What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-05-10 · 185 added, 200 removed, 199 unchanged (66% of the section changed)

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InnovAge Holding Corp.

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

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 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.

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

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

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

(“InnovAge”) became a public company in March 2021.

As of September 30, 2022, the Company served approximately 6,540 PACE participants, and operated 18 PACE centers across Colorado, California, New Mexico, Pennsylvania, and Virginia.

Trends and Uncertainties Affecting the Company

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, as discussed in more detail below.

These effects included inflation and increased 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 and vendors.

The effects of inflation, after accounting for these mitigation strategies, were immaterial to our financial results for the three months ended September 30, 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 be sufficient.

In addition, the increased wage pressure, exacerbated by the labor shortage, increased the cost of providing care and our overall operating expenses.

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.

Operating expenses increased $26.4 million, or 16.4%, for the three months ended September 30, 2022 compared to 2021 due to, in part, the increased cost of care and related cost per participant.

We continue to evaluate increased costs and methods to mitigate or offset such costs.

Impact of Macroeconomic Conditions and COVID-19

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

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

The United States experienced supply chain issues with respect to personal protective equipment (“PPE”) and other medical supplies during the height of the pandemic.

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

While uncertainties related to the magnitude and duration of global supply chain disruptions have adversely affected, and may continue to adversely affect, our business and outlook, supply chain disruptions have begun to alleviate and prices for certain medical supplies have begun to normalize.

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.

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 in conjunction with higher headcount has contributed to increased cost of care for the three months ended September 30, 2022 as discussed in “Results of Operations” below.

We continue to assess key roles and benchmarks to market while monitoring trends in the labor market.

For additional information on the various risks posed by macroeconomic events and the ongoing COVID-19 pandemic, please see the section entitled “Risk Factors” included in Part I, Item 1A of our 2022 10-K.

Key Factors Affecting Our Performance

Our historical financial performance has been, and we expect our financial performance in the future to be, driven by the following factors:

● 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 Interdisciplinary Care Teams (“IDTs”), strengthening our home care network and reliability, improving timelines of scheduling and coordinating care with providers outside our centers, among others.

See “Audit Processes and Remediation Efforts” below.

● Our participants.

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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 2.41 based on InnovAge data as of March 31, 2022 ;

(i) we manage a higher acuity population, with an average risk adjustment factor (“RAF”) score of 2.35 based on InnovAge data as of September 30, 2022 ;

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

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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 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.

We achieved an 76% participant satisfaction rating as of July 1, 2022 and average participant tenure was 3.2 years as of September 30, 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 5.7% 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 79% of our revenue in the nine months ended March 31, 2022.

healthcare system, our external provider costs and cost of

care, excluding depreciation and amortization, represented approximately 87% of our revenue in the three months ended September 30, 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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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.

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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.

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.

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.

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

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

Historically, when integrating acquired programs, we worked closely with key constituencies, including local governments, health systems and senior housing providers, to enable continuity of high-quality care for participants.

Once restrictions on our ability to open de novo centers are lifted or resolved, we intend to resume execution of tuck-in acquisitions.

● Contracting with government payors .

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

We view the government not only as a payor but also

as a key partner in our efforts to expand into new geographies and access more participants in our existing markets.

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

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

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 Risk Adjustment Factor score as measured twice per year and is based on the evolving acuity of a participant.

Based on the difference between our estimate and the final determination from CMS, we may receive incremental true up revenue or be required to repay certain amounts.

Historically, these true-up payments typically occur between May and August, but the timing of these payments is determined by CMS, and we have neither visibility nor control over the timing of such payments.

Audit Processes and Remediation Efforts

We are routinely subject to, and will continue to be subject to, various governmental inspections, reviews and audits.

Set forth below is a summary of the ongoing audits at our centers and updates on such audit processes.

In December 2021, each of CMS and the Colorado Department of Health Care Policy & Financing (“HCPF”) suspended new enrollments at the Company’s Colorado centers, based on deficiencies related to participant provision of services detected in the joint audit initiated in May and June 2021.

In January and February 2022, we submitted corrective action plans (“CAP”) to each of these agencies, which have been accepted and, in June 2022, both CMS and HCPF began monitoring the implementation of the CAPs.

In October 2022, the Company submitted an “Attestation” to CMS stating that it believes it has rectified the deficiencies and complied with the CAPs.

CMS will begin validating compliance in December 2022.

HCPF will collaborate with CMS but has not provided timing.

Timing and results of validation are uncertain and there can be no assurance that the agencies will agree with us or release us from sanctions.

On May 10, 2021, CMS began an audit of our Sacramento, California center.

In September 2021, CMS determined to suspend new enrollments at our Sacramento center based on deficiencies detected in the audit related to participant provision of services.

In that same month, we were further notified that the Department of Health Care Services (“DHCS”) of the State of California had reached the same determination.

In October 2021, we submitted a CAP to each of these agencies and have since been executing the CAPs.

In October 2022, the Company submitted “Attestations” to CMS and DHCS, stating that it believes it has rectified the deficiencies and complied with the CAPs.

CMS will begin validating compliance in November 2022.

DHCS has not provided a start date.

Timing and results of validation are uncertain and there can be no assurance that the agencies will agree with us or release us from sanctions.

In January 2022, DHCS notified us that it was suspending the State Attestations with respect to de novo centers in the State of California until such time as the enrollment sanctions are lifted.

In March 2022, CMS and DHCS began separate audits of our San Bernardino, California center.

In September 2022, CMS issued a final audit report identifying certain deficiencies previously noted in preliminary results.

CMS has verbally notified us that no enforcement actions will be taken.

We are implementing corrective actions (“iCARs”), and are currently working on the audit close process.

In November 2021, CMS began an audit of our Albuquerque, New Mexico center.

In July 2022, CMS verbally notified us that no enforcement actions will be taken, and in October 2022, CMS issued a final audit report.

To address the deficiencies related to participant provision of services identified in the audit, we are implementing iCARs are currently working with CMS on the audit close out process.

Kentucky, Indiana and Florida .

The States of Kentucky and Indiana have taken actions to suspend our ability to open de novo centers in those states, and we have committed to regulatory agencies in the State of Florida, that we will proactively pause remaining steps with respect to planned de novo centers in that state.

The Company’s priority is to remediate the deficiencies raised in the audit processes and to return to growth as a company, both for the short- and long-term.

We continue to work with the appropriate authorities to make the necessary changes within the Company to increase care coordination and care documentation among our centers.

Components of Results of Operations

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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, 2022 for California and (ii) July 1, 2021 through June 30, 2022 for all other states, except Pennsylvania, for which we are currently operating in good standing under the 2020 amended agreement while the agency finalizes its 2021 amendment.

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

New amendments have been executed for the periods (i) January 1, 2021 through December 31, 2022 for California and (ii) July 1, 2022 through June 30, 2023 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 current amendment.

For a discussion of our revenue recognition policies, please see Critical Accounting Estimates below and Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2022 10-K.

Other Service Revenue.

Other service revenue primarily consists of revenues derived from fee-for-service arrangements, state food grants, rent revenues and management fees.

We generate fee-for-service revenue from 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.

Prior to June 30, 2022 we generated fee-for-service revenue from providing home-care services to non-PACE patients in their homes, for which we billed the patient or their insurance plan on a fee-for-service basis.

We no longer offer in-home care services.

For a discussion of our revenue recognition policies, please see Critical Accounting Estimates below and Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2022 10-K.

Operating Expenses

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We separate external provider costs into four categories:

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

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

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

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Cost of care, excluding depreciation and amortization, includes the costs we incur to operate our care delivery model.

This includes costs related to IDTs, salaries, wages and benefits for center-level staff, participant transportation, medical supplies, occupancy, insurance and other operating costs.

This includes costs related to salaries, wages and benefits for IDT and other center-level staff, participant transportation, medical supplies, occupancy, insurance and other operating costs.

IDT employees include medical doctors, registered nurses, social workers, physical, occupational, and speech therapists, nursing assistants, and transportation workers.

Center-level employees include clinic managers, dieticians, activity assistants and certified nursing assistants.

Other center-level employees include clinic managers, dieticians, activity assistants and certified nursing assistants.

Cost of care excludes any expenses associated with sales and marketing activities incurred at a local level as well as any allocation of our corporate, general and administrative expenses.

A portion of our cost of care is fixed relative to the number of participants we serve, such as occupancy and insurance expenses.

The remainder of our cost of care, including our employee-related costs, is directly related to the number of participants cared for in a center.

As a result, as revenue increases due to census growth, cost of care, excluding depreciation and amortization, typically decreases as a percentage of revenue.

A portion of our cost of care, including our employee-related costs, is directly related to the number of participants cared for in a center.

The remainder of our cost of care is fixed relative to the number of participants we serve, such as occupancy and insurance expenses.

As a result, as revenue increases due to census growth, cost of care, excluding depreciation and amortization, moderately decreases as a percentage of revenue.

As we open new centers, we expect cost of care, excluding depreciation and amortization, to increase in absolute dollars due to higher census and facility related costs.

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Sales and marketing expenses also include local and centralized advertising costs, as well as the infrastructure required to support our marketing efforts.

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

We 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.

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

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

Other Operating Income.

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

For more information relating to the components of our results of operations, see Results of Operations below and Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2022 10-K.

Results of Operations

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

Nine Months Ended

Three months ended September 30,

Capitation revenue

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Depreciation and amortization

Other operating income

Total expenses

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Interest expense, net

Loss on extinguishment of debt

Gain on equity method investment

Other income (expense)

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Net Income (Loss) Attributable to InnovAge Holding Corp.

Three Months Ended

Nine Months Ended

Three months ended September 30,

Capitation revenue

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Capitation revenue.

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.

Capitation revenue was $170.9 million for the three months ended September 30, 2022, a decrease of $1.6 million, or 0.9%, compared to $172.6 million for the three months ended September 30, 2021.

This decrease was driven by a 5.6% decrease in member months partially offset by a 4.9% increase in capitation rates.

The decrease in member months is primarily due to disenrollments and our inability to enroll new participants at our Sacramento, California and Colorado centers as a result of the sanctions.

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 $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.

Other service revenue was $0.3 million for the three months ended September 30, 2022, a decrease of $0.2 million, or 44.4%, from $0.5 million for the three months ended September 30, 2021.

The decrease is primarily due to less fee-for-service revenue as a result of winding down our in-home care services during fiscal year 2022.

Operating Expenses

Three Months Ended

Nine Months Ended

Three months ended September 30,

External provider costs

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Depreciation and amortization

Other operating income

Total operating expenses

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External provider costs.

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 (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.

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

External provider costs were $96.2 million for the three months ended September 30, 2022, an increase of $6.2 million, or 6.9%, compared to $90.0 million for the three months ended September 30, 2021.

The increase is primarily driven by an increase of $11.2 million, or 13.2%, in cost per participant partially offset by a decrease of $5.0 million, or 5.6%, in member months.

The increase in cost per participant is primarily driven by a $7.7 million increase associated with increased housing utilization and cost per day as mandated by certain states.

Cost of care (excluding depreciation and amortization).

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.

Cost of care (excluding depreciation and amortization) expense was $53.6 million for the three months ended September 30, 2022, an increase of $12.8 million, or 31.5%, compared to $40.7 million for the three months ended September 30, 2021, primarily due to an increase of $15.1 million, or 39.3%, in cost per participant partially offset by a decrease of $2.3 million, or 5.6%, in member months.

Of the total variance, the increase was primarily driven by (i) a $7.8 million increase salaries, wages and benefits associated with increased headcount and higher wage rates due to the ongoing competitive labor market, (ii) $1.0 million in third party audit and compliance support, (iii) $1.3 million in increased fleet and contract transportation as a result of higher average daily attendance, increase in external appointments, and higher fuel costs, and (iv) $0.6 million in de novo costs.

Sales and marketing.

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.

Sales and marketing expenses were $4.4 million for the three months ended September 30, 2022, a decrease of $1.9 million, or 29.9%, compared to $6.3 million for the three months ended September 30, 2021, primarily due to a $1.3 million reduction in marketing spend and $0.5 million associated with fewer headcount within the sales department, both as a result of sanctions in our Colorado and Sacramento centers.

Corporate, general and administrative.

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) 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 $3.9 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 $- 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.

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 nine months ended March 31, 2022.

Other operating income.

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.

Corporate, general and administrative expenses were $30.2 million for the three months ended September 30, 2022, an increase of $9.1 million, or 43.1%, compared to $21.1 million for the three months ended September 30, 2021.

The increase was primarily due to (i) a $3.1 million increase in employee compensation and benefits as the result of an increase in headcount, to support compliance and bolster organizational capabilities, and (ii) $5.1 million in third party costs associated with strengthening organizational capabilities, implementing our core provider initiatives, and assessing our risk-bearing payor capabilities.

Other Income (Expense)

Three Months Ended

Nine Months Ended

Three months ended September 30,

Interest expense, net

Loss on extinguishment of debt

Gain on equity method investment

Other expense

Other income (expense)

Total other expense

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Interest expense, net.

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

Interest expense, net was $0.7 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.

Interest expense, net was $0.6 million for

the three months ended September 30, 2022, an increase of $0.1 million, or 10.2%, compared to $0.5 million for the three months ended September 30, 2021.

The increase was primarily due to a higher average interest rate, partially offset by a lower outstanding debt balance.

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 $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.

Other income (expense).

Other income (expense) consists primarily of the net proceeds received from the sale of or disposal of property and equipment.

Other income (expense) was $0.04 million for the three months ended September 30, 2022, an increase of $0.5 million, or 107.5%, compared to $(0.5 million) for the three months ended September 30, 2021.

The increase is primarily due to the recognition of a loss on disposal of assets of $0.5 million during the three months ended September 30, 2021 related to the write off of certain assets in conjunction with a move to a new facility at our Roanoke, Virginia center.

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 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 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.

During the three months ended September 30, 2022 and 2021, we reported benefit for income taxes of $3.5 million and a provision for income taxes of $3.0 million, respectively.

The decrease of $6.5 million is primarily due (i) our pretax book loss recognized during the three months ended September 30, 2022, as compared to pretax book income recognized during the three months ended September 30, 2021 and (ii) certain permanent differences between the financial and tax accounting treatment of (a) the Section 162(m) limitation on compensation of five highest paid officers, (b) income from entities not subject to tax, and (c) disallowed stock options related to profit unit interests.

Net Loss Attributable to Noncontrolling Interests.

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

The Company has a controlling interest in InnovAge Sacramento.

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

Net Income (Loss)

During the three months ended 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.

During the three months ended September 30, 2022 and 2021, we reported net income (loss) of ($13.7 million) and $7.6 million, respectively, consisting of (i) income (loss) from operations of ($16.6 million) and $11.7 million,

respectively, (ii) other expense of $0.6 million and $1.0 million, respectively, and (iii) a benefit for income taxes of $3.5 million and provision of $3.0 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.

Nine Months Ended March 31,

Three months ended September 30,

dollars in thousands

Key Business Metrics:

Census (a)(b)

Total Member Months (a)

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Non-GAAP Measures:

Adjusted EBITDA (c)

Adjusted EBITDA Margin (c)

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

(b) Participant numbers are approximate.

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

Adjusted EBITDA (b)

Adjusted EBITDA Margin (b)

(a) Amounts are approximate.

(b) Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures.

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

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

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We define 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 $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 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

Nine Months Ended

Net income (loss)

Interest expense, net

Depreciation and amortization

Provision for income tax

Stock-based compensation

Rate determination (a)

Executive severance and recruitment (b)

Class action litigation (c)

M&A diligence, transaction and integration (d)

Business optimization (e)

EMR implementation (f)

Gain on consolidation of equity investee (g)

Financing-related fees (h)

Contingent consideration (i)

Adjusted EBITDA

(a) Reflects the CMS settlement payment of approximately $2.2 million related to end-stage renal disease beneficiaries for calendar years 2010 through 2020.

(b) Reflects charges related to executive severance and recruiting.

(d) For the 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.

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

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

(g) Reflects 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.

(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.

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 $21.4 million and $42.3 million for the three months ended September 30, 2022 and 2021, respectively.

Adjusted EBITDA and Adjusted EBITDA Margin

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, class action litigation, M&A transaction and integration, business optimization, and electronic medical record (“EMR”) implementation.

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

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%.

For the three months ended September 30, 2022 and 2021, net loss was $13.7 million and net income was $7.6 million, respectively, representing a year-over-year decrease of 279.7%.

Adjusted EBITDA was ($3.8 million) and $18.2 million, for the three months ended September 30, 2022 and 2021, respectively, representing a year-over-year decrease of 120.9%.

For the three months ended September 30, 2022, net loss margin was 8.0%, as compared to net income margin of 4.4% for the three months ended September 30, 2021.

For the three months ended September 30, 2022, our Adjusted EBITDA margin was negative 2.2%, as compared to our Adjusted EBITDA margin for the three months ended September 30, 2021 of 10.5%.

The decrease in Adjusted EBITDA and Adjusted EBITDA margin is primarily from (i) increased center-level headcount and wage rates associated with a competitive labor market, (ii) increased housing utilization and rates as mandated by the states, and (iii) higher corporate, general, and administrative expenses, primarily attributable to increased headcount to support compliance and to bolster our organizational capabilities.

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 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.

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

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

Three months ended September 30,

Net income (loss)

Interest expense, net

Depreciation and amortization

Provision (benefit) for income tax

Stock-based compensation

Class action litigation (a)

M&A and de novo development (b)

Business optimization (c)

EMR implementation (d)

Adjusted EBITDA

(a) Reflects charges/(credits) related to litigation by stockholders.

(b) Reflects charges related to M&A transaction and integrations, and de novo center developments.

Such charges related 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 third party support to address efforts to remediate deficiencies in audits.

For the three months ended September 30, 2022 this includes (i) $0.7 million related to consultants and contractors performing audit and other related services at sanctioned centers, (ii) $1.6 million of charges related to government investigations, and (iii) $4.3 million of costs associated with third party consultants as we implement our core provider initiatives, assess our risk-bearing payor capabilities, and strengthen our enterprise capabilities.

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

Liquidity and Capital Resources

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

As of March 31, 2022, we had cash and cash equivalents of $199.5 million.

As of September 30, 2022, we had cash and cash equivalents of $188.2 million.

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

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

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

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

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

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

Our capital resources are generally used to fund (i) debt service requirements, the majority of which relate to the quarterly principal payments of the Term Loan Facility (as defined in Note 8, “Long Term Debt” to the condensed consolidated financial statements) due 2026, (ii) capital and operating lease obligations, which are generally paid on a monthly basis and include maturities through 2025 and 2032, respectively, (iii) the operations of our business, including special projects such as our transition to a new EMR vendor, with respect to which we expect to incur non-recurring implementation costs over the next 9 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.

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

As of September 30, 2022, we had $72.6 million of long-term debt outstanding.

As of September 30, 2022, we had future

minimum operating lease payments under non-cancellable leases through the year 2032 of $30.4 million.

We also had non-cancellable finance lease agreements with third parties through the year 2027 with future minimum payments of $14.5 million.

For additional information, see Note 7, “Leases”, Note 8, “Long Term Debt”, and Note 9, “Commitments and Contingencies” in our condensed 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 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.

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

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

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

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

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

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.

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.

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

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

As of September 30, 2022, the interest rate on the Term Loan Facility was 3.38%.

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 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.

As of September 30, 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.

As of September 30, 2022, we also had $2.3 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 nine months ended March 31, 2022 and 2021 are summarized as follows:

Nine Months Ended

Net cash provided by (used in) operating activities

Our consolidated statements of cash flows for the three months ended September 30, 2022 and 2021 are summarized as follows:

Three months ended September 30,

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net change in cash

Cash at beginning of period

Cash at end of period

Net cash used in financing activities

Net change in cash, cash equivalents and restricted cash

Operating Activities.

The change in net cash provided by (used in) operating activities was primarily due to the net effect of (i) net income of $5.6 million in the current year period compared to a net loss of $51.1 million in the prior year period, as described further above, (ii) a net increase in working capital primarily as a result of the impact of the completion of the Colorado Department of Health Care Policy & Financing’s (“HCPF”) reconciliation, as described below, and the timing of accrued expenses.

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

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

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

The change in net cash provided by operating activities was primarily due to the net effect of (i) net loss of $13.7 million in the current year period compared to a net income of $7.6 million in the prior year period, as described further above, and (ii) a net increase in working capital primarily attributable to pre-payment for services.

Investing Activities.

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Financing activities.

The decrease in net cash used in financing activities was primarily due to the net effect of the Apax Transaction in fiscal year 2021, which included net proceeds on long-term debt of $79.1 million, $77.6 million related to treasury stock purchases and $32.4 million related to stock option cancellation payments, those payments of which did not recur in fiscal year 2022.

Contractual Obligations and Commitments

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

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 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.

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

Off Balance Sheet Arrangements

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

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 stockholder advisory votes on golden parachute compensation.

The increase in net cash used in financing activities was primarily due to an increase in principal payments on capital leases.

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 stockholder advisory votes on golden parachute compensation.

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

We 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 condensed consolidated financial statements, which have been prepared in accordance with GAAP.

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Actual results may differ from these estimates under different assumptions or conditions, impacting our reported results of operations and financial condition.

Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of assets and liabilities and the recognition of income and expenses.

We consider these accounting policies to be critical accounting policies.

Certain accounting estimates involve significant judgments and assumptions by management, which have a material impact on the carrying value of assets and liabilities and the recognition of income and expenses.

We consider these accounting estimates to be critical accounting estimates.

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

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

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

For a description of our estimates regarding our critical accounting estimates, see “Critical Accounting Estimates” in the 2022 Annual 10-K.

With the exception of the adoption of ASC 842 – Leases, as more thoroughly described in Note 7 “Leases”, there have been no significant changes in our critical accounting policies, estimates, or methodologies to our condensed consolidated financial statements .

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis