UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2021~~2022

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-40159

InnovAge Holding Corp.

(Exact name of registrant as specified in its charter)


Delaware	81-0710819
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)
8950 E. Lowry Boulevard Denver, CO (Address of Principal Executive Offices)	80230 (Zip Code)

(844) 803-8745

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value	INNV	The Nasdaq Stock Market LLC (Nasdaq Global Select Market)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐☒ No ☒☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☐	Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May ~~10, 2021,~~9, 2022, there were ~~135,516,513~~135,525,006 of the registrant’s common stock outstanding.

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TABLE OF CONTENTS

		Page

Part I	Financial Information

Item 1.	Financial Statements (Unaudited)	5

	Condensed Consolidated Balance Sheets as of March 31, ~~2021~~2022 (Unaudited) and June 30, ~~2020 (Unaudited)~~2021	5

	Condensed Consolidated Statements of Operations for the three and nine months ended March 31, ~~2021~~2022 and ~~2020~~2021 (Unaudited)	6

	Condensed Consolidated Statements of ~~Shareholders’~~Stockholders’ Equity for the three and nine months ended March 31, ~~2021~~2022 and ~~2020~~2021 (Unaudited)	7

	Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, ~~2021~~2022 and ~~2020~~2021 (Unaudited)	9

	Notes to Condensed Consolidated Financial Statements as of March 31, ~~2021~~2022 (Unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2932

Item 3.	Quantitative and Qualitative Disclosures ~~about~~About Market Risk	4546

Item 4.	Controls and Procedures	4546

Part II	Other Information	4647

Item 1.	Legal Proceedings	4647

Item 1A.	Risk Factors	4647

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4851

Item 3.	Defaults Upon Senior Securities	4851

Item 4.	Mine Safety Disclosures	4851

Item 5.	Other Information	4851

Item 6.	Exhibits	4851

Exhibit Index		4852

Signatures		5153

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InnovAge Holding Corp. and Subsidiaries

Quarterly Report on Form 10-Q

For the quarterly period ended March 31, ~~2021~~2022

Cautionary Note on Forward-Looking Statements

Throughout this Quarterly Report on Form 10-Q, we make “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as “may,” “will,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect,” “anticipate,” “target,” “should,” “could,” “potential,” “opportunity,” “goal” or similar terminology. Forward-looking statements may be identified by the fact that they do not relate strictly to historical or current facts and may include statements about our expectations with respect to current audits and legal proceedings and actions, relationships and discussions with regulatory agencies, our expectations with respect to correcting deficiencies raised in audits and other processes, and our expectations to increase the number of participants we serve, to grow enrollment and capacity within existing centers, to build de novo centers, and other similar statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q are generally located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations”~~Operations,” included in Part I, Item 2, and “Risk Factors,” included in Part II, Item 1A, but may be found in other locations as well. These statements are based upon management’s current expectations, assumptions and estimates and are not guarantees of timing, future results or performance. Therefore, you should not rely on any of these forward-looking statements as predictions of future events. Actual results may differ materially from those contemplated in these statements due to a variety of risks and uncertainties and other factors, including, among other things:

●

the results of periodic inspections, reviews and audits under the federal and state government programs, including the ongoing audits of our Albuquerque, New Mexico center and San Bernadino, California center, the sanctions currently in place on our centers in Colorado and in our Sacramento center in California and our ability to sufficiently cure any deficiencies identified by the respective federal and state government programs;

●

the results of regulatory processes and voluntary actions relating to planned de novo centers;

●

the impact on our business of security breaches, loss of data or other disruptions causing the compromise of sensitive information or preventing us from accessing critical information;

●

our ability to develop and maintain proper and effective internal control over financial reporting;

●

the impact on our business of disruptions in our disaster recovery systems or management continuity planning;

●

the impact of any restrictions on our use of or ability to license data or our failure to license data and integrate third-party technologies;

●

our ability to attract and retain highly qualified personnel;

●

our management team’s limited experience managing a public ~~company;~~company and recent Chief Executive Officer succession;

●

the impact on our business of the termination of our leases, increases in rent or inability to renew or extend leases;

●

the impact of failures by our suppliers, material price increases on supplies, lack of reimbursement for drugs we purchase or limitations on our ability to access new technology or products;

●

our ability to maintain our corporate culture;

●

the impact of competition for physicians and nurses, shortages of qualified personnel and related increases in our labor costs;

●

our ability to attract and retain the services of key primary care physicians;

●

the risk that our submissions to health plans may contain inaccurate or unsupportable information regarding risk adjustment scores of members;

●

our ability to accurately estimate incurred but not reported medical expense;

●

the impact of negative publicity regarding the managed healthcare industry;

●

the impact of state and federal efforts to reduce Medicaid spending;

●

the impact on our centers of adverse weather conditions and other factors beyond our control;

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●

general macro-economic and geopolitical events, including the heightened inflation, increase in interest rates and the war in Ukraine; and

●

other factors disclosed in the section entitled “Risk Factors” in our Annual Report for the year ended June 30, 2021 filed with the Securities and Exchange Commission (the “SEC”) on September 22, 2021 as well as ~~prospectus dated March 3, 2021, which forms part of the Registration Statement on Form S-1 declared effective as of the same date (the “IPO Prospectus”) and~~ in this Quarterly Report on Form 10-Q.

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and in our IPO Prospectus. All written and oral forward-looking

~~Table of Contents~~

statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other ~~Securities~~public communications and ~~Exchange Commission (“SEC”)~~ filings ~~and public communications.~~with the SEC. You should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Unless otherwise ~~mentioned~~specified or unless the context requires otherwise, all references in this Quarterly Report on Form 10-Q to “InnovAge,” ~~“Company,~~“the Company,” “we,” “us,” and “our,” or similar references, refer to InnovAge Holding Corp. and our consolidated subsidiaries.

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PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

INNOVAGE HOLDING CORP. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)


					March 31,		June 30,
	March 31,		June 30,		2022		2021
Assets	2021		2020
Current Assets
Cash and cash equivalents	$	201,527	$	112,904	$	199,493	$	201,466
Restricted cash		2,236		1,661		18		2,234
Accounts receivable, net of allowance ($7,741 – March 31, 2021 and $6,384 – June 30, 2020)		44,356		46,312
Accounts receivable, net of allowance ($3,921 – March 31, 2022 and $4,350 – June 30, 2021)						31,905		32,582
Prepaid expenses and other		3,626		4,311		13,572		9,249
Income tax receivable		131		1,743		5,461		5,401
Total current assets		251,876		166,931		250,449		250,932
Noncurrent Assets
Property and equipment, net		141,515		102,494		163,882		142,715
Investments		2,645		2,645		5,493		3,493
Deposits and other		3,611		3,003		5,378		3,877
Equity method investments		848		13,245
Goodwill		124,217		116,139		124,217		124,217
Other intangible assets, net		6,683		5,177
Intangible assets, net						8,772		6,518
Total noncurrent assets		279,519		242,703		307,742		280,820
Total assets	$	531,395	$	409,634	$	558,191	$	531,752
Liabilities and Stockholders’ Equity
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses	$	33,223	$	28,875	$	41,834	$	32,361
Reported and estimated claims		30,735		30,291		36,012		33,234
Due to Medicaid and Medicare		25,054		12,244		9,530		7,101
Current portion of long-term debt		2,852		1,938		3,793		3,790
Current portion of capital lease obligations		2,121		1,496		3,216		2,079
Contingent consideration		—		1,789
Total current liabilities		93,985		76,633		94,385		78,565
Noncurrent Liabilities
Deferred tax liability, net		5,817		9,282		15,781		15,700
Capital lease obligations		5,727		4,091		10,282		5,190
Other non-current liabilities		2,390		1,446
Other noncurrent liabilities						2,570		2,758
Long-term debt, net of debt issuance costs		72,415		210,432		69,051		71,574
Total liabilities		180,334		301,884		192,069		173,787
Commitments and Contingencies (See Note 10)
Commitments and Contingencies (See Note 9)
Redeemable Noncontrolling Interests (See Note 4)						15,996		16,986
Stockholders’ Equity
Common stock, $0.001 par value; 500,000,000 authorized as of March 31, 2021 and June 30, 2020; 135,516,513 and 132,718,461 issued shares as of March 31, 2021 and June 30, 2020, respectively		136		133
Common stock, $0.001 par value; 500,000,000 authorized as of March 31, 2022 and June 30, 2021; 135,525,006 and 135,516,513 shares issued and outstanding as of March 31, 2022 and June 30, 2021, respectively						136		136
Additional paid-in capital		323,127		36,338		326,346		323,760
Retained earnings		4,820		64,737		17,437		10,663
Less: Treasury stock (0 and 102,030 shares of common stock at $0.0 and $1.89 per share as of March 31, 2021 and June 30, 2020, respectively)		—		(193)
Total InnovAge Holding Corp.		328,083		101,015		343,919		334,559
Noncontrolling interests		22,978		6,735		6,207		6,420
Total stockholders’ equity		351,061		107,750		350,126		340,979
Total liabilities and stockholders’ equity	$	531,395	$	409,634	$	558,191	$	531,752

The accompanying notes are an integral part of these condensed consolidated financial statements.

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INNOVAGE HOLDING CORP. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except number of shares and per share data)

(Unaudited)


	Three Months Ended				Nine Months Ended
	March 31,		March 31,		March 31,		March 31,		Three Months Ended March 31,				Nine Months Ended March 31,
	2021		2020		2021		2020		2022		2021		2022		2021
Revenues
Capitation revenue	$	155,835	$	144,174	$	464,294	$	412,724	$	176,988	$	155,835	$	524,507	$	464,294
Other service revenue		473		596		1,890		1,976		371		473		1,273		1,890
Total revenues		156,308		144,770		466,184		414,700		177,359		156,308		525,780		466,184
Expenses
External provider costs		75,389		71,022		224,215		204,387		103,254		75,389		284,299		224,215
Cost of care, excluding depreciation and amortization		39,565		39,285		115,922		114,465		46,102		39,565		129,740		115,922
Sales and marketing		5,592		4,628		14,335		14,405		6,144		5,592		19,117		14,335
Corporate, general and administrative		18,595		14,028		105,901		42,417		24,682		18,595		74,248		105,901
Depreciation and amortization		3,311		2,769		9,262		8,310		3,850		3,311		10,435		9,262
Equity loss		—		163		1,343		203		—		—		—		1,343
Other operating (income) expense		19,222		(99)		18,211		(250)
Other operating income										—		19,222		—		18,211
Total expenses		161,674		131,796		489,189		383,937		184,032		161,674		517,839		489,189
Operating Income (Loss)		(5,366)		12,974		(23,005)		30,763		(6,673)		(5,366)		7,941		(23,005)

Other Income (Expense)
Interest expense, net		(4,876)		(2,361)		(17,061)		(11,287)		(709)		(4,876)		(1,930)		(17,061)
Loss on extinguishment of debt		(13,488)		—		(14,479)		—		—		(13,488)		—		(14,479)
Gain on equity method investment		10,871		—		10,871		—		—		10,871		—		10,871
Other income (expense)		(2,267)		244		(2,222)		(735)		108		(2,267)		(358)		(2,222)
Total other expense		(9,760)		(2,117)		(22,891)		(12,022)		(601)		(9,760)		(2,288)		(22,891)
Income (Loss) Before Income Taxes		(15,126)		10,857		(45,896)		18,741		(7,274)		(15,126)		5,653		(45,896)
Provision (Benefit) for Income Taxes		(4,264)		2,867		5,159		4,954		(4,116)		(4,264)		81		5,159
Net Income (Loss)		(10,862)		7,990		(51,055)		13,787		(3,158)		(10,862)		5,572		(51,055)
Less: net loss attributable to noncontrolling interests		(352)		(148)		(595)		(394)		(337)		(352)		(616)		(595)
Net Income (Loss) Attributable to InnovAge Holding Corp.	$	(10,510)	$	8,138	$	(50,460)	$	14,181	$	(2,821)	$	(10,510)	$	6,188	$	(50,460)

Weighted-average number of common shares outstanding - basic		121,324,980		132,616,431		119,619,806		132,616,431		135,516,608		121,324,980		135,516,544		119,619,806
Weighted-average number of common shares outstanding - diluted		121,324,980		134,368,002		119,619,806		133,792,985		135,516,608		121,324,980		135,530,793		119,619,806

Net income (loss) per share - basic	$	(0.09)	$	0.06	$	(0.42)	$	0.11	$	(0.02)	$	(0.09)	$	0.05	$	(0.42)
Net income (loss) per share - diluted	$	(0.09)	$	0.06	$	(0.42)	$	0.11	$	(0.02)	$	(0.09)	$	0.05	$	(0.42)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

INNOVAGE HOLDING CORP. AND SUBSIDIARIES

Condensed Consolidated Statements of ~~Shareholders’~~Stockholders’ Equity

(In thousands, except per share data)

(Unaudited)


	For the Three Months Ended March 31, 2022
													Total		Redeemable
				Additional		Retained							Permanent		Noncontrolling
	Capital Stock			Paid-in		Earnings		Treasury Stock			Noncontrolling		Stockholders'		Interests
	Shares	Amount		Capital		(Deficit)		Shares	Amount		Interests		Equity		(Temporary Equity)		Net Income (Loss)
Balances, December 31, 2021	135,516,513		136		325,501		17,695	-		-		6,254		349,586		18,850
Stock-based compensation	8,493		-		845		-	-		-		-		845		-
Net income (loss)	-		-		-		(2,821)	-		-		(47)		(2,868)		(290)		(3,158)
Adjustment to redemption value	-		-		-		2,563	-		-		-		2,563		(2,563)
Balances, March 31, 2022	135,525,006	$	136	$	326,346	$	17,437	-	$	-	$	6,207	$	350,126	$	15,996


	For the Nine Months Ended March 31, 2022
													Total		Redeemable
				Additional		Retained							Permanent		Noncontrolling
	Capital Stock			Paid-in		Earnings		Treasury Stock			Noncontrolling		Stockholders'		Interests
	Shares	Amount		Capital		(Deficit)		Shares	Amount		Interests		Equity		(Temporary Equity)		Net Income (Loss)

Balances, June 30, 2021	135,516,513		136		323,760		10,663	-		-		6,420		340,979		16,986
Stock-based compensation	8,493		-		2,586		-	-		-		-		2,586		-
Net income (loss)	-		-		-		6,188					(213)		5,975		(403)	$	5,572
Adjustment to redemption value	-		-		-		586	-		-		-		586		(586)
Balances, March 31, 2022	135,525,006	$	136	$	326,346	$	17,437	-	$	-	$	6,207	$	350,126	$	15,996

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	For the Three Months Ended March 31, 2021
													Total		Redeemable
				Additional									Permanent		Noncontrolling
	Capital Stock			Paid-in		Retained		Treasury Stock			Noncontrolling		Stockholders'		Interests		Net Income
	Shares	Amount		Capital		Earnings		Shares	Amount		Interests		Equity		(Temporary Equity)		(Loss)
Balances, December 31, 2020	132,718,461	$	133	$	24,552	$	15,330	16,197,849	$	(77,796)	$	6,492	$	(31,289)	$	-	$
Treasury stock retirement	(16,197,849)		(16)		(77,780)		—	(16,197,849)		77,796		—		—		-
Stock-based compensation	—		—		530		—	—		—		—		530		-
Reclassification of warrant liability	—		—		2,264		—	—		—		—		2,264		-
Initial public offering of common stock, net of offering costs of $25,334	18,995,901		19		373,561		—	—		—		—		373,580		-
Consolidation of equity method investment	—		—		—		—	—		—		—		—		16,838
Adjustment to redemption value	—		—		—		(344)	—		—		—		(344)		344
Net income (loss)	—		—		—		(10,510)	—		—		(89)		(10,599)		(263)	$	(10,862)
Balances, March 31, 2021	135,516,513	$	136	$	323,127	$	4,476	—	$	—	$	6,403	$	334,142	$	16,919

For the Three Months Ended March 31, 2021





Additional











Common Stock

Paid-in

Retained

Treasury Stock

Noncontrolling


Shares

Amount

Capital

Earnings

Shares

Amount

Interests

Total
Balances, December 31, 2020

132,718,461

$
133

$
24,552

$
15,330

16,197,849

$
(77,796)

$
6,492

$
(31,289)
Treasury stock retirement

(16,197,849)

(16)

(77,780)

(16,197,849)

77,796

—

—
Stock-based compensation

—

—

530

—

—

—

—

530
Reclassification of warrant liability

—

—

2,264

—

—

—

—

2,264
Initial public offering of common stock, net of offering costs of $25,334

18,995,901

19

373,561

—

—

—

—

373,580
Consolidation of equity method investment

—

—

—

—

—

—

16,838

16,838
Net loss

—

—

—

(10,510)

—

—

(352)

(10,862)
Balances, March 31, 2021

135,516,513

$
136

$
323,127

$
4,820

—

$
—

$
22,978

$
351,061


For the Nine Months Ended March 31, 2021





Additional











Common Stock

Paid-in

Retained

Treasury Stock

Noncontrolling


Shares

Amount

Capital

Earnings

Shares

Amount

Interests

Total
Balances, June 30, 2020

132,718,461

$
133

$
36,338

$
64,737

102,030

$
(193)

$
6,735

$
107,750
Treasury stock transaction

—

—

—

—

16,095,819

(77,603)

—

(77,603)
Treasury stock retirement

(16,197,849)

(16)

(77,780)

(16,197,849)

77,796

—

—
Stock option cancellation

—

—

—

(9,457)

—

—

—

(9,457)
Time based awards- option cancellation

—

—

(32,358)

—

—

—

—

(32,358)
Stock-based compensation

—

—

1,102

—

—

—

—

1,102
Reclassification of warrant liability

—

—

2,264

—

—

—

—

2,264
Capital contribution

—

—

20,000

—

—

—

—

20,000
Initial public offering of common stock, net of offering costs of $25,334

18,995,901

19

373,561

—

—

—

—

373,580
Consolidation of equity method investment

—

—

—

—

—

—

16,838

16,838
Net loss

—

—

—

(50,460)

—

—

(595)

(51,055)
Balances, March 31, 2021

135,516,513

$
136

$
323,127

$
4,820

—

$
—

$
22,978

$
351,061

~~The accompanying notes are an integral part of these condensed consolidated financial statements.~~

~~Table of Contents~~

~~INNOVAGE HOLDING CORP. AND SUBSIDIARIES~~

~~Condensed Consolidated Statements of Shareholders’ Equity~~

~~(In thousands, except per share data)~~

~~(Unaudited)~~


	For the Three Months Ended March 31, 2020
				Additional
	Common Stock			Paid-in		Retained		Treasury Stock			Noncontrolling
	Shares	Amount		Capital		Earnings		Shares	Amount		Interests		Total
Balances, December 31, 2019	132,718,461	$	133	$	36,067	$	44,502	102,030	$	(193)	$	7,002	$	87,511
Stock-based compensation	—		—		135		—	—		—		—	$	135
Net income (loss)	—		—		—		8,138	—		—		(148)	$	7,990
Balances, March 31, 2020	132,718,461	$	133	$	36,202	$	52,640	102,030	$	(193)	$	6,854	$	95,636

															For the Nine Months Ended March 31, 2021
	For the Nine Months Ended March 31, 2020																										Total		Redeemable
				Additional														Additional									Permanent		Noncontrolling
	Common Stock			Paid-in		Retained		Treasury Stock			Noncontrolling				Capital Stock			Paid-in		Retained		Treasury Stock			Noncontrolling		Stockholders'		Interests		Net Income
	Shares	Amount		Capital		Earnings		Shares	Amount		Interests		Total		Shares	Amount		Capital		Earnings		Shares	Amount		Interests		Equity		(Temporary Equity)		(Loss)
Balances, June 30, 2019	132,718,461	$	133	$	35,795	$	38,459	102,030	$	(193)	$	7,248	$	81,442
Balances, June 30, 2020															132,718,461	$	133	$	36,338	$	64,737	102,030	$	(193)	$	6,735	$	107,750	$	-	$
Treasury stock transaction															—		—		—		—	16,095,819		(77,603)		—		(77,603)		-
Treasury stock retirement															(16,197,849)		(16)		(77,780)		—	(16,197,849)		77,796		—		—		-
Stock option cancellation															—		—		—		(9,457)	—		—		—		(9,457)		-
Time based awards- option cancelation															—		—		(32,358)		—	—		—		—		(32,358)		-
Stock-based compensation	—		—		407		—	—		—		—	$	407	—		—		1,102		—	—		—		—		1,102		-
Reclassification of warrant liability															—		—		2,264		—	—		—		—		2,264		-
Capital contribution															—		—		20,000		—	—		—		—		20,000		-
Initial public offering of common stock, net of offering costs of $25,334															18,995,901		19		373,561		—	—		—		—		373,580		-
Consolidation of equity method investment															—		—		—		—	—		—		—		—		16,838
Adjustment to redemption value															—		—		—		(344)	—		—		—		(344)		344
Net income (loss)	—		—		—		14,181	—		—		(394)	$	13,787	—		—		—		(50,460)	—		—		(332)		(50,792)		(263)	$	(51,055)
Balances, March 31, 2020	132,718,461	$	133	$	36,202	$	52,640	102,030	$	(193)	$	6,854	$	95,636
Balances, March 31, 2021															135,516,513	$	136	$	323,127	$	4,476	—	$	—	$	6,403	$	334,142	$	16,919

The accompanying notes are an integral part of these condensed consolidated financial statements.

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INNOVAGE HOLDING CORP. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

For the Nine Months Ended


March 31,

March 31,

2021

2020
Operating Activities




Net income (loss)

$
(51,055)

$
13,787
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:



Loss (gain) on disposal of assets

2

1,021
Provision for uncollectible accounts

4,144

3,909
Depreciation and amortization

9,262

8,310
Gain on equity method investment

(10,871)

—
Loss on extinguishment of long-term debt

8,494

—
Amortization of deferred financing costs

948

412
Stock based compensation

1,102

407
Change in fair value of warrants

2,264

—
Deferred income taxes

(3,464)

313
Equity loss

1,343

203
Change in fair value of contingent consideration

—

(250)
Changes in operating assets and liabilities, net of acquisitions



Accounts receivable, net

(1,402)

(6,929)
Prepaid expenses and other

635

274
Income taxes receivable

1,613

2,562
Deposits and other

(606)

689
Accounts payable and accrued expenses

7,717

1,372
Reported and estimated claims

114

(816)
Due to Medicaid and Medicare

12,732

(5,245)
Deferred revenue

—

2
Net cash provided by (used in) operating activities

(17,028)

20,021

Investing Activities



Purchases of property and equipment

(14,083)

(9,088)
Proceeds from the sale of equipment

—

169
Proceeds from net working capital settlements

—

1,129
Purchase of intangible assets

(2,000)

—
Net cash used in investing activities

(16,083)

(7,790)

Financing Activities



Distribution to owners

(9,458)

—
Capital contributions

20,000

—
Payments on capital lease obligations

(1,685)

(850)
Proceeds from long-term debt

375,000

25,000
Principal payments on long-term debt

(512,649)

(1,447)
Payment of debt issuance costs

(8,896)

—
Proceeds from initial public offering of common stock

373,580

—
Treasury stock purchase

(77,603)

—
Payments under acquisition agreements

(3,622)

—
Payments related to option cancellation

(32,358)

—
Net cash provided by financing activities

122,309

22,703

INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS & RESTRICTED CASH

$
89,198

$
34,934
CASH, CASH EQUIVALENTS & RESTRICTED CASH BEGINNING OF PERIOD

114,565

61,196
CASH, CASH EQUIVALENTS & RESTRICTED CASH END OF PERIOD

$
203,763

$
96,130

Supplemental Cash Flows Information



Interest paid

$
16,251

$
10,330
Income taxes paid

7,047

2,080
Prepayment penalty on extinguishment of debt

6,000

—
Property and equipment included in accounts payable

224

—
Property and equipment purchased under capital leases

3,517

1,115


	For the Nine Months Ended March 31,
	2022		2021
Operating Activities
Net income (loss)	$	5,572	$	(51,055)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Loss on disposal of assets		358		2
Provision for uncollectible accounts		4,834		4,144
Depreciation and amortization		10,435		9,262
Gain on equity method investment		—		(10,871)
Loss on extinguishment of long-term debt		—		8,494
Amortization of deferred financing costs		322		948
Stock-based compensation		2,586		1,102
Deferred income taxes		81		(3,464)
Change in fair value of warrants		—		2,264
Change in fair value of contingent consideration		—		1,343
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable, net		(4,157)		(1,402)
Prepaid expenses and other		(4,323)		635
Income tax receivable		(60)		1,613
Deposits and other		(1,501)		(606)
Accounts payable and accrued expenses		4,705		7,717
Reported and estimated claims		2,778		114
Due to Medicaid and Medicare		2,429		12,732
Net cash provided by (used in) operating activities		24,059		(17,028)
Investing Activities
Purchases of property and equipment		(20,141)		(14,083)
Purchase of intangible assets		(1,437)		(2,000)
Purchase of cost method investment		(2,000)		—
Net cash used in investing activities	$	(23,578)	$	(16,083)
Financing Activities
Distributions to owners	$	—	$	(9,458)
Owner contributions		—		20,000
Payments on capital lease obligations		(1,829)		(1,685)
Proceeds from long-term debt		—		375,000
Principal payments on long-term debt		(2,841)		(512,649)
Payment of financing costs and debt premiums		—		(8,896)
Proceeds from initial public offering of common stock		—		373,580
Treasury stock purchases		—		(77,603)
Payments under acquisition agreements		—		(3,622)
Payments related to option cancellation		—		(32,358)
Net cash provided by (used in) financing activities		(4,670)		122,309

INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS & RESTRICTED CASH		(4,189)		89,198
CASH, CASH EQUIVALENTS & RESTRICTED CASH, BEGINNING OF PERIOD		203,700		114,565
CASH, CASH EQUIVALENTS & RESTRICTED CASH, END OF PERIOD	$	199,511	$	203,763

Supplemental Cash Flows Information
Interest paid	$	1,452	$	16,251
Income taxes paid	$	84	$	7,047
Prepayment penalty on extinguishment of debt	$	—	$	6,000
Intangibles and property and equipment included in accounts payable	$	4,577	$	224
Property and equipment purchased under capital leases	$	8,057	$	3,517

The accompanying notes are an integral part of these condensed consolidated financial statements.

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INNOVAGE HOLDING CORP. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

~~(Dollars in thousands, unless otherwise stated)~~

(Unaudited)

Note 1:Business

InnovAge Holding Corp. (formerly, TCO Group Holdings, Inc.) ~~and certain wholly owned subsidiaries were~~was formed ~~as for-profit corporations effective~~ May 13, 2016, ~~for~~to acquire the ~~purpose of purchasing all the outstanding common stock~~business of Total Community Options, Inc. d/b/a InnovAge, which was formed in May 2007. In connection with this purchase, Total Community Options, Inc. and certain of its subsidiaries converted from not-for-profit organizations to for-profit corporations, and Total Community Options Foundation, Inc. (“Foundation”) and Johnson Adult Day Program, Inc. (“Johnson”), both not-for-profit organizations, separated from Total Community Options, Inc. In connection with the Company’s initial public offering (“IPO”), which occurred in March 2021, we changed the name of our ~~company~~Company from TCO Group Holdings, Inc. to InnovAge Holding Corp.

InnovAge Holding Corp. and its subsidiaries, ~~which~~ are headquartered in Denver, ~~Colorado and employ approximately 2,100 people, have a strong record of innovation, quality, and sensitivity to the needs of participants and staff.~~Colorado. The Company manages, and in many cases directly provides, a broad range of medical and ancillary services for seniors in need of care and support to safely live independently in their homes and communities, 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 Program of All-Inclusive Care for the Elderly (“PACE”) center and third-party medical appointments; and care management. The Company manages its business as 1 reportable segment, PACE.

~~The~~As of March 31, 2022, the Company ~~serves~~served approximately ~~6,700~~6,800 PACE participants, making it the largest PACE provider in the United States of America (the “U.S.”) based upon participants served, and operates 18 PACE centers across Colorado, California, New Mexico, Pennsylvania and Virginia.

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.

On March 3,8, 2021, the Company’s Registration Statement on Form S-1 with respect to the Company’s initial public offering (“IPO”) of shares of common stock, par value $0.001 per share, was declared effective by the Securities and Exchange Commission (“SEC”).we completed our IPO. The Company’s common stock began trading ~~on March 3, 2021~~ on the Nasdaq Stock Market LLC (“NASDAQ”) under the ticker symbol “INNV”.

On March 8, 2021, we completed our IPO in which we issued and sold 16,666,667 shares of our common stock at an offering price of $21.00 per share. In addition, the underwriters had the option to purchase 2,500,000 additional shares of common stock, and on March 9, 2021, the underwriters exercised the option to purchase 2,329,234 shares of common stock. We received net proceeds of $373.6 million, after deducting underwriting discounts and commissions of $23.9 million and deferred offering costs of $1.4 million. Deferred, direct offering costs were capitalized and consisted of fees and expenses incurred in connection with the sale of our common stock in the IPO, including the legal, accounting, printing and other offering related costs. Upon completion of the IPO, these deferred offering costs were reclassified from current assets to stockholders’ equity and recorded against the net proceeds from the offering.

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Note 2:Summary of Significant Accounting Policies

The Company described its significant accounting policies in Note 2, “Summary of Significant Accounting Policies” of the ~~notes~~Notes to ~~consolidated financial statements~~Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended June 30, ~~2020, which were included in the IPO Prospectus.~~2021 (“2021 10-K”). During the nine months ended March 31, ~~2021,~~2022, there were no significant changes to those accounting policies. ~~Those policies impacted by the new accounting pronouncements adopted during the period are further described below in “Recent Accounting Pronouncements.”~~

Basis of Preparation and Principles of Consolidation

The unaudited interim condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such regulations. These financial statements have been prepared on a basis consistent with the accounting principles applied for the fiscal year ended June 30, ~~2020.~~2021. In the opinion of management, all adjustments (consisting of all normal and recurring adjustments) considered necessary for a fair presentation have been included. The condensed consolidated financial statements include the accounts of InnovAge, its wholly owned subsidiaries, ~~and~~ variable interest entities (“VIEs”)

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for which it is the primary beneficiary and entities for which it has a controlling interest. All intercompany accounts and transactions have been eliminated in consolidation.

The Company does not have any components of comprehensive income and comprehensive income is equal to net income reported in the statements of operations for all periods presented.

~~Property and Equipment~~Restatement of Prior Period Financial Statements

~~Property and equipment were comprised~~Subsequent to the issuance of the ~~following~~Company’s consolidated financial statements as of and for the year ended June 30, 2021, we identified an error in our consolidated balance sheet and statement of stockholders’ equity as of June 30, 2021 related to the presentation of redeemable noncontrolling interests. Additionally, the error also impacted our condensed consolidated statements of shareholders’ equity for the three months and nine-months ended March 31, 2021. The Company incorrectly recorded redeemable noncontrolling interests of $17.0 million and $16.9 million as permanent equity rather than temporaryequity as of June 30, 2021 and March 31, 2021, respectively. As a result, the Company restated the June 30, 2021 and March 31, 2021 condensed consolidated financial statements to reflect this reclassification from permanent to temporary equity and to record the related adjustments to redemption value as of June 30, 2021 and March 31, 2021. Management has evaluated the materiality of this misstatement and concluded that it is not material to the prior period.

The effect of the restatement on the consolidated balance sheet as of June 30, 2021 is as follows (in thousands):


	As Previously
	Reported	Adjustments	As Restated
Redeemable Noncontrolling Interests (See Note 4)	—	16,986	16,986
Retained earnings	11,250	(587)	10,663
Total InnovAge Holding Corp.	335,146	(587)	334,559
Noncontrolling interests	22,819	(16,399)	6,420
Total stockholders’ equity	357,965	(16,986)	340,979

The effect of the restatement on the balances as of June 30, 2021 included in the consolidated statement of stockholders’ equity as of March 31, ~~2021 and June 30, 2020:~~2022 is as follows (in thousands):

Estimated

(In thousands)

Useful Lives

March 31, 2021

June 30, 2020
Land

N/A

$
11,980

$
8,580
Buildings and leasehold improvements

10 - 40 years or term of lease

104,727

79,514
Software

3 - 5 years

12,355

11,387
Equipment and vehicles

3 - 7 years

35,201

28,814
Construction in progress

N/A

19,257

7,069

183,520

135,364
Less accumulated depreciation and amortization



(42,005)

(32,870)
Total property and equipment, net



$
141,515

$
102,494

~~Depreciation of $8.8 million and $7.8 million was recorded during the nine months ended March 31, 2021 and 2020, respectively.~~

~~Revenue Recognition~~

The Company’s PACE operating unit provides comprehensive health care services to participants on the basis of fixed or capitated fees per participant that are paid monthly by Medicare, Medicaid, the VA, and private pay sources. Medicaid and Medicare capitation revenues are based on per-member, per-month capitation rates under the PACE program. Capitation payments are recognized as revenue in the period in which they relate.


				Redeemable
			Total Permanent	Noncontrolling
	Retained	Noncontrolling	Stockholders’	Interests
	Earnings	Interests	Equity	(Temporary Equity)
As Previously Reported
Balances, June 30, 2021	11,250	22,819	357,965	—
Adjustments
Balances, June 30, 2021	(587)	(16,399)	(16,986)	16,986
As Restated
Balances, June 30, 2021	10,663	6,420	340,979	16,986

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Capitation payments received for PACE participants under Medicare Advantage plans are subject to retroactive premium risk adjustments based upon various factors. The Company estimates the amount of current-year adjustments in revenues. Any corresponding retroactive adjustments by CMS are recorded as final settlements are determined.

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

The ~~audit process and~~effect of the ~~resolution~~restatement on the consolidated statement of ~~significant related matters~~stockholders’ equity for the three months ended March 31, 2021 is as ~~a result~~follows (in thousands):


				Redeemable
			Total Permanent	Noncontrolling
	Retained	Noncontrolling	Stockholders’	Interests	Retained
	Earnings	Interests	Equity	(Temporary Equity)	Earnings
As Previously Reported
Consolidation of equity method investment	—	16,838	16,838	—	—
Net income (loss)	(10,510)	(352)	(10,862)	—	—
Adjustment to redemption value	—	—	—	—	—
Balances, March 31, 2021	4,820	22,978	351,061	—	—
Adjustments
Consolidation of equity method investment	—	(16,838)	(16,838)	16,838	—
Net income (loss)	—	263	263	(263)	(10,862)
Adjustment to redemption value	(344)	—	(344)	344	—
Balances, March 31, 2021	(344)	(16,575)	(16,919)	16,919	—
As Restated
Consolidation of equity method investment	—	—	—	16,838	—
Net income (loss)	(10,510)	(89)	(10,599)	(263)	(10,862)
Adjustment to redemption value	(344)	—	(344)	344	—
Balances, March 31, 2021	4,476	6,403	334,142	16,919	—

The effect of ~~these examinations often are not finalized until several years after~~ the ~~services are rendered. Any adjustments resulting from these examinations are recorded in~~restatement on the ~~period the Company is notified~~consolidated statement of ~~them.~~

At times, the Company accepts participants into the program pending final authorization from Medicaid. If Medicaid coverage is later denied and there are no alternative resources available to pay for services, the participant is disenrolled. Any costs incurred on behalf of these participants were nominalstockholders’ equity for the nine months ended March 31, 2021 is as follows (in thousands):


				Redeemable
			Total Permanent	Noncontrolling
	Retained	Noncontrolling	Stockholders’	Interests	Retained
	Earnings	Interests	Equity	(Temporary Equity)	Earnings
As Previously Reported
Consolidation of equity method investment	—	16,838	16,838	—	—
Net income (loss)	(50,460)	(595)	(51,055)	—	—
Adjustment to redemption value	—	—	—	—	—
Balances, March 31, 2021	4,820	22,978	351,061	—	—
Adjustments
Consolidation of equity method investment	—	(16,838)	(16,838)	16,838	—
Net income (loss)	—	263	263	(263)	(51,055)
Adjustment to redemption value	(344)	—	(344)	344	—
Balances, March 31, 2021	(344)	(16,575)	(16,919)	16,919	—
As Restated
Consolidation of equity method investment	—	—	—	16,838	—
Net income (loss)	(50,460)	(332)	(50,792)	(263)	(51,055)
Adjustment to redemption value	(344)	—	(344)	344	—
Balances, March 31, 2021	4,476	6,403	334,142	16,919	—

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Property and ~~2020.~~Equipment

~~Capitated revenues consisted~~Property and equipment were comprised of the following ~~sources for~~as of March 31, 2022 and June 30, 2021:


	Estimated
dollars in thousands	Useful Lives	March 31, 2022		June 30, 2021
Land	N/A	$	11,980	$	11,980
Buildings and leasehold improvements	10 - 40 years		121,661		104,724
Software	3 - 5 years		15,107		13,316
Equipment and vehicles	3 - 7 years		46,655		35,341
Construction in progress	N/A		22,336		22,130
			217,739		187,491
Less accumulated depreciation and amortization			(53,857)		(44,776)
Total property and equipment, net		$	163,882	$	142,715

Depreciation of $3.8 million and $3.2 million was recorded during the three months ended March 31, 2022 and 2021, respectively. Depreciation of $9.9 million and $8.8 million was recorded during the nine months ~~ended:~~

March 31,

March 31,


2021

2020

Medicaid

53
%
56
%
Medicare

46
%
43
%
Private pay and other

1
%
1
%
Total

100
%
100
%

~~The Company also provides prescription drug benefits in accordance with Medicare Part D. Monthly payments received from CMS~~ended March 31, 2022 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.

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.2021, respectively.

Coronavirus Pandemic (“COVID-19”)

In March 2020, the World Health Organization declared COVID-19 a pandemic. The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption. Governments in affected regions have implemented, and may continue to implement, safety precautions which include quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures as they deem necessary. Many organizations and individuals, including the Company and its employees, continue to take additional steps to avoid or reduce infection, including limiting travel and working from home. These measures are disrupting normal business operations both in and outside of affected areas and have had significant negative impacts on businesses worldwide. As a PACE ~~company,~~organization, we have been and will continue to be impacted by the effects of ~~COVID-19; however, we~~COVID-19. We closed all our centers in March 2020 and transitioned to a 100% in-home and virtual care model. We believe that the general lack of in-person interaction and the reduction in healthcare personnel, and specifically, trained personnel, impacted our ability to adhere to the complex government laws and regulations that apply to our business. We remain committed to carrying out our mission of caring for our participants. We continue to closely monitor the impact of COVID-19 on all aspects of our business, including the impacts to our employees, participants and ~~suppliers; however, at this time,~~suppliers. Due to the numerous evolving factors, we are unable to reliably estimate the ultimate impact the pandemic will have on our consolidated financial condition, results of operations or cash flows.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into legislation. ~~The CARES Act provides for $100.0 billion to healthcare providers, including hospitals on the front~~

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~~lines of the COVID-19 pandemic.~~ Under the CARES Act, the state of Pennsylvania signed into law the Act 24 of 2020, which allocates $10.0 million of funding from the federal CARES Act to managed long term care organizations. Funding from the Act 24 of 2020 must be used to cover necessary COVID-19 related costs incurred between March 1, 2020 and November 30, 2020 for entities in operation as of March 31, 2020. We received ~~$2.0~~$1.0 million in funding under the Act 24 of ~~2020. Of this amount, $1.0 million~~2020, which was allocated to InnovAge centers in ~~Pennsylvania and~~Pennsylvania. Of the $1.0 million, $0.7 million was recognized ~~as of~~prior June ~~20, 2020. The~~30, 2020 and the remaining ~~unrecognized~~ balance of $0.3 million was recognized during the ~~nine months~~year ended ~~March 31, 2021 as a reduction of expense within the consolidated statement of operations.~~June 30, 2021. The CARES Act also provides for the temporary suspension of the automatic 2% reduction of Medicare claim reimbursements (sequestration) for the period of May 1, 2020 through December 31, 2020. The Consolidated Appropriations Act, 2021, enacted December 27, 2020, extended this suspension for three more months, through March 31, 2021. H.R. 1868, enacted on April 14, 2021 further extends the suspension through December 31, 2021. On December 10, 2021 the “Protecting Medicare and American Farmers from Sequester Cuts Act” extends the 2% Medicare sequester moratorium through March 31, 2022, and adjusts the sequester to 1% between April 1, 2022 and June 30, 2022.

~~Recent~~Recently Adopted Accounting Pronouncements

~~Revenue Recognition~~Income Taxes

In ~~May 2014,~~December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU ~~2014-09~~2019-12, ~~Revenue from Contracts with Customers~~Income Taxes Topic 740-Simplifying the Accounting for Income Taxes (“ASU ~~2014-09”~~2019-12”), which ~~requires an entity~~intended to ~~recognize the amount of revenue~~simplify various aspects related to ~~which it expects to be entitled~~accounting for ~~the transfer of promised goods or services to customers. The guidance will replace most existing revenue recognition guidance when it becomes effective. Subsequent~~income taxes. ASU 2019-12 removes certain exceptions to the ~~issuance~~general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application of ASU 2014-09, the FASB also issued several updates related to ASU 2014-09 including deferring its adoption date. As per the latest ASU 2020-05, issued by the FASB, the entities who have not yet issued or made available for issuance the financial statements as of June 3, 2020 can defer the new guidance for one year.Topic 740. This guidance is effective for ~~the annual reporting period~~companies with fiscal years beginning ~~July 1,~~after December 15, 2020, including interim periods therein, and interim reporting periods within the annual reporting period beginning July 1, 2021. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method).early adoption is permitted. The Company ~~plans on applying~~adopted ASU 2019-12 during the ~~modified retrospective method of adoption for this guidance. The Company is in the process of evaluating the impact that the pronouncement will~~quarter ended September 30, 2021 and it did not have a material effect on the Company’s condensed consolidated financial statements.

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Recent Accounting Pronouncements Not Yet Adopted

Leases

In February 2016, the FASB issued ASU 2016-02 Leases (“~~Topic 842”~~ASU 2016-02”), which ~~outlines a comprehensive~~was intended to increase transparency and comparability among organizations by recognizing lease ~~accounting model~~assets and ~~supersedes the current lease guidance. The new guidance requires lessees to recognize almost all of their leases~~liabilities on the balance sheet ~~by recording~~and disclosing key information about leasing arrangements. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability, ~~and corresponding right-of-use assets~~measured on a discounted basis, at the commencement date for all leases with ~~lease~~ terms greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. As per the latest ASU 2020-05 issued by FASB, the entities who have not yet issued or made available for issuance the financial statements as of June 3, 2020 can defer the new guidance for one year. The Company will be adoptingAdditionally, this guidance ~~for the annual reporting period beginning July 1, 2022, and interim reporting periods within the annual reporting period beginning July 1, 2023. This~~ will require ~~application~~disclosures to help investors and other financial statement users to better understand the amount, timing, and uncertainty of ~~the new accounting~~cash flows arising from leases, including qualitative and quantitative requirements. The guidance should be applied under a modified retrospective transition approach for leases existing at the beginning of the earliest comparative period presented in the ~~year of adoption.~~adoption-period financial statements. Any leases that expire before the initial application date will not require any accounting adjustment. In June 2020, 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 December 15, 2022, with early adoption permitted. The Company iswill adopt this ASU in the ~~process~~fiscal year beginning July 1, 2022 and has not yet determined the effect of ~~evaluating~~ the ~~impact that the pronouncement will have~~standard on ~~the consolidated~~its ongoing financial ~~statements.~~reporting.

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 (“ASU 2019-04”), 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.

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ASU 2019-04 is effective for the Company for 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 ~~ongoing~~condensed consolidated financial ~~reporting.~~statements.

In June 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (“Subtopic 470-20”) and Derivatives and Hedging – Contracts in Entity’s Own Equity (“Subtopic 815-40”). This ASU amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. These amendments seek to remove certain requirements from the settlement guidance and clarify scope requirements. The ASU is effective for public companies for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company will adopt this guidance for the annual and interim reporting periods beginning July 1, 2021. The Company has not determined the effect of the standard on its ongoing financial reporting.

~~Non-employee awards~~

~~In June 2018, the FASB issued ASU 2018-07,~~ ~~Compensation—Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting~~ (“ASU 2018-07”), which simplifies the accounting for share-based payments granted to nonemployees for goods and services. The Company will be adopting this guidance for the annual reporting period beginning July 1, 2020, and interim reporting periods within the annual reporting period beginning July 1, 2021. The Company has not determined the effect of the standard on its ongoing financial reporting.

We do not expect that any other recently issued accounting guidance will have a significant effect on our condensed consolidated financial statements.

Note 3:~~Equity~~Revenue Recognition

~~Equity owner~~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.

~~On July 27, 2020, InnovAge Holding Corp. (formerly TCO Group Holdings, Inc.), Ignite Aggregator LP (“Purchaser”),~~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 ~~former equity holders of InnovAge Holding Corp.~~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 per member, per month (“~~Sellers”~~PMPM”) ~~entered into a Securities Purchase Agreement (the “Agreement”), effective July 27, 2020. Under the terms~~basis. We receive 100% of the ~~Agreement,~~pooled capitated payment to directly provide or manage the Sellers sold a portion of their equity interest to the Purchaser. The Purchaser and the Sellers then contributed their equity interests in the Company to a newly formed limited partnership, TCO Group Holdings, L.P. (the “LP”) resulting in the Company being wholly owned by the LP.

Concurrently with the entry into the Agreement, the Company amended and restated its 2016 Credit Agreement (as defined below), see Note 8 for further discussion. A portion of the proceeds from the 2016 Credit Agreement were used by the Company to repurchase 16,095,819 shares of its common stock for $77.6 million from certain members of management, including certain members of the Board of Directors, and certain membershealthcare needs of our ~~equity partner. The common stock was then recognized as Treasury stock. The Treasury stock was retired in March 2021, see Note 14.~~

Additionally, as part of the Agreement, the Company executed an Option Cancellation Agreement (the “Cancellation Agreement”), which canceled the Company’s common stock option awards of 16,994,975 granted under the 2016 Incentive Plan for $74.6 million. Such cancellation resulted in a settlement of the awards. Vesting of the contingent performance-based awards was not deemed probable at the time of the settlement resulting in the settlement of the contingent performance-based awards being recorded as Corporate, general and administrative. Vesting of the time vesting awards was deemed probable at the time of the settlement resulting in a portion of the settlement of the time vesting awards being recorded as Corporate, general and administrative expense and the remainder being recorded as a reduction to Additional paid-in capital. Of the total settlement, $42.2 million was recorded as Corporate, general and administrative expense and $32.4 million was recorded as a reduction to Additional paid-in capital. The Cancellation Agreement resulted in the option holders receiving the same amount of cash that they would have received had they exercised their options, participated in the repurchase described above and sold their remaining shares.participants.

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As part of the transaction, the Company incurred $22.6 million in transaction costs, of which $13.1 million was recognized as Corporate, general and administrative expense and $9.5 million was recognized as a distribution to owner as the costs were paid on behalf of the owners.

~~Capital Contribution~~

~~On October 15, 2020 Finback Pace, LP contributed $20.0 million for an investment in the LP, which in turn contributed the funds to the Company.~~

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.

The Company disaggregates capitation revenue from the following sources for the nine months ended:


	March 31,
	2022		2021
Medicaid	53	%	53	%
Medicare	46	%	46	%
Private pay and other	1	%	1	%
Total	100	%	100	%

The Company determined 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) 12% of capitation revenues for both the nine months ended March 31, 2022 and 2021 and (ii) 23% and 25% of external provider costs for the nine months ended March 31, 2022 and 2021, respectively.

Our accounts receivable as of March 31, 2022 and June 30, 2021 is primarily from capitation revenue arrangements. The concentration of net receivables from participants and third-party payers was as follows:


	March 31,		June 30,
	2022		2021
Medicaid	50	%	60	%
Medicare	37	%	20	%
Private pay and other	13	%	20	%
Total	100	%	100	%

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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 $3.9 million as of March 31, 2022, compared to $4.4 million as of June 30, 2021. 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. Other service revenue was 0.2% and 0.4% of total revenue for the nine months ended March 31, 2022 and 2021, respectively, and 0.2% and 0.3% for the three months ended March 31, 2022 and 2021, respectively. Accounts receivable related to other service revenue were not significant as of both March 31, 2022 and June 30, 2021.

Note 4:~~Variable Interest Entity~~Investments

The Company holds equity method and cost method investments as of:


		March 31,		June 30,
in thousands	2022		2021
Cost method investments	$	4,645	$	2,645
Equity method investments		848		848
Total investments	$	5,493	$	3,493

Nonconsolidated Entities

Cost Method Investments

The Company maintains 2 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 nine months ended March 31, 2022 and 2021, there were 0 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

Since 2019, the Company has maintained an investment of $2.6 million in DispatchHealth Holdings, Inc. (“Dispatch Health”). Dispatch Health offers complete in-home on-demand healthcare. The balance of the Company’s investment is $2.6 million which represents the maximum exposure to loss.

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Equity Method Investments

Pinewood Lodge

The Company’s operations ~~also~~ include a Senior Housing unit that primarily includes the accounts of Continental

Community Housing (“CCH”), the general partner of Pinewood Lodge, LLP (“ PWD”)~~; a 0.01% partnership interest each in PWD and InnovAge Senior Housing Thornton, LLC (“SH1”), both of~~ which ~~were~~was organized to develop, construct, own, maintain, and operate certain apartment complexes intended for rental to low-income elderly individuals aged 62 or older.

PWD 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 recorded in Equity method investments in the accompanying consolidated balance sheets.~~accounting. The equity earnings of PWD are insignificant. ~~The~~As of March 31, 2022, the balance of the Company’s investment in PWD is $0.8 million which represents the maximum exposure to loss.

Noncontrolling Interest

Senior Housing

The Company’s operations include a 0.01% partnership interest in InnovAge Senior Housing Thornton, LLC (“SH1”), which was organized to develop, construct, own, maintain, and operate certain apartment complexes intended for rental to low-income elderly individuals aged 62 or older.

SH1 is a VIE. The Company is the primary beneficiary of SH1 and consolidates SH1. The Company is the primary beneficiary of SH1 as 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 senior housing facility. The Company has provided a subordinated loan to SH1 and has provided a guarantee for a convertible term loan held by SH1.

~~The following table shows the assets and liabilities of SH1 as of March 31, 2021 and June 30, 2020:~~Redeemable Noncontrolling Interest

~~In thousands (000’s)~~InnovAge Sacramento

March 31,

June 30,
Assets/Liabilities

2021

2020
Cash and cash equivalents

$
498

$
435
Accounts receivable

3

1
Prepaid expenses and other

13

7
Property, plant and equipment, net

10,143

10,501
Deposits and other, net

386

376
Accounts payable and accrued expenses

279

199
Current portion long-term debt

39

38
Noncurrent liabilities

454

454
Long-term debt, net of debt issuance costs

3,838

3,901

~~Note 5:~~~~Nonconsolidated Entities~~

Prior to January 1, 2021, the Company had 2 nonconsolidated equity method investments, PWD, see Note 4 for further discussion, and InnovAge California Pace-Sacramento, LLC (“InnovAge Sacramento”).

On March 18, 2019, in connection with the formation of InnovAge Sacramento, the joint venture with Adventist Health System/West (“Adventist”) and Eskaton Properties, Incorporated (“Eskaton”), 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,

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InnovAge Sacramento. Further, Adventist contributed $5.8 million in cash and Eskaton contributed $3.0 million in cash for membership interests of ~~26.41%~~26.4% and ~~13.69%~~13.7%, respectively. ~~The~~

Prior to January 1, 2021, the Company did not consolidate InnovAge Sacramento. In the third quarter of fiscal year 2021, the Company made an additional contribution of $52,000 ~~dollars~~ to obtain an additional 0.1% membership interest in the joint venture. With the acquisition of the additional 0.1% membership interest, the Company obtained control of InnovAge Sacramento effective January 1, 2021. Accordingly, beginning January 1, 2021, the results of InnovAge Sacramento are included in our consolidated results of operations.

~~The InnovAge California PACE-Sacramento LLC Limited Liability~~Before consolidation on January 1, 2021, the Company ~~Agreement (the “JV Agreement”) includes numerous provisions whereby, if certain conditions are met,~~recorded its proportionate share of net loss, which was a loss of $1.3 million for the six months ended December 31, 2020, as equity loss in the statement of operations.

When 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. As of March 31, 2021, none of the conditions specified in the JV Agreement had been met.

~~At the consummation of the JV Agreement,~~was formed, the Company issued warrants to Adventist (the “Sacramento Warrants”) to purchase 5% of its issued and outstanding common stock ~~to Adventist Health System/West at a~~ par value of $0.001 per share, ~~and~~at an exercise price equal to the fair market value per share at the time of exercise of ~~this~~the warrant. ~~The~~Pursuant to the original warrants, the Sacramento Warrants were to fully vest on ~~the exercise date, which is defined as~~ the date on which Adventist ~~has~~would have made aggregate capital contributions in an amount greater than $25.0 million to one or more joint venture entities in which Adventist and the Company ~~hold~~held equity (the “Investment Threshold”).

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On February 9, 2021, we entered into an amendment agreement with ~~our joint venture partner~~ Adventist to amend the Sacramento Warrants. The amendment removes the Investment Threshold requirement and grants Adventist the right to purchase up to $15.0 million of our common stock at an exercise price equal to the initial public offering price. The warrant iswas exercisable for one year beginning onMarch 8, 2021, the date of the consummation of ~~the~~our IPO. ~~As of~~The Sacramento Warrants expired in March ~~31, 2021, Adventist had not exercised any warrants.~~2022, without being exercised.

At inception, the Sacramento Warrants were initially determined to be equity-based payments to nonemployees and as such the measurement date for these warrants was considered to be the date when the Investment Threshold is reached. At the time of the amendment, due to the removal of the Investment Threshold, the ~~warrants~~Sacramento Warrants were evaluated under ASC 815-40, “Contracts in an Entity’s Own Equity,” which resulted in a liability classification from the date of the amendment through completion of our IPO, due to the variable amount of shares which could be issued. Upon completion of the IPO, the number of shares to be issued were no longer variable, which resulted in the warrants being recorded in equity. A charge of $2.3 million, representing the fair value of the ~~warrants~~Sacramento Warrants from inception through the date of completion of the IPO, was recorded in other income (expense) in the condensed consolidated statement of operations.

WeAs described above, we obtained control of InnovAge Sacramento through acquisition of an additional 0.1% membership interest, which we consider to be a step acquisition, whereby the Company remeasured the previously held equity method investment to fair value. This resulted in a gain on consolidation of $10.9 million, which is recorded in gain on equity method investment in the condensed consolidated statement of operations. The fair value of the previously held equity investments was determined using a discounted cash flow model.

~~We accounted for the transaction as a business combination, which requires that we record the assets acquired and liabilities assumed at fair value.~~ The amount by which the purchase price exceeds the fair value of the net assets acquired is recorded as goodwill.

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The fair value of the ~~assets acquired and net liabilities assumed~~previously held equity investments was determined using a discounted cash flow model. This resulted in ~~the step acquisition are as follows as~~recording a gain on consolidation of ~~January 1, 2021:~~

January 1,
(In thousands)

2021
Assets:


Cash

$
646
Accounts receivable

786
Property and equipment, net

30,667
Goodwill

8,078
Total assets

40,177

Liabilities:


Accounts payable

530
Reported and estimated claims

330
Due to Medicaid and Medicare

77
Capital leases

428
Other liabilities

48
Total liabilities

$
1,413

~~The following table sets forth the results of InnovAge Sacramento for the six months ended December 31, 2020. The results of InnovAge Sacramento are consolidated beginning January 1, 2021.~~

Six Months Ended
(In thousands)

December 31, 2020
Revenue:

Total revenue

$
2,297
Less: members’ interest

921
The Company’s interest

1,376
Cost of operations:

Total cost of operations

4,538
Less: members’ interest

1,820
The Company’s interest

2,718
The Company’s interest in net income (loss)

$
(1,342)

~~The overall operations for InnovAge Sacramento were insignificant~~$10.9 million during the ~~three and nine months ended March 31, 2021.~~

~~Note 6:~~~~Goodwill and Other Intangible Assets~~

Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $124.2 million at March 31, 2021 and $116.1 million as of June 30, 2020. The increase of $8.1 million resulted from the consolidation of InnovAge Sacramento beginning on January 1, 2021. 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 3 reporting units. There were no indicators of impairment identified and 0 goodwill impairments recorded during the nine months ended March 31, 2021 and 2020.

The Company has Other intangible assets, net that are both definite and indefinite lived. Other intangible assets that are definite-lived are amortized over their useful lives. Other intangible assets that are definite-lived amounted to $6.6 million at both March 31, 2021 and June 30, 2020 and associated accumulated amortization amounted to $1.9 million and $1.4 million at March 31, 2021 and June 30, 2020, respectively. The Company

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~~recorded amortization expense of $0.2 and $0.5 million for both the three and nine months ended March 31, 2021 and 2020, respectively.~~

On October 20, 2020, the Company paid $2.0 million for the right to serve PACE members in Florida, which was recognized within the consolidated balance sheet as Other intangible assets, net and are indefinite-lived.

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 0 intangible asset impairments recorded during the nine months ended March 31, 2021 and 2020.

~~Note 7:~~~~Leases~~

Property and equipment includes property under various capital leases. These leases have expiration dates ranging from January 2021 to September 2025, varying interest rates, and generally include an option to purchase the equipment at fair value at the end of the underlying lease period. The Company’s capital leases included the following at March 31, 2021 and June 30, 2020:

~~In thousands (000’s)~~

March 31, 2021

June 30, 2020
Equipment

$
13,777

$
9,845
Less accumulated depreciation

(6,848)

(4,829)
Balance as of end of period

$
6,929

$
5,016

Certain of the Company’s property and equipment is leased under operating leases. Total rental expense under operating leases was $1.4 million and $3.5 million for the three and nine months ended March 31, 2021, respectively, and $1.5 million and $3.8 million for the three and nine months ended March 31, 2020, respectively.

~~Future minimum lease payments for fiscal years beginning with remainder~~third quarter of fiscal year ~~2021 for capital leases having initial terms of more than one year and noncancelable operating leases were as follows:~~

Operating Leases

Capital Leases

Minimum Lease
(In thousands)

Obligations

Payments
Amount remaining in 2021

$
713

$
866
2022

2,527

4,138
2023

2,468

4,410
2024

1,941

4,052
2025

1,169

3,592
Thereafter

144

13,704
Total

8,962

$
30,762
Less amount representing interest

1,114


Total minimum lease payments

7,848


Less current maturities

2,121


Noncurrent maturities

$
5,727

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~~Note~~~~8. Long Term Debt~~

~~Long-term debt consisted of the following at March 31, 2021 and June 30, 2020:~~

In thousands (000’s)

March 31, 2021

June 30, 2020
Senior secured borrowings:




Senior secured term loan

$
75,000

$
187,625
Revolving credit facility

—

25,000
Convertible term loan

2,377

2,401
Total debt

77,377

215,026
Less unamortized debt issuance costs

2,110

2,656
Less current maturities

2,852

1,938
Long-term debt, net of debt issuance costs

$
72,415

$
210,432

2021.

The InnovAge California PACE-Sacramento LLC Limited Liability Company ~~originally entered into a senior secured borrowing agreement~~Agreement (the ~~“2016 Credit~~“JV Agreement”) ~~on May 13, 2016, that consisted~~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 a senior secured term loan for $75.0 million and a revolving credit facility for $20.0 million. The 2016 Credit Agreement was subsequently amended on May 2, 2019 to increase the senior secured term loan to $190.0 million and a revolving credit facility for $30.0 million and a delayed draw term loan facility (“DDTL”) for $45.0 million. The senior secured term loan and the DDTL had a maturity date of May 2, 2025, and the revolving credit facility had a maturity date of May 2, 2024.

On July 27, 2020, the Company amended and restated the 2016 Credit Agreement once again to increase the senior secured term loan to $300.0 million, the revolving credit facility to $40.0 million and to ~~terminate~~ ~~the DDTL. The maturity date of the revolving credit facility was extended to July 27, 2025, the senior secured term loan was extended to July 27, 2026, and there were updates to~~ certain ~~covenants contained in the existing credit agreement. Principal was paid each calendar quarter in an amount equal to 0.25% of the aggregate outstanding principal amount.~~

~~The structure of the amendment to the 2016 Credit Agreement as amended on July 27, 2020 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 was $57.1 million which led to the write off of $1.0 million in debt issuance costs which was recorded in loss on extinguishment of debt for the nine months ended March 31, 2021. The total debt structure that was modified was $250.0 million, while the new debt issued was $50.0 million, which resulted in $9.1 million of debt issuance costs being capitalized.

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 of $75.0 million and a revolving credit facility of $100.0 million. The maturity date of the revolving credit facility is March 8, 2026 and of the senior secured term loan, March 8, 2026. The 2021 Credit Agreement includes a more lose set of covenants compared to the 2016 Credit Agreement. Loans under the 2021 Credit Agreement are secured by substantially all of the Company’s assets. Principal on the senior secured term loan 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 new senior secured loan, together with proceeds from the IPO, were used to repay amounts outstanding under the 2016 Credit Agreement.

The structure of the 2021 Credit Agreement led to a 2.0% prepayment fee as the cancellation of the 2016 Credit Agreement occurred prior to the first anniversary of the July 27, 2020 amendment of the 2016 Credit Agreement, an extinguishment of debt for certain lenders, and a modification of debt for other lenders. The total prepayment fee was $6.0 million and is recorded in loss on extinguishment of debt in the consolidated statements of operations. The total debt structure extinguishment for certain lenders was $250.0 million which led to the write off of $7.5 million in debt issuance costs which was recorded in loss on extinguishment of debt for the three months ended March 31, 2021. The total debt structure that was modified was $25.0 million related to each of

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the term loan and the revolver, while the new debt issued was $50.0 million related to the term loan and $75.0 million related to the revolver. This resulted in $2.1 million of debt issuance costs being capitalized.

~~Any outstanding principal amounts under the 2021 Credit Agreement accrue interest at a variable interest rate.~~members. As of March 31, 2021, the interest rate on the senior secured term loan was 1.94%. At June 30, 2020 the interest rate on the senior secured term loan under the 2016 Credit Agreement was 6.0%. Prior to the entry into the 2021 Credit Agreement, the revolving credit facility fee accrued at 0.5%. Under the terms2022, none of the ~~2021 Credit~~conditions specified in the JV Agreement had been met. At the ~~revolving credit facility fee accrues at 0.25%~~time the Company became a publicly traded company these put rights held by the noncontrolling interests of the ~~average daily unused amount and is paid quarterly. There is also an immaterial administrative fee.~~

~~During fiscal year 2020, the Company borrowed $25.0~~Joint Venture were required to be presented as temporary equity. The redeemable noncontrolling interest of $15.9 million ~~under the revolving credit facility~~was recorded at an interest rate of 3.94%, to ensure sufficient funds available during the unknown time of the COVID-19 pandemic and for general corporate purposes. The Company repaid all outstanding amounts on the revolving credit facility andcarrying value as of March 31, ~~2021 had 0 outstanding borrowings. The remaining capacity under the revolving credit facility as of March 31, 2021 is $100.0 million.~~

The 2021 Credit Agreement requires the Company to meet certain operational and reporting requirements, including, but not limited to, defined leverage and fixed-charge coverage ratios. Additionally, annual capital expenditures and permitted investments, including acquisitions, are limited to amounts specified in the 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 and the 2016 Credit Agreement as of March 31, 2021 and June 30, 2020, respectively.

The deferred financing costs of $2.1 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 deferred financing costs were $0.9 million and $0.4 million for the nine months ended March 31, 2021 and 2020, respectively.

On June 29, 2015, SH1 entered into a convertible term. 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.2022.

Note 9:5: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 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

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Level 3

Unobservable inputs to the valuation techniques that are significant to the fair value measurements of the assets or liabilities

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Recurring Measurements

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. As a result, at each fiscal period end the Company reports this put right at the greater of i) carrying value of the redeemable noncontrolling interest or (ii) fair value of the redeemable noncontrolling interest. Because this asset does not have observable inputs, level 3 inputs are used to measure fair value. For the three months ended March 31, 2022, the Company recorded an adjustment to redemption value of the redeemable noncontrolling interest of $2.6 million, which was a reduction to carrying value. This adjustment represents the excess amount of fair value over the carrying value as of March 31, 2022. The fair value of the redeemable noncontrolling interest is determined utilizing a discounted cash flow model.

Effective August 7, 2018, the Company finalized the acquisition of ~~New Courtland~~NewCourtland LIFE Program (“~~New Courtland”~~NewCourtland”) in Pennsylvania. The Company paid a base purchase price of $30.0 million, subject to certain net working capital and closing adjustments plus contingent consideration of up to $20.0 million. Such contingent consideration will be paid over a specified period if certain conditions outlined in the Securities Purchase Agreement are met. These conditions are based upon the performance of the PACE centers acquired in the New Courtland acquisition for the two fiscal years following the acquisition, as well as potential payments to be made in the event of the Company being acquired, selling substantially all of its assets, or selling equity securities pursuant to an effective registration statement under the Securities Act of 1933. If all of the contingent consideration of $20.0 million is paid, the lease payments in certain real estate leases between the Company and New Courtland are reduced from their current amounts and allow the Company to exercise its option to purchase the leased buildings at fair market value, after the initial term of the lease.

On March 8, 2021, we completed our IPO, which satisfied the condition that the Company sell equity securities pursuant to an effective registration statement. Accordingly, $20.0 million of contingent consideration was paid under the terms of the ~~Securities Purchase Agreement.~~acquisition agreement. Since all of the contingent consideration of $20.0 million was paid, the lease payments in certain real estate leases between the Company and NewCourtland were reduced from their current amounts and allow the Company to exercise its option to purchase the leased buildings at fair market value, after the initial term of the lease.

As of June 30, 2021 and March 31, ~~2021,~~2022, there are 0 amounts of contingent consideration outstanding.

~~Changes in fair value resulted in immaterial amounts recorded in other operating (income) expense within the consolidated statement of for the nine months ended March 31, 2021 and 2020, respectively.~~

There were no0 transfers in and out of Level 3 during the nine months ended March 31, ~~2021~~2022 or 2021.

Note 6:Goodwill and ~~2020. The Company’s policy~~Intangible Assets

Goodwill, which represents the excess of consideration paid over the fair value of net assets acquired through business acquisitions. Goodwill amounted to $124.2 million at each of March 31, 2022 and June 30, 2021. Goodwill is not amortized.

Pursuant to ~~recognize transfers~~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 ~~actual date~~recovery of recorded amounts. For purposes of the ~~event or change in circumstances.~~

~~Nonrecurring Measurements~~

~~In addition to assets and liabilities that are recorded at fair value on a recurring basis,~~annual goodwill impairment assessment, the Company ~~records certain assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result~~has identified 3 reporting units. There were no indicators of impairment ~~charges that are required by U.S. GAAP. No such amounts were~~identified and 0 goodwill impairments recorded during the nine months ended March 31, 2022 and 2021.

Intangibles assets consisted of the following as of:


		March 31,		June 30,
in thousands	2022		2021
Definite-lived intangible assets	$	9,350	$	6,600
Indefinite-lived intangible assets		2,000		2,000
Total intangible assets		11,350		8,600
Accumulated amortization		(2,578)		(2,082)
Balance as of end of period	$	8,772	$	6,518

Intangible assets consist primarily of customer relationships acquired through business acquisitions and technology-based assets. The Company recorded amortization expense of $0.5 million and $0.2 million for the nine months ended March 31, 2022 and 2021, respectively.

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During the nine months ended March 31, 2022, the market value of our common stock declined below the carrying value of equity. As a result, we were required to qualitatively assess whether a triggering event had occurred and whether it was more likely than not that our goodwill was impaired as of March 31, 2022. We believe the impact of the regulatory actions described below to our planned opening of new centers and expansion into new service areas met the criteria of a triggering event, which required us to perform quantitative procedures as part of a Step 1 goodwill impairment analysis to asses whether it was more-likely-than-not that the fair value of the Company was greater than the net book value.

In September 2021, we were notified that CMS and the State of California had determined to suspend new enrollments at our Sacramento center based on deficiencies detected in an audit related to participant provision of services. In December 2021, we were notified that CMS and Colorado Department of Health Care Policy and Financing (“HCPF”) had determined to suspend new enrollments at our Colorado centers based on deficiencies detected in an audit related to participant provision of services. In each case, the suspensions will remain in effect until CMS and the respective States determine that we have remediated the deficiencies to their satisfaction. During the third quarter ended March 31, 2022, we were notified by the State of Kentucky that they no longer intend to enter into an agreement with us relating to PACE services, and during the same period, CMS denied our initial application to develop a PACE center in the State of Indiana.

As a result of the above assessment, we concluded that there was 0 goodwill impairment based on a review of macroeconomic and industry considerations, the Company's financial results in each of our reporting units for the nine months ended March 31, 2022 and financial projections, inclusive of a sustained impact of the enrollment suspension and inability to open new centers. If assumptions or estimates in the fair value calculations change or if future cash flows vary from what was expected, including those assumptions relating to the duration and severity of the financial impact of the enrollment suspension at Sacramento and Colorado or new regulatory sanctions or other actions are imposed on the Company, this may impact the impairment analysis and could reduce the underlying cash flows used to estimate fair values and result in a decline in fair value that may trigger future impairment charges.

Note 7:Leases

Property and equipment includes property under various capital leases. These leases have expiration dates ranging from August 2022 to July 2032, varying interest rates, and generally include an option to purchase the equipment at the end of the underlying lease period. The Company’s capital leases included the following at March 31, 2022 and June 30, 2021:


	March 31, 2022		June 30, 2021
in thousands
Equipment	$	18,885	$	13,302
Less accumulated depreciation		(7,150)		(7,081)
Total capital leases	$	11,735	$	6,221

Certain of the Company’s property and equipment is leased under operating leases. Such leases generally have lease terms ranging from years 2022 through 2032 with renewal options. Total rental expense under operating leases was $1.3 million and $3.5 million for the three and nine months ended March 31, 2022, respectively, and $1.4 million and $3.5 million for the three and nine months ended March 31, 2021 respectively.

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Future minimum lease payments for fiscal years beginning with remainder of fiscal year 2022 for capital leases having initial terms of more than one year and noncancelable operating leases were as follows:


			Operating Leases
	Capital Leases		Minimum Lease
in thousands	Obligations		Payments
Amount remaining in 2022	$	958	$	1,203
2023		4,405		4,872
2024		3,909		4,582
2025		3,126		4,122
2026		2,092		4,061
Thereafter		1,927		14,029
Total		16,417	$	32,869
Less amount representing interest		(2,912)
Total minimum lease payments		13,498
Less current maturities		(3,216)
Noncurrent maturities	$	10,282

Note8. Long Term Debt

Long-term debt consisted of the following at March 31, 2022 and June 30, 2021:


	Interest rate	Maturity date	March 31, 2022		June 30, 2021

			in thousands
Senior secured borrowings:
Term Loan Facility	(a)	March 8, 2026	$	72,188	$	75,000
Revolving Credit Facility (b)	(a)	March 8, 2026		—		—
Convertible term loan	6.68%	August 20, 2030		2,338		2,367
Total debt				74,526		77,367
Less unamortized debt issuance costs				1,681		2,003
Less current maturities				3,793		3,790
Noncurrent maturities			$	69,051	$	71,574

(a)

The interest rates on the Term Loan Facility and Revolving Credit Facility are described below.

(b)

The remaining capacity under the Revolving Credit Facility as of March 31, 2022 was $100.0 million, subject to (i) any issued amounts under our letters of credit, which as of March 31, 2022 was $2.6 million, and (ii) applicable covenant compliance restrictions and any other conditions precedent to borrowing.

2016 Credit Agreement

The Company originally entered into a senior secured borrowing agreement (the “2016 Credit Agreement”) on May 13, 2016, that consisted of a senior secured term loan for $75.0 million and a revolving credit facility for $20.0 million. The 2016 Credit Agreement was subsequently amended (i) on May 2, 2019 to increase the senior secured term loan to $190.0 million and a revolving credit facility for $30.0 million and a delayed draw term loan facility (“DDTL”) for $45.0 million and (ii) on July 27, 2020, to increase the senior secured term loan to $300.0 million, the revolving credit facility to $40.0 million and to terminate the DDTL. The structure of the July 27, 2020 amendment to the 2016 Credit Agreement 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 was $57.1 million, and the write off of $1.0 million in debt issuance costs was recorded in loss on extinguishment of debt for the nine months ended March 31, 2021. The total debt structure that was modified was $250.0 million, while the new debt issued was $50.0 million, which resulted in $9.1 million of capitalized debt issuance costs. Total amortization of deferred financing costs was $0.9 million for the nine months ended March 31, 2021.

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Concurrent with the Company’s entry into the 2021 Credit Agreement (as defined below), the Company terminated and repaid in full all outstanding indebtedness under the 2016 Credit Agreement.

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 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. 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 March 31, 2022, the interest rate on the Term Loan Facility was 2.21%. Under the terms of the 2021 Credit Agreement, the Revolving Credit Facility fee accrues at 0.25% of the average daily unused amount and is paid quarterly. As of March 31, 2022, we had 0 borrowings outstanding under the Revolving Credit Facility.

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. As of March 31, 2022, the Company was in compliance with the covenants of the 2021 Credit Agreement.

The deferred financing costs 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 $0.3 million for the nine months ended March 31, 2022.

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. The loan is secured by a deed of trust to Public Trustee, assignment of leases and rents, security agreements, and SH1’s fixture filing.

Note ~~10:~~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.~~business, including those described below. 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. ~~In the opinion of management, none of the claims and suits,~~

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~~either individually or in the aggregate, are reasonably likely to have a material adverse effect on the Company's operations or consolidated financial statements.~~ The Company expenses legal costs as such costs are incurred.

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On October 14, 2021, 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. Through the complaint, plaintiffs are asserting claims against the Company, certain of the Company’s officers and the underwriters in the Company’s IPO, alleging violations of Sections 11 and 15 of the Securities Act of 1933 for making allegedly inaccurate and misleading statements and omissions in connection with the Company’s IPO and seeking compensatory damages, among other things. The plaintiffs have indicated that they intend to file an amended complaint on or before June 14, 2022. We are currently unable to predict the outcome of this matter.

~~Note 11:~~ ~~Retirement Plans~~

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.

In February 2022, the Company ~~offers its eligible employees~~received a ~~401(k) Retirement Savings Plan (the “Plan”~~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). The Company ~~matches 50%~~is fully cooperating with the DOJ to produce the requested information and documentation. We are currently unable to predict the outcome of this investigation.

On April 20, 2022, the Board of Directors of the ~~employee contribution up~~Company received a books and records demand pursuant to 4%Section 220 of the ~~employee’s compensation. Matching contributions~~Delaware General Corporation Law, from a purported stockholder of the Company, 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.

Although the results of legal proceedings and claims are inherently unpredictable and uncertain, we do not believe that the outcomes of the legal proceedings with which we are currently involved, based on the currently available information, either individually or in the aggregate, will have a material adverse effect on our business, financial condition, or cash flows, though the outcomes 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: Equity

Equity Owner Transaction

On July 27, 2020, InnovAge Holding Corp. (formerly TCO Group Holdings, Inc.), Ignite Aggregator LP (“Purchaser”), and the former equity holders of InnovAge Holding Corp. (“Sellers”) entered into a Securities Purchase Agreement (the “Agreement”), effective July 27, 2020. Under the terms of the Agreement, the Sellers sold a portion of their equity interest to the Purchaser. The Purchaser and the Sellers then contributed their equity interests in the Company to a newly formed limited partnership, TCO Group Holdings, L.P. (the “LP”) resulting in the Company being wholly owned by the LP.

Concurrently with the entry into the Agreement, the Company amended and restated its 2016 Credit Agreement, see Note 8, “Long Term Debt” for further discussion. A portion of the proceeds from the 2016 Credit Agreement were ~~$0.4~~used by the Company to repurchase 16,095,819 shares of its common stock for $77.6 million from certain members of management, including certain members of the Board of Directors, and ~~$1.3~~certain members of our equity partner. The common stock was then recognized as Treasury stock. The Treasury stock was retired in March 2021.

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Additionally, as part of the Agreement, the Company executed an Option Cancellation Agreement (the “Cancellation Agreement”), which canceled the Company’s common stock option awards of 16,994,975 granted under the 2016 Equity Incentive Plan for $74.6 million. Such cancellation resulted in a settlement of the awards. Vesting of the contingent performance-based awards was not deemed probable at the time of the settlement resulting in the settlement of the contingent performance-based awards being recorded as Corporate, general and administrative. Vesting of the time vesting awards was deemed probable at the time of the settlement resulting in a portion of the settlement of the time vesting awards being recorded as Corporate, general and administrative expense and the remainder being recorded as a reduction to Additional paid-in capital. Of the total settlement, $45.4 million was recorded as Corporate, general and administrative expense and $32.4 million was recorded as a reduction to Additional paid-in capital. The Cancellation Agreement resulted in the option holders receiving the same amount of cash that they would have received had they exercised their options, participated in the repurchase described above and sold their remaining shares.

As part of the transaction, for the ~~three and~~ nine months ended March 31, 2021, ~~respectively,~~the Company incurred $22.6 million in transaction costs, of which $13.1 million was recognized as Corporate, general and ~~$0.4~~administrative expense and $9.5 million ~~and $1.3 million for~~was recognized as a distribution to owners as the ~~three and~~costs were paid on behalf of the owners. These costs were recorded during the nine months ended March 31, ~~2020, respectively.~~2021.

Effective January 1, 2016, InnovAge established a 409(a) Deferred Compensation Plan for key employees. Matching contributions were $0.1 million for both the three and nine months ended March 31, 2021 and 0 and $0.1 million for the three and nine months ended March 31, 2020, respectively.

Note ~~12:~~11: Stock-based Compensation

A summary of our aggregate stock-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.


	Nine Months Ended
	March 31,
in thousands	2022		2021

Stock options (a)	$	359	$	45,387
Profits interests units		1,095		1,102
Restricted stock units		1,132		—
Total stock-based compensation expense	$	2,586	$	46,489

(a)

The amount for 2021 relates to stock-based compensation expense recognized as a result of the Cancellation Agreement.

2016 Equity Incentive Plan

The Company maintained the 2016 Equity Incentive Plan ~~(the “2016 Incentive Plan”)~~ pursuant to which various stock-based awards ~~may be~~were granted to employees, directors, consultants, and advisers. The total number of shares of the Company’s common stock that iswas authorized under the 2016 Equity Incentive Plan was ~~17,836,636. As~~17,836,636, of ~~June 30, 2020~~which a total of 16,994,976 awards ~~had been~~were granted. ~~The 2016 Incentive Plan provided for the following general vesting terms:~~

~~(a)~~

~~Half~~ vested over time (“Time Vesting Awards”). Awards vested on the first anniversary of the grant date in the range of 25% to 62.5%, and the remaining awards that vested over time vest ratably on a semiannual basis thereafter through the fourth anniversary of the grant date.

~~(b)~~

~~Half~~ vested upon the attainment of certain performance-based criteria measured at the time the Company experiences a liquidity event, as defined by the 2016 Incentive Plan (“Contingent Performance-Based Awards”).

~~Stock options were exercisable over a period of time not to exceed 10 years from the date of grant.~~

~~Cancellation of Stock Option Awards Under 2016 Equity Incentive Plan~~

On July 27, 2020, ~~TCO Group Holdings, Inc.,~~the Company, Ignite Aggregator LP, and the equity holders of ~~TCO Group Holdings, Inc.~~the Company entered into a Securities Purchase Agreement, ~~effective July 27, 2020. In addition,~~and in conjunction therewith, the Company amended and restated the 2016 Credit Agreement.

A portion of the proceeds from the 2016 Credit Agreement were used by the Company to repurchase 16,095,819 shares of its common stock from the certain members of management, the Board of Directors, and members of our equity partner. Additionally, as part of the 2016 Credit Agreement, the Company executed the Cancellation Agreement with each of the 2016 Equity Incentive Plan option holders, pursuant to which ~~canceled~~ the Company’s 16,994,976 common stock options which were granted under the 2016 Equity Incentive ~~Plan.~~Plan, were cancelled. The Cancellation Agreement resulted in the option holders receiving the same amount of cash that they would have received had they exercised their options, ~~participated in the repurchase described above and sold their remaining shares.~~

~~A summary of the stock option activity for the nine months ended March 31, 2021, was as follows:~~

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~~Time Vesting Awards~~

Weighted-

Average

Number of

Option

Average

Remaining


Options

Price Range

Exercise Price

Term (in years)
Outstanding balance, June 30, 2020

8,497,488

$
1.00 - $ 2.35

1.26

6.76
Canceled

(8,497,488)

$
1.00 - $ 2.35

1.26

6.76
Outstanding balance, March 31, 2021

—

~~Contingent Performance-based Awards~~

Weighted-Average

Number of

Weighted-Average

Remaining


Options

Exercise Price

Term (in years)
Outstanding balance, June 30, 2020

8,497,488

$
0.78

6.76
Canceled

(8,497,488)

$
0.78

6.76
Outstanding balance, March 31, 2021

—

~~Profits Interests~~

The LP maintains the 2020 Equity Incentive Plan (the “2020 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, and advisers. A maximum number of 16,162,177 Class B Units are authorized for grant under the 2020 Incentive Plan. As of March 31, 2021, a total of 13,009,137 profits interests units have been granted.

These profits interests represented 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 participated in any increase of LP value related to their profits interests after the hurdle value had been achieved and the LP profits interests received the agreed-upon return on their invested capital. The Company granted 13,009,137 and 0 profits interests units during the nine months ended March 31, 2021 and 2020, respectively.

~~Each profits interests unit contains the following material terms:~~

~~(i)~~

The profits interests receive distributions (other than tax distributions) only upon a liquidity event, as defined, that exceed a threshold equivalent to the fair value of the LP, as determined by the Company’s Board of Directors, at the grant date.

~~(ii)~~

A portion of the units vest over a period of continuous employment or service (service-vesting units) while the other portion of the units only vest based on the level of aggregate multiple of invested capital and internal rate of return achieved by Ignite Aggregator upon a change of control of the Company, (performance-vesting units).

~~The performance-vesting units are subject to a market condition, which the Company incorporated as part of its determination of the grant date fair value of the units.~~

For performance-vesting units, the Company recognizes unit-based compensation expense when it was probable that the performance condition would be achieved. The Company will analyze if a performance condition was probable for each reporting period through the settlement date for units subject to performance vesting. For service-vesting units, the Company will recognize unit-based compensation expense over the requisite service period for each separately vested portion of the profits interests as if the unit was, in-substance, multiple units. The hurdle value per unit is $5.49 for both the performance-vesting and service-vesting units.

The Company uses the Monte Carlo option model to determine the fair value of the granted profits interests units. The stock price is based on the price realized in the equity owner transaction. Expected stock price volatility is based on consideration of indications observed from several publicly traded peer companies. The risk-free interest

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~~rate is based on a treasury instrument whose term is consistent~~participated in the repurchase described above and sold their remaining shares. The 2016 Equity Incentive Plan was cancelled and replaced with the expected life of the unit. The dividend yield percentage is 0 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.2020 Equity Incentive Plan, as described below.

2020 Equity Incentive Plan

Profits Interests

The ~~following is~~LP maintains 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, and advisers. A maximum number of 16,162,177 Class B Units are authorized for grant under the 2020 Equity Incentive Plan. As of March 31, 2022, a ~~summary~~total of 13,009,137 profits interests ~~transactions and number of~~ units ~~outstanding:~~

~~Time Vesting Units~~

Weighted-

Number of

Average


Units

Grant Date FV
Outstanding balance, June 30, 2020

—

Granted

6,686,568

1.28
Forfeited

(99,307)


1.17
Outstanding balance, March 31, 2021

6,587,261

$
1.28

~~Performance-Vesting Units~~

Weighted-

Number of

Average


Units

Grant Date FV
Outstanding balance, June 30, 2020

—

Granted

6,322,569

$
0.57
Forfeited

(99,307)


0.44
Outstanding balance, March 31, 2021

6,223,262

$
0.57

have been granted under the 2020 Equity Incentive Plan.

The Company used the Monte Carlo option model to determine the fair value of the profits interests units ~~granted~~at the time of the grant. There were 0 grants during the nine months ended March 31, ~~2021 under~~2022.

A summary of profits interests activity for the ~~2020 Incentive Plan,~~nine months ended March 31, 2022 was ~~based upon a Monte Carlo option pricing model using the assumptions in the following table (presented on a weighted average basis):~~as follows:



	Number of	Weighted average
Time-based unit awards	units	grant date fair value

Outstanding balance, June 30, 2021	6,587,261	$	1.28
Forfeited	(2,409,972)	$	1.28
Outstanding balance, March 31, 2022	4,177,289	$	1.28

2021

Expected volatility

44
%
Expected life (years) – Time vesting units

1.8

Interest rate

0.16
%
Dividend yield

0
%
Weighted-average fair values

$
1.28

Fair value of underlying stock

$
5.49


	Number of	Weighted average
Performance-based unit awards	units	grant date fair value

Outstanding balance, June 30, 2021	6,223,262	$	0.57
Forfeited	(3,210,939)	$	0.57
Outstanding balance, March 31, 2022	3,012,323	$	0.57

The total unrecognized compensation cost related to ~~all~~ profits interests units outstanding as of March 31, 2022 was ~~$11.1 million. The unrecognized compensation cost~~$6.4 million, comprised (i) $4.3 million related to ~~the Time Vesting Units was $7.5 million and is~~time-based unit awards expected to be recognized over a weighted-average period of ~~3.5 years. The unrecognized compensation cost~~0.9 years and (ii) $2.1 million related to ~~the Performance-Vesting Units was $3.6 million and~~performance-based unit awards, which will be recorded when it is probable that the performance-based criteria will be met.

~~Compensation Expense~~2021 Omnibus Incentive Plan

In March 2021, the compensation committee of our Board of Directors approved the InnovAge Holding Corp. 2021 Omnibus Incentive Plan (the “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 ~~recognizes stock-based compensation expense~~has issued time-based restricted stock units under this plan to its employees which generally vest (i) on March 4, 2023, the second anniversary of the grant date, or (ii) over a ~~straight-line basis over~~three-year period with one-third vesting on each anniversary of the date of grant. Certain other vesting ~~period~~periods have also been used. The grant date fair value of restricted stock units with time based vesting 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 critiera and ~~includes such charges in employee benefits in the consolidated statements of operations.~~

Three Months Ended

Nine Months Ended

March 31,

March 31,
(In thousands)

2021

2020

2021

2020
Stock options

$
—

$
135

$
45,387

$
407
Profits interest units

530

—

1,102

—
Total share-based compensation expense

$
530

$
135

$
46,489

$
407

are determined to have performance-based vesting conditions.

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Restricted Stock Units

A summary of time-based vesting restricted stock units activity for the nine months ended March 31, 2022 was as follows:


			Weighted
			average
	Number of		grant-date fair
Restricted stock units - time based	awards		value per share

Outstanding balance, June 30, 2021	48,470	$	22.87
Granted	315,177	$	8.99
Forfeited	(9,670)	$	23.35
Exercised	(8,493)	$	17.66
Outstanding balance, March 31, 2022	345,484	$	10.50

The total unrecognized compensation cost related to time based restricted stock units outstanding as of March 31, 2022 was $4.0 million and is expected to be recognized over a weighted-average period of 2.0 years.

A summary of performance based vesting restricted stock units activity for the nine months ended March 31, 2022 was as follows:


			Weighted
			average
	Number of		grant-date fair
Restricted stock units - performance based	awards		value per share

Outstanding balance, June 30, 2021	—	$	—
Granted	258,767	$	5.18
Forfeited	—	$	—
Outstanding balance, March 31, 2022	258,767	$	5.18

The fair value of the performance based restricted stock units and performance based stock options granted during the nine months ended March 31, 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 March 31, 2022 was $1.2 million and is expected to be recognized over a weighted-average period of 3.6 years.

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Nonqualified Stock Options

A summary of time-based vesting stock option activity for the nine months ended March 31, 2022 was as follows:


			Weighted
			average
	Number of		grant-date fair
Stock options - time based	awards		value per share

Outstanding balance, June 30, 2021	—	$	—
Granted	554,499	$	1.61
Forfeited	—	$	—
Outstanding balance, March 31, 2022	554,499	$	1.61

The total unrecognized compensation cost related to time-based vesting stock options outstanding as of March 31, 2022 was $0.7 million and is expected to be recognized over a weighted-average period of 2.5 years.

The fair value of the time-based stock options granted during the nine months ended March 31, 2022, was based upon the Black-Scholes option pricing model using the assumptions in the following table:


	2022
Expected volatility		34.5	%
Weighted-average expected life (years) - time vesting units		2.9
Interest rate		0.83	%
Dividend yield		0	%
Weighted-average fair values	$	1.61
Fair value of underlying stock	$	7.89

A summary of performance-based vesting stock option activity for the nine months ended March 31, 2022 was as follows:


			Weighted
			average
	Number of		grant-date fair
Stock options - performance based	awards		value per share

Outstanding balance, June 30, 2021	—	$	—
Granted	776,299	$	3.08
Forfeited	—	$	—
Outstanding balance, March 31, 2022	776,299	$	3.08

The fair value of the performance-based stock options granted during the nine months ended March 31, 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 March 31, 2022 was $2.2 million and is expected to be recognized over a weighted-average period of 3.6 years.

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Note 12: Income Taxes

The Company recorded an income tax benefit of $4.1 million and $4.3 million for the three months ended March 31, 2022 and 2021, respectively. The Company recorded a tax provision of $0.1 million and $5.2 million for the nine months ended March 31, 2022 and 2021, respectively. This represents an effective tax rate of 56.6% and 28.2% for the three months ended March 31, 2022 and 2021, respectively. This represents an effective tax rate of 1.4% and (11.2)% for the nine months ended March 31, 2022 and 2021, respectively.

The effective rate for the nine months ended March 31, 2022 was different from the federal statutory rate primarily due to the Company’s book loss offset partially by disallowed officers’ compensation under Internal Revenue Code (“IRC”) Section 162(m) and lobbying expenses which occurred during the nine month period.

The Company assesses the valuation allowance recorded against deferred tax assets at each reporting date. The determination of whether a valuation allowance for deferred tax assets is appropriate requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize deferred tax assets, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating income taxes, the Company assesses the relative merits and risks of the appropriate income tax treatment of transactions taking into account statutory, judicial, and regulatory guidance. As of the nine-month period ended March 31, 2022, the Company has determined that it is not “more likely than not” that the deferred tax assets associated with certain state net operating losses will be realized and as such continues to maintain a valuation allowance against these state deferred tax assets.

The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of the employer portion of social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. The Company continues to examine the impacts that the CARES Act may have on its business. While several of these provisions may impact the Company, there have not been any significant impacts noted through March 31, 2022.

Note 13: Earnings per Share

Basic earnings (loss) per share 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, 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.

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The following table sets forth the computation of basic and diluted net loss per common share:


	Three Months Ended March 31,				Nine Months Ended March 31,				Three months ended March 31,				Nine months ended March 31,
(In thousands, except share values)	2021		2020		2021		2020
in thousands, except share values									2022		2021		2022		2021
Net income (loss) attributable to InnovAge Holding Corp.	$	(10,510)	$	8,138	$	(50,460)	$	14,181	$	(2,821)	$	(10,510)	$	6,188	$	(50,460)
Weighted average common shares outstanding (basic)		121,324,980		132,616,431		119,619,806		132,616,431		135,516,608		121,324,980		135,516,544		119,619,806
EPS (basic)	$	(0.09)	$	0.06	$	(0.42)	$	0.11
Earnings (loss) per share - basic									$	(0.02)	$	(0.09)	$	0.05	$	(0.42)

Dilutive shares		—		1,751,571		—		1,176,554		—		—		14,249		—
Weighted average common shares outstanding (diluted)		121,324,980		134,368,002		119,619,806		133,792,985		135,516,608		121,324,980		135,530,793		119,619,806
EPS (diluted)	$	(0.09)	$	0.06	$	(0.42)	$	0.11
Earnings (loss) per share -diluted									$	(0.02)	$	(0.09)	$	0.05	$	(0.42)

~~Note 14:~~ ~~Treasury Stock~~

On July 27, 2020, as a part of the amendment and restatement of the 2016 Credit Agreement, a portion of the proceeds were used by the Company to repurchase 16,095,819 shares of its common stock from certain members of management, our Board of Directors and our equity partner, at $4.82 per share. As a result of the repurchase, $77.6 million was recorded as Treasury stock, see Note 3 for further discussion. In March 2021, the Company retired all outstanding shares of Treasury stock and at March 31, 2021 there were 0 shares of treasury stock outstanding.

~~Note 15: Income Taxes~~

The Company recorded an income tax benefit of $(4.3) million and a tax provision of $2.9 million for the three months ended March 31, 2021 and 2020, respectively. The Company recorded an income tax provision of $5.2 million and $5.0 million for the nine months ended March 31, 2021 and 2020, respectively. This represents an effective tax rate of 28.2% and 26.4% for the three months ended March 31, 2021 and 2020, respectively. This represents an effective tax rate of (11.2)% and (26.4)% for the nine months ended March 31, 2021 and 2020, respectively.

The effective rate for the nine months ended March 31, 2021 was different from the federal statutory rate primarily due to disallowed officers’ compensation under Internal Revenue Code (“IRC”) Section 162(m), lobbying expenses, transaction costs, and payments of contingent consideration which occurred during the nine month period.

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temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating income taxes, the Company assesses the relative merits and risks of the appropriate income tax treatment of transactions taking into account statutory, judicial, and regulatory guidance. As of the nine-month period ended March 31, 2021, the Company has determined that it is not “more likely than not” that the deferred tax assets associated with certain state net operating losses will be realized and as such continues to maintain a valuation allowance against these state deferred tax assets.

Note ~~16:~~14: Segment Reporting

The Company applies ASC Topic 280, ~~"Segment~~"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 5 operating segments, 3 of which are related to the Company’s PACE offering. The PACE-related operating segments are based on 3 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 1 reportable segment for PACE. The ~~company’s~~Company’s remaining 2 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.

~~The~~As of March 31, 2022, the Company ~~serves~~served approximately ~~6,700~~6,800 PACE participants, making it the largest PACE provider in the U.S. based upon participants served, and operates 18 PACE centers across Colorado, California, New Mexico, Pennsylvania and Virginia. 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; the 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, ~~the~~ CMS ~~share~~shares part of the risk for providing prescription medication to the Company’s participants.

The Company evaluates performance and allocates capital resources to each segment based on an operating model that is designed to maximize the ~~quality~~provision of ~~care~~services 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)., which includes all medical and pharmacy costs. The Company allocates corporate level expenses to its segments with a majority of the allocation going to the PACE segment.

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The following table summarizes the operating results regularly provided to the CODM by reportable segment for the three months ~~ended:~~ended March 31, 2022 and 2021:


	March 31, 2021						March 31, 2020
(In thousands)	PACE		All other⁽¹⁾		Totals		PACE		All other⁽¹⁾		Totals
													March 31, 2022						March 31, 2021
in thousands													PACE		All other⁽¹⁾		Totals		PACE		All other⁽¹⁾		Totals
Capitation revenue	$	155,835	$	—	$	155,835	$	144,174	$	—	$	144,174	$	176,988	$	—	$	176,988	$	155,835	$	—	$	155,835
Other service revenue		(47)		520		473		(56)		652		596		166		205		371		(47)		520		473
Total revenues		155,788		520		156,308		144,118		652		144,770		177,154		205		177,359		155,788		520		156,308
External provider costs		75,389		—		75,389		71,022		—		71,022		103,254		—		103,254		75,389		—		75,389
Cost of care, excluding depreciation and amortization		38,867		698		39,565		38,559		726		39,285		45,995		107		46,102		38,867		698		39,565
Center-Level Contribution Margin		41,532		(178)		41,354		34,537		(74)		34,463
Center-level Contribution Margin														27,905		98		28,003		41,532		(178)		41,354
Overhead costs⁽²⁾		24,217		(30)		24,187		18,614		42		18,656		30,911		(85)		30,826		24,217		(30)		24,187
Depreciation and amortization		3,181		130		3,311		2,619		150		2,769		3,760		90		3,850		3,181		130		3,311
Equity loss		—		—		—		163		—		163		—		—		—		—		—		—
Other operating (income) expense		19,222		—		19,222		(99)		—		(99)
Other operating income														—		—		—		19,222		—		19,222
Interest expense, net		4,824		52		4,876		2,317		44		2,361		(663)		(46)		(709)		(4,824)		(52)		(4,876)
Loss on extinguishment of debt		13,488		—		13,488		—		—		—		—		—		—		(13,488)		—		(13,488)
Gain on equity method investment		(10,871)		—		(10,871)		—		—		—		—		—		—		10,871		—		10,871
Other expense (income)		2,267		—		2,267		(244)		—		(244)		108		—		108		(2,267)		—		(2,267)
Income (Loss) Before Income Taxes	$	(14,796)	$	(330)	$	(15,126)	$	11,167	$	(310)	$	10,857	$	(7,321)	$	47	$	(7,274)	$	(14,796)	$	(330)	$	(15,126)

The following table summarizes the operating results regularly provided to the CODM by reportable segment for the nine months ~~ended:~~ended March 31, 2022 and 2021:


	March 31, 2021						March 31, 2020						March 31, 2022						March 31, 2021
(In thousands)	PACE		All other⁽¹⁾		Totals		PACE		All other⁽¹⁾		Totals
in thousands													PACE		All other⁽¹⁾		Totals		PACE		All other⁽¹⁾		Totals
Capitation revenue	$	464,294	$	—	$	464,294	$	412,724	$	—	$	412,724	$	524,507	$	—	$	524,507	$	464,294	$	—	$	464,294
Other service revenue		213		1,677		1,890		(1,112)		3,088		1,976		234		1,039		1,273		213		1,677		1,890
Total revenues		464,507		1,677		466,184		411,612		3,088		414,700		524,741		1,039		525,780		464,507		1,677		466,184
External provider costs		224,215		—		224,215		204,387		—		204,387		284,299		—		284,299		224,215		—		224,215
Cost of care, excluding depreciation and amortization		113,611		2,311		115,922		111,021		3,444		114,465		128,573		1,167		129,740		113,611		2,311		115,922
Center-Level Contribution Margin		126,681		(634)		126,047		96,204		(356)		95,848		111,869		(128)		111,741		126,681		(634)		126,047
Overhead costs⁽²⁾		120,249		(13)		120,236		56,846		(24)		56,822		93,463		(98)		93,365		120,249		(13)		120,236
Depreciation and amortization		8,901		361		9,262		7,525		785		8,310		10,130		305		10,435		8,901		361		9,262
Equity loss		1,343		—		1,343		201		2		203		—		—		—		1,343		—		1,343
Other operating (income) expense		18,211		—		18,211		(252)		2		(250)		—		—		—		18,211		—		18,211
Interest expense, net		16,919		142		17,061		11,025		262		11,287		(1,783)		(147)		(1,930)		(16,919)		(142)		(17,061)
Loss on extinguishment of debt		14,479		—		14,479		—		—		—		—		—		—		(14,479)		—		(14,479)
Gain on equity method investment		(10,871)		—		(10,871)		—		—		—		—		—		—		10,871		—		10,871
Other expense (income)		2,222		—		2,222		673		62		735
Other income														(357)		(1)		(358)		(2,222)		—		(2,222)
Income (Loss) Before Income Taxes	$	(44,772)	$	(1,124)	$	(45,896)	$	20,186	$	(1,445)	$	18,741	$	6,136	$	(483)	$	5,653	$	(44,772)	$	(1,124)	$	(45,896)

(1)Center-level Contribution Margin from segments below the quantitative thresholds are attributable to 2 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.

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~~(1)~~

Center-level Contribution Margin from segments below the quantitative thresholds are attributable to 2 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 ~~17:~~15: Related-party

Pursuant to the PWD Amended and Restated Agreement of Limited Partnership, the general partner, who is a subsidiary of the Company (the “General Partner”), helped fund operating deficits and shortfalls of PWD in the form of a loan. At each of March 31, ~~2021~~2022 and June 30, ~~2020,~~2021, $0.7 million ~~and $0.6 million, respectively,~~ was recorded in Deposits and other. Additionally, the ~~general partner~~General Partner is paid an administration fee of $35,000 per year.

In accordance with the Management Service Agreement between the Company and the joint venture partner, the Company is responsible for the daily operations of the joint venture InnovAge Sacramento. For the six months ended December 31, 2020, the Company generated $0.3 million in management fee revenue, which was recorded in other service revenue. For the three months ended March 31, 2021, management fee revenue was eliminated in consolidation as the results of InnovAge Sacramento are consolidated effective January 1, 2021. Management fee revenue was insignificant during the nine months ended March 31, 2020.

Note ~~18:~~16: Subsequent Events

The Company has evaluated subsequent events through May ~~11, 2021,~~10, 2022, the date on which the condensed consolidated financial statements were issued.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Readers are cautioned not to place undue reliance on any forward-looking statements, as forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly due to numerous known and unknown risks and uncertainties, including those discussed below and in the section entitled “Cautionary Note on Forward-Looking Statements.” Those known risks and uncertainties include, but are not limited to, the risk factors identified in the section titled “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the ~~IPO Prospectus.~~fiscal year ended June 30, 2021 (“2021 10-K”).

~~Executive~~ Overview

~~We are~~InnovAge Holding Corp. (“InnovAge”), formerly TCO Group Holdings, Inc., became a public company in March 2021. As of March 31, 2022, the ~~leading healthcare delivery platform by number of~~Company served approximately 6,800 PACE participants, ~~focused on providing all-inclusive, capitated care to high-cost, dual-eligible seniors. We directly address two of the most pressing challenges facing the U.S. healthcare industry: rising costs~~ and ~~poor outcomes. Our patient-centered care delivery approach meaningfully improves the quality of care our participants receive, while keeping them in their homes for as long as safely possible~~operated 18 PACE centers across Colorado, California, New Mexico, Pennsylvania, and reducing over-utilization of high-cost care settings such as hospitals and nursing homes. Our patient-centered approach is led by our interdisciplinary care teams (“IDTs”), who design, manage and coordinate each participant’s personalized care plan. We directly manage and are responsible for all healthcare needs and associated costs for our participants. We directly contract with government payors, such as Medicare and Medicaid, and do not rely on third-party administrative organizations or health plans. We believe our model aligns with how healthcare is evolving, namely (1) the shift toward value-based care, in which coordinated, outcomes-driven, high-quality care is delivered while reducing unnecessary spend, (2) eliminating excessive administrative costs by contracting directly with the government, (3) focusing on the patient experience and (4) addressing social determinants of health.

~~Recent Developments~~

On March 3, 2021, the Company’s Registration Statement on Form S-1 with respect to the Company’s initial public offering (“IPO”) was declared effective by the Securities and Exchange Commission (“SEC”). The Company’s common stock began trading on March 3, 2021 on Nasdaq Stock Market LLC (“NASDAQ”) under the ticker symbol “INNV.”

On March 8, 2021, we completed our IPO in which we issued and sold 16,666,667 shares of common stock at an offering price of $21.00 per share. In addition, the underwriters exercised the option to purchase 2,329,234 additional shares of common stock. We received net proceeds of $373.6 million, after deducting underwriting discounts and commissions of $23.9 million and deferred offering costs of $1.4 million. Deferred, direct offering costs were capitalized and consisted of fees and expenses incurred in connection with the sale of our common stock in the IPO, including the legal, accounting, printing and other offering related costs. Upon completion of the IPO, these deferred offering costs were recorded against the net proceeds from the offering.

The Company made an additional contribution of $52,000 to and obtained control of InnovAge California PACE-Sacramento, LLC (“InnovAge Sacramento”), effective January 1, 2021. Accordingly, beginning January 1, 2021, the results of InnovAge Sacramento are included in our consolidated results of operations. This resulted in a gain on consolidation of $10.9 million, which is recorded in gain on equity method investment on the condensed consolidated statement of operations.

Virginia.

Impact of COVID-19

The ~~rapid spread of the novel coronavirus disease (“COVID-19”) around the world~~COVID-19 virus has and ~~throughout the United States of America (“U.S.”) has altered the behavior of businesses and people, with significant negative effects on~~

~~Table of Contents~~

~~federal, state and local economies, the duration of which~~ continues to ~~be uncertain at this time. The virus~~ disproportionately ~~impacts~~impact older adults, especially those with chronic illnesses, which describes our participants. ~~We have experienced or expect to experience~~

Despite the ~~following impacts~~challenges brought on ~~our business model due to COVID-19:~~

~~Care Model~~~~. Though the~~by COVID-19, pandemic has altered the mix of settings where we deliver care, our multimodal model has ensured that our participants continue to receive the care they need. As a result of the COVID-19 pandemic, we have transitioned much of our care to in-home and telehealth services, while increasing participant visit volume and maintaining continuity of care. We closed all our centers on March 18, 2020 and transitioned to a 100% in-home and virtual care model that allowed for a seamless delivery of care. We structured our care teams to deliver in-home services that otherwise would have occurred at our centers. Our physicians are equipped with several telehealth platforms to provide virtual care and utilize the option best suited for each individual participant’s preferences and needs. Our aim is to keep the virtual setting simple to use, convenient and effective. If a participant lacks access to a device or is unable to use technology, we offer to provide them a device or dispatch a team member to their home to assist. For all of these reasons, our telehealth solution has received high satisfaction among participants, caregivers and IDTs. In addition to increased telehealth and in-home care, we have repurposed our existing infrastructure and workforce to support care delivery during the COVID-19 pandemic.

~~Growth~~. As a result of the COVID-19 pandemic, at the end of March 2020, we pivoted to a virtual enrollment model due to safety concerns for our employees and participants and to comply with local government ordinances. We also realigned our marketing strategy to increase our focus on digital channels during the COVID-19 pandemic and to reach those searching for senior care alternatives.

~~Revenue.~~ ~~Our revenue is capitated and not determined by the number of times we interact with our participants face-to-face. As~~as of March 31, 2022, we continue care delivery through telehealth and predominantly at our centers, all of which remain fully opened during the period. As economies around the world reopened in 2021, sharp increases in demand are creating significant disruptions to the global supply chain. Global logistics network challenges have resulted in higher prices for the medical supplies we ~~had not experienced a decline in revenue as a result~~require. Uncertainties related to the magnitude and duration of global supply chain disruptions have adversely affected, and may continue to adversely affect, our business and outlook.

For additional information on the COVID-19 pandemic. The capitation payments we receive from Medicare are risk-adjusted based on documented encounters and diagnosed conditions. Government payors require that participants’ health issues be documented annually regardless of the permanence of the underlying causes. Historically, this documentation has been required to be completed during an in-person visit with a participant, but Centers for Medicare and Medicaid Services (“CMS”) is now allowing documentation of conditions identified during qualifying telehealth visits with participants. Given the disruption causedvarious risks posed by the COVID-19 pandemic, ~~it is unclear whether we will be able to document~~please see the ~~health conditions~~section entitled “Risk Factors” included in Part I, Item 1A of our ~~participants as comprehensively as we did prior to the COVID-19 pandemic, which may adversely impact Medicare risk adjustment factor (“RAF”) scores and our resulting revenue in future periods.~~

~~Expenses.~~ Though the distribution of expenses across expense categories changed as a result of the COVID-19 pandemic, we did not experience material changes in our aggregate expenses. Our internal care delivery costs remained largely the same as we remained fully staffed to execute on our participants’ care plans, albeit through a different mix of care settings. Though we experienced fewer emergency room visits than normal in the early months of the COVID-19 pandemic, the frail nature of our participant population necessitates very limited instances of deferrable care otherwise. As a result of the non-deferrable nature of most of our participants’ third-party medical needs, we experienced no material changes to total external provider costs as a result of the COVID-19 pandemic.

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 2020, we acquired significantly greater quantities of medical supplies at significantly higher prices than normal to ensure the safety of our employees and our participants. These incremental costs represent less than 1.4% of our total cost of care for the fiscal year ended June 30, 2020. While the price of PPE may remain higher than historical levels for the foreseeable future, we do not expect these incremental costs to be material as a percentage of our total expenses.2021 10-K.

~~Table of Contents~~

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 participants.~~ We focus on providing all-inclusive care to frail, high-cost, dual-eligible seniors. We directly contract with government payors, such as Medicare and Medicaid, through PACE and receive a capitated risk-adjusted payment to manage the totality of a participant’s medical care across all settings. InnovAge manages participants that are, on average, more complex and medically fragile than other Medicare-eligible patients, including those in Medicare Advantage programs. As a result, we receive larger payments for our participants compared to Medicare Advantage participants. This is driven by two factors: (1) we manage a higher acuity population, with an average Medicare RAF score of 2.39 as of March 31, 2021 compared to an average RAF score of 1.08 for Medicare fee-for-service non-dual enrollees; and (2) 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, including primary and specialist care, in-home care, hospital visits, nutrition, transportation to our care centers and to other medical appointments, pharmacy and behavioral health. Our care model and 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 a risk-adjusted PMPM payment directly from Medicare and Medicaid, which provides recurring revenue streams and significant visibility into our revenue growth trajectory.

The Medicare portion of our capitated payment is risk-adjusted based on the underlying medical conditions and frailty of each participant. Our IDTs develop an individualized care plan specific to the needs of each participant. Our high touch model involves daily interaction with our participants across multiple settings. This enables us to not only deliver coordinated, high quality care, but also to identify and proactively manage changes to each participant’s conditions, which further supports our ability to more precisely report our participants’ condition to obtain appropriate Medicare RAF scores.

~~Our ability to grow enrollment and capacity within existing centers.~~ We believe our demonstrated ability to drive sustained, organic census growth is a key indicator of the attractiveness of the InnovAge Platform to our key constituents: participants, their families and government payors. Since 2015 and through March 31, 2021, we have achieved 12% annual, organic census growth. Eligible participants can enroll in our program year-round, allowing us to continuously attract new participants and reducing seasonal variability in our results of operations.

Awareness of PACE programs remains low among potential participants, despite high levels of patient satisfaction. To improve awareness and attract new participants, our sales and marketing teams educate prospective participants and their families on our powerful value proposition, superior health outcomes and participant satisfaction. Our scale enables us to invest in targeted sales and marketing capabilities, which accelerates census growth. We take a multichannel approach to sales and marketing, relying on a mix of traditional community provider referrals and targeted direct-to-consumer digital marketing. We have realigned our marketing strategy to focus more on digital channels during the COVID-19 pandemic and to reach those searching for senior care alternatives. We are proud of the fact that the “friends and family” of our participants remain one of our largest referral sources.

~~Our ability to maintain high participant satisfaction and retention.~~ 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. Furthermore, historically, we have experienced low levels of voluntary disenrollment. Our historical disenrollments have been involuntary, due primarily to participant death and otherwise to participants re-locating out of our service areas.

~~Table of Contents~~

~~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. Our participants are among the most frail and medically complex individuals in the U.S. healthcare system. Our care model focuses on delivering high-quality medical care in cost efficient, community-based settings as a means of avoiding costly inpatient and outpatient services. However, our participants retain the freedom to seek care at sites of their choice, including hospitals and emergency rooms; we do not restrict participant access to care. Since the Company bears the burden of all participant medical expenses, we are liable for potentially large medical claims, avoidable or not. We believe the risk of such large medical claims is mitigated by (1) our proactive care model, and (2) our scale, which diminishes the financial impact of any unexpected catastrophic care our participants may require.

~~Center-level contribution margin.~~ We have a history of achieving profitable Center-level Contribution Margin. 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, corporate, or general and administrative expenses across our centers.

~~Our ability to build de novo centers within existing and new markets.~~ We have proven our ability to expand and operationalize new centers across multiple geographies while generating consistent center-level performance. This performance highlights the predictability of our model and gives us conviction to continue investing in building new centers to drive long-term value creation.

We have a large addressable market with a target population estimated at approximately 2.2 million, representing seniors who we believe are dually eligible for Medicare and Medicaid and meet the nursing home level of care criteria for PACE. Based upon our success to date, we believe our innovative care model can scale nationally, and we expect to continue selectively and strategically expanding into new geographies. Our go to market approach prioritizes high-density urban and suburban areas, where there are sizable numbers of frail, dual-eligible seniors who would benefit from our program.

In our existing markets, we believe there is significant opportunity to expand our footprint by not only growing the physical footprint and participant census of existing centers, but also by developing new centers. These strategically developed new sites will allow us to leverage our established market brand and infrastructure.

We have a successful track record of building de novo centers with compelling unit economics. Once we have identified a location for a new center, it takes, on average, less than 27 months to open. We believe investments in de novo centers generate robust internal rates of return and accretive cash-on-cash returns.

Opening of de novo centers can also result in losses, generally related to pre-opening and start-up ramp, from the time the center opens and its first 24 months of operations. For the three months ended March 31, 2021, de novo losses were approximately $0.3 million, respectively, for our Sacramento center in California and our Pennypack center in Philadelphia.

~~Execute tuck-in acquisitions.~~ We believe there is a sizeable landscape of potential tuck-in acquisitions to supplement our organic growth strategy. We are disciplined in our approach to acquisitions and have executed multiple types of transactions, including turnarounds and non-profit conversions. When integrating acquired programs, we work closely with key constituencies, including local governments, health systems and senior housing providers, to ensure continuity of high-quality care for participants. Based on our experience, joining the InnovAge platform enables revenue growth and improved operational efficiency and care delivery post-integration. We believe our track record of and reputation for integrating and improving acquired organizations, while continuing to prioritize high-quality patient care, positions us as the acquirer of choice in this market.

●

Our participants. We focus on providing all-inclusive care to frail, high-cost, dual-eligible seniors. We directly contract with government payors, such as Medicare and Medicaid, through PACE and receive a capitated risk-adjusted payment to manage the totality of a participant’s medical care across all settings. InnovAge manages participants that are, on average, more complex and medically fragile than other Medicare-eligible patients, including those in Medicare Advantage (“MA”) programs. As a result, we receive larger payments for our participants compared to MA participants. This is driven by two factors: (i) we manage a higher acuity population, with an average risk adjustment factor (“RAF”) score of 2.41 based on InnovAge data as of March 31, 2022; and (ii) we manage Medicaid spend in addition to Medicare. Our participants are managed on a capitated, or at-risk basis, where InnovAge is financially responsible for all of participant medical costs. Our comprehensive care model and globally capitated payments are designed to cover participants from enrollment until the end of life, including coverage for participants requiring hospice and palliative care. For dual-eligible participants, we receive per member, per month (“PMPM”) payments directly from Medicare and Medicaid, which provides recurring revenue streams and significant visibility into our revenue. The Medicare portion of our capitated payment is risk-based on the underlying medical conditions and frailty of each participant.

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~~Contracting with Government Payors.~~ Our economic model relies on our capitated arrangements with government payors, namely Medicare and Medicaid. We view the government not only as a payor but also as a key partner in our efforts to expand into new geographies and access more participants in our existing markets. Maintaining, supporting and growing these relationships, particularly as we enter new geographies, is critical to our long-term success. Our model is aligned with the interests of our government payors, as we drive better health outcomes for participants at lower costs and enhance participant satisfaction. We believe this alignment of interests and our highly effective care model resonates with government payors and will result in continued opportunities to open and acquire centers.

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

~~Seasonality to our business.~~ ~~Our operational and financial results will experience some variability depending upon the time of year in which they are measured. This variability is most notable in the following areas:~~

~~Medical costs.~~ Medical costs will vary seasonally depending on a number of factors, and most significantly as a result of the weather. Certain illnesses, such as the influenza virus, are far more prevalent during colder months of the year, which will result in an increase in medical expenses during these time periods. We therefore expect higher per-participant medical costs in our second and third fiscal quarters. Medical costs also depend upon the number of business days in a period, and shorter periods will have lower medical costs. Business days can also create year-over-year comparability issues if a period in one year has a different number of business days compared to the same period in another. We would also expect medical costs to be impacted by a pandemic, such as the COVID-19 pandemic, which may result in increased or decreased total medical costs depending upon the severity of the relevant infection, the proximity of the spread of the disease to our centers, the duration of the infection and the availability of healthcare services for our participants.

~~Timing of risk score revenue true-ups.~~ The Medicare portion of the capitated payments we receive for each participant is determined by a participant’s RAF score, which is measured twice per year and is based on the evolving acuity of a participant. We estimate and accrue for the expected Medicare RAF scores of our participants. Based on the difference between the Medicare RAF score we estimate and the Medicare RAF score determined by 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.

●

Our ability to grow enrollment and capacity within existing centers. We believe all seniors should have access to the type of all-inclusive care offered by the PACE model. Several factors can affect our ability to grow enrollment and capacity within existing centers, including sanctions issued by regulators. Currently, the Centers for Medicare and Medicaid Services (“CMS”) and state agencies have suspended new enrollments at our Sacramento, California center and at our centers in the State of Colorado. See “Risk Factors” in Part II, Item 1A.

●

Our ability to maintain high participant satisfaction and retention. We achieved an 81% participant satisfaction rating as of December 2021 and average participant tenure was 3.0 years as of March 31, 2022, measured as tenure from enrollment to disenrollment, among our centers that have been operated by us for at least five years. Furthermore, we experience low levels of voluntary disenrollment, averaging 5% annually over the last three fiscal years. Approximately 75% 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 nine months ended March 31, 2022. While we are liable for potentially large medical claims, our care model focuses on delivering high-quality medical care in cost efficient, community-based settings as a means of avoiding costly inpatient and outpatient services. However, our participants retain the freedom to seek care at sites of their choice, including hospitals and emergency rooms; we do not restrict participant access to care.

●

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. The enrollment sanctions in place in Sacramento, California and Colorado limit our ability to grow our participant census and impact Center-level Contribution Margin. See “Risk Factors” in Part II, Item 1A.

●

Our ability to expand via acquisition or de novo centers within existing and new markets. 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’ 2021 audits of our Sacramento and Colorado PACE programs. In addition, we have committed to CMS and the Agency for Healthcare Administration in the State of Florida, that we will proactively pause remaining steps with respect to de novo centers to focus on remediating deficiencies raised in the audit processes. See “Risk Factors” in Part II, Item 1A.

●

Execute tuck-in acquisitions. Over the past three fiscal years, we have acquired and integrated three PACE organizations, expanding our InnovAge Platform to one new state and four new markets through those acquisitions. We are disciplined in our approach to acquisitions and have executed multiple types of transactions, including turnarounds and non-profit conversions. When integrating acquired programs, we work closely with key constituencies, including local governments, health systems and senior housing providers, to enable continuity of high-quality care for participants.

●

Contracting with government payors. Our economic model relies on our capitated arrangements with government payors, namely Medicare and Medicaid. We view the government not only as a payor but also

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as a key partner in our efforts to expand into new geographies and access more participants in our existing markets. Maintaining, supporting and growing these relationships in existing markets as well as new geographies, is critical to our long-term success.

●

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

●

Seasonality of our business. Our operational and financial results, including medical costs and per-participant revenue true-ups, will experience some variability depending upon the time of year in which they are measured. Medical costs vary most significantly as a result of (i) the weather, with certain illnesses, such as the influenza virus, being more prevalent during colder months of the year, which generally increases per-participant costs and (ii) the number of business days in a period, with shorter periods generally having lower medical costs all else equal. 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.

Components of Results of ~~operations~~Operations

The following table sets forth our results of operations for the periods presented and as a percentage of our total revenues for those periods. Percentages presented in the following tables may not sum due to rounding.

Revenue

~~Comparison~~Capitation Revenue. In order to provide comprehensive services to manage the totality of a participant’s medical care across all settings, we receive fixed or capitated fees per participant that are paid monthly by Medicare, Medicaid, Veterans Affairs (“VA”) and private pay sources.

Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the ~~three~~PACE program. The PACE state contracts between us and ~~nine months ended March~~the respective state Medicaid administering agency are amended annually each June 30 in all states other than California and Pennsylvania, which contract on a calendar-year basis. New agreements have been executed for the periods (i) January 1, 2021 through December 31, 2022 for California and (ii) July 1, 2021 through June 30, 2022 for all other states, except Pennsylvania, for which we are currently operating in good standing under the 2020 amended agreement while the agency finalizes its 2021 amendment. For a discussion of our revenue recognition policies, please see Critical Accounting Policies and ~~2020~~Estimates below and Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2021 10-K.

Three Months Ended

Nine Months Ended

March 31,

March 31,


2021

2020

2021

2020
(in thousands)

Revenues

Capitation revenue

$
155,835

$
144,174

$
464,294

$
412,724
Other service revenue

473

596

1,890

1,976
Total revenues

156,308

144,770

466,184

414,700
Expenses








External provider costs

75,389

71,022

224,215

204,387
Cost of care (excluding depreciation and amortization)

39,565

39,285

115,922

114,465
Sales and marketing

5,592

4,628

14,335

14,405
Corporate, general and administrative

18,595

14,028

105,901

42,417
Depreciation and amortization

3,311

2,769

9,262

8,310
Equity loss

—

163

1,343

203
Other operating (income) expense

19,222

(99)

18,211

(250)
Operating expenses

161,674

131,796

489,189

383,937
Income (Loss) from Operations

$
(5,366)

$
12,974

$
(23,005)

$
30,763
Other Income (Expense)








Interest expense, net

(4,876)

(2,361)

(17,061)

(11,287)
Loss on extinguishment of debt

(13,488)

—

(14,479)

—
Gain on equity method investment

10,871

—

10,871

—
Other

(2,267)

244

(2,222)

(735)
Total other income (expense)

(9,760)

(2,117)

(22,891)

(12,022)
Income (Loss) Before Income Taxes

(15,126)

10,857

(45,896)

18,741
Provision (Benefit) for income taxes

(4,264)

2,867

5,159

4,954
Net Income (Loss)

$
(10,862)

$
7,990

$
(51,055)

$
13,787
Less: Net Loss attributable to noncontrolling interests

(352)

(148)

(595)

(394)
Net Income (Loss) Attributable to the Company

$
(10,510)

$
8,138

$
(50,460)

$
14,181

Other Service Revenue. Other service revenue primarily consists of revenues derived from fee-for-service arrangements, state food grants, rent revenues and management fees. We generate fee-for-service revenue from providing home-care services to non-PACE patients in their homes, for which we bill the patient or their insurance plan on a fee-for-service basis. For a discussion of our revenue recognition policies, please see Critical Accounting Policies and Estimates below and Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2021 10-K.

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Operating Expenses

Three Months Ended

Nine Months Ended

March 31,

March 31,


2021
2020

2021
2020
Revenues









Capitation revenue

99.7
%
99.6
%

99.6
%
99.5
%
Other service revenue

0.3
%
0.4
%

0.4
%
0.5
%
Total revenues

100.0
%
100.0
%

100.0
%
100.0
%
Expenses









External provider costs

48.2
%
49.1
%

48.1
%
49.3
%
Cost of care (excluding depreciation and amortization)

25.3
%
27.1
%

24.9
%
27.6
%
Sales and marketing

3.6
%
3.2
%

3.1
%
3.5
%
Corporate, general and administrative

11.9
%
9.7
%

22.7
%
10.2
%
Depreciation and amortization

2.1
%
1.9
%

2.0
%
2.0
%
Equity loss

—

0.1
%

0.3
%
—
%
Other operating (income) expense

12.3
%
(0.1)
%

3.9
%
(0.1)
%
Operating expenses

103.4
%
91.0
%

104.9
%
92.6
%
Income (Loss) from Operations

(3.4)
%
9.0
%

(4.9)
%
7.4
%
Other Income (Expense)









Interest expense, net

(3.1)
%
(1.6)
%

(3.7)
%
(2.7)
%
Loss on extinguishment of debt

(8.6)
%
—
%

(3.1)
%
—
%
Gain on equity method investment

7.0
%
—
%

2.3
%
—
%
Other

(1.5)
%
0.2
%

(0.5)
%
(0.2)
%
Total other income (expense)

(6.2)
%
(1.5)
%

(4.9)
%
(2.9)
%
Income (Loss) Before Income Taxes

(9.7)
%
7.5
%

(9.8)
%
4.5
%
Provision (Benefit) for income taxes

(2.7)
%
2.0
%

1.1
%
1.2
%
Net Income (Loss)

(6.9)
%
5.5
%

(11.0)
%
3.3
%
Less: Net Loss attributable to noncontrolling interests

*
%
*
%

*
%
*
%
Net Income (Loss) Attributable to the Company

(6.7)
%
5.6
%

(10.8)
%
3.4
%

*	~~Indicates amounts that are not material.~~

~~Total revenues~~

Three Months Ended

Nine Months Ended

March 31,

Change

March 31,

Change

(dollars in thousands)
2021

2020

$

%


2021

2020

$

%

Revenues

















Capitation revenue
$
155,835

$
144,174

$
11,661

8
%

$
464,294

$
412,724

$
51,570

12
%
Other service revenue

473

596

(123)

(21)
%

1,890

1,976

(86)

(4)
%
Total revenues
$
156,308

$
144,770

$
11,538

8
%

$
466,184

$
414,700

$
51,484

12
%

~~Capitation~~External Provider Costs. External provider costs consist primarily of the costs for medical care provided by non-InnovAge providers. We separate external provider costs into four categories: inpatient (e.g., hospital and skilled nursing facility), housing (e.g., assisted living), outpatient and pharmacy. In aggregate, external provider costs represent the largest portion of our expenses.

Cost of Care, Excluding Depreciation and Amortization. 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. 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. 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 ~~was $155.8 million for the three months ended March 31, 2021, an increase~~increases due to census growth, cost of ~~$11.7 million, or 7%, compared~~care, excluding depreciation and amortization, typically decreases as a percentage of revenue. As we open new centers, we expect cost of care, excluding depreciation and amortization, to ~~$144.2 million for the three months ended March 31, 2020. This increase was driven primarily by an~~ increase in absolute dollars due to higher census and ~~rates,~~facility related costs.

Sales and Marketing. Sales and marketing expenses consist of employee-related expenses, including salaries, commissions, and employee benefits costs, for all employees engaged in marketing, sales, community outreach and sales support. These employee-related expenses capture all costs for both ~~of which increased Medicaid~~our field-based and ~~Medicare revenue, partially offset by a low single digit rate decrease related~~corporate sales and marketing teams. Sales and marketing expenses also include local and centralized advertising costs, as well as the infrastructure required to support our marketing efforts. We expect these costs to increase in absolute dollars over time as we continue to grow our participant census. We evaluate our sales and marketing expenses relative to our ~~participants~~participant growth and will invest more heavily in ~~Colorado.~~sales and marketing from time-to-time to the extent we believe such investment can accelerate our growth without negatively affecting profitability.

~~Capitation revenue was $464.3 million for the nine months ended March 31, 2021, an increase of $51.6 million, or 11%, compared~~

Corporate, General and Administrative. 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. We expect our general and administrative expenses to ~~$412.7 million for the nine months ended March 31, 2020. This increase was driven primarily by an~~ increase in ~~census~~absolute dollars due to the additional legal, accounting, insurance, investor relations and ~~rates, both~~other costs that we incur as a public company, as well as other costs associated with continuing to grow our business. However, we anticipate general and administrative expenses to decrease as a percentage of ~~which increased Medicaid~~revenue over the long term, although such expenses may fluctuate as a percentage of revenue from period to period due to the timing and ~~Medicare revenue, partially offset by a low single digit rate decrease related~~amount of these expenses.

Depreciation and Amortization. Depreciation and amortization expenses are primarily attributable to our ~~participants~~buildings and leasehold improvements and our equipment and vehicles. Depreciation and amortization are recorded using the straight-line method over the shorter of estimated useful life or lease terms, to the extent the assets are being leased.

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

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

For more information relating to the components of our results of operations, see Results of Operations below and Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2021 10-K.

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~~Medicare revenue also increased due to~~Results of Operations

The results of our operations for the ~~temporary suspension~~three and nine months ended March 31, 2022 include those of InnovAge Sacramento, which during the same period of the ~~automatic 2% reduction~~prior year was not a consolidated entity. The following table sets forth our consolidated results of ~~Medicare claim reimbursements (sequestration)~~operations for the ~~period of May 1, 2020 through December 31, 2021.~~periods presented:

~~Other service~~


	Three Months Ended				Nine Months Ended
	March 31,				March 31,
in thousands	2022		2021		2022			2021
Revenues
Capitation revenue	$	176,988	$	155,835	$	524,507		$	464,294
Other service revenue		371		473		1,273			1,890
Total revenues		177,359		156,308		525,780			466,184
Expenses
External provider costs		103,254		75,389		284,299			224,215
Cost of care, excluding depreciation and amortization		46,102		39,565		129,740			115,922
Sales and marketing		6,144		5,592		19,117			14,335
Corporate, general and administrative		24,682		18,595		74,248			105,901
Depreciation and amortization		3,850		3,311		10,435			9,262
Equity loss		—		—		—			1,343
Other operating income		—		19,222		—			18,211
Total expenses		184,032		161,674		517,839			489,189
Operating Income (Loss)	$	(6,673)	$	(5,366)	$	7,941		$	(23,005)
		—		—		—			—
Other Income (Expense)
Interest expense, net		(709)		(4,876)		(1,930)			(17,061)
Loss on extinguishment of debt		—		(13,488)		—			(14,479)
Gain on equity method investment		—		10,871		—			10,871
Other income (expense)		108		(2,267)		(358)			(2,222)
Total other expense		(601)		(9,760)		(2,288)			(22,891)
Income (Loss) Before Income Taxes		(7,274)		(15,126)		5,653			(45,896)
Provision (Benefit) for Income Taxes		(4,116)		(4,264)		81	��		5,159
Net Income (Loss)	$	(3,158)	$	(10,862)	$	5,572		$	(51,055)
Less: net loss attributable to noncontrolling interests		(337)		(352)		(616)			(595)
Net Income (Loss) Attributable to InnovAge Holding Corp.	$	(2,821)	$	(10,510)	$	6,188		$	(50,460)

Revenues


	Three Months Ended								Nine Months Ended
	March 31,				Change				March 31,				Change
	2022		2021		$		%		2022		2021		$		%
in thousands
Capitation revenue	$	176,988	$	155,835	$	21,153	13.6	%	$	524,507	$	464,294	$	60,213	13.0	%
Other service revenue		371		473		(102)	(21.6)	%		1,273		1,890		(617)	(32.6)	%
Total revenues	$	177,359	$	156,308	$	21,051	13.5	%	$	525,780	$	466,184	$	59,596	12.8	%

Capitation revenue. Capitation revenue was ~~$0.5~~$177.0 million for the three months ended March 31, ~~2021, a decrease~~2022, an increase of ~~$0.1~~$21.2 million, or ~~26%~~13.6%, ~~from $0.6~~compared to $155.8 million for the three months ended March 31, ~~2020. Other service~~2021. This increase was driven by (i) a 9.9% increase in capitation rates and (ii) a 3.4% increase in member months (as defined below). The increase in capitation rates was primarily driven by an annual increase in both Medicaid and Medicare capitation rates as a result of increased risk score and county rates.

Capitation revenue was ~~$1.9~~$524.5 million for the nine months ended March 31, ~~2021,~~2022, a decrease of ~~$0.1~~$60.2 million, or ~~5%, from $2.0~~13.0% compared to $464.3 million for the nine months ended March 31, ~~2020.~~

~~External provider costs~~

Three Months Ended

Nine Months Ended

March 31,

Change

March 31,

Change

(dollars in thousands)
2021

2020

$

%


2021

2020

$

%

External provider costs
$
75,389

$
71,022

$
4,367

6
%

$
224,215

$
204,387

$
19,828

10
%
% of total revenues

48
%

49
%

48
%

49
%

~~External provider costs were $75.4 million for the three months ended March 31, 2021, an~~2021. This increase ~~of $4.4 million, or 6%, compared to $71.0 million for the three months ended March 31, 2020. This change~~ was driven by an(i) a 6.3% increase in ~~census~~capitation rates and (ii) an 6.2% increase in ~~the average cost per participant.~~

~~External provider costs were $224.2 million for the nine~~member months ~~ended March 31, 2021, an increase of $19.8 million, or 10%, compared to $204.4 million for the nine months ended March 31, 2020. This change was driven by an~~(as defined below). The increase in ~~census and an increase in the average cost per participant.~~

~~Cost of care (excluding depreciation and amortization)~~

Three Months Ended

Nine Months Ended

March 31,

Change

March 31,

Change

(dollars in thousands)
2021

2020

$

%


2021

2020

$

%

Cost of care
(excluding depreciation and amortization)
$
39,565

$
39,285

$
280

1
%

$
115,922

$
114,465

$
1,457

1
%
% of total revenues

25
%

27
%

25
%

28
%

Cost of care (excluding depreciation and amortization) expense was $39.6 million for the three months ended March 31, 2021, an increase of $0.3 million, or 1%, compared to $39.3 million for the three months ended March 31, 2020. This change is primarily driven by an increase in census offset by the decrease in the cost per participant. This decrease in cost per participant was primarily driven by year-over-year cost savings due to the closures of our centers on account of the COVID-19 pandemic.

Cost of care (excluding depreciation and amortization) expense was $115.9 million for the nine months ended March 31, 2021, an increase of $1.5 million, or 1%, compared to $114.5 million for the nine months ended March 31, 2020. This change is primarily driven by an increase in census offset by the decrease in cost per participant. This decrease in cost per participant was primarily driven by year-over-year cost savings due to the closures of our centers due to the COVID-19 pandemic.

~~Sales and marketing~~

Three Months Ended

Nine Months Ended

March 31,

Change

March 31,

Change

(dollars in thousands)
2021

2020

$

%


2021

2020

$

%

Sales and marketing
$
5,592

$
4,628

$
964

21
%

$
14,335

$
14,405

$
(70)

(0)
%
% of total revenues

4
%

3
%

3
%

3
%

Sales and marketing expenses were $5.6 million for the three months ended March 31, 2021, an increase of $1.0 million, or 21%, compared to $4.6 million for the three months ended March 31, 2020. The increase was primarily due to an increase in headcount to support enrollment growth as well as a shift in marketing spend to the second half of fiscal year 2021.

capitation rates

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

Other service revenue. Other service revenue was $0.4 million for the three months ended March 31, 2022, a decrease of $0.1 million, or 21.6%, from $0.5 million for the three months ended March 31, 2021. Other service revenue was $1.3 million for the nine months ended March 31, 2022, a decrease of $0.6 million, or 32.6%, from $1.9 million for the nine months ended March 31, 2021.

Operating Expenses


	Three Months Ended								Nine Months Ended
	March 31,				Change				March 31,				Change
	2022		2021		$		%		2022		2021		$		%
in thousands
External provider costs	$	103,254	$	75,389	$	27,865	37.0	%	$	284,299	$	224,215	$	60,084	26.8	%
Cost of care (excluding depreciation and amortization)		46,102		39,565		6,537	16.5	%		129,740		115,922		13,818	11.9	%
Sales and marketing		6,144		5,592		552	9.9	%		19,117		14,335		4,782	33.4	%
Corporate, general, and administrative		24,682		18,595		6,087	32.7	%		74,248		105,901		(31,653)	(29.9)	%
Depreciation and amortization		3,850		3,311		539	16.3	%		10,435		9,262		1,173	12.7	%
Equity loss		—		—		—	*			—		1,343		(1,343)	(100.0)	%
Other operating income		—		19,222		(19,222)	(100.0)	%		—		18,211		(18,211)	(100.0)	%
Total operating expenses	$	184,032	$	161,674	$	22,358			$	517,839	$	489,189	$	28,650

___________________

*not meaningful

External provider costs. External provider costs were $103.3 million for the three months ended March 31, 2022, an increase of $27.9 million, or 37.0%, compared to $75.4 million for the three months ended March 31, 2021. The increase is primarily driven by (i) an increase of 32.5% in cost per participant and (ii) an increase of 3.4% in member months. The increase in cost per participant is primarily driven by the net effect of (i) an increase in outpatient and specialist care expenses, in part as a result of our participants seeking healthcare services that were delayed during the COVID-19 pandemic, (ii) an increase in inpatient and medical respite utilization and cost as a result of the Omicron surge, (iii) increased housing utilization, and (iv) increased housing rates as mandated by certain states.

External provider costs were $284.3 million for the nine months ended March 31, 2022, an increase of $60.1 million, or 26.8%, compared to $224.2 million for the nine months ended March 31, 2021. The increase is primarily driven by (i) an increase of 19.4% in cost per participant and (ii) an increase of 6.2% in member months. The increase in cost per participant is primarily driven by the net effect of an increase in housing, outpatient, inpatient and specialist care expenses.

Cost of care (excluding depreciation and amortization). Cost of care (excluding depreciation and amortization) expense was $46.1 million for the three months ended March 31, 2022, an increase of $6.5 million, or 16.5%, compared to $39.6 million for the three months ended March 31, 2021, primarily due to the net effect of (i) an increase of 3.4% in member months and (ii) an increase of 12.7% in cost per participant. The increase in cost per participant was driven by an increase in operational costs of reopening our centers following shutdowns as a result of COVID-19, pre-opening losses associated with de novo locations, and an increase wage rates.

Cost of care (excluding depreciation and amortization) expense was $129.7 million for the nine months ended March 31, 2022, an increase of $13.8 million, or 11.9%, compared to $115.9 million for the nine months ended March 31, 2021, primarily due to the net effect of (i) an increase of 6.2% in member months and (ii) an increase of 5.4% in cost per participant. The increase in cost per participant was driven by an increase in operational costs of reopening our centers following shutdowns as a result of COVID-19, pre-opening losses associated with de novo locations, and an increase in wage rates.

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

Table of Contents

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

Sales and marketing expenses were $19.1 million for the nine months ended March 31, 2022, an increase of $4.8 million, or 33.4%, compared to $14.3 million for the nine months ended March 31, 2021, ~~a decrease of $0.1 million, or 0.7%, compared~~primarily due to ~~$14.4~~an increase in (i) employee compensation and benefits due to an increase in FTEs and (ii) costs associated with organizational realignment, and (iii) costs associated with certain new advertising campaigns to raise PACE awareness.

Corporate, general and administrative. Corporate, general and administrative expenses were $24.7 million for the three months ended March 31, ~~2020. We incurred lower marketing and sales expenses in the first half~~2022, an increase of ~~fiscal year 2021 as a result of shifting marketing spend~~$6.1 million, or 32.7%, compared to ~~the second half of fiscal year 2021.~~

~~Corporate, general and administrative~~

Three Months Ended

Nine Months Ended

March 31,

Change

March 31,

Change

(dollars in thousands)
2021

2020

$

%


2021

2020

$

%

Corporate, general and administrative
$
18,595

$
14,028

$
4,567

33
%

$
105,901

$
42,417

$
63,484

150
%
% of total revenues

12
%

10
%

23
%

10
%

~~Corporate, general and administrative expenses were~~ $18.6 million for the three months ended March 31, ~~2021,~~2021. The increase is related to (i) employee compensation and benefits as the result of an increase ~~of $4.6 million, or 33%, compared to $14.0 million for the three months ended March 31, 2020. This increase was primarily related to fees incurred as~~in FTEs, (ii) compliance-related expense, (iii) costs associated with organizational realignment, and (iv) increased costs associated with being a ~~result of the IPO.~~publicly traded company.

Corporate, general and administrative expenses were $74.2 million for the nine months ended March 31, 2022, a decrease of $31.7 million, or 29.9%, compared to $105.9 million for the nine months ended March 31, ~~2021, an increase of $63.5 million, or 150%, compared to $42.4 million for the nine months ended March 31, 2020.~~2021. The ~~increase~~decrease was primarily due to the fees incurred during fiscal year 2021 as a result of the Apax Transaction (as defined below) ~~and the IPO.~~. In connection with the Apax Transaction, ~~$42.2~~$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 ~~(the “2016 Incentive Plan”)~~ and $13.1 million of transaction related costs were recorded as corporate, general and administrative expenses. ~~In connection~~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 ~~the IPO transaction $1.5 million of transaction~~organizational realignment, (iv) increased legal costs, ~~were recorded as corporate, general~~(v) costs associated with executive severance and ~~administrative expenses.~~recruiting and (vi) increased costs associated with being a publicly traded company.

Depreciation and ~~amortization~~

Three Months Ended

Nine Months Ended

March 31,

Change

March 31,

Change

(dollars in thousands)
2021

2020

$

%


2021

2020

$

%

Depreciation and amortization
$
3,311

$
2,769

$
542

20
%

$
9,262

$
8,310

$
952

11
%
% of total revenues

2
%

2
%

2
%

2
%

amortization. Depreciation and amortization expense was $3.9 million for the three months ended March 31, 2022, an increase of $0.5 million, or 16.3%, compared to $3.3 million for the three months ended March 31, ~~2021, an increase of $0.5 million, or 20%, compared to $2.8~~2021. Depreciation and amortization expense was $10.4 million for the ~~three~~nine months ended March 31, ~~2020. Depreciation and amortization expense was~~2022, an increase of $1.2 million, or 12.7%, compared to $9.3 million for the nine months ended March 31, ~~2021, an increase of $1.0 million, or 11%, compared to $8.3 million for the nine months ended March 31, 2020.~~2021. This increase in both periods is ~~the~~due to an increase in depreciation expense as a result of capital additions in the normal course of business.

Equity loss. Equity loss

Three Months Ended

Nine Months Ended

March 31,

Change

March 31,

Change

(dollars in thousands)
2021

2020

$

%


2021

2020

$

%

Equity loss
$
—

$
163

$
(163)

(100)
%

$
1,343

$
203

$
1,140

562
%
% of total revenues

-
%

0
%

0
%

0
%

~~We did not experience any equity loss for the three-month period ended March 31, 2021, a decrease~~ of ~~$0.2 million compared to $0.2~~$- million for the three months ended March 31, ~~2020. Equity loss was~~2021 and $1.3 million for the nine months ended March 31, 2021 ~~an increase of $1.1 million compared to $0.2 million for the nine months ended March 31, 2020. The changes~~ related to ~~the~~our equity ~~loss are derived from~~method investment in InnovAge Sacramento. InnovAge Sacramento ~~which~~ began operations in July 2020 and was ~~accounted for as an equity method investee and~~ subsequently ~~became a~~ consolidated ~~entity~~into operations effective January 1, ~~2021.~~2021, therefore there are no equity earnings for the three and nine months ended March 31, 2022.

Other operating ~~(income) expense~~

Three Months Ended

Nine Months Ended

March 31,

Change

March 31,

Change

(dollars in thousands)
2021

2020

$

%


2021

2020

$

%

Other operating (income) expense
$
19,222

$
(99)

19,321

(19,516)
%

18,211

(250)

18,461

(7,384)
%

~~Table of Contents~~

~~% of total revenues~~income.

~~(0)~~

Other operating ~~expense~~income was $19.2 million for the three months ended March 31, 2021 ~~an increase of $19.3 million compared to other operating income of $(0.1) million for the three months ended March 31, 2020. Other operating expense was~~and $18.2 million for the nine months ended March 31, 2021 ~~an increase of $18.5 million compared~~due to ~~other operating income of $(0.3) million for the nine months ended March 31, 2020. This change primarily represents~~ the change in fair value ~~related to~~of contingent consideration. The contingent consideration was paid in March 2021 and ~~the payment~~there were no amounts outstanding as of ~~$20.0~~March 31, 2022.

Other Income (Expense)

Three Months Ended






Nine Months Ended






March 31,

Change

March 31,

Change


2022

2021

$

%

2022

2021

$

%
in thousands

















Interest expense, net

$
(709)

$
(4,876)

$
4,167

85.5
%

$
(1,930)

$
(17,061)

$
15,131

88.7
%
Loss on extinguishment of debt

—

(13,488)

13,488

*

—

(14,479)

14,479

*

Gain on equity method investment

—

10,871

(10,871)

*

—

10,871

(10,871)

*

Other expense

108

(2,267)

2,375

104.8
%

(358)

(2,222)

1,864

83.9
%
Total other expense

$
(601)

$
(9,760)

$
9,159

$
(2,288)

$
(22,891)

$
20,603

___________________
*not meaningful

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Interest expense, net. Interest expense, net, consists primarily of interest payments on our outstanding borrowings, net of interest income earned on our cash and cash equivalents and restricted cash. Interest expense, net was $0.7 million ~~made under the acquisition agreement of the New Courtland LIFE Program during~~for the three months ended March 31, ~~2021. There were no such payments during the nine months ended March 31, 2020.~~

~~Other income (expense)~~

Three Months Ended

Nine Months Ended

March 31,

Change

March 31,

Change

(dollars in thousands)
2021

2020

$

%

2021

2020

$

%

Other income (expense)





















Interest expense, net
$
(4,876)

$
(2,361)

$
(2,515)

107
%

$
(17,061)

$
(11,287)

$
(5,774)

34
%
Loss on extinguishment of debt

(13,488)

—

(13,488)

*

(14,479)

—

(14,479)

*

Gain on equity method investment

10,871

—

10,871

*

10,871

—

10,871

*

Other

(2,267)

244

(2,511)

(1,029)
%

(2,222)

(735)

(1,487)

67
%
Total other income (expense)
$
(9,760)

$
(2,117)

$
(7,643)

361
%

$
(22,891)

$
(12,022)

$
(10,869)

90
%

~~Interest expense, net.~~ ~~Interest expense, net was~~2022, a decrease of $4.2 million, or 85.5%, compared to $4.9 million for the three months ended March 31, ~~2021, an increase of $2.5 million, or 52%, compared to $2.4~~2021. Interest expense, net was $1.9 million for the ~~three~~nine months ended March 31, ~~2020. Interest expense, net was~~2022, a decrease of $15.1 million, or 88.7%, compared to $17.1 million for the nine months ended March 31, ~~2021, an increase of $5.8 million, or 34%, compared to $11.3 million for the nine months ended March 31, 2020.~~2021. The ~~increase~~decrease was primarily due to (i) a ~~higher~~lower outstanding debt balance and (ii) to a lesser extent, a lower average interest ~~rate of 7.75% for the three months ended March 31, 2021 on the existing Term Loan Facility (as defined below) as a result of the July 27, 2020 amendment and restatement of~~rate. For additional information regarding our ~~2016 Credit Agreement (as defined below) and higher levels of~~ outstanding ~~borrowings during the nine months ended March 31, 2021.~~indebtedness, see Note 8, “Long-Term Debt” to our condensed consolidated financial statements.

Loss on extinguishment of debt. ~~Loss on extinguishment of debt was $13.5 million for the three months ended March 31, 2021 and no~~We recognized a loss on ~~extinguishment of debt was recorded for the three months ended March 31, 2020. 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.~~

~~Loss on extinguishment of debt was~~and $14.5 million for the nine months ended March 31, 2021 and no loss on extinguishment of debt was recorded for the nine months ended March 31, 2020. 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.~~ ~~Gain on equity method investment was $10.9~~ for the three and nine months ended March 31, 2021, respectively, and no ~~amounts were recorded~~loss on extinguishment of debt for the three and nine months ended March 31, ~~2020.~~ 2022.

Gain on equity method investment. We recognized a gain on equity method investment ~~resulted from InnovAge Sacramento becoming a consolidated entity as~~ of ~~January 1, 2021.~~

~~Other.~~ ~~Other expense was less than $2.3~~$10.9 million for the three and nine months ended March 31, 2021, ~~a decrease~~related to the consolidation of ~~$2.5 million, or 111%, compared to other income of $0.2 million~~InnovAge Sacramento beginning January 1, 2021, and no gain on equity method investment for the three and nine months ended March 31, 2022.

Provision for Income Taxes
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 Sacramento have elected to be taxed as partnerships, and no provision for income taxes for SH1 or Sacramento is included in these condensed 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.
During the nine months ended March 31, 2022 and 2021, we reported provision for income taxes of $0.1 million and $5.2 million, respectively. The decrease of $5.1 million is primarily due to certain permanent differences between the financial and tax accounting treatment of (a) the Section 162(m) limitation on compensation of five highest paid officers and (b) transaction costs associated with the Apax Transaction in 2020. ~~Other expense was $2.2 million~~These differences resulted in our pretax book loss generating taxable net income for the nine months ended March 31, ~~2021, an increase of $1.5 million, or 67%, compared to other~~2021. The taxable net income ~~of $0.7 million~~ for the nine months ended March 31, ~~2020.~~2022 was lower than the taxable net income for the nine months ended March 31, 2021.

Net Loss Attributable to Noncontrolling Interests.

InnovAge Senior Housing Thornton, LLC (“SH1”) is a Variable Interest Entity (“VIE”). The ~~impact~~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. The SH1 interest is reflected within equity as noncontrolling interests. Our share of earnings are recorded in the consolidated statements of operations and the share of the other noncontrolling interest holders’ earnings are recorded as net loss attributable to noncontrolling interests.

The Company has a controlling interest in InnovAge Sacramento. As of January 1, 2021, ~~is primarily a result~~our share of ~~an amendment~~earnings are recorded in the consolidated statements of operations and the share of the other noncontrolling interest holders’ earnings are recorded as net loss attributable to ~~the~~noncontrolling interests.

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~~warrants issued by~~

Net Income (Loss)

During the ~~Company to Adventist Health System/West (“Sacramento Warrants”) which resulted in additional~~three months ended March 31, 2022 and 2021, we reported net loss of $3.2 million and $10.9 million, respectively, consisting of (i) loss from operations of $6.7 million and $5.4 million, respectively, (ii) other expense of $0.6 million and $9.8 million, respectively, and (iii) provision for income taxes of $4.1 million and $4.3 million, respectively, each as described above.

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

Key ~~business metrics~~Business Metrics and ~~non-GAAP measures~~Non-GAAP Measures
In addition to our ~~U.S. generally accepted accounting principles (“U.S. GAAP”)~~GAAP financial information, we review a number of operating and financial metrics, including the following key metrics and non-GAAP measures, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. We believe these ~~non-GAAP~~ metrics provide additional perspective and insights when analyzing our core operating performance from period to period and evaluating trends in historical operating results. These key business metrics and non-GAAP measures should not be considered superior to, or a substitute for, and should be read in conjunction with, the ~~U.S.~~ GAAP financial information presented herein. These measures may not be comparable to similarly-titled performance indicators used by other companies.

Nine months ended March 31,

(dollars in thousands)

2021

2020

Key Business Metrics:







Centers⁽¹⁾

18

16

Census⁽²⁾

6,655

6,336

Total Member Months

59,050

55,762

Center-level Contribution Margin⁽³⁾

27.0
%

23.1
%

Non-GAAP Measures:





Adjusted EBITDA⁽⁴⁾

$
65,985

$
42,977

Adjusted EBITDA Margin⁽⁴⁾

14.2
%

10.4
%

Nine Months Ended March 31,


2022

2021

dollars in thousands
Key Business Metrics:





Centers^(a)

18

18

Census^(a)(b)

6,800

6,655

Total Member Months^(a)

62,726

59,050

Center-level Contribution Margin

$
111,741

$
126,047

Center-level Contribution Margin as a % of revenue

21.3
%

27.0
%

Non-GAAP Measures:

Adjusted EBITDA^(c)

$
34,895

$
65,985

Adjusted EBITDA Margin^(c)

6.6%

14.2%

~~(1)~~ (a) ~~Includes~~Amount for 2021 includes InnovAge Sacramento, which the Company owns and controls through a joint venture and is ~~now~~ consolidated in our financial statements as of ~~March 31,~~January 1, 2021.
~~(2)~~ (b) Participant numbers are approximate.
~~(3)~~ ~~Expressed as a percentage of revenue.~~
~~(4)~~(c) 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 ~~U.S.~~ GAAP measures for the ~~periods~~period indicated, see below under ~~“—Adjusted~~“Adjusted EBITDA.”

Centers
We define our centers as those centers open for business and attending to participants at the end of a particular period.
Census
~~Census~~
Our census is comprised of our capitated participants for whom we are financially responsible for their total healthcare costs.

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Total Member Months

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

Center-level Contribution Margin

~~Center-level contribution margin~~

We define Center-level Contribution Margin as total revenues less external provider costs and ~~costs~~cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs. For purposes of evaluating Center-level Contribution Margin on a center-by-center basis, we do not allocate our sales and marketing expense or corporate, general and administrative expenses across our centers.

Center-level Contribution Margin was ~~$41.4~~$111.7 million and ~~$34.5 million for the three months ended March 31, 2021 and 2020, respectively, and~~ $126.0 ~~million and $95.8~~ million for the nine months ended March 31, 2022 and 2021, ~~and 2020,~~ respectively.

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Adjusted EBITDA

We define Adjusted EBITDA as net income adjusted for interest expense, depreciation and amortization, and provision for income tax as well as addbacks for non-recurring expenses or exceptional items, including charges relating to management equity compensation, ~~final~~rate determination, ~~of rates, merger~~executive severance and ~~acquisition transactions~~recruitment, class action litigation, M&A diligence, transaction and ~~the corresponding~~ integration, business optimization, electronic medical ~~records transition, special employee bonuses, consolidation of equity investee,~~record (“EMR”) implementation, financing-related fees and ~~payment of~~ contingent consideration.

For the three months ended March 31, 2021 and 2020, we had a net loss of $(10.9) million and net income of $8.0 million, respectively, representing a period over period decline of 235%, while Adjusted EBITDA was $20.3 million and $17.6 million, respectively, representing a period over period growth rate of 15%.

For the nine months ended March 31, 2022 and 2021, ~~and 2020, we had a~~ net ~~loss of $(51.1)~~income was $5.6 million and net loss was $51.1 million, respectively, and our net income ~~of $13.8~~(loss) margin was 1.1% and (11%), respectively. Adjusted EBITDA was $34.9 million and $66.0 million, for the nine months ended March 31, 2022 and 2021, respectively, representing a ~~period over period decline~~year-over-year decrease of ~~470%, while~~47.1%. The decrease in Adjusted EBITDA ~~was $65.9 million~~ and ~~$42.9 million, respectively, representing~~Adjusted EBITDA margin is primarily from (i) the impact of normalization of center-level contribution margin as a ~~period over period~~result of (a) our participants seeking healthcare services that were delayed during the onset of the COVID-19 pandemic coupled with the Omicron surge and state-mandated increases in housing cost, and (b) costs associated with the re-opening of our centers and higher wage rates, (ii) an increase in sales and marketing expense as a result of growth ~~rate of 54%.~~and our investment in digital and other sales initiatives and (iii) higher corporate, general and administrative expenses, primarily attributable to growth and costs associated with being a publicly traded company.

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

Three Months Ended

Nine Months Ended

March 31,

March 31,


2021

2020

2021

2020
(In thousands)

Net income

$
(10,862)

$
7,990

$
(51,055)

$
13,787
Interest expense, net

4,876

2,361

17,061

11,287
Depreciation and amortization

3,311

2,769

9,262

8,310
Provision (benefit) for income tax

(4,264)

2,867

5,159

4,954
Management equity plan

530

135

1,102

407
Rate determination^(a)

—

(199)

(2,158)

(199)
M&A diligence, transaction and integration^(b)

4,548

1,076

63,333

2,541
Business optimization^(c)

268

390

1,127

622
EMR transition^(d)

66

123

335

761
Special employee bonus^(e)

204

—

727
Gain on consolidation of equity investee^(f)

(10,871)

—

(10,871)

—
Financing-related^(g)

13,488

—

14,479

30
Contingent consideration^(h)

19,222

(99)

18,211

(250)
Adjusted EBITDA

$
20,312

$
17,617

$
65,985

$
42,977

Three Months Ended

Nine Months Ended

March 31,

March 31,

in thousands

2022

2021

2022

2021

Net income (loss)

$
(3,158)

$
(10,862)

$
5,572

$
(51,055)

Interest expense, net

709

4,876

1,930

17,061

Depreciation and amortization

3,850

3,311

10,435

9,262

Provision for income tax

(4,116)

(4,264)

81

5,159

Stock-based compensation

845

530

2,586

1,102

Rate determination^(a)

—

—

—

(2,158)

Executive severance and recruitment^(b)

—

—

4,123

—

Class action litigation^(c)

246

—

292

—

M&A diligence, transaction and integration^(d)

693

4,548

1,533

63,333

Business optimization^(e)

2,460

268

7,248

1,127

EMR implementation^(f)

402

66

1,095

335

Gain on consolidation of equity investee^(g)

—

(10,871)

—

(10,871)

Financing-related fees^(h)

—

13,488

—

14,479

Contingent consideration⁽ⁱ⁾

—

19,222

—

18,211

Adjusted EBITDA

$
1,931

$
20,312

$
34,895

$
65,985

(a) ~~For the nine months ended March 31, 2021, this reflects~~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.
(c) Reflects charges related to litigation by shareholders.
(d) For the nine months ended March 31, 2021, this is primarily ~~due~~represents (i) $45.4 million related to the cancellation of options and the redemption of shares and (ii) $13.1 million of transaction fees and expenses recognized in connection with the July 27, 2020 transaction between us, an affiliate of Apax Partners and our then existing equity holders entering into a Securities Purchase Agreement (the “Apax Transaction”) which resulted in expense of $58.3 million, relating to $42.2 million from the cancellation of options and the redemption of shares, $1.8 million related to transaction specific bonuses, $13.1 million relates to transaction fees and expenses, $2.2 million related to reclassification of warrant liability and $1.7 million relating to payroll taxes and other administrative items..
~~(c)~~ (e) Reflects charges related to business optimization initiatives. Such charges relate to one-time investments in projects designed to enhance our technology and compliance systems, and improve and support the efficiency and effectiveness of our operations.
~~(d)~~ (f) Reflects non-recurring expenses relating to the ~~transition to~~implementation of a new electronic medical record vendor.
~~(e)~~ (g) Reflects non-recurring ~~special bonuses paid to certain of our employees of the Company relating to shareholder dividend transactions that occurred in fiscal years 2018 and 2019.~~
~~(f)~~ ~~Reflects non-recurring expense related to the~~ gain on consolidation of InnovAge ~~Sacramento.~~Sacramento during the three and nine months ended March 31, 2021.
~~(g)~~ (h) Reflects fees and expenses incurred in connection with amendments to our credit agreements. See Note 8, “Long Term Debt” to the condensed consolidated financial statements.
~~(h)~~ (i) Reflects the contingent consideration fair value adjustment made during the reporting period associated with ~~its~~our acquisition of ~~New Courtland.~~NewCourtland.

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Net income (loss) margin and Adjusted EBITDA margin

Net loss margin is net loss expressed as a percentage of our total revenue. Adjusted EBITDA margin is Adjusted EBITDA expressed as a percentage of our total revenue less any exceptional, ~~one-time~~one time revenue items.
In For the nine months ended March 31, 2022, net income margin was 1.1%, as compared to net loss margin of 11.0% for the nine months ended March 31, 2021. For the nine months ended March 31, 2022, our Adjusted EBITDA margin was 6.6%, as compared to our Adjusted EBITDA margin for the nine months ended March 31, 2021 ~~we recognized the CMS settlement payment related to end stage renal disease beneficiaries for calendar years 2010-2020 in the amount~~ of ~~approximately $2.2 million, which is deducted from total revenue solely for purposes of calculating Adjusted EBITDA margin.~~
~~For the three months ended March 31, 2021 and 2020, our net income margin increased from 5.5% to (6.9)%, respectively, and Adjusted EBITDA Margin expanded from 12.2% to 13.0%, respectively.~~
~~For the nine months ended March 31, 2021 and 2020, our net income margin increased from 3.3% to (11.0)%, respectively, and Adjusted EBITDA Margin expanded from 10.4% to~~ 14.2%~~, respectively.~~.
Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures of operating performance monitored by management that are not defined under ~~U.S.~~ GAAP and that do not represent, and should not be considered as, an alternative to net income (loss) and net income (loss) margin, respectively, as determined by ~~U.S.~~ GAAP. We believe that Adjusted EBITDA and Adjusted EBITDA margin are appropriate measures of operating performance because the metrics eliminate the impact of revenue and expenses that do not relate to our ongoing business performance, allowing us to more effectively evaluate our core operating performance and trends from period to period. We believe that Adjusted EBITDA and Adjusted EBITDA margin help investors and analysts in comparing our results across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. These non-GAAP financial

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measures have limitations as analytical tools and should not be considered in isolation from, or as a substitute for, the analysis of other ~~U.S.~~ GAAP financial measures, including net income (loss) and net income (loss) margin. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. 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~~The use of the term Adjusted EBITDA varies from others in our industry.

Liquidity and ~~capital resources~~Capital Resources

General

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 ~~sales~~sale of common ~~stock.~~stock in our IPO that occurred in March 2021. As of March 31, ~~2021,~~2022, we had cash and cash equivalents of ~~$201.5~~$199.5 million. Our cash and cash equivalents primarily consist of highly liquid investments in demand deposit accounts and cash.
Our capital resources are generally used to fund (i) debt service requirements, the majority of which relate to the quarterly principal payments of the Term Loan Facility (as defined in Note 8, “Long Term Debt” to the condensed consolidated financial statements) due 2026, (ii) capital and operating lease obligations, which are generally paid on a monthly basis and include maturities through 2025 and 2032, respectively, (iii) the operations of our business, including special projects such as our transition to a new electronic medical record vendor, with respect to which we expect to incur non-recurring implementation costs over the next 18 months, and ongoing costs through 2026, and (iv) income tax payments, which are generally due on a quarterly and annual basis. We also expect to use capital resources for capital additions, which we expect to primarily relate to the development of de novo centers to the extent and as they are opened. Collectively, these obligations are expected to represent a significant liquidity requirement of our Company on both a short-term and long-term basis. For additional information regarding our lease obligations, debt and commitments, see Note 7, “Leases”, Note 8, “Long Term Debt” and Note 9, “Commitments and Contingencies” to our condensed consolidated financial statements.
We believe that our cash and cash equivalents and our cash flows from operations will be sufficient to fund our operating and capital needs for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, the timing and extent of spending to open new centers and the expansion of sales and marketing activities. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. 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 (the “2016 Credit Agreement”). The 2016 Credit Agreement was subsequently amended and amended and restated a number of

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times. 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 have been repaid in full.

On March 8, 2021, concurrently with the closing of the IPO, the Company entered into a new credit agreement, ~~(the “2021~~(“the 2021 Credit Agreement”), that replaced the 2016 Credit ~~Agreement.~~Agreement, as further discussed in Note 8, “Long Term Debt” to our condensed consolidated financial statements. The 2021 Credit Agreement consists of a senior secured term loan, Term Loan Facility, of $75.0 million principal amount and a revolving credit facility, Revolving Credit Facility, of $100.0 ~~million.~~million maximum borrowing capacity, each as defined and described in Note 8, “Long Term debt” to the condensed consolidated financial statements. Principal on the ~~senior secured term loan~~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 ~~new senior secured loan,~~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 March 31, ~~2021,~~2022, the interest rate on the ~~senior secured term loan~~Term Loan Facility was ~~1.94%~~2.21%. Under the terms of the 2021 Credit Agreement, the ~~revolving credit facility~~Revolving Credit Facility fee accrues at 0.25% of the average daily unused amount and is paid quarterly. ~~There is also an immaterial administrative fee.~~ As of March 31, ~~2021,~~2022, we had no borrowings outstanding under the ~~revolving credit facility~~Revolving Credit Facility and, therefore, had full capacity ~~thereunder.~~thereunder, subject to applicable covenant compliance restrictions and any other conditions precedent to borrowing. As of

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March 31, ~~2021,~~2022, we also had $2.4 million principal amount outstanding under our convertible term loan. Monthly principal and interest payments are approximately $0.02 million, and the loan bears interest at an annual rate of 6.68%. The remaining principal balance is due upon maturity, which is August 20, 2030.

For more information about our debt, see Note ~~8. Long~~8 “Long Term ~~Debt,~~Debt” to our ~~Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.~~condensed 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~~business.

Condensed Consolidated Statements of Cash Flows

Our consolidated statements of cash ~~dividends in the foreseeable future.~~

~~Cash, cash equivalents, and restricted cash~~

~~The following table presents a summary of our consolidated cash, cash equivalents, and restricted cash from operating, investing and financing activities for the periods indicated.~~

Nine Months Ended

March 31,
(In thousands)


2021


2020
Net cash provided by (used in) operating activities

$
(17,028)

$
20,021
Net cash used in investing activities

(16,083)

(7,790)
Net cash provided by financing activities

122,309

22,703
Net change in cash

89,198

34,934
Cash at beginning of period

114,565

61,196
Cash at end of period

$
203,763

$
96,130

~~Operating activities~~
~~For the nine months ended March 31, 2021, net cash used in operating activities was $(17.0) million, a decrease of $37.0 million compared to net cash provided by operating activities of $20.0 million~~flows for the nine months ended March 31, ~~2020.~~ 2022 and 2021 are summarized as follows:


Nine Months Ended

March 31,

2022

2021

$ Change
in thousands


Net cash provided by (used in) operating activities

$
24,059

$
(17,028)

$
41,087
Net cash used in investing activities

(23,578)

(16,083)

(7,495)
Net cash provided by (used in) financing activities

(4,670)

122,309

(126,979)
Net change in cash

(4,189)

89,198

(93,387)
Cash at beginning of period

203,700

114,565

89,135
Cash at end of period

$
199,511

$
203,763

$
(4,252)

Operating Activities. The ~~principal contributors~~change in net cash provided by (used in) operating activities was primarily due to the ~~year-over-year change~~net effect of (i) net income of $5.6 million in the current year period compared to a net loss of $51.1 million in the prior year period, as described further above, (ii) a net increase in working capital primarily as a result of the impact of the completion of the Colorado Department of Health Care Policy & Financing’s (“HCPF”) reconciliation, as described below, and the timing of accrued expenses.
In fiscal year 2021, the Company and the HCPF completed the reconciliation for fiscal years 2018 and 2019. The reconciliation resulted in a net adjustment of reduction of accounts receivable of $3.4 million, which was recorded in fiscal year 2021. The Company does not expect adjustments related to the reconciliation to be significant in future periods.
Investing Activities. Investing activities were made up of approximately $22.7 million in purchases of property and equipment.
Financing activities. The decrease in net cash used in financing activities was primarily due to the net effect of the Apax Transaction in fiscal year 2021, which included net proceeds on long-term debt of $79.1 million, $77.6 million related to treasury stock purchases and $32.4 million related to stock option cancellation payments, those payments of which did not recur in fiscal year 2022.
Contractual Obligations and Commitments
Our principal commitments consist of repayments of long-term debt and obligations under operating ~~cash flows were as follows:~~and capital leases. As of March 31, 2022, we had $74.5 million of long-term debt outstanding. See Note 8, “Long Term Debt” in our condensed consolidated financial statements for more information. As of March 31, 2022, we had future minimum operating lease payments under non-cancellable leases through the year 2032 of $33.8 million. We also had non-cancellable capital lease agreements with third parties through the year 2027 with future minimum payments of $14.6 million. See Note 7, “Leases” in our condensed consolidated financial statements for more information.

● net loss of $(50.5) million for the nine months ended March 31, 2021 as compared to $14.2 million for the nine months ended March 31, 2020 decreased primarily due to expenses related to the Apax Transaction, the IPO, and the $20.0 million payment made under the acquisition agreement of the New Courtland LIFE Program that resulted in a non-reoccurring Corporate, general and administrative expense totaling $55.3 million;

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●

deferred income taxes for the nine months ended March 31, 2021 of $(3.5) million as compared to $0.3 million for the nine months ended March 31, 2020 changed primarily due to disallowed officers’ compensation under IRC Section 162(m); and

●

increase in amounts due to Medicare and Medicaid of $12.7 million for the nine months ended March 31, 2021 compared to ($5.2) million for the nine months ended March 31, 2020 due to HCPF reconciliation and settlement process.

~~Investing activities~~

For the nine months ended March 31, 2021, net cash used in investing activities was $16.1 million, an increase of $8.3 million compared to net cash used in investing activities of $7.8 million for the nine months ended March 31, 2020 due primarily to growth-related capital expenditures.

~~Financing activities~~Off Balance Sheet Arrangements

Cash provided by financing activities for the nine months ended March 31, 2021 was $122.3 million primarily due to IPO net proceeds of $373.6 million, partially offset by net payments on long-term debt of $137.6 million in debt payments, treasury stock purchases of $77.6 million, and stock option cancellation payments of $32.4 million.

~~Cash provided by financing activities for the nine months ended March 31, 2020 was $22.7 million primarily due to net borrowings on long-term debt for $23.6 million.~~

~~Contractual obligations and commitments~~

~~Other than the Long-term debt obligations noted below, there have been no material changes outside of the normal course of business as disclosed in the IPO Prospectus:~~

Payments due by period

Less than

1-3

3-5

More than
(In thousands)

Total

1 year

years

years

5 years
Long-term debt obligations⁽¹⁾

$
77,377

3,990

11,970

60,480

$
937
~~(1)~~ ~~Represents amounts related to the Credit Agreement and the convertible term loan.~~

~~Off balance sheet arrangements~~
We did not have any off balance sheet arrangements as of March 31, ~~2021.~~2022.

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

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In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We ~~intend to~~ take advantage of the longer phase-in periods for the adoption of new or revised financial accounting standards under the JOBS Act until we are no longer an emerging growth company. Our election to use the phase-in periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the longer phase-in periods permitted under the JOBS Act and who will comply with new or revised financial accounting standards. If we were to subsequently elect instead to comply with public company effective dates, such election would be irrevocable pursuant to the JOBS Act.

Critical ~~accounting policies~~Accounting Policies and Estimates
~~Our~~The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, ~~and accompanying notes~~which have been prepared in accordance with ~~U.S.~~ GAAP. The preparation of these financial statements requires usmanagement to make estimates and ~~assumptions~~judgments that affect the reported amounts ~~reported~~ of assets and liabilities ~~revenue~~and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses ~~and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under~~during the circumstances. We evaluate our estimates and assumptions on an ongoing basis. The future effects of the COVID-19 pandemic on our results of operations, cash flows, and financial position are unclear, however, we believe we have made reasonable estimates and assumptions in preparing the financial statements.reporting period. Actual results may differ from these ~~estimates. To~~estimates under different assumptions or conditions, impacting our reported results of operations and financial condition.
Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the ~~extent that there are material differences between~~carrying value of assets and liabilities and the recognition of income and expenses. We consider these accounting policies to be critical accounting policies. The estimates and ~~our actual results, our future financial statements will~~assumptions used by management are based on historical experience and other factors, which are believed to be ~~affected.~~
reasonable under the circumstances.
For a description of our policies regarding our critical accounting policies, see “Critical Accounting ~~Policies”~~Policies and Estimates” in the ~~IPO Prospectus.~~2021 Annual 10-K. There have been no significant changes in our critical accounting ~~estimate~~ policies, estimates, or methodologies to our condensed consolidated financial ~~statements.~~statements

~~Recent accounting pronouncements~~
See Note 2 “Summary of Significant Accounting Policies—Recent Accounting Pronouncements” in our condensed consolidated financial statements included elsewhere in this report for information on recent accounting pronouncements..

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure due to potential changes in inflation or interest rates. We do not hold financial instruments for trading purposes.
Interest rate risk
As of March 31, 2022, we had total outstanding debt of $72.1 million in principal amount under the Term Loan Facility, $2.3 million under the convertible term loan, and no outstanding debt under the Revolving Credit Facility (each as defined in Note 8, “Long Term Debt” to our condensed consolidated financial statements). As of June 30, 2021, we had total outstanding debt of $75.0 million in principal amount under the Term Loan Facility $2.4 million under the convertible term loan, and no outstanding debt under the Revolving Credit Facility. As of June 30, 2020, we had total outstanding debt of $190.0 million in principal amount under the prior Term Loan Facility, $25.0 million under the prior Revolving Credit Facility and $2.4 million under the Convertible Term Loan. ~~Borrowings under~~As of March 31, 2022, the ~~2016 Credit Agreement bore~~ interest ~~at a floating~~ rate ~~per annum, equal to an applicable margin, plus, at our option, an alternative base rate or Eurodollar rate.~~
Under the 2016 Credit Agreement, the applicable margin for borrowings was (a) with respect to term loan borrowings, 5.5% for alternate base rate borrowings and 6.5% for Eurodollar borrowings and (b) with respect to revolving loans, 3.5% for alternate base rate borrowings and 4.5% for Eurodollar borrowings. Under the 2021 Credit Agreement, the applicable margin for borrowings is (a) with respect to term loan and revolving loan borrowings, 0.75% for alternate base rate borrowings and 1.75% for Eurodollar borrowings.

~~Additionally, we are required to pay the following fees pursuant to the terms of the 2021 Credit Agreement:~~

~~(a) a commitment fee~~ on the ~~average daily unused portion of the revolving credit commitments of 0.25% effective March 8, 2021 and 0.5% per annum prior to that date;~~
~~(b) a customary administrative agent fee to the first lien administrative agent;~~
(c) a participation fee on the daily amount of letter of credit exposure of each letter of credit issued by each issuing bank at a rate equal to 5.0% with respect to the term loan borrowings after the 2021 Credit Agreement; and
~~(d) a fronting fee which shall accrue at 0.125% on the actual daily amounts of the exposure determined in the prior subsection (c).~~
Term Loan Facility was 2.21%
We had cash and cash equivalents of ~~$201.5~~$199.5 million and ~~$112.9~~$201.5 million as of March 31, ~~2021~~2022 and June 30, ~~2020,~~2021, respectively, which are deposited with high credit quality financial institutions and are primarily in demand deposit accounts.
Our cash and cash equivalents and interest payments in respect of our debt are subject to market risk due to changes in interest rates. We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on our business, financial condition or results of operations.
Inflation risk
Based on our analysis of the periods presented, we believe that inflation has not had a material effect on our operating results. There can be no assurance that future inflation, including as a result of COVID-19, will not have an adverse impact on our operating results and financial condition.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined

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in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this ~~report.~~Report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of March 31, ~~2021.~~2022.

Changes to our Internal Controls over Financial Reporting

There have been no changes in internal control over financial reporting during the quarter ended March 31, ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
~~None.~~For information regarding our material pending legal proceedings, refer to Note 9 to our Condensed Consolidated Financial Statements located in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Item 1.A Risk Factors

Other than the updates to the risk ~~factor~~factors set forth below, there have been no material changes to the risk factors disclosed in the “Risk factors” section of ~~the IPO Prospectus.~~our 2021 10-K.

Risks ~~related~~Related to our ~~business~~Business

~~A pandemic, epidemic or outbreak~~We may be subject to legal proceedings, enforcement actions and litigation, malpractice and privacy disputes, which are costly to defend and could materially harm our business and results of ~~an infectious disease in the United States or worldwide, including the ongoing outbreak of COVID-19, could adversely affect our business.~~operations.

~~The severity, magnitude~~We may be party to lawsuits and ~~duration~~legal proceedings in the normal course of business. These matters are often expensive and disruptive to normal business operations. We may face allegations, lawsuits and regulatory inquiries, requests for information, audits and investigations regarding care and services provided to participants, the False Claims Act (“FCA”), data privacy, security, labor and employment, consumer protection or intellectual property. We may also face allegations or litigation related to our acquisitions, securities issuances or business practices, including public disclosures about our business. On October 14, 2021, 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 ~~current COVID-19 pandemic~~Company’s common stock during a specified period. We are currently unable to predict the outcome of this proceeding. In addition, 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, 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.
Litigation and regulatory proceedings may be protracted and expensive, and the results are difficult to predict. Certain of these matters include claims for substantial or indeterminate amounts of damages and may include claims for injunctive relief. Additionally, our litigation costs could be significant. Adverse outcomes with respect to litigation or any of these legal proceedings may result in significant settlement costs or judgments, penalties, fines and sanctions. In the event of compliance issues, sanctions could include civil monetary penalties, corrective action plans, monitoring, contract termination, and/or CMS and/or Medicaid agencies suspending or restricting enrollment with us (as is ~~uncertain~~the case currently with respect to our Sacramento, California center, and ~~rapidly changing. Because~~our centers in the State of Colorado), which could negatively impact our geographical expansion and revenue growth. We are also subject to periodic audits, which have and may continue to increase our regulatory compliance costs and may require us to change our business ~~model,~~practices, which could negatively impact our revenue growth. Managing legal proceedings, regulatory inquiries, litigation and audits, even if we achieve favorable outcomes, is costly, time-consuming and diverts management’s attention from our business.
The results of regulatory proceedings, investigations, inquiries, litigation, claims, and audits cannot be predicted with certainty, and determining reserves for pending litigation and other legal, regulatory and audit matters requires significant judgment and assumptions. There can be no assurance that our expectations will prove correct, and even if these matters are resolved in our favor or without significant cash settlements, these matters, and the ~~full impact of the COVID-19 pandemic may not be fully reflected in~~time and resources necessary to litigate or resolve them, cause harm to our reputation, business, financial condition, results of operations and ~~overall financial condition until future periods. Additionally, any future pandemic, epidemic or outbreak of an infectious disease may adversely affect our business if one of~~ the geographies we serve is affected by the outbreak, particularly at the onset of any such outbreak before response protocols have been developed. Specifically, if our participants fall ill due to an outbreak, we may experience a high level of unexpected deaths, increased costs, and other effects, including a loss of revenue, negative publicity, litigation and inquiries from government regulators.

~~Adverse~~ market ~~conditions resulting from the spread of the virus that causes COVID-19 could materially and adversely affect our business and the value~~price of our common stock. Numerous state and local jurisdictions, including some markets where we operate, continue to impose, and others in the future may impose, travel bans and restrictions, “shelter-in-place” orders or shutdowns, quarantines, curfews, executive orders and similar government orders and restrictions for their residents to control the spread of the virus that causes COVID-19. Such orders or restrictions have resulted in largely remote operations at our headquarters and centers, work stoppages among some vendors and suppliers, slowdowns and delays, travel restrictions and cancellation of events and have restricted the ability of our front-line outreach teams to host and attend community events, among other effects, thereby significantly impacting our operations. In addition, the COVID-19 virus disproportionately impacts older adults, especially those with chronic illnesses, which describes many of our participants.

~~The COVID-19 pandemic has significantly~~We are also subject to lawsuits under the FCA and ~~temporarily increased demand~~comparable state laws for our telehealth and in-home offerings. The telehealth market is relatively new, and it is uncertain whether it will achieve and sustain high levels of demand, consumer acceptance and market adoption. Although our pivot to telehealthsubmitting allegedly fraudulent, inadequately supported or otherwise inappropriate bills for services has been a useful tool for providing remote care during the COVID-19 pandemic, the COVID-19 pandemic has limited our ability to provide in-person care. If our participants do not perceive the benefits of telehealth services, or if our services are not competitive, it could have a material adverse effect on our business, financial condition or results of operations. Similarly, individual and healthcare industry concerns or negative publicity regarding participant confidentiality and privacy in the context of telehealth could limit market acceptance of such healthcare services. In addition, some

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of our participants may lack access to telehealth devices, such as cell phones and/or computers, or may be unable to use the telehealth technology on their own. Because some of our participants may not be comfortable with a team member coming to their home to deliver face-to-face care or entering with a device to assist with using our telehealth services, participants may be reluctant to seek necessary care given their inability to use telehealth services, coupled with preference to stay at home due to the ~~risks of the COVID-19 pandemic. This could have the effect of deferring healthcare costs that we will need to incur at later periods~~Medicare and may also affect the health of participants who defer treatment, which may cause our costs to increase in the future. Further, as a result of the COVID-19 pandemic, we may experience slowed growth or a decline in new participants.

Due to the COVID-19 pandemic, we may not be able to document the health conditions of our participants as completely as we have in the past. Medicare pays capitation using a “risk adjustment model,” which compensates providers based on the health status (acuity) of each individual participant. Participants with higher RAF scores necessitate larger capitated payments, and those with lower RAF scores necessitate smaller capitated payments. Medicare requires that a participant’s health issues be documented annually regardless of the permanence of the underlying causes. Historically, this documentation was required to be completed during an in-person visit with a participant, but CMS is now allowing documentation of conditions identified during qualifying telehealth visits with participants. However, given the disruption caused by the COVID-19 pandemic and the limitations relating to assessing the health needs of our participants through telehealth services described above, it is unclear whether we will be able to document the health conditions of our participants as comprehensively as we have historically, which may adversely impact our revenue in future periods.

The COVID-19 pandemic temporarily forced our centers to close or to perform operations remotely reducing our frequent in-person contact with participants and exacerbated difficulties to hire additional healthcare professionals, causing certain of our centers to be understaffed or staffed with personnel that requires training. The general lack of in-person interaction and the reduction in healthcare personnel, and specifically, trained personnel, has impacted and may continue to impact our ability to adhere to the complex government laws and regulations that apply to our business. PACE regulators require that new participants be assessed within a period of 30 days from enrollment to our programs and for us to provide them a personalized care plan. Recently, we became aware that certain of our centers failed to timely complete a portion of these new participant assessments and care plans. We are working diligently to remedy this issue. Failure to conduct assessments or produce care plans within the required period of time may subject us to suspension of new enrollment or restrict enrollment at the affected centers and other centers in the affected state.Medicaid programs. These or future violations of these requirements or other government laws or regulations could result in significant consequences that may have a material adverse effect on our business, results of operations, financial condition and cash flows.

On March 27, 2020, the CARES Act was signed into law. The CARES Act provides for $100.0 billion in funding for healthcare providers, including hospitals on the front lines of the COVID-19 pandemic, and subsequent COVID-19 economic relief legislation authorized additional funding to be distributed to healthcare providers. The state of Pennsylvania enacted Act 24 of 2020 (“Act 24”), which allocates $10.0 million in federal CARES Act funding to Managed Long Term Care Organizations to cover COVID-19 related costs. Our Pennsylvania centers were granted $1.0 million of funding from Act 24. As of June 30, 2020, we recognized $0.7 million of such funds and for the six months ended December 31, 2020, we recognized the remaining funds of $0.3 million. As a result of receiving this funding, we may be subject to audits and oversight by the federal government and Pennsylvania regulators, and there is no guarantee that the funds we received could not be subject to recoupment. Recipients are not required to repay these funds, provided that they attest to and comply with certain terms and conditions, including not using funds received to reimburse expenses or losses that other sources are obligated to reimburse, as well as certain audit and reporting requirements.

As of June 30, 2020, we incurred $3.5 million of COVID-19 related costs, and for the six months ended December 31, 2020, we incurred an additional $2.4 million of COVID-19 related costs. We expect our COVID-19 related expenses to continue to increase, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.

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lawsuits, which may be initiated by government authorities as well as private party relators, can involve significant monetary damages, fines, attorney fees and the award of bounties to private plaintiffs who successfully bring these suits, as well as to the government programs. In recent years, government oversight and law enforcement have become increasingly active and aggressive in investigating and taking legal action against potential fraud and abuse.

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 ~~extent~~demand requests information and ~~continued~~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.

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). The Company is fully cooperating with the DOJ to produce the requested information and documentation. We are currently unable to predict the outcome of this investigation.

Furthermore, our business exposes us to potential medical malpractice, professional negligence or other related actions or claims that are inherent in the provision of healthcare services. While the industry has not seen an increase in the number of claims of this nature due to the impact of the COVID-19 pandemic, this remains a possibility due to the relatively lengthy claim development inherent in professional liability claims. These claims, whether or not they have merit, could cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our core business, harm our reputation and adversely affect our ability to attract and retain participants, any of which could have a material adverse effect on our business, ~~will depend on certain developments, including:~~financial condition and results of operations.

Although we maintain third-party professional liability insurance coverage, it is possible that claims against us may exceed the ~~duration and spread~~coverage limits of ~~the outbreak; government responses to the pandemic, including responses to state budget shortfalls; the impact on~~ our ~~participants and enrollment; the availability, effectiveness and receipt~~insurance policies. Even if any professional liability loss is covered by an insurance policy, these policies typically have substantial deductibles for which we are responsible. Professional liability claims in excess of ~~vaccines by our participants and our employees; the impact on participant, industry or employee events; and the~~applicable insurance coverage could have a material adverse effect on our ~~supply chains, all~~business, financial condition and results of ~~which are uncertain~~operations. In addition, any professional liability claim brought against us, whether or not they have merit, could result in an increase of our professional liability insurance premiums. Insurance coverage varies in cost and can be difficult to obtain, and we cannot guarantee that we will be ~~predicted. Because~~able to obtain insurance coverage in the future on terms acceptable to us or at all. If our costs of insurance and claims increase, then our earnings could decline.

We depend on our senior management team and other key employees, and the loss of one or more of these employees or an inability to attract and retain other highly skilled employees could harm our business.

Our success depends largely upon the services of our senior management team and other key employees. We rely on our leadership team in the areas of operations, provision of medical services, information technology and security, marketing, and general and administrative functions. Since we became a public company, there have been changes in our executive management team resulting from the hiring or departure of executives. Effective January 1, 2022, our Board of Directors elevated Patrick Blair, then President of the Company, to the position of President and Chief Executive Officer to replace Maureen Hewitt, our former Chief Executive Officer, who resigned effective on that same date. Even though Mr. Blair has had a long and successful career in healthcare, joining the Company from BAYADA Home Health Care, where he was the Group President responsible for overall quality and financial performance of the Home Health, Hospice and Personal Care businesses, failure to execute a smooth transition could affect the execution of our business ~~model, the full impact~~strategy and relationships with regulators and other stakeholders. In addition, our employment agreements with our executive officers and other key personnel do not require them to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time. The loss, whether as a result of voluntary termination or illness, of one or more of the ~~COVID-19 pandemic~~members of our senior management

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team, or other key employees, could harm our business. Changes in our executive management team may ~~not be fully reflected~~also cause disruptions in, and harm to, our business.

Risks Related to Regulation

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, ~~and overall~~liquidity, financial condition ~~until future periods.~~and reputation.

ToAs a result of our PACE contracts with CMS and state government agencies, state licenses, and participation in Medicaid, we are routinely subject to, and will continue to be subject to, various governmental inspections, reviews, audits, requests for information and investigations to verify our compliance with requirements of these programs and applicable laws and regulations, assess the ~~extent~~quality of the ~~COVID-19 pandemic~~services we are providing to our participants, and evaluate the accuracy of the risk adjustment data we have submitted to the government.

Colorado. On May 26, 2021, the Colorado Department of Health Care Policy & Financing(“HCPF”)and the Colorado Department of Public Health and Environment (“CDPHE”) initiated a joint audit of our Colorado PACE centers, and on June 21, 2021, CMS also initiated a separate focused desk audit of our Colorado PACE program. We received preliminary findings from CMS and HCPF/CDPHE in July 2021, followed by validation results in October 2021. In conjunction with providing validation results, the agencies referred our case to the Compliance and Enforcement Division of CMS for review and possible further action. Effective December 23, 2021, CMS suspended new enrollments at the Company’s Colorado centers, based on deficiencies detected in the joint audit related to participant provision of services, which can be categorized as care delivery and management, care coordination and documentation of care. The suspension will remain in effect until CMS determines that we have remediated the deficiencies to their satisfaction. Effective on the same date, HCPF also determined to impose sanctions and suspended new enrollments at the Company’s Colorado centers identifying certain deficiencies specific to Medicaid. In addition, as a result of their specific findings, CDPHE mandated that we retain a consultant for a period of 12 months to oversee our remediation efforts, and issued a $10,000 penalty, which we have paid. On January 17, 2022 and February 5, 2022, we submitted a CAP to each of CDPHE and CMS, respectively. A separate CAP for HCPF was submitted on February 22, 2022. CDPHE and CMS have accepted the CAPs, and as a result, we are currently monitoring the implementation of these CAPs. We cannot guarantee that HCPF will accept the CAP we submitted, that we will be able to implement the CAPs, or that we will be able to remedy the deficiencies specified by each of the agencies. In addition, although these agencies coordinate many of the actions taken with respect to these audits, they each have separate mandates and are not obligated to act together or reach the same decisions. Therefore, we cannot guarantee that the agencies will not separately request further actions or impose additional separate sanctions.

California. On May 10, 2021, CMS began a routine, scheduled audit of our Sacramento, California center. On September 17, 2021, we were notified that CMS had determined to suspend new enrollments at our Sacramento center based on deficiencies detected in the audit related to participant provision of services, which can be categorized as care delivery and management, care coordination and documentation of care, and on September 30, 2021, we were further notified that the Department of Health Care Services (“DHCS”) of the State of California had reached the same determination. The suspension will remain in effect until CMS and DHCS determine that we have remediated the deficiencies to their satisfaction. We submitted a CAP on October 15, 2021, which has been accepted by both CMS and DHCS. As a result, both agencies are currently monitoring the implementation of the CAP. On January 7, 2022, DHCS 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 CAPs and the remediation and validation processes for our Sacramento center have been successfully completed and the enrollment sanctions are lifted. As a result of the suspension, we will be unable to open one of the de novo centers we had identified in California within our planned timeline. In March 2022, CMS and DHCS began separate audits of our San Bernadino, California center. Both agencies have finalized their field work and recently issued preliminary results identifying certain deficiencies related to participant provision of services, which can be categorized as care delivery and management, care coordination and

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documentation of care. We are currently in the audit validation process, which entails provision of various participant records. Following such process, we expect to receive results from the audit. At this time, we cannot guarantee the outcome of this audit, including whether or not sanctions will be imposed.

New Mexico. As previously disclosed, in November 2021, CMS began an audit of our Albuquerque, New Mexico center. On November 23, 2021, we received preliminary results identifying certain deficiencies related to participant provision of services, which can be categorized as care delivery and management, care coordination and documentation of care. Validation results were received in March 2022 and in conjunction with providing validation results, the agency referred our case to the Compliance and Enforcement Division of CMS for review and possible further action. At this time, we cannot guarantee the final outcome of this audit. If CMS were to suspend enrollments at, or otherwise curtail, our center or impose other sanctions, such actions could have a material adverse effect on our business operations, financial results and reputation.

Kentucky. 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.

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

Florida. 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 planned de novo centers in the State of Florida, to focus on remediating deficiencies raised in the audit processes.

At this time, we cannot guarantee the final outcome of any of the audits and processes described above. If we are unable to effectively remediate the deficiencies raised by the audits, implement the CAPs we have submitted, will submit or may be required to submit, or otherwise satisfy the agencies’ concerns, we could be subject to additional sanctions and our business plan, including our growth strategy (including with respect to enrollment growth and de novo openings), would continue to be adversely ~~affects~~impacted. Our management has been working collaboratively with the various agencies, including CMS.

In general, inspections, reviews, audits, requests for information or investigations with adverse findings, and in particular the audits described above, have resulted in and may further result in:

●

temporary or permanent enrollment sanctions in the affected center(s), as is the case with our Sacramento, California center and our centers in the State of Colorado;

●

refunding amounts we have been paid by the government;

●

state or federal agencies imposing CAPs, fines, penalties, training, policies and procedures, and other requirements or sanctions on us;

●

temporary suspension of payments;

●

debarment or exclusion from participation in federal health care programs;

●

self-disclosure of violations to applicable regulatory authorities;

●

damage to our reputation;

●

the revocation of a facility’s license; and

●

loss of certain rights under, or termination of, our contracts with government payors.

We may be required to refund amounts we have been paid and/or pay fines and penalties as a result of these inspections, reviews, audits, requests for information and investigations. Any of the results noted above could have further material adverse effects on our business and ~~financial results, it may also have~~operating results. Furthermore, the ~~effect of amplifying many of the~~legal, document production and other ~~risks described in the “Risk Factors” section of our IPO Prospectus, including but not limited to those relating to our ability to raise additional capital~~costs associated with complying with these inspections, reviews, audits, requests for information or ~~generate sufficient cash flows necessary to fulfill our obligations under our existing indebtedness or to expand our operations.~~investigations is significant.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities

There were no unregistered sales of equity securities during the ~~three~~nine months ended March 31, ~~2021~~2022..

Use of Proceeds

On March 8, 2021, we completed the IPO of our common stock pursuant to a Registration Statement on Form S-1 (File No. ~~333-252853~~)333-252853), which was declared effective on March 3, 2021. The Company sold 18,995,901 shares of common stock, including the partial exercise of the underwriters’ option to purchase additional shares of common stock at the IPO price of $21.00 per share. The managing underwriters of the IPO were J.P. Morgan Securities LLC, Barclays Capital Inc., Goldman Sachs & Co. LLC and Citigroup Global Markets Inc.

~~In aggregate, the shares issued~~There have been no material changes in the IPO generated $373.6 million in net proceeds, which amount is net of $23.9 million in underwriters’ discounts and commissions and offering costs of $1.4 million. No offering expenses were paid directly or indirectly to any of our officers or directors (or their associates) or persons owning 10% or more of any class of our equity securities or to any other affiliates.

During the three months ended March 31, 2021, we used the net proceeds of the IPO, together with proceeds from our 2021 Credit Agreement, to repay all borrowings outstanding under the 2016 Credit Agreement and to fund the related prepayment fees and expenses and to satisfy an earn-out arrangement in connection with the acquisition of New Courtland. There was no material change in the expectedplanned use of ~~the net~~ proceeds from the IPO asfrom those that were described in the ~~IPO Prospectus.~~
final prospectus filed pursuant to Rule 424(b) with the Securities and Exchange Commission on March 5, 2021.

Item 3. Defaults Upon Senior Securities
None.

Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information
None.

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Item 6. Exhibits
The following is a list of all exhibits filed or furnished as part of this report:

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EXHIBIT INDEX

Exhibit
No.

Description

3.1

Second Amended and Restated Certificate of Incorporation of InnovAge Holding Corp., filed March 3, 2021 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 8, 2021).

3.2

Amended and Restated Bylaws of InnovAge Holding Corp., effective March 3, 2021 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 8, 2021).

~~4.1~~

Registration Rights Agreement, dated as of March 8, 2021, by among the Company and the other signatory party thereto (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 8, 2021).

10.1

~~Director Nomination Agreement,~~Separation Letter, dated as of ~~March 8, 2021,~~January 1, 2022, by and ~~among the Company~~between InnovAge Holding Corp. and ~~the other signatories party thereto~~Maureen Hewitt (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on ~~March 8, 2021)~~January 3, 2022).

~~10.2~~

InnovAge Holding Corp 2021 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to InnovAge Holding Corp.’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on March 5, 2021).

~~10.3~~

Credit Agreement, dated as of March 8, 2021, by and among Total Community Options, Inc., the Borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the other parties thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 12, 2021).

~~10.4§~~

~~Amended and Restated Amendment to InnovAge Holding Corp. Stock Purchase Agreement, effective as of February 9, 2021, by and between InnovAge Holding Corp. and Adventist health System/West~~

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1†

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2†

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

~~Table of Contents~~

104		Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

†

The certifications furnished in Exhibit 32.1 and Exhibit 32.2 hereto are deemed ~~to accompany~~“furnished” with this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

§	~~Exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be provided on a supplemental basis to the Securities and Exchange Commission upon request.~~

5052

Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.
Date: May ~~11, 2021~~10, 2022

INNOVAGE HOLDING CORP.

By:
/s/ Barbara Gutierrez

Name:
Barbara Gutierrez

Title:
Chief Financial Officer

5153


	For the Nine Months Ended
	March 31,		March 31,
	2021		2020
Operating Activities
Net income (loss)	$	(51,055)	$	13,787
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Loss (gain) on disposal of assets		2		1,021
Provision for uncollectible accounts		4,144		3,909
Depreciation and amortization		9,262		8,310
Gain on equity method investment		(10,871)		—
Loss on extinguishment of long-term debt		8,494		—
Amortization of deferred financing costs		948		412
Stock based compensation		1,102		407
Change in fair value of warrants		2,264		—
Deferred income taxes		(3,464)		313
Equity loss		1,343		203
Change in fair value of contingent consideration		—		(250)
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable, net		(1,402)		(6,929)
Prepaid expenses and other		635		274
Income taxes receivable		1,613		2,562
Deposits and other		(606)		689
Accounts payable and accrued expenses		7,717		1,372
Reported and estimated claims		114		(816)
Due to Medicaid and Medicare		12,732		(5,245)
Deferred revenue		—		2
Net cash provided by (used in) operating activities		(17,028)		20,021

Investing Activities
Purchases of property and equipment		(14,083)		(9,088)
Proceeds from the sale of equipment		—		169
Proceeds from net working capital settlements		—		1,129
Purchase of intangible assets		(2,000)		—
Net cash used in investing activities		(16,083)		(7,790)

Financing Activities
Distribution to owners		(9,458)		—
Capital contributions		20,000		—
Payments on capital lease obligations		(1,685)		(850)
Proceeds from long-term debt		375,000		25,000
Principal payments on long-term debt		(512,649)		(1,447)
Payment of debt issuance costs		(8,896)		—
Proceeds from initial public offering of common stock		373,580		—
Treasury stock purchase		(77,603)		—
Payments under acquisition agreements		(3,622)		—
Payments related to option cancellation		(32,358)		—
Net cash provided by financing activities		122,309		22,703

INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS & RESTRICTED CASH	$	89,198	$	34,934
CASH, CASH EQUIVALENTS & RESTRICTED CASH BEGINNING OF PERIOD		114,565		61,196
CASH, CASH EQUIVALENTS & RESTRICTED CASH END OF PERIOD	$	203,763	$	96,130

Supplemental Cash Flows Information
Interest paid	$	16,251	$	10,330
Income taxes paid		7,047		2,080
Prepayment penalty on extinguishment of debt		6,000		—
Property and equipment included in accounts payable		224		—
Property and equipment purchased under capital leases		3,517		1,115


	March 31,		June 30,
Assets/Liabilities	2021		2020
Cash and cash equivalents	$	498	$	435
Accounts receivable		3		1
Prepaid expenses and other		13		7
Property, plant and equipment, net		10,143		10,501
Deposits and other, net		386		376
Accounts payable and accrued expenses		279		199
Current portion long-term debt		39		38
Noncurrent liabilities		454		454
Long-term debt, net of debt issuance costs		3,838		3,901


	January 1,
(In thousands)	2021
Assets:
Cash	$	646
Accounts receivable		786
Property and equipment, net		30,667
Goodwill		8,078
Total assets		40,177

Liabilities:
Accounts payable		530
Reported and estimated claims		330
Due to Medicaid and Medicare		77
Capital leases		428
Other liabilities		48
Total liabilities	$	1,413


	Six Months Ended
(In thousands)	December 31, 2020
Revenue:
Total revenue	$	2,297
Less: members’ interest		921
The Company’s interest		1,376
Cost of operations:
Total cost of operations		4,538
Less: members’ interest		1,820
The Company’s interest		2,718
The Company’s interest in net income (loss)	$	(1,342)


	March 31, 2021		June 30, 2020
Equipment	$	13,777	$	9,845
Less accumulated depreciation		(6,848)		(4,829)
Balance as of end of period	$	6,929	$	5,016


In thousands (000’s)	March 31, 2021		June 30, 2020
Senior secured borrowings:
Senior secured term loan	$	75,000	$	187,625
Revolving credit facility		—		25,000
Convertible term loan		2,377		2,401
Total debt		77,377		215,026
Less unamortized debt issuance costs		2,110		2,656
Less current maturities		2,852		1,938
Long-term debt, net of debt issuance costs	$	72,415	$	210,432


				Weighted-	Average
	Number of	Option		Average	Remaining
	Options	Price Range		Exercise Price	Term (in years)
Outstanding balance, June 30, 2020	8,497,488	$	1.00 - $ 2.35	1.26	6.76
Canceled	(8,497,488)	$	1.00 - $ 2.35	1.26	6.76
Outstanding balance, March 31, 2021	—


				Weighted-Average
	Number of	Weighted-Average		Remaining
	Options	Exercise Price		Term (in years)
Outstanding balance, June 30, 2020	8,497,488	$	0.78	6.76
Canceled	(8,497,488)	$	0.78	6.76
Outstanding balance, March 31, 2021	—


	2021
Expected volatility		44	%
Expected life (years) – Time vesting units		1.8
Interest rate		0.16	%
Dividend yield		0	%
Weighted-average fair values	$	1.28
Fair value of underlying stock	$	5.49


	Nine months ended March 31,
(dollars in thousands)	2021			2020
Key Business Metrics:
Centers⁽¹⁾		18			16
Census⁽²⁾		6,655			6,336
Total Member Months		59,050			55,762
Center-level Contribution Margin⁽³⁾		27.0	%		23.1	%

Non-GAAP Measures:
Adjusted EBITDA⁽⁴⁾	$	65,985		$	42,977
Adjusted EBITDA Margin⁽⁴⁾		14.2	%		10.4	%


Exhibit No.		Description

3.1		Second Amended and Restated Certificate of Incorporation of InnovAge Holding Corp., filed March 3, 2021 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 8, 2021).

3.2		Amended and Restated Bylaws of InnovAge Holding Corp., effective March 3, 2021 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 8, 2021).

~~4.1~~		Registration Rights Agreement, dated as of March 8, 2021, by among the Company and the other signatory party thereto (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 8, 2021).

10.1		~~Director Nomination Agreement,~~Separation Letter, dated as of ~~March 8, 2021,~~January 1, 2022, by and ~~among the Company~~between InnovAge Holding Corp. and ~~the other signatories party thereto~~Maureen Hewitt (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on ~~March 8, 2021)~~January 3, 2022).

~~10.2~~		InnovAge Holding Corp 2021 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to InnovAge Holding Corp.’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on March 5, 2021).

~~10.3~~		Credit Agreement, dated as of March 8, 2021, by and among Total Community Options, Inc., the Borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the other parties thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 12, 2021).

~~10.4§~~		~~Amended and Restated Amendment to InnovAge Holding Corp. Stock Purchase Agreement, effective as of February 9, 2021, by and between InnovAge Holding Corp. and Adventist health System/West~~

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1†		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2†		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document


	INNOVAGE HOLDING CORP.

	By:	/s/ Barbara Gutierrez
	Name:	Barbara Gutierrez
	Title:	Chief Financial Officer