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Item 2. Management’s Discussion and Analysis

2021-11-09 compared with 2021-05-11 · 254 added, 345 removed, 117 unchanged (84% of the section changed)

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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.

Readers are cautioned not to place undue reliance on any forward-looking statements, as forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly due to numerous known and unknown risks and uncertainties, including those discussed below and in the section entitled “Cautionary Note on Forward-Looking Statements.” Those known risks and uncertainties include, but are not limited to, the risk factors identified in the section titled “Risk Factors” in this Quarterly Report on Form 10-Q and in the IPO Prospectus.

Executive 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 (“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.

Recent Developments

On March 3, 2021, the Company’s Registration Statement on Form S-1 with respect to the Company’s initial public offering (“IPO”) was declared effective by the Securities and Exchange Commission (“SEC”).

The Company’s common stock began trading on March 3, 2021 on Nasdaq Stock Market LLC (“NASDAQ”) under the ticker symbol “INNV.”

On March 8, 2021, we completed our IPO in which we issued and sold 16,666,667 shares of common stock at an offering price of $21.00 per share.

In addition, the underwriters exercised the option to purchase 2,329,234 additional shares of common stock.

We received net proceeds of $373.6 million, after deducting underwriting discounts and commissions of $23.9 million and deferred offering costs of $1.4 million.

Deferred, direct offering costs were capitalized and consisted of fees and expenses incurred in connection with the sale of our common stock in the IPO, including the legal, accounting, printing and other offering related costs.

Upon completion of the IPO, these deferred offering costs were recorded against the net proceeds from the offering.

The Company made an additional contribution of $52,000 to and obtained control of InnovAge California PACE-Sacramento, LLC (“InnovAge Sacramento”), effective January 1, 2021.

Accordingly, beginning January 1, 2021, the results of InnovAge Sacramento are included in our consolidated results of operations.

This resulted in a gain on consolidation of $10.9 million, which is recorded in gain on equity method investment on the condensed consolidated statement of operations.

InnovAge Holding Corp.

(“InnovAge”), formerly TCO Group Holdings, Inc., became a public company in March 2021.

The Company serves approximately 6,990 PACE participants, and operates 18 PACE centers across Colorado, California, New Mexico, Pennsylvania and Virginia.

Impact of COVID-19

The rapid spread of the novel coronavirus disease (“COVID-19”) around the world and throughout the United States of America (“U.S.”) has altered the behavior of businesses and people, with significant negative effects on

federal, state and local economies, the duration of which continues to be uncertain at this time.

The virus disproportionately impacts older adults, especially those with chronic illnesses, which describes our participants.

We have experienced or expect to experience the following impacts on our business model due to COVID-19:

Though the COVID-19 pandemic has altered the mix of settings where we deliver care, our multimodal model has ensured that 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.

We structured our care teams to deliver in-home services that otherwise would have occurred at our 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.

If a participant lacks access to a device or is unable to use technology, we offer to provide them 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 have repurposed our existing infrastructure and workforce to support care delivery during the COVID-19 pandemic.

As a result of the COVID-19 pandemic, at the end of March 2020, we pivoted to a virtual enrollment model due to safety concerns for our employees and participants and to comply with local government ordinances.

We also realigned our marketing strategy to increase our focus on digital channels during the COVID-19 pandemic and to reach those searching for senior care alternatives.

Our revenue is capitated and not determined by the number of times we interact with our participants face-to-face.

As of March 31, 2021, we had not experienced a decline in revenue as a result of the COVID-19 pandemic.

The capitation payments we receive from Medicare are risk-adjusted based on documented encounters and diagnosed conditions.

Government payors require that participants’ health issues be documented annually regardless of the permanence of the underlying causes.

Historically, this documentation has been required to be completed during an in-person visit with a participant, but Centers for Medicare and Medicaid Services (“CMS”) is now allowing documentation of conditions identified during qualifying telehealth visits with participants.

Given the disruption caused by the COVID-19 pandemic, 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 Medicare risk adjustment factor (“RAF”) scores and our resulting revenue in future periods.

Though the distribution of expenses across expense categories changed as a result of the COVID-19 pandemic, we did not experience material changes in our aggregate expenses.

Our internal care delivery costs remained largely the same as we remained fully staffed to execute on our participants’ care plans, albeit through a different mix of care settings.

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 necessitates very limited instances of deferrable care otherwise.

As a result of the non-deferrable nature of most of our participants’ third-party medical needs, we experienced no material changes to total external provider costs as a result of the COVID-19 pandemic.

The United States continues to experience supply chain issues with respect to personal protective equipment (“PPE”) and other medical supplies used to prevent transmission of COVID-19.

During 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.

These incremental costs represent less than 1.4% of our total cost of care for the fiscal year ended June 30, 2020.

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.

Key Factors Affecting Performance

The rapid spread of COVID-19 around the world and throughout the United States has altered the behavior of businesses and people, with significant negative effects on federal, state and local economies, the duration of which continues to be unknown at this time.

The virus has and continues to disproportionately impact older adults, especially those with chronic illnesses, which describes our participants.

Despite the challenges brought on by COVID-19, as of September 30, 2021, we continue care delivery through telehealth and at our centers, all of which remain fully opened.

As economies around the world have reopened in 2021, sharp increases in demand are creating significant disruptions to the global supply chain.

Global logistics network challenges have resulted in higher prices for the medical supplies we require.

Uncertainties related to the magnitude and duration of global supply chain disruptions have adversely affected, and may continue to adversely affect, our business and outlook.

For additional information on the various risks posed by the COVID-19 pandemic, please see ‘Risk Factors’ included in our 2021 10-K.

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:

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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 Medicare Advantage programs.

As a result, we receive larger payments for our participants compared to Medicare Advantage participants.

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 Medicare RAF score of 2.39 as of March 31, 2021 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 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 Medicare RAF scores.

(i) we manage a higher acuity population, with an average RAF score of 2.40 based on InnovAge data as of September 30, 2021, compared to an average RAF score of 1.08 for Medicare fee-for-service non-dual enrollees, as calculated in an analysis by Avalere Health in June 2020 of a cohort of individuals enrolled in Medicare Fee-for-Service in 2019 ;

and (ii) 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 participant medical costs.

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.

For dual-eligible participants, we receive PMPM payments 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-based on the underlying medical conditions and frailty of each participant.

● 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 and through March 31, 2021, 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 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 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.

We are proud of the fact that the “friends and family” of our participants remain one of our largest referral sources.

participants;

their families and government payors.

We have driven 10% annual, organic census growth over the last four fiscal years.

Awareness of PACE programs remains low among potential participants, despite high levels of participant 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.

We have a large, embedded growth opportunity within our existing center base.

As of September 30, 2021, our eligible participant penetration rate was, 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.

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.

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We have multiple touch points with participants and their families, which enhances participant receptivity to our services.

Furthermore, historically, we have experienced low levels of voluntary disenrollment.

Our historical disenrollments have been involuntary, due primarily to participant death and otherwise to participants re-locating out of our service areas.

We achieved an 83% participant satisfaction rating as of July 1, 2021 and average participant tenure was 3.0 years as of September 30, 2021, measured as tenure from enrollment to disenrollment, 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 three fiscal years.

Approximately 75% of our historical disenrollments have been involuntary, due primarily to participant death or otherwise due 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.

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.

Because our participants are among the most frail and medically complex individuals in the U.S.

healthcare system, our external provider costs and cost of care, excluding depreciation and amortization, represented approximately 76% of our revenue in the three months ended September 30, 2021.

While we are liable for potentially large medical claims, 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 the Company 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.

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.

Over time, we plan to grow both our number of centers and the number of participants at each center.

As we add participants to existing centers, we further leverage our fixed cost base at those centers and the value of a center to our business increases over time .

We have a history of achieving profitable Center-level Contribution Margin, as defined and described below under Key Business Metrics and Non-GAAP Measures .

● Our ability to expand via acquisition or de novo centers within existing and new markets.

We have a large addressable market and believe we serve a very small portion of PACE-eligible participants in those markets, reflecting significant unmet demand for PACE services and creating opportunities for us to grow in new and existing markets.

We have proven our ability to integrate and improve acquired organizations, as well as expand and operationalize new centers across multiple geographies while generating consistent center-level performance.

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 there is significant opportunity to expand our footprint 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.

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.

We believe investments in de novo centers generate robust internal rates of return and accretive cash-on-cash returns.

Opening of de novo centers can also result in losses, generally related to pre-opening and start-up ramp, from the time the center opens and its first 24 months of operations.

For the three months ended March 31, 2021, de novo losses were approximately $0.3 million, respectively, for our Sacramento center in California and our Pennypack center in Philadelphia.

● Execute tuck-in acquisitions.

We believe there is a sizeable landscape of potential tuck-in acquisitions to supplement our organic growth strategy.

We are disciplined in our approach to acquisitions and have executed multiple types of transactions, including turnarounds and non-profit conversions.

Over the past three 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.

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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 costs 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 expect our expenses to increase in absolute dollars for the foreseeable future to support our growth and due to additional costs we are incurring and 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 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.

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 relevant 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 Medicare RAF scores of our participants.

Based on the difference between the Medicare RAF score we estimate and the Medicare RAF score determined by CMS, we may receive incremental true-up revenue or be required to repay certain amounts.

● Seasonality of our business .

Our operational and financial results, including medical costs and per-participant revenue true-ups, will experience some variability depending upon the time of year in which they are measured.

Medical costs vary most significantly as a result of (i) the weather, with certain illnesses, such as the influenza virus, being more prevalent during colder months of the year, which generally increases per-participant costs and (ii) the number of business days in a period, with shorter periods generally having lower medical costs all else equal.

Per-participant revenue true-ups represent the difference between our estimate of per-participant capitation revenue to be received and actual revenue received by CMS, which is based on CMS’s determination of a participant’s RAF score as measured twice per year and is based on the evolving acuity of a participant.

Based on the difference between our estimate and the final determination from 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.

Results of operations

The following table sets forth our results of operations for the periods presented and as a percentage of our total revenues for those periods.

Percentages presented in the following tables may not sum due to rounding.

Comparison of the three and nine months ended March 31, 2021 and 2020

Three Months Ended

Nine Months Ended

(in thousands)

Components of Results of Operations

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.

Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the PACE program.

The PACE state contracts between us and the respective state Medicaid administering agency are amended annually each June 30 in all states other than California and Pennsylvania, which contract on a calendar-year basis.

New agreements have been executed for the periods (i) January 1, 2021 through December 31, 2021 for California and (ii) July 1, 2021 through June 30, 2022 for all other states, except Pennsylvania, for which we are currently operating in good standing under the 2020 amended agreement while the agency finalizes its 2021 amendment.

For a discussion of our revenue recognition policies, please see Critical Accounting Policies and Estimates below and Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2021 10-K.

Other Service Revenue.

Total revenues

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 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.

For a discussion of our revenue recognition policies, please see Critical Accounting Policies and Estimates below and Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2021 10-K.

Operating 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.

Corporate, general and administrative

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 due to the additional legal, accounting, insurance, investor relations and other costs that we incur as a public company, as well as other costs associated with 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.

Other operating (income) expense

Operating expenses

Income (Loss) from Operations

Other Income (Expense)

Interest expense, net

Loss on extinguishment of debt

Gain on equity method investment

Total other income (expense)

Income (Loss) Before Income Taxes

Provision (Benefit) for income taxes

Net Income (Loss)

Net Loss attributable to noncontrolling interests

Net Income (Loss) Attributable to the Company

Depreciation and amortization expenses are primarily attributable to our buildings and leasehold improvements and our equipment and vehicles.

Depreciation and amortization are recorded using the straight-line method over the shorter of estimated useful life or lease terms, to the extent the assets are being leased.

Equity loss relates to our equity method investment in InnovAge Sacramento, which began operations in July 2020 and subsequently became a consolidated entity effective January 1, 2021.

Other Operating Income.

Other operating income consists of the re-measurement of contingent consideration to fair value relating to our acquisition of NewCourtland.

For more information relating to the components of our results of operations, see Results of Operations below and Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2021 10-K

Results of Operations

The results of our operations for the three months ended September 30, 2021 include those of InnovAge Sacramento, which during the same period of the prior year was not a consolidated entity.

The following table sets forth our consolidated results of operations for the periods presented:

Three Months Ended

Nine Months Ended

September 30,

Capitation revenue

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Depreciation and amortization

Other operating (income) expense

Operating expenses

Income (Loss) from Operations

Other operating income

Total expenses

Operating Income (Loss)

Other Income (Expense)

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Loss on extinguishment of debt

Gain on equity method investment

Total other income (expense)

Other expense

Total other expense

Income (Loss) Before Income Taxes

Provision (Benefit) for income taxes

Provision for Income Taxes

Net Income (Loss)

net loss attributable to noncontrolling interests

Net Income (Loss) Attributable to the Company

Indicates amounts that are not material.

Total revenues

Net Income (Loss) Attributable to InnovAge Holding Corp.

Three Months Ended

Nine Months Ended

(dollars in thousands)

September 30,

Capitation revenue

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Total revenues

Capitation revenue was $155.8 million for the three months ended March 31, 2021, an increase of $11.7 million, or 7%, compared to $144.2 million for the three months ended March 31, 2020.

This increase was driven primarily by an increase in census and rates, both of which increased Medicaid and Medicare revenue, partially offset by a low single digit rate decrease related to our participants in Colorado.

Capitation revenue was $464.3 million for the nine months ended March 31, 2021, an increase of $51.6 million, or 11%, compared to $412.7 million for the nine months ended March 31, 2020.

Medicare revenue also increased due to the temporary suspension of the automatic 2% reduction of Medicare claim reimbursements (sequestration) for the period of May 1, 2020 through December 31, 2021.

Other service revenue was $0.5 million for the three months ended March 31, 2021, a decrease of $0.1 million, or 26%, from $0.6 million for the three months ended March 31, 2020.

Other service revenue was $1.9 million for the nine months ended March 31, 2021, a decrease of $0.1 million, or 5%, from $2.0 million for the nine months ended March 31, 2020.

External provider costs

Three Months Ended

Nine Months Ended

(dollars in thousands)

Capitation revenue.

Capitation revenue was $172.6 million for the three months ended September 30, 2021, an increase of $20.6 million, or 13.6%, compared to $151.9 million for the three months ended September 30, 2020.

This increase was driven by (i) a 5.1% increase in capitation rates and (ii) an 8.1% increase in member months (as defined below).

The increase in capitation rates was primarily driven by an expected annual increase in Medicaid capitation rates.

Other service revenue.

Other service revenue was $0.5 million for the three months ended September 30, 2021, a decrease of $0.1 million, or 17%, from $0.6 million for the three months ended September 30, 2020.

Operating Expenses

Three months ended September 30,

External provider costs

% of total revenues

External provider costs were $75.4 million for the three months ended March 31, 2021, an increase of $4.4 million, or 6%, compared to $71.0 million for the three months ended March 31, 2020.

This change was driven by an increase in census and an increase in the average cost per participant.

External provider costs were $224.2 million for the nine months ended March 31, 2021, an increase of $19.8 million, or 10%, compared to $204.4 million for the nine months ended March 31, 2020.

This change was driven by an increase in census and an increase in the average cost per participant.

Cost of care (excluding depreciation and amortization)

Three Months Ended

Nine Months Ended

(dollars in thousands)

(excluding depreciation and amortization)

% of total revenues

Cost of care (excluding depreciation and amortization) expense was $39.6 million for the three months ended March 31, 2021, an increase of $0.3 million, or 1%, compared to $39.3 million for the three months ended March 31, 2020.

This change is primarily driven by an increase in census offset by the decrease in the cost per participant.

This decrease in cost per participant was primarily driven by year-over-year cost savings due to the closures of our centers on account of the COVID-19 pandemic.

Cost of care (excluding depreciation and amortization) expense was $115.9 million for the nine months ended March 31, 2021, an increase of $1.5 million, or 1%, compared to $114.5 million for the nine months ended March 31, 2020.

This change is primarily driven by an increase in census offset by the decrease in cost per participant.

This decrease in cost per participant was primarily driven by year-over-year cost savings due to the closures of our centers due to the COVID-19 pandemic.

Sales and marketing

Three Months Ended

Nine Months Ended

(dollars in thousands)

Sales and marketing

% of total revenues

Sales and marketing expenses were $5.6 million for the three months ended March 31, 2021, an increase of $1.0 million, or 21%, compared to $4.6 million for the three months ended March 31, 2020.

The increase was primarily due to an increase in headcount to support enrollment growth as well as a shift in marketing spend to the second half of fiscal year 2021.

Sales and marketing expenses were $14.3 million for the nine months ended March 31, 2021, a decrease of $0.1 million, or 0.7%, compared to $14.4 million for the three months ended March 31, 2020.

We incurred lower marketing and sales expenses in the first half of fiscal year 2021 as a result of shifting marketing spend to the second half of fiscal year 2021.

Corporate, general, and administrative

Three Months Ended

Nine Months Ended

(dollars in thousands)

Corporate, general and administrative

% of total revenues

Corporate, general and administrative expenses were $18.6 million for the three months ended March 31, 2021, an increase of $4.6 million, or 33%, compared to $14.0 million for the three months ended March 31, 2020.

This increase was primarily related to fees incurred as a result of the IPO.

Corporate, general and administrative expenses were $105.9 million for the nine months ended March 31, 2021, an increase of $63.5 million, or 150%, compared to $42.4 million for the nine months ended March 31, 2020.

The increase was primarily due to the fees incurred as a result of the Apax Transaction (as defined below) and the IPO.

In connection with the Apax Transaction, $42.2 million was recorded related to the cancellation of stock options outstanding under the Company’s 2016 Equity Incentive Plan (the “2016 Incentive Plan”) and $13.1 million of transaction related costs were recorded as corporate, general and administrative expenses.

In connection with the IPO transaction $1.5 million of transaction costs were recorded as corporate, general and administrative expenses.

Depreciation and amortization

Three Months Ended

Nine Months Ended

(dollars in thousands)

Other operating income

Total operating expenses

External provider costs.

External provider costs were $90.0 million for the three months ended September 30, 2021, an increase of $16.3 million, or 22.2%, compared to $73.7 million for the three months ended September 30, 2020.

The increase is primarily driven by (i) an increase of 13.0% in cost per participant and (ii) an increase of 8.1% in member months.

The increase in cost per participant is primarily driven by the net effect of an increase in housing, outpatient, inpatient and specialist care expenses.

Cost of care (excluding depreciation and amortization).

Cost of care (excluding depreciation and amortization) expense was $40.7 million for the three months ended September 30, 2021, an increase of $2.4 million, or 6.4%, compared to $38.3 million for the three months ended September 30, 2020, primarily due to the net effect of (i) an increase of 8.1% in member months and (ii) a decrease of 1.6% in cost per participant.

The decrease in cost per participant was driven by a decrease in supplies expense offset by an increase in transportation costs due to the reopening of our centers.

Sales and marketing.

Sales and marketing expenses were $6.3 million for the three months ended September 30, 2021, an increase of $2.2 million, or 53.0%, compared to $4.1 million for the three months ended September 30, 2020, primarily due to an increase in (i) employee compensation and benefits due to an increase in FTEs and (ii) costs associated with certain new advertising campaigns to raise PACE awareness and accelerate growth.

Corporate, general and administrative.

Corporate, general and administrative expenses were $21.1 million for the three months ended September 30, 2021, a decrease of $50.5 million, or 70.5%, compared to $71.6 million for the three months ended September 30, 2020.

The decrease was primarily due to the fees incurred during fiscal year 2021 as a result of the Apax Transaction (as defined below).

In connection with the Apax Transaction, $45.4 million was recorded related to the cancellation of 16,994,975 common stock options outstanding under the Company’s 2016 Equity Incentive Plan and $13.1 million of transaction related costs were recorded as corporate, general and administrative expenses.

Offsetting the decrease of $58.5 million related to the Apax Transaction were expenses of $8.0 million primarily from Company growth and the additional costs associated with being a publicly traded company.

Depreciation and amortization.

% of total revenues

Depreciation and amortization expense was $3.3 million for the three months ended March 31, 2021, an increase of $0.5 million, or 20%, compared to $2.8 million for the three months ended March 31, 2020.

Depreciation and amortization expense was $9.3 million for the nine months ended March 31, 2021, an increase of $1.0 million, or 11%, compared to $8.3 million for the nine months ended March 31, 2020.

This increase in both periods is the result of capital additions in the normal course of business.

Three Months Ended

Nine Months Ended

(dollars in thousands)

% of total revenues

We did not experience any equity loss for the three-month period ended March 31, 2021, a decrease of $0.2 million compared to $0.2 million for the three months ended March 31, 2020.

Equity loss was $1.3 million for the nine months ended March 31, 2021, an increase of $1.1 million compared to $0.2 million for the nine months ended March 31, 2020.

The changes related to the equity loss are derived from InnovAge Sacramento, which began operations in July 2020 and was accounted for as an equity method investee and subsequently became a consolidated entity effective January 1, 2021.

Other operating (income) expense

Three Months Ended

Nine Months Ended

(dollars in thousands)

Other operating (income) expense

% of total revenues

Other operating expense was $19.2 million for the three months ended March 31, 2021, an increase of $19.3 million compared to other operating income of $(0.1) million for the three months ended March 31, 2020.

Other operating expense was $18.2 million for the nine months ended March 31, 2021, an increase of $18.5 million compared to other operating income of $(0.3) million for the nine months ended March 31, 2020.

This change primarily represents the change in fair value related to contingent consideration and the payment of $20.0 million made under the acquisition agreement of the New Courtland LIFE Program during the three months ended March 31, 2021.

There were no such payments during the nine months ended March 31, 2020.

Depreciation and amortization expenses are primarily attributable to our buildings and leasehold improvements and our equipment and vehicles.

Depreciation and amortization are recorded using the straight-line method over the shorter of estimated useful life or lease terms, to the extent the assets are being leased.

Depreciation and amortization expense was $3.3 million for the three months ended September 30, 2021, an increase of $0.3 million, or 11.3%, compared to $3.0 million for the three months ended September 30, 2020.

This increase is due to an increase in depreciation expense as a result of capital additions in the normal course of business.

Equity loss of $0.8 million for the three months ended September 30, 2020 related to our equity method investment in InnovAge Sacramento.

InnovAge Sacramento began operations in July 2020 and was subsequently consolidated into operations effective January 1, 2021, therefore there are no equity earnings for the three months ended September 30, 2021.

Other operating income.

Other operating income was $0.7 million for the three months ended September 30, 2020 due to the change in fair value of contingent consideration.

The contingent consideration was paid in March 2021 and there were no amounts outstanding as of September 30, 2021.

Other Income (Expense)

Three Months Ended

Nine Months Ended

(dollars in thousands)

Other income (expense)

September 30,

Interest expense, net

Loss on extinguishment of debt

Gain on equity method investment

Total other income (expense)

Other expense

Total other expense

Interest expense, net.

Interest expense, net was $4.9 million for the three months ended March 31, 2021, an increase of $2.5 million, or 52%, compared to $2.4 million for the three months ended March 31, 2020.

Interest expense, net was $17.1 million for the nine months ended March 31, 2021, an increase of $5.8 million, or 34%, compared to $11.3 million for the nine months ended March 31, 2020.

The increase was primarily due to a higher interest rate of 7.75% for the three months ended March 31, 2021 on the existing Term Loan Facility (as defined below) as a result of the July 27, 2020 amendment and restatement of our 2016 Credit Agreement (as defined below) and higher levels of outstanding borrowings during the nine months ended March 31, 2021.

Interest expense, net, consists primarily of interest payments on our outstanding borrowings, net of interest income earned on our cash and cash equivalents and restricted cash.

Interest expense, net was $0.5 million for the three months ended September 30, 2021, a decrease of $5.1 million, or 90.3%, compared to $5.6 million for the three months ended September 30, 2020.

The decrease was primarily due to (i) a lower outstanding debt balance and (ii) to a lesser extent, a lower average interest rate.

For additional information regarding our outstanding indebtedness, see Note 8, “Long-Term Debt” to our consolidated financial statements.

Loss on extinguishment of debt.

Loss on extinguishment of debt was $13.5 million for the three months ended March 31, 2021 and no loss on extinguishment of debt was recorded for the three months ended March 31, 2020.

On March 8, 2021, we entered into the 2021 Credit Agreement, which led to an extinguishment of debt of $13.5 million, including $6.0 million of a prepayment penalty.

Loss on extinguishment of debt was $14.5 million for the nine months ended March 31, 2021 and no loss on extinguishment of debt was recorded for the nine months ended March 31, 2020.

On July 27, 2020, we amended and restated our 2016 Credit Agreement, which led to an extinguishment of debt for certain lenders and a modification of debt for other lenders.

The total debt structure extinguishment for certain lenders led to the write-off of $1.0 million in debt issuance costs.

On March 8, 2021, we entered into the 2021 Credit Agreement, which led to an extinguishment of debt of $13.5 million, including $6.0 million of a prepayment penalty.

Gain on equity method investment.

Gain on equity method investment was $10.9 for the three and nine months ended March 31, 2021, respectively, and no amounts were recorded for the three and nine months ended March 31, 2020.

Gain on equity method investment resulted from InnovAge Sacramento becoming a consolidated entity as of January 1, 2021.

Other expense was less than $2.3 million for the three months ended March 31, 2021, a decrease of $2.5 million, or 111%, compared to other income of $0.2 million for the three months ended March 31, 2020.

Other expense was $2.2 million for the nine months ended March 31, 2021, an increase of $1.5 million, or 67%, compared to other income of $0.7 million for the nine months ended March 31, 2020.

The impact in 2021 is primarily a result of an amendment to the

warrants issued by the Company to Adventist Health System/West (“Sacramento Warrants”) which resulted in additional expense of $2.3 million.

We recognized a loss on extinguishment of debt of $1.0 million for the three months ended September 30, 2020 and no loss on extinguishment of debt for the three months ended September 30, 2021.

Provision for Income Taxes

The Company and its subsidiaries calculate 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 and Sacramento have elected to be taxed as partnerships, and no provision for income taxes for SH1 or Sacramento 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% likelihood of being realized upon settlement.

The Company recognizes interest and penalty expense associated with uncertain tax positions as a component of provision for income taxes.

During the three months ended September 30, 2021 and 2020, we reported provision for income taxes of $3.0 million and $4.9 million, respectively.

The decrease of $1.9 million is primarily due to (i) our pretax book loss recognized during the three months ended September 30, 2020, as compared to pretax book income recognized during the three months ended September 30, 2021 and (ii) certain permanent differences between the financial and tax accounting treatment in 2020 of (a) the Section 162(m) limitation on compensation of five highest paid officers, (b) transaction costs associated with the Apax Transaction and (c) the change in our valuation allowance.

Net Loss Attributable to Noncontrolling Interests.

InnovAge Senior Housing Thornton, LLC (“SH1”) is a Variable Interest Entity (“VIE”).

The Company is the primary beneficiary of SH1 and consolidates SH1.

The Company is the primary beneficiary of SH1 because it has 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

The most significant activity of SH1 is the operation of the housing facility.

The Company has provided a subordinated loan to SH1 and has provided a guarantee for the convertible term loan held by SH1.

The SH1 interest is reflected within equity as noncontrolling interests.

Our share of earnings are recorded in the consolidated statements of operations and the share of the other noncontrolling interest holders’ earnings are recorded as net loss attributable to noncontrolling interests.

The Company has a controlling interest in InnovAge Sacramento.

As of January 1, 2021, our share of earnings are recorded in the consolidated statements of operations and the share of the other noncontrolling interest holders’ earnings are recorded as net loss attributable to noncontrolling interests.

Net Income (Loss)

During the three months ended September 30, 2021 and 2020, we reported net income of $7.6 million and a net loss of $(49.8) million, respectively, consisting of (i) income (loss) from operations of $11.7 million and ($38.2 million), respectively, (ii) other expense of $1.0 million and $6.7 million, respectively, and (iii) provision for income taxes of $3.0 million and $4.9 million, respectively, each as described above.

Key Business Metrics and Non-GAAP Measures

In addition to our U.S.

generally accepted accounting principles (“U.S.

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 performance, identify trends affecting our business, formulate business plans and make strategic decisions.

We believe these non-GAAP 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 U.S.

GAAP financial information presented herein.

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 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.

Nine months ended March 31,

Three months ended September 30,

dollars in thousands

Key Business Metrics:

Total Member Months

Census (a)(b)

Total Member Months (a)

Center-level Contribution Margin

Center-level Contribution Margin as a % of revenue

Non-GAAP Measures:

Adjusted EBITDA (4)

Adjusted EBITDA Margin (4)

(1) Includes InnovAge Sacramento, which the Company owns and controls through a joint venture and is now consolidated in our financial statements as of March 31, 2021.

(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 most closely comparable U.S.

GAAP for the periods indicated, see below under “—Adjusted EBITDA.”

Adjusted EBITDA (c)

Adjusted EBITDA Margin (c)

(a) Amount for 2021 includes InnovAge Sacramento, which the Company owns and controls through a joint venture and is consolidated in our financial statements.

(b) Participant numbers are approximate.

For a definition and reconciliation of these non-GAAP measures to the most closely comparable GAAP measures for the period indicated, see below under “Adjusted EBITDA.”

We define our centers as those centers open for business and attending to participants at the end of a particular period.

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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 annually.

We believe this is a useful metric as it more precisely tracks the number of participants we serve throughout the year.

Center-level Contribution Margin

We define Center-level Contribution Margin as total revenues less external provider costs and costs of care, excluding depreciation and amortization, which includes all medical and pharmacy costs.

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 $41.4 million and $34.5 million for the three months ended March 31, 2021 and 2020, respectively, and $126.0 million and $95.8 million for the nine months ended March 31, 2021 and 2020, respectively.

Center-level Contribution Margin was $42.3 million and $40.6 million for the three months ended September 30, 2021 and 2020, respectively.

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, merger and acquisition transactions and the corresponding integration, business optimization, electronic medical records transition, special employee bonuses, consolidation of equity investee, financing-related fees and payment of contingent consideration.

For the three months ended March 31, 2021 and 2020, we had a net loss of $(10.9) million and net income of $8.0 million, respectively, representing a period over period decline of 235%, while Adjusted EBITDA was $20.3 million and $17.6 million, respectively, representing a period over period growth rate of 15%.

For the nine months ended March 31, 2021 and 2020, we had a net loss of $(51.1) million and net income of $13.8 million, respectively, representing a period over period decline of 470%, while Adjusted EBITDA was $65.9 million and $42.9 million, respectively, representing a period over period growth rate of 54%.

A reconciliation of Adjusted EBITDA to net income, the most directly comparable U.S.

GAAP measure, for each of the periods is as follows:

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, M&A diligence, transaction and integration, business optimization, electronic medical record (“EMR”) implementation, financing-related fees and contingent consideration.

For the three months ended September 30, 2021 and 2020, our net income (loss) was $7.6 million and ($49.8 million), respectively, and Adjusted EBITDA was $18.2 million and $23.1 million, respectively, representing a year-over-year decrease of 21.2%.

The decrease in Adjusted EBITDA and Adjusted EBITDA margin is primarily from i) the impact of normalization of center-level contribution margin as COVID-19 transmission rates declined period over period ii) an increase in sales and marketing expense as a result of our investment in digital and other sales initiatives and ii) higher corporate, general and administrative expenses, including those associated with being a publicly traded company.

A reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, for each of the periods is as follows:

Three Months Ended

Nine Months Ended

(In thousands)

September 30,

Net income (loss)

Interest expense, net

Depreciation and amortization

Provision (benefit) for income tax

Management equity plan

Rate determination (a)

M&A diligence, transaction and integration (b)

Business optimization (c)

EMR transition (d)

Special employee bonus (e)

Gain on consolidation of equity investee (f)

Financing-related (g)

Contingent consideration (h)

Provision for income tax

Stock-based compensation

M&A diligence, transaction and integration (a)

Business optimization (b)

EMR implementation (c)

Financing-related fees (d)

Contingent consideration (e)

Adjusted EBITDA

(a) For the nine months ended March 31, 2021, 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) For the nine months ended March 31, 2021, this is primarily due to the July 27, 2020 transaction between us, an affiliate of Apax Partners and our existing equity holders entering into a Securities Purchase Agreement (the “Apax Transaction”) which resulted in expense of $58.3 million, relating to $42.2 million from the cancellation of options and the redemption of shares, $1.8 million related to transaction specific bonuses, $13.1 million relates to transaction fees and expenses, $2.2 million related to reclassification of warrant liability and $1.7 million relating to payroll taxes and other administrative items.

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) Reflects non-recurring expense related to the gain on consolidation of InnovAge Sacramento.

(g) Reflects fees and expenses incurred in connection with amendments to our credit agreements.

(h) Reflects the contingent consideration fair value adjustment made during the reporting period associated with its acquisition of New Courtland.

(a) For the three months ended September 30, 2020, this primarily represents (i) $45.4 million related to the cancellation of options and the redemption of shares and (ii) $13.1 million of transaction fees and expenses recognized in connection with

the July 27, 2020 transaction between us, an affiliate of Apax Partners and our then existing equity holders entering into a Securities Purchase Agreement (the “Apax Transaction”).

(b) 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 and effectiveness of our operations.

(d) Reflects fees and expenses incurred in connection with amendments to our credit agreements.

See Note 8, “Long Term Debt” to the consolidated financial statements.

(e) Reflects the contingent consideration fair value adjustment made during the reporting period 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 nine months ended March 31, 2021, 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, which is deducted from total revenue solely for purposes of calculating Adjusted EBITDA margin.

For the three months ended March 31, 2021 and 2020, our net income margin increased from 5.5% to (6.9)%, respectively, and Adjusted EBITDA Margin expanded from 12.2% to 13.0%, respectively.

For the nine months ended March 31, 2021 and 2020, our net income margin increased from 3.3% to (11.0)%, respectively, and Adjusted EBITDA Margin expanded from 10.4% to 14.2%, respectively.

Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures of operating performance monitored by management that are not defined under U.S.

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 U.S.

We believe that Adjusted EBITDA and Adjusted EBITDA margin are appropriate measures of operating performance because the metrics eliminate the impact of 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.

For the three months ended September 30, 2021, our net income margin was 4.4%, as compared to our net income margin of (32.6)% for the three months ended September 30, 2020.

For the three months ended September 30, 2021, our Adjusted EBITDA margin was 10.5%, as compared to our Adjusted EBITDA margin for the three months ended September 30, 2020 of 15.1%.

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 (loss) and net income (loss) 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 U.S.

GAAP financial measures, including net income and net income margin.

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 (loss) and net income (loss) 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.

The use of the term Adjusted EBITDA varies from others in our industry.

Liquidity and Capital Resources

To date, we have financed our operations principally through cash flows from operations and through borrowings under our credit facilities, and most recently from the sales of common stock.

As of March 31, 2021, we had cash and cash equivalents of $201.5 million.

To date, we have financed our operations principally through cash flows from operations and through borrowings under our credit facilities, and from the sale of common stock in our IPO that occurred in March 2021.

As of September 30, 2021, we had cash and cash equivalents of $215.5 million.

Our cash and cash equivalents primarily consist of highly liquid investments in demand deposit accounts and cash.

Our capital resources are generally used to fund (i) debt service requirements, the majority of which relate to the quarterly principal payments of the Term Loan Facility (as defined in Note 8, “Long Term Debt” to the condensed consolidated financial statements) due 2026, (ii) capital and operating lease obligations, which are generally paid on a monthly basis and include maturities through 2025 and 2032, respectively, (iii) the operations of our business, including special projects such as our transition to a new electronic medical record vendor, with respect to which we expect to incur non-recurring implementation costs over the next 18 months, and ongoing costs through 2026, and (iv) income tax payments, which are generally due on a quarterly and annual basis.

We also expect to use capital resources for capital additions, which we expect to primarily relate to the development of de novo centers to the extent and as they are opened.

Collectively, these obligations are expected to represent a significant liquidity requirement of our Company on both a short-term and long-term basis.

For additional information regarding our lease obligations, debt and commitments, see Note 7, “Leases”, Note 8, “Long Term Debt” and Note 9, “Commitments and Contingencies” to our condensed consolidated financial statements.

We believe that our cash and cash equivalents and our cash flows from operations will be sufficient to fund our operating and capital needs for at least the next 12 months.

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If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected.

On May 13, 2016, we entered into a credit agreement with Capital One Financial Corporation (the “2016 Credit Agreement”).

The 2016 Credit Agreement was subsequently amended and amended and restated a number of

In March 2020, we borrowed $25.0 million under the revolving credit facility to ensure sufficient funds available due to the uncertainty relating to the COVID-19 pandemic and for general corporate purposes.

Those borrowings have been repaid in full.

On March 8, 2021, concurrently with the closing of the IPO, the Company entered into a new credit agreement (the “2021 Credit Agreement”) that replaced the 2016 Credit Agreement.

The 2021 Credit Agreement consists of a senior secured term loan of $75.0 million and a revolving credit facility of $100.0 million.

Principal on the senior secured term loan is paid each calendar quarter beginning September 2021 in an amount equal to 1.25% of the initial term loan on closing date.

Proceeds of the new senior secured loan, together with proceeds from the IPO, were used to repay amounts outstanding under the 2016 Credit Agreement.

On March 8, 2021, concurrently with the closing of the IPO, the Company entered into a new credit agreement, the 2021 Credit Agreement, that replaced the 2016 Credit Agreement, as further discussed in Note 8, “Long Term Debt” to our condensed consolidated financial statements.

The 2021 Credit Agreement consists of a senior secured term loan, Term Loan Facility, of $75.0 million principal amount and a revolving credit facility, Revolving Credit Facility, of $100.0 million maximum borrowing capacity, each as defined and described in Note 8, “Long Term debt” to the consolidated financial statements.

Principal on the Term Loan Facility is paid each calendar quarter beginning September 2021 in an amount equal to 1.25% of the initial term loan on closing date.

Proceeds of the Term Loan Facility, together with proceeds from the IPO, were used to repay amounts outstanding under the 2016 Credit Agreement.

Any outstanding principal amounts under the 2021 Credit Agreement accrue interest at a variable interest rate.

As of March 31, 2021, the interest rate on the senior secured term loan was 1.94%.

As of September 30, 2021, the interest rate on the Term Loan Facility was 1.84%.

Under the terms of the 2021 Credit Agreement, the Revolving Credit Facility fee accrues at 0.25% of the average daily unused amount and is paid quarterly.

There is also an immaterial administrative fee.

As of March 31, 2021, we had no borrowings outstanding under the revolving credit facility and, therefore, had full capacity thereunder.

As of March 31, 2021, we also had $2.4 million outstanding under our convertible term loan.

As of September 30, 2021, we had no borrowings outstanding under the Revolving Credit Facility and, therefore, had full capacity thereunder, subject to applicable covenant compliance restrictions and any other conditions precedent to borrowing.

As of September 30, 2021, we also had $2.4 million principal amount outstanding under our convertible term loan.

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.

For more information about our debt, see Note 8.

Long Term Debt, to our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

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.

Cash, cash equivalents, and restricted cash

The following table presents a summary of our consolidated cash, cash equivalents, and restricted cash from operating, investing and financing activities for the periods indicated.

Nine Months Ended

(In thousands)

For more information about our debt, see Note 8 “Long Term Debt” to our consolidated financial statements.

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business.

Condensed Consolidated Statements of Cash Flows

Our consolidated statements of cash flows for the three months ended September 30, 2021 and 2020 are summarized as follows:

Three Months Ended

September 30,

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net change in cash

Cash at beginning of period

Cash at end of period

Net cash used in financing activities

Net change in cash, cash equivalents and restricted cash

Operating Activities.

For the nine months ended March 31, 2021, net cash used in operating activities was $(17.0) million, a decrease of $37.0 million compared to net cash provided by operating activities of $20.0 million for the nine months ended March 31, 2020.

The principal contributors to the year-over-year change in operating cash flows were as follows:

● net loss of $(50.5) million for the nine months ended March 31, 2021 as compared to $14.2 million for the nine months ended March 31, 2020 decreased primarily due to expenses related to the Apax Transaction, the IPO, and the $20.0 million payment made under the acquisition agreement of the New Courtland LIFE Program that resulted in a non-reoccurring Corporate, general and administrative expense totaling $55.3 million;

● deferred income taxes for the nine months ended March 31, 2021 of $(3.5) million as compared to $0.3 million for the nine months ended March 31, 2020 changed primarily due to disallowed officers’ compensation under IRC Section 162(m);

● increase in amounts due to Medicare and Medicaid of $12.7 million for the nine months ended March 31, 2021 compared to ($5.2) million for the nine months ended March 31, 2020 due to HCPF reconciliation and settlement process.

The change in net cash provided by (used in) operating activities was primarily due to the net effect of (i) net income of $7.6 million in the current year period compared to a net loss of $49.8 million in the prior year period, as described further above, (ii) a net increase in working capital primarily as a result of the impact of the completion of the Colorado Department of Health Care Policy & Financing’s (‘HCPF’) reconciliation, as described below, and the timing of prepaid expenses.

In fiscal year 2021, the Company and the HCPF completed the reconciliation for fiscal years 2018 and 2019.

The reconciliation resulted in a net adjustment of reduction of accounts receivable of $3.4 million, which was recorded in fiscal year 2021.

The Company does not expect adjustments related to the reconciliation to be significant in future periods.

Investing Activities.

For the nine months ended March 31, 2021, net cash used in investing activities was $16.1 million, an increase of $8.3 million compared to net cash used in investing activities of $7.8 million for the nine months ended March 31, 2020 due primarily to growth-related capital expenditures.

The increase in net cash used in investing activities was primarily due to an increase in cash used of $3.0 million for growth-related capital expenditures and a $2.0 million cost method investment.

Financing activities.

Cash provided by financing activities for the nine months ended March 31, 2021 was $122.3 million primarily due to IPO net proceeds of $373.6 million, partially offset by net payments on long-term debt of $137.6 million in debt payments, treasury stock purchases of $77.6 million, and stock option cancellation payments of $32.4 million.

Cash provided by financing activities for the nine months ended March 31, 2020 was $22.7 million primarily due to net borrowings on long-term debt for $23.6 million.

The decrease in net cash used in financing activities was primarily due to the net effect of the Apax Transaction in fiscal year 2021, which included net proceeds on long-term debt of $87.4 million, $77.6 million related to treasury stock purchases and $32.4 million related to stock option cancellation payments, those payments of which did not recur in fiscal year 2022.

Contractual Obligations and Commitments

Other than the Long-term debt obligations noted below, there have been no material changes outside of the normal course of business as disclosed in the IPO Prospectus:

Payments due by period

(In thousands)

Long-term debt obligations (1)

(1) Represents amounts related to the Credit Agreement and the convertible term loan.

Our principal commitments consist of repayments of long-term debt and obligations under operating and capital leases.

As of September 30, 2021, we had $76.4 million of long-term debt outstanding.

See Note 8, “Long Term Debt” in our consolidated financial statements for more information.

As of September 30, 2021, we had future minimum operating lease payments under non-cancellable leases through the year 2032 of $31.4 million.

We also had non-cancellable capital lease agreements with third parties through the year 2027 with future minimum payments of $6.9 million.

See Note 7, “Leases” in our consolidated financial statements for more information.

Off Balance Sheet Arrangements

We did not have any off balance sheet arrangements as of March 31, 2021.

We did not have any off balance sheet arrangements as of September 30, 2021 .

We qualify as an “emerging growth company” pursuant to the provisions of the Jumpstart Our Business Startups (“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.

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 stockholder 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.

We 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

Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S.

The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported of assets, liabilities, revenue and expenses, and related disclosures.

We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances.

We evaluate our estimates and assumptions on an ongoing basis.

The future effects of the COVID-19 pandemic on our results of operations, cash flows, and financial position are unclear, however, we believe we have made reasonable estimates and assumptions in preparing the financial statements.

Actual results may differ from these estimates.

To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

For a description of our policies regarding our critical accounting policies, see “Critical Accounting Policies” in the IPO Prospectus.

There have been no significant changes in our critical accounting estimate policies or methodologies to our condensed consolidated financial statements.

Recent accounting pronouncements

See Note 2 “Summary of Significant Accounting Policies—Recent Accounting Pronouncements” in our condensed consolidated financial statements included elsewhere in this report for information on recent accounting pronouncements.

Critical Accounting Policies and Estimates

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 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.

For a description of our policies regarding our critical accounting policies, see “Critical Accounting Policies and Estimates” in the 2021 Annual 10-K.

There have been no significant changes in our critical accounting policies, estimates, or methodologies to our condensed consolidated financial statements .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis