What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-09-12 compared with 2022-09-13 · 237 added, 227 removed, 272 unchanged (63% of the section changed)

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

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

The Company served approximately 6,400 PACE participants as of June 30, 2023, making it the largest PACE provider in the U.S.

based upon participants served, and operates 17 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.

Through our Program of All-Inclusive Care for the Elderly (“PACE”), we manage, and in many cases directly provide, a broad range of medical and ancillary services for seniors, including in-home care services (skilled, unskilled and personal care);

in-center services such as primary care, physical therapy, occupational therapy, speech therapy, dental services, mental health and psychiatric services, meals, and activities;

transportation to the PACE center and third-party medical appointments;

During the year ended June 30, 2023, the Company consolidated its Germantown LIFE center with its Allegheny and Henry Avenue LIFE centers in Pennsylvania.

InnovAge’s programs are designed 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.

Through our Program of All-Inclusive Care for the Elderly (“PACE”) program, we fulfill a broad range of medical and ancillary services for seniors, including in-home care services (skilled, unskilled and personal care), center services such as primary care, physical therapy, occupational therapy, speech therapy, dental services, mental health and psychiatric services, meals, and activities;

transportation to and from the PACE center and third-party medical appointments;

and care management.

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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.

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, 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.

Trends and Uncertainties Affecting the Company

During fiscal year 2023, 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.

In fiscal year 2022 and 2023, in response to high levels of inflation, we implemented various mitigation strategies to reduce costs of operation, including consolidating services and price negotiations with providers and vendors.

While inflationary pressures eased significantly during the second half of fiscal year 2023, high inflation is expected to continue through the remainder of the calendar year.

The effects of inflation, after accounting for these mitigation strategies, were immaterial to our financial results for fiscal year 2023.

Although we expect to continue mitigation efforts in fiscal year 2024, there can be no assurance that our strategies will be sufficient.

In fiscal year 2023, operating expenses increased $34.4 million, or 4.9%, compared to 2022 due to the increased cost of care and related cost per participant as a result of increased salaries, wages and benefits associated with increased headcount and higher wage rates resulting from inflation, third party audit and compliance support, and increased fleet and contract transportation due to an increase in average daily attendance, external appointments, and higher fuel costs.

In fiscal year 2023, we launched and conducted several initiatives intended to lower certain of our costs, including limiting corporate staffing, effecting a reduction in workforce in December 2022, and optimizing working capital.

We expect to continue to experience elevated operating expenses during fiscal year 2024 for similar reasons.

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

Impact of Macroeconomic Conditions and COVID-19

Census and capitation revenue.

On May 11, 2023 the President allowed the national emergency and public health emergency declarations related to the COVID-19 pandemic to expire.

The declarations had been in place since early 2020, and in addition to various Congress enacted legislation allowed the federal government flexibility to waive or modify certain requirements in a range of areas, including Medicare and Medicaid.

At this time, we do not believe material census attrition will occur as a result of the expiration of the public health emergency declarations and the resumption of Medicaid’s redetermination of beneficiary eligibility.

The frailty level of PACE participants coupled with the complexity of Medicaid services needed, results in a comprehensive financial qualifications review compared to the more traditional Medicaid-only population.

Throughout the public health emergency, the Company continued to complete annual Medicaid redeterminations.

This process enables the Company to monitor eligibility, assist with the redetermination process, address potential issues with eligibility in real time, and track future renewal dates.

While we do not believe that the expiration of these emergency declarations will have a material impact to our financial results, we continue to evaluate how the expiration of these emergency declarations may affect our business outlook.

During the COVID-19 pandemic, global logistics network challenges resulted in higher prices for medical supplies we require.

However, supply chain disruptions improved to almost pre-pandemic level during the course of fiscal year 2023.

As a result, prices for most medical supplies have normalized.

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.

The COVID-19 pandemic and high inflation exacerbated difficulties to hire additional healthcare professionals, causing certain of our centers to be understaffed or staffed with personnel that required training.

Labor pressure mostly eased during fiscal year 2023;

however, the Company continues to be affected by the increased competition in the labor market and market adjustments to increase retention and improve our ability to hire.

These market adjustments contributed, in part, to an increase in cost of care for fiscal year 2023, further impacted by additional staffing related to compliance and remediation efforts.

These increases resulted in increased cost of care for fiscal year 2023 compared to fiscal year 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.

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 post-sanction remediation efforts in our centers as a result of our recent audits and maintain high quality of regulatory compliance.

The Company’s priority is to continue to remediate the deficiencies raised in audit processes and to implement post-sanction corrective actions as required, as well as maintain high quality of regulatory compliance in all its centers.

As part of its actions to do so, the Company has worked with the appropriate regulators to make the necessary changes within the Company to improve 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.

• Our participants.

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This is driven by two factors:

(i) we manage a higher acuity population, with an average RAF score of 2.40 based on InnovAge data as of 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 ;

(i) we manage a higher acuity population, with an average RAF score of 2.46 based on InnovAge data as of June 30,

2023, 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.

Our participants are managed on a capitated, or at-risk, basis, where InnovAge is financially responsible for all of their medical costs.

Our participants are managed on a capitated, or at-risk, basis, where InnovAge is financially responsible for all of participant medical costs.

Our comprehensive care model and globally capitated payments are designed to cover participants from enrollment until the end of life, including coverage for participants requiring hospice and palliative care.

For dual-eligible participants, we receive PMPM payments directly from Medicare and Medicaid, which provides recurring revenue streams and significant visibility into our revenue growth trajectory.

For dual-eligible participants, we receive PMPM payments directly from Medicare and Medicaid, which provides recurring revenue streams and significant visibility into our revenue.

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

● Our ability to 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.”

In fiscal year 2023, we began working on expanding payer capabilities so that our revenue more accurately reflects the acuity of the populations we serve.

• Our ability to grow enrollment and capacity within existing centers.

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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.

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Our comprehensive individualized care model and frequency of interaction with participants generates high levels of participant satisfaction.

We have multiple touch points with participants and their families, which enhances participant receptivity to our services, leading to an 81% participant satisfaction rating as of January 1, 2022 and average participant tenure of 3.7 years as of June 30, 2022, measured as tenure from enrollment to disenrollment, among our centers that have been operated by us for at least five years.

We achieved a 78% participant satisfaction rating as of March 1, 2023 and average participant tenure was 3.7 years as of June 30, 2023, 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 5.9% annually over the last three fiscal years.

Approximately 75% of our historical disenrollments have been involuntary, due primarily to participant death and otherwise to participants moving out of our service areas.

Approximately 71% of our historical disenrollments have been involuntary, due primarily to participant death or otherwise due to participants moving out of our service areas.

• Effectively managing the cost of care for our participants .

We receive capitated payments to manage the totality of a participant’s medical care across all settings.

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 year ended June 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.

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

healthcare system and average acuity rises with the passage of time.

The risk pool of our population became more acute in fiscal year 2023 as we were not able to replenish our population mix with newer, lower-acuity participants as a result of State sanctions, and as a result, our external provider costs and cost of care, excluding depreciation and amortization, represented approximately 85% of our revenue in the year ended June 30, 2023.

In addition, 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;

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• Center-level Contribution Margin .

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.

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 expand via acquisition or de novo centers within existing and new markets.

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.

The enrollment sanctions in Sacramento, California and Colorado limited our ability to grow our participant census and impacted Center-level Contribution Margin in fiscal year 2022 and the first half of fiscal year 2023.

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

• Our ability to expand via de novo centers within existing and new markets.

Several factors can affect our ability to open de novo centers, including sanctions issued by regulators as the ones we were subject to in our Sacramento, California and Colorado centers.

As a result of such sanctions, we were precluded from, or voluntarily suspended efforts to, open de novo centers in Florida, Kentucky and Indiana.

Since the Company was released from sanctions, in Florida, we have recommenced our efforts to obtain the licensure required to open a PACE center in each of Tampa and Orlando.

We are also pursuing the licensure required to open another PACE center in Downey, California.

• Execute tuck-in 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.

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.

Since the Company was released from sanctions, we have recommenced our efforts to pursue tuck-in acquisitions.

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

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.

• Contracting with government payors .

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

Maintaining, supporting and growing these relationships, particularly as we enter new geographies, is critical to our long-term success.

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

• Investing to support growth .

We intend to continue investing in our centers, value-based care model, and sales and marketing organization to support long-term growth.

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

We have begun to invest in building capabilities to increase our sophistication as a payor to drive clinical value, improve outcomes, and manage cost trends.

Accordingly, in the short term we expect the activities noted above to increase our expenses as a percentage of revenue, but in the longer term, we anticipate that these investments will positively impact our business and results of operations.

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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 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.

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

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

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

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

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 into nor control over the timing of such payments.

Components of Results of Operations

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The concentration of capitation revenue from our various payors was:

Medicaid 54 % 54 %

Medicare 46 % 46 %

Private pay and other *% *%

Total 100 % 100 %

* denotes less than 1%

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.

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 .

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.

We 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 Estimates below and Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in this Annual Report on Form 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.

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 bill the patient or their insurance plan on a fee-for-service basis.

We no longer offer in-home care services to non-PACE patients.

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 this Annual Report on Form 10-K.

Operating Expenses

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We separate external provider costs into four categories:

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

inpatient (e.g., hospital), 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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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 further 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 accelerate our growth without negatively affecting profitability.

Corporate, General and Administrative Expenses.

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

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

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

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.

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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 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 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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Depreciation and amortization 15,419 13,924

Other operating expense

Total expenses 737,482 703,046

Operating Income (Loss)

Operating Loss (49,395) (4,406)

Other Income (Expense)

Interest expense, net (1,522) (2,526)

Loss on extinguishment of debt

Gain on equity method investment

Other expense

Other income (expense) 124 (305)

Total other expense (1,398) (2,831)

Income (Loss) Before Income Taxes

Provision for Income Taxes

Net Income (Loss)

Loss Before Income Taxes (50,793) (7,237)

Provision (Benefit) for Income Taxes (7,241) 723

Net Loss (43,552) (7,960)

net loss attributable to noncontrolling interests (2,879) (1,439)

Net Income (Loss) Attributable to InnovAge Holding Corp.

Year ended June 30,

Net Loss Attributable to InnovAge Holding Corp.

$ (40,673) $ (6,521)

Loss Before Income Taxes as a % of revenue (7.4) % (1.0) %

Net Loss as a % of revenue (6.3) % (1.1) %

Year Ended June 30, $ Change % Change

Capitation revenue $ 686,836 $ 696,998 $ (10,162) (1.5) %

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Capitation revenue.

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 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 $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,

Capitation revenue was $686.8 million for the year ended June 30, 2023, a decrease of $10.2 million, or 1.5%, compared to $697.0 million for the year ended June 30, 2022.

This decrease was driven by a 6.6% decrease in member months (as defined below under “Key Business Metrics and non-GAAP Measures – Total member months”) partially offset by a 5.5% 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 center for the majority of the year ended June 30, 2023 as a result of sanctions, minimally offset by the ramp up of enrollments at our Colorado centers as we resumed the enrollment process in the third quarter of 2023.

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

Year Ended June 30, $ Change % Change

External provider costs $ 374,528 $ 383,046 $ (8,518) (2.2) %

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Depreciation and amortization 15,419 13,924 1,495 10.7 %

Other operating expenses

Total operating expenses $ 737,483 $ 703,046 $ 34,437 4.9 %

External provider costs.

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 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.

External provider costs were $374.5 million for the year ended June 30, 2023, a decrease of $8.5 million, or 2.2%, compared to $383.0 million for the year ended June 30, 2022.

The decrease was primarily driven by (i) a decrease of $25.2 million, or 6.6% in member months partially offset by an increase of $16.7 million, or 4.7%, in cost per participant.

The increase in cost per participant is primarily driven by a $13.7 million increase associated with increased assisted living and nursing facility utilization and unit cost partially offset by a $3.2 million reduction in inpatient cost per admit associated with fewer COVID admissions.

Cost of care, excluding depreciation and amortization.

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.

Cost of care, excluding depreciation and amortization expense was $212.3 million for the year ended June 30, 2023, an increase of $32.0 million, or 17.8%, compared to $180.2 million for the year ended June 30, 2022, primarily due to an increase of $43.9 million, or 26.1%, in cost per participant partially offset by a decrease of $11.9 million, or 6.6%, in member months.

The increase in cost per participant was driven by (i) a $21.6 million increase in salaries, wages and benefits associated with increased headcount and higher wage rates due to the ongoing competitive labor market, (ii) $2.5 million in third party audit and compliance support, (iii) $3.9 million in increased fleet expense and contract transportation as a result of higher average daily attendance, an increase in external appointments, and higher fuel costs, (iv) $1.9 million in increased building maintenance and security, (v) $1.3 million in supplies, travel and mileage, and (vi) $1.0 million in de novo rent expense.

Sales and marketing.

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.

Sales and marketing expenses were $19.6 million for the year ended June 30, 2023, a decrease of $4.6 million, or 18.9%, compared to $24.2 million for the year ended June 30, 2022, primarily due to (i) a $1.7 million reduction in marketing spend and $2.0 million reduction in costs associated with fewer headcount within the sales department, both as a result of sanctions in our Colorado and Sacramento, California centers and (ii) a $0.9 million reduction in sales commissions expense due to the deferral of commissions.

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.

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.

Corporate, general and administrative expenses were $115.6 million for the year ended June 30, 2023, an increase of $14.0 million, or 13.8% compared to $101.7 million for the year ended June 30, 2022.

The increase was primarily due to (i) a $11.0 million increase in employee compensation and benefits as the result of an increase in headcount to support compliance and bolster organizational capabilities, (ii) $3.8 million in third party costs associated with implementing our core provider initiatives, assessing our risk-bearing payer capabilities, and strengthening organizational capabilities including the transition to a new electronic medical record ("EMR"), (iii) $4.5 million in legal spend, and (iv) $4.9 million in software license and maintenance expense, inclusive of Epic license fees.

These increases in cost were partially offset by (i) a $2.8 million reduction in bad debt expense, (ii) $1.2 million reduction in insurance expense, and (iii) $4.1 million in executive severance and recruiting recognized during the year ended June 30, 2022.

Depreciation and amortization.

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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, 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.

Other Income (Expense)

Year Ended June 30,

2023 2022 $ Change % Change

Interest expense, net $ (1,522) $ (2,526) $ 1,004 (39.7)%

Loss on extinguishment of debt

Gain on equity method investment

Other expense

Other income (expense) 124 (305) 429 (140.7)%

Total other expense $ (1,398) $ (2,831) $ 1,433 (50.6)%

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Interest expense, net was $1.5 million for the year ended June 30, 2023, a decrease of $1.0 million, or 39.7%, compared to $2.5 million for the year ended June 30, 2022.

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.

We recognized a loss on extinguishment of debt of $14.5 million for the year ended June 30, 2021 and no loss on extinguishment of debt for the year ended June 30, 2022.

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

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

issuance costs.

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

Gain on equity method investment.

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.

The decrease was primarily due to interest income of $3.4 million from money market funds offsetting interest expense of $4.9 million during the year ended June 30, 2023.

Interest income during the year ended June 30, 2022 was negligible.

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 (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

The members of InnovAge Senior Housing Thornton, LLC (“SH1”) 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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During the years ended June 30, 2023 and 2022, we reported provision for income taxes of $(7.2) million and $0.7 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.

The decrease of $7.9 million is primarily due to (i) pretax book loss recognized during the year ended June 30, 2023, as compared to the pretax book loss recognized during the year ended June 30, 2022 and (ii) the change in our valuation allowance.

Net Loss Attributable to Noncontrolling Interests.

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

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

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

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During the years ended June 30, 2023 and 2022, we reported net loss of $43.6 million and $8.0 million, respectively, consisting of (i) loss from operations of $49.4 million and $4.4 million, respectively, (ii) other expense of $1.4 million and $2.8 million, respectively, and (iii) provision for income taxes of $7.2 million and $0.7 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 .

Key Business Metrics and Non-GAAP Measures

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Census (a)(b)

Total Member Months (a)

Center-level Contribution Margin

Center-level Contribution Margin as a % of revenue

Total Member Months (b)

77,370 82,820

Non-GAAP Measures:

Center-level Contribution Margin (c)

$ 101,288 $ 135,372

Center-level Contribution Margin as a % of revenue (c)

14.7 % 19.4 %

Adjusted EBITDA (c)

$ (1,261) $ 34,253

Adjusted EBITDA Margin (c)

(0.2) % 4.9 %

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(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.

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.”

During the fiscal year ended June 30, 2023, the Company consolidated its Germantown LIFE center with its Allegheny and Henry Avenue LIFE centers in Pennsylvania.

(b) Amounts are approximate.

(c) Center-level Contribution Margin, Center-level Contribution Margin as a percentage of revenue, 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.

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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Total member months

We define Total Member Months as the total number of participants multiplied by the number of months within a year in which each participant was enrolled in our program.

We define Total Member Months as the total number of participants as of period end multiplied by the number of months within a year in which each participant was enrolled in our program.

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

Center-level Contribution Margin

The Company’s management uses Center-level Contribution Margin as the measure for assessing performance of its segments.

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.

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 $101.3 million and $135.4 million for the years ended June 30, 2023 and 2022, 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.

The decrease in Center-level Contribution

Margin for fiscal year 2023 was primarily due to a year-over-year increase in cost of care of 17.8% and a 1.5% decrease in total revenue during the same period.

For more information relating to Center-level Contribution Margin, see Note 13 “Segment Reporting” to our consolidated financial statements.

Adjusted EBITDA

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,

Net income (loss)

Interest expense, net

A reconciliation of Center-level Contribution Margin to income (loss) before income taxes, the most directly comparable GAAP measure, for each of the periods is as follows:

June 30, 2023 June 30, 2022

in thousands PACE All other (1)

Totals PACE All other (1)

Center-Level Contribution Margin 100,948 340 101,288 135,451 (79) 135,372

Overhead costs (2)

135,264 — 135,264 125,948 (94) 125,854

Depreciation and amortization 14,959 460 15,419 13,491 433 13,924

Provision for income tax

Stock-based compensation

Rate determination (a)

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, 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.

(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.

Equity loss — — — — — —

Other operating (income) expense — — — — — —

Interest expense, net 1,342 180 1,522 2,335 191 2,526

Loss on extinguishment of debt — — — — — —

Gain on equity method investment — — — — — —

Other expense (income) (124) — (124) 305 — 305

Income (Loss) Before Income Taxes $ (50,493) $ (300) $ (50,793) $ (6,628) $ (609) $ (7,237)

___________________________________

(1) Center-level Contribution Margin from segments below the quantitative thresholds are attributable to two operating segments of the Company.

Those segments consist of Homecare and Senior Housing.

Neither of those segments has ever met any of the quantitative thresholds for determining reportable segments.

(2) Overhead consists of the Sales and marketing and Corporate, general and administrative financial statement line items.

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA as net income (loss) adjusted for interest expense, depreciation and amortization, and provision (benefit) for income tax as well as addbacks for non-recurring expenses or exceptional items, including relating to management equity compensation, executive severance and recruitment, litigation costs and settlement, M&A and de novo center development, business optimization, and electronic medical record (“EMR”) implementation.

Adjusted EBITDA margin is Adjusted EBITDA expressed as a percentage of our total revenue.

For the years ended June 30, 2023 and 2022, our net loss was $43.6 million and $8.0 million, respectively, representing a year-over-year decline of 445%, and Adjusted EBITDA was $(1.3) million and $34.3 million, respectively, representing a year-over-year decline of 104%.

Adjusted EBITDA margin is Adjusted EBITDA expressed as a percentage of our total revenue.

For the year ended June 30, 2023, our net loss margin was 6.3%, as compared to our net loss margin of 1.1% for the year ended June 30, 2022.

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In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation.

Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by the types of items excluded from the calculation of Adjusted EBITDA.

Our presentation of Adjusted EBITDA should not be construed to imply

that our future results will be unaffected by the types of items excluded from the calculation of Adjusted EBITDA.

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

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

Year Ended June 30,

Net Loss $ (43,552) $ (7,960)

Interest expense, net 1,522 2,526

Depreciation and amortization 15,419 13,924

Provision (benefit) for income tax (7,241) 723

Stock-based compensation 4,993 3,739

Executive severance and recruitment (a)

Litigation costs and settlement (b)

M&A and de novo center development (c)

Business optimization (d)

EMR implementation (e)

Adjusted EBITDA $ (1,261) $ 34,253

___________________________________

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

(b) Reflects a $1.2 million reserve for a California wage and hour class action settlement for the year ended June 30, 2023 and charges/(credits) related to litigation by stockholders, litigation related to de novo center development, and civil investigative demands.

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

Costs reflected consist of litigation costs considered one-time in nature and outside of the ordinary course of business based on the following considerations which we assess regularly:

(i) the frequency of similar cases that have been brought to date, or are expected to be brought within two years, (ii) complexity of the case, (iii) nature of the remedies sought, (iv) litigation posture of the Company, (v) counterparty involved, and (vi) the Company's overall litigation strategy.

(d) Reflects charges related to business optimization initiatives.

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 year ended June 30, 2023 includes (i) $1.8 million related to consultants and contractors performing audit and other related services at sanctioned centers, (ii) $5.7 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, (iii) $0.6 million in the consolidation of the Germantown, Pennsylvania center, (iv) $1.1 million related to organizational restructure, and (iv) $1.4 million related to other non-recurring projects aimed at reducing costs and improving efficiencies.

During the year ended June 30, 2022, costs included (i) $1.8 million paid to consultants and contractors performing audit and other related services at sanctioned centers, (ii) $3.8 million of costs associated with third party consultants to strengthen enterprise capabilities, (iii) $0.7 million in costs associated with transition to the replacement Roanoke, Virginia center, and (iv) $2.7 million related to other non-recurring projects aimed at reducing costs and improving efficiencies.

(e) Reflects non-recurring expenses relating to the implementation of a new EMR 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 most recently from the sale of common stock in our IPO that occurred in March 2021.

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.

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

As of the years ended June 30, 2023 and 2022, we had cash and cash equivalents of $127.2 million and $184.4 million, respectively, a decrease of $57.2 million primarily due to purchases of property and equipment and short-term investments, consisting primarily of managed income funds invested in investment grade short-term fixed and floating rate debt securities aimed at creating income while maintaining low volatility on principal.

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 7 “Long-term Debt” to the audited consolidated financial statements) due 2026, (ii) finance and operating lease obligations, which are generally paid on a monthly basis and include maturities through 2028 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 incurred non-recurring implementation costs over the last 12 months, and expect to incur ongoing costs through 2024 and beyond, and third party support to address remediation efforts, (iv) income tax payments, which are generally due on a quarterly and annual basis, and (v) capital additions, which included costs relating to the development of de novo centers, including those in Florida and California.

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

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.

For additional information regarding our lease obligations, debt and commitments, see Notes 6 “Leases,” 7 “Long-term Debt,” and 9 “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 (as defined in Note 7, “Long-term Debt”) and Revolving Credit Facility (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, 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.

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, and the expansion of sales and marketing activities and other costs of operating the business.

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

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

Those borrowings were repaid in full in connection with the entry into the 2021 Credit Agreement (as defined and discussed below) and the closing of our IPO.

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.

The borrowing capacity under the Revolving Credit Facility is subject (i) any issued amounts under our letters of credit and (ii) applicable covenant compliance restrictions and any other conditions precedent to borrowing.

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.

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

As of June 30, 2022, the interest rate on the Term Loan Facility was 3.83%.

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

As of June 30, 2023 and 2022, the interest rate on the Term Loan Facility was 6.95% and 3.83%, respectively.

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 June 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 June 30, 2023, we had no borrowings outstanding, $2.8 million of letters of credit issued, and $97.2 million of remaining capacity under the Revolving Credit Facility.

As of June 30, 2023, we also had $2.3 million principal amount outstanding under our convertible term loan.

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Expected timing of those payments are as follows:

Next 12 Months

Beyond 12 Months

Total Next 12 Months Beyond 12 Months

Long-term debt (excluding interest) (1)

$ 69,784 $ 3,796 $ 65,988

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.

27,675 4,882 22,793

Finance leases (excluding interest) 20,793 5,970 14,823

Total $ 118,252 $ 14,648 $ 103,604

___________________________________

(1) Represents principal amounts related to the 2021 Credit Agreement.

(2) We adopted ASU 2016-02 on July 1, 2022, which requires lessees to recognize almost all leases on the balance sheet.

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

Our consolidated statements of cash flows for the year ended June 30, 2023 and 2022 are summarized as follows:

Year ended June 30,

Year Ended June 30, $ Change

Net cash provided by (used in) operating activities $ 20,236 $ 27,302 $ (7,066)

Net cash used in investing activities (69,521) (40,238) (29,283)

Net cash provided by (used in) financing activities

Net cash used in financing activities (7,896) (6,318) (1,578)

Net change in cash, cash equivalents and restricted cash $ (57,181) $ (19,254) $ (37,927)

Operating Activities.

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.

The reconciliation resulted in a reduction of accounts receivable of $17.0 million and due to Medicaid of $13.6 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 (used in) operating activities was primarily due to the net effect of (i) a net loss of $43.6 million for the year ended June 30, 2023 compared to a net loss of $8.0 million during the prior year, as described further above, (ii) an increase of $28.1 million in deferred revenue during fiscal year 2023 due to timing of payments received, (iii) a decrease of $17.7 million in accounts receivable, net of allowance primarily due to timing for the receipt of payments in 2023, and (iv) a net decrease in working capital primarily attributable to payments for operating leases and reported and estimated claims.

Investing Activities.

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.

Investing activities were made up of approximately $23.4 million in purchases of property and equipment and $46.2 million for purchases of short-term investments, consisting primarily of managed income funds invested in investment grade short-term fixed and floating rate debt securities aimed at creating income while maintaining low volatility on principal.

Our investment in managed income funds regularly pay dividends which are reinvested into the funds.

Financing activities.

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.

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

Emerging Growth Company and Smaller Reporting Company

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Revenue Recognition

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.

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 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.

As a result of electing the modified retrospective adoption approach, results for reporting periods beginning after July 1, 2020 are presented under ASC 606.

There was no material impact upon the adoption of ASC 606, therefore the Company did not record any adjustments to retained earnings at July 1, 2020 or for any periods previously presented.

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

Our PACE operating unit provides comprehensive health care services to participants on the basis of estimated PMPM amounts we expect to be entitled to receive from the capitated fees per participant that are paid monthly by Medicare, Medicaid, the VA, and private pay sources.

We recognize revenue in accordance with Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”).

Our PACE operating unit provides comprehensive healthcare services to participants on the basis of estimated PMPM amounts we expect to be entitled to receive from the capitated fees per participant that are paid monthly by Medicare, Medicaid, the VA, and private pay sources.

We recognize capitation revenues based on the estimated PMPM transaction price to transfer the service for a distinct increment of the series (i.e.

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If our accrual estimates for risk scores at June 30, 2023 were to differ by 5%, the impact on revenues would be approximately $0.5 million.

These adjustments are not expected to be material.

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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There were no indicators of impairment identified and no goodwill impairments recorded during the years ended June 30, 2023 and 2022.

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

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.

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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 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.

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 healthcare 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.

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The cumulative actual incurred claims table represents the actual amount of claims incurred by the Company with the benefit of the passage of time.

The cumulative actual paid claims table represents the actual amount of claims paid by the Company during the period.

The variance between the expense recorded and the cumulative actual incurred claims ranges between approximately 1% and 3% of actual total incurred claims over the periods presented, and such variance may vary based on the factors described above in this section.

Expenses Recorded for the Fiscal Years Ended June 30,

2019 2020 2021 2022 2023

Claims incurred year:

FY 2019 $ 171,128

FY 2020 $ 211,381

FY 2021 $ 234,070

FY 2022 $ 299,432

FY 2023 $ 291,988

Total $ 171,128 $ 211,381 $ 234,070 $ 299,432 $ 291,988

Pharmacy expense 82,541

External provider costs $ 374,529

Cumulative Actual Incurred Claims for the Fiscal Years Ended June 30,

Cumulative Actual Incurred Claims for the Fiscal Year Ended June 30,

2019 2020 2021 2022 2023

Claims incurred year:

Cumulative Actual Paid Claims for the Fiscal Years Ended June 30,

FY 2019 $ 173,047 $ 173,061 $ 172,855 $ 172,802 $ 172,555

FY 2020 210,512 205,633 205,550 205,301

FY 2021 239,207 238,488 204,792

FY 2022 291,315 333,752

FY 2023 285,118

Total $ 173,047 $ 383,573 $ 617,695 $ 908,155 $ 1,201,518

Cumulative Actual Paid Claims for the Fiscal Year Ended June 30,

2019 2020 2021 2022 2023

Claims incurred year:

FY 2019 $ 144,943 $ 173,048 $ 172,855 $ 172,803 $ 172,555

FY 2020 179,616 205,601 205,550 205,301

FY 2021 205,356 238,476 204,792

FY 2022 252,665 333,748

FY 2023 241,770

Total $ 144,943 $ 352,664 $ 583,812 $ 869,494 $ 1,158,166

Other claims-related liabilities (353)

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

What changed 10-K

Item 7. Management’s Discussion and Analysis