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Item 7. Management’s Discussion and Analysis

2022-09-13 compared with 2021-09-23 · 184 added, 226 removed, 315 unchanged (57% of the section changed)

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The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes

thereto included elsewhere in this Annual Report on Form 10-K.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.

The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management.

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

The Company serves approximately 6,850 PACE participants, making it the largest PACE provider in the United States of America (the U.S.) based upon participants served, and operates 18 PACE centers across Colorado, California, New Mexico, Pennsylvania and Virginia.

The Company serves approximately 6,650 PACE participants, making it the largest PACE provider in the U.S.

based upon participants served, and operates 18 PACE centers across Colorado, California, New Mexico, Pennsylvania and Virginia.

InnovAge aims to allow frail seniors to live life on their terms by aging in place, in their own homes and communities, for as long as safely possible.

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We are the leading healthcare delivery platform by number of participants focused on providing all-inclusive, capitated care to high-cost, dual-eligible seniors.

Our programs directly address two of the most pressing challenges facing the U.S.

Our programs are designed to directly address two of the most pressing challenges facing the U.S.

healthcare industry:

rising costs and poor outcomes.

Our participant-centered care delivery approach meaningfully improves the quality of care our participants receive, while keeping them in their homes for as long as safely possible and reducing over-utilization of high-cost care settings such as hospitals and nursing homes.

Our participant-centered care delivery approach is designed to improve the quality of care our participants receive, while keeping them in their homes for as long as safely possible and reducing over-utilization of high-cost care settings such as hospitals and nursing homes.

Our participant-centered approach is led by our Interdisciplinary Care Teams (“IDTs”), who design, manage and coordinate each participant’s personalized care plan.

We directly manage and are responsible for all healthcare needs and associated costs for our participants.

We directly manage and are responsible for all healthcare needs and associated costs for our participants, including housing costs, where applicable.

We directly contract with government payors, such as Medicare and Medicaid, and do not rely on third-party administrative organizations or health plans.

We believe our model aligns with how healthcare is evolving, namely (i) the shift toward value-based care, in which coordinated, outcomes-driven, high-quality care is delivered while reducing unnecessary spend, (ii) eliminating excessive administrative costs by contracting directly with the government, (iii) focusing on the participant experience and (iv) addressing social determinants of health.

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.

We believe our model aligns with how healthcare is evolving, namely (i) the shift toward value-based care, in which coordinated, outcomes-driven, quality care is delivered while reducing unnecessary spend, (ii) eliminating excessive administrative costs by contracting directly with the government, (iii) focusing on the participant experience and (iv) addressing social determinants of health.

Impact of COVID-19 and Macroeconomic Conditions

The COVID-19 pandemic altered the behavior of businesses and people, the effects of which continue on federal, state and local economies.

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

To date, we have experienced or expect to experience the following impacts on our business model due to COVID-19.

Though the COVID-19 pandemic altered the mix of settings where we deliver care, our multimodal model ensured that our participants continued to receive the care they needed.

We closed all our centers in March 2020 and transitioned to a 100% in-home and virtual care model that allowed for seamless delivery of care while increasing participant visit volume and maintaining continuity of care.

Our telehealth solution received high satisfaction among participants, caregivers and IDTs.

In February 2021, as the prevalence of COVID-19 decreased in the communities we serve, we began re-opening our centers using a phased approach to ensure the safety of both our staff and participants.

In addition, community assisted living and skilled nursing facilities began to open to allow in-person visits by all members

By June 2021, we fully opened all our centers and transitioned to a predominantly in-person, center-based care model, supplemented by telehealth.

We expect telehealth care delivery to remain a part of our ongoing care model.

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

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

During our fiscal fourth quarter, as we continue to recover from the pandemic, enrollment growth continued to improve and has returned to pre-COVID levels.

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

As of June 30, 2021, we had not experienced a decline in revenue as a result of the COVID-19 pandemic.

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

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

Historically, this documentation has been required to be completed during an in-person visit with a participant, but due to COVID-19 and going forward, CMS is now allowing documentation of conditions identified during qualifying telehealth visits with participants.

Thus far, we have been able to document the health conditions of our participants during telehealth visits as well as we did during in-person visits prior to COVID-19;

however, any issues with documenting such conditions could adversely impact Medicare RAF scores and our resulting revenue for future periods.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into legislation.

The CARES Act, in addition to other provisions, provided for the temporary suspension of the automatic 2% reduction of Medicare claim reimbursements (sequestration) for the period of May 1, 2020 through December 31, 2021, which positively impacted our revenue during the year ended June 30, 2021.

For the year ended June 30, 2021, as compared to the year ended June 30, 2020, on a PMPM basis, our internal care delivery costs decreased, while our external provider costs increased, as further described in Results of Operations , in part due to the impact of COVID-19 on our care delivery costs as we executed our participants’ care plans through a different mix of care settings.

On a PMPM basis, we did not experience material changes in our aggregate participant-related care expenses.

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

During the years ended June 30, 2021 and 2020, we acquired significantly greater quantities of medical supplies at significantly higher prices than pre-pandemic rates to ensure the safety of our employees and our participants.

Costs related to PPE medical supplies represented approximately 0.6% and 2.1% of our total cost of care for the years ended June 30, 2021 and 2020, respectively.

While the price of PPE may remain higher than historical levels for the foreseeable future, we do not expect these incremental costs to be material as a percentage of our total expenses.

Risk Factors included in Part I of this Annual Report on Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on our business.

During the years ended June 30, 2022 and 2021, we acquired significantly greater quantities of medical supplies at significantly higher

prices than pre-pandemic rates to ensure the safety of our employees and our participants.

These costs did not have a material effect on our business or expenses.

Labor market .

The COVID-19 pandemic has and continues to exacerbate difficulties to hire additional healthcare professionals, causing certain of our centers to be understaffed or staffed with personnel that requires training.

The labor shortage has also contributed to the increased wage pressure to retain and attract such healthcare professionals.

The combination of increased wage pressure and labor shortage amongst healthcare personnel, and specifically, trained personnel, has impacted and may continue to impact our expenses and ability to adhere to the complex government laws and regulations that apply to our business.

Additionally, geopolitical events have contributed to adverse macroeconomic conditions, including but not limited to inflation, new or increased tariffs, changes to fiscal monetary policy, higher interest rates, potential global security issues and market volatility.

None of these factors has had a material effect on our operations to date.

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 2.45 based on InnovAge data as of June 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 RAF score of 2.40 based on InnovAge data as of June 30, 2022, 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 2020 ;

and (ii) we manage Medicaid spend in addition to Medicare.

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The Medicare portion of our capitated payment is risk-based on the underlying medical conditions and frailty of each participant.

● Our ability to effectively implement remediation efforts in our centers as a result of our recent audits.

The Company’s priority is to remediate the deficiencies raised in the audit processes in California, Colorado and New Mexico.

As part of its actions to do so, the Company has worked with the appropriate authorities to make the necessary changes within the Company to increase care coordination and care documentation among our centers, including working to fill critical personnel gaps at our centers, standardizing the process of our IDTs, strengthening our home care network and reliability, improving timelines of scheduling and coordinating care with providers outside our centers, among others.

For more information, see Item 1.

“Business.” We expect that our ability effectively implement remediation initiatives will have an impact on our efforts to lift the sanctions imposed by regulatory agencies on our ability to increase enrollments at our centers in Sacramento, California and all our centers in Colorado, and our return to growth.

For more information, see Item 1A.

Risk Factors, “Risks Related to Our Business—Our business strategy may not realize expected returns.”

● 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 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 June 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.

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.

Risk Factors, “Risks Related to Our Business — We face inspections, reviews, audits and investigations under federal and state government programs and contracts.

These audits require corrective actions and have resulted in adverse findings that have negatively affected and may continue to affect our business, including our results of operations, liquidity, financial condition and reputation.

● Our ability to maintain high participant satisfaction and retention.

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healthcare system, our external provider costs and cost of care, excluding depreciation and amortization, represented approximately 79% of our revenue in the year ended June 30, 2022.

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.

While we are liable for potentially large medical claims, our care model focuses on delivering high-quality medical care in cost efficient, community-based settings as a means of avoiding costly inpatient and outpatient services.

However, our participants retain the freedom to seek care at sites of their choice, including hospitals and emergency rooms;

we do not restrict participant access to care, therefore, we are liable for potentially large medical claims should we not effectively manage our participants’ health.

we do not restrict participant access to care.

● Center-level Contribution Margin .

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

As we add participants to existing centers, we further leverage our fixed cost base at those centers 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 .

At this time, the enrollment sanctions in place in Sacramento, California and Colorado limit our ability to grow our participant census and impact Center-level Contribution Margin.

Risk Factors, “Risks Related to Our Business — We face inspections, reviews, audits and investigations under federal and state government programs and contracts.

● 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

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.

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.

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’s 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.

● 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.

From fiscal year 2019 through fiscal year 2021, we acquired and integrated three PACE organizations, expanding our InnovAge Platform to one new state and four new markets through those acquisitions.

When integrating acquired programs, we work closely with key constituencies, including local governments, health systems and senior housing providers, to enable continuity of quality care for our participants.

Once restrictions on our ability to enroll participants as a result of the audits of our centers in Sacramento, California and Colorado and on our ability to open

de novo centers as a result of actions taken by other states or us, are lifted or resolved, we believe there is a robust landscape of potential tuck-in acquisitions to supplement our organic growth.

● Contracting with government payors .

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

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

Medical costs vary most significantly as a result of (i) the weather, with certain illnesses, such as the influenza virus and possibly COVID-19, being more prevalent during colder months of the year, which generally increases per-participant costs and (ii) the number of business days in a period, with shorter periods generally having lower medical costs all else equal.

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

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Capitation Revenue .

In order to provide comprehensive services to manage the totality of a participant’s medical care across all settings, we receive fixed or capitated fees per participant that are paid monthly by Medicare,

Medicaid, Veterans Affairs (“VA”) and private pay sources.

The concentration of revenue from our various payors was:

The concentration of capitation revenue from our various payors was:

Private pay and other

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

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

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

The PACE state contracts between us and the respective state Medicaid administering agency are amended annually each

June 30 in all states other than California and Pennsylvania, which contract on a calendar-year basis.

W e are currently operating in good standing under each of our PACE state contracts .

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 this Annual Report on Form 10-K .

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We expect these costs to increase in absolute dollars over time as we continue to grow our participant census.

We evaluate our sales and marketing expenses relative to our

participant growth and will invest more heavily in sales and marketing from time-to-time to the extent we believe such investment can accelerate our growth without negatively affecting profitability.

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 further our growth without negatively affecting profitability.

Corporate, General and Administrative Expenses.

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In addition, general and administrative expenses include all corporate technology and occupancy costs associated with our regional corporate offices.

We expect our general and administrative expenses to increase in absolute dollars following the closing of this offering due to the additional legal, accounting, insurance, investor relations and other costs that we incur as a public company, as well as other costs associated with continuing to grow our business.

We expect our general and administrative expenses to increase in absolute dollars due to the additional legal, accounting, insurance, investor relations and other costs that we incur as a public company, as well as other costs associated with compliance and continuing to grow our business.

However, we anticipate general and administrative expenses to decrease as a percentage of revenue over the long term, although such expenses may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses.

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Other Operating Expenses (Income).

Other operating expenses (income) consists of the payment and re-measurement of contingent consideration to fair value relating to our acquisition of NewCourtland.

Other operating expenses (income) consists of the payment and re-measurement of contingent consideration to fair value relating to our acquisition of NewCourtland LIFE Program (“NewCourtland”).

For more information relating to the components of our results of operations, see Results of Operations below and Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in this Annual Report on Form 10-K for more detailed information regarding our critical accounting policies.

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

For comparisons of the results of operations for the fiscal year ended June 30, 2020 to the fiscal year ended June 30, 2019, refer to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our IPO prospectus, dated March 3, 2021 filed with the Securities and Exchange Commission on March 5, 2021.

Year ended June 30,

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Capitation revenue was $697.0 million for the year ended June 30, 2022, an increase of $61.7 million, or 9.7%, compared to $635.3 million for the year ended June 30, 2021.

This increase was driven by (i) an increase in capitation rates and (ii) a 6.1% increase in member months (as defined below).

The increase in capitation rates was primarily driven by the net effect of (a) an increase in Medicare rates due to (1) a 5.3% increase in average risk score and (2) the temporary suspension of the automatic 2% reduction of Medicare claim reimbursements (sequestration) beginning May 1, 2020 and, to a lesser extent, (b) an increase in Medicaid rates across the majority of our markets.

This increase was driven by (i) an increase in capitation rates and (ii) a 4.3% increase total in member months (as defined below under “Key Business Metrics and non-GAAP Measures – Total member months”).

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

Other service revenue.

Other service revenue was $2.5 million for the year ended June 30, 2021, an increase of $0.1 million, or 5.1%, from $2.4 million for the year ended June 30, 2020.

Other service revenue was $1.6 million for the year ended June 30, 2022, a decrease of $0.8 million, or 33.7%, from $2.5 million for the year ended June 30, 2021.

The decrease is primarily due to less fee-for-service revenue as a result of winding down our in-home care services and a decrease in food grant revenue as a result of fewer meals provided for the year ended June 30, 2022 when compared to the same period in 2021.

Year ended June 30,

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External provider costs were $383.0 million for the year ended June 30, 2022, an increase of $73.7 million, or 23.8%, compared to $309.3 million for the year ended June 30, 2021.

The increase is primarily driven by (i) an increase of 6.8% in cost per participant and (ii) an increase of 6.1% in member months.

The increase in cost per participant is primarily driven by the net effect of an increase in pharmacy expenses, inpatient expenses (due to the increased cost of COVID-19 admissions), and outpatient expenses, partially offset by a decrease in specialist expenses due to the lower utilization during the pandemic.

The increase was primarily driven by (i) an increase of 18.8% in cost per participant and (ii) an increase of 4.3% in member months.

The increase in cost per participant was primarily driven by the net effect of (i) an increase in inpatient and medical respite utilization and cost as a result of the Omicron COVID-19 surge, (ii) an increase in post-acute care utilization and cost, (iii) increased housing utilization, (iv) increased housing rates as mandated by certain states, and (v) 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.

Cost of care, excluding depreciation and amortization.

Cost of care (excluding depreciation and amortization) expense was $154.4 million for the year ended June 30, 2021, an increase of $1.3 million, or 0.9%, compared to $153.1 million for the year ended June 30, 2020, primarily due to the net effect of (i) an increase of 6.1% in member months and (ii) a decrease of 4.9% in cost per participant.

The decrease in cost per participant was driven by a decrease in transportation costs due to the closures of our centers due to the COVID-19 pandemic and lower employee compensation and benefit costs, due to employee attrition while our centers were closed during the pandemic.

Cost of care, excluding depreciation and amortization expense was $180.2 million for the year ended June 30, 2022, an increase of $25.8 million, or 16.7%, compared to $154.4 million for the year ended June 30, 2021, primarily due to the net effect of (i) an increase of 4.3% in member months and (ii) an increase of 11.9% 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, increased labor costs associated with ongoing audit remediation and compliance efforts, and an increase in headcount and wage rates.

Sales and marketing.

Sales and marketing expenses were $22.2 million for the year ended June 30, 2021, an increase of $3.2 million, or 17.0%, compared to $19.0 million for the year ended June 30, 2020, primarily due to an increase in (i) employee compensation and benefits due to an increase in FTEs and (ii) costs associated with certain new advertising campaigns to raise PACE awareness and accelerate growth.

Corporate, general and administrative.

Corporate, general and administrative expenses were $132.3 million for the year ended June 30, 2021, an increase of $73.9 million, or 126.3%, compared to $58.5 million for the year ended June 30, 2020.

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

Sales and marketing expenses were $24.2 million for the year ended June 30, 2022, an increase of $2.0 million, or 8.8%, compared to $22.2 million for the year ended June 30, 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.

Corporate, general and administrative expenses.

Corporate, general and administrative expenses were $101.7 million for the year ended June 30, 2022, a decrease of $30.7 million, or 23.2%, compared to $132.3 million for the year ended June 30, 2021.

The decrease was primarily due to the fees incurred during fiscal year 2021 as a result of the July 27, 2020 transaction between us, Ignite Aggregator LP (an investment vehicle owned by certain funds advised by Apax Partners LLP) and our then-existing equity holders entering into a Securities Purchase Agreement (the “Apax Transaction”).

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

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

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 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 $13.9 million for the year ended June 30, 2022, an increase of $1.6 million, or 13.3%, compared to $12.3 million for the year ended June 30, 2021.

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

Equity loss was $1.3 million for the year ended June 30, 2021, an increase of $0.7 million compared to $0.7 million for the year ended June 30, 2020.

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

The increase in depreciation expense was a result of capital additions in the normal course of business.

Equity loss was $1.3 million for the year ended June 30, 2021, which 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 were no equity earnings for the year ended June 30, 2022.

Other operating expenses.

Other operating expenses were $18.2 million for the year ended June 30, 2021, an increase of $17.3 million compared to $0.9 million for the year ended June 30, 2020 primarily due to the payment of $20.0 million, and related change in fair value of contingent consideration, made under the acquisition agreement of the NewCourtland LIFE Program during the year ended June 30, 2021.

Other operating expenses were $18.2 million for the year ended June 30, 2021, primarily due to the payment of $20.0 million, and related change in fair value of contingent consideration, made under the acquisition agreement of the NewCourtland LIFE Program during the year ended June 30, 2021.

There were no such payments during the year ended June 30, 2022.

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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 $16.8 million for the year ended June 30, 2021, an increase of $2.2 million, or 14.8%, compared to $14.6 million for the year ended June 30, 2020.

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

For additional information regarding our outstanding indebtedness, see Note 10 to our consolidated financial statements.

Interest expense, net was $2.5 million for the year ended June 30, 2022, a decrease of $14.3 million, or 85.0%, compared to $16.8 million for the year ended June 30, 2021.

The decrease was primarily due to a lower average outstanding debt balance.

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

Loss on extinguishment of debt.

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

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

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

issuance costs.

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

Gain on equity method investment.

We recognized a gain on equity method investment of $10.9 million for the year ended June 30, 2021, which was related to InnovAge Sacramento becoming a consolidated entity as of January 1, 2021.

Other expense was $2.2 million for the year ended June 30, 2021, an increase of $1.6 million, or 228.5%, compared to $0.7 million for the year ended June 30, 2020, due primarily to an amendment of the warrants issued by the Company to Adventist Health System/West (“Sacramento Warrants”) resulting in additional expense of $2.3 million in 2021.

We recognized a gain on equity method investment of $10.9 million for the year ended June 30, 2021, which was related to InnovAge Sacramento becoming a consolidated entity as of January 1, 2021, and no gain on equity method investment for the year ended June 30, 2022.

Other expense was $0.3 million for the year ended June 30, 2022, a decrease of $1.9 million, or 86.4%, compared to $2.2 million for the year ended June 30, 2021, due primarily to an amendment of the warrants issued by the Company to Adventist Health System/West (“Sacramento Warrants”) resulting in additional expense of $2.3 million in 2021.

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 (as defined below under “— Net Loss Attributable to Noncontrolling Interests ”) and InnovAge Sacramento have elected to be taxed as partnerships, and no provision for income taxes for SH1 or InnovAge Sacramento is included in these consolidated financial statements

A valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized.

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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 year ended June 30, 2021 and 2020, we reported provision for income taxes of $9.8 million and $9.9 million, respectively.

The decrease of $0.1 million is primarily due to (i) our pretax book loss recognized during the year ended June 30, 2021, as compared to pretax book income recognized during the year ended June 30, 2020 and (ii) certain permanent differences between the financial and tax accounting treatment 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 years ended June 30, 2022 and 2021, we reported provision for income taxes of $0.7 million and $9.8 million, respectively.

The decrease of $9.1 million is primarily due to (i) pretax book loss recognized during the year ended June 30, 2022, as compared to the pretax book loss recognized during the year ended June 30, 2021 and (ii) certain permanent differences between the financial and tax accounting treatment of (a) the Section 162(m) limitation on compensation of five highest paid officers, (b) transaction costs associated with the Apax Transaction in the prior year and (c) the change in our valuation allowance.

There were no transactions during the year ended June 30, 2022, and thus considerably less of an addback for the permanent differences discussed.

Net Loss Attributable to Noncontrolling Interests.

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

InnovAge Senior Housing Thornton, LLC (“SH1”) is a variable interest entity (“VIE”).

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

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Net Income (Loss)

During the year ended June 30, 2021 and 2020, we reported net income (loss) of ($44.7 million) and $25.8 million, respectively, consisting of (i) income (loss) from operations of ($12.3 million) and $50.9 million, respectively, (ii) other expense of $22.6 million and $15.3 million, respectively, and (iii) provision for income taxes of $9.8 million and $9.9 million, respectively, each as described above.

During the years ended June 30, 2022 and 2021, we reported net loss of $8.0 million and $44.7 million, respectively, consisting of (i) loss from operations of $4.4 million and $12.3 million, respectively, (ii) other expense of $2.8 million and $22.6 million, respectively, and (iii) provision for income taxes of $0.7 million and $9.8 million, respectively, each as described above.

For more information relating to our accounting policies, see Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in this Annual Report on Form 10-K .

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Adjusted EBITDA Margin (c)

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

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

(b) Participant numbers are approximate.

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

For purposes of evaluating Center-level Contribution Margin on a center-by-center basis, we do not allocate our sales and marketing expense or corporate, general and administrative expenses across our centers.

Center-level Contribution Margin was $174.1 million

and $141.3 million for the years ended June 30, 2021 and 2020, respectively.

For more information relating to Center-level Contribution Margin, see Note 17 to our consolidated financial statements.

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 $135.4 million and $174.1 million for the years ended June 30, 2022 and 2021, respectively.

The decrease in Center-level Contribution Margin for fiscal year 2022 was primarily due to a year-over-year increase in external provider costs and cost of care of 23.8% and 16.7%, respectively.

This was slightly offset by a 9.5% increase in total revenue during the same period.

For more information relating to Center-level Contribution Margin, see Note 14 “Segment Reporting” to our consolidated financial statements.

Adjusted EBITDA

We define Adjusted EBITDA as net income adjusted for interest expense, depreciation and amortization, and provision for income tax as well as addbacks for non-recurring expenses or exceptional items, including charges relating to management equity compensation, final determination of rates, M&A transaction and integration, business optimization, electronic medical record (“EMR”) implementation, special employee bonuses, gain on consolidation of equity investee, financing-related fees and contingent consideration.

For the years ended June 30, 2021 and 2020, our net income (loss) was ($44.7 million) and $25.8 million, respectively, representing a year-over-year decline of 273.6%, and Adjusted EBITDA was $85.3 million and $65.9 million, respectively, representing a year-over-year growth of 29.5%.

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

We define Adjusted EBITDA as net income (loss) adjusted for interest expense, depreciation and amortization, and provision for income tax as well as addbacks for non-recurring expenses or exceptional items, including charges relating to management equity compensation, final determination of rates, executive severance and recruitment, litigation, M&A transaction and integration, business optimization, electronic medical record (“EMR”) implementation, gain on consolidation of equity investee, financing-related fees and contingent consideration.

For the years ended June 30, 2022 and 2021, our net loss was $8.0 million and $44.7 million, respectively, representing a year-over-year decline of 82.2%, and Adjusted EBITDA was $34.3 million and $85.3 million, respectively, representing a year-over-year decline of 59.9%.

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

Year ended June 30,

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Rate determination (a)

M&A diligence, transaction and integration (b)

Business optimization (c)

EMR implementation (d)

Special employee bonus (e)

Gain on consolidation of equity investee (f)

Financing-related (g)

Contingent consideration (h)

Executive severance and recruitment (b)

Class action litigation (c)

M&A transaction and integration (d)

Business optimization (e)

EMR implementation (f)

Gain on consolidation of equity investee (g)

Financing-related (h)

Contingent consideration (i)

Adjusted EBITDA

(a) For the year ended June 30, 2021, this reflects the CMS settlement payment of approximately $2.2 million related to end-stage renal disease beneficiaries for calendar years 2010 through 2020.

For the year ended June 30, 2020, this reflects the final determination of certain rates for capitation payments from the State of California, all of which we consider non-recurring.

(b) For the year ended June 30, 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”).

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

(e) Reflects non-recurring special bonuses paid to certain of our employees of the Company relating to shareholder dividend transactions that occurred in fiscal years 2018 and 2019.

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

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

(a) For the year ended June 30, 2021, 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.

See Item 3, “Legal Proceedings” included in this Annual Report on Form 10-K.

(d) For the year ended June 30, 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 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, improve and support the efficiency and effectiveness of our operations, and, for the fiscal year ended June 30, 2022, third party support to address efforts to remediate deficiencies in audits, including (i) $1.8 million paid to consultants and contractors performing audit and other related

services at sanctioned centers, (ii) $4.0 million of charges related to government investigations, and (iii) $3.0 million of costs associated with third party consultants to strengthen enterprise capabilities.

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

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

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

See Note 8 to the consolidated financial statements.

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

(i) Reflects the contingent consideration fair value adjustment made during fiscal year 2021 associated with our acquisition of NewCourtland.

Adjusted EBITDA margin

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

In the years ended June 30, 2021 and 2020, we recognized (i) the CMS settlement payment related to end stage renal disease beneficiaries for calendar years 2010-2020 in the amount of approximately $2.2 million and (ii) final determination of certain rates for capitation payments from the State of California in the amount of approximately $3.4 million, respectively, each of which is deducted from total revenue solely for purposes of calculating Adjusted EBITDA margin in each respective reporting period.

For the year ended June 30, 2021, our net loss margin was 7.0%, as compared to our net income margin of 4.5% for the year ended June 30, 2020.

For the year ended June 30, 2022, our net loss margin was 1.1%, as compared to our net loss margin of 7.0% for the year ended June 30, 2021.

For the year ended June 30, 2022, our Adjusted EBITDA margin was 4.9%, as compared to our Adjusted EBITDA margin for the year ended June 30, 2021 of 13.4%.

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

We believe that Adjusted EBITDA and Adjusted EBITDA margin are appropriate measures of operating performance because the metrics eliminate the impact of revenue and expenses that do not relate to our ongoing business performance, allowing us to more effectively evaluate our core operating performance and trends from period to period.

We believe that Adjusted EBITDA and Adjusted EBITDA margin are appropriate measures of operating performance because the metrics eliminate the impact of revenue and expenses that do not relate to our ongoing business performance and certain noncash expenses, allowing us to more effectively evaluate our core operating performance and trends from period to period.

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

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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 most recently from the sale of common stock in our IPO that occurred in March 2021.

As of June 30, 2021, we had cash and cash equivalents of $201.5 million.

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

Our capital resources are generally used to fund (i) debt service requirements, the majority of which relate to the quarterly principal payments of the Term Loan Facility (as defined in Note 10 to the consolidated financial statements) due 2026, (ii) capital and operating lease obligations, which are generally paid on a monthly basis and include maturities through 2025 and 2032, respectively, (iii) the operations of our business, including special projects such as our transition to a new electronic medical record vendor, with respect to which we expect to incur non-recurring implementation costs over the next 18 months, and ongoing costs through 2026, and (iv) income tax payments, which are generally due on a quarterly and annual basis.

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

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

For additional information regarding our lease obligations, debt and commitments, see Notes 9, 10 and 12 to our 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.

As of the years ended June 30, 2022 and 2021, we had cash and cash equivalents of $184.4 million and $201.5 million, respectively, a decrease of $17.1 million primarily due to purchases of property and equipment offset by cash received from operations.

In each case, our cash and cash equivalents primarily consist of highly liquid investments in demand deposit accounts and cash.

Our capital resources are generally used to fund (i) debt service requirements, the majority of which relate to the quarterly principal payments of the Term Loan Facility (as defined in Note 8 “Long-term Debt” to the consolidated financial statements) due 2026, (ii) capital and operating lease obligations, which are generally paid on a monthly basis and include maturities through 2025 and 2032, respectively, (iii) the operations of our business, including special projects such as our transition to a new EMR vendor, with respect to which we expect to incur non-recurring implementation costs over the next 12 months, and ongoing costs through 2026, and third party support to address remediation efforts, and (iv) income tax payments, which are generally due on a quarterly and annual basis.

We also will continue investing in the effective implementation of corrective remediation plans (CAPs) and other corrective initiatives as a result of deficiencies found during audits at some of our centers, and our ability to continually provide necessary and quality services to our participants.

In the long-term, we also expect to use capital resources for capital additions, which we expect to primarily relate to the development of de novo centers, to the extent and if they are opened.

Collectively, these obligations are expected to represent a significant liquidity requirement of our Company on both a short-term (next 12 months) and long-term (beyond 12 months) basis.

For additional information regarding our lease obligations, debt and commitments, see

Notes 7 “Leases,” 8 “Long-term Debt,” and 10 “Commitments and Contingencies,” respectively, to our Audited Consolidated Financial Statements.

We believe that our cash and cash equivalents and our cash flows from operations, available funds and access to financing sources, including our 2021 Credit Agreement and Revolving Credit Facility (each as discussed and defined below), will be sufficient to fund our operating and capital needs for the next 12 months and beyond.

We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect.

Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, the timing and extent of spending to open new centers and the expansion of sales and marketing activities.

Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, our ability to retain and grow the number of PACE participants, subject to our ability to effectively remediate deficiencies identified in our Colorado and Sacramento centers, and the expansion of sales and marketing activities.

We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies.

We may be required to

seek additional equity or debt financing.

We may be required to seek additional equity or debt financing.

In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.

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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.

The 2021 Credit Agreement consists of a senior secured term loan (the “Term Loan Facility”) of $75.0 million principal amount and a revolving credit facility (the “Revolving Credit Facility”) of $100.0 million maximum borrowing capacity, each as defined and described in Note 10 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.

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

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

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The remaining principal balance is due upon maturity, which is August 20, 2030.

For more information about our debt, see Note 10 to our consolidated financial statements.

For more information about our debt, see Note 8 “Long-term Debt” to our audited Consolidated Financial Statements.

Our material cash requirements from known contractual and other obligations primarily relate to long-term debt and lease obligations.

Expected timing of those payments are as follows:

Next 12 Months

Beyond 12 Months

Long-term debt (excluding interest) (1)

Operating leases (2)

Capital leases (excluding interest)

(1) Represents principal amounts related to the credit agreements.

(2) We have not adopted ASU 2016-02, which requires lessees to recognize almost all leases on the balance sheet.

We will be adopting this guidance for the fiscal year beginning July 1, 2022, the results of which are not reflected.

See Note 2 “Summary of Significant Accounting Policies” to our Consolidated Financial Statements.

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness and, therefore, we do not anticipate paying any cash dividends in the foreseeable future.

Trends and Uncertainties

During fiscal year 2022, the U.S.

and global economies experienced adverse macroeconomic effects in part resulting from the ongoing effects of the COVID-19 pandemic.

These effects included inflation and increase in wages due to labor shortages.

In fiscal year 2022, in response to high levels of inflation, we began to implement various mitigation strategies to reduce costs of operation, including consolidating services and price negotiations with providers.

The effects of inflation, after accounting for these mitigation strategies, were immaterial to our financial results for the fiscal year 2022.

However, we expect inflation is likely to continue for most or all of fiscal year 2023, and even though we expect to continue mitigation efforts, there can be no assurance that our strategies will continue to achieve the same degree of success as in fiscal year 2022.

In addition, in fiscal year 2022, we experienced workforce and labor shortages, within all of our centers.

We recognize that our participant-facing staff is critical to delivering quality care.

As such, we made market adjustments to certain roles to increase retention and improve our ability to hire.

These adjustments resulted in an increase in cost of care further impacted by additional staffing related to compliance and remediation efforts.

This increase did not have a material effect on our financial results.

We continue to assess key roles and benchmarks to market while monitoring trends in the labor market where we continue to see wage inflation in fiscal year 2023.

Consolidated Statements of Cash Flows

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Net cash used in investing activities

Net cash provided by financing activities

Net cash provided by (used in) financing activities

Net change in cash, cash equivalents and restricted cash

Operating Activities.

The change in net cash provided by (used in) operating activities was primarily due to the net effect of (i) a decrease in net income (loss) of $70.5 million, as described further above, (ii) the $14.5 million loss on extinguishment of long-term debt recognized during 2021, as described further above, with no loss recognized in 2020, (iii) the $10.9 million gain on equity method investment recognized during 2021, as described further above, with no gain recognized in 2020, (iv) an increase of $7.2 million in the change in accounts payable and accrued expenses due to timing of payments and the impact of the completion of HCPF’s reconciliation, as described below, (v) an increase of $7.1 million in the change in accounts receivable, including the impact of the completion of HCPF’s reconciliation, as defined and described below, and (vi) a decrease of $5.6 million in the change in income tax receivable.

The change in net cash provided by (used in) operating activities was primarily due to the net effect of (i) a net loss of $8.0 million for the year ended June 30, 2022 compared to a net loss of $44.7 million in the prior period, as described further above, (ii) an increase of $18.2 million in the change in accounts payable and accrued expenses during fiscal year 2022 due to timing of payments, and the impact of the completion of HCPF’s reconciliation during fiscal year 2021, as described below, (iii) the $10.9 million gain on equity method investment recognized during 2021, as described further above, with no gain recognized in 2022, (iv) an increase of $7.2 million in the change in amounts due to Medicaid, (v) slightly offset by a $14.5 million loss on extinguishment of long-term debt recognized during 2021, as described further above, with no loss recognized in 2022.

In fiscal year 2021, the Company and the Colorado Department of Health Care Policy & Financing (“HCPF”) completed the reconciliation for fiscal years 2018 and 2019.

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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 $5.7 million for growth-related capital expenditures.

The increase in net cash used in investing activities was primarily due to an increase in cash used for growth-related capital expenditures and implementation of an integrated EMR system.

Financing activities.

The increase in net cash provided by financing activities was primarily due to the net effect of (i) an increase in cash provided of $370.5 million related to the net proceeds received from our IPO, (ii) a decrease in cash provided of $160.7 million due to higher net repayments on long-term debt, (iii) a decrease in cash provided of $77.6 million related to treasury stock purchases and (iv) a decrease in cash provided of $29.2 million related to stock option cancellation payments.

Contractual Obligations and Commitments

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

The following table summarizes our contractual obligations as of June 30, 2021:

Payments due by period

Long-term debt (excluding interest) (1)

Operating leases (2)

Capital leases (excluding interest)

(1) Represents principal amounts related to the credit agreements.

(2) We have not adopted ASU 2016-02, which requires lessees to recognize almost all of their leases on the balance sheet.

We will be adopting this guidance for the annual reporting period beginning July 1, 2022, and interim reporting periods within the annual reporting period beginning July 1, 2023.

See Note 2 “Summary of Significant Accounting Policies--Recent Accounting Pronouncements” to our consolidated financial statements included in this Annual Report on Form 10-K

Off Balance Sheet Arrangements

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

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

For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, only being required to present two years of audited financial statements, plus unaudited condensed consolidated financial statements for applicable interim periods and the related discussion in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, exemptions from the requirements of holding non-binding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation.

The decrease in net cash provided by financing activities was primarily due to the net effect of (i) an increase in cash provided of $370.5 million related to the net proceeds received from our IPO in 2021, (ii) offset by net cash outflows of $137.7 million due to net repayments on long-term debt in excess of proceeds from long-term debt during the year ended June 30, 2021 compared to net repayments of debt of $3.8 million during the year ended June 30, 2022, (iii) a decrease in cash provided of $77.6 million related to treasury stock purchases in 2021, and (iv) a decrease in cash provided of $29.2 million related to stock option cancellation payments during the year ended June 30, 2021.

Emerging Growth Company and Smaller Reporting Company

We qualify as an “emerging growth company” pursuant to the provisions of the Jumpstart Our Business Startups (“JOBS”) Act and a “smaller reporting company” as defined by the Exchange Act.

For as long as we are an “emerging growth company” or a “smaller reporting company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” or “smaller reporting companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, only being required to present two years of audited financial statements, plus unaudited condensed consolidated financial statements for applicable interim periods and the related discussion in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, exemptions from the requirements of holding non-binding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation.

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies.

We intend to take advantage of the longer phase-in periods for the adoption of new or revised financial accounting standards under the JOBS Act until we are no longer an emerging

growth company.

We intend to take advantage of the longer phase-in periods for the adoption of new or revised financial accounting standards under the JOBS Act until we are no longer an emerging growth company.

Our election to use the phase-in periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the longer phase-in periods permitted under the JOBS Act and who will comply with new or revised financial accounting standards.

If we were to subsequently elect instead to comply with public company effective dates, such election would be irrevocable pursuant to the JOBS Act.

Critical Accounting Policies and Estimates

Critical Accounting 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.

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The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances.

While our significant accounting policies are described in more detail in Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and require management to make subjective and complex judgments and estimates in the preparation of our consolidated financial statements.

While our significant accounting policies are described in more detail in Note 2 “Summary of Significant Accounting Policies” to our audited Consolidated Financial Statements, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and require management to make subjective and complex judgments and estimates in the preparation of our consolidated financial statements.

Revenue recognition

Revenue for the year ended June 30, 2020 is presented under Accounting Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”).

Under ASC 605, we recognized revenue when all of the following criteria were met:

(i) persuasive evidence of an arrangement exists;

(ii) the sales price is fixed or determinable;

(iii) collection is reasonably assured;

and (iv) services have been rendered.

The judgement of when to recognize revenue is linked to the period in which eligible members are entitled to receive benefits.

In May 2014, the FASB issued Accounting Standards Update 2014-09 (“ASU 2014-09”), and has since issued various amendments which provide additional clarification and implementation guidance, to Topic 606, Revenue from Contracts with Customers , which superseded revenue recognition guidance in ASC 605.

with Customers , which superseded revenue recognition guidance in ASC 605.

ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.

This guidance is effective for the annual reporting period beginning July 1, 2020, and interim reporting periods within the annual reporting period beginning July 1, 2021.

This guidance became effective for annual reporting periods beginning July 1, 2020, and interim reporting periods within the annual reporting period beginning July 1, 2021.

Effective July 1, 2020, the Company adopted ASU 2014-09 using the modified retrospective method applied to those contracts which were not completed as of June 30, 2020.

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Accordingly, comparative periods have not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition .

Management estimates related to revenue are discussed below in more detail.

Capitation revenue

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We recognize revenue in the month in which participants are entitled to receive comprehensive care benefits during the contract term.

Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the PACE program, and Medicare rates can fluctuate throughout the

contract based on the acuity of each individual participant.

Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the PACE program, and Medicare rates can fluctuate throughout the contract based on the acuity of each individual participant.

In certain contracts, PMPM rates also include “risk adjustments” based on various factors.

For certain capitation payments, the Company is subject to retroactive premium risk adjustments based on various factors.

The Company estimates the amount of the adjustment and records it monthly on a straight-line basis.

The Company estimates the amount of the adjustment based on participant medical status and historical experience.

Such estimates are then recorded monthly on a straight-line basis.

We review our assumptions and adjust these estimates accordingly on a quarterly basis.

Our consolidated financial statements could be materially impacted if actual risk scores are different from the estimated risk scores.

If our accrual estimates for risk scores at June 30, 2022 were to differ by +/- 5%, the impact on revenues would be approximately $0.5 million.

These adjustments are not expected to be material.

Capitation revenues may be subject to adjustment as a result of examination by government agencies or contractors.

The audit process and the resolution of significant related matters often are not finalized until several years after the services are rendered.

Any adjustments resulting from these examinations are recorded in the period we are notified of them.

At times, we accept participants into the program pending final authorization from Medicaid.

If Medicaid coverage is later denied and there are no alternative resources available to pay for services, the participant is disenrolled.

Costs incurred on behalf of such participants were nominal in the fiscal years ended June 30, 2021 and 2020.

Certain third-party payor contracts include a Medicare Part D payment related to pharmacy claims, which is subject to risk sharing through accepted risk corridor provisions.

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We estimate and recognize an adjustment monthly to Part D capitation revenues related to these risk corridor provisions based upon pharmacy claims experience to date, as if the annual risk contract were to terminate at the end of the reporting period.

For our capitation revenue arrangements, we record revenue on a gross basis, as we are acting as a principal in providing for or overseeing comprehensive care for our participants.

Goodwill and other intangible assets

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a component).

A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component.

We have three reporting units for evaluating goodwill impairment.

ASC 350, Intangibles—Goodwill and Other (“ASC 350”), allows entities to first use a qualitative approach to test goodwill for impairment.

When the reporting units where we perform the quantitative goodwill impairment are tested, we compare the fair value of the reporting unit, which we primarily determine using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill.

Management estimates and assumptions are used when we determine fair value using widely accepted valuation techniques, including discounted cash flow.

These techniques are also used when assigning the purchase price to acquired assets and liabilities.

These types of analyses require us to make assumptions and estimates regarding industry and economic factors and the profitability of future business strategies.

It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations.

If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired.

If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss.

There were no goodwill impairments recorded during the years ended June 30, 2021 and 2020.

For purposes of the annual goodwill impairment assessment, the Company has identified three reporting units.

There were no indicators of impairment identified and no goodwill impairments recorded during the years ended June 30, 2022 and 2021.

In determining the fair value of our reporting units, we estimate a number of factors including anticipated future cash flows and discount rates.

Although we believe these estimates are reasonable, actual results could differ from those estimates due to the inherent uncertainty involved in making such estimates.

Additionally, the customer relationships represent the estimated values of customer relationships of acquired businesses and have definite lives.

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We test for recoverability of the customer relationships whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

There were no intangible asset impairments recorded during the years ended June 30, 2021 and 2020.

Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on the determination of the fair value.

Judgment is also required in determining the intangible asset’s useful life.

Reported and estimated claims

Reported and estimated claims expenses are costs for third-party healthcare service providers that provide medical care to our participants for which we are contractually obligated to pay (through our full-risk capitation arrangements).

The estimated reserve for unpaid claims liability is included in the liability for reported and estimated claims in the consolidated balance sheets.

Actual claims expense will differ from the estimated liability due to differences in estimated and actual member utilization of health care services, unit cost trends, participant acuity, changes in net census, known outbreaks of disease, including COVID-19 or increased incidence of illness such as influenza and other factors.

The estimated reserve for unpaid claims liability is included in the liability for reported and estimated claims in the consolidated balance sheets and requires estimates including actual member utilization of health care services, unit cost trends, participant acuity, changes in net census, known outbreaks of disease, including COVID-19 or increased incidence of illness such as influenza and other factors.

We periodically assess our estimates with an independent actuarial expert to ensure our estimates represent the best, most reasonable estimate given the data available to us at the time the estimates are made.

We have included incurred but not reported claims of approximately $38.5 million and $33.2 million on our balance sheet as of June 30, 2022 and 2021, respectively.

Our recorded medical claims expense estimate are approximately within +/- 5-10% of actual medical claims expense incurred, or less than 1% of our total operating expense.

Our recorded medical claims expense estimate is approximately within +/- 5-10% of actual medical claims expense incurred, or less than 1% of our total operating expense.

The following tables provide information about incurred and paid claims reporting and development as of June 30, 2022 (except as otherwise noted).

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Reported and estimated claims

Stock-based compensation

ASC 718, Compensation—Stock Compensation (“ASC 718”) requires the measurement of the cost of the employee services received in exchange for an award of equity instruments based on the grant-date fair value or, in certain circumstances, the calculated value of the award.

We maintained the 2016 Equity Incentive Plan pursuant to which various stock-based awards may be granted to employees, directors, consultants, and advisers.

Under our 2016 Equity Incentive Plan, we were able to reward employees with various types of awards, including but not limited to stock options on a service-based or performance-based schedule.

We have elected to account for forfeitures as they occur.

2016 Equity Incentive Plan

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model, which requires inputs based on certain subjective assumptions, including fair value of the underlying common stock, the expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option, and our expected dividend yield.

Changes in these assumptions can materially affect the estimate of fair value and ultimately how much stock-based compensation expense is recognized, and the resulting change in fair value, if any, is recognized in our statement of operations and comprehensive loss during the period the related services are rendered.

These inputs are subjective and generally require significant analysis and judgment to develop.

For service-vesting awards, we recognize stock-based compensation expense over the requisite service period, which is generally the vesting period of the respective award, on a straight-line basis.

For performance-vesting awards, we recognize stock-based compensation expense when it is probable that the performance condition will be achieved.

We will analyze if a performance condition is probable for each reporting period through the settlement date for awards subject to performance vesting.

For service-vesting awards, we recognize stock-based compensation expense over the requisite service period for each separately vesting portion of the awards as if the award was, in substance, multiple awards.

The 2016 Equity Incentive Plan was canceled in July 2020 and we subsequently established the 2020 Equity Incentive Plan, as described below, pursuant to which interests in TCO Group Holdings, L.P.

in the form of Class B Units were granted to employees, directors, consultants, and advisers.

2020 Equity Incentive Plan

Profits Interests Units

The Company uses the Monte Carlo option model to determine the fair value of the granted profits interests units, which requires inputs based on certain subjective assumptions, including fair value of the underlying common stock, the

expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option, and our expected dividend yield.

These inputs are subjective and generally require significant analysis and judgment to develop.

We concluded that the performance-vesting units are subject to a market condition and assessed the market condition as part of the determination of the grant date fair value.

For performance-vesting units, we recognized unit-based compensation expense when it was probable that the performance condition would be achieved.

We will analyze if a performance condition was probable for each reporting period through the settlement date for units subject to performance vesting.

For service-vesting units, we will recognize unit-based compensation expense over the requisite service period for each separately vesting portion of the profits interest as if the unit was, in-substance, multiple units.

Restricted Stock Units

We recognize expense related to restricted stock units based on their grant-date fair values, which is based upon the closing share price of the Company’s common stock on the date of grant.

We recognize stock-based compensation expense, using the straight-line method, as a charge to operations over the vesting period based on the grant-date fair value of outstanding awards, which may differ from the fair value of such awards on any given date.

Recent Accounting Pronouncements

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What changed 10-K

Item 7. Management’s Discussion and Analysis