InnovAge Holding Corp. 10-K

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (a) Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID: 34 ) 70 Consolidated Balance Sheets as of June 30, 2023 and 2022 71 Consolidated Statements of Operations for the years ended June 30, 2023 and 2022 72 Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2023 and 2022 73 Consolidated Statements of Cash Flows for the years ended June 30, 2023 and 2022 74 Notes to Consolidated Financial Statements 74 69 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of InnovAge Holding Corp. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of InnovAge Holding Corp. and subsidiaries (the "Company") as of June 30, 2023 and 2022, the related consolidated statements of operations, stockholders' equity, and cash flows, for each of the two years in the period ended June 30, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Emphasis of a Matter As discussed in Note 2 to the financial statements, the Company adopted ASU 2016-02, Leases, and related amendments (Topic 842) on July 1, 2022. /s/ Deloitte & Touche LLP Denver, CO September 12, 2023 We have served as the Company's auditor since 2018. 70 Table of Contents InnovAge Holding Corp. and Subsidiaries Consolidated Balance Sheets June 30, 2023 June 30, 2022 in thousands Assets Current Assets Cash and cash equivalents $ 127,249 $ 184,429 Short-term investments 46,213 — Restricted cash 16 17 Accounts receivable, net of allowance ($ 4,161 – June 30, 2023 and $ 3,403 – June 30, 2022) 24,344 35,907 Prepaid expenses 17,145 13,842 Income tax receivable 262 6,761 Total current assets 215,229 240,956 Noncurrent Assets Property and equipment, net 192,188 176,260 Operating lease assets 21,210 — Investments 5,493 5,493 Deposits and other 3,823 2,812 Goodwill 124,217 124,217 Other intangible assets, net 5,198 5,858 Total noncurrent assets 352,129 314,640 Total assets $ 567,358 $ 555,596 Liabilities and Stockholders' Equity Current Liabilities Accounts payable and accrued expenses $ 54,935 $ 50,562 Reported and estimated claims 42,999 38,454 Due to Medicaid and Medicare 9,142 9,130 Income tax payable 1,212 — Current portion of long-term debt 3,795 3,793 Current portion of finance lease obligations 4,722 3,368 Current portion of operating lease obligations 3,530 — Deferred revenue 28,115 — Total current liabilities 148,450 105,307 Noncurrent Liabilities Deferred tax liability, net 6,236 17,761 Finance lease obligations 13,114 9,440 Operating lease obligations 18,828 — Other noncurrent liabilities 1,086 1,134 Long-term debt, net of debt issuance costs 64,844 68,210 Total liabilities 252,558 201,852 Commitments and Contingencies (See Note 9) Redeemable Noncontrolling Interests (See Note 4) 12,708 15,278 Stockholders’ Equity Common stock, $ 0.001 par value; 500,000,000 authorized as of June 30, 2023 and 2022; 135,639,845 and 135,532,811 issued shares as of June 30, 2023 and June 30, 2022, respectively 136 136 Additional paid-in capital 332,107 327,499 Retained earnings (deficit) ( 35,944 ) 4,729 Total InnovAge Holding Corp. 296,299 332,364 Noncontrolling interests 5,793 6,102 Total stockholders’ equity 302,092 338,466 Total liabilities and stockholders’ equity $ 567,358 $ 555,596 See Notes to Consolidated Financial Statements 71 Table of Contents InnovAge Holding Corp. and Subsidiaries Consolidated Statements of Operations Year Ended June 30, 2023 2022 in thousands, except per share amounts Revenues Capitation revenue $ 686,836 $ 696,998 Other service revenue 1,251 1,642 Total revenues 688,087 698,640 Expenses External provider costs 374,528 383,046 Cost of care, excluding depreciation and amortization 212,271 180,222 Sales and marketing 19,627 24,201 Corporate, general and administrative 115,637 101,653 Depreciation and amortization 15,419 13,924 Total expenses 737,482 703,046 Operating Loss ( 49,395 ) ( 4,406 ) Other Income (Expense) Interest expense, net ( 1,522 ) ( 2,526 ) Other income (expense) 124 ( 305 ) Total other expense ( 1,398 ) ( 2,831 ) Loss Before Income Taxes ( 50,793 ) ( 7,237 ) Provision (Benefit) for Income Taxes ( 7,241 ) 723 Net Loss ( 43,552 ) ( 7,960 ) Less: net loss attributable to noncontrolling interests ( 2,879 ) ( 1,439 ) Net Loss Attributable to InnovAge Holding Corp. $ ( 40,673 ) $ ( 6,521 ) Weighted-average number of common shares outstanding - basic 135,593,824 135,519,970 Weighted-average number of common shares outstanding - diluted 135,593,824 135,519,970 Net loss per share - basic $ ( 0.30 ) $ ( 0.05 ) Net loss per share - diluted $ ( 0.30 ) $ ( 0.05 ) See Notes to Consolidated Financial Statements 72 Table of Contents InnovAge Holding Corp. and Subsidiaries Consolidated Statements of Stockholders’ Equity Capital Stock Additional Paid-in Capital Retained Earnings (Deficit) Noncontrolling Interests Total Permanent Stockholders' Equity Redeemable Noncontrolling Interests (Temporary Equity) Net Loss Shares Amount in thousands, except share amounts Balances, June 30, 2021 135,516,513 $ 136 $ 323,760 $ 10,663 $ 6,420 $ 340,979 $ 16,986 Stock-based compensation 16,298 — 3,739 — — 3,739 — Adjustment to redemption value — — — 587 — 587 ( 587 ) Net loss — — — ( 6,521 ) ( 318 ) ( 6,839 ) ( 1,121 ) ( 7,960 ) Balances, June 30, 2022 135,532,811 $ 136 $ 327,499 $ 4,729 $ 6,102 $ 338,466 $ 15,278 Balances, June 30, 2022 135,532,811 $ 136 $ 327,499 $ 4,729 $ 6,102 $ 338,466 $ 15,278 — Stock-based compensation 107,034 — 4,608 — — 4,608 — Adjustment to redemption value — — — — — — — Net loss — — — ( 40,673 ) ( 309 ) ( 40,982 ) ( 2,570 ) ( 43,552 ) Balances, June 30, 2023 135,639,845 $ 136 $ 332,107 $ ( 35,944 ) $ 5,793 $ 302,092 $ 12,708 $ See Notes to Consolidated Financial Statements 73 Table of Contents InnovAge Holding Corp. and Subsidiaries Consolidated Statements of Cash Flows Year Ended June 30, 2023 2022 in thousands Operating Activities Net loss $ ( 43,552 ) $ ( 7,960 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Loss on disposal of assets 1,107 305 Provision for uncollectible accounts 3,340 6,181 Depreciation and amortization 15,419 13,924 Operating lease rentals 4,604 — Amortization of deferred financing costs 429 429 Stock-based compensation 4,608 3,739 Deferred income taxes ( 11,525 ) 2,061 Other 167 — Changes in operating assets and liabilities, net of acquisitions Accounts receivable, net 8,223 ( 9,506 ) Prepaid expenses ( 3,303 ) ( 4,667 ) Income tax receivable 6,499 ( 1,360 ) Deposits and other ( 1,263 ) ( 475 ) Accounts payable and accrued expenses 34,901 17,381 Reported and estimated claims 4,545 5,221 Due to Medicaid and Medicare 12 2,029 Income taxes payable 1,212 — Operating lease liabilities ( 5,187 ) — Net cash provided by operating activities 20,236 27,302 Investing Activities Purchases of property and equipment ( 23,354 ) ( 38,238 ) Purchases of short-term investments ( 46,167 ) — Purchase of cost method investment — ( 2,000 ) Net cash used in investing activities $ ( 69,521 ) $ ( 40,238 ) Financing Activities Payments for finance lease obligations ( 4,103 ) ( 2,528 ) Principal payments on long-term debt ( 3,793 ) ( 3,790 ) Net cash used in financing activities ( 7,896 ) ( 6,318 ) DECREASE IN CASH, CASH EQUIVALENTS & RESTRICTED CASH ( 57,181 ) ( 19,254 ) CASH, CASH EQUIVALENTS & RESTRICTED CASH, BEGINNING OF PERIOD 184,446 203,700 CASH, CASH EQUIVALENTS & RESTRICTED CASH, END OF PERIOD $ 127,265 $ 184,446 Supplemental Cash Flows Information Interest paid $ 3,997 $ 1,474 Income taxes paid $ 13 $ 84 Property and equipment included in accounts payable $ 882 $ 2,135 Property and equipment purchased under capital leases $ 9,131 $ 8,067 See Notes to Consolidated Financial Statements 74 Table of Contents Note 1: Business InnovAge Holding Corp. and its subsidiaries (the “Company”), are headquartered in Denver, Colorado. The Company fulfills a broad range of medical and ancillary services for seniors in need of care and support to safely live independently in their communities, including 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 Program of All-Inclusive Care for the Elderly (“PACE”) center and third-party medical appointments; and care management. The Company manages its business as one reportable segment, PACE. As of June 30, 2023, the Company served approximately 6,400 PACE participants, making it the largest PACE provider in the United States of America (the U.S.) based upon participants served, and operates 17 PACE centers across Colorado, California, New Mexico, Pennsylvania and Virginia. During the third quarter ended March 31, 2023, the Company consolidated its Germantown LIFE center with its Allegheny and Henry Avenue LIFE centers in Pennsylvania. PACE is a fully-capitated managed care program, which serves the frail elderly, and predominantly dual-eligible, population in a community-based service model. InnovAge is obligated to provide, and participants receive, all needed healthcare services through an all-inclusive, coordinated model of care, and the Company is at risk for 100 % of healthcare costs incurred with respect to the care of its participants. PACE programs receive capitation payments directly from Medicare Parts C and D, Medicaid, Veterans Administration (“VA”), and private pay sources. Additionally, under the Medicare Prescription Drug Plan, the Centers for Medicare and Medicaid Services (“CMS”) share part of the risk for providing prescription medication to the Company’s participants. The Company’s common stock is traded on the Nasdaq Stock Market LLC (“NASDAQ”) under the ticker symbol “INNV”. Note 2: Summary of Significant Accounting Policies Basis of Preparation and Principles of Consolidation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and variable interest entities (VIEs) for which it is the primary beneficiary and entities for which it is the controlling general partner. All intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used in accounting for, among other things, the allowance for uncollectible accounts; useful lives of property and equipment and the valuation of goodwill and intangible assets; risk-score adjustments to participant revenues; reported and estimated claims; accruals; the determination of assumptions for stock-based compensation costs; deferred taxes, including the determination of a need for a valuation allowance; legal contingencies, including medical malpractice claims; the determination of fair value of net assets acquired in a business combination; and other fair value measurements. Actual results may differ from previously estimated amounts. Cash and Cash Equivalents Cash and cash equivalents consist of cash and financial instruments issued by major financial institutions that have an original maturity of less than three months. Amounts are reported in the consolidated balance sheets at cost, which approximates fair value. The Company’s cash and cash equivalents are deposited with high credit quality financial institutions and are primarily in demand deposit accounts. The FDIC insurance coverage is $250,000 on the aggregate of interest bearing and non-interest bearing accounts. 75 Table of Contents Investments Cost method investments do not have a readily determinable fair value and are carried at cost, less impairment plus or minus any changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The Company uses the equity method to account for investments in entities that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. The Company’s investments in these nonconsolidated entities is reflected in the Company’s consolidated balance sheets under the equity method, and the Company’s proportionate net income (loss), if any, is included in the Company’s consolidated statements of operations as equity income (loss). The Company evaluates its investments for impairment whenever events or changes in circumstances indicate that a decline in value has occurred that is other than temporary. Evidence considered in this evaluation includes, but would not necessarily be limited to, the financial condition and near-term prospects of the investee, recent operating trends and forecasted performance of the investee, market conditions in the geographic area or industry in which the investee operates and the Company’s strategic plans for holding the investment in relation to the period of time expected for an anticipated recovery of its carrying value. If the investment is determined to have a decline in value deemed to be other than temporary it is written down to estimated fair value. There were no write-downs in the fiscal years ended June 30, 2023 or 2022. See Note 4 “Cost and Equity Method Investments” for more information. Short-term Investments Short-term investments consist of investments in managed income fund securities managed by major financial institutions. These securities are measured at fair value on a recurring basis with changes in fair value recognized in earnings. The estimated fair value of the short-term investments is valued using quoted market prices in active markets and classified as Level 1 of the fair value hierarchy. Dividend income is reported within other income (expense) in the Company’s consolidated statement of operations. Dividends received are reinvested in fund securities. We may sell these securities at any time for use in current operations. As a result, we classify our short-term investments as current assets on the Company’s consolidated balance sheets. Restricted Cash Restricted cash includes cash held for participants who have established a personal-needs account to pay for nonmedical personal expenses, payment of which only occurs upon participant authorization, in the amount of approximately $ 0.02 million as of both June 30, 2023 and 2022. The Company records a related deposit liability for any participant contributions to these personal-needs accounts in accounts payable and accrued expenses in the consolidated balance sheets. Accounts Receivable The Company provides comprehensive healthcare services to participants on the basis of capitated or fixed fees per participant that are paid monthly by Medicare, Medicaid, the VA, and private pay sources. The Company records accounts receivable at net realizable value, which includes an allowance for estimated uncollectible accounts. The allowance for uncollectible accounts reflects the Company’s best estimate of probable losses considering eligibility, historical experience, and existing economic conditions. Accounts are written off as bad debts when they are deemed uncollectible based upon individual credit evaluations and specific circumstances underlying the accounts. See additional information in Note 3 “Revenue Recognition”. Property and Equipment Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are recorded using the straight-line method over the shorter of estimated useful lives or lease terms, if the assets are being leased. 76 Table of Contents Property and equipment were comprised of the following as of June 30: dollars in thousands Estimated Useful Lives 2023 2022 Land N/A $ 11,970 $ 11,980 Buildings and leasehold improvements 10 - 40 years 124,263 122,076 Software 3 - 5 years 26,656 16,264 Equipment and vehicles 3 - 7 years 57,754 47,546 Construction in progress N/A 42,223 35,479 262,865 233,345 Less accumulated depreciation and amortization ( 70,677 ) ( 57,085 ) Total property and equipment, net $ 192,188 $ 176,260 Depreciation of $ 14.8 million and $ 13.3 million was recorded during the fiscal years ended June 30, 2023 and 2022, respectively. Land is not depreciated, and construction in progress is not depreciated until ready for service. Costs of enhancements or modifications that substantially extend the capacity or useful life of an asset are capitalized and depreciated accordingly. Ordinary repairs and maintenance are expensed as incurred. The costs of acquiring or developing internal-use software, including directly related payroll costs for internal resources, are capitalized. Software maintenance and training costs are expensed in the period incurred. Interest is capitalized on construction projects, including internal-use software development projects, while in progress. During the fiscal years ended June 30, 2023 and 2022, the Company capitalized interest of approximately $ 1.0 million and $ 0.9 million, respectively. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the consolidated balance sheets, and the resulting gain or loss, if any, is reflected in the consolidated statements of operations. Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. No impairment charges were recorded in the fiscal years ended June 30, 2023 or 2022. Goodwill and Intangible Assets Intangible assets consist of customer relationships acquired through business acquisitions. Goodwill represents the excess of consideration paid over the fair value of net assets acquired through business acquisitions. Goodwill is not amortized but is tested for impairment at least annually. The Company tests goodwill for impairment annually on April 1st or more frequently if triggering events occur or other impairment indicators arise which might impair recoverability. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale, disposition of a significant portion of the business, or other factors. Impairment of goodwill is evaluated at the reporting unit level. A reporting unit is defined as an operating segment (i.e. before aggregation or combination), or one level below an operating segment (i.e. a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. The Company has three reporting units for evaluating goodwill impairment. ASC 350, Intangibles — Goodwill and Other (“ASC 350”), allows entities to first use a qualitative approach to test goodwill for impairment. When the reporting units where the Company performs the quantitative goodwill impairment are tested, the Company compares the fair value of the reporting unit, which the Company primarily determines using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss. There were no goodwill impairments recorded during the years ended June 30, 2023 and 2022. Customer relationships represent the estimated values of customer relationships of acquired businesses and have definite lives. The Company amortizes these intangible assets on a straight-line basis over their ten-year estimated useful life. Intangible assets are reviewed for impairment in conjunction with long-lived assets. There were no intangible asset impairments recorded during the years ended June 30, 2023 and 2022. 77 Table of Contents Reported and Estimated Claims Reported and estimated claims consist of unpaid claims reported as of the balance sheet date and estimates of claims incurred on or before June 30 that have not been reported by that date (IBNR). Such estimates are developed using actuarial methods and are based on many variables, including the utilization of healthcare services, historical payment patterns, cost trends, and other factors. These complex estimation methods and the resulting reserves are continually reviewed and updated, and any adjustments deemed necessary to contemplate new or updated information are reflected in current operations. Debt Issuance Costs Debt issuance costs are those costs that have been incurred in connection with the issuance of long-term debt and are offset against long-term debt in the consolidated balance sheets. Such costs are being amortized over the term of the underlying debt using the straight-line method, as the difference between that and the effective interest method are immaterial. Revenue Recognition Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performed the following five steps: (i) Identify the contract(s) with a customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance obligations in the contract; and (v) Recognize revenue as the entity satisfies a performance obligation. Medicaid and Medicare capitation revenues are based on a per member, per month (“PMPM”) capitation rates under the PACE program. For a discussion of our revenue recognition policies, please see Note 3 “Revenue Recognition”. Professional Liability Claims The Company records a liability for medical malpractice claims based on estimated probable losses and costs associated with settling these claims and a receivable to reflect the estimated insurance recoveries, if any. See Note 9 “Commitments and Contingencies”. Advertising Costs The Company’s purchased services and contracts expenses include media advertising, tactical advertising, and promotion costs. The creative portion of these activities is expensed as incurred. Production costs of advertising and promotional materials are expensed when the advertising is first run, unless such costs support direct-response advertising campaigns. In that case, these costs are capitalized and amortized over the period estimated to benefit from the campaign. Total advertising expenses were $ 5.6 million and $ 6.7 million for the fiscal years ended June 30, 2023 and 2022, respectively. Stock-based Compensation The Company and its principal shareholder have long-term equity incentive plans that provide for stock-based compensation, including the granting of stock options, profits interest units and restricted stock units to employees, directors, consultants, or advisers, as determined by each of the respective plans. The Company utilizes the Black-Scholes option-pricing model to determine the fair value of the stock options on the date of grant. This model derives the fair value of the options based on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rate, and dividend yield. The Company uses the Monte Carlo option model to determine the fair value of the granted profits interests units. For service-vesting awards, we recognize stock-based compensation expense over the requisite service period, which is generally the vesting period of the respective award, on a straight-line basis. If the award was, in substance, multiple awards, we recognize stock-based compensation expense over the requisite service period for each separately vesting portion of the awards. For performance-vesting awards, we recognize stock-based compensation expense when it is probable that the performance condition will be achieved. We analyze if a performance condition is probable for each reporting period through the settlement date for awards subject to performance vesting. Stock-based compensation is included in corporate, general and administrative expenses on our consolidated statements of operations. 78 Table of Contents Shares issued pursuant to our equity incentive plans are issued from authorized but unissued shares or from shares, if any, held by the Company as treasury stock. See Note 10 “Stock-based Compensation”. Income Taxes The Company and its subsidiaries calculate federal and state income taxes currently payable and for deferred income taxes arising from temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured pursuant to enacted tax laws and rates applicable to periods in which those temporary differences are expected to be recovered or settled. The impact on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment. The members of SH1 and 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. Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination based on the technical merits of the position. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalty expense associated with uncertain tax positions as a component of provision for income taxes. Variable Interest Entities (VIE) A VIE is defined as a legal entity whose equity owners do not have sufficient equity at risk or whose equity owners lack certain decision-making and economic rights. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity. The primary beneficiary is required to consolidate the VIE. InnovAge Senior Housing Thornton, LLC (“SH1”) and Pinewood Lodge, LLC (“PWD”) are considered to be VIEs. The Company is not considered the primary beneficiary of PWD but is considered the primary beneficiary of SH1. Emerging Growth Company Status The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that the Company (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, the Company's consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. Recently Adopted Accounting Pronouncements Leases In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02 Leases (“ASU 2016-02”), which was intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees are required to recognize a right-of-use (“ROU”) asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than 12 months. Additionally, this guidance requires enhanced disclosures to help investors and other financial statement users to better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. In June 2020, the FASB issued ASU 2020-05 Revenue from contracts with customers (Topic 606) and leases (Topic 842) – Effective dates for certain entities which deferred the new lease standard effective date for the Company to interim periods beginning after December 15, 2021, with early adoption permitted. We adopted the new standard on July 1, 2022 using the modified retrospective transition approach as permitted in ASU 2018-11. In accordance with this approach, the effective date of Topic 842 is also the application date of the new requirements, with prior comparative periods presented in the financial statements with the legacy requirements of ASC Topic 840, Leases. We elected the package of practical expedients which permits us not to reassess under the new lease standard our prior conclusions for lease identification and lease classification on expired or existing contracts and whether 79 Table of Contents initial direct costs previously capitalized would qualify for capitalization under the new lease standard. We also elected to adopt the optional transition method which allows an entity to recognize, if necessary, a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company did not elect the practical expedient to use hindsight in determining the lease term and in assessing impairment conclusions on the ROU assets. Comparative periods presented in the financial statements continue to be presented in accordance with GAAP related to leases prior to transitioning to the new lease standard. The adoption of Topic 842 resulted in the recognition of operating lease liabilities and ROU assets of $ 25.1 million and $ 23.6 million, respectively, while our accounting for capital leases (now referred to as finance leases) remained substantially unchanged. The impact of adopting Topic 842 was not material to our Statements of Operations and Statements of Cash Flows. See Note 6, “Leases.” Recent Accounting Pronouncements Not Yet Adopted Financial Instruments In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments , which requires entities to use a current expected credit loss (“CECL”) model to measure impairment for most financial assets that are not recorded at fair value through net income. Under the CECL model, an entity will estimate lifetime expected credit losses considering available relevant information about historical events, current conditions and supportable forecasts. The CECL model does not apply to available-for-sale debt securities. This guidance also expands the required credit loss disclosures and will be applied using a modified retrospective approach by recording a cumulative effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The ASU is effective for private companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company will adopt this guidance for the annual and interim reporting periods beginning July 1, 2023. The Company has not determined the effect of the standard on its consolidated financial statements. We do not expect that any other recently issued accounting guidance will have a significant effect on our condensed consolidated financial statements. Note 3: Revenue Recognition Capitation Revenue and Accounts Receivable Our capitation revenue relates to contracts with participants in which our performance obligation is to provide healthcare services to the participants. Revenues are recorded during the period our obligations to provide healthcare services are satisfied as noted below within each service type. The Company contracts directly with Medicare and Medicaid on a PMPM basis. We receive 100 % of the pooled capitated payment to directly provide or manage the healthcare needs of our participants. Fees are recorded gross in revenues because the Company is acting as a principal in providing for or overseeing comprehensive care provided to the participants. Neither the Company nor any of its affiliates is a registered insurance company because state law in the states in which it operates does not require such registration for risk-bearing providers. In general, a participant enrolls in the PACE program and is considered a customer of InnovAge. The Company considers all contracts with participants as a single performance obligation to provide comprehensive medical, health, and social services that integrate acute and long-term care. The Company identified that contracts with customers in the PACE program have similar performance obligations and therefore groups them into one portfolio. This performance obligation is satisfied as the Company provides comprehensive care to its participants. Our revenues are based on the estimated PMPM amounts we expect to be entitled to receive from the capitated fees per participant that are paid monthly by Medicaid, Medicare, the VA, and private pay sources. Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the PACE program. VA is included in “Private Pay and other” and is also capitated. Private pay includes direct payments from participants who do not qualify for the full capitated rate and have to pay all or a portion of the capitated rate. 80 Table of Contents The Company disaggregates capitation revenue from the following sources for the year ended June 30: 2023 2022 Medicaid 54 % 54 % Medicare 46 % 46 % Private pay and other *% *% Total 100 % 100 % * Less than 1% The Company determined that the transaction price for these contracts is the amount we expect to be entitled to, which is the most likely amount. For certain capitation payments, the Company is subject to retroactive premium risk adjustments based on various factors. The Company estimates the amount of the adjustment and records it monthly on a straight-line basis. These adjustments are not expected to be material. The capitation revenues are recognized based on the estimated PMPM transaction price to transfer the service for a distinct increment of the series (i.e. month). We recognize revenue in the month in which participants are entitled to receive comprehensive care benefits during the contract term. As the period between the time of service and time of payment is typically one year or less, the Company elected the practical expedient under ASC 606-10-32-18 and did not adjust for the effects of a significant financing component. The Company also provides prescription drug benefits in accordance with Medicare Part D. Monthly payments received from CMS and the participants represent the bid amount for providing prescription drug coverage. The portion received from CMS is subject to risk sharing through Medicare Part D risk-sharing corridor provisions. These risk-sharing corridor provisions compare costs targeted in the Company’s bid to actual prescription drug costs. The Company estimates and records a monthly adjustment to Medicare Part D revenues associated with these risk-sharing corridor provisions. Medicare Part D comprised (i) 13 % and 12 % of capitation revenues for each of the years ended June 30, 2023 and 2022, respectively, and (ii) 23 % and 23 % of external provider costs for the year ended June 30, 2023 and 2022, respectively. The Company provides comprehensive healthcare services to participants on the basis of capitated or fixed fees per participant that are paid monthly by Medicare, Medicaid, the VA, and private pay sources. The concentration of net receivables from participants and third-party payers as of June 30, 2023 and 2022 was as follows: 2023 2022 Medicaid 61 % 70 % Medicare 29 % 22 % Private pay and other 10 % 8 % Total 100 % 100 % The Company records accounts receivable at net realizable value, which includes an allowance for estimated uncollectible accounts. The allowance for uncollectible accounts reflects the Company’s best estimate of probable losses considering eligibility, historical experience, and existing economic conditions. The balance of the allowance for uncollectible accounts was $ 4.2 million as of June 30, 2023, compared to $ 3.4 million as of June 30, 2022. Accounts are written off as bad debts when they are deemed uncollectible based upon individual credit evaluations and specific circumstances underlying the accounts. Other Service Revenue and Accounts Receivable Other service revenue is comprised of rents earned related to Senior Housing and other fee for service revenue. Accounts receivable related to other service revenue were not significant as of both June 30, 2023 and June 30, 2022. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to change, as well as government review. Failure to comply with these laws can expose the entity to significant regulatory action, including fines, penalties, and exclusion from the Medicare and Medicaid programs. See Note 9, “Commitments and Contingencies”. 81 Table of Contents Note 4: Cost and Equity Method Investments The Company holds cost method and equity method investments as of June 30: 2023 2022 in thousands Cost method investments $ 4,645 $ 4,645 Equity method investments 848 848 Total investments $ 5,493 $ 5,493 Nonconsolidated Entities Cost Method Investments The Company maintains two investments that are accounted for using the cost method. The investments do not have a readily determinable fair value and the Company has elected to record the investments at cost, less impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. During the years ended June 30, 2023 and 2022, there were no observable price changes or impairments recorded. JetDoc In August 2021, the Company acquired a minority interest equal to 806,481 shares of the outstanding common stock of Jetdoc, Inc. (“Jetdoc”), a telehealth and virtual urgent care app dedicated to effectively connecting users with medical professionals, for cash consideration of $ 2.0 million. The balance of the Company’s investment in Jetdoc is $ 2.0 million which represents the maximum exposure to loss. Dispatch Health On June 14, 2019, the Company invested $ 1.5 million in DispatchHealth Holdings, Inc., ("DispatchHealth") through the purchase of a portion of its outstanding Series B Preferred Stock. On April 2, 2020, the Company invested an additional $ 1.1 million through the purchase of a portion of its outstanding Series C Preferred Stock. The balance of the Company’s investment is $ 2.6 million which represents the maximum exposure to loss. The investment does not have a readily determinable fair value and the Company has elected to record the investment at cost, less impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. During the period ended June 30, 2023 and 2022, there were no observable price changes or impairments. Equity Method Investments Pinewood Lodge Pinewood Lodge, LLP is a VIE, but the Company is not the primary beneficiary. The Company does not have the power to direct the activities that most significantly impact the economic performance of PWD. Accordingly, the Company does not consolidate PWD. PWD is accounted for using the equity method of accounting and is included in equity method investments in the accompanying consolidated balance sheets. The equity earnings of PWD are insignificant. As of June 30, 2023, the balance of the Company’s investment in PWD was $ 0.8 million, which represents the maximum exposure to loss. Consolidated Entities Noncontrolling Interest Senior Housing InnovAge Senior Housing Thornton, LLC is a VIE. The Company is the primary beneficiary of SH1 and consolidates SH1. The Company is the primary beneficiary of SH1 because it has the power to direct the activities that are most significant to SH1 and has an obligation to absorb losses or the right to receive benefits from SH1. The most significant activity of SH1 is the operation of the housing facility. The Company has provided a subordinated loan to SH1 and has provided a guarantee for the convertible term loan held by SH1. 82 Table of Contents The following table shows the assets and liabilities of SH1 as of June 30: 2023 2022 in thousands Assets Cash and cash equivalents $ 648 $ 526 Accounts receivable — — Prepaid expenses and other 1 5 Property, plant and equipment, net 9,933 10,404 Deposits and other, net 402 395 Liabilities Accounts payable and accrued expenses 266 256 Current portion long-term debt — 43 Deferred revenue 2 — Noncurrent liabilities 454 454 Long-term debt, net of debt issuance costs 3,784 3,784 Redeemable Noncontrolling Interest InnovAge Sacramento InnovAge Sacramento is a joint venture with Adventist Health System/West (“Adventist”) and Eskaton Properties, Incorporated (“Eskaton”). On March 18, 2019, in connection with the formation of InnovAge Sacramento, the Company contributed $ 9.0 million in cash and land valued at $ 4.2 million for a 59.9 % membership interest in the joint venture. Adventist contributed $ 5.8 million in cash and Eskaton contributed $ 3.0 million in cash for membership interests of 26.4 % and 13.7 %, respectively. In fiscal year 2021, the Company made an additional contribution of $ 52,000 and obtained an additional 0.1 % membership interest in the joint venture, which resulted in the Company obtaining control and consolidating InnovAge Sacramento as of January 1, 2021. The InnovAge California PACE-Sacramento LLC Limited Liability Company Agreement (the “JV Agreement”) includes numerous provisions whereby, if certain conditions are met, the joint venture may be required to purchase, at fair market value, certain members’ interests or certain members’ may be required to purchase, at fair market value, the interests of certain other members. The Company’s investment in InnovAge Sacramento includes a put right for the noncontrolling interest holders to require the Company to repurchase the interest of the noncontrolling interest holders at fair value, after the initial term of the management services agreement in 2028. At the time the Company became a publicly traded company these put rights held by the noncontrolling interests of the joint venture were required to be presented as temporary equity. As of June 30, 2023, none of the conditions specified in the JV Agreement had been met. These put rights held by the noncontrolling interests of the joint venture are required to be presented as temporary equity. The redeemable noncontrolling interest of $ 12.7 million was recorded at carrying value as of June 30, 2023. Note 5: Goodwill and Intangible Assets Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill amounted to $ 124.2 million at each of June 30, 2023 and June 30, 2022. The Company did no t have any acquisitions resulting in goodwill during the year ended June 30, 2023 and 2022. Goodwill is not amortized. Pursuant to ASC 350, “Intangibles — Goodwill and Other,” we review the recoverability of goodwill annually as of April 1 or whenever significant events or changes occur which might impair the recovery of recorded amounts. For purposes of the annual goodwill impairment assessment, the Company has identified three reporting units. There were no goodwill impairments recorded during the year ended June 30, 2023 and 2022. 83 Table of Contents Intangible assets consisted of the following as of June 30: in thousands 2023 2022 Definite-lived intangible assets Customer relationships $ 6,600 $ 6,600 Indefinite-lived intangible assets Permits 2,000 2,000 Total intangible assets 8,600 8,600 Accumulated amortization ( 3,402 ) ( 2,742 ) Balance as of end of period $ 5,198 $ 5,858 Intangible assets with a finite useful life continue to be amortized over their useful lives. The Company recorded amortization expense of $ 0.7 million for each of the years ended June 30, 2023 and 2022, respectively. The total expected future annual amortization expense for the next 5 years ended June 30, is as follows: in thousands Amortization Expense 2024 $ 660 2025 660 2026 660 2027 630 2028 — We review the recoverability of other intangible assets in conjunction with long-lived assets whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. There were no intangible asset impairments recorded during the years ended June 30, 2023 and 2022. Note 6: Leases Leasing Arrangements as Lessee The Company leases certain property and equipment under various third-party operating and finance lease agreements. The Company determines if an arrangement is or contains a lease at the lease inception date by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. The leases are noncancelable and expire on various terms from 2023 through 2032. We determine if an arrangement is a lease upon commencement of the contract. If an arrangement is determined to be a long-term lease (greater than 12 months), we recognize an ROU asset and lease liability based on the present value of the future minimum lease payments over the lease term at the commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Our lease terms may also include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. We have elected to apply the short-term lease exception for contracts that have a lease term of twelve months or less and do not include an option to purchase the underlying asset. Therefore, we do not recognize a ROU asset or lease liability for such contracts. We recognize short-term lease payments as expense on a straight-line basis over the lease term. Variable lease payments that do not depend on an index or rate are recognized as expense. Certain leases include escalations based on inflation indexes and fair market value adjustments. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement for such leases. On March 20, 2023, we consolidated our Germantown center in Pennsylvania with two of our existing centers. Upon consolidation, we terminated our Germantown center lease and recognized lease termination costs of $ 0.6 million. Lease termination costs are included in other income (expense) on our consolidated statements of operations. 84 Table of Contents The following table presents the components of our ROU assets and their classification in our Balance Sheet at June 30, 2023. Component of Lease Balances Balance Sheet Line Items Year Ended June 30, in thousands Assets: Operating lease assets Operating lease assets $ 21,210 Finance lease assets Property and equipment, net 16,378 Total leased assets $ 37,588 The following table presents the components of our lease cost and the classification of such costs in our Statement of Operations for the year ended June 30, 2023. Component of Lease Cost Statement of Operations Line Items Year Ended June 30, in thousands Operating lease cost Cost of care excluding depreciation and amortization and Corporate, general and administrative $ 4,642 Finance lease expense: Amortization of leased assets Depreciation and amortization 3,080 Interest on lease liabilities Interest expense, net 1,255 Variable lease cost Cost of care excluding depreciation and amortization and Corporate, general and administrative 82 Short-term lease cost Cost of care excluding depreciation and amortization and Corporate, general and administrative 108 Total lease expense: $ 9,167 The following table includes the weighted-average lease terms and discount rates for operating and finance leases as of June 30, 2023. Weighted average remaining lease term: June 30, 2023 Operating leases 7.9 years Finance leases 3.9 years Weighted average discount rate June 30, 2023 Operating leases 6.60 % Finance leases 7.80 % The following table includes the future maturities of lease payments for operating leases and finance leases for periods subsequent to June 30, 2023. 85 Table of Contents in thousands Operating Lease Finance Lease Total 2024 $ 4,882 $ 5,970 $ 10,852 2025 4,356 5,270 9,626 2026 4,283 4,245 8,528 2027 3,981 3,549 7,530 2028 3,140 1,759 4,899 Thereafter 7,033 — 7,033 Total lease payments 27,675 20,793 48,468 Less liability accretion / imputed interest ( 5,317 ) ( 2,957 ) ( 8,274 ) Total lease liabilities 22,358 17,836 40,194 Less: Current lease liabilities 3,530 4,722 8,252 Total long-term lease liabilities $ 18,828 $ 13,114 $ 31,942 The following table includes the future maturities of minimum rental payments that are required to be paid under all non-cancelable operating and capital lease obligations, prior to the adoption of ASC 842: in thousands Operating Lease Capital Lease 2023 $ 4,873 $ 4,405 2024 4,581 3,909 2025 4,122 3,126 2026 4,061 2,092 2027 3,764 1,393 Thereafter 10,265 535 Total minimum rental payments 31,666 15,460 Less: Amount representing interest ( 2,652 ) Subtotal 12,808 Current portion 3,368 Long-term portion $ 9,440 Note 7: Long-term Debt The components of our long-term debt are as follows: June 30, 2023 June 30, 2022 in thousands Senior secured borrowings: Term Loan Facility $ 67,500 $ 71,250 Convertible term loan 2,284 2,327 Total debt 69,784 73,577 Less unamortized debt issuance costs 1,145 1,574 Less current maturities 3,795 3,793 Noncurrent maturities $ 64,844 $ 68,210 86 Table of Contents 2021 Credit Agreement 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 its prior 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. As of June 30, 2023, we had no borrowings outstanding under the facility. The remaining capacity under the Revolving Credit Facility as of June 30, 2023 was $ 97.2 million, subject to (i) any issued amounts under our letters of credit, which as of June 30, 2023 was $ 2.8 million, and (ii) applicable covenant compliance restrictions and any other conditions precedent to borrowing. The maturity date of each of the Term Loan Facility and the Revolving Credit Facility is March 8, 2026. Loans under the 2021 Credit Agreement are secured by substantially all of the Company’s assets. 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. 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. U.S.-dollar LIBOR ceased to be published on June 30, 2023. As such, during fiscal year 2023, the Company prospectively adjusted the effective interest rate for debt and now utilizes SOFR as the effective interest rate. The 2021 Credit Agreement requires the Company to meet certain operational and reporting requirements, including, but not limited to, a secured net leverage ratio. Additionally, annual capital expenditures and permitted investments, including acquisitions, are limited to amounts specified in the 2021 Credit Agreement. The 2021 Credit Agreement also provides certain restrictions on dividend payments and other equity transactions and requires the Company to make prepayments under specified circumstances. The Company was in compliance with the covenants of the 2021 Credit Agreement as of June 30, 2023 and 2022, respectively. The deferred financing costs related to the Term Loan of $ 2.0 million are amortized over the term of the underlying debt and unamortized amounts have been offset against long-term debt in the consolidated balance sheets. Total amortization of deferred financing costs was $ 0.4 million and $ 0.4 million for the years ended June 30, 2023 and 2022, respectively. Convertible Term Loan On June 29, 2015, SH1 entered into a convertible term loan. Monthly principal and interest payments of $ 0.02 million commenced on September 1, 2015, and the loan bears interest at an annual rate of 6.68 %. The remaining principal balance is due upon maturity, which is August 20, 2030. The loan is secured by a deed of trust to Public Trustee, assignment of leases and rents, security agreements, and SH1’s fixture filing. Aggregate maturities of our debt as of June 30, 2023 were as follows: Long-term debt in thousands Year ending June 30: 2024 $ 3,796 2025 3,799 2026 60,052 2027 56 2028 60 Thereafter 2,021 Total debt $ 69,784 Note 8: Fair Value Measurements Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market 87 Table of Contents participants at the measurement date. A fair value hierarchy was established that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources outside the reporting entity. Unobservable inputs are inputs that reflect the Company’s own assumptions based on market data and assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The sensitivity to changes in inputs and their impact on fair value measurements can be significant. The three levels of inputs that may be used to measure fair value are: Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date Level 2 Quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the assets or liabilities Level 3 Unobservable inputs to the valuation techniques that are significant to the fair value measurements of the assets or liabilities The following table shows the Company’s cash, cash equivalents and marketable securities by significant investment category as of June 30, 2023. in thousands Amortized Cost Fair Value Cash and Cash Equivalents Short-term Investments Cash $ 49,775 $ 49,775 $ 49,775 $ — Level 1 Money market funds 77,474 77,474 77,474 — Mutual funds 46,170 46,213 — 46,213 Total $ 173,419 $ 173,462 $ 127,249 $ 46,213 There were no transfers in and out of Level 3 during the fiscal years ended June 30, 2023 and 2022. The Company’s policy is to recognize transfers as of the actual date of the event or change in circumstances. Note 9: Commitments and Contingencies Professional Liability The Company pays fixed premiums for annual professional liability insurance coverage under a claims-made policy. Under such policy, only claims made and reported to the insurer are covered during the policy term, regardless of when the incident giving rise to the claim occurred. The Company records claim liabilities and expected recoveries, if any, at gross amounts. The Company is not currently aware of any unasserted claims or unreported incidents that are expected to exceed medical malpractice insurance coverage limits. Litigation From time to time in the normal course of business, the Company is involved in or subject to legal proceedings related to its business. The Company regularly evaluates the status of claims and legal proceedings in which it is involved in order to assess whether a loss is probable or there is a reasonable possibility that a loss may have been incurred, and to determine if accruals are appropriate. The Company expenses legal costs as such costs are incurred. Civil Investigative Demands In July 2021, the Company received a civil investigative demand from the Attorney General for the State of Colorado under the Colorado Medicaid False Claims Act. The demand requests information and documents regarding Medicaid billing, patient services and referrals in connection with the Company’s PACE program in Colorado. We continue to fully cooperate with the Attorney General and produce the requested information and documentation. We are currently unable to predict the outcome of this investigation. 88 Table of Contents In February 2022, the Company received a civil investigative demand from the Department of Justice (“DOJ”) under the Federal False Claims Act on similar subject matter. The demand requests information and documents regarding audits, billing, orders tracking, and quality and timeliness of patient services in connection with the Company’s PACE programs in the states where the Company operates (California, Colorado, New Mexico, Pennsylvania, and Virginia). In December 2022, the Company received a supplemental civil investigative demand requesting supplemental information on the same matters. The Company continues to fully cooperate with the DOJ and produce the requested information and documentation. We are currently unable to predict the outcome of this investigation. Stockholder Lawsuits On October 14, 2021, and subsequently amended on June 21, 2022, the Company was named as a defendant in a putative class action complaint filed in the District Court for the District of Colorado on behalf of individuals who purchased or acquired shares of the Company’s common stock during a specified period (the "Securities Action"). Through the complaint, plaintiffs are asserting claims against the Company, certain of the Company’s officers and directors, Apax Partners, L.P., Welsh, Carson, Anderson & Stowe and the underwriters in the Company’s IPO, alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 for making allegedly inaccurate and misleading statements and omissions in connection with the Company’s IPO and subsequent earnings calls and public filings, and seeking compensatory damages, among other things. On September 13, 2022, the Company and the officer and director defendants and Apax Partners, L.P. and Welsh, Carson, Anderson & Stowe filed a motion to dismiss the amended complaint for failure to state a claim upon which relief can be granted. On April 20, 2022, the Board of Directors of the Company received a books and records demand pursuant to Section 220 of the Delaware General Corporation Law, from a purported stockholder of the Company, Brian Hall, in connection with the stockholder’s investigation of, among other matters, potential breaches of fiduciary duty, mismanagement, self-dealing, corporate waste or other violations of law by the Company’s Board with respect to these matters. We are currently unable to predict the outcome of this matter. On May 15, 2023, Mr. Hall filed a lawsuit in the Delaware Court of Chancery asserting derivative claims for breach of fiduciary duty against certain of the Company’s current and former officers and directors generally relating to alleged failures by the defendants to take remedial actions to address the matters that resulted in sanctions by CMS at certain of the Company’s centers, and alleged misstatements in the Company’s public filings relating to those matters. On June 28, 2023, upon stipulation of the parties, the court entered an order staying the litigation pending the resolution of the motion to dismiss in the Securities Action or upon fifteen days’ notice by any party to the litigation. We are currently unable to predict the outcome of this matters. Other Matters In the third fiscal quarter of 2023, the Company agreed to settle a wage and hour class action lawsuit in the State of California for a cash payment of $ 1.2 million. The agreement is subject to court approval. Because the results of legal proceedings and claims are inherently unpredictable and uncertain, we are currently unable to predict whether the legal proceedings we are involved in will, either individually or in the aggregate, have a material adverse effect on our business, financial condition, or cash flows. The outcomes of legal proceedings and claims could be material to the Company’s operating results for any particular period, depending in part, upon the operating results of such period. Regardless of the outcome, litigation has the potential to have an adverse impact on us due to any related defense and settlement costs, diversion of management resources, and other factors. Note 10: Stock-based Compensation A summary of our aggregate share-based compensation expense is set forth below. Stock-based compensation expense is included in corporate, general and administrative expenses on our consolidated statements of operations. Year ended June 30, 2023 2022 in thousands Stock options $ 1,010 $ 719 Profits interests units 867 1,162 Restricted stock units 3,116 1,858 Total stock-based compensation expense $ 4,993 $ 3,739 89 Table of Contents 2020 Equity Incentive Plan Profits Interests TCO Group Holdings, L.P. (the “LP”), the Company’s largest shareholder and prior to the IPO, the Company’s parent, maintains the TCO Group Holdings, L.P. Equity Incentive Plan (the “2020 Equity Incentive Plan”) pursuant to which interests in the LP in the form of Class B Units (profits interests) may be granted to employees, directors, consultants, advisers, and other services providers (including partners) of the LP or any of its affiliates, including the Company. A maximum number of 16,162,177 Class B Units are authorized for grant under the 2020 Equity Incentive Plan. Both performance-based and time-based units were issued under the plan. As of June 30, 2023, a total of 13,009,137 profits interests units have been granted under the 2020 Equity Incentive Plan. These profits interests represent profits interest ownership in the LP tied solely to the accretion, if any, in the value of the LP following the date of issuance of such profits interests. Profits interests participate in any increase of LP value after a hurdle rate is achieved and, for performance-based units, the LP profits interests receive the agreed-upon return on their invested capital and internal rate of return, as applicable. The hurdle rate per unit is $ 5.49 for both the performance-based and time-based units outstanding as of June 30, 2023. Each award of profits interests is subject to the following material terms: (i) The profits interests receive distributions (other than tax distributions) only upon a liquidity event, as defined, that exceeds a threshold equivalent to the fair value of the LP, as determined by the LP’s Board of Directors, at the grant date. (ii) A portion of the units vest over a period of continuous employment or service (time-based units) while the other portion of the units only vest based on the level of aggregate multiple of invested capital and, with respect to certain grants of profits interests, internal rate of return achieved by Ignite Aggregator LP, one of the limited partners of the LP, upon a change of control of the Company (performance-based units). The performance-based units are subject to a market condition, which the Company incorporates as part of its determination of the grant date fair value of the units. The Company uses the Monte Carlo option model to determine the fair value of the granted profits interests units at the time of the grant. As the awards outstanding as of June 30, 2023, were granted prior to our IPO, the stock price was based on prices realized in equity transactions prior to being publicly traded. Expected stock price volatility was based on consideration of indications observed from several publicly traded peer companies. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the unit. The dividend yield percentage is zero because the Company neither currently pays dividends nor intends to do so during the expected term. The expected term of the units represents the time the units are expected to be outstanding. The assumptions under the Monte Carlo model related to the profits interests units, presented on a weighted-average basis, are provided below: 2021 Expected volatility 44 % Expected life (years) - time vesting units 1.8 Interest rate 0.16 % Dividend yield — % Weighted-average fair value $ 1.28 Fair value of underlying stock $ 5.49 90 Table of Contents A summary of profits interests activity for the year ended June 30, 2023, was as follows: Time-based unit awards Number of units Weighted average grant date fair value Unvested balance, June 30, 2022 2,158,072 $ 1.28 Granted — $ — Forfeited ( 49,654 ) $ 1.28 Vested ( 844,081 ) $ 1.28 Unvested balance, June 30, 2023 1,264,337 $ 1.28 Performance-based unit awards Number of units Weighted average grant date fair value Unvested balance, June 30, 2022 2,217,865 $ 0.57 Granted — $ — Forfeited ( 99,307 ) $ 0.57 Vested — $ — Unvested balance, June 30, 2023 2,118,558 $ 0.57 The total unrecognized compensation cost related to profits interests units outstanding as of June 30, 2023 was $ 2.1 million, comprised (i) $ 0.9 million related to time-based unit awards expected to be recognized over a weighted-average period of 1.8 years and (ii) $ 1.2 million related to performance-based unit awards, which will be recorded when it is probable that the performance-based criteria will be met. 2021 Omnibus Incentive Plan In March 2021, the Board of Directors approved the InnovAge Holding Corp. 2021 Omnibus Incentive Plan (“2021 Omnibus Incentive Plan”), pursuant to which various stock-based awards may be granted to employees, directors, consultants, and advisers. The total number of shares of the Company’s common stock authorized under the 2021 Omnibus Incentive Plan is 14,700,000 . The Company has issued time-based restricted stock units under this plan to its employees which generally vest or vested (i) on March 4, 2023, the second anniversary of the grant date, (ii) over a three-year period with one-third vesting on each anniversary of the date of grant, or (iii) at other dates. The grant date fair value of restricted stock units is based on the closing market price of our common stock on the date of grant. Certain awards under this plan vest upon achieving specific share price performance criteria and are determined to have performance-based vesting conditions. Restricted Stock Units A summary of time-based vesting restricted stock units activity for the year ended June 30, 2023, was as follows: Restricted stock units - time based Number of awards Weighted average grant-date fair value per share Outstanding balance, June 30, 2022 476,768 $ 9.69 Forfeited ( 236,344 ) $ 5.19 Vested ( 194,337 ) $ 6.29 Granted 1,827,707 $ 6.49 Outstanding balance, June 30, 2023 1,873,794 $ 10.10 The total unrecognized compensation cost related to time-based restricted stock units outstanding as of June 30, 2023, was $ 9.4 million and is expected to be recognized over a weighted-average period of 2.3 years. 91 Table of Contents A summary of performance-based vesting restricted stock units activity for the year ended June 30, 2023, was as follows: Restricted stock units - performance based Number of awards Weighted average grant-date fair value per share Outstanding balance, June 30, 2022 258,767 $ 5.18 Forfeited — $ — Vested — $ — Granted — $ — Outstanding balance, June 30, 2023 258,767 $ 5.18 The fair value of the performance-based restricted stock units and performance-based stock options granted during the year ended June 30, 2022, was based upon a Monte Carlo option pricing model using the assumptions in the following table: 2022 Expected volatility 34.5 % Expected term (in years) 5.0 Interest rate 1.56 % Dividend yield 0 % Weighted-average fair values $ 5.18 Fair value of underlying stock $ 7.89 The total unrecognized compensation cost related to performance-based vesting restricted stock units outstanding as of June 30, 2023, was $ 0.8 million and is expected to be recognized over a weighted-average period of 2.4 years. Nonqualified Stock Options A summary of time-based vesting stock option activity for the year ended June 30, 2023, was as follows: Stock options - time based Number of awards Weighted average grant-date fair value per share Outstanding balance, June 30, 2022 554,499 $ 1.61 Granted 162,162 $ 0.80 Forfeited — $ — Exercised — $ — Expired — $ — Outstanding balance, June 30, 2023 716,661 $ 1.43 Exercisable balance, June 30, 2023 207,936 $ 0.21 The total unrecognized compensation costs related to time-based vesting stock options outstanding as of June 30, 2023, was $ 0.4 million and is expected to be recognized over a weighted-average period of 1.8 years. 92 Table of Contents The fair value of the time-based stock options granted during the year ended June 30, 2023, was based upon the Black-Scholes option pricing model using the assumptions in the following table: 2023 Expected volatility 34.5 % Weighted-average expected life (years) - time vesting units 2.9 Interest rate 1.56 % Dividend yield 0 % Weighted-average fair values $ 0.80 Fair value of underlying stock $ 3.70 A summary of performance-based vesting stock option activity for the year ended June 30, 2023, was as follows: Stock options - performance based Number of awards Weighted average grant-date fair value per share Outstanding balance, June 30, 2022 776,299 $ 3.08 Granted — $ — Forfeited — $ — Vested — $ — Outstanding balance, June 30, 2023 776,299 $ 3.08 The fair value of the performance-based stock options granted during the year ended June 30, 2022, was based upon a Monte Carlo option pricing model using the assumptions in the table above under the ‘Restricted Stock Units’ heading. The total unrecognized compensation cost related to performance-based vesting stock options outstanding as of June 30, 2023, was $ 1.4 million and is expected to be recognized over a weighted-average period of 2.4 years. Note 11: Income Taxes The Company’s effective income tax rate for the years ended June 30, 2023 and 2022 was 14.3 % and ( 10.0 %), respectively, which differed from the amount computed by applying the applicable U.S. federal statutory corporate income tax rate of 21% in each period as a result of the following factors: Year ended June 30, 2023 2022 in thousands Statutory rate $ ( 10,667 ) $ ( 1,520 ) IRC Section 162(m) limitation (a) 588 506 Change in valuation allowance 4,297 2,738 Permanent adjustments 457 662 Prior year true-up and other 157 389 Income from entities not subject to taxation 605 302 State tax ( 2,678 ) ( 2,354 ) Provision for income taxes $ ( 7,241 ) $ 723 ___________________________________ (a) Reflects the permanent addback for the Section 162(m) limitation, which limits the deduction of compensation for the five highest paid officers to $ 1,000,000 . 93 Table of Contents Provision for income taxes consisted of the following for the years ended June 30, 2023 and 2022: Year ended June 30, 2023 2022 in thousands Current: Federal $ 3,709 $ ( 998 ) State 575 ( 339 ) Total current tax expense 4,284 ( 1,337 ) Deferred: Federal ( 10,263 ) 1,408 State ( 1,262 ) 652 Total deferred tax expense ( 11,525 ) 2,060 Total provision for income taxes $ ( 7,241 ) $ 723 The significant components of deferred tax assets and liabilities were as follows for the years ended June 30, 2023 and 2022: Year ended June 30, 2023 2022 in thousands Deferred tax assets: Amortization $ 629 $ 686 Federal net operating losses 17,147 3,083 State net operating losses 5,701 4,048 Provision for uncollectible accounts 1,114 869 Accrued vacation 835 828 Reported and estimated claims 1,164 1,025 Stock-based compensation 449 185 Accrued bonuses 582 102 Interest Expense 791 496 Lease liability 6,784 — Other — 6 Total deferred tax assets 35,196 11,328 Valuation allowance ( 8,347 ) ( 4,050 ) Deferred tax assets, net of valuation allowance 26,849 7,278 Deferred tax liabilities: Goodwill ( 6,697 ) ( 9,108 ) Depreciation ( 13,137 ) ( 8,430 ) Equity investment ( 5,019 ) ( 5,429 ) Prepaid expenses ( 1,792 ) ( 2,072 ) ROU asset ( 6,436 ) — Other ( 4 ) — Total deferred tax liabilities ( 33,085 ) ( 25,039 ) Net deferred tax liability $ ( 6,236 ) $ ( 17,761 ) 94 Table of Contents Carryforwards The Company had state net operating loss carryforwards of $ 117.9 million and $ 73.1 million at June 30, 2023 and 2022, respectively, which will begin to expire in 2037 if not utilized. Included in this is a city net operating loss which will begin to expire in 2025 if not utilized. Additionally, the Company has federal net operating loss carryforwards of $ 81.7 million and $ 14.7 million as of June 30, 2023 and 2022, respectively which do not expire. Valuation Allowance The Company has provided $ 8.3 million and $ 4.1 million at June 30, 2023 and June 30, 2022, respectively, as a valuation allowance against its deferred tax assets for federal and state net operating losses and state 163(j) interest expense limitations where there is not sufficient positive evidence to substantiate that these deferred tax assets will be realized at a more-likely-than-not level of assurance. Other The Company had no uncertain tax positions at June 30, 2023 and 2022. The Company files income tax returns as a consolidated group, excluding SH1 and InnovAge Sacramento, in the U.S. federal jurisdiction and various states and is subject to examination by taxing authorities in all of those jurisdictions. From time to time, the Company’s tax returns are reviewed or audited by U.S. federal and various U.S. state-taxing authorities. The Company believes that adjustments, if any, resulting from these reviews or audits would not be material, individually or in the aggregate, to the Company’s consolidated financial position, results of operations, or liquidity. The Company is subject to income tax examinations by U.S. federal and state jurisdictions for the period ended June 30, 2020 and forward. The Company is subject to income tax examinations by California, Colorado and New Mexico state jurisdictions for the period ended June 30, 2019 and forward. Note 12: Related Parties PWD VIE . Pursuant to the PWD Amended and Restated Agreement of Limited Partnership, Continental Community Housing, the general partner of PWD and our wholly-owned subsidiary (the “General Partner”), helped fund operating deficits and shortfalls of PWD in the form of a loan (the “PWD Loan”). The PWD Loan does not accrue interest. Additionally, the General Partner is paid an administration fee of $ 35,000 per year. At each of June 30, 2023 and 2022, $ 0.7 million was recorded in Deposits and other. Note 13: Segment Reporting The Company applies ASC Topic 280, “Segment Reporting,” which establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about operations, major customers and the geographies in which the entity holds material assets and reports revenue. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the Company’s chief executive officer, who is the chief operating decision maker (“CODM”), and for which discrete financial information is available. The Company has determined that it has five operating segments, three of which are related to the Company’s PACE offering. The PACE-related operating segments are based on three geographic divisions, which are West, Central, and East. Due to the similar economic characteristics, nature of services, and customers, we have aggregated our West, Central, and East operating segments into one reportable segment for PACE. The Company’s remaining two operating segments relate to Homecare and Senior Housing, which are immaterial operating segments, and are shown below as “Other” along with certain corporate unallocated expenses. As of June 30, 2023, the Company served approximately 6,400 PACE participants, making it the largest PACE provider in the U.S. based upon participants served, and operated 17 PACE centers across Colorado, California, New Mexico, Pennsylvania and Virginia. PACE, an alternative to nursing homes, is a managed care, capitated program, which serves the frail elderly in a community-based service model. Participants receive all medical services through a comprehensive, consolidated model of care. Capitation payments are received from Medicare parts C and D; Medicaid; VA, and private pay sources. The Company is at risk for all health and allied care costs incurred with respect to the care of its participants, although it does negotiate discounted rates with its provider network consisting of hospitals, nursing homes, assisted living facilities, and medical specialists. Additionally, under the Medicare Prescription Drug Plan, CMS shares part of the risk for providing prescription medication to the Company’s participants. 95 Table of Contents The Company evaluates performance and allocates capital resources to each segment based on an operating model that is designed to maximize the quality of care provided and profitability. The Company does not review assets by segment and therefore assets by segment are not disclosed below. For the periods presented, all of the Company’s long-lived assets were located in the U.S. and all revenue was earned in the U.S. The Company’s management uses Center-level Contribution Margin as the measure for assessing performance of its segments. Center-level Contribution Margin is defined as total segment revenues less external provider costs and cost of care (excluding depreciation and amortization). The Company allocates corporate level expenses to its segments with a majority of the allocation going to the PACE segment. The following table summarizes the operating results regularly provided to the CODM by reportable segment for the twelve months ended: June 30, 2023 June 30, 2022 in thousands PACE All other (1) Totals PACE All other (1) Totals Capitation revenue $ 686,836 $ — $ 686,836 $ 696,998 $ — $ 696,998 Other service revenue 347 904 1,251 403 1,239 1,642 Total revenues 687,183 904 688,087 697,401 1,239 698,640 External provider costs 374,528 — 374,528 383,046 — 383,046 Cost of care, excluding depreciation and amortization 211,707 564 212,271 178,904 1,318 180,222 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 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. Note 14: Earnings per Share Basic earnings (loss) per share (“EPS”) is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding options and other equity awards, using the treasury stock method and the average market price of the Company’s common stock during the applicable period. When a loss from continuing operations exists, all dilutive securities and potentially dilutive securities are anti-dilutive and are therefore excluded from the computation of diluted earnings per share. When net income from continuing operations exists, performance-based units, are omitted from the calculation of diluted EPS until it is determined that the performance criteria has been met at the end of the reporting period. As of June 30, 2023 and 2022, there were 1,035,066 performance-based awards excluded from the calculation of diluted EPS. 96 Table of Contents The following table sets forth the computation of basic and diluted net loss per common share: Year ended June 30, in thousands, except share values 2023 2022 Net income (loss) attributable to InnovAge Holding Corp. $ ( 40,673 ) $ ( 6,521 ) Weighted average common shares outstanding (basic) 135,593,824 135,519,970 EPS (basic) $ ( 0.30 ) $ ( 0.05 ) Dilutive shares — — Weighted average common shares outstanding (diluted) 135,593,824 135,519,970 EPS (diluted) $ ( 0.30 ) $ ( 0.05 ) Note 15: Subsequent Event The Company has evaluated subsequent events through September 12, 2023, the date on which the condensed consolidated financial statements were issued. 97 Table of Contents Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.