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~~December 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,~~February 6, 2023, there were ~~135,516,513~~135,596,225 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~~December 31, ~~2021~~2022 (Unaudited) and June 30, ~~2020 (Unaudited)~~2022	5

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

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

	Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~March~~December 31, ~~2021~~2022 and ~~2020~~2021 (Unaudited)	98

	Notes to Condensed Consolidated Financial Statements as of ~~March~~December 31, ~~2021~~2022 (Unaudited)	109

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2927

Item 3.	Quantitative and Qualitative Disclosures ~~about~~About Market Risk	4542

Item 4.	Controls and Procedures	4543

Part II	Other Information	4644

Item 1.	Legal Proceedings	4644

Item 1A.	Risk Factors	4644

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4844

Item 3.	Defaults Upon Senior Securities	4844

Item 4.	Mine Safety Disclosures	4844

Item 5.	Other Information	4844

Item 6.	Exhibits	4845

Exhibit Index		4845

Signatures		5146

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InnovAge Holding Corp. and Subsidiaries

Quarterly Report on Form 10-Q

For the quarterly period ended ~~March~~December 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, audits and investigations under the federal and state government programs, including the sanctions currently in place on our Sacramento center in California and our ability to sufficiently cure any deficiencies identified by the respective federal and state government programs including with respect to the audits of our Albuquerque, New Mexico center and San Bernardino, California center;

●

the adverse impact of inspections, reviews, audits, investigations, legal proceedings, enforcement actions and litigation, including the current civil investigative demands initiated by federal and state agencies, as well as the litigation and other proceedings initiated by, or on behalf, of our stockholders;

●

the effects of a pandemic, epidemic or outbreak of an infectious disease, including the ongoing effects of COVID-19;

●

the risk that the cost of providing services will exceed our compensation under the Program of All Inclusive Care for the Elderly (“PACE”);

●

the dependence of our revenues and operations upon a limited number of government payors;

●

changes in the rules governing the Medicare, Medicaid or PACE programs or applicable licensure requirements;

●

the risk that our submissions to government payors may contain inaccurate or unsupportable information, including regarding risk adjustment scores of participants;

●

the viability of our business strategy and our ability to realize expected results;

●

the impact on our business of renegotiation, non-renewal or termination of capitation agreements with government payors;

●

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

●

the impact on our business from an economic downturn

●

our dependence on our senior management team and other key employees;

●

the effect of sustained inflation on our business;

●

the impact of failures by our suppliers, sustained material price increases on supplies or limitations on our ability to access new technology or medical products;

●

the effect of our relatively limited operating history as a for-profit company on investors’ ability to evaluate our current business and future prospects;

●

our ability to enroll or attract new participants and grow our revenue, especially as a result of the sanctions currently in place on our Sacramento center in California and actions from other states;

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●

the concentration of our presence in Colorado;

●

our ability to manage our operations effectively, execute our business plan, maintain effective levels of service and participant satisfaction and adequately address competitive challenges;

●

our ability to compete in the healthcare industry;

●

our ability to establish a presence in new geographic markets, especially as a result of the actions taken by certain states and us in light of our ongoing audit processes;

●

the impact of competition for physicians and other clinical personnel and related increases in our labor costs;

●

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~~effectively invest in, implement improvements to and properly maintain ~~proper~~the uninterrupted operation and ~~effective internal control over financial reporting;~~

●

~~the impact on~~data integrity of our information technology and other 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;~~systems;

●

our ability to ~~attract and retain highly qualified personnel;~~accurately estimate incurred but not reported medical expense or the risk scores of our participants;

●

risks associated with our ~~management team’s limited experience managing a public company;~~use of “open-source” software;

●

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~~weather and ~~federal efforts~~other factors beyond our control;

●

our ability to ~~reduce Medicaid spending;~~adhere to complex and changing government laws and regulations in the healthcare industry, including U.S. Healthcare reform, the regulation of the corporate practice of medicine and the Health Information Technology for Economic and Clinical Health Act of 2009 (the “HITECH Act”), and their implementing regulations (collectively, “HIPAA”), the California Consumer Privacy Act (“CCPA”) and other privacy laws and regulations in the healthcare industry;

●

our status as a “controlled company”;

●

our ability to maintain effective internal controls over financial reporting and other enhanced requirements of being a public company;

●

our ability to maintain and enhance our reputation and brand recognition;

●

the impact on our ~~centers~~business of ~~adverse weather conditions and other factors beyond~~disruptions in our ~~control; and~~disaster recovery systems or business continuity planning;

●

~~other factors disclosed~~changes in ~~the section entitled “Risk Factors”~~accounting principles and guidance, resulting in ~~the~~ ~~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”)~~unfavorable accounting charges or effects; and ~~in this Quarterly Report on Form 10-Q.~~

●other factors disclosed in the section entitled “Risk Factors” in our Annual Report for the year ended June 30, 2022 filed with the Securities and Exchange Commission (the “SEC”) on September 13, 2022, as supplemented by our subsequent filings with the SEC.

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,
Assets

2021

2020
Current Assets




Cash and cash equivalents

$
201,527

$
112,904
Restricted cash

2,236

1,661
Accounts receivable, net of allowance ($7,741 – March 31, 2021 and $6,384 – June 30, 2020)

44,356

46,312
Prepaid expenses and other

3,626

4,311
Income tax receivable

131

1,743
Total current assets

251,876

166,931
Noncurrent Assets




Property and equipment, net

141,515

102,494
Investments

2,645

2,645
Deposits and other

3,611

3,003
Equity method investments

848

13,245
Goodwill

124,217

116,139
Other intangible assets, net

6,683

5,177
Total noncurrent assets

279,519

242,703
Total assets

$
531,395

$
409,634
Liabilities and Stockholders’ Equity




Current Liabilities




Accounts payable and accrued expenses

$
33,223

$
28,875
Reported and estimated claims

30,735

30,291
Due to Medicaid and Medicare

25,054

12,244
Current portion of long-term debt

2,852

1,938
Current portion of capital lease obligations

2,121

1,496
Contingent consideration

—

1,789
Total current liabilities

93,985

76,633
Noncurrent Liabilities




Deferred tax liability, net

5,817

9,282
Capital lease obligations

5,727

4,091
Other non-current liabilities

2,390

1,446
Long-term debt, net of debt issuance costs

72,415

210,432
Total liabilities

180,334

301,884
Commitments and Contingencies (See Note 10)




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
Additional paid-in capital

323,127

36,338
Retained earnings

4,820

64,737
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
Noncontrolling interests

22,978

6,735
Total stockholders’ equity

351,061

107,750
Total liabilities and stockholders’ equity

$
531,395

$
409,634


	December 31,		June 30,
	2022		2022
Assets
Current Assets
Cash and cash equivalents	$	99,460	$	184,429
Short-term investments		45,424		—
Restricted cash		17		17
Accounts receivable, net of allowance ($4,202 – December 31, 2022 and $3,403 – June 30, 2022)		38,643		35,907
Prepaid expenses		12,212		13,842
Income tax receivable		3,733		6,761
Total current assets		199,489		240,956
Noncurrent Assets
Property and equipment, net		185,774		176,260
Operating lease assets		22,223		—
Investments		5,493		5,493
Deposits and other		3,391		2,812
Goodwill		124,217		124,217
Other intangible assets, net		5,528		5,858
Total noncurrent assets		346,626		314,640
Total assets	$	546,115	$	555,596
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses	$	48,901	$	50,562
Reported and estimated claims		35,115		38,454
Due to Medicaid and Medicare		11,077		9,130
Current portion of long-term debt		3,794		3,793
Current portion of finance lease obligations		3,864		3,368
Current portion of operating lease obligations		3,434		—
Total current liabilities		106,185		105,307
Noncurrent Liabilities
Deferred tax liability, net		11,379		17,761
Finance lease obligations		9,032		9,440
Operating lease obligations		20,034		—
Other noncurrent liabilities		1,182		1,134
Long-term debt, net of debt issuance costs		66,528		68,210
Total liabilities		214,340		201,852
Commitments and Contingencies (See Note 9)
Redeemable Noncontrolling Interests (See Note 4)		14,054		15,278
Stockholders’ Equity
Common stock, $0.001 par value; 500,000,000 authorized as of December 31, 2022 and June 30, 2022; 135,596,225 and 135,532,811 issued shares as of December 31, 2022 and June 30, 2022, respectively		136		136
Additional paid-in capital		329,777		327,499
Retained earnings (deficit)		(18,137)		4,729
Total InnovAge Holding Corp.		311,776		332,364
Noncontrolling interests		5,945		6,102
Total stockholders’ equity		317,721		338,466
Total liabilities and stockholders’ equity	$	546,115	$	555,596

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 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 December 31,				Six Months Ended December 31,
	2021		2020		2021		2020		2022		2021		2022		2021
Revenues
Capitation revenue	$	155,835	$	144,174	$	464,294	$	412,724	$	167,140	$	174,964	$	338,071	$	347,518
Other service revenue		473		596		1,890		1,976		316		386		603		902
Total revenues		156,308		144,770		466,184		414,700		167,456		175,350		338,674		348,420
Expenses
External provider costs		75,389		71,022		224,215		204,387		93,507		91,033		189,744		181,045
Cost of care, excluding depreciation and amortization		39,565		39,285		115,922		114,465		51,376		42,911		104,933		83,639
Sales and marketing		5,592		4,628		14,335		14,405		3,774		6,679		8,187		12,972
Corporate, general and administrative		18,595		14,028		105,901		42,417		28,817		28,482		58,999		49,566
Depreciation and amortization		3,311		2,769		9,262		8,310		3,662		3,292		7,095		6,585
Equity loss		—		163		1,343		203
Other operating (income) expense		19,222		(99)		18,211		(250)
Total expenses		161,674		131,796		489,189		383,937		181,136		172,397		368,958		333,807
Operating Income (Loss)		(5,366)		12,974		(23,005)		30,763		(13,680)		2,953		(30,284)		14,613

Other Income (Expense)
Interest expense, net		(4,876)		(2,361)		(17,061)		(11,287)		(223)		(674)		(826)		(1,221)
Loss on extinguishment of debt		(13,488)		—		(14,479)		—
Gain on equity method investment		10,871		—		10,871		—
Other income (expense)		(2,267)		244		(2,222)		(735)		444		28		480		(465)
Total other expense		(9,760)		(2,117)		(22,891)		(12,022)		221		(646)		(346)		(1,686)
Income (Loss) Before Income Taxes		(15,126)		10,857		(45,896)		18,741		(13,459)		2,307		(30,630)		12,927
Provision (Benefit) for Income Taxes		(4,264)		2,867		5,159		4,954		(2,912)		1,201		(6,383)		4,197
Net Income (Loss)		(10,862)		7,990		(51,055)		13,787		(10,547)		1,106		(24,247)		8,730
Less: net loss attributable to noncontrolling interests		(352)		(148)		(595)		(394)		(754)		(217)		(1,381)		(279)
Net Income (Loss) Attributable to InnovAge Holding Corp.	$	(10,510)	$	8,138	$	(50,460)	$	14,181	$	(9,793)	$	1,323	$	(22,866)	$	9,009

Weighted-average number of common shares outstanding - basic		121,324,980		132,616,431		119,619,806		132,616,431		135,578,888		135,516,513		135,572,503		135,516,513
Weighted-average number of common shares outstanding - diluted		121,324,980		134,368,002		119,619,806		133,792,985		135,578,888		135,516,513		135,572,503		135,516,513

Net income (loss) per share - basic	$	(0.09)	$	0.06	$	(0.42)	$	0.11	$	(0.07)	$	0.01	$	(0.17)	$	0.07
Net income (loss) per share - diluted	$	(0.09)	$	0.06	$	(0.42)	$	0.11	$	(0.07)	$	0.01	$	(0.17)	$	0.07

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 ~~Shareholders’~~Stockholders’ Equity

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

(Unaudited)

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 December 31, 2022
				Additional		Retained				Total		Redeemable
	Capital Stock			Paid-in		Earnings		Noncontrolling		Permanent		Noncontrolling Interests		Net Income
	Shares	Amount		Capital		(Deficit)		Interests		Stockholders' Equity		(Temporary Equity)		(Loss)
Balances, September 30, 2022	135,570,078	$	136	$	328,708	$	(8,344)	$	6,020	$	326,520		14,734
Stock-based compensation	26,147		—		1,069		—		—		1,069		—
Adjustments to redemption value	—		—		—		—		—		—		—
Net loss	—		—		—		(9,793)		(75)		(9,868)		(680)		(10,547)
Balances, December 31, 2022	135,596,225	$	136	$	329,777	$	(18,137)	$	5,945	$	317,721	$	14,054	$

	For the Six Months Ended December 31, 2022
				Additional		Retained				Total		Redeemable
	Capital Stock			Paid-in		Earnings		Noncontrolling		Permanent		Noncontrolling Interests		Net Income
	Shares	Amount		Capital		(Deficit)		Interests		Stockholders' Equity		(Temporary Equity)		(Loss)
Balances, June 30, 2022	135,532,811	$	136	$	327,499	$	4,729	$	6,102	$	338,466		15,278
Stock-based compensation	63,414		—		2,278		—		—		2,278		—
Adjustments to redemption value	—		—		—		—		—		—		—
Net loss	—		—		—		(22,866)		(157)		(23,023)		(1,224)		(24,247)
Balances, December 31, 2022	135,596,225	$	136	$	329,777	$	(18,137)	$	5,945	$	317,721	$	14,054	$

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, 2020

Additional

Common Stock

Paid-in

Retained

Treasury Stock

Noncontrolling


Shares

Amount

Capital

Earnings

Shares

Amount

Interests

Total
Balances, June 30, 2019

132,718,461

$
133

$
35,795

$
38,459

102,030

$
(193)

$
7,248

$
81,442
Stock-based compensation

—

—

407

—

—

—

—

$
407
Net income (loss)

—

—

—

14,181

—

—

(394)

$
13,787
Balances, March 31, 2020

132,718,461

$
133

$
36,202

$
52,640

102,030

$
(193)

$
6,854

$
95,636


	For the Three Months Ended December 31, 2021
				Additional		Retained				Total		Redeemable
	Capital Stock			Paid-in		Earnings		Noncontrolling		Permanent		Noncontrolling Interests		Net Income
	Shares	Amount		Capital		(Deficit)		Interests		Stockholders' Equity		(Temporary Equity)		(Loss)
Balances, September 30, 2021	135,516,513	$	136	$	324,718	$	18,936	$	6,326	$	350,116		16,431
Stock-based compensation	—		—		783		—		—		783		—
Adjustments to redemption value	—		—		—		(2,564)		—		(2,564)		2,564
Net income (loss)	—		—		—		1,323		(72)		1,251		(145)		1,106
Balances, December 31, 2021	135,516,513	$	136	$	325,501	$	17,695	$	6,254	$	349,586	$	18,850	$

	For the Six Months Ended December 31, 2021
				Additional		Retained				Total		Redeemable
	Capital Stock			Paid-in		Earnings		Noncontrolling		Permanent		Noncontrolling Interests		Net Income
	Shares	Amount		Capital		(Deficit)		Interests		Stockholders' Equity		(Temporary Equity)		(Loss)
Balances, June 30, 2021	135,516,513	$	136	$	323,760	$	10,663	$	6,420	$	340,979		16,986
Stock-based compensation	—		—		1,741		—		—		1,741		—
Adjustments to redemption value	—		—		—		(1,977)		—		(1,977)		1,977
Net income (loss)	—		—		—		9,009		(166)		8,843		(113)		8,730
Balances, December 31, 2021	135,516,513	$	136	$	325,501	$	17,695	$	6,254	$	349,586	$	18,850	$

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,		For the Six Months Ended December 31,
	2021		2020		2022		2021
Operating Activities
Net income (loss)	$	(51,055)	$	13,787	$	(24,247)	$	8,730
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Loss (gain) on disposal of assets		2		1,021
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
(Gain) loss on disposal of assets						(53)		465
Provision for uncollectible accounts		4,144		3,909		2,244		2,883
Depreciation and amortization		9,262		8,310		7,095		6,585
Gain on equity method investment		(10,871)		—
Loss on extinguishment of long-term debt		8,494		—
Operating lease rentals						2,335		—
Amortization of deferred financing costs		948		412		215		215
Stock based compensation		1,102		407
Change in fair value of warrants		2,264		—
Stock-based compensation						2,278		1,741
Deferred income taxes		(3,464)		313		(6,381)		3,380
Equity loss		1,343		203
Change in fair value of contingent consideration		—		(250)
Other						(424)		—
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable, net		(1,402)		(6,929)		(4,980)		(3,589)
Prepaid expenses and other		635		274
Income taxes receivable		1,613		2,562
Prepaid expenses						1,631		(209)
Income tax receivable						3,027		757
Deposits and other		(606)		689		(533)		(89)
Accounts payable and accrued expenses		7,717		1,372		(544)		7,596
Reported and estimated claims		114		(816)		(3,339)		1,373
Due to Medicaid and Medicare		12,732		(5,245)		1,946		1,739
Deferred revenue		—		2
Net cash provided by (used in) operating activities		(17,028)		20,021

Operating lease liabilities						(2,260)		—
Net cash provided (used) by operating activities						(21,990)		31,577
Investing Activities
Purchases of property and equipment		(14,083)		(9,088)		(14,632)		(11,681)
Proceeds from the sale of equipment		—		169
Proceeds from net working capital settlements		—		1,129
Purchase of intangible assets		(2,000)		—
Purchases of short-term investments						(45,000)		—
Purchase of cost method investment						—		(2,000)
Net cash used in investing activities		(16,083)		(7,790)	$	(59,632)	$	(13,681)

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
Payments for finance lease obligations						(1,452)		(1,154)
Principal payments on long-term debt		(512,649)		(1,447)		(1,895)		(1,894)
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
Net cash used in financing activities						(3,347)		(3,048)

INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS & RESTRICTED CASH	$	89,198	$	34,934		(84,969)		14,848
CASH, CASH EQUIVALENTS & RESTRICTED CASH BEGINNING OF PERIOD		114,565		61,196
CASH, CASH EQUIVALENTS & RESTRICTED CASH END OF PERIOD	$	203,763	$	96,130
CASH, CASH EQUIVALENTS & RESTRICTED CASH, BEGINNING OF PERIOD						184,446		203,700
CASH, CASH EQUIVALENTS & RESTRICTED CASH, END OF PERIOD					$	99,477	$	218,548

Supplemental Cash Flows Information
Interest paid	$	16,251	$	10,330	$	1,726	$	984
Income taxes paid		7,047		2,080	$	13	$	84
Prepayment penalty on extinguishment of debt		6,000		—
Property and equipment included in accounts payable		224		—	$	53	$	1,004
Property and equipment purchased under capital leases		3,517		1,115
Property and equipment purchased under finance leases					$	1,541	$	5,653

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 formed as for-profit corporations effective May 13, 2016, for the purpose of purchasing all the outstanding common stock 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 initial public offering, which occurred in March 2021, we changed the name of our 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 1one reportable segment, PACE.

~~The~~As of December 31, 2022, the Company ~~serves~~served approximately ~~6,700~~6,460 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, 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”). The Company’s common stock ~~began trading on March 3, 2021~~is traded on the Nasdaq Stock Market LLC (“NASDAQ”) under the ticker symbol ~~“INNV”.~~“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.

~~Table of Contents~~

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~~2022 (“2022 10-K”). With the ~~IPO Prospectus. During the nine months ended March 31, 2021,~~exception of Recently Adopted Accounting Pronouncements described below, 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.”~~six months ended December 31, 2022.

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.~~2022. 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 (loss) reported in the statements of operations for all periods presented.

Property and Equipment

Property and equipment were comprised of the following as of ~~March~~December 31, ~~2021~~2022 and June 30, ~~2020:~~2022:


	Estimated					Estimated
(In thousands)	Useful Lives	March 31, 2021		June 30, 2020
dollars in thousands						Useful Lives	December 31, 2022		June 30, 2022
Land	N/A	$	11,980	$	8,580	N/A	$	11,980	$	11,980
Buildings and leasehold improvements	10 - 40 years or term of lease		104,727		79,514	10 - 40 years		122,885		122,076
Software	3 - 5 years		12,355		11,387	3 - 5 years		27,532		16,264
Equipment and vehicles	3 - 7 years		35,201		28,814	3 - 7 years		49,847		47,546
Construction in progress	N/A		19,257		7,069	N/A		37,091		35,479
			183,520		135,364			249,335		233,345
Less accumulated depreciation and amortization			(42,005)		(32,870)
Less: accumulated depreciation and amortization								(63,561)		(57,085)
Total property and equipment, net		$	141,515	$	102,494		$	185,774	$	176,260

Depreciation of ~~$8.8~~$3.3 million and ~~$7.8~~$2.8 million was recorded during the ~~nine~~three months ended ~~March~~December 31, 2022 and 2021, respectively. Depreciation of $6.5 million and ~~2020,~~$6.1 million was recorded during the six months ended December 31, 2022 and 2021, respectively.

~~Revenue Recognition~~Recently Adopted Accounting Pronouncements

~~The Company’s PACE operating unit provides comprehensive health care services~~Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02 Leases (“ASU 2016-02”), which was intended to ~~participants~~increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees are required to recognize a right-of-use (“ROU”) asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than 12 months. Additionally, this guidance requires enhanced disclosures to help investors and other financial statement users to better understand the amount, timing, and uncertainty of ~~fixed or capitated fees per participant that are paid monthly by Medicare, Medicaid,~~cash flows arising from leases, including qualitative and quantitative requirements. In June 2020, the ~~VA,~~FASB issued ASU 2020-05 Revenue from contracts with customers (Topic 606) and ~~private pay sources. Medicaid and Medicare capitation revenues are based~~leases (Topic 842) – Effective dates for certain entities which deferred the new lease standard effective date for the Company to interim periods beginning after December 15, 2021, with early adoption permitted.

We adopted the new standard on ~~per-member, per-month capitation rates~~July 1, 2022 using the modified retrospective transition approach as permitted in ASU 2018-11. In accordance with this approach, the effective date of Topic 842 is also the application date of the new requirements, with prior comparative periods presented in the financial statements with the legacy requirements of ASC Topic 840, Leases. We elected the package of practical expedients which permits us not to reassess under the ~~PACE program. Capitation payments are recognized as revenue~~new lease standard our prior conclusions for lease identification and lease classification on expired or existing contracts and whether initial direct costs previously capitalized would qualify for capitalization under the new lease standard. We also elected to adopt the optional transition method which allows an entity to recognize, if necessary, a cumulative-effect adjustment to the opening balance of retained earnings in the period ~~in which they relate.~~

~~Table~~ of ~~Contents~~

~~Capitation payments received for PACE participants under Medicare Advantage plans are subject to retroactive premium risk adjustments based upon various factors.~~adoption. The Company ~~estimates~~did not elect the ~~amount of current-year adjustments~~practical expedient to use hindsight 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~~determining the lease term and in assessing impairment conclusions on the resolution of significant related matters as a result of these examinations often are not finalized until several years after the services are rendered. Any adjustments resulting from these examinations are recordedROU assets. Comparative periods presented in the ~~period the Company is notified 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~~financial statements continue to ~~pay for services, the participant is disenrolled. Any costs incurred on behalf of these participants were nominal for the nine months ended March 31, 2021 and 2020.~~

~~Capitated revenues consisted of the following sources for 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~~be presented in accordance with ~~Medicare Part D. Monthly payments received from CMS and~~GAAP related to leases prior to transitioning to the ~~participants represent the bid amount for providing prescription drug coverage.~~new lease standard. 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~~adoption of Topic 842 resulted in the ~~Company’s bid~~recognition of operating lease liabilities and ROU assets of $25.1 million and $23.6 million, respectively, while our accounting for capital leases (now referred to ~~actual prescription drug costs.~~as finance leases) remained substantially unchanged. 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.

~~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, we have been and will continue to be impacted by the effects of COVID-19; however, 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~~adopting Topic 842 was not material to our ~~employees, participants~~Statements of Operations and ~~suppliers; however, at this time, we are unable to estimate the ultimate impact the pandemic will have on our consolidated financial condition, results~~Statements 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 frontCash Flows. See Note 7, “Leases.”

1210

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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 million in funding under the Act 24 of 2020. Of this amount, $1.0 million was allocated to InnovAge centers in Pennsylvania and $0.7 million was recognized as of June 20, 2020. The remaining unrecognized balance of $0.3 million was recognized during the nine months ended March 31, 2021 as a reduction of expense within the consolidated statement of operations. 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, 2021.

Recent Accounting Pronouncements Not Yet Adopted

~~Revenue Recognition~~

~~In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09~~ ~~Revenue from Contracts with Customers~~ (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The guidance will replace most existing revenue recognition guidance when it becomes effective. Subsequent to the issuance 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. This guidance is effective for the annual reporting period beginning July 1, 2020, and interim reporting periods within the annual reporting period beginning July 1, 2021. 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). The Company plans on applying the modified retrospective method of adoption for this guidance. The Company is in the process of evaluating the impact that the pronouncement will have on the consolidated financial statements.

~~Leases~~

In February 2016, the FASB issued ASU 2016-02, Leases (“Topic 842”) which outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize almost all of their leases on the balance sheet by recording a lease liability and corresponding right-of-use assets 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 adopting this guidance for the annual reporting period beginning July 1, 2022, and interim reporting periods within the annual reporting period beginning July 1, 2023. This will require application of the new accounting guidance at the beginning of the earliest comparative period presented in the year of adoption. The Company is in the process of evaluating the impact that the pronouncement will have on the consolidated financial statements.

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.

~~Table of Contents~~

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 performs 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~~healthcare needs of our participants.

Fees are recorded gross in revenues because the Company is acting as a ~~portion of their equity interest~~principal in providing for or overseeing comprehensive care provided to the ~~Purchaser. The Purchaser and~~participants. Neither the ~~Sellers then contributed their equity interests~~Company nor any of its affiliates is a registered insurance company because state law in the ~~Company to~~states in which it operates does not require such registration for risk-bearing providers.

In general, a ~~newly formed limited partnership, TCO Group Holdings, L.P. (the “LP”) resulting~~participant enrolls in the PACE program and is considered a customer of InnovAge. The Company ~~being wholly owned by~~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 ~~LP.~~

~~Concurrently with the entry~~PACE program have similar performance obligations and therefore groups them into ~~the Agreement,~~one portfolio. This performance obligation is satisfied as the Company ~~amended and restated~~provides comprehensive care to its ~~2016 Credit Agreement (as defined below), see Note 8 for further discussion. A portion of~~participants.

Our revenues are based on the ~~proceeds~~estimated PMPM amounts we expect to be entitled to receive from the ~~2016 Credit Agreement were used~~capitated fees per participant that are paid monthly by Medicaid, Medicare, 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,~~VA, and ~~certain members 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 grantedprivate pay sources. Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the ~~2016 Incentive Plan~~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 ~~$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, generalfull capitated rate and ~~administrative. Vesting of the time vesting awards was deemed probable at the time of the settlement resulting in~~have to pay all or a portion of the ~~settlement~~capitated rate. Costs to obtain contracts consist of ~~the time vesting awards being recorded as Corporate, general~~sales commissions for new enrollees and ~~administrative expense~~are included in deposits and ~~the remainder being recorded as~~other. These costs are amortized over a ~~reduction~~three-year period which corresponds 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.

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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.~~

the average time a participant is enrolled in the PACE program. As of December 31, 2022 and June 30, 2022 contract assets included within deposits and other were $0.5 million and nil, respectively.

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

December 31,


2022

2021

Medicaid

55
%
54
%
Medicare

45
%
46
%
Private pay and other

*
%
*
%
Total

100
%
100
%
* Less than 1%

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 12% of capitation revenues for each of the three months ended December 31, 2022 and 2021. Medicare Part D comprised 12% of capitation revenues for each of the six months ended December 31, 2022 and 2021.
Our accounts receivable as of December 31, 2022 and June 30, 2022 is primarily from capitation revenue arrangements. The concentration of net receivables from participants and third-party payers was as follows:

December 31,

June 30,


2022

2022

Medicaid

40
%
70
%
Medicare

53
%
22
%
Private pay and other

7
%
8
%
Total

100
%
100
%

The Company records accounts receivable at net realizable value, which includes an allowance for estimated uncollectible accounts. The allowance for uncollectible accounts reflects the Company’s best estimate of probable losses considering eligibility, historical experience, and existing economic conditions. The balance of the allowance for uncollectible accounts was $4.2 million as of December 31, 2022, compared to $3.4 million as of June 30, 2022. Accounts are written off as bad debts when they are deemed uncollectible based upon individual credit evaluations and specific circumstances underlying the accounts.
Other Service Revenue and Accounts Receivable
Other service revenue is comprised of rents earned related to Senior Housing and other fee for service revenue. Other service revenue was 0.2% and 0.2% of total revenue for the three months ended December 31, 2022 and 2021, respectively.

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Other service revenue was 0.2% and 0.3% of total revenue for the six months ended December 31, 2022 and 2021, respectively. Accounts receivable related to other service revenue was not significant as of both December 31, 2022 and June 30, 2022.

Note 4:  Investments
The Company holds equity method and cost method investments as of:

December 31,

June 30,
in thousands

2022

2022
Cost method investments

$
4,645

$
4,645
Equity method investments

848

848
Total investments

$
5,493

$
5,493

Nonconsolidated Entities
Cost Method Investments~~Variable Interest Entity~~
The Company maintains two investments that are accounted for using the cost method. The investments do not have a readily determinable fair value and the Company has elected to record the investments at cost, less impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. During the six months ended December 31, 2022 and 2021, there were no observable price changes or impairments recorded.
Jetdoc

In August 2021, the Company acquired a minority interest equal to 806,481 shares of the outstanding common
stock of Jetdoc, Inc. (“Jetdoc”), a telehealth and virtual urgent care app dedicated to effectively connecting users with medical professionals, for cash consideration of $2.0 million. The balance of the Company’s investment in Jetdoc is $2.0 million which represents the maximum exposure to loss.

DispatchHealth

On June 14, 2019, the Company invested $1.5 million in DispatchHealth Holdings, Inc. ("DispatchHealth"), through the purchase of a portion of its outstanding Series B Preferred Stock. On April 2, 2020, the Company invested an additional $1.1 million through the purchase of a portion of its outstanding Series C Preferred Stock. The balance of the Company’s investment is $2.6 million which represents the maximum exposure to loss.

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

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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 December 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~~In fiscal year 2021, the Company made an additional contribution of $52,000 ~~dollars to obtain~~and obtained an additional 0.1% membership interest in the joint ~~venture. With the acquisition of the additional 0.1% membership interest,~~venture, which resulted in the Company ~~obtained~~obtaining control ofand consolidating InnovAge Sacramento ~~effective~~as of 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 Company Agreement (the “JV Agreement”) includes numerous provisions whereby, if certain conditions are met, the ~~joint venture~~Joint Venture may be required to purchase, at fair market value, certain members’ interests or certain ~~members’~~members may be required to purchase, at fair market value, the interests of certain other members. As of ~~March~~December 31, ~~2021,~~2022, none of the conditions specified in the JV Agreement had been met.

At the consummation of the JV Agreement, the Company issued warrants (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 an exercise price equal to the fair market value per share at the time of exercise of this warrant. The Sacramento Warrants fully vest on the exercise date, which is defined as the date on which Adventist has 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 equity (the “Investment Threshold”).

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 is exercisable for one year beginning on the date of the consummation of the IPO. As of March 31, 2021, Adventist had not exercised any warrants.

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 the Company became a publicly traded company these put rights held by the noncontrolling interests of the ~~amendment, due to the removal of the Investment Threshold, the warrants~~joint venture 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 sharesrequired to be ~~issued were no longer variable, which resulted in the warrants being recorded in~~presented as temporary equity. ~~A charge~~The redeemable noncontrolling interest of ~~$2.3~~$14.1 million ~~representing the fair value of the warrants from inception through the date of completion of the IPO,~~ was recorded ~~in other income (expense) in the condensed consolidated statement of operations.~~

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 fairat carrying 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 in the step acquisition are as follows~~ as of ~~January 1, 2021:~~December 31, 2022.


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 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 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

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 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. 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 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. There is also an immaterial administrative fee.

During fiscal year 2020, the Company borrowed $25.0 million under the revolving credit facility 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 and 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.

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

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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
The following table shows the Company’s cash, cash equivalents and marketable securities by significant investment category as of December 31, 2022:

2022

Cash and

Short-

Amortized

Unrealized

Unrealized

Fair

Cash

term

in thousands

Cost

Gains

Losses

Value

Equivalents

Investments

Cash

$
18,858

$
—

$
—

$
18,858

$
18,858

$
—

Level 1

Money market funds

80,602

—

—

80,602

80,602

—

Mutual funds

45,000

424

—

45,424

—

45,424

Total

$
144,460

$
424

$
—

$
144,884

$
99,460

$
45,424

Recurring Measurements
~~Effective August 7, 2018, the Company finalized the acquisition of New Courtland LIFE Program (“New Courtland”)~~The Company’s investment in ~~Pennsylvania. The Company paid~~InnovAge Sacramento includes 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 acquisitionput right for the ~~two fiscal years following the acquisition, as well as potential payments~~noncontrolling interest holders 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 allowrequire the Company to ~~exercise its option to purchase~~repurchase the ~~leased buildings~~interest of the noncontrolling interest holders at fair ~~market~~ value, after the initial term of the ~~lease.~~
~~On March 8, 2021, we completed our IPO, which satisfied the condition that~~management services agreement in 2028. As a result, at each fiscal period end the Company ~~sell equity securities pursuant to an effective registration statement. Accordingly, $20.0 million~~reports this put right at the greater of ~~contingent consideration was paid under the terms~~(i) carrying value of the ~~Securities Purchase Agreement.~~

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. The fair value of the redeemable noncontrolling interest is determined utilizing a discounted cash flow model. As of ~~March~~December 31, ~~2021, there are 0 amounts~~2022, the Company’s redeemable noncontrolling interest was recorded at carrying value 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.~~$14.1 million.
There were no transfers in and out of Level 3 during the ~~nine~~six months ended ~~March~~December 31, ~~2021~~2022 or 2021.
Note 6: Goodwill and ~~2020. The Company’s policy~~Intangible Assets
Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill amounted to $124.2 million at each of December 31, 2022 and June 30, 2022. 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~~annual goodwill impairment assessment, the Company has identified three reporting units. There were no indicators of impairment identified and no goodwill impairments recorded during the six months ended December 31, 2022 and 2021.

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Intangible assets consisted of the following as of:

December 31,

June 30,
in thousands

2022

2022
Definite-lived intangible assets

$
6,600

$
6,600
Indefinite-lived intangible assets

2,000

2,000
Total intangible assets

8,600

8,600
Accumulated amortization

(3,072)

(2,742)
Balance as of end of period

$
5,528

$
5,858

Intangible assets consist primarily of customer relationships acquired through business acquisitions. The Company recorded amortization expense of $0.2 million and $0.2 million for the three months ended December 31, 2022 and 2021, respectively. The Company recorded amortization expense of $0.3 million and $0.3 million for the six months ended December 31, 2022 and 2021, respectively.
We review the recoverability of other intangible assets in conjunction with long-lived assets whenever events or ~~change~~changes in ~~circumstances.~~circumstances indicate the carrying amount of such assets may not be recoverable. There were no intangible asset impairments recorded during the six months ended December 31, 2022 and 2021.
~~Nonrecurring Measurements~~
Note 7:  Leases
~~In addition~~Leasing Arrangements as Lessee
The Company leases certain property and equipment under various third-party operating and finance lease agreements. The Company determines if an arrangement is or contains a lease at the lease inception date by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. The leases are noncancelable and expire on various terms from 2023 through 2032. We determine if an arrangement is a lease upon commencement of the contract. If an arrangement is determined to be a long-term lease (greater than 12 months), we recognize an ROU asset and lease liability based on the present value of the future minimum lease payments over the lease term at the commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Our lease terms may also include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have elected to apply the short-term lease exception for contracts that have a lease term of twelve months or less and do not include an option to purchase the underlying asset. Therefore, we do not recognize a ROU asset or lease liability for such contracts. We recognize short-term lease payments as expense on a straight-line basis over the lease term. Variable lease payments that do not depend on an index or rate are recognized as expense. Certain leases include escalations based on inflation indexes and fair market value adjustments. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement for such leases.
The following table presents the components of our ROU assets and ~~liabilities that are recorded~~their classification in our Balance Sheet at ~~fair value on a recurring basis,~~December 31, 2022:

Component of Lease Balances
Balance Sheet Line Items

Six months ended December 31,

2022

in thousands
Assets:

Operating lease assets
Operating lease assets
$
22,223
Finance lease assets
Property and equipment, net

11,153
Total leased assets

$
33,376

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The following table presents the ~~Company records certain assets~~components of our lease cost and ~~liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis~~the classification of such costs in our Statements of Operations for the six months ended December 31, 2022:

Component of Lease Cost
Statements of Operations Line Items

Six months ended December 31,

2022

in thousands
Operating lease cost
Cost of care excluding depreciation and amortization and Corporate, general and administrative
$
2,557
Finance lease expense:

Amortization of leased assets
Depreciation and amortization

1,685
Interest on lease liabilities
Interest expense, net

562
Variable lease cost
Cost of care excluding depreciation and amortization and Corporate, general and administrative

—
Short-term lease cost
Cost of care excluding depreciation and amortization and Corporate, general and administrative

17
Total lease expense

$
4,821

The following table includes the weighted-average lease terms and discount rates for operating and finance leases as ~~a result~~ of ~~impairment charges~~December 31, 2022:

Weighted average remaining lease term:

December 31,

2022
Operating leases
8.8 years
Finance leases

3.8 years

Weighted average discount rate:

December 31,

2022

Operating leases
6.61
%
Finance leases

8.53
%

The following table includes the future maturities of lease payments for operating leases and finance leases for periods subsequent to December 31, 2022:

Operating

Finance

in thousands

Lease

Lease

Total
Amount remaining in 2023

$
2,552

$
2,580

$
5,132
2024

4,542

4,263

8,805
2025

4,136

3,480

7,616
2026

4,061

2,456

6,517
2027

3,764

1,760

5,524
Thereafter

10,302

686

10,988
Total lease payments

29,357

15,225

44,582
Less liability accretion / imputed interest

(5,889)

(2,329)

(8,218)
Total lease liabilities

23,468

12,896

36,364
Less: Current lease liabilities

3,434

3,864

7,298
Total long-term lease liabilities

$
20,034

$
9,032

$
29,066

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The following table includes the future maturities of minimum rental payments that are required ~~by U.S. GAAP. No such amounts were recorded during~~to be paid under all non-cancelable operating and capital lease obligations as previously disclosed in our 2022 Annual Report on Form 10-K as of June 30, 2022, prior to the ~~nine months ended March 31, 2021 and 2020, respectively.~~adoption of ASC 842:

Operating

Capital
in thousands

Lease

Lease
Amount remaining in 2023

$
4,873

$
4,405
2024

4,581

3,909
2025

4,122

3,126
2026

4,061

2,092
2027

3,764

1,393
Thereafter

10,265

535
Total minimal rental payments

31,666

15,460
Less: Amount representing interest

(2,652)
Subtotal

12,808
Current portion

3,368
Long-term portion

$
9,440

Note8.  Long-Term Debt
Long-term debt consisted of the following at December 31, 2022 and June 30, 2022:


December 31,

June 30,

2022

2022

in thousands
Senior secured borrowings:

Term Loan Facility

$
69,375

$
71,250
Convertible term loan

2,306

2,327
Total debt

71,681

73,577
Less: unamortized debt issuance costs

1,359

1,574
Less: current maturities

3,794

3,793
Noncurrent maturities

$
66,528

$
68,210

2021 Credit Agreement
On March 8, 2021, the Company entered into a credit agreement (the “2021 Credit Agreement”) that replaced its prior credit agreement. The 2021 Credit Agreement consists of a senior secured term loan (the “Term Loan Facility”) of $75.0 million principal amount and a revolving credit facility (the “Revolving Credit Facility”) of $100.0 million maximum borrowing capacity, each with a maturity date of March 8, 2026. The remaining capacity under the Revolving Credit Facility as of December 31, 2022 was $97.2 million, subject to (i) any issued amounts under our letters of credit, which as of December 31, 2022 was $2.8 million, and (ii) applicable to covenant compliance restrictions and any other conditions precedent to borrowing. 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 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 Company’s initial public offering (“IPO”), were used to repay long term debt amounts then outstanding.

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Outstanding principal amounts under the 2021 Credit Agreement accrue interest at a variable interest rate. As of December 31, 2022, the interest rate on the Term Loan Facility was 6.14%. 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 December 31, 2022, we had no borrowings outstanding, $2.8 million of letters of credit issued, and $97.2 million of remaining capacity under the Revolving Credit Facility.

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 December 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 condensed consolidated balance sheets. Total amortization of deferred financing costs was $0.2 million for the six months ended December 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 bears interest at an annual rate of 6.68%, with the remaining principal balance due upon maturity at 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.

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,~~

~~Table of Contents~~

~~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.

~~Note 11:~~Table of Contents ~~Retirement Plans~~

~~The~~On October 14, 2021, and subsequently amended on June 21, 2022, the Company ~~offers its eligible employees~~was named as a ~~401(k) Retirement Savings Plan (the “Plan”). The Company matches 50%~~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 ~~employee contribution up to 4%~~Company’s common stock during a specified period. Through the complaint, plaintiffs are asserting claims against the Company, certain of the ~~employee’s compensation. Matching contributions were $0.4 million~~Company’s officers and ~~$1.3 million~~directors, the Company’s former CEO, Apax Partners, L.P., Welsh, Carson, Anderson & Stowe and the underwriters in the Company’s IPO alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for making allegedly inaccurate and misleading statements and omissions in connection with the ~~three~~Company’s IPO and ~~nine months ended March 31, 2021, respectively,~~subsequent earnings calls and ~~$0.4 million~~public filings, and ~~$1.3 million~~seeking to impose control person liability against the officer and director defendants, Apax Partners, L.P. and Welsh, Carson, Anderson & Stowe. The complaint seeks compensatory damages, among other things. On September 13, 2022, the Company and the officer and director defendants and Apax Partners, L.P. and Welsh, Carson, Anderson & Stowe filed a motion to dismiss the amended complaint for failure to state a claim upon which relief can be granted. We are currently unable to predict the ~~three and nine months ended March 31, 2020, respectively.~~

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.outcome of this matter.

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. The Company continues 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). In December 2022, the Company received a supplemental civil investigative demand requesting supplemental information on the same matters. The Company continues to fully cooperate with the DOJ and produce the requested information and documentation. We are currently unable to predict the outcome of this investigation.

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.

Because the results of legal proceedings and claims are inherently unpredictable and uncertain, we are currently unable to predict whether the legal proceedings we are involved in will, either individually or in the aggregate, have a material adverse effect on our business, financial condition, or cash flows. The outcomes of legal proceedings and claims could be material to the Company’s operating results for any particular period, depending in part, upon the operating results of such period. Regardless of the outcome, litigation has the potential to have an adverse impact on us due to any related defense and settlement costs, diversion of management resources, and other factors.

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Note ~~12:~~10:  Stock-based Compensation
~~2016~~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.

Six months ended December 31,

Three months ended December 31,

2022

2021

2022

2021

in thousands

in thousands

Stock options
$
533

$
90

$
261

$
90
Profits interests units

456

1,029

202

439
Restricted stock units

1,523

622

749

254
Total stock-based compensation expense
$
2,512

$
1,741

$
1,212

$
783

2020 Equity Incentive Plan
~~The Company maintained~~Profits Interests
TCO Group Holdings, L.P. (the “LP”), the ~~2016~~Company’s largest shareholder and prior to the IPO, the Company’s parent, maintains the 2020 Equity Incentive Plan ~~(the “2016 Incentive Plan”)~~ pursuant to which ~~various stock-based awards may~~interests in the LP in the form of Class B Units (profits interests) could be granted to employees, directors, consultants, and advisers. ~~The total~~A maximum number of ~~shares of the Company’s common stock that is~~16,162,177 Class B Units were authorized for grant under the ~~2016~~2020 Equity Incentive ~~Plan was 17,836,636.~~Plan. As of ~~June 30, 2020~~December 31, 2022, a total of ~~16,994,976 awards~~13,009,137 profits interests units had been ~~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., Ignite Aggregator LP, and the equity holders of TCO Group Holdings, Inc. entered into a Securities Purchase Agreement, effective July 27, 2020. In addition, 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 Agreement, the Company executed the Cancellation Agreement which canceled the Company’s 16,994,976 common stock options which were granted under the ~~2016~~2020 Equity Incentive Plan.
The ~~Cancellation Agreement resulted in~~Company used the Monte Carlo option ~~holders receiving~~model to determine the ~~same amount~~fair value of ~~cash that they would have received had they exercised their options, participated in~~ the ~~repurchase described above~~profits interests units at the time of the grant. There were no grants following the IPO and ~~sold their remaining shares.~~during the six months ended December 31, 2022.
A summary of ~~the stock option~~profits interests activity for the ~~nine~~six months ended ~~March~~December 31, ~~2021,~~2022 was as follows:

Number of

Weighted average
Time-based unit awards

units

grant date fair value

Outstanding balance, June 30, 2022

2,158,072

$
1.28
Granted

—

$
—
Forfeited

(49,654)

$
1.28
Vested

(844,081)

$
1.28
Outstanding balance, December 31, 2022

1,264,337

$
1.28

Number of

Weighted average
Performance-based unit awards

units

grant date fair value

Outstanding balance, June 30, 2022

2,217,865

$
0.57
Granted

—

$
—
Forfeited

(99,307)

$
0.57
Vested

—

$
—
Outstanding balance, December 31, 2022

2,118,558

$
0.57

The total unrecognized compensation cost related to profits interests units outstanding as of December 31, 2022 was $2.5 million, comprised (i) $1.3 million related to time-based unit awards expected to be recognized over a weighted-average period of 0.9 years and (ii) $1.2 million related to performance-based unit awards, which will be recorded when it is probable that the performance-based criteria will be met.

2221

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~~Time Vesting Awards~~2021 Omnibus Incentive Plan

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~~In March 2021, the ~~2020 Equity~~compensation committee of our Board of Directors approved the InnovAge Holding Corp. 2021 Omnibus Incentive Plan (the ~~“2020~~“2021 Omnibus Incentive Plan”), pursuant to which ~~interests in the LP in the form of Class B Units (profits interests)~~various stock-based awards may be granted to employees, directors, consultants, and advisers. ~~A maximum~~The total number of ~~16,162,177 Class B Units are~~shares of the Company’s common stock authorized ~~for grant~~ under the ~~2020~~2021 Omnibus Incentive ~~Plan. As of~~Plan is 14,700,000. The Company has issued time-based restricted stock units under this plan to its employees which generally vest (i) on March ~~31, 2021, a total of 13,009,137 profits interests units have been granted.~~
~~These profits interests represented profits interest ownership in~~4, 2023, the ~~LP tied solely to the accretion, if any, in the value~~second anniversary of the ~~LP following~~grant date, or (ii) over a three-year period with one-third vesting on each anniversary of 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~~grant. Certain other vesting periods have also been ~~achieved and the LP profits interests received the agreed-upon return on their invested capital.~~used. 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~~restricted stock 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~~with time based vesting is based on the closing market price ~~realized in~~of our common stock on the ~~equity owner transaction. Expected~~date of grant. Certain awards under this plan vest upon achieving specific share price performance criteria and are determined to have performance-based vesting conditions. The Company has issued time-based stock options under this plan to its employees which generally vest at various intervals over a three-year period. Certain awards under this plan vest upon achieving specific share price ~~volatility~~performance criteria and are determined to have performance-based vesting conditions.
Restricted Stock Units
A summary of time-based vesting restricted stock units activity for the six months ended December 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, 2022

476,768

$
9.69
Granted

986,200

$
5.97
Forfeited

(155,741)

$
5.48
Vested

(97,727)

$
4.50
Outstanding balance, December 31, 2022

1,209,500

$
6.41

The total unrecognized compensation cost related to time based restricted stock units outstanding as of December 31, 2022 was $5.1 million and is expected to be recognized over a weighted-average period of 2.3 years.
A summary of performance based ~~on consideration~~vesting restricted stock units activity for the six months ended December 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, 2022

258,767

$
5.18
Granted

—

$
—
Forfeited

—

$
—
Vested

—

$
—
Outstanding balance, December 31, 2022

258,767

$
5.18

The total unrecognized compensation cost related to performance based vesting restricted stock units outstanding as of ~~indications observed from several publicly traded peer companies. The risk-free interest~~December 31, 2022 was $1.0 million and is expected to be recognized over a weighted-average period of 2.8 years.

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rate is based on a treasury instrument whose term is consistent 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.Nonqualified Stock Options
~~The following is a~~A summary of ~~profits interests transactions and number of units outstanding:~~
~~Time Vesting Units~~time-based vesting stock option activity for the six months ended December 31, 2022 was as follows:

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

The fair value of the profits interests units granted during the nine months ended March 31, 2021 under the 2020 Incentive Plan, was based upon a Monte Carlo option pricing model using the assumptions in the following table (presented on a weighted average basis):


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

Weighted



average

Number of

grant-date fair
Stock options - time based

awards

value per share

Outstanding balance, June 30, 2022

554,499

$
1.61
Granted

81,082

$
0.80
Forfeited

—

$
—
Vested

(138,624)

$
0.28
Outstanding balance, December 31, 2022

496,957

$
0.90

The total unrecognized compensation cost related to ~~all profits interests units~~time-based vesting stock options outstanding as of December 31, 2022 was ~~$11.1 million. The unrecognized compensation cost related to the Time Vesting Units was $7.5~~$0.5 million and is expected to be recognized over a weighted-average period of ~~3.5~~2.4 years.
The fair value of the time-based stock options granted during the six months ended December 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

1.56
%
Dividend yield

0
%
Weighted-average fair values

$
0.80

Fair value of underlying stock

$
3.70

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

Weighted



average

Number of

grant-date fair
Stock options - performance based

awards

value per share

Outstanding balance, June 30, 2022

776,299

$
3.08
Granted

—

$
—
Forfeited

—

$
—
Vested

—

$
—
Outstanding balance, December 31, 2022

776,299

$
3.08

The total unrecognized compensation cost related to ~~the Performance-Vesting Units~~performance-based vesting stock options outstanding as of December 31, 2022 was ~~$3.6~~$1.7 million and ~~will~~is expected to be ~~recorded when it is probable that the performance-based criteria will be met.~~recognized over a weighted-average period of 2.9 years.
~~Compensation Expense~~
Note 11:  Income Taxes
The Company ~~recognizes stock-based compensation expense on a straight-line basis over~~recorded an income tax benefit of $2.9 million and an income tax provision of $1.2 million for the ~~vesting period~~three months ended December 31, 2022 and ~~includes such charges in employee benefits in~~2021, respectively. The Company recorded an income tax benefit of $6.4 million and an income tax provision of $4.2 million for 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
six months ended December 31, 2022 and 2021, respectively. This

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represents an effective tax rate of 20.9% and 32.5% for the three months ended December 31, 2022 and 2021, respectively. This represents an effective tax rate of 20.9% and 32.5% for the six months ended December 31, 2022 and 2021, respectively.

The effective rate for the six months ended December 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), disallowed stock options related to the profit interest units, exclusion of losses from entities not subject to tax, and lobbying expenses which occurred during the three 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 six-month period ended December 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 Company has provided $4.1 million at each of December 31, 2022 and June 30, 2022, as a valuation allowance against its deferred tax assets for state net operating losses where there is not sufficient positive evidence to substantiate that these deferred tax assets will be realized at a more-likely-than-not level of assurance.

Note ~~13:~~12: Earnings per Share
Basic earnings (loss) per share (“EPS”) is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding options, 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. For the three and six months ended December 31, 2022, 424,316 and 14,076 potentially diluted securities, respectively, were excluded from the weighted-average shares used to calculate the diluted net loss per common share as they would have an anti-dilutive effect. There were no potentially dilutive shares for the three and six months ended December 31, 2021, therefore, there was no difference between basic and diluted net loss per common shares.

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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 December 31,

Six months ended December 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

$
(9,793)

$
1,323

$
(22,866)

$
9,009
Weighted average common shares outstanding (basic)

121,324,980

132,616,431

119,619,806

132,616,431

135,578,888

135,516,513

135,572,503

135,516,513
EPS (basic)

$
(0.09)

$
0.06

$
(0.42)

$
0.11

$
(0.07)

$
0.01

$
(0.17)

$
0.07

Dilutive shares

—

1,751,571

—

1,176,554

—

—

—

—
Weighted average common shares outstanding (diluted)

121,324,980

134,368,002

119,619,806

133,792,985

135,578,888

135,516,513

135,572,503

135,516,513
EPS (diluted)

$
(0.09)

$
0.06

$
(0.42)

$
0.11

$
(0.07)

$
0.01

$
(0.17)

$
0.07

~~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.
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

~~Table of Contents~~

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.

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, 2021.

Note ~~16:~~13: 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 5five operating segments, 3three of which are related to the Company’s PACE offering. The PACE-related operating segments are based on 3three 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 1one reportable segment for PACE. The ~~company’s~~Company’s remaining 2two 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 Company serves approximately 6,700 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; 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 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.~~United States and all revenue was earned in the ~~U.S.~~United States.

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 December 31, 2022 and 2021:

March 31, 2021

March 31, 2020

December 31, 2022

December 31, 2021
(In thousands)

PACE

All other⁽¹⁾

Totals

PACE

All other⁽¹⁾

Totals

PACE

All other⁽¹⁾

Totals

PACE

All other⁽¹⁾

Totals
Capitation revenue

$
155,835

$
—

$
155,835

$
144,174

$
—

$
144,174

$
167,140

$
—

$
167,140

$
174,964

$
—

$
174,964
Other service revenue

(47)

520

473

(56)

652

596

99

217

316

60

326

386
Total revenues

155,788

520

156,308

144,118

652

144,770

167,239

217

167,456

175,024

326

175,350
External provider costs

75,389

—

75,389

71,022

—

71,022

93,507

—

93,507

91,033

—

91,033
Cost of care, excluding depreciation and amortization

38,867

698

39,565

38,559

726

39,285

51,184

192

51,376

42,478

433

42,911
Center-Level Contribution Margin

41,532

(178)

41,354

34,537

(74)

34,463

22,548

25

22,573

41,513

(107)

41,406
Overhead costs⁽²⁾

24,217

(30)

24,187

18,614

42

18,656

32,532

59

32,591

35,160

1

35,161
Depreciation and amortization

3,181

130

3,311

2,619

150

2,769

3,555

107

3,662

3,185

107

3,292
Equity loss

—

—

—

163

—

163
Other operating (income) expense

19,222

—

19,222

(99)

—

(99)
Interest expense, net

4,824

52

4,876

2,317

44

2,361

(177)

(46)

(223)

(624)

(50)

(674)
Loss on extinguishment of debt

13,488

—

13,488

—

—

—
Gain on equity method investment

(10,871)

—

(10,871)

—

—

—
Other expense (income)

2,267

—

2,267

(244)

—

(244)

444

—

444

29

(1)

28
Income (Loss) Before Income Taxes

$
(14,796)

$
(330)

$
(15,126)

$
11,167

$
(310)

$
10,857

$
(13,272)

$
(187)

$
(13,459)

$
2,573

$
(266)

$
2,307

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

March 31, 2021

March 31, 2020
(In thousands)

PACE

All other⁽¹⁾

Totals

PACE

All other⁽¹⁾

Totals
Capitation revenue

$
464,294

$
—

$
464,294

$
412,724

$
—

$
412,724
Other service revenue

213

1,677

1,890

(1,112)

3,088

1,976
Total revenues

464,507

1,677

466,184

411,612

3,088

414,700
External provider costs

224,215

—

224,215

204,387

—

204,387
Cost of care, excluding depreciation and amortization

113,611

2,311

115,922

111,021

3,444

114,465
Center-Level Contribution Margin

126,681

(634)

126,047

96,204

(356)

95,848
Overhead costs⁽²⁾

120,249

(13)

120,236

56,846

(24)

56,822
Depreciation and amortization

8,901

361

9,262

7,525

785

8,310
Equity loss

1,343

—

1,343

201

2

203
Other operating (income) expense

18,211

—

18,211

(252)

2

(250)
Interest expense, net

16,919

142

17,061

11,025

262

11,287
Loss on extinguishment of debt

14,479

—

14,479

—

—

—
Gain on equity method investment

(10,871)

—

(10,871)

—

—

—
Other expense (income)

2,222

—

2,222

673

62

735
Income (Loss) Before Income Taxes

$
(44,772)

$
(1,124)

$
(45,896)

$
20,186

$
(1,445)

$
18,741

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December 31, 2022

December 31, 2021
in thousands

PACE

All other⁽¹⁾

Totals

PACE

All other⁽¹⁾

Totals
Capitation revenue

$
338,071

$
—

$
338,071

$
347,518

$
—

$
347,518
Other service revenue

176

427

603

69

833

902
Total revenues

338,247

427

338,674

347,587

833

348,420
External provider costs

189,744

—

189,744

181,045

—

181,045
Cost of care, excluding depreciation and amortization

104,595

338

104,933

82,579

1,060

83,639
Center-Level Contribution Margin

43,908

89

43,997

83,963

(227)

83,736
Overhead costs⁽²⁾

67,107

79

67,186

62,551

(13)

62,538
Depreciation and amortization

6,881

214

7,095

6,370

215

6,585
Interest expense, net

(735)

(91)

(826)

(1,120)

(101)

(1,221)
Other expense (income)

480

—

480

(464)

(1)

(465)
Income (Loss) Before Income Taxes

$
(30,335)

$
(295)

$
(30,630)

$
13,458

$
(531)

$
12,927
(1)Center-level Contribution Margin from segments below the quantitative thresholds are attributable to two operating segments of the Company. Those segments consist of Homecare and Senior Housing. Neither of those segments has ever met any of the quantitative thresholds for determining reportable segments.
~~(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:~~14:  ~~Related-party~~Related Party Transactions
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 ~~March~~each of December 31, ~~2021~~2022 and June 30, ~~2020,~~2022, $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:~~15:  Subsequent Events
On January 23, 2023, CMS and the Colorado Department of Healthcare Policy & Financing (“HCPF”) released the enrollment sanctions for all of our Colorado centers. CMS and HCPF will require the Company to conduct post-sanction corrective action and monitoring activities to address any issues identified during the validation audits. The release of both sanctions permits the Company ~~has evaluated subsequent events through May 11, 2021, the date on which the consolidated financial statements were issued.~~to resume normal enrollment of eligible Colorado seniors into its PACE program at its six Colorado centers.

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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, 2022 (“2022 10-K”).
~~Executive~~ Overview
~~We are~~InnovAge Holding Corp. (“InnovAge”) became a public company in March 2021. As of December 31, 2022, the ~~leading healthcare delivery platform by number of~~Company served approximately 6,460 PACE participants, ~~focused on providing all-inclusive, capitated care to high-cost, dual-eligible seniors. We directly address two~~and operated 18 PACE centers across Colorado, California, New Mexico, Pennsylvania, and Virginia.
Trends and Uncertainties Affecting the Company
During fiscal year 2022, the U.S. and global economies experienced adverse macroeconomic effects in part resulting from the ongoing effects of the ~~most pressing challenges facing~~COVID-19 pandemic, as discussed in more detail below. These effects included inflation and increased wages due to labor shortages. In fiscal year 2022, in response to high levels of inflation, we began to implement various mitigation strategies to reduce costs of operation, including consolidating services and price negotiations with providers and vendors. While inflationary pressures eased slightly during the ~~U.S. healthcare industry: rising costs~~three and ~~poor outcomes. Our patient-centered care delivery approach meaningfully improves~~six months ended December 31, 2022, inflation has continued during the ~~quality~~first half of ~~care~~fiscal 2023 and is expected to continue through the remainder of the fiscal year. As a result, the Company has continued the mitigation strategies discussed during the six months ended December 31, 2022. The effects of inflation, after accounting for these mitigation strategies, were immaterial to our ~~participants receive, while keeping them in their homes~~financial results for ~~as long as safely possible~~the three and ~~reducing over-utilization of high-cost care settings such as hospitals and nursing homes. Our patient-centered approach is led by~~six months ended December 31, 2022. Although we expect to continue mitigation efforts, there can be no assurance that 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.strategies will be sufficient.
~~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~~increased wage pressure, exacerbated by the ~~option~~labor shortage, increased the cost of providing care and our overall operating expenses during the six months ended December 31, 2022. The combination of increased wage pressure and labor shortage amongst healthcare personnel, and specifically, trained personnel, has impacted and may continue to ~~purchase 2,329,234 additional shares~~impact our expenses and ability to adhere to the complex government laws and regulations that apply to our business.
Furthermore, operating expenses increased $35.2 million, or 10.5%, for the six months ended December 31, 2022 compared to 2021 due to, in part, the increased cost of ~~common stock.~~care and related cost per participant as a result of increased salaries, wages and benefits associated with increased headcount and higher wage rates, third party audit and compliance support, increased fleet and contract transportation, increase in external appointments, and higher fuel costs. We ~~received net proceeds~~expect to experience elevated operating expenses for the remainder of ~~$373.6 million, after deducting underwriting discounts~~fiscal 2023. We continue to evaluate increased costs and ~~commissions~~methods to mitigate or offset such costs.
Impact of ~~$23.9 million~~Macroeconomic Conditions 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.
COVID-19
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.

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

~~Table~~ of ~~Contents~~

which, to some extent, continue on federal, state and local economies, ~~the duration~~including as a result of ~~which~~new virus variants that have resulted in renewed mask mandates in certain circumstances.

Expenses. The virus has and 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 the following impacts on our business model due to COVID-19:~~

~~Care Model~~. Though the 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 of March 31, 2021, we had not experienced a decline in revenue as a result of the COVID-19 pandemic. The capitation payments we receive from Medicare are risk-adjusted based on documented encounters and diagnosed conditions. Government payors require that participants’ health issues be documented annually regardless of the permanence of the underlying causes. Historically, this documentation has been required to be completed during an in-person visit with a participant, but Centers for Medicare and Medicaid Services (“CMS”) is now allowing documentation of conditions identified during qualifying telehealth visits with participants. Given the disruption caused by the COVID-19 pandemic, it is unclear whether we will be able to document the health conditions 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~~experienced supply chain issues with respect to personal protective equipment (“PPE”) and other medical supplies ~~used to prevent transmission~~during the height of ~~COVID-19. During 2020, we acquired significantly greater quantities of medical supplies at significantly~~the pandemic. Global logistics network challenges resulted in 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.

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for medical supplies we require. While supply chain disruptions have adversely affected, and may continue to adversely affect, our business and outlook, supply chain disruptions have improved to almost pre-pandemic level during the course of the first half of fiscal 2023. As a result, prices for most medical supplies have normalized.

Labor market. The COVID-19 pandemic has and continues to exacerbate difficulties to hire additional healthcare professionals, causing certain of our centers to be understaffed or staffed with personnel that requires training. In fiscal year 2022, we experienced workforce and labor shortages, within all of our centers. This labor pressure has eased slightly during the six months ended December 31, 2022. While the labor pressure and related costs have eased slightly, the Company continues to be affected by the increased competition in the labor market and market adjustments to increase retention and improve our ability to hire. These adjustments contributed, in part, to an increase in cost of care for the six months ended December 31, 2022, further impacted by additional staffing related to compliance and remediation efforts. This increase in conjunction with higher headcount has contributed to increased cost of care for the six months ended December 31, 2022 compared to the six months ended December 31, 2021 as discussed in “Results of Operations” below. We continue to assess key roles and benchmarks to market while monitoring trends in the labor market.

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

Key Factors Affecting Our Performance

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

~~Our participants.~~
● Our ability to effectively implement remediation efforts in our centers as a result of our recent audits. The Company’s priority is to remediate the deficiencies raised in the audit processes in California, Colorado and New Mexico. As part of its actions to do so, the Company has worked with the appropriate authorities to make the necessary changes within the Company to increase care coordination and care documentation among our centers, including working to fill critical personnel gaps at our centers, standardizing the process of our Interdisciplinary Care Teams (“IDTs”), strengthening our home care network and reliability, improving timelines of scheduling and coordinating care with providers outside our centers, among others. See “Audit Processes and Remediation Efforts” below.
● Our participants.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 2.31 based on InnovAge data as of December 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.
● 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. Even though enrollment sanctions have been released in the State of Colorado, our ability to enroll Medicaid recipients, which is required to enroll seniors with both Medicare and Medicaid, remain suspended at our Sacramento, California center by the Department of Health Care Services (“DHCS”) of the State of California.

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●

Our ability to maintain high participant satisfaction and retention. We achieved a 79% participant satisfaction rating as of October 1, 2022 and average participant tenure was 3.2 years as of December 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 5.7% 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 87% of our revenue in the six months ended December 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 Sacramento, California and Colorado limited our ability to grow our participant census and impact Center-level Contribution Margin in fiscal 2022 and the first half of fiscal 2023.

●

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, 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.

●

Execute tuck-in acquisitions. From fiscal year 2019 through fiscal year 2021, we acquired and integrated three PACE organizations, expanding our InnovAge Platform to one new state and four new markets through those acquisitions. We are disciplined in our approach to acquisitions and have executed multiple types of transactions, including turnarounds and non-profit conversions. Historically, when integrating acquired programs, we worked closely with key constituencies, including local governments, health systems and senior housing providers, to enable continuity of high-quality care for participants. Once restrictions on our ability to open de novo centers are lifted or resolved, we intend to resume execution of tuck-in acquisitions.

●

Contracting with government payors. Our economic model relies on our capitated arrangements with government payors, namely Medicare and Medicaid. We view the government not only as a payor but also as a key partner in our efforts to expand into new geographies and access more participants in our existing markets. 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

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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 Risk Adjustment Factor score as measured twice per year and is based on the evolving acuity of a participant. Based on the difference between our estimate and the final determination from CMS, we may receive incremental true up revenue or be required to repay certain amounts. Historically, these true-up payments typically occur between May and August, but the timing of these payments is determined by CMS, and we have neither visibility into nor control over the timing of such payments.

Audit Processes and Remediation Efforts

We are routinely subject to, and will continue to be subject to, various governmental inspections, reviews and audits. Set forth below is a summary of the ongoing audits at our centers and updates on such audit processes.

Colorado. In December 2021, each of CMS and the Colorado Department of Health Care Policy & Financing (“HCPF”) suspended new enrollments at the Company’s Colorado centers, based on deficiencies related to participant provision of services detected in the joint audit initiated in May and June 2021. On January 23, 2023, both CMS and HCPF released the enrollment sanctions for all Colorado centers. CMS and HCPF require that we conduct post-sanction corrective action and monitoring activities to address any issues identified during the validation audits.

California. On May 10, 2021, CMS began an audit of our Sacramento, California center. InSeptember 2021, CMS suspended new enrollments at our Sacramento center based on deficiencies detected in the audit related to participant provision of services. In that same month, we were further notified that the DHCS had reached the same determination. In October 2021, we submitted a CAP to each of these agencies and began executing the CAPs. Effective November 21, 2022, CMS released the enrollment sanction for Medicare-eligible participants. The DHCS has not lifted the state sanction. The DHCS audit outcome determines our ability to enroll Medicaid recipients, which is required to enroll seniors with both Medicare and Medicaid. Timing and results of validation from DHCS are uncertain, and there can be no assurance that the agency will agree with us or release us from sanction.

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

In March 2022, CMS and DHCS began separate audits of our San Bernardino, California center. On January 11, 2023, CMS closed its audit. There has been no additional activity related to the DHCS audit; however, DHCS has not officially closed the audit.

New Mexico. In November 2021, CMS began an audit of our Albuquerque, NewMexico center. In July 2022, CMS verbally notified us that no enforcement actions will be taken, and in October 2022, CMS issued a final audit report. To address the deficiencies related to participant provision of services identified in the audit, we implemented iCARs and CARs and are currently working with CMS on the audit close out process.

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

The Company’s priority is to remediate the deficiencies raised in the audit processes and to return to growth as a company, both for the short- and long-term. We continue to work with the appropriate authorities to make the necessary changes within the Company to increase care coordination and care documentation among our centers.

Components of Results of Operations

Revenue

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

~~Our participants~~Medicaid and Medicare capitation revenues are ~~managed~~based on PMPM capitation rates under the PACE program. The PACE state contracts between us and the respective state Medicaid administering agency are amended annually each June 30 in all states other than California and Pennsylvania, which contract on a ~~capitated, or at-risk, basis, where InnovAge is financially responsible~~calendar-year basis. New amendments have been executed for the periods (i) January 1, 2021 through December 31, 2025 for California and (ii) July 1, 2022 through June 30, 2023 for all other states, except Pennsylvania, for which we are currently operating in good standing under the 2020 amended agreement while the agency finalizes its current amendment. For a discussion of ~~their medical costs, including primary~~our revenue recognition policies, please see Critical Accounting Estimates below and ~~specialist care, in-home care, hospital visits, nutrition, transportation~~Note 2 “Summary of Significant Accounting Policies” 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 intoconsolidated financial statements included in 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.2022 10-K.

~~Our ability~~Other Service Revenue. Other service revenue primarily consists of revenues derived from fee-for-service arrangements, state food grants, rent revenues and management fees. Prior to ~~grow enrollment~~June 30, 2022 we generated fee-for-service revenue from providing home-care services to non-PACE patients in their homes, for which we billed the patient or their insurance plan on a fee-for-service basis. We no longer offer in-home care services. For a discussion of our revenue recognition policies, please see Critical Accounting Estimates below and ~~capacity within existing centers.~~ ~~We believe our demonstrated ability to drive sustained, organic census growth is a key indicator~~Note 2, “Summary of ~~the attractiveness of the InnovAge Platform~~Significant Accounting Policies” 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~~consolidated financial statements included in our ~~program year-round, allowing us to continuously attract new participants and reducing seasonal variability in our results of operations.~~2022 10-K.

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.Operating Expenses

~~Our ability to maintain high participant satisfaction~~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), housing (e.g., assisted living and ~~retention.~~ ~~Our comprehensive individualized care model~~skilled nursing facility), outpatient 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 outpharmacy. In aggregate, external provider costs represent the largest portion of our ~~service areas.~~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 salaries, wages and benefits for IDT and other center-level staff, participant transportation, medical supplies, occupancy, insurance and other operating costs. IDT employees include medical doctors, registered nurses, social workers, physical, occupational, and speech therapists, nursing assistants, and transportation workers. Other center-level employees include clinic managers, dieticians, activity assistants and certified nursing assistants. Cost of care excludes any expenses associated with sales and marketing activities incurred at a local level as well as any allocation of our corporate, general and administrative expenses. A portion of our cost of care, including our employee-related costs, is directly related to the number of participants cared for in a center. The remainder of our cost of care is fixed relative to the number of participants we serve, such as occupancy and insurance expenses. As a result, as revenue increases due to census growth, cost of care, excluding depreciation and amortization, moderately decreases as a percentage of revenue. As we open new centers, we expect cost of care, excluding depreciation and amortization, to increase in absolute dollars due to higher census and facility related costs.

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

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~~Effectively managing~~sales support. These employee-related expenses capture all costs for both our field-based and corporate sales and marketing teams. Sales and marketing expenses also include local and centralized advertising costs, as well as the ~~cost of care for~~infrastructure required to support our ~~participants.~~ marketing efforts. We ~~receive capitated payments~~expect these costs to ~~manage~~increase in absolute dollars over time as we continue to grow our participant census. We evaluate our sales and marketing expenses relative to our participant growth and will invest more heavily in sales and marketing from time-to-time to the 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,extent we believe such investment can accelerate 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.growth without negatively affecting profitability.

~~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~~Corporate, General 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, orAdministrative. Corporate, general and administrative expenses ~~across~~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 ~~centers.~~

~~Our ability~~corporate office. We expect our general and administrative expenses to ~~build de novo centers within existing~~increase in absolute dollars due to the additional legal, accounting, insurance, investor relations and ~~new markets.~~ ~~We have proven~~other costs that we incur as a public company, as well as other costs associated with continuing to grow our ~~ability~~business. However, we anticipate general and administrative expenses to ~~expand~~decrease as a percentage of revenue over the long term, although such expenses may fluctuate as a percentage of revenue from period to period due to the timing and ~~operationalize new centers across multiple geographies while generating consistent center-level performance. This performance highlights the predictability~~amount of ~~our model and gives us conviction to continue investing in building new centers to drive long-term value creation.~~these expenses.

~~We have a large addressable market with a target population~~Depreciation and Amortization. Depreciation and amortization expenses are primarily attributable to our buildings and leasehold improvements and our equipment and vehicles. Depreciation and amortization are recorded using the straight-line method over the shorter of estimated ~~at approximately 2.2 million, representing seniors who we believe~~useful life or lease terms, to the extent the assets 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.being leased.

InFor more information relating to the components of our ~~existing markets, we believe there is significant opportunity~~results of operations, see Results of Operations below and Note 2 “Summary of Significant Accounting Policies” 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~~consolidated financial statements included in 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.2022 10-K.

~~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.

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~~Contracting with Government Payors.~~ ~~Our economic model relies on~~Results of Operations

The following table sets forth our ~~capitated arrangements with government payors, namely Medicare and Medicaid. We view~~consolidated results of operations for 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.periods presented:

Three Months Ended

Six Months Ended

December 31,

December 31,
in thousands

2022

2021

2022

2021
Revenues








Capitation revenue

$
167,140

$
174,964

$
338,071

$
347,518
Other service revenue

316

386

603

902
Total revenues

167,456

175,350

338,674

348,420
Expenses








External provider costs

93,507

91,033

189,744

181,045
Cost of care, excluding depreciation and amortization

51,376

42,911

104,933

83,639
Sales and marketing

3,774

6,679

8,187

12,972
Corporate, general and administrative

28,817

28,482

58,999

49,566
Depreciation and amortization

3,662

3,292

7,095

6,585
Total expenses

181,136

172,397

368,958

333,807
Operating Income (Loss)

$
(13,680)

$
2,953

$
(30,284)

$
14,613

Other Income (Expense)








Interest expense, net

(223)

(674)

(826)

(1,221)
Other income (expense)

444

28

480

(465)
Total other expense

221

(646)

(346)

(1,686)
Income (Loss) Before Income Taxes

(13,459)

2,307

(30,630)

12,927
Provision (Benefit) for Income Taxes

(2,912)

1,201

(6,383)

4,197
Net Income (Loss)

$
(10,547)

$
1,106

$
(24,247)

$
8,730
Less: net loss attributable to noncontrolling interests

(754)

(217)

(1,381)

(279)
Net Income (Loss) Attributable to InnovAge Holding Corp.

$
(9,793)

$
1,323

$
(22,866)

$
9,009

~~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.
Revenues

Three Months Ended






Six Months Ended






December 31,

Change

December 31,

Change


2022

2021

$

%

2022

2021

$

%
in thousands

















Capitation revenue

$
167,140

$
174,964

$
(7,824)

(4.5)
%

$
338,071

$
347,518

$
(9,447)

(2.7)
%
Other service revenue

316

386

(70)

(18.1)
%

603

902

(299)

(33.1)
%
Total revenues

$
167,456

$
175,350

$
(7,894)

(4.5)
%

$
338,674

$
348,420

$
(9,746)

(2.8)
%

~~Seasonality~~Capitation revenue. Capitation revenue was $167.1 million for the three months ended December 31, 2022, a decrease of $7.8 million, or 4.5%, compared to $175.0 million for the three months ended December 31, 2021. This decrease was driven by a 8.1% decrease in member months partially offset by a 4.0% increase in capitation rates. The decrease in member months is primarily due to disenrollments and our ~~business.~~ ~~Our operational~~inability to enroll new participants at our Sacramento, California 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~~Colorado centers 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~~sanctions. The increase in ~~medical expenses during these time periods. We therefore expect higher per-participant medical costs~~capitation rates was primarily driven by an annual increase in ~~our second~~Medicaid capitation rates as determined by the States and ~~third fiscal quarters. Medical costs also depend upon~~Medicare capitation rates as a result of increased risk score and county rates partially offset by the ~~number~~reinstatement of ~~business days in~~sequestration.
Capitation revenue was $338.1 million for the six months ended December 31, 2022, 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~~decrease of ~~business days~~$9.4 million, or 2.7%, compared to $347.5 million for the ~~same period in another. We would also expect medical costs to be impacted~~six months ended December 31, 2021. This decrease was driven by a ~~pandemic, such as the COVID-19 pandemic, which may result~~6.9% decrease 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~~member months partially offset by a ~~participant’s RAF score, which is measured twice per year and is based on~~4.4% increase in capitation rates, primarily due to 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.
factors discussed above.

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~~Results of operations~~Operating Expenses

~~The following table sets forth our results of operations~~

Three Months Ended






Six Months Ended






December 31,

Change

December 31,

Change

2022

2021

$

%

2022

2021

$

%
in thousands

















External provider costs

$
93,507

$
91,033

$
2,474

2.7
%

$
189,744

$
181,045

$
8,699

4.8
%
Cost of care (excluding depreciation and amortization)

51,376

42,911

8,465

19.7
%

104,933

83,639

21,294

25.5
%
Sales and marketing

3,774

6,679

(2,905)

(43.5)
%

8,187

12,972

(4,785)

(36.9)
%
Corporate, general, and administrative

28,817

28,482

335

1.2
%

58,999

49,566

9,433

19.0
%
Depreciation and amortization

3,662

3,292

370

11.2
%

7,095

6,585

510

7.7
%
Total operating expenses

$
181,136

$
172,397

$
8,739

$
368,958

$
333,807

$
35,151

External provider costs. External provider costs were $93.5 million for the ~~periods presented~~three months ended December 31, 2022, an increase of $2.5 million, or 2.7%, compared to $91.0 million for the three months ended December 31, 2021. The increase was primarily driven by an increase of $9.9 million, or 11.8%, in cost per participant partially offset by a decrease of $7.4 million, or 8.1%, in member months. The increase in cost per participant was primarily driven by a $8.3 million increase associated with increased housing utilization and cost per day as mandated by certain states.
External provider costs were $189.7 million for the six months ended December 31, 2022, an increase of $8.7 million, or 4.8%, compared to $181.0 million for the six months ended December 31, 2021. The increase is primarily driven by an increase of $21.1 million, or 12.5%, in cost per participant partially offset by a decrease of $12.4 million, or 6.9%, in member months. The increase in cost per participant is primarily driven by a $14.7 million increase associated with increased housing utilization and cost per day as mandated by certain states.
Cost of care (excluding depreciation and amortization). Cost of care (excluding depreciation and amortization) expense was $51.4 million for the three months ended December 31, 2022, an increase of $8.5 million, or 19.7%, compared to $42.9 million for the three months ended December 31, 2021, primarily due to an increase of $11.9 million, or 30.0%, in cost per participant partially offset by a decrease of $3.5 million, or 8.1%, in member months. The increase was primarily driven by (i) a $5.4 million increase in salaries, wages and benefits associated with increased headcount and higher wage rates due to the ongoing competitive labor market, (ii) $1.0 million in third party audit and compliance support, and (iii) $0.9 million in increased fleet and contract transportation as a ~~percentage~~result of ~~our total revenues~~higher average daily attendance, increase in external appointments, and higher fuel costs.

Cost of care (excluding depreciation and amortization) expense was $104.9 million for ~~those periods. Percentages presented in~~ the ~~following tables may not sum~~six months ended December 31, 2022, an increase of $21.3 million, or 25.5%, compared to $83.6 million for the six months ended December 31, 2021, primarily due to ~~rounding.~~an increase of $27.0 million, or 34.7%, in cost per participant partially offset by a decrease of $5.7 million, or 6.9%, in member months. The increase was primarily driven by (i) a $13.2 million increase in salaries, wages and benefits associated with increased headcount and higher wage rates due to the ongoing competitive labor market, (ii) $2.1 million in third party audit and compliance support, (iii) $2.2 million in increased fleet and contract transportation as a result of higher average daily attendance, increase in external appointments, and higher fuel costs, and (iv) $0.9 million in de novo costs due primarily to rent expense.

~~Comparison of~~Sales and marketing. Sales and marketing expenses were $3.8 million for the three ~~and nine~~ months ended ~~March~~December 31, 2022, a decrease of $2.9 million, or 43.5%, compared to $6.7 million for the three months ended December 31, 2021, primarily due to a (i) $1.3 million reduction in marketing spend and ~~2020~~$0.6 million reduction in costs associated with fewer headcount within the sales department, both as a result of sanctions in our Colorado and Sacramento centers and (ii) a $0.8 million reduction in sales commission expense due to the deferral of commissions.

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

Sales and marketing expenses were $8.2 million for the six months ended December 31, 2022, a decrease of $4.8 million, or 36.9%, compared to $13.0 million for the six months ended December 31, 2021, primarily due to a $2.6 million

Table of Contents

reduction in marketing spend and $1.2 million reduction in costs associated with fewer headcount within the sales department, both as a result of sanctions in our Colorado and Sacramento centers and (ii) a $0.8 million reduction in sales commissions expense due to the deferral of commissions.

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 revenue was $155.8~~Corporate, general and administrative. Corporate, general and administrative expenses were $28.8 million for the three months ended ~~March~~December 31, ~~2021,~~2022, an increase of ~~$11.7~~$0.3 million, or 7%1.2%, compared to ~~$144.2~~$28.5 million for the three months ended ~~March~~December 31, ~~2020. This~~2021. The increase was ~~driven~~ primarily bydue to (i) a $1.9 million increase in employee compensation and benefits as the result of an increase in ~~census~~headcount, to support compliance and ~~rates, both of which increased Medicaid~~bolster organizational capabilities, (ii) $2.7 million in third party costs associated with implementing our core provider initiatives, assessing our risk-bearing payor capabilities, and ~~Medicare revenue,~~strengthening organizational capabilities including the transition to a new EMR, and (iii) a $0.6 million increase in software license and maintenance expense. These increases in cost are partially offset by (i) a ~~low single digit rate decrease related to our participants~~$0.9 million reduction in ~~Colorado.~~bad debt expense and (ii) $4.1 million in executive severance and recruiting recognized during the three months ended December 31, 2021.
~~Capitation revenue was $464.3~~
Corporate, general and administrative expenses were $59.0 million for the ~~nine~~six months ended ~~March~~December 31, ~~2021,~~2022, an increase of ~~$51.6~~$9.4 million, or ~~11%~~19.0%, compared to ~~$412.7~~$49.6 million for the ~~nine~~six months ended ~~March~~December 31, ~~2020. This~~2021. The increase was ~~driven~~ primarily bydue to (i) a $5.0 million increase in employee compensation and benefits as the result of an increase in ~~census~~headcount, to support compliance and ~~rates, both of which~~bolster organizational capabilities, (ii) $6.8 million in third party costs associated with implementing our core provider initiatives, assessing our risk-bearing payor capabilities, and strengthening organizational capabilities including the transition to a new EMR, (iii) $0.8 million in increased ~~Medicaid~~legal spend, and ~~Medicare revenue,~~(iv) $1.1 million increase in software license and maintenance expense. These increases in cost were partially offset by (i) a ~~low single digit rate~~$0.6 million reduction in bad debt expense and (ii) $4.1 million in executive severance and recruiting recognized during the six months ended December 31, 2021.

Other Income (Expense)

Three Months Ended






Six Months Ended






December 31,

Change

December 31,

Change


2022

2021

$

%

2022

2021

$

%
in thousands

















Interest expense, net

$
(223)

$
(674)

$
451

66.9
%

$
(826)

$
(1,221)

$
395

32.4
%
Other income (expense)

444

28

416

1,485.7
%

480

(465)

945

203.2
%
Total other expense

$
221

$
(646)

$
867

$
(346)

$
(1,686)

$
1,340

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 $0.2 million for the three months ended December 31, 2022, a decrease of $0.5 million, or 66.9%, compared to $0.7 million for the three months ended December 31, 2021. The decrease was primarily due to interest income of $0.8 million from money market funds offsetting interest expense of $1.1 million for the three months ended December 31, 2022. Interest income during the three months ended December 31, 2021 was negligible.
Interest expense, net was $0.8 million for the six months ended December 31, 2022, a decrease of $0.4 million, or 32.4%, compared to $1.2 million for the six months ended December 31, 2021. The decrease was primarily due to interest income of $1.2 million from money market funds offsetting interest expense of $2.1 million during the six months ended December 31, 2022. Interest income during the six months ended December 31, 2021 was negligible. For additional information regarding our outstanding indebtedness, see Note 8, “Long-Term Debt” to our condensed consolidated financial statements.
Other income (expense). Other income (expense) consists primarily of the net proceeds received from the sale of or disposal of property and equipment and unrealized gains and losses related to ~~our participants~~short-term investments. Other income (expense) for the three months ended December 31, 2022 increased $0.4 million, or 1,485.7%, when compared to the three months ended December 31, 2021. The increase is primarily due to the recognition of $0.4 million in ~~Colorado.~~unrealized gains related to short-term investments. Other income (expense) was $0.5 million for the six months ended December 31, 2022,

Table of Contents

~~Medicare revenue also increased due to the temporary suspension of the automatic 2% reduction of Medicare claim reimbursements (sequestration) for the period of May 1, 2020 through December 31, 2021.~~

Other service revenue was $0.5 million for the three months ended March 31, 2021, a decrease of $0.1 million, or 26%, from $0.6 million for the three months ended March 31, 2020. Other service revenue was $1.9 million for the nine months ended March 31, 2021, a decrease of $0.1 million, or 5%, from $2.0 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 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 increase in census and an increase in the average cost per participant.
External provider costs were $224.2 million for the nine 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 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%~~203.2%, compared to ~~$4.6~~a loss of $0.5 million for the six months ended December 31, 2021. The increase is due to the recognition of unrealized gains on short-term investments of $0.4 million during the six months ended December 31, 2022 in addition to the recognition of a loss on disposal of assets of $0.5 million during the six months ended December 31, 2021 related to the write off of certain assets in conjunction with a move to a new facility at our Roanoke, Virginia center.
Provision for Income Taxes
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 three months ended ~~March~~December 31, ~~2020.~~2022 and 2021, we reported benefit for income taxes of $2.9 million and a provision for income taxes of $1.2 million, respectively. During the six months ended December 31, 2022 and 2021, we reported benefit for income taxes of $6.4 million and a provision for income taxes of $4.2 million, respectively. The ~~increase was~~decrease of $10.6 million is primarily due (i) our pretax book loss recognized during the six months ended December 31, 2022, as compared to pretax book income recognized during the six months ended December 31, 2021 and (ii) certain permanent differences between the financial and tax accounting treatment of (a) the Section 162(m) limitation on compensation of five highest paid officers, (b) income from entities not subject to tax, and (c) disallowed stock options related to profit unit interests.

Net Loss Attributable to Noncontrolling Interests.

InnovAge Senior Housing Thornton, LLC (“SH1”) is a Variable Interest Entity (“VIE”). The Company is the primary beneficiary of SH1 and consolidates SH1. The Company is the primary beneficiary of SH1 because it has the power to direct the activities that are most significant to SH1 and has an ~~increase~~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 ~~headcount~~the consolidated statements of operations and the share of the other noncontrolling interest holders’ earnings are recorded as net loss attributable to ~~support enrollment growth~~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 ~~well~~net loss attributable to noncontrolling interests.

Net Income (Loss)

During the six months ended December 31, 2022 and 2021, we reported net income (loss) of ($24.2 million) and $8.7 million, respectively, consisting of (i) income (loss) from operations of ($30.3 million) and $14.6 million, respectively, (ii) other expense of $0.3 million and $1.7 million, respectively, and (iii) a benefit for income taxes of $6.4 million and provision of $4.2 million, respectively, each as ~~a shift in marketing spend to the second half of fiscal year 2021.~~described above.

Table of Contents

Sales and marketing expenses were $14.3 million for the nine months ended March 31, 2021, a decrease of $0.1 million, or 0.7%, compared to $14.4 million for the three months ended March 31, 2020. We incurred lower marketing and sales expenses in the first half of fiscal year 2021 as a result of shifting marketing spend to the second half of fiscal year 2021.

~~Corporate, general~~Key Business Metrics 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, 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 a result of the IPO.

Corporate, general and administrative expenses were $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. The increase was primarily due to the fees incurred as a result of the Apax Transaction (as defined below) and the IPO. In connection with the Apax Transaction, $42.2 million was recorded related to the cancellation of 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 with the IPO transaction $1.5 million of transaction costs were recorded as corporate, general and administrative expenses.

~~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
%

Depreciation and amortization expense was $3.3 million for the three months ended March 31, 2021, an increase of $0.5 million, or 20%, compared to $2.8 million for the three months ended March 31, 2020. Depreciation and amortization expense was $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. This increase in both periods is the result of capital additions in the normal course of business.

~~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 $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 equity loss are derived from InnovAge Sacramento, which began operations in July 2020 and was accounted for as an equity method investee and subsequently became a consolidated entity effective January 1, 2021.

~~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~~

~~(0)~~

Other operating expense 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 $18.2 million for the nine months ended March 31, 2021, an increase of $18.5 million compared 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 contingent consideration and the payment of $20.0 million made under the acquisition agreement of the New Courtland LIFE Program during 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 $4.9 million for the three months ended March 31, 2021, an increase of $2.5 million, or 52%, compared to $2.4 million for the three months ended March 31, 2020. Interest expense, net was $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. The increase was primarily due to a higher 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 our 2016 Credit Agreement (as defined below) and higher levels of outstanding borrowings during the nine months ended March 31, 2021.

~~Loss on extinguishment of debt.~~ Loss on extinguishment of debt was $13.5 million for the three months ended March 31, 2021 and no 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 $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 for the three and nine months ended March 31, 2020. 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 million for the three months ended March 31, 2021, a decrease of $2.5 million, or 111%, compared to other income of $0.2 million for the three months ended March 31, 2020. Other expense was $2.2 million for the nine months ended March 31, 2021, an increase of $1.5 million, or 67%, compared to other income of $0.7 million for the nine months ended March 31, 2020. The impact in 2021 is primarily a result of an amendment to the

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~~warrants issued by the Company to Adventist Health System/West (“Sacramento Warrants”) which resulted in additional expense of $2.3 million.~~

~~Key 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
%

Six months ended December 31,


2022

2021

dollars in thousands
Key Business Metrics:





Centers

18

18

Census^(a)

6,460

7,050

Total Member Months^(a)

39,210

42,095

Center-level Contribution Margin

$
43,997

$
83,736

Center-level Contribution Margin as a % of revenue

13.0
%

24.0
%

GAAP Measures:

Net income (loss)

$
(24,247)

$
8,730

Net loss margin

(7.2)
%

2.5
%

Non-GAAP Measures:

Adjusted EBITDA^(b)

$
(5,768)

$
32,962

Adjusted EBITDA Margin^(b)

(1.7)
%

9.5
%
~~(1)~~ (a) ~~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, 2021.~~
~~(2)~~ ~~Participant numbers~~Amounts are approximate.
~~(3)~~ ~~Expressed as a percentage of revenue.~~
~~(4)~~(b) Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. For a definition and reconciliation of these non-GAAP measures to the most closely comparable ~~U.S.~~ GAAP measures for the ~~periods~~period indicated, see below under “—“Adjusted EBITDA and Adjusted ~~EBITDA.~~EBITDA Margin.”

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~~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~~$44.0 million and ~~$34.5~~$83.7 million for the ~~three~~six months ended ~~March~~December 31, 2022 and 2021, ~~and 2020, respectively, and $126.0 million and $95.8 million for the nine months ended March 31, 2021 and 2020,~~ respectively.

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Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA as net income (loss) adjusted for interest expense, depreciation and amortization, and provision for income tax as well as addbacks for non-recurring expenses or exceptional items, including charges relating to management equity compensation, ~~final determination of rates, merger~~class action litigation, M&A transaction and ~~acquisition transactions and the corresponding~~ integration, business optimization, and electronic medical ~~records transition, special employee bonuses, consolidation of equity investee, 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, 2021 and 2020, we had a net loss of $(51.1) million and net income of $13.8 million, respectively, representing a period over period decline of 470%, while Adjusted EBITDA was $65.9 million and $42.9 million, respectively, representing a period over period growth rate of 54%.

~~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
~~(a)~~ ~~For the nine months ended March 31, 2021, this reflects the CMS settlement payment of approximately $2.2 million related to end-stage renal disease beneficiaries for calendar years 2010 through 2020.~~
~~(b)~~ For the nine months ended March 31, 2021, this is primarily due to the July 27, 2020 transaction between us, an affiliate of Apax Partners and our 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)~~ Reflects charges related to business optimization initiatives. Such charges relate to one-time investments in projects designed to enhance our technology systems and improve the efficiency of our operations.
~~(d)~~ ~~Reflects non-recurring expenses relating to the transition to a new electronic medical record vendor.~~
~~(e)~~ ~~Reflects non-recurring special bonuses paid to certain of our employees of the Company relating to shareholder dividend transactions that occurred in fiscal years 2018 and 2019.~~
~~(f)~~ ~~Reflects non-recurring expense related to the gain on consolidation of InnovAge Sacramento.~~
~~(g)~~ ~~Reflects fees and expenses incurred in connection with amendments to our credit agreements.~~
~~(h)~~ ~~Reflects the contingent consideration fair value adjustment made during the reporting period associated with its acquisition of New Courtland.~~

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~~Adjusted EBITDA margin~~

record (“EMR”) implementation. 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~~six months ended ~~March~~December 31, 2022 and 2021, ~~we recognized the CMS settlement payment related to end stage renal disease beneficiaries for calendar years 2010-2020 in the amount~~net loss was $24.2 million and net income was $8.7 million, respectively, representing a year-over-year decrease of ~~approximately $2.2 million, which is deducted from total revenue solely for purposes of calculating~~377.7%. Adjusted EBITDA ~~margin.~~

was ($5.8 million) and $33.0 million, for the six months ended December 31, 2022 and 2021, respectively, representing a year-over-year decrease of 117.5%. For the ~~three~~six months ended ~~March~~December 31, ~~2021 and 2020, our~~2022, net loss margin was 7.2%, as compared to net income margin ~~increased from 5.5%~~of 2.5% for the six months ended December 31, 2021. For the six months ended December 31, 2022, our Adjusted EBITDA margin was negative 1.7%, as compared to ~~(6.9)%, respectively,~~our Adjusted EBITDA margin for the six months ended December 31, 2021 of 9.5%. The decrease in Adjusted EBITDA and Adjusted EBITDA ~~Margin expanded~~margin is primarily from ~~12.2%~~(i) increased center-level headcount and wage rates associated with a competitive labor market, (ii) increased housing utilization and rates as mandated by the states, and (iii) higher corporate, general, and administrative expenses, primarily attributable to ~~13.0%, respectively.~~

~~For the nine months ended March 31, 2021~~increased headcount to support compliance and ~~2020,~~to bolster our ~~net income margin increased from 3.3% to (11.0)%, respectively, and Adjusted EBITDA Margin expanded from 10.4% to 14.2%, respectively.~~organizational capabilities.

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 and noncash expenses, allowing us to more effectively evaluate our core operating performance and trends from period to period. We believe that Adjusted EBITDA and Adjusted EBITDA margin help investors and analysts in comparing our results across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or as a substitute for, the analysis of other ~~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.

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

Three months ended December 31,

Six months ended December 31,


2022

2021

2022

2021

in thousands

Net income (loss)

$
(10,547)

$
1,106

$
(24,247)

$
8,730
Interest expense, net

223

674

826

1,221
Depreciation and amortization

3,662

3,292

7,095

6,585
Provision (benefit) for income tax

(2,912)

1,201

(6,383)

4,197
Stock-based compensation

1,212

783

2,512

1,741
Executive severance and recruitment^(a)

—

4,123

—

4,123
Class action litigation^(b)

1,282

45

1,238

45
M&A and de novo development^(c)

336

513

622

840
Business optimization^(d)

2,846

2,671

10,035

4,788
EMR implementation^(e)

1,944

342

2,534

692
Adjusted EBITDA

$
(1,954)

$
14,750

$
(5,768)

$
32,962
(a) Reflects charges related to executive severance and recruiting.
(b) Reflects charges/(credits) related to litigation by stockholders.
(c) Reflects charges related to M&A transaction and integrations, and de novo center developments.
(d) Reflects charges related to business optimization initiatives. Such charges related to one-time investments in projects designed to enhance our technology and compliance systems, improve and support the efficiency and effectiveness of our operations, and third party support to address efforts to remediate deficiencies in audits. For the three months ended December 31, 2022 this includes (i) $0.5 million related to consultants and contractors performing audit and other related services at sanctioned centers, (ii) $1.4 million of charges related to government investigations, (iii) $0.8 million of costs associated with third party consultants as we implement our core provider initiatives, assess our risk-bearing payor capabilities, and strengthen our enterprise capabilities, and (iv) $0.1 million related to other non-recurring projects aimed at reducing costs and improving efficiencies. For the six months ended December 31, 2022 this includes (i) $1.2 million related to consultants and contractors performing audit and other related services at sanctioned centers, (ii) $3.0 million of charges related to government investigations, (iii) $5.1 million of costs associated with third party consultants as we implement our core provider initiatives, assess our risk-bearing payor capabilities, and strengthen our enterprise capabilities, and (iv) $0.7 million related to other non-recurring projects aimed at reducing costs and improving efficiencies..
(e) Reflects non-recurring expenses relating to the implementation of a new electronic medical record (“EMR”) vendor.

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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~~December 31, ~~2021,~~2022, we had cash and cash equivalents of ~~$201.5~~$99.5 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 EMR vendor, with respect to which we expect to incur non-recurring implementation costs over the next six months, and ongoing costs through 2026, and third party support to address remediation efforts, and (iv) income tax payments, which are generally due on a quarterly and annual basis. We also will continue investing in the effective implementation of corrective remediation plans (CAPs) and other corrective initiatives as a result of deficiencies found during audits at some of our centers, and our ability to continually provide necessary and quality services to our participants. We also have and expect to continue using capital resources for capital additions, which include costs relating to the development of de novo centers. Collectively, these obligations are expected to represent a significant liquidity requirement of our Company on both a short-term (next 12 months) and long-term (beyond 12 months) basis.

Our cash obligations consist of repayments of long-term debt and obligations under operating and finance leases. As of December 31, 2022, we had $71.7 million of long-term debt outstanding. As of December 31, 2022, we had future minimum operating lease payments under non-cancellable leases through the year 2032 of $29.4 million. We also had non-cancellable finance lease agreements with third parties through the year 2027 with future minimum payments of $15.2 million. For additional information, see Note 7, “Leases”, Note 8, “Long Term Debt”, and Note 9, “Commitments and Contingencies” in our condensed consolidated financial statements.

We believe that our cash and cash equivalents and our cash flows from operations, available funds, and access to financing sources, including our 2021 Credit Agreement and Revolving Credit Facility (each discussed and defined below), will be sufficient to fund our operating and capital needs for ~~at least~~ the next 12 ~~months.~~months and beyond. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, our ability to retain and grow the ~~timing and extent~~number of ~~spending~~PACE participants, subject to ~~open new centers~~our ability to effectively remediate deficiencies identified in our Sacramento center 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 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.~~million maximum borrowing capacity. The borrowing capacity under the Revolving Credit Facility is subject (i) any issued amounts under our letters of credit and (ii) applicable covenant compliance restrictions and any other conditions precedent to borrowing. Principal on the ~~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, 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~~December 31, ~~2021,~~2022, the interest rate on the ~~senior secured term loan~~Term Loan Facility was ~~1.94%~~6.14%. 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~~December 31, ~~2021,~~2022, we had no borrowings outstanding, $2.8 million of letters of credit issued, and $97.2 million of

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remaining capacity under the ~~revolving credit facility and, therefore, had full capacity thereunder.~~Revolving Credit Facility. As of ~~March~~December 31, ~~2021,~~2022, we also had ~~$2.4~~$2.3 million principal amount outstanding under our convertible term loan. Monthly principal and interest payments for the convertible term loan 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 Term Debt,~~8 “Long-Term 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~~flows for the ~~periods indicated.~~six months ended December 31, 2022 and 2021 are summarized as follows:

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


Six months ended December 31,



2022

2021

$ Change
in thousands


Net cash provided (used) by operating activities

$
(21,990)

$
31,577

$
(53,567)
Net cash used in investing activities

(59,632)

(13,681)

(45,951)
Net cash used in financing activities

(3,347)

(3,048)

(299)
Net change in cash, cash equivalents and restricted cash

$
(84,969)

$
14,848

$
(99,817)

Operating Activities. The change in net cash provided (used) by operating activities was primarily due to the net effect of (i) net loss of $24.2 million in the current year period compared to a net income of $8.7 million in the prior year period, as described further above, and (ii) a net decrease in working capital primarily attributable to payments for operating leases and reported and estimated claims.
~~For the nine months ended March 31, 2021,~~Investing Activities. Investing activities were made up of approximately $14.6 million in purchases of property and equipment and $45.0 million for purchases of short-term investments.
Financing activities. The increase in net cash used in ~~operating~~financing activities was $(17.0) million, a decrease of $37.0 million compared to net cash provided by operating activities of $20.0 million for the nine months ended March 31, 2020. The principal contributors to the year-over-year change in operating cash flows were as follows:

● 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~~

~~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~~an increase in principal payments on ~~long-term debt of $137.6 million in debt payments, treasury stock purchases of $77.6 million,~~finance leases.

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

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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 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 under different assumptions or conditions, impacting our reported results of operations and financial condition.

Certain accounting estimates involve significant judgments and assumptions by management, which have a material impact on the carrying value of assets and liabilities and the recognition of income and expenses. We consider these accounting estimates to be critical accounting estimates. ~~To the extent that there are material differences between these~~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~~estimates regarding our critical accounting ~~policies,~~estimates, see “Critical Accounting ~~Policies”~~Estimates” in the ~~IPO Prospectus. There~~2022 10-K. With the exception of the adoption of ASC 842 – Leases, as more thoroughly described in Note 7 “Leases”, there have been no significant changes in our critical accounting ~~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.

~~Table of Contents~~

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~~December 31, ~~2021,~~2022, we had total outstanding debt of ~~$75.0~~$69.4 million in principal amount under the Term Loan Facility, ~~$2.4~~$2.3 million under the convertible term loan, and no outstanding debt under the Revolving Credit ~~Facility.~~Facility (each as defined in Note 8, “Long Term Debt” to our condensed consolidated financial statements). As of June 30, ~~2020,~~2022, we had total outstanding debt of ~~$190.0~~$71.3 million in principal amount under the ~~prior~~ Term Loan Facility ~~$25.0 million under the prior Revolving Credit Facility~~ and ~~$2.4~~$2.3 million under the Convertible Term Loan. ~~Borrowings under~~As of December 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 6.14%.

We had cash and cash equivalents of ~~$201.5~~$99.5 million and ~~$112.9~~$184.4 million as of ~~March~~December 31, ~~2021~~2022 and June 30, ~~2020,~~2022, 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.

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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 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

~~Table of Contents~~

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~~December 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~~December 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 “Commitments and Contingencies” 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 set forth below, there~~There have been no material changes to the risk factors previously disclosed in ~~the “Risk factors” section of the IPO Prospectus.~~our 2022 10-K.

~~Risks related to our business~~

~~A pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide, including the ongoing outbreak of COVID-19, could adversely affect our business.~~

The severity, magnitude and duration of the current COVID-19 pandemic is uncertain and rapidly changing. Because of our business model, the full impact of the COVID-19 pandemic may not be fully reflected in our 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 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 and temporarily increased demand 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 telehealth 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

~~Table of Contents~~

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 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. 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.

~~Table of Contents~~

The extent and continued impact of the COVID-19 pandemic on our business will depend on certain developments, including: the duration and spread 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 of vaccines by our participants and our employees; the impact on participant, industry or employee events; and the effect on our supply chains, all of which are uncertain and cannot be predicted. Because of our business model, the full impact of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial condition until future periods.

To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of amplifying many of the 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 or generate sufficient cash flows necessary to fulfill our obligations under our existing indebtedness or to expand our operations.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
~~Unregistered Sales of Equity Securities~~
None.
~~There were no unregistered sales of equity securities~~ ~~during the three months ended March 31, 2021~~.

~~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~~), 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 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 expected use of the net proceeds from the IPO as described in the IPO Prospectus.

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:

~~Table of Contents~~

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, dated as of March 8, 2021, by and among the Company and the other signatories party thereto (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).

~~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.~~

5045

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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~~

INNOVAGE HOLDING CORP.

Date: February 7, 2023
By:
/s/ Barbara Gutierrez

Name:
Barbara Gutierrez

Title:
Chief Financial Officer

5146


	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


	December 31,		June 30,
in thousands	2022		2022
Cost method investments	$	4,645	$	4,645
Equity method investments		848		848
Total investments	$	5,493	$	5,493


	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


			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


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


		2022
										Cash and		Short-
		Amortized		Unrealized		Unrealized		Fair		Cash		term
in thousands		Cost		Gains		Losses		Value		Equivalents		Investments
Cash	$	18,858	$	—	$	—	$	18,858	$	18,858	$	—
Level 1
Money market funds		80,602		—		—		80,602		80,602		—
Mutual funds		45,000		424		—		45,424		—		45,424
Total	$	144,460	$	424	$	—	$	144,884	$	99,460	$	45,424


Component of Lease Balances	Balance Sheet Line Items		Six months ended December 31,
			2022
		in thousands
Assets:
Operating lease assets	Operating lease assets	$	22,223
Finance lease assets	Property and equipment, net		11,153
Total leased assets		$	33,376


Component of Lease Cost	Statements of Operations Line Items		Six months ended December 31,
			2022
		in thousands
Operating lease cost	Cost of care excluding depreciation and amortization and Corporate, general and administrative	$	2,557
Finance lease expense:
Amortization of leased assets	Depreciation and amortization		1,685
Interest on lease liabilities	Interest expense, net		562
Variable lease cost	Cost of care excluding depreciation and amortization and Corporate, general and administrative		—
Short-term lease cost	Cost of care excluding depreciation and amortization and Corporate, general and administrative		17
Total lease expense		$	4,821


Weighted average remaining lease term:		December 31,
		2022
Operating leases		8.8 years
Finance leases		3.8 years


Weighted average discount rate:	December 31,
	2022
Operating leases	6.61	%
Finance leases	8.53	%


	Operating		Finance
in thousands	Lease		Lease		Total
Amount remaining in 2023	$	2,552	$	2,580	$	5,132
2024		4,542		4,263		8,805
2025		4,136		3,480		7,616
2026		4,061		2,456		6,517
2027		3,764		1,760		5,524
Thereafter		10,302		686		10,988
Total lease payments		29,357		15,225		44,582
Less liability accretion / imputed interest		(5,889)		(2,329)		(8,218)
Total lease liabilities		23,468		12,896		36,364
Less: Current lease liabilities		3,434		3,864		7,298
Total long-term lease liabilities	$	20,034	$	9,032	$	29,066


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

Outstanding balance, June 30, 2022	2,158,072	$	1.28
Granted	—	$	—
Forfeited	(49,654)	$	1.28
Vested	(844,081)	$	1.28
Outstanding balance, December 31, 2022	1,264,337	$	1.28


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

Outstanding balance, June 30, 2022	2,217,865	$	0.57
Granted	—	$	—
Forfeited	(99,307)	$	0.57
Vested	—	$	—
Outstanding balance, December 31, 2022	2,118,558	$	0.57


				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	—


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

Outstanding balance, June 30, 2022	476,768	$	9.69
Granted	986,200	$	5.97
Forfeited	(155,741)	$	5.48
Vested	(97,727)	$	4.50
Outstanding balance, December 31, 2022	1,209,500	$	6.41


	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


	2022
Expected volatility		34.5	%
Weighted-average expected life (years) - time vesting units		2.9
Interest rate		1.56	%
Dividend yield		0	%
Weighted-average fair values	$	0.80
Fair value of underlying stock	$	3.70


	Three Months Ended March 31,				Nine Months Ended March 31,				Three months ended December 31,				Six months ended December 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	$	(9,793)	$	1,323	$	(22,866)	$	9,009
Weighted average common shares outstanding (basic)		121,324,980		132,616,431		119,619,806		132,616,431		135,578,888		135,516,513		135,572,503		135,516,513
EPS (basic)	$	(0.09)	$	0.06	$	(0.42)	$	0.11	$	(0.07)	$	0.01	$	(0.17)	$	0.07

Dilutive shares		—		1,751,571		—		1,176,554		—		—		—		—
Weighted average common shares outstanding (diluted)		121,324,980		134,368,002		119,619,806		133,792,985		135,578,888		135,516,513		135,572,503		135,516,513
EPS (diluted)	$	(0.09)	$	0.06	$	(0.42)	$	0.11	$	(0.07)	$	0.01	$	(0.17)	$	0.07


	March 31, 2021						March 31, 2020						December 31, 2022						December 31, 2021
(In thousands)	PACE		All other⁽¹⁾		Totals		PACE		All other⁽¹⁾		Totals		PACE		All other⁽¹⁾		Totals		PACE		All other⁽¹⁾		Totals
Capitation revenue	$	155,835	$	—	$	155,835	$	144,174	$	—	$	144,174	$	167,140	$	—	$	167,140	$	174,964	$	—	$	174,964
Other service revenue		(47)		520		473		(56)		652		596		99		217		316		60		326		386
Total revenues		155,788		520		156,308		144,118		652		144,770		167,239		217		167,456		175,024		326		175,350
External provider costs		75,389		—		75,389		71,022		—		71,022		93,507		—		93,507		91,033		—		91,033
Cost of care, excluding depreciation and amortization		38,867		698		39,565		38,559		726		39,285		51,184		192		51,376		42,478		433		42,911
Center-Level Contribution Margin		41,532		(178)		41,354		34,537		(74)		34,463		22,548		25		22,573		41,513		(107)		41,406
Overhead costs⁽²⁾		24,217		(30)		24,187		18,614		42		18,656		32,532		59		32,591		35,160		1		35,161
Depreciation and amortization		3,181		130		3,311		2,619		150		2,769		3,555		107		3,662		3,185		107		3,292
Equity loss		—		—		—		163		—		163
Other operating (income) expense		19,222		—		19,222		(99)		—		(99)
Interest expense, net		4,824		52		4,876		2,317		44		2,361		(177)		(46)		(223)		(624)		(50)		(674)
Loss on extinguishment of debt		13,488		—		13,488		—		—		—
Gain on equity method investment		(10,871)		—		(10,871)		—		—		—
Other expense (income)		2,267		—		2,267		(244)		—		(244)		444		—		444		29		(1)		28
Income (Loss) Before Income Taxes	$	(14,796)	$	(330)	$	(15,126)	$	11,167	$	(310)	$	10,857	$	(13,272)	$	(187)	$	(13,459)	$	2,573	$	(266)	$	2,307


	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, dated as of March 8, 2021, by and among the Company and the other signatories party thereto (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).

~~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.

Date: February 7, 2023	By:	/s/ Barbara Gutierrez
	Name:	Barbara Gutierrez
	Title:	Chief Financial Officer