What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-09 compared with 2021-11-09 · 133 added, 109 removed, 262 unchanged (48% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q.

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q.

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 our 2021 Annual Report on Form 10-K.

InnovAge Holding Corp.

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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.

We closed all our centers in March 2020 and transitioned to a 100% in-home and virtual care model.

We believe that the general lack of in-person interaction and the reduction in healthcare personnel, and specifically, trained personnel, impacted our ability to adhere to the complex government laws and regulations that apply to our business.

Despite the challenges brought on by COVID-19, as of December 31, 2021, we continue care delivery through telehealth and at our centers, all of which remain fully opened.

As economies around the world 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.

For additional information on the various risks posed by the COVID-19 pandemic, please see the section entitled “Risk Factors” included in Part I, Item 1A of our 2021 10-K.

Key Factors Affecting Our Performance

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This is driven by two factors:

(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 ;

(i) we manage a higher acuity population, with an average risk adjustment factor (“RAF”) score of 2.36 based on InnovAge data as of December 31, 2021 ;

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.

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 per member, per month (“PMPM”) payments directly from Medicare and Medicaid, which provides recurring revenue streams and significant visibility into our revenue.

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.

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.

We believe all seniors should have access to the type of all-inclusive care offered by the PACE model.

We believe our ability to expand access to care and serve more seniors in our existing centers is a key competency of the InnovAge Platform.

Awareness of PACE programs remains low among potential participants and we believe we have growth opportunities to serve more seniors within our existing center base.

However, several factors can affect our ability to grow enrollment and capacity within existing centers, including sanctions issued by regulators.

Currently, the Centers for Medicare and Medicaid Services (“CMS”) and state agencies have suspended new enrollments at our Sacramento, California center and at our centers in the State of Colorado.

● 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.

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.

We achieved an 83% participant satisfaction rating as of July 1, 2021 and average participant tenure was 3.1 years as of December 31, 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.

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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.

healthcare system, our external provider costs and cost of care, excluding depreciation and amortization, represented approximately 76% of our revenue in the six months ended December 31, 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.

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● Center-level Contribution Margin .

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 .

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

The enrollment sanctions in place in Sacramento and Colorado limit our ability to grow our participant census and impact Center-level Contribution Margin.

See “Risk Factors” in Part II, Item 1A.

● 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.

We believe our innovative care model can scale nationally, and part of our business strategy is to continue selectively and strategically expanding into new geographies.

However, several factors can affect our ability to open de novo centers, including sanctions issued by regulators.

On January 7, 2022, the Department of Health Care Services (“DHCS”) of the State of California notified us that it was suspending the State’s previously provided assurances that it would enter into a PACE program agreement with the Company (State Attestations) with respect to de novo centers in the State of California until such time as the corrective action plans (“CAPs”) and the remediation and validation processes for our Sacramento center have been successfully completed and the enrollment sanctions are lifted.

In addition, on February 9, 2022, we received notice from the Cabinet for Health and Family Services of the State of Kentucky informing us that they no longer intend to enter into an agreement with us to be a PACE provider in the State of Kentucky.

We intend to work closely with the Cabinet to attempt to address any issues that may have prompted the notification.

See “Risk Factors” in Part II, Item 1A.

● 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 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.

Based on our experience, joining the InnovAge Platform enables revenue 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.

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 enable continuity of high-quality care for participants.

● Contracting with government payors .

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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.

Maintaining, supporting and growing these relationships in existing markets as well as new geographies, is critical to our long-term success.

● Investing to support growth .

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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.

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

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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.

Corporate, general and administrative expenses include employee-related expenses, including salaries and related costs.

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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 results of our operations for the six months ended December 31, 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

September 30,

Six Months Ended

Capitation revenue

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Loss on extinguishment of debt

Other expense

Other income (expense)

Total other expense

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Three Months Ended

September 30,

Six Months Ended

Capitation revenue

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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).

Capitation revenue was $175.0 million for the three months ended December 31, 2021, an increase of $18.5 million, or 11.8%, compared to $156.5 million for the three months ended December 31, 2020.

This increase was driven by (i) an 7.3% increase in member months (as defined below) and (ii) a 4.2% increase in capitation rates.

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

Capitation revenue was $347.5 million for the six months ended December 31, 2021, an increase of $39.1 million, or 12.7% compared to $308.5 million for the six months ended December 31, 2020.

This increase was driven by (i) an 7.7%

increase in member months (as defined below) and (ii) a 4.6% increase in capitation rates.

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.

Other service revenue was $0.4 million for the three months ended December 31, 2021, a decrease of $0.4 million, or 51.5%, from $0.8 million for the three months ended December 31, 2020.

Other service revenue was $0.9 million for the six months ended December 31, 2021, a decrease of $0.5 million, or 36.4%, from $1.4 million for the six months ended December 31, 2020.

Operating Expenses

Three months ended September 30,

Three Months Ended

Six Months Ended

External provider costs

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Total operating expenses

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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.

External provider costs were $91.0 million for the three months ended December 31, 2021, an increase of $15.9 million, or 21.1%, compared to $75.1 million for the three months ended December 31, 2020.

The increase is primarily driven by (i) an increase of 12.9% in cost per participant and (ii) an increase of 7.3% 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, in part as a result of our participants seeking healthcare services that were delayed during the peak of the COVID-19 pandemic, the current Omicron surge, and increased housing rates as mandated by certain states

External provider costs were $181.0 million for the six months ended December 31, 2021, an increase of $32.2 million, or 21.6%, compared to $148.8 million for the six months ended December 31, 2020.

The increase is primarily driven by (i) an increase of 13.0% in cost per participant and (ii) an increase of 7.7% 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.

Cost of care (excluding depreciation and amortization) expense was $42.9 million for the three months ended December 31, 2021, an increase of $4.8 million, or 12.7%, compared to $38.1 million for the three months ended December 31, 2020, primarily due to the net effect of (i) an increase of 7.3% in member months and (ii) an increase of 5.0% in cost per participant.

The increase in cost per participant was driven by an increase in operational costs of reopening our centers and an increase wage rates.

Cost of care (excluding depreciation and amortization) expense was $83.6 million for the six months ended December 31, 2021, an increase of $7.3 million, or 9.5%, compared to $76.4 million for the six months ended December 31, 2020, primarily due to the net effect of (i) an increase of 7.7% in member months and (ii) an increase of 1.7% in cost per participant.

The increase in cost per participant was driven by an increase in operational costs of reopening our centers and an increase in headcount.

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.

Sales and marketing expenses were $6.7 million for the three months ended December 31, 2021, an increase of $2.0 million, or 44.2%, compared to $4.6 million for the three months ended December 31, 2020, primarily due to an increase in (i) employee compensation and benefits due to an increase in full time employees and (ii) costs associated with certain new advertising campaigns to raise PACE awareness.

Sales and marketing expenses were $13.0 million for the six months ended December 31, 2021, an increase of $4.2 million, or 48.4%, compared to $8.7 million for the six months ended December 31, 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.

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.

Corporate, general and administrative expenses were $28.5 million for the three months ended December 31, 2021, an increase of $12.8 million, or 81.1%, compared to $15.7 million for the three months ended December 31, 2020.

The increase is related to (i) employee compensation and benefits as the result of an increase in FTEs, (ii) compliance-related expense, (iii) increased legal costs, (iv) costs associated with executive severance and recruiting and (v) costs associated with being a publicly traded company.

Corporate, general and administrative expenses were $49.6 million for the six months ended December 31, 2021, a decrease of $37.7 million, or 43.2%, compared to $87.3 million for the six months ended December 31, 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.

Offsetting the decrease of $58.5 million related to the Apax Transaction were expenses related to (i) employee compensation and benefits as the result of an increase in FTEs, (ii) compliance-related expense, (iii) increased legal costs, (iv) costs associated with executive severance and recruiting and (v) costs associated with being a publicly traded company.

Depreciation and amortization.

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

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

Depreciation and amortization expense was $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.

Depreciation and amortization expense was $3.3 million for the three months ended December 31, 2021, an increase of $0.3 million, or 10.0%, compared to $3.0 million for the three months ended December 31, 2020.

Depreciation and amortization expense was $6.6 million for the six months ended December 31, 2021, an increase of $0.6 million, or 10.7%, compared to $6.0 million for the six months ended December 31, 2020.

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

Equity loss of $0.5 million for the three months ended December 31, 2020 and $1.3 million for the six months ended December 31, 2020 related to our equity method investment in InnovAge Sacramento.

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 operating income was $0.3 million for the three months ended December 31, 2020 and $1.0 million for the six months ended December 31, 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 December 31, 2021.

Other Income (Expense)

Three Months Ended

September 30,

Six Months Ended

Interest expense, net

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Total other expense

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Interest expense, net.

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

Interest expense, net was $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.

Interest expense, net was $0.7 million for the three months ended December 31, 2021, a decrease of $5.9 million, or 89.7%, compared to $6.6 million for the three months ended December 31, 2020.

Interest expense, net was $1.2 million for the six months ended December 31, 2021, a decrease of $11.0 million, or 90.0%, compared to $12.2 million for the six months ended December 31, 2020.

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 condensed consolidated financial statements.

Loss on extinguishment of debt.

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.

We recognized a loss on extinguishment of debt of $1.0 million for the six months ended December 31, 2020 and no loss on extinguishment of debt for the six months ended December 31, 2021.

Provision for Income Taxes

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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.

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 condensed 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.

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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.

During the six months ended December 31, 2021 and 2020, we reported provision for income taxes of $4.2 million and $9.4 million, respectively.

The decrease of $5.2 million is primarily due to certain permanent differences between the financial and tax accounting treatment of (a) the Section 162(m) limitation on compensation of five highest paid officers and (b) transaction costs associated with the Apax Transaction in 2020.

These differences resulted in our pretax book loss generating taxable net income for the six months ended December 31, 2020.

The taxable net income for the six months ended December 31, 2021 was lower than the taxable net income for the six months ended December 31, 2020.

Net Loss Attributable to Noncontrolling Interests.

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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.

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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.

During the three months ended December 31, 2021 and 2020, we reported net income of $1.1 million and $9.6 million, respectively, consisting of (i) income from operations of $3.0 million and $20.5 million, respectively, (ii) other expense of $0.6 million and $6.4 million, respectively, and (iii) provision for income taxes of $1.2 million and $4.5 million, respectively, each as described above.

During the six months ended December 31, 2021 and 2020, we reported net income of $8.7 million and a net loss of $(40.2) million, respectively, consisting of (i) income (loss) from operations of $14.6 million and ($17.6 million), respectively, (ii) other expense of $1.7 million and $13.1 million, respectively, and (iii) provision for income taxes of $4.2 million and $9.4 million, respectively, each as described above.

Key Business Metrics and Non-GAAP Measures

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These measures may not be comparable to similarly-titled performance indicators used by other companies.

Three months ended September 30,

Six Months Ended December 31,

dollars in thousands

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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 $42.3 million and $40.6 million for the three months ended September 30, 2021 and 2020, respectively.

Center-level Contribution Margin was $83.6 million and $84.7 million for the six months ended December 31, 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, 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.

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, rate determination, executive severance and recruitment, class action litigation, M&A diligence, transaction and integration, business optimization, electronic medical record (“EMR”) implementation, financing-related fees and contingent consideration.

For the six months ended December 31, 2021 and 2020, our net income (loss) was $8.7 million and ($40.2 million), respectively, and Adjusted EBITDA was $22.6 million and $45.7 million, respectively, representing a year-over-year decrease of 27.8%.

The decrease in Adjusted EBITDA and Adjusted EBITDA margin is primarily from i) the impact of normalization of center-level contribution margin as a result of our participants seeking healthcare services that were delayed during the peak of the COVID-19 pandemic and costs associated with with re-opening of our centers ii) an increase in sales and marketing expense as a result of growth and our investment in digital and other sales initiatives and ii) higher corporate, general and administrative expenses, primiarily attributable to growth and costs 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

September 30,

Six Months Ended

Net income (loss)

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Stock-based compensation

M&A diligence, transaction and integration (a)

Business optimization (b)

EMR implementation (c)

Financing-related fees (d)

Contingent consideration (e)

Rate determination (a)

Executive severance and recruitment (b)

Class action litigation (c)

M&A diligence, transaction and integration (d)

Business optimization (e)

EMR implementation (f)

Financing-related fees (g)

Contingent consideration (h)

Adjusted EBITDA

(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.

(a) 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 charges related to executive severance and recruiting.

(d) For the six months ended December 31, 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”).

(e) Reflects charges related to business optimization initiatives.

Such charges relate to one-time investments in projects designed to enhance our technology and compliance systems, and improve and support the efficiency and effectiveness of our operations.

(f) Reflects non-recurring expenses relating to the implementation of a new electronic medical record vendor.

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

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

(h) 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.

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%.

For the six months ended December 31, 2021, our net income margin was 2.5%, as compared to our net income margin of (13.0)% for the six months ended December 31, 2020.

For the six months ended December 31, 2021, our Adjusted EBITDA margin was 9.5%, as compared to our Adjusted EBITDA margin for the six months ended December 31, 2020 of 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 (loss) and net income (loss) margin, respectively, as determined by GAAP.

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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.

As of December 31, 2021, we had cash and cash equivalents of $218.5 million.

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

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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.

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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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.

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

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

As of December 31, 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.

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.

As of December 31, 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 December 31, 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 consolidated financial statements.

For more information about our debt, see Note 8 “Long Term Debt” to our condensed 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,

Our consolidated statements of cash flows for the six months ended December 31, 2021 and 2020 are summarized as follows:

Six Months Ended

Net cash provided by (used in) operating activities

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Operating Activities.

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.

The change in net cash provided by (used in) operating activities was primarily due to the net effect of (i) net income of $8.7 million in the current year period compared to a net loss of $40.2 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 accrued expenses.

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

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Investing Activities.

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.

Investing activities were made up of approximately $11.5 million in purchases of property and equipment.

Financing activities.

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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.

As of December 31, 2021, we had $75.4 million of long-term debt outstanding.

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

As of December 31, 2021, we had future minimum operating lease payments under non-cancellable leases through the year 2032 of $33.8 million.

We also had non-cancellable capital lease agreements with third parties through the year 2027 with future minimum payments of $14.6 million.

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

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

Off Balance Sheet Arrangements

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

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

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

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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.

The discussion and analysis of our financial condition and results of operations are based upon our condensed 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 condensed 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.

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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