptions from unauthorized tampering or any weather-related disruptions in Denver, Colorado, where our headquarters is located. In addition, in the event that a significant number of our management personnel were unavailable in the event of a disaster, our ability to effectively conduct business could be adversely affected.
 
61

 
Changes in accounting principles and guidance could result in unfavorable accounting charges or effects.
We prepare our consolidated financial statements in accordance with GAAP. These principles are subject to interpretation by the Securities and Exchange Commission (the “SEC”) and various bodies formed to create and interpret appropriate accounting principles and guidance. A change in these principles or guidance, or in their interpretations, may have a material effect on our reported results, as well as our processes and related controls, and may retroactively affect previously reported results. For example, during February 2016, the Financial Accounting Standards Board issued ASU 2016-02, Leases (Topic 842). The updated standard requires the recognition of a liability for lease obligations and a corresponding right-of-use asset on the balance sheet, and disclosures of certain information regarding leasing arrangements. We are currently in the process of evaluating the impact this pronouncement will have on our consolidated financial statements.
We depend on our senior management team and other key employees, and the loss of one or more of these employees or an inability to attract and retain other highly skilled employees could harm our business.
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 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.
 
62

 
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our expected use of proceeds, expected entry into the New Credit Facilities, estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties (many of which may be amplified on account of the COVID-19 pandemic) that may cause actual results to differ materially from those that we expected, including:

the risk that the cost of providing services will exceed our compensation under PACE;

the dependence of our revenues and operations upon a limited number of government payors;

the effects of rules governing the Medicare, Medicaid or PACE programs;

the risk that our submissions to government payors may contain inaccurate or unsupportable information regarding risk adjustment scores of participants;

the impact on our business of non-renewal or termination of capitation agreements with government payors;

the impact of state and federal efforts to reduce healthcare spending;

the effects of a pandemic, epidemic or outbreak of an infectious disease, including the ongoing outbreak of COVID-19;

the effect of our relatively limited operating history as a for-profit company on investors’ ability to evaluate our current business and future prospects;

the viability of our growth strategy and our ability to realize expected results;

our ability to attract new participants and grow our revenue;

reduction in budget appropriations or any other adverse developments in the state of Colorado;

our ability to manage our growth effectively, execute our business plan, maintain high levels of service and participant satisfaction and adequately address competitive challenges;

our ability to compete in the healthcare industry;

the concentration of our presence in Colorado, California, New Mexico, Pennsylvania and Virginia;

the impact on our business of an economic downturn;

the impact on our business of security breaches, loss of data or other disruptions causing the compromise of sensitive information or preventing us from accessing critical information;

the potential adverse impact of legal proceedings, enforcement actions and litigation;

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 ability to accurately estimate incurred but not reported medical expense or the risk scores of our participants;
 
63

 

risks associated with our use of “open-source” software;

the impact on our business of the termination of our leases, increases in rent or inability to renew or extend leases;

the impact of failures by our suppliers, material price increases on supplies or limitations on our ability to access new technology or medical products;

our ability to maintain our corporate culture;

the impact of competition for physicians and other clinical personnel and related increases in our labor costs;

the impact of negative publicity regarding the managed healthcare industry;

the impact of pandemics, such as the COVID-19 pandemic, weather and other factors beyond our control;

our ability to maintain and enhance our reputation and brand recognition;

our ability to maintain profitability in an environment of increasing expenses;

the impact on our business of disruptions in our disaster recovery systems or business continuity planning;

changes in accounting principles and guidance, resulting in unfavorable accounting charges or effects;

our dependence on our senior management team and other key employees;

our ability to attract, retain and contract with highly qualified personnel; and

other factors disclosed in the section entitled “Risk Factors” and elsewhere in this prospectus.
We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.
We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
 
64

 
MARKET AND INDUSTRY DATA
Unless otherwise indicated, information in this prospectus concerning economic conditions, our industry, our markets and our competitive position is based on a variety of sources, including information from independent industry analysts and publications, as well as our own estimates and research. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the information presented in this prospectus is generally reliable, forecasts, assumptions, expectations, beliefs, estimates and projects involve risk and uncertainties and are subject to change based on various factors, including those described under “Forward-Looking Statements” and “Risk Factors.”
Certain information in the text of this prospectus is contained in independent industry publications. The sources of these independent industry publications are provided below:

AHIP, Social Determinants of Health, Stats and Facts, 2020;

National Conference of Legislatures and the AARP Public Policy Institute, Aging in Place: A State Survey of Livability Policies and Practices, December 2011; and

Dartmouth Atlas Project, Atlas Data - General Atlas Rates - Medicare Reimbursements, 2017.
 
65

 
USE OF PROCEEDS
We estimate that our net proceeds from this offering will be approximately $      million assuming an initial public offering price of $      per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us.
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our shareholders. We intend to use (i) approximately $       million of the net proceeds of this offering, together with proceeds from our New Credit Facilities, to repay any borrowings outstanding under the Term Loan Facility (which had an interest rate of 7.75% as of December 31, 2020) and to fund prepayment fees and expenses, and (ii) $20.0 million of the net proceeds to satisfy an earn-out arrangement in connection with the August 2018 acquisition of NewCourtland, and the remainder of such net proceeds will be used for general corporate purposes, including working capital, operating expenses and capital expenditures. The existing Term Loan Facility would mature on May 2, 2025. The existing Term Loan Facility required quarterly amortization payments equal to approximately 25% of the original principal amount. As discussed under the section entitled “Summary—Recent developments—Entry into new credit facilities,” we expect to repay and terminate our existing Term Loan Facility and Revolving Credit Facility and replace them with the New Credit Facilities. At this time, we have not specifically identified a large single use for which we intend to use the net proceeds other than the repayment of outstanding borrowings under the Term Loan Facility and payment of the NewCourtland earn-out, and, accordingly, we are not able to allocate the net proceeds among any of these potential uses in light of the variety of factors that will impact how such net proceeds are ultimately utilized by us. Pending use of the proceeds from this offering, we intend to invest the proceeds in a variety of capital preservation investments, including short-term, investment-grade and interest-bearing instruments.
We may also use a portion of our net proceeds to acquire or invest in complementary businesses, including other PACE organizations. However, we do not have agreements or commitments for any acquisitions or investments at this time.
We will not receive any proceeds from the sale of shares of our common stock by our Sponsors if the underwriters’ option to purchase additional shares is exercised.
Each $1.00 increase or decrease in the assumed initial public offering price of $      per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $      million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us.
Each 1,000,000 increase or decrease in the number of shares offered would increase or decrease the net proceeds to us from this offering by approximately $      million, assuming that the assumed initial public offering price per share for the offering remains at $      , which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us.
 
66

 
DIVIDEND POLICY
We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness and, therefore, we do not anticipate paying any cash dividends in the foreseeable future. Additionally, because we are a holding company, our ability to pay dividends on our common stock may be limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us. Any future determination to pay dividends will be at the discretion of our Board, subject to compliance with covenants in current and future agreements governing our and our subsidiaries’ indebtedness (see “Description of Certain Indebtedness”) and requirements under Delaware law, and will depend on our results of operations, financial condition, capital requirements and other factors that our Board may deem relevant. See “Risk Factors Risks Related to Our Common Stock and This Offering.” Because we have no current plans to pay regular cash dividends on our common stock following this offering, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.”
 
67

 
CAPITALIZATION
The following table sets forth our cash and cash equivalents and our capitalization as of December 31, 2020:

on an actual basis; and

on an as adjusted basis to give effect to (x) our issuance and sale of shares of our common stock in this offering at an assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds of the offering as set forth in “Use of Proceeds.” and (y) the entry into the New Credit Facilities and the repayment of the remaining outstanding borrowings under our existing Term Loan Facility with borrowings under the New Credit Facilities.
Our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with our consolidated financial statements and the related notes appearing elsewhere in this prospectus and the sections of this prospectus titled “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds” and “Description of Capital Stock.”
As of December 31, 2020
ActualAs adjusted
(in thousands, except share data)
Cash and cash equivalents$77,321$      
Long-term debt, net of debt issuance costs, including current portion:
Credit Facilities:
Revolving Credit Facility(1)
Term Loan Facility(1)290,758
New Revolver(1)
New Term Loan Facility(1)
Convertible Term Loan2,386
Total long-term debt, including current portion, net of debt issuance costs(2)293,144
Stockholders’ equity:
Common stock, $0.001 par value; 149,847,000 shares authorized; 132,718,461 shares issued and outstanding, actual;      shares authorized,      shares issued and outstanding, as adjusted133
Additional paid-in capital24,552
Retained earnings15,330
Less: Treasury stock (     shares of common stock at $      per share,
actual and as adjusted)
(77,796)
Noncontrolling interests6,492
Total stockholders’ equity(31,289)
Total capitalization$261,855$      
(1) On an as adjusted basis, the amounts reflect the repayment of all outstanding amounts under the Term Loan Facility using a portion of the net proceeds of this offering and borrowings under the New Credit Facilities and the payment of related prepayment fees and expenses. We anticipate entering into the New Credit Facilities in connection with the consummation of this offering. For more information, see the sections entitled “Prospectus summary—Recent developments—Entry into new credit facilities” and “Description of certain indebtedness—New Credit Facilities.” On an as adjusted basis, there will be $      million outstanding under the New Term Loan Facility, and $       million will remain available under the New Revolver.
(2) Net of $8.5 million of debt issuance costs.
 
68

 
A $1.00 increase or decrease in the assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $      million, assuming no change in the number of shares offered by us, as set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions payable by us.
An increase or decrease of 1,000,000 shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase or decrease each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization on an as adjusted basis by $      million, assuming no change in the assumed initial public offering price per share and after deducting estimated underwriting discounts and commissions payable by us.
Except as otherwise indicated, the above discussion and table are based on                 shares of our common stock outstanding as of December 31, 2020 and excludes                 shares of common stock reserved for future issuance under our 2021 Plan, which will be adopted in connection with this offering.
 
69

 
DILUTION
If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the as adjusted net tangible book value per share of our common stock immediately after this offering.
As of December 31, 2020, we had a net tangible book value of $      million, or $      per share of common stock. Our net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of December 31, 2020.
After giving effect to the sale of shares of common stock in this offering, after deducting the underwriting discount and estimated offering expenses payable by us, at an assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover of this prospectus, our as adjusted net tangible book value as of December 31, 2020 would have been approximately $      million, or approximately $      per share of common stock. This represents an immediate increase in net tangible book value of $      per share to our existing shareholders and an immediate dilution in net tangible book value of $      per share to investors participating in this offering at the assumed initial public offering price.
The following table illustrates this per share dilution:
Assumed initial public offering price per share$       
Historical net tangible book value per share as of December 31, 2020$       
Increase in net tangible book value per share attributable to the investors in this offering
As adjusted net tangible book value per share after giving effect to this offering
Dilution in net tangible book value per share to the investors in this offering$       
A $1.00 increase or decrease in the assumed initial public offering price of $      per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, would increase or decrease our as adjusted net tangible book value per share after this offering by $      , and would increase or decrease the dilution per share to the investors in this offering by $      , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us. Similarly, each increase or decrease of 1,000,000 shares in the number of shares of common stock offered by us would increase our as adjusted net tangible book value per share after this offering by $      and would decrease or increase dilution per share to investors in this offering by $      , assuming the assumed initial public offering price, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us.
The following table presents, on a as adjusted basis as of December 31, 2020, the differences between our existing shareholders and the investors purchasing shares of our common stock in this offering, with respect to the number of shares purchased, the total consideration paid to us, and the average price per share paid by our existing shareholders or to be paid to us by investors purchasing shares in this offering at an assumed offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the underwriting discount and estimated offering expenses payable by us.
Shares purchasesTotal consideration
Average price
per share
NumberPercentageAmountPercentage
Existing shareholders   %$         %$      
New investors
Total100%$      ���   %$      
 
70

 
A $1.00 increase or in the assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors by $      million and increase the percentage of total consideration paid by new investors by    % and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors by    %, in each case assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting the underwriting discounts and commissions payable by us.
Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares from the Sponsors. After giving effect to sales of shares in this offering, assuming the underwriters’ option to purchase additional shares from the Sponsors is exercised in full, our existing shareholders would own    % and our new investors would own    % of the total number of shares of our common stock outstanding after this offering.
In addition, to the extent we issue any stock options or any stock options are exercised, or we issue any other securities or convertible debt in the future, investors participating in this offering may experience further dilution.
Except as otherwise indicated, the above discussion and tables are based on                 shares of our common stock outstanding as of December 31, 2020 and excludes                 shares of common stock reserved for future issuance under our 2021 Plan, which will be adopted in connection with this offering.
 
71

 
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present our selected consolidated financial data. The selected consolidated statement of operations data for the fiscal years ended June 30, 2019 and 2020 and the selected consolidated balance sheets data as of June 30, 2020 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The selected consolidated statement of operations data for the six months ended December 31, 2019 and 2020 and the selected consolidated balance sheet data as of December 31, 2020 are derived from our unaudited interim consolidated financial statements that are included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments that are necessary for the fair statement of our unaudited interim consolidated financial statements.
Our historical results are not necessarily indicative of the results that may be expected in any future period, and our results for any interim period are not necessarily indicative of results that may be expected for any full year. You should read the selected historical financial data below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.
 
72

 
Years ended
June 30,
Six months ended
December 31,
2019202020192020
(dollars in thousands, except share and per share data)
Revenues
Capitation revenue$461,766$564,834$268,550$308,459
Other Service Revenue3,8642,3581,3801,418
Total revenues465,630567,192269,930309,877
Expenses
External provider costs222,232272,832133,365148,826
Cost of care (excluding depreciation and amortization)132,770153,05675,18076,357
Sales and Marketing16,46019,0019,7778,743
Corporate, general and administrative48,25058,48128,38987,306
Depreciation and amortization8,99611,2915,5415,951
Equity loss (earnings)678401,342
Other operating expenses (income)(2,753)920(150)(1,011)
Total expenses425,955516,259252,142327,514
Operating Income39,67550,93317,788(17,637)
Other Income (Expense)
Interest expense, net(9,594)(14,619)(8,926)(12,186)
Loss on extinguishment of debt(3,144)(991)
Other(1,549)(681)(978)44
Total other expense(14,287)(15,300)(9,904)(13,133)
Income (loss) before income taxes25,38835,6337,884(30,770)
Provision for income taxes6,3179,8682,0879,423
Net Income (Loss)$19,071$25,765$5,797$(40,193)
Less: Net loss attributable to noncontrolling interests(507)(513)(246)(243)
Net Income (Loss) Attributable to the Company.$19,578$26,278$6,043$(39,950)
Weighted-average number of common shares outstanding — basic132,315,101132,616,431132,616,431130,214,967
Weighted-average number of common shares outstanding — diluted134,034,459135,233,630133,174,001130,214,967
Net Income per share — basic$0.15$0.20$0.05$(0.31)
Net Income per share — diluted$0.15$0.19$0.05$(0.31)
Pro Forma Per Share Data(1):
Pro forma net income (loss) per share:
Basic$      $      
Diluted$      $      
Pro forma weighted-average shares used in computing net income (loss) per share:
Basic
Diluted
Selected Other Data:
Adjusted EBITDA(2)$51,662$65,909$25,361$45,673
Adjusted EBITDA margin(2)11.1%11.7%9.4%14.8%
 
73

 
June 30, 2020December 31, 2020
ActualActual
(dollars in thousands)
Consolidated Balance Sheets Data (at period end):
Cash and cash equivalents$112,904$77,321
Working capital(3)90,29830,659
Total assets409,634374,707
Long-term debt, net of debt issuance costs (including current portion)212,370293,144
Total stockholders’ equity107,750(31,289)
(1) Unaudited pro forma per share information gives effect to our sale of        shares of common stock in this offering at an annual initial public offering price of $      per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus.
(2) Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures of operating performance that are not prepared in accordance with GAAP and that do not represent, and should not be considered as, alternatives to net loss or net income margin, respectively, as determined in accordance with GAAP. For a reconciliation of Adjusted EBITDA and Adjusted EBITDA margin to net loss, the most directly comparable GAAP measures, see “Prospectus Summary—Summary Historical Financial and Other Data.”
(3) We define working capital as current assets less current liabilities.
 
74

 
Management’s discussion and analysis of financial condition and results of operations
The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. 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 elsewhere in this prospectus, particularly in the sections entitled “Risk Factors” and “Forward-Looking Statements.”
Overview
We are the leading healthcare delivery platform by number of participants focused on providing all-inclusive, capitated care to high-cost, dual-eligible seniors. We directly address two of the most pressing challenges facing the U.S. healthcare industry: rising costs and poor outcomes. Our patient-centered care delivery approach meaningfully improves the quality of care our participants receive, while keeping them in their homes for as long as safely possible and reducing over-utilization of high-cost care settings such as hospitals and nursing homes. Our patient-centered approach is led by our IDTs, who design, manage and coordinate each participant’s personalized care plan. We directly manage and are responsible for all healthcare needs and associated costs for our participants. We directly contract with government payors, such as Medicare and Medicaid, and do not rely on third-party administrative organizations or health plans. We believe our model aligns with how healthcare is evolving, namely (1) the shift toward value-based care, in which coordinated, outcomes-driven, high-quality care is delivered while reducing unnecessary spend, (2) eliminating excessive administrative costs by contracting directly with the government, (3) focusing on the patient experience and (4) addressing social determinants of health.
We deliver our patient-centered care through the InnovAge Platform.   The InnovAge Platform consists of (1) our IDTs and (2) our community-based care delivery model. The key attributes of the InnovAge Platform include:

Our participant focus.   Our model is focused on caring for frail, high-cost, dual-eligible seniors. We define dual-eligible seniors as individuals who are 55+ and qualify for benefits under both Medicare and Medicaid. Our target participant population is the frail, nursing home-eligible subset of dual-eligible seniors to whom we refer as “high-cost, dual-eligibles” given their high healthcare acuity and the associated high level of spend. Our participants are among the most frail and medically complex individuals in the U.S. healthcare system. The typical InnovAge participant has, on average, nine chronic conditions and requires, on average, assistance with three or more ADLs. As a result, the average InnovAge participant has a Medicare RAF of 2.53. A higher RAF score indicates poorer health and higher predicted health care costs. The average InnovAge participant’s RAF is over 2.3 times higher than the 1.08 RAF of the average Medicare fee-for-service non-dual enrollee according to a 2019 analysis. Our platform enables participants to exercise their preference to age independently in their homes and stay active in their communities for as long as safely possible. All of our participants are certified as nursing home-eligible, but, as a result of the InnovAge Platform, over 90% of our participants are able to live safely in their homes and communities.

Our interdisciplinary care teams.   Our IDTs are the core of our comprehensive clinical model. They design, manage and coordinate all aspects of each participant’s customized care plan. Our IDT structure is designed to enhance access to care for our participants and eliminate the information silos and gaps in care that often occur in traditional fee-for-service models. We are responsible for the totality of our participants’ medical and social needs, including primary and specialist care, in-home care,
 
75

 
hospital visits, nutrition, transportation to our care centers and other medical appointments, pharmacy and behavioral health support. We leverage a technology suite powered by industry-leading clinical and operational information technology solutions to collect and analyze data, streamline IDT workflows and empower our teams with timely participant insights that improve outcomes.

The composition of our IDTs reflects our comprehensive mandate and the complexity of our participants’ care needs. Each IDT convenes, at minimum, experts across at least 11 disciplines, from the primary care physician to the social worker, who are collectively responsible for managing all aspects of our participant’s care.

Our care plans seek to mitigate challenges presented by participants’ social determinants of health. We provide food, transportation and in-home assistance to remove barriers to accessing care and promote a safe in-home living environment for our participants.

Our community-based care delivery model.   Our model delivers care across a continuum of community-based settings. Our multimodal approach leverages our care centers, the participant’s home, and telehealth to deliver comprehensive care to our participants in the most appropriate and cost-effective setting, while enabling participants to live in their homes and communities. The InnovAge Platform is designed to be a higher touch care model compared to many of our peers, and our providers interact with our participants daily across multiple settings. As an example, a representative participant (1) visits the center approximately six times per month (prior to the COVID-19 pandemic), (2) receives daily in-home support and (3) has 24/7 virtual access to an IDT member. Each care plan is individualized by the IDT to include a set of interactions tailored to each participant’s needs. We believe our high-touch, integrated approach results in high-quality care and better outcomes for our participants.

Our direct contracting relationships with federal and state governments.   We directly contract with government payors, such as Medicare and Medicaid, through PACE and receive a capitated payment to manage the totality of a participant’s medical care. The capitated payment model gives us flexibility to invest in a comprehensive care delivery model, which delivers value-added services that are not typically covered in a fee-for-service environment. As a result of our direct contracts with government payors, we capture 100% of the premium and do not rely on administrative intermediaries, such as health plans, to recruit participants or administer our contracts. Our model is designed to generate savings for federal and state governments compared to the nursing home alternative. For the year ended June 30, 2020, approximately 99.5% of our total revenue was derived from capitation agreements with government payors. We have developed strong relationships with Medicare and Medicaid agencies through our participation in PACE and believe we are well positioned to participate in future direct contracting opportunities with government payors.
According to CMS, healthcare spending in the United States 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. Our focus is on the most frail, complex subset of dual-eligible seniors who represent some of the highest-cost individuals in the U.S. healthcare system. Based on our estimated market of approximately 2.2 million PACE eligibles in the United States, we estimate that our total addressable market is approximately $200 billion. Currently, only approximately 55,000 individuals among the 2.2 million nursing home-eligible, dual-eligible seniors we target receive care from a PACE provider, based on a November 2020 report from the National PACE Association. Over the next eight years, the National PACE Association is targeting a PACE enrollment increase at a CAGR of approximately 17%.
We believe the traditional fee-for-service reimbursement model in healthcare does not adequately incentivize providers to efficiently manage this complex population. Dual-eligible seniors must navigate a disjointed, separately 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
 
76

 
proactively manage all aspects of a participant’s health. Costs under the PACE program are estimated to be 13% lower on average than for a comparable dual-eligible population aged 65 and older under Medicaid, based on an analysis of available data by the National PACE Association as of 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. Importantly, we believe we deliver significantly better health outcomes. Our care model reduces unnecessary or avoidable medical spend. 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, our participants have a 25% lower 30-day hospital readmission rate compared to a frail, dual-eligible or disabled waiver population. In addition to reducing spend, we also focus on ensuring our participants are satisfied and receive high-quality care. Our participant satisfaction, based on a survey of a random sample of participants and administered by an independent third party as of June 30, 2020, is 89%. Our participants live, on average, 1.5 years longer than comparable populations who choose nursing home care, based on a HHS report dated June 27, 2017.
We believe the InnovAge Platform has enabled us to create a healthcare model where all constituencies involved—participants, their families, providers and government payors—“Win.”

Participants.   We enable our participants to remain in their homes and communities and age independently. We leverage our differentiated care delivery model to improve the health of our participants, avoid unnecessary hospitalizations and nursing home stays, and greatly improve our participants’ experience with the healthcare system.

Families.   By taking over many aspects of care, such as transportation to appointments, we reduce the caregiving burden on participants’ family members. We believe families receive “peace of mind” knowing their loved ones are well taken care of and that they have a clear point of contact with our IDTs.

Providers.   We enable our providers to focus on taking care of patients by providing them with meaningful clinical and administrative support.

Government payors.   We provide government payors with fiscal certainty through our capitated payment arrangements and reduced medical and social costs for frail, high-cost, dual-eligible seniors. Costs under the PACE program are estimated to be 13% lower on average than for a comparable dual-eligible population aged 65 and older under Medicaid, 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.
We believe our strong value proposition to each constituency translates into a superior economic model. We directly contract with Medicare and Medicaid on a PMPM basis, which creates recurring revenue streams and provides significant visibility into our revenue growth trajectory. We receive 100% of the pooled capitated payment to directly provide or manage the healthcare needs of our participants. By proactively providing high-quality care and addressing risks related to social determinants of health, we have demonstrated our ability to reduce avoidable utilization of high-cost care settings, such as hospitals and nursing homes. As a result, we create a surplus that can be used to invest in refining our care model and providing even greater social supports for our participants. These investments further improve participants’ experiences and health outcomes, which we believe will result in more savings that will drive our profitable growth. The virtuous cycle we have created enables us to consistently deliver high-quality care, achieve high participant satisfaction and retention, and attract new participants. We believe that continuing to drive medical cost savings over a growing participant census will deliver an even greater surplus to our organization, enabling us to invest in more participant programs, evolve our care model, enhance our technology and fund new centers.
We have a record of driving profitable growth and achieving compelling unit economics. For the fiscal year ended June 30, 2020, all of our centers had a positive Center-level Contribution Margin, and our mature de
 
77

 
novo centers opened in the last six years have generated positive Center-level Contribution Margins in fewer than 12 months of operation. For a discussion of Center-level Contribution Margin, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key business metrics and non-GAAP measures—Center-level contribution margin.”
We have demonstrated an ability to scale successfully, expanding our model to a network of 16 centers in five states, which provided care for approximately 6,400 participants during the year ended June 30, 2020. For the fiscal years ended June 30, 2019 and 2020, our total revenues were $465.6 million and $567.2 million, respectively, representing a year-over-year growth rate of 22%. For the fiscal years ended June 30, 2019 and 2020, our net income was $19.1 million and $25.8 million, respectively, representing a year-over-year growth rate of 35.1%, while Adjusted EBITDA was $51.7 million and $65.9 million, respectively, representing a year-over-year growth rate of 27.6%. Over the same period, our net income margin expanded from 4.1% to 4.5% and Adjusted EBITDA margin expanded from 11.1% to 11.7%. For the six months ended December 31, 2019 and 2020, our total revenues were $269.9 and $309.9, respectively, representing a period-over-period growth rate of 14.8%. For the six months ended December 31, 2019 and 2020, our net income was $5.8 million and $(40.2) million, respectively, while Adjusted EBITDA was $25.4 million and $45.7 million, respectively, representing a period over period growth rate of 80.1%. Over the same period, our net income margin changed from 2.1% to (13.0)% and Adjusted EBITDA Margin expanded from 9.4% to 14.8%. See “—Summary Consolidated Financial Data” for a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, and the definitions of Adjusted EBITDA and Adjusted EBITDA margin. Our experience driving profitable growth and expanding geographically underscores our confidence in our ability to successfully execute on the growth opportunities ahead. We intend to substantially increase the number of centers we operate in new and existing markets to bring our innovative care model to more frail, high-cost, dual-eligible seniors and their families across the country.
[MISSING IMAGE: tm2037889d4-tbl_trajec4clr.jpg]
Key factors affecting our performance
Our historical financial performance has been, and we expect our financial performance in the future to be, driven by the following factors:
Our participants
We focus on providing all-inclusive care to frail, high-cost, dual-eligible seniors. We directly contract with government payors, such as Medicare and Medicaid, through PACE and receive a capitated risk-adjusted payment to manage the totality of a participant’s medical care across all settings. InnovAge manages participants that are, on average, more complex and medically fragile than other Medicare-eligible patients, including those in MA programs. As a result, we receive larger payments for our participants compared to MA participants. This is driven by two factors: (1) we manage a higher acuity population, with an average
 
78

 
RAF score of 2.53 compared to an average RAF score of 1.08 for Medicare fee-for-service non-dual enrollees; and (2) we manage Medicaid spend in addition to Medicare.
Our participants are managed on a capitated, or at-risk, basis, where InnovAge is financially responsible for all of their medical costs, including primary and specialist care, in-home care, hospital visits, nutrition, transportation to our care centers and to other medical appointments, pharmacy and behavioral health. Our care model and payments are designed to cover participants from enrollment until the end of life, including coverage for participants requiring hospice and palliative care. For dual-eligible participants, we receive a risk-adjusted PMPM payment directly from Medicare and Medicaid, which provides recurring revenue streams and significant visibility into our revenue growth trajectory.
The Medicare portion of our capitated payment is risk-adjusted based on the underlying medical conditions and frailty of each participant. Our interdisciplinary care teams (“IDTs”) develop an individualized care plan specific to the needs of each participant. Our high touch model involves daily interaction with our participants across multiple settings. This enables us to not only deliver coordinated, high quality care, but also to identify and proactively manage changes to each participant’s conditions, which further supports our ability to more precisely report our participants’ condition to obtain appropriate RAF scores.
Our model provides visibility on our financial and growth trajectory given the recurring nature of the capitated revenue we collect from our government payors. The following table sets out our growth in census since fiscal year 2016:
[MISSING IMAGE: tm2037889d1-bc_totalbw.jpg]
Our ability to grow enrollment and capacity within existing centers
We believe our demonstrated ability to drive sustained, organic census growth is a key indicator of the attractiveness of the InnovAge Platform to our key constituents: participants, their families and government payors. Since 2015, we have achieved 12% annual, organic census growth. Eligible participants can enroll in our program year-round, allowing us to continuously attract new participants and reducing seasonal variability in our results of operations.
Awareness of PACE programs remains low among potential participants, despite high levels of patient satisfaction. To improve awareness of InnovAge and attract new participants, our sales and marketing teams educate prospective participants and their families on our powerful value proposition, superior health outcomes and participant satisfaction. Our scale enables us to invest in targeted sales and marketing capabilities, which accelerates census growth. We take a multichannel approach to sales and marketing, relying
 
79

 
on a mix of traditional community provider referrals and targeted direct-to-consumer 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. For example, we increased the mix of marketing dollars spent on search engine advertising from 5% to 17% of our total media budget, helping to drive 145% year-over-year web traffic growth and over 20% year-over-year referral growth from this channel (each with respect to July through November 2020 as compared to the same period in 2019). We are proud of the fact that the “friends and family” of our participants remain one of our largest referral sources. We believe our 38.5% average referral conversion rate reflects the attractiveness of our care model and our ability to appropriately target eligible participants.
We have a large, embedded growth opportunity within our existing center base. As of December 2020, our eligible participant penetration rate is, on average, 13% across our existing markets, and as the only designated PACE provider in most of the MSAs that we serve, we believe there is significant runway for further growth. For the fiscal year ended June 30, 2020, our participant census was approximately 6,400 across our 16 centers in five states. Inclusive of two additional centers opened after June 30, 2020 and our in-progress and planned center expansion efforts, each of our centers would have an average maximum capacity of 800 participants, enabling us to serve approximately 14,500 participants in total, and thus leaving ample runway to increase enrollment within our current footprint. We also believe that we will continue to conduct a portion of visits via telehealth after the COVID-19 pandemic subsides, which could potentially increase the average capacity of our centers.
Our ability to maintain high participant satisfaction and retention
Our comprehensive individualized care model and frequency of interaction with participants generates high levels of participant satisfaction. We have multiple touch points with participants and their families, which enhances participant receptivity to our services, leading to an 89% participant satisfaction rating as of June 30, 2020 and average participant tenure of 3.1 years as of September 30, 2020, among our centers that have been operated by us for at least five years. Furthermore, we experience low levels of voluntary disenrollment, averaging 5% annually over the last two fiscal years. Approximately 71% of our historical disenrollments have been involuntary, due primarily to participant death and otherwise to participants moving out of our service areas.
Effectively managing the cost of care for our participants
We receive capitated payments to manage the totality of a participant’s medical care across all settings. Our participants are among the most frail and medically complex individuals in the U.S. healthcare system. As a result, external provider costs and cost of care, excluding depreciation and amortization, represented approximately 75% of our revenue in the year ended June 30, 2020. Our care model focuses on delivering high-quality medical care in cost efficient, community-based settings as a means of avoiding costly inpatient and outpatient services. However, our participants retain the freedom to seek care at sites of their choice, including hospitals and emergency rooms; we do not restrict participant access to care. Since InnovAge bears the burden of all participant medical expenses, we are liable for potentially large medical claims, avoidable or not. We believe the risk of such large medical claims is mitigated by (1) our proactive care model, and (2) our scale, which diminishes the financial impact of any unexpected catastrophic care our participants may require.
Center-level contribution margin
We have a history of achieving profitable Center-level Contribution Margin. We define Center-level Contribution Margin as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs. For purposes of evaluating Center-level Contribution Margin on a center-by-center basis, we do not allocate our sales and marketing, corporate, or general and administrative expenses across our centers.
 
80

 
In the year ended June 30, 2020, all of our centers generated positive Center-level Contribution Margin, with a consolidated Center-level Contribution Margin, expressed as a percentage of revenue, of 24.9%. Over time, we plan to both expand our number of centers and grow the number of participants at each center. As we add participants to existing centers, we further leverage our fixed cost base at those centers.
Our ability to build de novo centers within existing and new markets
We have proven our ability to expand and operationalize new centers across multiple geographies while generating consistent center-level performance. This performance highlights the predictability of our model and gives us conviction to continue investing in building new centers to drive long-term value creation.
We have a large addressable market with a target population estimated at approximately 2.2 million, representing seniors who we believe are dually eligible for Medicare and Medicaid and meet the nursing home level of care criteria for PACE. Of this target population, only approximately 55,000 individuals are enrolled in a PACE program, based on a November 2020 report from the National PACE Association, reflecting significant unmet demand for PACE services and creating opportunities for us to grow in new and existing markets. Based upon our success to date, we believe our innovative care model can scale nationally, and we expect to continue selectively and strategically expanding into new geographies. Our go to market approach prioritizes high-density urban and suburban areas, where there are sizable numbers of frail, dual-eligible seniors who would benefit from our program.
In our existing markets, we believe that we currently serve, on average, less than 15% of PACE-eligible participants. As a result, there is significant opportunity to expand our footprint in our existing markets by not only growing the physical footprint and participant census of existing centers, but also by developing new centers. These strategically developed new sites will allow us to leverage our established market brand and infrastructure. Our mature de novo centers opened in the last six years have generated positive Center-level Contribution Margins in less than 12 months of operation. The performance of these centers, which consist of our Loveland and San Bernardino centers that opened in calendar year 2015 and 2014, respectively, demonstrate how we expect our de novo centers to ramp. During the first five years of operations, the Loveland and San Bernardino centers achieved compound annual census growth rates of 54% and 50%, respectively. As of June 30, 2020, these centers had Center-level Contribution Margins of 37% and 33%, respectively, each expressed as a percentage of revenue.
[MISSING IMAGE: tm2037889d4-lc_census4clr.jpg]
We have a successful track record of building de novo centers with compelling unit economics. Once we have identified a location for a new center, it takes, on average, less than 27 months to open. Our Loveland and San Bernardino centers, which are our mature de novo centers that have opened in the last six years, on average, (1) required approximately $10 million to $20 million of upfront capital to build, (2) generated positive Center-level Contribution Margin in fewer than 12 months of operation, and (3) generate approximately $10 million to $20 million of annual Center-level Contribution Margin. As a result, we
 
81

 
believe investments in de novo centers generate robust internal rates of return and accretive cash-on-cash returns. We have five new developments in our pipeline slated for the next 24 months, including three in two new states.
Execute tuck-in acquisitions
We believe there is a sizeable landscape of potential tuck-in acquisitions to supplement our organic growth strategy. Over the past two fiscal years, we have acquired and integrated three PACE organizations, expanding our InnovAge Platform to one new state and four new markets through those acquisitions. We are disciplined in our approach to acquisitions and have executed multiple types of transactions, including turnarounds and non-profit conversions. When integrating acquired programs, we work closely with key constituencies, including local governments, health systems and senior housing providers, to ensure continuity of high-quality care for participants. Based on our experience, joining the InnovAge Platform enables census growth and improved operational efficiency and care delivery post-integration. We believe our track record of and reputation for integrating and improving acquired organizations, while continuing to prioritize high-quality patient care, positions us as the acquirer of choice in this market.
The acquired organizations detailed in the table below experienced census and revenue growth post-acquisition, as well as high participant satisfaction.
Acquired organizationDate of acquisition
Census CAGR
post-acquisition(1)
Revenue CAGR
post-acquisition(1)
Kissito PACE
Roanoke, VA
Apr.201717%26%
NewCourtland LIFE
Philadelphia, PA
Aug.20187%15%
Riverside PACE
Richmond, VA
Newport News, VA
Oct.20188%7%
Blue Ridge PACE
Charlottesville, VA
Nov.201825%26%
(1) As of June 30, 2020.
Contracting with government payors
Our economic model relies on our capitated arrangements with government payors, namely Medicare and Medicaid. We view the government not only as a payor but also as a key partner in our efforts to expand into new geographies and access more participants in our existing markets. Maintaining, supporting and growing these relationships, particularly as we enter new geographies, is critical to our long-term success. Our model is aligned with the interests of our government payors, as we drive better health outcomes for participants at lower cost and enhance participant satisfaction. We believe this alignment of interests and our highly effective care model resonates with government payors and will result in continued opportunities to open and acquire centers.
Investing to support growth
We intend to continue investing in our centers, value-based care model, and sales and marketing organization to support long-term growth. We expect our expenses to increase in absolute dollars for the foreseeable future to support our growth and due to additional costs we expect to incur as a public company, including expenses related to compliance with the rules and regulations of the SEC and the listing standards of Nasdaq, additional corporate and director and officer insurance, investor relations and increased legal, audit, reporting and consulting fees. We plan to invest in future growth judiciously and maintain focus on managing our results of operations. Accordingly, in the short term we expect the activities noted above to
 
82

 
increase our expenses as a percentage of revenue, but in the longer term, we anticipate that these investments will positively impact our business and results of operations.
[MISSING IMAGE: tm2037889d1-bc_invest4c.jpg]
Seasonality to our business
Our operational and financial results will experience some variability depending upon the time of year in which they are measured. This variability is most notable in the following areas:
Medical costs
Medical costs will vary seasonally depending on a number of factors, and most significantly as a result of the weather. Certain illnesses, such as the influenza virus, are far more prevalent during colder months of the year, which will result in an increase in medical expenses during these time periods. We therefore expect higher per-participant medical costs in our second and third fiscal quarters. Medical costs also depend upon the number of business days in a period, and shorter periods will have lower medical costs. Business days can also create year-over-year comparability issues if a period in one year has a different number of business days compared to the same period in another. We would also expect medical costs to be impacted by a pandemic, such as the COVID-19 pandemic, which may result in increased or decreased total medical costs depending upon the severity of the infection, the proximity of the spread of the disease to our centers, the duration of the infection and the availability of healthcare services for our participants.
Timing of risk score revenue true-ups
The Medicare portion of the capitated payments we receive for each participant is determined by a participant’s RAF score, which is measured twice per year and is based on the evolving acuity of a participant. We estimate and accrue for the expected RAF scores of our participants. Based on the difference between the RAF score we estimate and the RAF score determined by CMS, we may receive incremental true-up revenue or be required to repay certain amounts. Though no assurances can be made in the future, we have historically used our best estimate for accruing participant RAF scores, and we had net positive true-up payments for the fiscal years ended 2019 and 2020. 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.
Key business metrics and non-GAAP measures
In addition to our GAAP financial information, we review a number of operating and financial metrics, including the following key metrics and non-GAAP measures, to evaluate our business, measure our
 
83

 
performance, identify trends affecting our business, formulate business plans and make strategic decisions. We believe these metrics provide additional perspective and insights when analyzing our core operating performance from period to period and evaluating trends in historical operating results. These key business metrics and non-GAAP measures should not be considered superior to, or a substitute for, and should be read in conjunction with, the GAAP financial information presented herein. These measures may not be comparable to similarly-titled performance indicators used by other companies.
Fiscal
years ended
June 30,
Six months
ended
December 31,
2019202020192020
(dollars in thousands)
Key Business Metrics:
Centers(1)16161617
Census(1)(2)5,9006,4006,3006,600
Total Member Months(1)65,10074,90036,90039,100
Center-level Contribution Margin(3)23.8%24.9%22.7%27.3%
Non-GAAP Measures:
Adjusted EBITDA(4)$51,662$65,909$25,361$45,673
Adjusted EBITDA margin(4)11.1%11.7%9.4%14.8%
(1) This excludes non-consolidated joint ventures. As of December 31, 2020, the Company operated 17 PACE centers (18 centers when including our non-consolidated joint venture), across Colorado, California, New Mexico, Pennsylvania and Virginia.
(2) Participant numbers are approximate.
(3) Expressed as a percentage of revenue.
(4) Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. For a reconciliation of these non-GAAP measures to the closest GAAP equivalents for the period indicated, see below under “—Adjusted EBITDA.”
Centers
We define our centers as those centers open for business and attending to participants at the end of a particular period. As of June 30, 2020 and December 31, 2020, 50% of our centers were located on sites that we own and the remaining 50% were located on sites that we leased.
Census
Our census is comprised of our capitated participants for whom we are financially responsible for their total healthcare costs.
Total member months
We define Total Member Months as the total number of participants multiplied by the number of months within a year in which each participant was enrolled in our program. We believe this is a useful metric as it more precisely tracks the number of participants we serve each year.
Center-level contribution margin
We define Center-level Contribution Margin as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs. For purposes of evaluating Center-level Contribution Margin on a center-by-center basis, we do not allocate our sales and marketing expense or corporate, general and administrative expenses across our centers. Center-level Contribution Margin was $110.6 million and $141.3 million for the fiscal years ended June 30, 2019 and 2020, respectively, and $61.4 million and $84.7 million for the six months ended December 31, 2019 and 2020, respectively. For more information relating to Center-level Contribution Margin, see Note 17, Segment Reporting, of our audited financial statements included elsewhere in this prospectus.
 
84

 
Lifetime value to customer acquisition cost ratio
We define Lifetime Value to Customer Acquisition Cost Ratio, or the LTV to CAC Ratio, as the lifetime value of a participant (calculated as the average contribution margin PMPM multiplied by the average number of months a participant is enrolled) divided by the customer acquisition cost of a new participant (calculated as the total cost of enrollments divided by total participant enrollments), using a blended average of all markets. For the fiscal year ended June 30, 2020, our LTV to CAC ratio was 6.3x. We believe this is a useful metric to present to investors in connection with this offering as it tracks the efficiency of our sales and marketing spend.
Adjusted EBITDA
We define Adjusted EBITDA as net income adjusted for interest expense, depreciation and amortization, and provision for income tax as well as addbacks for non-recurring expenses or exceptional items, including charges relating to management equity compensation, final determination of rates, M&A transaction and integration, business optimization, EMR transition, special employee bonuses, financing-related fees and contingent consideration. For the fiscal years ended June 30, 2019 and 2020, our net income was $19.1 million and $25.8 million, respectively, representing a year-over-year growth rate of 35.1%, while Adjusted EBITDA was $51.7 million and $65.9 million, respectively, representing a year-over-year growth rate of 27.6%. For the six months ended December 31, 2019 and 2020, our net income was $5.8 million and $(40.2) million, respectively, while Adjusted EBITDA was $25.4 million and $45.7 million, respectively, representing a period over period growth rate of 80.1%.
A reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, for each of the periods is as follows:
Fiscal year ended
June 30,
Six months
ended December 31,
2019202020192020
(dollars in thousands)
Net income$19,071$25,765$5,797$(40,193)
Interest expense, net9,59414,6198,92612,186
Depreciation and amortization8,99611,2915,5415,951
Provision for income tax6,3179,8682,0879,423
Management equity plan727543272572
Rate determination(a)(3,372)(2,158)
M&A diligence, transaction and integration(b)2,5282,7181,46558,784
Business optimization(c)4541,171232859
EMR transition(d)1,078638269
Special employee bonuses(e)3,1271,278523
Financing-related(f)3,6013030991
Contingent consideration(g)(2,753)920(150)(1,011)
Adjusted EBITDA$51,662$65,909$25,361$45,673
(a) For the fiscal year ended June 30, 2020 this reflects the final determination of certain rates for capitation payments from the State of California of approximately $3.4 million relating to the fiscal years ended June 30, 2016, 2017, 2018 and 2019, all of which we consider non-recurring. For the six months ended December 31, 2020, this reflects the CMS settlement payment of approximately $2.2 million related to End-Stage Renal Disease beneficiaries for calendar years 2010 through 2020.
(b) Reflects costs associated with due diligence, transaction and integration expenses for acquisitions explored or completed of approximately $2.5 million and $2.7 million for the years ended June 30, 2019 and 2020, respectively. For the six months ended December 31, 2020, this reflects such expenses related primarily due to the Apax Transaction in the amount of approximately $58.8 million, relating to $42.2 million from the cancellation of options and the redemption of shares, $1.8 million relates to transaction specific bonuses, and $13.1 million of transaction fees and expenses, along with $1.7 million relating to payroll taxes and other administrative items.
 
85

 
(c) Reflects charges related to business optimization initiatives. Such charges relate to one-time investments in projects designed to enhance our technology systems and improve the efficiency of our operations.
(d) Reflects non-recurring expenses relating to the transition to a new electronic medical record vendor.
(e) Reflects non-recurring special bonuses paid to certain of our employees of the Company relating to shareholder dividend transactions that occurred in fiscal years 2018 and 2019.
(f) With respect to the fiscal year ended June 30, 2019, such amount includes $0.5 million related to fees and expenses incurred in connection with amendments to our Credit Agreement and $3.1 million related to a loss on extinguishment of debt incurred in connection with the refinancing of the Credit Agreement. With respect to fiscal year ended June 30, 2020 and the six months ended December 31, 2019, the amount reflects fees and expenses incurred in connection with amendments to our Credit Agreement. With respect to the six months ended December 31, 2020, the amount reflects a loss on extinguishment of debt incurred in connection with the refinancing of our Credit Agreement.
(g) Reflects fair value adjustment relating to the contingent consideration associated with our acquisition of NewCourtland.
Adjusted EBITDA margin
Adjusted EBITDA margin is Adjusted EBITDA expressed as a percentage of our total revenue less any exceptional, one-time revenue items. In the fiscal year ended June 30, 2020, we recognized final determination of certain rates for capitation payments from the State of California in the amount of approximately $3.4 million , and in the six months ended December 31, 2020, we recognized the CMS settlement payment related to End-Stage Renal Disease beneficiaries for calendar years 2010-2020 in the amount of approximately $2.2 million, each of which is deducted from total revenue solely for purposes of calculating Adjusted EBITDA margin. From the fiscal years ended June 30, 2019 to 2020, our net income margin expanded from 4.1% to 4.5% and Adjusted EBITDA margin expanded from 11.1% to 11.7%. From the six months ended December 31, 2019 to 2020, our net income margin changed from 2.1% to (13.0)% and Adjusted EBITDA Margin expanded from 9.4% to 14.8%.
Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures of operating performance monitored by management that are not defined under GAAP and that do not represent, and should not be considered as, an alternative to net income and net income margin, respectively, as determined by GAAP. We believe that Adjusted EBITDA and Adjusted EBITDA margin are appropriate measures of operating performance because the metrics eliminate the impact of revenue and expenses that do not relate to our ongoing business performance, allowing us to more effectively evaluate our core operating performance and trends from period to period. We believe that Adjusted EBITDA and Adjusted EBITDA margin help investors and analysts in comparing our results across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or as a substitute for, the analysis of other GAAP financial measures, including net income and net income margin. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by the types of items excluded from the calculation of Adjusted EBITDA. Our use of the term Adjusted EBITDA varies from others in our industry.
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 disproportionately impacts 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 has altered the mix of settings where we deliver care, our multimodal model has ensured our participants continue to receive the care they need. As a result of the COVID-19 pandemic, we have transitioned much of our care to in-home and telehealth services, while increasing participant visit volume and maintaining continuity of care. We closed all our centers on March 18, 2020 and transitioned to a 100% in-home and virtual care model that allowed for a seamless delivery of care. Between March 2020 and November 2020, we provided over 62,500 telehealth visits and over 203,000
 
86

 
wellness checks, and we structured our care teams to deliver in-home services that otherwise would have occurred at centers. Our physicians are equipped with several telehealth platforms to provide virtual care and utilize the option best suited for each individual participant’s preferences and needs. Our aim is to keep the virtual setting simple to use, convenient and effective. In situations where a participant lacks access to a device or is unable to use technology on their own, we offer to provide them with a device or dispatch a team member to their home to assist. For all of these reasons, our telehealth solution has received high satisfaction among participants, caregivers and IDTs.
In addition to increased telehealth and in-home care, we repurposed our existing infrastructure and workforce to support care delivery during the COVID-19 pandemic. As an example, we leveraged our transportation infrastructure that normally drives participants to the centers to instead deliver food to participants in their homes, making over 117,000 deliveries since our centers were closed in March 2020.
Growth.   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 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. For example, we increased the mix of marketing dollars spent on search engine advertising from 5% to 17% of our total media budget, helping to drive 145% year-over-year web traffic growth and over 20% year-over-year referral growth from this channel (each with respect to July through November 2020 as compared to the same period in 2019). As a result, as of December 2020, our monthly enrollment levels are comparable to pre-March 2020 levels.
Revenue.   Our revenue is capitated and not determined by the number of times we interact with our participants face-to-face. As of December 31, 2020, 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 was required to be completed during an in-person visit with a participant, but CMS is now allowing documentation of conditions identified during qualifying telehealth visits with participants. Given the disruption caused by COVID-19, it is unclear whether we will be able to document the health conditions of our participants as comprehensively as we did prior to the COVID-19 pandemic, which may adversely impact RAF scores and our resulting revenue in future periods.
Expenses.   As of June 30, 2020, we incurred $3.5 million of COVID-19 related costs, of which $2.9 million was for supplies disclosed within cost of care, excluding depreciation and amortization on the consolidated statement of operations. Additionally, for the six months ended December 31, 2020, we incurred an additional $2.4 million of COVID-19 related costs, of which $1.7 million was for supplies disclosed within cost of care, excluding depreciation and amortization on the consolidated statement of operations. We also experienced higher center level contribution margins during the COVID-19 pandemic as a result of lower center-level cost of care. While we retained and, in many cases, repurposed our center-based staff to deliver care to participants in-home and via telemedicine as a result of the pandemic, the closure of our centers resulted in reduced transportation and facility operating costs. We did not experience material changes in our aggregate external provider costs as a result of the nondeferrable nature of most of our participants’ third-party medical needs. Though we experienced fewer emergency room visits than normal in the early months of the COVID-19 pandemic, the frail nature of our participant population results in very limited instances of deferrable care otherwise. The United States continues to experience supply chain issues with respect to PPE and other medical supplies used to prevent transmission of COVID-19. During 2020, we acquired significantly greater quantities of medical supplies at significantly higher prices than normal to ensure the safety of our employees and our participants. For example, as of June 30, 2020, $0.6 million of medical supplies were purchased due to the nation-wide medical supplies shortage, which was recorded on the consolidated balance sheet within prepaid expenses and other. Additionally, as of December 31, 2020, $0.04 million of additional medical supplies were purchased due to the nation-wide medical supplies shortage, which was recorded on the consolidated balance sheet within prepaid expenses and other. While the price of
 
87

 
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.
The United States continues to experience supply chain issues with respect to PPE and other medical supplies used to prevent transmission of COVID-19. During 2020, we acquired significantly greater quantities of medical supplies at significantly higher prices than normal to ensure the safety of our employees and our participants. 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.
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, Medicaid, Veterans Affairs (“VA”) and private pay sources. The concentration of revenue from our various payors was:
Fiscal year ended
June 30,
Six months
ended
December 31,
2019202020192020
Medicaid56%55%56%52%
Medicare43%44%43%47%
VA and private pay sources1%1%1%1%
100%100%100%100%
Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the PACE program. The PACE tri-party contracts, between us, the respective state and CMS, are renewable annually and expire each June 30 in all states other than California, which contracts on a calendar-year basis. We have executed agreements for the periods January 1, 2021 through December 31, 2021 for California, and July 1, 2020 through June 30, 2021 for all other states in which we operate. See “Risk Factors—Risk Relating to Our Business—We conduct a significant percentage of our operations in the State of Colorado and, as a result, we are partially susceptible to any reduction in budget appropriations for our services and any other adverse developments in that state.” Capitation payments are recognized as revenue in the period to which they relate, with the exception of risk score true-ups, which are estimated and subsequently adjusted when the appropriate information is available.
The variable nature of the PMPM capitation payment is driven by changes to each participant’s RAF score, which fluctuates based on the health status of each individual participant. Our capitation revenues included $2.3 million and $2.0 million of risk adjustment true-ups tied to prior periods for the years ended June 30, 2019 and 2020, respectively. We have not received any risk adjustment true-ups tied to prior periods for the six months ended December 31, 2020. Capitation revenues are recognized based on the actual PMPM revenues earned and estimates of the PMPM revenues associated with risk score true-ups. Based on the difference between the RAF score we estimate and the RAF score determined by CMS, we may receive incremental true-up revenue or be required to repay certain amounts. Such true-up revenue or repayment amounts in future periods may be impacted by the COVID-19 pandemic, which may have an adverse impact on our revenue if we are unable to accurately document the health needs of our participants. We recognize revenue in the month in which eligible members are entitled to receive healthcare benefits. Although risk score-related adjustments are accrued in most periods, the amount of revenue recognized could be adjusted in subsequent periods once the adjustments have been paid to or from the organization.
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 generate fee-for-service revenue from
 
88

 
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. Fee-for-service revenue accounted for approximately 0.4% and 0.2% of our total revenue during the fiscal years ended June 30, 2019 and 2020, respectively. State food grant revenue accounted for less than 0.1% of our total revenue during each of the fiscal years ended June 30, 2019 and 2020. Rent revenues and management fees accounted for approximately 0.3% and 0.2% of our total revenue during the fiscal years ended June 30, 2019 and 2020, respectively.
Expenses
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), 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 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-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. As a result, as revenue increases due to census growth, cost of care, excluding depreciation and amortization, typically 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 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. 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 will incur as a public company, as well as other costs associated with 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.
 
89

 
Equity Loss.   Equity loss primarily represents our proportionate share in the earnings or loss of primarily our joint venture InnovAge California Pace-Sacramento, LLC (“InnovAge Sacramento”), which was created on March 18, 2019 and began operations in fiscal year 2021. InnovAge Sacramento is a PACE organization, and, given that its operations align with our operations, the loss related to this equity method investment is reflected in our operating expenses. In future periods, our results related to InnovAge Sacramento will be included in our consolidated results of operations, as we made additional contributions to and obtained control of InnovAge Sacramento effective as of January 1, 2021.
Other Operating Expenses (Income).   Other operating expenses (income) consists of the re-measurement of contingent consideration to fair value relating to our acquisition of NewCourtland.
Other Income (Expense)
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.
Loss on Extinguishment of Debt.   Loss on extinguishment of debt consists of realized losses from the extinguishment of debt for certain lenders during the amendment of the Credit Agreement in the fiscal year ended June 30, 2019 and in the six months ended December 31, 2020.
Other Expenses (Income).   Other expenses (income) consists of a loss on disposal from the write-off of certain leasehold improvements for the fiscal year ended June 30, 2020 and included acquisition transaction costs for the fiscal year ended June 30, 2019.
Income Taxes.   We, other than InnovAge Senior Housing Thornton, LLC (“SH1”), provide for federal and state income taxes currently payable and for deferred income taxes arising from temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured pursuant to enacted tax laws and rates applicable to periods in which those temporary differences are expected to be recovered or settled. The impact on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment. The members of SH1 have elected for it to be taxed as a partnership, and no provision for income taxes for this entity is included in these consolidated financial statements.
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 50.0% likelihood of being realized upon settlement. We recognize interest and penalty expense associated with uncertain tax positions as a component of provision for income taxes.
Net Loss Attributable to Noncontrolling Interests.   We own a 0.01% partnership interest in SH1, which is one of our variable interest entities. SH1 was organized to develop, construct, own, maintain, and operate certain apartment complexes intended for rental to low-income elderly individuals aged 62 or older. We are the primary beneficiary of SH1 and we have the power to direct the activities that are most significant to SH1 and has an obligation to absorb losses or the right to receive benefits from SH1. The most significant activity of SH1 is the operation of the housing facility. Based upon this, we determined that SH1 is a variable interest entity. Accordingly, the SH1 interest is reflected within equity as noncontrolling interests. Our share of earnings is recorded in the consolidated statements of operations as net loss attributable to noncontrolling interests.
For more information relating to the components of our results of operations, see Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included elsewhere in this prospectus for more detailed information regarding our critical accounting policies.
 
90

 
Results of operations
The following table sets forth our consolidated statements of operations data for the periods indicated:
Year ended June 30,
Six Months Ended
December 31,
2019202020192020
(in thousands)
Revenues
Capitation revenue$461,766$564,834$268,550$308,459
Other Service Revenue3,8642,3581,3801,418
Total revenues465,630567,192269,930309,877
Expenses
External Provider Costs222,232272,832133,365148,826
Cost of care (excluding depreciation and amortization)132,770153,05675,18076,357
Sales and Marketing16,46019,0019,7778,743
Corporate, general and administrative48,25058,48128,38987,306
Depreciation and amortization8,99611,2915,5415,951
Equity loss678401,342
Other operating expenses (income)(2,753)920(150)(1,011)
Operating expenses425,955516,259252,142327,514
Income from Operations$39,675$50,933$17,788$(17,637)
Other Income (Expense)
Interest expense, net(9,594)(14,619)(8,926)(12,186)
Loss on Extinguishment of Debt(3,144)(991)
Other(1,549)(681)(978)44
Total other income (expense)(14,287)(15,300)(9,904)(13,133)
Income (Loss) Before Income Taxes25,38835,6337,884(30,770)
Provision for Income Taxes6,3179,8682,0879,423
Net Income (Loss)$19,071$25,765$5,797$(40,193)
Less: Net Loss attributable to noncontrolling interests(507)(513)(246)(243)
Net Income (Loss) Attributable to the Company$19,578$26,278$6,043$(39,950)
 
91

 
The following table sets forth our consolidated statements of operations data expressed as a percentage of total revenue for the periods indicated:
Fiscal Year ended June 30,
Six Months Ended
December 31,
% of Revenue2019202020192020
Revenues
Capitation revenue99%99%99%99%
Other Service Revenue0.8%0.4%0.5%0.5%
Total revenues100%100%100%100%
Expenses
External Provider Costs48%48%49%48%
Cost of care (excluding depreciation and amortization)29%27%28%25%
Sales and Marketing4%3%4%3%
Corporate, general and administrative10%10%11%28%
Depreciation and amortization2%2%2%2%
Equity loss0.1%*%0.4%
Other operating expenses (income)(0.6)%0.2%(0.1)%(0.3)%
Operating expenses92%91%94%106%
Income from operations8%9%6%(6)%
Other Income (Expense)
Interest expense, net(2)%(3)%(3)%(4)%
Loss on Extinguishment of Debt(1)%(0.3)%
Other*%*%*%*%
Total other income (expense)(3)%(3)%(3)%(4)%
Income (Loss) Before Income Taxes5%6%3%(10)%
Provision for Income Taxes1%1%1%3%
Net Income (Loss)4%5%2%(13)%
Less: Net income (loss) attributable to noncontrolling interests*%*%*%*%
Net Income (Loss) Attributable to the Company4%5%2%(13)%
* Indicates amounts that are not material.
Comparison of the Six Months Ended December 31, 2019 and 2020
Revenues
Six Months Ended
December 31,
20192020$ Change% Change
(in thousands)
Revenues
Capitation revenue$268,550$308,459$39,90915%
Other Service Revenue1,3801,418383%
Total revenues$269,930$309,877$39,94715%
Capitation Revenue.   Capitation revenue was $308.5 million for the six months ended December 31, 2020, an increase of $39.9 million, or 15%, compared to $268.6 million for the six months ended December 31,
 
92

 
2019. This increase was driven primarily by an average census increase of approximately 350 participants, or 6%, as well as rate increases across various states, both of which increased Medicaid and Medicare revenue. Medicaid and Medicare revenue for the six months ended December 31, 2020 was $161.7 million and $145.5 million, respectively. This reflects an increase of $10.8 million and $29.7 million from Medicaid and Medicare revenue, respectively, for the six months ended December 31, 2019.Medicare revenue increased due to average risk score increasing by 11.5% period over period as well the temporary suspension of the automatic 2% reduction of Medicare claim reimbursements (sequestration) for the period of May 1, 2020 through March 31, 2021.
Other Service Revenue.   Other service revenue was $1.4 million for the six months ended December 31, 2020, which insignificantly increased less than $0.1 million, or 3%, compared to $1.4 million for the six months ended December 31, 2019.
Expenses
Six Months Ended
December 31,
20192020$ Change% Change
(in thousands)
Expenses
External Provider Costs$133,365$148,826$15,46112%
Cost of care (excluding depreciation and amortization)75,18076,3571,1772%
Sales and Marketing9,7778,743(1,034)(11)%
Corporate, general and administrative28,38987,30658,917208%
Depreciation and amortization5,5415,9514107%
Equity loss401,3421,3023,255%
Other operating expenses (income)(150)(1,011)(861)574%
Operating expenses$252,142$327,514$75,37230%
External Provider Costs.   External provider costs were $148.8 million for the six months ended December 31, 2020, an increase of $15.4 million, or 12%, compared to $133.4 million for the six months ended December 31, 2019. This change was driven by an increase in census, which accounts for $8.0 million of the increase using six months ended December 31, 2019 cost per participant. The remaining increase was driven by an increase in the average cost per participant, which increased by $192, or 5%, from $3,614 to $3,806 for the six months ended December 31, 2019 and 2020, respectively. The increase in cost per participant was primarily driven by year-over-year cost and utilization changes impacting outpatient expenses, partially offset by a decrease in inpatient and housing expenses. Outpatient expenses increased $7.7 million, or 30%, from $25.2 million to $32.9 million for the six months ended December 31, 2019 and 2020, respectively, with $6.2 million relating to increased cost per participant and $1.5 million relating to census growth. Housing costs increased by $1.8 million, or 4%, from $45.1 million to $46.9 million for the six months ended December 31, 2019 and 2020, respectively, with $2.7 million relating to census growth, which was partially offset by a decrease of $0.9 million primarily relating to a decrease in utilization. The cost of inpatient services increased $1.6 million, or 5%, from $32.1 million to $33.7 million for the six months ended December 31, 2019 and 2020, respectively, with $1.9 million relating to census growth, which was partially offset by a decrease of $0.3 million primarily relating to a decrease in utilization. The remaining increase in external provider costs is a result of pharmaceutical costs. Pharmaceutical costs increased $4.4 million, or 14%, from $31.0 million to $35.3 million for the six months ended December 31, 2019 and 2020, respectively, with $1.9 million increase relating to census growth and $2.5 million relating to increased cost per participant as a result of annual cost increases within the pharmaceutical sector.
Cost of Care (Excluding Depreciation and Amortization).   Cost of care (excluding depreciation and amortization) expense was $76.4 million for the six months ended December 31, 2020, an increase of
 
93

 
$1.2 million, or 2%, compared to $75.2 million for the six months ended December 31, 2019. This change is primarily driven by an increase in census, which accounts for $4.5 million, using the six months ended December 31, 2019 cost per participant. This is offset by the cost per participant decrease of $85, or 4%, from $2,037 to $1,953 for the six months ended December 31, 2019 and 2020, respectively. This decrease in cost per participant was primarily driven by year-over-year cost savings due to the closures of our centers during the COVID-19 pandemic, which resulted in reduced transportation and facility operating costs.
Sales and Marketing.   Sales and Marketing expenses were $8.7 million for the six months ended December 31, 2020, a decrease of $1.1 million, or 11%, compared to $9.8 million for the six months ended December 31, 2019. We incurred lower sales and marketing expenses in the first half of fiscal year 2021 as a result of the timing of outreach and advertising campaigns, including delaying the development of a new brand campaign. With limited access to facilities for filming and photography as a result of the COVID-19 pandemic, these expenses are expected to be deferred until later during fiscal year 2021.
Corporate, General and Administrative.   Corporate, general and administrative expenses were $87.3 million for the six months ended December 31, 2020, an increase of $58.9 million, or 208%, compared to $28.4 million for the six months ended December 31, 2019. The increase was primarily due to the Apax Transaction. In connection with the Apax Transaction, we canceled 16,994,975 of common stock options that were granted under the 2016 Plan, and recorded associated consideration of $42.2 million as corporate, general and administrative expenses. Additionally, we recognized $13.1 million of transaction costs as corporate, general and administrative expenses.
Depreciation and Amortization.   Depreciation and amortization expense was $6.0 million for the six months ended December 31, 2020, an increase of $0.4 million, or 7%, compared to $5.6 million for the six months ended December 31, 2019. This increase is the result of capital additions in the normal course of business.
Equity Loss.   Equity loss was $1.3 million for the six months ended December 31, 2020, an increase of $1.3 million compared to less than $0.1 million for the six months ended December 31, 2019. This increase results from our equity method investee, InnovAge Sacramento, which began its operations in July 2020.
Other Operating Expenses (Income).   Other operating expenses (income) was $(1.0) million for the six months ended December 31, 2020, an increase in income of $0.9 million compared to $(0.1) million for the six months ended December 31, 2019. This change resulted entirely from the remeasurement of the contingent consideration associated with our acquisition of NewCourtland.
Other Income (Expense)
Six Months Ended
December 31,
20192020$ Change% Change
(in thousands)
Other Income (Expense)
Interest expense, net$(8,926)$(12,186)$(3,260)37%
Loss on Extinguishment of Debt(991)(991)N/A
Other(978)441,022(105)%
Total other income (expense)$(9,904)$(13,133)$(3,229)32%
Interest expense, net.   Interest expense, net was $12.2 million for the six months ended December 31, 2020, an increase of $3.3 million, or 37%, compared to $8.9 million for the six months ended December 31, 2019. The increase was primarily due to higher interest rate of 7.75% for the six months ended December 31, 2020 on the existing Term Loan Facility loan as a result of the July 27, 2020 amendment and restatement of our Credit Agreement.
 
94

 
Loss on Extinguishment of Debt.   We had no loss on extinguishment of debt for the six months ended December 31, 2019 and a loss of $1.0 million for the six months ended December 31, 2020. On July 27, 2020, we amended and restated our 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.
Other.   Other income was less than $0.1 million for the six months ended December 31, 2020, an increase of $1.0 million compared to other expense of $1.0 milllion for the six months ended December 31, 2019. During the six months ended December 31, 2019, other expense related to the termination of the lease agreement at our Roosevelt, Pennsylvania location and the relocating of operations to the St. Bart’s, Pennsylvania location, which resulted in a write-off of leasehold improvements of $1.1 million, which was offset by immaterial other income. Comparatively, during the fiscal year ended June 30, 2020, no significant other expenses were incurred.
Comparison of the year ended June 30, 2019 and 2020
Revenues
Year ended
June 30,
20192020$ Change% Change
(in thousands)
Revenues
Capitation Revenue$461,766$564,834$103,06822%
Other Service Revenue3,8642,358(1,506)(39)%
Total Revenues$465,630$567,192$101,56222%
Capitation Revenue.   Capitation revenue was $564.8 million for the year ended June 30, 2020, an increase of $103.1 million, or 22%, compared to $461.8 million for the year ended June 30, 2019. The change was primarily driven by an average census increase of approximately 800 participants, or 15%, as well as rate increases across various states, both of which increased Medicaid and Medicare revenue. Medicaid and Medicare revenue for the year ended June 30, 2020 was $312.0 million and $249.8 million, respectively. This reflects an increase of $51.3 million and $49.7 million from Medicaid and Medicare revenue, respectively, for the year ended June 30, 2019.
Other Service Revenue.   Other service revenue was $2.4 million for the year ended June 30, 2020, a decrease of $1.5 million, or 39%, compared to $3.9 million for the year ended June 30, 2019. Other service revenue was primarily driven by fee-for-service of $1.1 million, which decreased 46% from $2.1 million for the year ended June 30, 2019 due to decreased focus on growing our fee-for-service operations. Management fees, grant revenues and other miscellaneous revenue also decreased by $0.5 million from $1.1 million to $0.6 million in revenue for the years ended June 30, 2019 and 2020, respectively. Rent revenue was $0.7 million for each of the years ended June 30, 2019 and 2020.
 
95

 
Expenses
Fiscal year ended
June 30,
20192020$ Change% Change
(in thousands)
Expenses
External Provider Costs$222,232$272,832$50,60023%
Cost of care (excluding depreciation and amortization)132,770153,05620,28615%
Sales and Marketing16,46019,0012,54115%
Corporate, general, and administrative48,25058,48110,23121%
Depreciation and amortization8,99611,2912,29526%
Equity loss678678N/A
Other operating expenses (income)(2,753)9203,673(133)%
Total operating expenses$425,955$516,259$90,30421%
External Provider Costs.   External provider costs were $272.8 million for the year ended June 30, 2020, an increase of $50.6 million, or 23%, compared to $222.2 million for the year ended June 30, 2019. This change is primarily driven by an increase in census, which accounts for $33.2 million of the increase using fiscal year 2019 cost per participant. The remaining increase is driven primarily by an increase in the cost per participant, which increased by $232, or 7%, from $3,413 to $3,645 for the years ended June 30, 2019 and 2020, respectively. The increase in cost per participant was primarily driven by year-over-year cost and utilization changes impacting housing and inpatient expenses, partially offset by a decrease in outpatient expenses. Housing costs increased by 33%, or $23.1 million, from $69.4 million to $92.5 million for the years ended June 30, 2019 and 2020, respectively, with $12.7 million relating to increased cost per participant and $10.4 million relating to increased census. The cost of inpatient services increased $15.3 million, or 29.3%, from $52.0 million to $67.3 million for the years ended June 30, 2019 and 2020, respectively, with $7.8 million relating to census growth and $7.5 million primarily relating to increased cost per participant. The cost of outpatient services increased $11.9 million, or 12.0%, from $99.6 million to $111.5 million for the years ended June 30, 2019 and 2020, respectively, with $14.9 million related to census growth, which was partially offset by a decrease of $3.0 million primarily relating to decrease in utilization.
Cost of Care (Excluding Depreciation and Amortization).   Cost of care, excluding depreciation and amortization, were $153.1 million for the year ended June 30, 2020, an increase of $20.3 million, or 15%, compared to $132.8 million for the year ended June 30, 2019. This change is primarily driven by an increase in census, which accounts for $20.2 million, or 97.8% of the change using fiscal year 2019 cost per participant. The cost per participant increased by $22, or 1.0%, from $2,074 to $2,096 for the years ended June 30, 2019 and 2020, respectively. The increase in cost per participant was primarily driven by year-over-year cost increases due to inflation.
Sales and Marketing.   Sales and marketing costs were $19.0 million for the year ended June 30, 2020, an increase of $2.5 million, or 15%, compared to $16.5 million for the year ended June 30, 2019. This change is driven by a full year of marketing campaigns associated with centers acquired in the prior year and increases in sales and marketing employee headcount and salaries.
Corporate, General and Administrative.   Corporate, general and administrative costs were $58.5 million for the year ended June 30, 2020, an increase of $10.2 million, or 21%, compared to $48.3 million for the year ended June 30, 2019. Salaries, wages and benefits expenses increased $1.6 million from $23.0 million at June 30, 2019 to $24.5 million at June 30, 2020, due to increased employee headcount and a slight year-over-year salary increase. Purchased services and contracts increased $2.6 million from $10.7 million at June 30, 2019 to $13.3 million at June 30, 2020, due to business optimization efforts, including software implementation and hiring consultants to implement process improvements and efficiencies within several
 
96

 
overhead departments, including the accounting and operations departments. Supplies and other costs increased $1.8 million from $6.2 million at June 30, 2019 to $8.0 million at June 30, 2020, due to increased headcount and an increase in supplies and other expense from COVID-19-related cleanings and security. Additionally, bad debt expense increased by $3.9 million, or 169%, from $2.3 million to $6.2 million for the years ended June 30, 2019 and 2020, respectively, due to reconciliation resulting from the Colorado Department of Health Care Policy & Financing (“HCPF”)'s modifications to its settlement process.
Depreciation and Amortization.   Depreciation and amortization was $11.3 million for the year ended June 30, 2020, an increase of $2.3 million, or 26%, compared to $9.0 million for the year ended June 30, 2019. This increase is the result of capital additions in the normal course of business.
Equity Loss.   Equity loss was $0.7 million for the year ended June 30, 2020, an increase of $0.7 million compared to nil for the year ended June 30, 2019. This increase results from the costs associated with the ramp up of operations of our equity method investee, InnovAge Sacramento.
Other Operating Expenses (Income).   Other operating expenses were $0.9 million for the year ended June 30, 2020, an increase in expense of $3.7 million, or 133%, compared to $2.8 million in other operating income for the year ended June 30, 2019. This change resulted entirely from the remeasurement of the contingent consideration associated with our acquisition of NewCourtland.
Other income (expense)
Fiscal year ended June 30,
20192020
$
Change
%
Change
(in thousands)
Other Income (Expense)
Interest expense, net$(9,594)$(14,619)$(5,025)52%
Loss on Extinguishment of Debt(3,144)3,144N/A
Other(1,549)(681)868(56)%
Total other income (expense)$(14,287)$(15,300)$(1,013)7%
Interest Expense, Net.   Interest expense, net, was $14.6 million for the year ended June 30, 2020, an increase of $5.0 million, or 52%, compared to $9.6 million for the year ended June 30, 2019. This increase is attributable to an increase in our outstanding debt in fiscal year 2020, as a result of borrowing $25.0 million under the Revolving Credit Facility at an interest rate of 3.94% to ensure sufficient funds available during the unknown time of the COVID-19 pandemic and for general corporate purposes. Interest expense was $10.0 million and $15.1 million for the years ended June 30, 2019 and 2020, respectively. Interest expense was partially offset by interest income of $0.4 million and $0.5 million for the years ended June 30, 2019 and 2020, respectively.
Loss on Extinguishment of Debt.   We had no loss on extinguishment of debt for the year ended June 30, 2020 and a loss of $3.1 million for the year ended June 30, 2019. On May 2, 2019, we amended and restated our 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 $3.1 million in debt issuance costs.
Other.   Other expenses were $0.7 million for the year ended June 30, 2020, a decrease in expense of $0.8 million, or 56%, compared to $1.5 million for the year ended June 30, 2019. During fiscal year ended June 30, 2020, other expense related to the termination of the lease agreement at our Roosevelt, Pennsylvania location and the relocating of operations to our St. Bart’s, Pennsylvania location, which resulted in a write-off of leasehold improvements of $1.1 million, which was offset by immaterial other income. Comparatively, during fiscal year ended June 30, 2019, other expense was primarily a result of acquisition transaction costs of $1.6 million.
 
97

 
Quarterly Results of Operations and Other Data
The following table sets forth our unaudited condensed consolidated statement of operations data for each of the last nine quarters in the period ended December 31, 2020. The unaudited quarterly statements of operations data set forth below have been prepared on a basis consistent with our audited annual consolidated financial statements included elsewhere in this prospectus and include, in our opinion, all normal recurring adjustments necessary for the fair statement of the results of operations for the periods presented. Our historical quarterly results are not necessarily indicative of the results that may be expected in the future. The following quarterly financial data for the respective three month periods should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus.
December 31,
2018
March 31,
2019
June 30,
2019
September 30,
2019
December 31,
2019
March 31,
2020
June 30,
2020
September 31,
2020
December 31,
2020
Revenues
Capitation revenue$115,515121,735129,349131,951136,599144,174152,109151,944156,515
Other Service Revenue8407771,385690690596382622796
Total revenues116,355122,512130,734132,641137,289144,770152,491152,566157,311
Expenses
External Provider Costs54,71459,13062,56862,39570,97071,02268,44473,68175,145
Cost of care (excluding depreciation and
amortization)
36,10434,75436,44837,56037,62039,28538,58938,28338,074
Sales and Marketing3,9924,3274,6594,2805,4974,6284,5964,1124,631
Corporate, general and administrative10,85110,92117,12113,12515,26414,02816,06571,57715,729
Depreciation and amortization2,3122,0202,7202,6642,8772,7692,9812,9592,992
Equity loss535163476801541
Other operating expenses (income)(441)369(2,852)(45)(106)(99)1,170(668)(343)
Operating expenses107,532111,521120,664119,984132,157131,796132,321190,745136,769
Income from Operations8,82310,99110,07012,6575,13212,97420,170(38,179)20,542
Other Income (Expense)
Interest expense, net(2,305)(2,428)(3,078)(5,153)(3,773)(2,361)(3,332)(5,631)(6,555)
Loss on Extinguishment of Debt$(3,144)(991)
Other$(536)(107)(225)64(1,042)24454(62)106
Total other income (expense)(2,841)(2,535)(6,447)(5,089)(4,815)(2,117)(3,278)(6,684)(6,449)
Income (Loss) Before Income Taxes5,9828,4563,6237,56831710,85716,892(44,863)14,093
Provision for Income Taxes1,7172,427702,003842,8674,9154,9374,486
Net Income (Loss)4,2656,0293,5535,5652337,99011,977(49,800)9,607
Less: Net loss attributable to noncontrolling interests(120)(139)(124)(120)(127)(148)(118)(146)(98)
Net Income (Loss) Attributable to the
Company
$4,3856,1683,6775,6853608,13812,095(49,654)9,705
Quarterly Trends
Total revenues generally increase with census growth and capitation rate changes. Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the PACE program. When capitation rate changes occur through the PACE tri-party contracts, between us, the respective state and CMS, a corresponding change in revenue will occur. Contracts are renewable annually and expire each June 30 in all states other than California, which contracts on a calendar-year basis. Additionally, the Medicare portion of the capitated payments we receive for each participant is determined by a participant’s RAF score, which is measured twice per year and is based on the evolving acuity of a participant. We estimate and accrue for the expected RAF scores of our participants. Based on the difference between the RAF score we estimate and the RAF score determined by CMS, we may receive incremental true-up revenue or be required to repay certain amounts. 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.
We evaluate our medical claims expense as a percent of our capitated revenue. Medical costs will vary seasonally depending on a number of factors, and most significantly as a result of the weather. Certain
 
98

 
illnesses, such as the influenza virus, are far more prevalent during colder months of the year, which will result in an increase in medical expenses during these time periods. We therefore expect higher per-participant medical costs in our second and third fiscal quarters. Medical costs also depend upon the number of business days in a period, and shorter periods will have lower medical costs. Number of business days can also create year-over-year comparability issues if a period in one year has a different number of business days compared to the same period in another. We would also expect medical costs to be impacted by a pandemic, such as the COVID-19 pandemic, which may result in increased or decreased total medical costs depending upon the severity of the infection, the proximity of the spread of the disease to our centers, the duration of the infection and the availability of healthcare services for our participants.
We monitor and evaluate our cost of care, excluding depreciation and amortization, as a percent of total revenues. Our cost of care, excluding depreciation and amortization, as a percentage of total revenues has fluctuated from quarter to quarter, driven by the timing of opening new centers. As our centers age and census grows, we expect the cost of care, excluding depreciation and amortization as a percent of total revenues to decline as we leverage fixed and semi-fixed costs. We expect the dollars associated with our cost of care, excluding depreciation and amortization, to continue to grow as we add new centers and new participants, but we expect these dollars as a percent of our total revenues to decline.
Our sales and marketing expenses fluctuate quarter to quarter based on the timing of outreach and advertising campaigns. We incurred lower sales and marketing expenses in the first half of fiscal year 2021 as a result of delaying outreach and advertising campaigns, including a delay in the development of a new brand campaign. With limited access to facilities for filming and photography as a result of the COVID-19 pandemic, these expenses are expected to be deferred until later during fiscal year 2021.
Our corporate, general and administrative expenses have fluctuated from quarter to quarter. This fluctuation is driven by the growth of our team, seasonality of certain operational expenses and changes in stock-based compensation, particularly during the three months ended June 30, 2019, when non-recurring special bonuses were paid to certain of our employees relating to shareholder dividend transactions as well as during the three months ended September 30, 2020, when non-recurring costs associated with the Apax Transaction occurred. We expect quarter to quarter fluctuations to continue.
Liquidity and capital resources
General
To date, we have financed our operations principally through cash flows from operations and through borrowings under our Credit Facilities, which is comprised of the $300.0 million Term Loan Facility and the $40.0 million Revolving Credit Facility. As of December 31, 2020, we had cash and cash equivalents of $77.3 million. Our cash and cash equivalents primarily consist of highly liquid investments in demand deposit accounts and cash.
We believe that our cash and cash equivalents will be sufficient to fund our operating and capital needs for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, the timing and extent of spending to open new centers and the expansion of sales and marketing activities. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies. We may be required to 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 (together with all amendments thereto, the “Credit Agreement”) with Capital One Financial Corporation, providing for a $75.0 million, five-year senior secured
 
99

 
term loan (the “Term Loan Facility”) and a $20.0 million revolving credit facility (the “Revolving Credit Facility”). On June 22, 2018, we amended and restated the Credit Agreement to, among other amendments, increase the size of the Revolving Credit Facility to $25.0 million, extend the maturity of the Term Loan Facility from May 13, 2021 to May 13, 2022, and provide for a delayed-draw term loan facility (“DDTL”) in an aggregate principal amount of $55.0 million. On May 2, 2019, we further amended and restated the Credit Agreement to, among other amendments, increase the size of the Term Loan Facility to $190.0 million, increase the size of the Revolving Credit Facility to $30.0 million and increase the size of the DDTL to $45.0 million.We used a portion of the proceeds from the upsized Term Loan Facility, together with existing cash, to pay $66.1 million in dividends to our shareholders in an amount equal to $0.50 per share. The Credit Agreement was subsequently amended and restated on July 27, 2020 to account for an upsize of the Term Loan Facility to $300.0 million and of the Revolving Credit Facility to $40.0 million and to terminate the DDTL. We used a portion of the proceeds from the upsized Term Loan Facility, together with existing cash, in a total amount of $77.6 million to repurchase 16,095,819 shares of common stock and $74.6 million to cancel 16,994,975 options granted under the 2016 Plan, in connection with the termination of the 2016 Plan. As of December 31, 2020, we had $299.3 million outstanding under the Term Loan Facility and none outstanding under the Revolving Credit Facility. Borrowings under the Credit Facilities bear interest at a rate per annum, equal to an applicable margin, plus, at our option, an alternative base rate or Eurodollar rate. The applicable margin for borrowings under the Credit Facilities is (a) with respect to term loan borrowings, 5.5% for alternate base rate borrowings and 6.5% for Eurodollar borrowings and (b) with respect to revolving loans, 3.5% for alternate base rate borrowings and 4.5% for Eurodollar borrowings. We intend to use approximately $      million of the net proceeds of this offering, together with borrowings under the New Term Loan Facility, to repay all outstanding borrowings, including prepayment fees and expenses, under the Term Loan Facility.
As of December 31, 2020, we also had $2.4 million outstanding under the Convertible Term Loan. The Convertible Term Loan was entered into by SH1 on August 20, 2013. Monthly principal and interest payments are approximately $0.02 million, 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.
In March 2020, we borrowed $25.0 million under our Revolving Credit Facility to ensure sufficient funds available due to the uncertainty relating to the coronavirus pandemic and for general corporate purposes. Those borrowings have since been repaid in full and the full capacity under our Revolving Credit Facility currently remains available for borrowing.
In connection with this offering, we anticipate entering into the New Term Loan Facility, comprised of a $      million      -year term loan, and the New Revolver, comprised of a $      million        -year revolving credit facility. Interest on our New Term Loan Facility is expected to bear interest at a rate of            (or a similar index for foreign currency borrowings) plus a margin that ranges from          basis points to           basis points, and borrowings under our New Revolving Credit Facility are expected to bear interest at a rate of                 (or a similar index for foreign currency borrowings) plus a margin that ranges from      basis points to           basis points, with a           floor of    %. Together with proceeds from this offering and borrowings under the New Term Loan Facility, we expect to repay outstanding indebtedness under our existing Term Loan Facility and terminate the existing Credit Agreement. We expect to enter into the New Credit Facilities shortly after the closing of this offering; however, there can be no assurance that we will be able to enter into the New Credit Facilities on the terms described herein or at all. For a description of the important terms of the New Credit Facilities, see the section entitled “Description of certain indebtedness—New credit facilities.”
We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness and, therefore, we do not anticipate paying any cash dividends in the foreseeable future.
 
100

 
Cash and cash equivalents
The following table presents a summary of our consolidated cash and cash equivalents from operating, investing and financing activities for the periods indicated.
Year ended
June 30,
Six Months Ended
December 31,
2019202020192020
(in thousands)
Net cash provided by operating activities$25,906$43,828$13,441$(743)
Net cash used in investing activities(52,481)(11,691)(5,954)(13,464)
Net cash provided by financing activities37,34921,232(1,688)(21,365)
Net change in cash10,77453,3695,799(35,572)
Cash at beginning of year/period50,42261,19661,196114,565
Cash at end of year/period$61,196$114,565$66,995$78,993
Operating activities
For the six months ended December 31, 2020, net cash used in operating activities was $0.7 million, a decrease of $14.1 million compared to net cash provided by operating activities of $13.4 million for the six months ended December 31, 2019. Significant changes impacting net cash provided by operating activities for the six months ended December 31, 2020 as compared to the six months ended December 31, 2019 were as follows:

net income of $(40.2) million for the six months ended December 31, 2020 compared to $5.8 million for the six months ended December 31, 2019 decreased due to the Apax Transaction that resulted in non-reoccurring Corporate, general and administrative expense totaling $55.3 million;

deferred income taxes for the six months ended December 31, 2020 of $6.1 million compared to $1.2 million for the six months ended December 31, 2019 increased primarily due to disallowed officers compensation under IRC Section 162(m); and

increase in amounts due to Medicare and Medicaid of $8.4 million for the six months ended December 31, 2020 compared to $5.8 million for the six months ended December 31, 2019 due to HCPF reconciliation and settlement process.
For the year ended June 30, 2020, net cash provided by operating activities was $43.8 million, an increase of $17.9 million compared to net cash provided by operating activities of $25.9 million for the year ended June 30, 2019. Significant changes impacting net cash provided by operating activities for the year ended June 30, 2020 as compared to the year ended June 30, 2019 were as follows:

net income of $25.8 million for the fiscal year ended June 30, 2020 compared to $19.1 million for the fiscal year ended June 30, 2019 increased due to growth;

decrease in accounts payable and accrued expenses for the fiscal year ended June 30, 2020 of $1.0 million compared to an increase in accounts payable for the fiscal year ended June 30, 2019 of $9.4 million due to timing of invoice payments;

decrease in amounts due to Medicare and Medicaid of $8.1 million for the fiscal year ended June 30, 2020 compared to $12.9 million for the fiscal year ended June 30, 2019 due to HCPF reconciliation and settlement process; and

increase in deferred revenue for the fiscal year ended June 30, 2020 of $2,000 compared to a decrease in deferred revenue for the fiscal year ended June 30, 2019 of $12.6 million due to the timing of Medicare payments.
 
101

 
Investing activities
For the six months ended December 31, 2020, net cash used in investing activities was $13.5 million, an increase of $7.5 million compared to net cash used in investing activities of $6.0 million for the six months ended December 31, 2019. Significant changes impacting net cash used in investing activities for the six months ended December 31, 2020 as compared to the six months ended December 31, 2019 were as follows:

purchases of property and equipment in the six months ended December 31, 2020 of $11.5 million compared to $7.3 million in the six months ended December 31, 2019 due to growth-related capital expenditures.
For the year ended June 30, 2020, net cash used in investing activities was $11.7 million, a decrease of $40.8 million compared to net cash used in investing activities of $52.5 million for the year ended June 30, 2019. Significant changes impacting net cash used in investing activities for the year ended June 30, 2020 as compared to the year ended June 30, 2019 were as follows:

purchases of property and equipment in the fiscal year ended June 30, 2020 of $11.8 million compared to $14.5 million in the fiscal year ended June 30, 2019 due to growth-related capital expenditures;

no business acquisitions or associated cash outlay in the fiscal year ended June 30, 2020 compared to payments for three acquisitions, net of cash acquired, in the fiscal year ended June 30, 2019 of $27.5 million; and

during the fiscal year ended June 30, 2019, we made an investment of $9.0 million related to our joint venture in InnovAge Sacramento, which was created on March 18, 2019 and which began operations in the fiscal year 2021.
Financing activities
For the six months ended December 31, 2020, net cash used in financing activities was $21.4 million, a decrease of $19.7 million compared to net cash used in financing activities of $1.7 million for the six months ended December 31, 2019. Significant changes impacting net cash used in financing activities for the six months ended December 31, 2020 as compared to the six months ended December 31, 2019 were as follows:

net proceeds from long-term debt of $79.1 million in the six months ended December 31, 2020 compared to net principal payments from long term debt of $1.0 million in the six months ended December 31, 2019 changed due to the amendment and restatement of our Credit Agreement in July 2020; and

net cash used related to the Apax Transaction and contributions of $99.1 million in the six months ended December 31, 2020 compared to none in the six months ended December 31, 2019.
For the year ended June 30, 2020, net cash provided by financing activities was $21.2 million, a decrease of $16.1 million compared to net cash provided by financing activities of $37.3 million for the year ended June 30, 2019. Significant changes impacting net cash provided by financing activities for the year ended June 30, 2020 as compared to the year ended June 30, 2019 were as follows:

proceeds from long-term debt of $25.0 million in the fiscal year ended June 30, 2020 compared to $245.0 million in the fiscal year ended June 30, 2019 due to borrowings under the Revolving Credit Facility in fiscal year 2020 to address liquidity concerns associated with COVID-19 (which amounts have since been repaid) and the refinancing of the Credit Agreement in fiscal year 2019;

principal payments on long-term debt of $1.9 million in the fiscal year ended June 30, 2020 compared to $127.6 million in the fiscal year ended June 30, 2019, due to the refinancing of the Credit Agreement in fiscal year 2019 and reoccurring payments on outstanding debt in fiscal year 2020; and

payment of dividend, net of withholding of nil in the fiscal year ended June 30, 2020 compared to $66.5 million in the fiscal year ended June 30, 2019.
 
102

 
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 December 31, 2020:
Payments due by period
Total
Less
than
1 year
1-3 
years
3-5 
years
More
than
5 years
(in thousands)
Long-term debt obligations(1)$301,6363,0436,0876,099$286,407
Operating lease obligations(2)26,3083,7557,2905,5349,729
Capital Leases9,2422,6604,5212,061
Total$337,1869,45817,89813,694$296,136
(1) Represents amounts related to the Credit Agreement.
(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 “—Recent accounting pronouncements.”
Off-balance sheet arrangements
We did not have any off-balance sheet arrangements as of December 31, 2020.
JOBS Act
We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act. For as long as we are an “emerging growth 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,” 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.
In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We intend to take advantage of the longer phase-in periods 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.
Critical accounting policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments 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
 
103

 
period. Actual results may differ from these estimates under different assumptions or conditions, impacting our reported results of operations and financial condition.
Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of assets and liabilities and the recognition of income and expenses. We consider these accounting policies to be critical accounting policies. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances.
While our significant accounting policies are described in more detail in Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included elsewhere in this prospectus, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and require management to make subjective and complex judgments and estimates in the preparation of our consolidated financial statements.
Revenue recognition
Revenue for the years ended June 30, 2019 and 2020 is presented under Accounting Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”). Under ASC 605, we recognized revenue when all of the following criteria were met: (i) persuasive evidence of an arrangement exists; (ii) the sales price is fixed or determinable; (iii) collection is reasonably assured; and (iv) services have been rendered. The judgement of when to recognize revenue is linked to the period in which eligible members are entitled to receive benefits.
In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers (“ASU 2014-09”), which 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. We plan on applying the modified retrospective method of adoption for this guidance.
Capitated revenue
Our PACE operating unit 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. Capitation payments are recognized as revenue in the period in which they relate. Capitation payments received for PACE participants from Medicare are subject to retroactive premium risk adjustments based upon various factors. We estimate the amount of current-year adjustments in revenues. Any corresponding retroactive adjustments by CMS are recorded as final settlements are determined.
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 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. If Medicaid coverage is later denied and there are no alternative resources available to pay for services, the participant is disenrolled. Costs incurred on behalf of such participants were nominal in the fiscal years ended June 30, 2019 and 2020 and for the six months ended December 31, 2019 and 2020.
Goodwill and other intangible assets
Intangible assets consist of customer relationships acquired through business acquisitions. Goodwill represents the excess of consideration paid over the fair value of net assets acquired through business acquisitions. Goodwill is not amortized but is tested for impairment at least annually.
We test goodwill for impairment annually on April 1 or more frequently if triggering events occur or other impairment indicators arise which might impair recoverability. These events or circumstances would include
 
104

 
a significant change in the business climate, legal factors, operating performance indicators, competition, sale, disposition of a significant portion of the business, or other factors. Impairment of goodwill is evaluated at the reporting unit level. A reporting unit is defined as an operating segment (i.e. before aggregation or combination), or one level below an operating segment (i.e. a component).
A component 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 reviews the operating results of that component. We have 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. There were no goodwill impairments recorded during the years ended June 30, 2019 and 2020 or during the six months ended December 31, 2019 and 2020.
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 no intangible asset impairments recorded during the years ended June 30, 2020 and 2019 or during the six months ended December 31, 2019 and 2020.
Reported and estimated claims
Reported and estimated claims expenses are costs for third-party healthcare service providers that provide medical care to our participants for which we are contractually obligated to pay (through our full-risk capitation arrangements). The estimated reserve for unpaid claims liability is included in the liability for reported and estimated claims in the consolidated balance sheets. Actual claims expense will differ from the estimated liability due to differences in estimated and actual member utilization of health care services, unit cost trends, participant acuity, changes in net census, known outbreaks of disease, including COVID-19 or increased incidence of illness such as influenza and other factors. We periodically assess our estimates with an independent actuarial expert to ensure our estimates represent the best, most reasonable estimate given the data available to us at the time the estimates are made.
We have included incurred but not reported claims of approximately $28.2 million and $30.3 million on our balance sheet as of June 30, 2019 and 2020, respectively and $36.5 million as of December 31, 2020. Our recorded medical claims expense estimate are approximately within +/- 5-10% of actual medical claims expense incurred, which could represent as much as approximately 0.7% of our total operating expense.
The following tables provide information about incurred and paid claims reporting and development as of June 30, 2020 (except as otherwise noted). The expenses recorded table reflects the amount of claims reported in our consolidated statements of operations as of the end of the applicable fiscal year based on our best and most reasonable estimates and actuarial assessment at the time of such determination. The cumulative
 
105

 
actual incurred claims table represents the actual amount of claims incurred by the Company with the benefit of the passage of time. The variance between the expense recorded and the cumulative actual incurred claims ranges between approximately 1% and 3% of actual total incurred claims over the periods presented, and such variance may vary based on the factors described above in this section.
Expenses Recorded for the Fiscal Years Ended June 30,
Claims incurred year:
(in thousands)
20162017201820192020
FY 2016$86,492
FY 2017$102,832
FY 2018$123,821
FY 2019$171,128
FY 2020$211,381
Total$86,492$102,832$123,821$171,128$211,381
Pharmacy Expense61,451
External provider costs$272,832
Cumulative Actual Incurred Claims for the Fiscal Years Ended June 30,
Claims incurred year:
(in thousands)
20162017201820192020
FY 2016$85,244$85,244$85,244$85,244$85,244
FY 2017101,386101,386101,386101,386
FY 2018119,687119,687119,687
FY 2019173,047173,061
FY 2020210,512
Total$85,244$186,630$306,317$479,364$689,890
Cumulative Actual Paid Claims for the Fiscal Years Ended June 30,
Claims incurred year:
(in thousands)
20162017201820192020
FY 2016$74,924$85,290$85,234$85,254$85,244
FY 201788,020101,572101,450101,386
FY 2018109,022119,759119,687
FY 2019144,943173,048
FY 2020179,616
Total$74,924$173,310$295,828$451,406$658,981
Other Claims-Related Liabilities(619)
Reported and estimated claims$30,291
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 Plan pursuant to which various stock-based awards may be granted to employees, directors, consultants, and advisers. Under our 2016 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.
 
106

 
The 2016 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 Plan was canceled in July 2020 and we subsequently established the 2020 Plan 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.
The 2020 Plan
The fair value of each stock option grant is estimated on the date of grant using the Monte Carlo 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.
We concluded that within the 2020 Plan both the performance-vesting units are subject to a market condition and assessed the market condition as part of its 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.
Recent accounting pronouncements
See Note 2 to our consolidated financial statements “Summary of Significant Accounting Policies—Recent Accounting Pronouncements” for more information.
Quantitative and qualitative disclosures about market risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure due to potential changes in inflation or interest rates. We do not hold financial instruments for trading purposes.
Interest rate risk
As of June 30, 2020, we had total outstanding debt of $190.0 million in principal amount under the Term Loan Facility, $25.0 million under the Revolving Credit Facility and $2.4 million under the Convertible Term
 
107

 
Loan. As of December 31, 2020, we had total outstanding debt of $299.3 million in principal amount under the Term Loan Facility, $2.4 million under the Convertible Term Loan, and no outstanding debt under the Revolving Credit Facility. Borrowings under the Credit Facilities bear interest at a floating rate per annum, equal to an applicable margin, plus, at our option, an alternative base rate or Eurodollar rate. The applicable margin for borrowings under the Credit Facilities is (a) with respect to term loan borrowings, 5.5% for alternate base rate borrowings and 6.5% for Eurodollar borrowings and (b) with respect to revolving loans, 3.5% for alternate base rate borrowings and 4.5% for Eurodollar borrowings. Additionally, we are required to pay the following fees pursuant to the terms of the Credit Facilities: (a) a commitment fee on the average daily unused portion of the revolving credit commitments of 0.5% per annum, (b) a customary administrative agent fee to the first lien administrative agent (c) a participation fee on the daily amount of letter of credit exposure of each letter of credit issued by each issuing bank at a rate equal to 5.0% and (d) a fronting fee which shall accrue at 0.125% on the actual daily amounts of the exposure determined in the prior subsection (c).
In connection with this offering, we anticipate entering into the New Term Loan Facility, comprised of a $      million           -year term loan, and the New Revolver, comprised of a $      million           -year revolving credit facility. Interest on our New Term Loan Facility is expected to bear interest at a rate of                 (or a similar index for foreign currency borrowings) plus a margin that ranges from           basis points to           basis points, and borrowings under our New Revolver are expected to bear interest at a rate of                 (or a similar index for foreign currency borrowings) plus a margin that ranges from      basis points to           basis points, with a            floor of    %. Together with proceeds from this offering and borrowings under the New Term Loan Facility, we expect to repay outstanding indebtedness under our existing Term Loan Facility and terminate the existing Credit Agreement. We expect to enter into the New Credit Facilities shortly after the closing of this offering; however, there can be no assurance that we will be able to enter into the New Credit Facilities on the terms described herein or at all.
We had cash and cash equivalents of $112.9 million and $77.3 million as of June 30, 2020 and December 31, 2020, respectively, which are deposited with high credit quality financial institutions and are primarily in demand deposit accounts.
Our cash and cash equivalents and interest payments in respect of our debt are subject to market risk due to changes in interest rates. We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on our business, financial condition or results of operations.
Inflation risk
Based on our analysis of the periods presented, we believe that inflation has not had a material effect on our operating results. There can be no assurance that future inflation will not have an adverse impact on our operating results and financial condition.
 
108

 
Business
Overview
We are the leading healthcare delivery platform by number of participants focused on providing all-inclusive, capitated care to high-cost, dual-eligible seniors. We directly address two of the most pressing challenges facing the U.S. healthcare industry: rising costs and poor outcomes. Our patient-centered care delivery approach meaningfully improves the quality of care our participants receive, while keeping them in their homes for as long as safely possible and reducing over-utilization of high-cost care settings such as hospitals and nursing homes. Our patient-centered approach is led by our IDTs, who design, manage and coordinate each participant’s personalized care plan. We directly manage and are responsible for all healthcare needs and associated costs for our participants. We directly contract with government payors, such as Medicare and Medicaid, and do not rely on third-party administrative organizations or health plans. We believe our model aligns with how healthcare is evolving, namely (1) the shift toward value-based care, in which coordinated, outcomes-driven, high-quality care is delivered while reducing unnecessary spend, (2) eliminating excessive administrative costs by contracting directly with the government, (3) focusing on the patient experience and (4) addressing social determinants of health.
We deliver our patient-centered care through the InnovAge Platform. The InnovAge Platform consists of (1) our IDTs and (2) our community-based care delivery model. The key attributes of the InnovAge Platform include:

Our participant focus.   Our model is focused on caring for frail, high-cost, dual-eligible seniors. We define dual-eligible seniors as individuals who are 55+ and qualify for benefits under both Medicare and Medicaid. Our target participant population is the frail, nursing home-eligible subset of dual-eligible seniors to whom we refer as “high-cost, dual-eligibles” given their high healthcare acuity and the associated high level of spend. Our participants are among the most frail and medically complex individuals in the U.S. healthcare system. The typical InnovAge participant has, on average, nine chronic conditions and requires, on average, assistance with three or more ADLs. As a result, the average InnovAge participant has a Medicare RAF of 2.53. A higher RAF score indicates poorer health and higher predicted health care costs. The average InnovAge participant’s RAF is over 2.3 times higher than the 1.08 RAF of the average Medicare fee-for-service non-dual enrollee according to a 2019 analysis. Our platform enables participants to exercise their preference to age independently in their homes and stay active in their communities for as long as safely possible. All of our participants are certified as nursing home-eligible, but, as a result of the InnovAge Platform, over 90% of our participants are able to live safely in their homes and communities.

Our interdisciplinary care teams.   Our IDTs are the core of our comprehensive clinical model. They design, manage and coordinate all aspects of each participant’s customized care plan. Our IDT structure is designed to enhance access to care for our participants and eliminate the information silos and gaps in care that often occur in traditional fee-for-service models. We are responsible for the totality of our participants’ medical and social needs, including primary and specialist care, in-home care, hospital visits, nutrition, transportation to our care centers and other medical appointments, pharmacy and behavioral health support. We leverage a technology suite powered by industry-leading clinical and operational information technology solutions to collect and analyze data, streamline IDT workflows and empower our teams with timely participant insights that improve outcomes.

The composition of our IDTs reflects our comprehensive mandate and the complexity of our participants’ care needs. Each IDT convenes, at minimum, experts across at least 11 disciplines, from the primary care physician to the social worker, who are collectively responsible for managing all aspects of our participant’s care.

Our care plans seek to mitigate challenges presented by participants’ social determinants of health. We provide food, transportation and in-home assistance to remove barriers to accessing care and promote a safe in-home living environment for our participants.
 
109

 

Our community-based care delivery model.   Our model delivers care across a continuum of community-based settings. Our multimodal approach leverages our care centers, the participant’s home, and telehealth to deliver comprehensive care to our participants in the most appropriate and cost-effective setting, while enabling participants to live in their homes and communities. The InnovAge Platform is designed to be a higher touch care model compared to many of our peers, and our providers interact with our participants daily across multiple settings. As an example, a representative participant (1) visits the center approximately six times per month (prior to the COVID-19 pandemic), (2) receives daily in-home support and (3) has 24/7 virtual access to an IDT member. Each care plan is individualized by the IDT to include a set of interactions tailored to each participant’s needs. We believe our high-touch, integrated approach results in high-quality care and better outcomes for our participants.

Our direct contracting relationships with federal and state governments.   We directly contract with government payors, such as Medicare and Medicaid, through PACE and receive a capitated payment to manage the totality of a participant’s medical care. The capitated payment model gives us flexibility to invest in a comprehensive care delivery model, which delivers value-added services that are not typically covered in