What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2022-02-09 · 101 added, 97 removed, 298 unchanged (40% of the section changed)

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

The Company serves approximately 7,050 PACE participants, and operates 18 PACE centers across Colorado, California, New Mexico, Pennsylvania and Virginia.

As of March 31, 2022, the Company served approximately 6,800 PACE participants, and operated 18 PACE centers across Colorado, California, New Mexico, Pennsylvania, and Virginia.

Impact of COVID-19

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

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

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.

The COVID-19 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 March 31, 2022, we continue care delivery through telehealth and predominantly at our centers, all of which remain fully opened during the period.

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

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This is driven by two factors:

(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 ;

(i) we manage a higher acuity population, with an average risk adjustment factor (“RAF”) score of 2.41 based on InnovAge data as of March 31, 2022 ;

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.

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.

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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.

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.

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

● Our ability to maintain high participant satisfaction and retention.

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.

We achieved an 81% participant satisfaction rating as of December 2021 and average participant tenure was 3.0 years as of March 31, 2022, 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 six months ended December 31, 2021.

healthcare system, our external provider costs and cost of care, excluding depreciation and amortization, represented approximately 79% of our revenue in the nine months ended March 31, 2022.

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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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.

The enrollment sanctions in place in Sacramento, California 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 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.

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.

On February 14, 2022, CMS denied our application to develop the previously announced PACE center in Terre Haute, Indiana, which was projected to open in fiscal year 2024 based on deficiencies detected during CMS’ 2021 audits of our Sacramento and Colorado PACE programs.

In addition, we have committed to CMS and the Agency for Healthcare Administration in the State of Florida, that we will proactively pause remaining steps with respect to de novo centers to focus on remediating deficiencies raised in the audit processes.

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.

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.

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Our economic model relies on our capitated arrangements with government payors, namely Medicare and Medicaid.

We view the government not only as a payor but also as a key partner in our efforts to expand into new geographies and access more participants in our existing markets.

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 in existing markets as well as new geographies, is critical to our long-term success.

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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 also expect to incur additional expenses for the foreseeable future in connection with current and future audits to our centers, remediation plans and current and potential legal and regulatory proceedings.

We plan to invest in future growth judiciously and maintain focus on managing our results of operations.

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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 separate external provider costs into four categories:

inpatient (e.g., hospital), housing (e.g., assisted living), outpatient and pharmacy.

inpatient (e.g., hospital and skilled nursing facility), housing (e.g., assisted living), outpatient and pharmacy.

In aggregate, external provider costs represent the largest portion of our expenses.

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Results of Operations

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 results of our operations for the three and nine months ended March 31, 2022 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

Six Months Ended

Nine Months Ended

Capitation revenue

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Loss on extinguishment of debt

Gain on equity method investment

Other income (expense)

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Income (Loss) Before Income Taxes

Provision for Income Taxes

Provision (Benefit) for Income Taxes

Net Income (Loss)

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Three Months Ended

Six Months Ended

Nine Months Ended

Capitation revenue

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Capitation revenue.

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.

Capitation revenue was $177.0 million for the three months ended March 31, 2022, an increase of $21.2 million, or 13.6%, compared to $155.8 million for the three months ended March 31, 2021.

This increase was driven by (i) a 9.9% increase in capitation rates and (ii) a 3.4% increase in member months (as defined below).

The increase in capitation rates was primarily driven by an annual increase in both Medicaid and Medicare capitation rates as a result of increased risk score and county rates.

Capitation revenue was $524.5 million for the nine months ended March 31, 2022, a decrease of $60.2 million, or 13.0% compared to $464.3 million for the nine months ended March 31, 2021.

This increase was driven by (i) a 6.3% increase in capitation rates and (ii) an 6.2% increase in member months (as defined below).

The increase in capitation rates

was primarily driven by an annual increase in both Medicaid and Medicare capitation rates as a result of increased risk score and county rates.

Other service revenue.

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.

Other service revenue was $0.4 million for the three months ended March 31, 2022, a decrease of $0.1 million, or 21.6%, from $0.5 million for the three months ended March 31, 2021.

Other service revenue was $1.3 million for the nine months ended March 31, 2022, a decrease of $0.6 million, or 32.6%, from $1.9 million for the nine months ended March 31, 2021.

Operating Expenses

Three Months Ended

Six Months Ended

Nine Months Ended

External provider costs

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External provider costs.

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.

External provider costs were $103.3 million for the three months ended March 31, 2022, an increase of $27.9 million, or 37.0%, compared to $75.4 million for the three months ended March 31, 2021.

The increase is primarily driven by (i) an increase of 32.5% in cost per participant and (ii) an increase of 3.4% 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 in cost per participant is primarily driven by the net effect of (i) an increase in outpatient and specialist care expenses, in part as a result of our participants seeking healthcare services that were delayed during the COVID-19 pandemic, (ii) an increase in inpatient and medical respite utilization and cost as a result of the Omicron surge, (iii) increased housing utilization, and (iv) increased housing rates as mandated by certain states.

External provider costs were $284.3 million for the nine months ended March 31, 2022, an increase of $60.1 million, or 26.8%, compared to $224.2 million for the nine months ended March 31, 2021.

The increase is primarily driven by (i) an increase of 19.4% in cost per participant and (ii) an increase of 6.2% in member months.

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Cost of care (excluding depreciation and amortization).

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.

Cost of care (excluding depreciation and amortization) expense was $46.1 million for the three months ended March 31, 2022, an increase of $6.5 million, or 16.5%, compared to $39.6 million for the three months ended March 31, 2021, primarily due to the net effect of (i) an increase of 3.4% in member months and (ii) an increase of 12.7% in cost per participant.

The increase in cost per participant was driven by an increase in operational costs of reopening our centers following shutdowns as a result of COVID-19, pre-opening losses associated with de novo locations, and an increase wage rates.

Cost of care (excluding depreciation and amortization) expense was $129.7 million for the nine months ended March 31, 2022, an increase of $13.8 million, or 11.9%, compared to $115.9 million for the nine months ended March 31, 2021, primarily due to the net effect of (i) an increase of 6.2% in member months and (ii) an increase of 5.4% in cost per participant.

Sales and marketing.

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.

Sales and marketing expenses were $6.1 million for the three months ended March 31, 2022, an increase of $0.6 million, or 9.9%, compared to $5.6 million for the three months ended March 31, 2021, primarily due to

an increase in employee compensation and benefits due to an increase in full time employees coupled with costs associated with organizational realignment partially offset by a reduction in marketing spend associated with the ongoing sanctions.

Sales and marketing expenses were $19.1 million for the nine months ended March 31, 2022, an increase of $4.8 million, or 33.4%, compared to $14.3 million for the nine months ended March 31, 2021, primarily due to an increase in (i) employee compensation and benefits due to an increase in FTEs and (ii) costs associated with organizational realignment, and (iii) costs associated with certain new advertising campaigns to raise PACE awareness.

Corporate, general and administrative.

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.

Corporate, general and administrative expenses were $24.7 million for the three months ended March 31, 2022, an increase of $6.1 million, or 32.7%, compared to $18.6 million for the three months ended March 31, 2021.

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

Corporate, general and administrative expenses were $74.2 million for the nine months ended March 31, 2022, a decrease of $31.7 million, or 29.9%, compared to $105.9 million for the nine months ended March 31, 2021.

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 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.

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) costs associated with organizational realignment, (iv) increased legal costs, (v) costs associated with executive severance and recruiting and (vi) increased costs associated with being a publicly traded company.

Depreciation and amortization.

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.

Depreciation and amortization expense was $3.9 million for the three months ended March 31, 2022, an increase of $0.5 million, or 16.3%, compared to $3.3 million for the three months ended March 31, 2021.

Depreciation and amortization expense was $10.4 million for the nine months ended March 31, 2022, an increase of $1.2 million, or 12.7%, compared to $9.3 million for the nine months ended March 31, 2021.

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.

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 and six months ended December 31, 2021.

Equity loss of $- million for the three months ended March 31, 2021 and $1.3 million for the nine months ended March 31, 2021 related to our equity method investment in InnovAge Sacramento.

Other operating income.

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 operating income was $19.2 million for the three months ended March 31, 2021 and $18.2 million for the nine months ended March 31, 2021 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 March 31, 2022.

Other Income (Expense)

Three Months Ended

Six Months Ended

Nine Months Ended

Interest expense, net

Loss on extinguishment of debt

Gain on equity method investment

Other expense

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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 $0.7 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.

Interest expense, net was $0.7 million for the three months ended March 31, 2022, a decrease of $4.2 million, or 85.5%, compared to $4.9 million for the three months ended March 31, 2021.

Interest expense, net was $1.9 million for the nine months ended March 31, 2022, a decrease of $15.1 million, or 88.7%, compared to $17.1 million for the nine months ended March 31, 2021.

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 condensed consolidated financial statements.

Loss on extinguishment of debt.

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.

We recognized a loss on extinguishment of debt of $13.5 million and $14.5 million for the three and nine months ended March 31, 2021, respectively, and no loss on extinguishment of debt for the three and nine months ended March 31, 2022.

Gain on equity method investment.

We recognized a gain on equity method investment of $10.9 million for the three and nine months ended March 31, 2021, related to the consolidation of InnovAge Sacramento beginning January 1, 2021, and no gain on equity method investment for the three and nine months ended March 31, 2022.

Provision for Income Taxes

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

During the nine months ended March 31, 2022 and 2021, we reported provision for income taxes of $0.1 million and $5.2 million, respectively.

The decrease of $5.1 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.

These differences resulted in our pretax book loss generating taxable net income for the nine months ended March 31, 2021.

The taxable net income for the nine months ended March 31, 2022 was lower than the taxable net income for the nine months ended March 31, 2021.

Net Loss Attributable to Noncontrolling Interests.

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Net Income (Loss)

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.

During the three months ended March 31, 2022 and 2021, we reported net loss of $3.2 million and $10.9 million, respectively, consisting of (i) loss from operations of $6.7 million and $5.4 million, respectively, (ii) other expense of $0.6 million and $9.8 million, respectively, and (iii) provision for income taxes of $4.1 million and $4.3 million, respectively, each as described above.

During the nine months ended March 31, 2022 and 2021, we reported net income of $5.6 million and a net loss of $51.1 million, respectively, consisting of (i) income from operations of $7.9 million and $23.0 million, respectively, (ii) other expense of $2.3 million and $22.9 million, respectively, and (iii) provision for income taxes of $0.1 million and $5.2 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.

Six Months Ended December 31,

Nine Months Ended March 31,

dollars in thousands

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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.

(a) Amount for 2021 includes InnovAge Sacramento, which the Company owns and controls through a joint venture and is consolidated in our financial statements as of January 1, 2021.

(b) Participant numbers are approximate.

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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 $83.6 million and $84.7 million for the six months ended December 31, 2021 and 2020, respectively.

Center-level Contribution Margin was $111.7 million and $126.0 million for the nine months ended March 31, 2022 and 2021, 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, 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.

For the nine months ended March 31, 2022 and 2021, net income was $5.6 million and net loss was $51.1 million, respectively, and our net income (loss) margin was 1.1% and (11%), respectively.

Adjusted EBITDA was $34.9 million and $66.0 million, for the nine months ended March 31, 2022 and 2021, respectively, representing a year-over-year decrease of 47.1%.

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 (a) our participants seeking healthcare services that were delayed during the onset of the COVID-19 pandemic coupled with the Omicron surge and state-mandated increases in housing cost, and (b) costs associated with the re-opening of our centers and higher wage rates, (ii) an increase in sales and marketing expense as a result of growth and our investment in digital and other sales initiatives and (iii) higher corporate, general and administrative expenses, primarily 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

Six Months Ended

Nine Months Ended

Net income (loss)

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EMR implementation (f)

Financing-related fees (g)

Contingent consideration (h)

Gain on consolidation of equity investee (g)

Financing-related fees (h)

Contingent consideration (i)

Adjusted EBITDA

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(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”).

(d) For the nine months ended March 31, 2021, 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.

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(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.

(g) Reflects non-recurring gain on consolidation of InnovAge Sacramento during the three and nine months ended March 31, 2021.

(h) 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

(i) Reflects the contingent consideration fair value adjustment made during the reporting period associated with our acquisition of NewCourtland.

Net income (loss) margin and Adjusted EBITDA margin

Net loss margin is net loss expressed as a percentage of our total revenue.

Adjusted EBITDA margin is Adjusted EBITDA expressed as a percentage of our total revenue less any exceptional, one time revenue items.

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%.

For the nine months ended March 31, 2022, net income margin was 1.1%, as compared to net loss margin of 11.0% for the nine months ended March 31, 2021.

For the nine months ended March 31, 2022, our Adjusted EBITDA margin was 6.6%, as compared to our Adjusted EBITDA margin for the nine months ended March 31, 2021 of 14.2%.

Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures of operating performance monitored by management that are not defined under GAAP and that do not represent, and should not be considered as, an alternative to net income (loss) and net income (loss) margin, respectively, as determined by GAAP.

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We believe that Adjusted EBITDA and Adjusted EBITDA margin help investors and analysts in comparing our results across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.

These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or as a substitute for, the analysis of other GAAP financial measures, including net income (loss) and net income (loss) 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.

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

As of March 31, 2022, we had cash and cash equivalents of $199.5 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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Any outstanding principal amounts under the 2021 Credit Agreement accrue interest at a variable interest rate.

As of December 31, 2021, the interest rate on the Term Loan Facility was 1.84%.

As of March 31, 2022, the interest rate on the Term Loan Facility was 2.21%.

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 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.

As of March 31, 2022, 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.

March 31, 2022, 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%.

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Condensed Consolidated Statements of Cash Flows

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

Six Months Ended

Our consolidated statements of cash flows for the nine months ended March 31, 2022 and 2021 are summarized as follows:

Nine Months Ended

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash used in financing activities

Net change in cash, cash equivalents and restricted cash

Net cash provided by (used in) financing activities

Net change in cash

Cash at beginning of period

Cash at end of period

Operating Activities.

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

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

As of March 31, 2022, we had $74.5 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.

As of March 31, 2022, 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.

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Off Balance Sheet Arrangements

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

We did not have any off balance sheet arrangements as of March 31, 2022 .

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

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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