UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________
FORM 10-Q
_______________________________________________________
(Mark One)
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
or
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 001-40159
_______________________________________________________
(Exact name of registrant as specified in its charter)
_______________________________________________________
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | ||||
(Address of Principal Executive Offices) | (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 | ||||||
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 x No o
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 x No o
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 | o | x | |||||||||||||||
| Non-accelerated filer | o | 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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 6, 2023, there were 135,884,840 of the registrant’s common stock outstanding.
TABLE OF CONTENTS
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InnovAge Holding Corp. and Subsidiaries
Quarterly Report on Form 10-Q
For the quarterly period ended September 30, 2023
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. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business, including 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,” 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, projections, 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 viability of our growth strategy;
•our ability to identify and successfully complete acquisitions;
•our ability to attract new participants and retain existing participants and grow our revenue throughout our existing centers;
•the results of periodic inspections, reviews, audits and investigations under the federal and state government programs, including our ability to sufficiently cure any deficiencies identified by the respective federal and state government programs;
•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 risk that the cost of providing services will exceed our compensation under the Program of All Inclusive Care for the Elderly (“PACE”);
•our increased costs and expenditures in the future and our inability to execute or realize the benefits of our clinical value initiatives;
•the impact on our business from ongoing macroeconomic and COVID-19 related challenges, including labor shortages and inflation;
•the dependence of our revenues and operations upon a limited number of government payors;
•the risk that our submissions to government payors may contain inaccurate or unsupportable information, including regarding risk adjustment scores of participants;
•the impact on our business of renegotiation, non-renewal or termination of capitation agreements with government payors;
•the difficulty to predict our future results, which could cause such results to fall below any guidance we provide;
•the impact of state and federal efforts to reduce healthcare spending;
•the effects of a pandemic, epidemic or outbreak of an infectious disease, such as COVID-19;
•our dependence on our senior management team and other key employees;
•the impact of failures by our suppliers or limitations on our ability to access new technology or medical products;
•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;
•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;
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•our ability to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems;
•our ability to accurately estimate incurred but not reported medical expense or the risk scores of our participants;
•risks associated with our 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 weather and other factors beyond our control;
•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 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 business of disruptions in our disaster recovery systems or business continuity planning;
•impact of negative publicity regarding the managed healthcare industry; and
•other factors disclosed in the section entitled “Risk Factors” in our Annual Report for the year ended June 30, 2023 filed with the Securities and Exchange Commission (the “SEC”) on September 12, 2023, and 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. All written and oral forward-looking 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 public communications and filings 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 specified or unless the context requires otherwise, all references in this Quarterly Report on Form 10-Q to “InnovAge,” “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)
| September 30, 2023 | June 30, 2023 | ||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Restricted cash | |||||||||||
Accounts receivable, net of allowance ($ | |||||||||||
| Prepaid expenses | |||||||||||
| Income tax receivable | |||||||||||
| Total current assets | |||||||||||
| Noncurrent Assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease assets | |||||||||||
| Investments | |||||||||||
| Deposits and other | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Total noncurrent assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Reported and estimated claims | |||||||||||
| Due to Medicaid and Medicare | |||||||||||
| Income tax payable | |||||||||||
| Current portion of long-term debt | |||||||||||
| Current portion of finance lease obligations | |||||||||||
| Current portion of operating lease obligations | |||||||||||
| Deferred revenue | |||||||||||
| Total current liabilities | |||||||||||
| Noncurrent Liabilities | |||||||||||
| Deferred tax liability, net | |||||||||||
| Finance lease obligations | |||||||||||
| Operating lease obligations | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Long-term debt, net of debt issuance costs | |||||||||||
| Total liabilities | |||||||||||
| Commitments and Contingencies (See Note 9) | |||||||||||
| Redeemable Noncontrolling Interests (See Note 4) | |||||||||||
| Stockholders’ Equity | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained deficit | ( | ( | |||||||||
| Total InnovAge Holding Corp. | |||||||||||
| Noncontrolling interests | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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INNOVAGE HOLDING CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except number of shares and per share data)
(Unaudited)
| Three Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenues | |||||||||||
| Capitation revenue | $ | $ | |||||||||
| Other service revenue | |||||||||||
| Total revenues | |||||||||||
| Expenses | |||||||||||
| External provider costs | |||||||||||
| Cost of care, excluding depreciation and amortization | |||||||||||
| Sales and marketing | |||||||||||
| Corporate, general and administrative | |||||||||||
| Depreciation and amortization | |||||||||||
| Total expenses | |||||||||||
| Operating Loss | ( | ( | |||||||||
| Other Income (Expense) | |||||||||||
| Interest expense, net | ( | ( | |||||||||
| Other income | |||||||||||
| Total other expense | ( | ( | |||||||||
| Loss Before Income Taxes | ( | ( | |||||||||
| Provision (Benefit) for Income Taxes | ( | ||||||||||
| Net Loss | ( | ( | |||||||||
| Less: net loss attributable to noncontrolling interests | ( | ( | |||||||||
| Net Loss Attributable to InnovAge Holding Corp. | $ | ( | $ | ( | |||||||
| Weighted-average number of common shares outstanding - basic | |||||||||||
| Weighted-average number of common shares outstanding - diluted | |||||||||||
| Net loss per share - basic | $ | ( | $ | ( | |||||||
| Net loss per share - diluted | $ | ( | $ | ( | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
INNOVAGE HOLDING CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands, except share amounts)
(Unaudited)
| For the Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Capital Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Noncontrolling Interests | Total Permanent Stockholders' Equity | Redeemable Noncontrolling Interests (Temporary Equity) | Net Income (Loss) | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances, June 30, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balances, September 30, 2022 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| For the Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Capital Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Noncontrolling Interests | Total Permanent Stockholders' Equity | Redeemable Noncontrolling Interests (Temporary Equity) | Net Income (Loss) | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances, June 30, 2023 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Tax withholding related to net share settlements of stock-based compensation awards | ( | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balances, September 30, 2023 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
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 Three Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating Activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities | |||||||||||
| Gain on disposal of assets | ( | ( | |||||||||
| Provision for uncollectible accounts | |||||||||||
| Depreciation and amortization | |||||||||||
| Operating lease rentals | |||||||||||
| Amortization of deferred financing costs | |||||||||||
| Stock-based compensation | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Other | |||||||||||
| Changes in operating assets and liabilities | |||||||||||
| Accounts receivable, net | ( | ( | |||||||||
| Prepaid expenses | |||||||||||
| Income tax receivable | |||||||||||
| Deposits and other | ( | ||||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Reported and estimated claims | ( | ( | |||||||||
| Due to Medicaid and Medicare | |||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Deferred revenue | ( | ||||||||||
| Net cash (used) provided by operating activities | ( | ||||||||||
| Investing Activities | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Purchases of short-term investments | ( | ||||||||||
| Net cash used in investing activities | $ | ( | $ | ( | |||||||
| Financing Activities | |||||||||||
| Payments for finance lease obligations | ( | ( | |||||||||
| Principal payments on long-term debt | ( | ( | |||||||||
| Taxes paid related to net share settlements of stock-based compensation awards | ( | ||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS & RESTRICTED CASH | ( | ||||||||||
| CASH, CASH EQUIVALENTS & RESTRICTED CASH, BEGINNING OF PERIOD | |||||||||||
| CASH, CASH EQUIVALENTS & RESTRICTED CASH, END OF PERIOD | $ | $ | |||||||||
| Supplemental Cash Flows Information | |||||||||||
| Interest paid | $ | $ | |||||||||
| Income taxes paid | $ | $ | |||||||||
| Property and equipment included in accounts payable | $ | $ | |||||||||
| Property and equipment purchased under finance leases | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
INNOVAGE HOLDING CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1: Business
InnovAge Holding Corp. and its subsidiaries (the "Company"), are headquartered in Denver, Colorado. The Company fulfills a broad range of medical and ancillary services for seniors in need of care and support to safely live independently in their communities, including in-center services such as primary care, physical therapy, occupational therapy, speech therapy, dental services, mental health and psychiatric services, meals, and activities; transportation to the Program of All-Inclusive Care for the Elderly (“PACE”) center and third-party medical appointments; and care management. The Company manages its business as one reportable segment, PACE.
As of September 30, 2023, the Company served approximately 6,580 PACE participants, making it the largest PACE provider in the United States of America (the “U.S.”) based upon participants served, and operates 17 PACE centers across Colorado, California, New Mexico, Pennsylvania and Virginia.
PACE is a fully-capitated managed care program, which serves the frail elderly, and predominantly dual-eligible, population in a community-based service model. We define dual-eligible seniors as individuals who are 55+ and qualify for benefits under both Medicare and Medicaid. InnovAge provides 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 Affairs (“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.
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 to Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended June 30, 2023 (“2023 10-K”). With the exception of Recently Adopted Accounting Pronouncements described below, there were no significant changes to those accounting policies during the three months ended September 30, 2023.
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, 2023. 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 the Company, its wholly owned subsidiaries, variable interest entities (“VIEs”) 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 loss reported in the statements of operations for all periods presented.
9
Property and Equipment
Property and equipment were comprised of the following as of September 30, 2023 and June 30, 2023:
| dollars in thousands | Estimated Useful Lives | September 30, 2023 | June 30, 2023 | ||||||||||||||
| Land | N/A | $ | $ | ||||||||||||||
| Buildings and leasehold improvements | |||||||||||||||||
| Software | |||||||||||||||||
| Equipment and vehicles | |||||||||||||||||
| Construction in progress | N/A | ||||||||||||||||
| Less: accumulated depreciation and amortization | ( | ( | |||||||||||||||
| Total property and equipment, net | $ | $ | |||||||||||||||
Depreciation of $4.1 million and $3.1 million was recorded during the three months ended September 30, 2023 and 2022, respectively.
Recently Adopted Accounting Pronouncements
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. The CECL model is expected to result in more timely recognition of credit losses. The Company adopted the standard on July 1, 2023. Our adoption of the standard did not have a material impact to the condensed consolidated financial statements. The Company makes estimates of expected credit losses based on a combination of factors, including historical losses adjusted for current market conditions, delinquency trends, aging behaviors of receivables and credit and liquidity indicators, and future market and economic conditions and regularly reviews the adequacy of the allowance for credit losses.
We do not expect that any other recently issued accounting guidance will have a significant effect on our condensed consolidated financial statements.
Note 3: Revenue Recognition
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, 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.
Capitation Revenue and Accounts Receivable
Our capitation revenue relates to contracts with participants in which our performance obligation is to provide healthcare services to the participants. Revenues are recorded during the period our obligations to provide healthcare services are satisfied as noted below within each service type. The Company contracts directly with Medicare and Medicaid on a per member, per month (“PMPM”) basis. We receive 100 % of the pooled capitated payment to directly provide or manage the healthcare needs of our participants.
Fees are recorded gross in revenues because the Company is acting as a principal in providing for or overseeing comprehensive care provided to the participants. Neither the Company nor any of its affiliates is a registered insurance company because state law in the states in which it operates does not require such registration for risk-bearing providers.
10
In general, a participant enrolls in the PACE program and is considered a customer of InnovAge. The Company considers all contracts with participants as a single performance obligation to provide comprehensive medical, health, and social services that integrate acute and long-term care. The Company identified that contracts with customers in the PACE program have similar performance obligations and therefore groups them into one portfolio. This performance obligation is satisfied as the Company provides comprehensive care to its participants.
Our revenues are based on the estimated PMPM amounts we expect to be entitled to receive from the capitated fees per participant that are paid monthly by Medicaid, Medicare, the VA, and private pay sources. Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the PACE program. VA is included in “Private Pay and other” and is also capitated. Private pay includes direct payments from participants who do not qualify for the full capitated rate and have to pay all or a portion of the capitated rate. Costs to obtain contracts consist of sales commissions for new enrollees and are included in deposits and other on our condensed consolidated balance sheets. These costs are amortized over a three-year period which corresponds to the average time a participant is enrolled in the PACE program. As of September 30, 2023 and June 30, 2023, contract assets included within deposits and other were $1.4 million and $1.0 million, respectively.
The Company disaggregates capitation revenue from the following sources for the three months ended:
| September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Medicaid | % | % | |||||||||
| Medicare | % | % | |||||||||
| Private pay and other | *% | *% | |||||||||
| Total | % | % | |||||||||
* 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 13
Our accounts receivable as of September 30, 2023 and June 30, 2023 is primarily from capitation revenue arrangements. The concentration of net receivables from participants and third-party payers was as follows:
| September 30, 2023 | June 30, 2023 | ||||||||||
| Medicaid | % | % | |||||||||
| Medicare | % | % | |||||||||
| Private pay and other | % | % | |||||||||
| Total | % | % | |||||||||
11
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 $4.5 million as of September 30, 2023, compared to $4.2 million as of June 30, 2023. 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
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to change, as well as government review. Failure to comply with these laws can expose the entity to significant regulatory action, including fines, penalties, and exclusion from the Medicare and Medicaid programs. See Note 9, “Commitments and Contingencies.”
Note 4: Cost Method and Equity Method Investments
The Company holds equity method and cost method investments as of:
| in thousands | September 30, 2023 | June 30, 2023 | |||||||||
| Cost method investments | $ | $ | |||||||||
| Equity method investments | |||||||||||
| Total investments | $ | $ | |||||||||
Nonconsolidated Entities
Cost Method Investments
The Company maintains two investments that are accounted for using the cost method. The investments do not have a readily determinable fair value and the Company has elected to record the investments at cost, less impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. During the three months ended September 30, 2023 and 2022, there were no observable price changes or impairments recorded.
Jetdoc
In August 2021, the Company acquired a minority interest equal to 806,481 shares of the outstanding common stock of Jetdoc, Inc. (“Jetdoc”), a telehealth and virtual urgent care app dedicated to effectively connecting users with medical professionals, for cash consideration of $2.0 million. The balance of the Company’s investment in Jetdoc is $2.0 million which represents the maximum exposure to loss.
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 include a Senior Housing unit that primarily includes the accounts of Continental Community Housing (“CCH”), the general partner of Pinewood Lodge, LLP (“PWD”), which was organized to develop,
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construct, own, maintain, and operate certain apartment complexes intended for rental to low-income elderly individuals aged 62 or older.
PWD is a VIE, but the Company is not the primary beneficiary. The Company does not have the power to direct the activities that most significantly impact the economic performance of PWD. Accordingly, the Company does not consolidate PWD. PWD is accounted for using the equity method of accounting. The equity earnings of PWD are insignificant. As of September 30, 2023, the balance of the Company’s investment in PWD was $0.8
Noncontrolling Interest
Senior Housing
The Company’s operations include a 0.01
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.
Redeemable Noncontrolling Interest
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, InnovAge Sacramento. Further, Adventist contributed $5.8 million in cash and Eskaton contributed $3.0 million in cash for membership interests of 26.4 % and 13.7 %, respectively. In fiscal year 2021, the Company made an additional contribution of $52,000 and obtained an additional 0.1 % membership interest in the joint venture, which resulted in the Company obtaining control and consolidating InnovAge Sacramento as of January 1, 2021.
The InnovAge California PACE-Sacramento LLC Limited Liability Company Agreement (the “JV Agreement”) includes numerous provisions whereby, if certain conditions are met, the joint venture may be required to purchase, at fair market value, certain members’ interests or certain members may be required to purchase, at fair market value, the interests of certain other members. As of September 30, 2023, none of the conditions specified in the JV Agreement had been met. At the time the Company became a publicly traded company these put rights held by the noncontrolling interests of the joint venture were required to be presented as temporary equity. Redeemable noncontrolling interest of $12.1 million and $12.7 million were recorded at carrying value as of September 30, 2023 and June 30, 2023, respectively.
Note 5: Fair Value Measurements
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The three levels of inputs that may be used to measure fair value are:
Level 1Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date
Level 2Quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the assets or liabilities
Level 3Unobservable 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 September 30, 2023 and June 30, 2023:
| September 30, 2023 | |||||||||||||||||||||||
| in thousands | Amortized Cost | Fair Value | Cash and Cash Equivalents | Short- term Investments | |||||||||||||||||||
| Cash | $ | $ | $ | $ | |||||||||||||||||||
| Level 1 | |||||||||||||||||||||||
| Money market funds | |||||||||||||||||||||||
| Mutual funds | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| June 30, 2023 | |||||||||||||||||||||||
| in thousands | Amortized Cost | Fair Value | Cash and Cash Equivalents | Short- term Investments | |||||||||||||||||||
| Cash | $ | $ | $ | $ | |||||||||||||||||||
| Level 1 | |||||||||||||||||||||||
| Money market funds | |||||||||||||||||||||||
| Mutual funds | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Recurring Measurements
The Company’s investment in InnovAge Sacramento includes a put right for the noncontrolling interest holders to require the Company to repurchase the interest of the noncontrolling interest holders at fair value, after the initial term of the management services agreement in 2028. As a result, at each fiscal period end the Company reports this put right at the greater of (i) carrying value of the redeemable noncontrolling interest or (ii) fair value of the redeemable noncontrolling interest. Because this asset does not have observable inputs, level 3 inputs are used to measure fair value. The fair value of the redeemable noncontrolling interest is determined utilizing a discounted cash flow model. As of September 30, 2023 and June 30, 2023, the Company’s redeemable noncontrolling interest was recorded at carrying value of $12.1 million and $12.7 million, respectively.
There were no transfers in and out of Level 3 during the three months ended September 30, 2023 or 2022.
Note 6: Goodwill and Intangible Assets
Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill amounted to $124.2
Pursuant to ASC 350, “Intangibles – Goodwill and Other,” we review the recoverability of goodwill annually as of April 1 or whenever significant events or changes occur which might impair the recovery of recorded amounts. For purposes of the annual goodwill impairment assessment, the Company has identified three reporting units. There were no
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indicators of impairment identified and no
Intangible assets consisted of the following as of:
| in thousands | September 30, 2023 | June 30, 2023 | |||||||||
| Definite-lived intangible assets | $ | $ | |||||||||
| Indefinite-lived intangible assets | |||||||||||
| Total intangible assets | |||||||||||
| Accumulated amortization | ( | ( | |||||||||
| Balance as of end of period | $ | $ | |||||||||
Intangible assets consist primarily of customer relationships acquired through business acquisitions. The Company recorded amortization expense of $0.2
Note 7: Leases
Leasing Arrangements as Lessee
The Company leases certain property and equipment under various third-party operating and finance lease agreements. The Company determines if an arrangement is or contains a lease at the lease inception date by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. The leases are noncancelable and expire on various terms from 2023 through 2032. We determine if an arrangement is a lease upon commencement of the contract. If an arrangement is determined to be a long-term lease (greater than 12 months), we recognize an ROU asset and lease liability based on the present value of the future minimum lease payments over the lease term at the commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Our lease terms may also include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have elected to apply the short-term lease exception for contracts that have a lease term of twelve months or less and do not include an option to purchase the underlying asset. Therefore, we do not recognize a ROU asset or lease liability for such contracts. We recognize short-term lease payments as expense on a straight-line basis over the lease term. Variable lease payments that do not depend on an index or rate are recognized as expense. Certain leases include escalations based on inflation indexes and fair market value adjustments. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement for such leases.
The following table presents the components of our ROU assets and their classification in our Balance Sheet at September 30, 2023:
| Component of Lease Balances | Balance Sheet Line Items | September 30, 2023 | June 30, 2023 | |||||||||||
| in thousands | ||||||||||||||
| Assets: | ||||||||||||||
| Operating lease assets | Operating lease assets | $ | $ | |||||||||||
| Finance lease assets | ||||||||||||||
| Total leased assets | $ | $ | ||||||||||||
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The following table presents the components of our lease cost and the classification of such costs in our Statements of Operations for the three months ended September 30, 2023:
| Three Months Ended September 30, | ||||||||||||||
| Component of Lease Cost | Statements of Operations Line Items | 2023 | 2022 | |||||||||||
| in thousands | ||||||||||||||
| Operating lease cost | Cost of care excluding depreciation and amortization and Corporate, general and administrative | $ | $ | |||||||||||
| Finance lease expense: | ||||||||||||||
| Amortization of leased assets | Depreciation and amortization | |||||||||||||
| Interest on lease liabilities | Interest expense, net | |||||||||||||
| 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 | |||||||||||||
| Total lease expense | $ | $ | ||||||||||||
The following table includes the weighted-average lease terms and discount rates for operating and finance leases as of September 30, 2023:
| Weighted average remaining lease term: | September 30, 2023 | September 30, 2022 | |||||||||
| Operating leases | |||||||||||
| Finance leases | |||||||||||
| Weighted average discount rate: | September 30, 2023 | September 30, 2022 | |||||||||
| Operating leases | % | % | |||||||||
| Finance leases | % | % | |||||||||
The following table includes the future maturities of lease payments for operating leases and finance leases for periods subsequent to September 30, 2023:
| in thousands | Operating Lease | Finance Lease | Total | ||||||||||||||
| Amount remaining in 2024 | $ | $ | $ | ||||||||||||||
| 2025 | |||||||||||||||||
| 2026 | |||||||||||||||||
| 2027 | |||||||||||||||||
| 2028 | |||||||||||||||||
| Thereafter | |||||||||||||||||
| Total lease payments | |||||||||||||||||
| Less liability accretion / imputed interest | ( | ( | ( | ||||||||||||||
| Total lease liabilities | |||||||||||||||||
| Less: Current lease liabilities | |||||||||||||||||
| Total long-term lease liabilities | $ | $ | $ | ||||||||||||||
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Note 8. Long-Term Debt
Long-term debt consisted of the following at September 30, 2023 and June 30, 2023:
| September 30, 2023 | June 30, 2023 | ||||||||||
| in thousands | |||||||||||
| Senior secured borrowings: | |||||||||||
| Term Loan Facility | $ | $ | |||||||||
| Convertible term loan | |||||||||||
| Total debt | |||||||||||
| Less: unamortized debt issuance costs | |||||||||||
| Less: current maturities | |||||||||||
| Noncurrent maturities | $ | $ | |||||||||
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 September 30, 2023 was $97.2 million, subject to (i) any issued amounts under our letters of credit, which as of September 30, 2023 was $2.8 million, and (ii) applicable 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.
Outstanding principal amounts under the 2021 Credit Agreement accrue interest at a variable interest rate. As of September 30, 2023, the interest rate on the Term Loan Facility was 7.30 %. 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 September 30, 2023, we had no borrowings outstanding, $2.8 million of letters of credit issued, and $97.2 million of remaining capacity under the Revolving Credit Facility.
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 September 30, 2023, 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 $0.1 million and $0.3 million for the three months ended September 30, 2023 and September 30, 2022, respectively.
Convertible Term Loan
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Note 9: Commitments and Contingencies
Professional Liability
The Company pays fixed premiums for annual professional liability insurance coverage under a claims-made policy. Under such policy, only claims made and reported to the insurer are covered during the policy term, regardless of when the incident giving rise to the claim occurred. The Company records claim liabilities and expected recoveries, if any, at gross amounts. The Company is not currently aware of any unasserted claims or unreported incidents that are expected to exceed medical malpractice insurance coverage limits.
Litigation
From time to time, in the normal course of business, the Company is involved in or subject to legal proceedings related to its business, 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. The Company expenses legal costs as such costs are incurred.
Civil Investigative Demands
In July 2021, the Company received a civil investigative demand from the Attorney General for the State of Colorado under the Colorado Medicaid False Claims Act. The demand requests information and documents regarding Medicaid billing, patient services and referrals in connection with the Company’s PACE program in Colorado. We continue to fully cooperate with the Attorney General and produce the requested information and documentation. We are currently unable to predict the outcome of this investigation.
In February 2022, the Company received a civil investigative demand from the Department of Justice (“DOJ”) under the Federal False Claims Act on similar subject matter. The demand requests information and documents regarding audits, billing, orders tracking, and quality and timeliness of patient services in connection with the Company’s PACE programs in the states where the Company operates (California, Colorado, New Mexico, Pennsylvania, and Virginia). In December 2022, the Company received a supplemental civil investigative demand requesting supplemental information on the same matters. The Company continues to fully cooperate with the DOJ and produce the requested information and documentation. We are currently unable to predict the outcome of this investigation.
Stockholder Lawsuits
On October 14, 2021, and subsequently amended on June 21, 2022, the Company was named as a defendant in a putative class action complaint filed in the District Court for the District of Colorado on behalf of individuals who purchased or acquired shares of the Company’s common stock during a specified period (the "Securities Action"). Through the complaint, plaintiffs are asserting claims against the Company, certain of the Company’s officers and directors, Apax Partners, L.P., Welsh, Carson, Anderson & Stowe and the underwriters in the Company’s IPO, alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 for making allegedly inaccurate and misleading statements and omissions in connection with the Company’s IPO and subsequent earnings calls and public filings, and seeking compensatory damages, among other things. On September 13, 2022, the Company and the officer and director defendants and Apax Partners, L.P. and Welsh, Carson, Anderson & Stowe filed a motion to dismiss the amended complaint for failure to state a claim upon which relief can be granted.
On April 20, 2022, the Board of Directors of the Company received a books and records demand pursuant to Section 220 of the Delaware General Corporation Law, from a purported stockholder of the Company, Brian Hall, in connection with the stockholder’s investigation of, among other matters, potential breaches of fiduciary duty, mismanagement, self-dealing, corporate waste or other violations of law by the Company’s Board with respect to these matters. We are currently unable to predict the outcome of this matter. On May 15, 2023, Mr. Hall filed a lawsuit in the Delaware Court of Chancery asserting derivative claims for breach of fiduciary duty against certain of the Company’s current and former officers and directors generally relating to alleged failures by the defendants to take remedial actions to address the matters that resulted in sanctions by CMS at certain of the Company’s centers, and alleged misstatements in the Company’s public filings relating to those matters. On June 28, 2023, upon stipulation of the parties, the court entered an order staying the litigation pending the resolution of the motion to dismiss in the Securities Action or upon fifteen days’ notice by any party to the litigation. We are currently unable to predict the outcome of this matters.
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Other Matters
In the third fiscal quarter of 2023, the Company agreed to settle a wage and hour class action lawsuit in the State of California for a cash payment of $1.2 million. Subsequently, the Company was notified of certain additional individual claims and has agreed to include such claims within the class. As a result, in October 2023, the Company agreed to increase the settlement amount to a total of $1.3 million. The agreement is subject to court approval, which we expect to occur in the second half of 2024.
Note 10: Stock-based Compensation
A summary of our aggregate stock-based compensation expense is set forth below. Stock-based compensation expense is included in corporate, general and administrative expenses on our condensed consolidated statements of operations.
| Three months ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| in thousands | |||||||||||
| Stock options | $ | $ | |||||||||
| Profits interests units | |||||||||||
| Restricted stock units | |||||||||||
| Total stock-based compensation expense | $ | $ | |||||||||
2020 Equity Incentive Plan
Profits Interests
TCO Group Holdings, L.P. (the “LP”), the Company’s largest shareholder and prior to the IPO, the Company’s parent, maintains the TCO Group Holdings, L.P. Equity Incentive Plan (the "2020 Equity Incentive Plan") pursuant to which interests in the LP in the form of Class B Units (profits interests) can be granted to employees, directors, consultants, advisers, and other service providers (including partners) of the LP or any of its affiliates, including the Company. A maximum number of 16,162,177 Class B Units are authorized for grant under the 2020 Equity Incentive Plan, and both performance-based and time-based units have been issued under the plan. As of September 30, 2023, a total of 14,972,836 profits interests units had been granted under the 2020 Equity Incentive Plan.
The Company used the Monte Carlo option model to determine the fair value of the profits interests units at the time of the grant. A total of 1,963,700 Class B Units were awarded during the three months ended September 30, 2023 to the Company's Chief Executive Officer and Chief Financial Officer. The assumptions under the Monte Carlo model related to the profits interests units, presented on a weighted-average basis, are provided below:
| 2023 | |||||||||||
| Expected volatility | % | ||||||||||
| Expected life (years) - time vesting units | |||||||||||
| Interest rate | % | ||||||||||
| Dividend yield | |||||||||||
| Weighted-average fair value | $ | ||||||||||
| Fair value of underlying stock | $ | ||||||||||
19
A summary of profits interests activity for the three months ended September 30, 2023 was as follows:
| Time-based unit awards | Number of units | Weighted average grant date fair value | ||||||||||||
| Outstanding balance, June 30, 2023 | $ | |||||||||||||
| Granted | $ | |||||||||||||
| Forfeited | ( | $ | ||||||||||||
| Vested | ( | $ | ||||||||||||
| Outstanding balance, September 30, 2023 | $ | |||||||||||||
| Performance-based unit awards | Number of units | Weighted average grant date fair value | ||||||||||||
| Outstanding balance, June 30, 2023 | $ | |||||||||||||
| Granted | $ | |||||||||||||
| Forfeited | ( | $ | ||||||||||||
| Vested | $ | |||||||||||||
| Outstanding balance, September 30, 2023 | $ | |||||||||||||
The total unrecognized compensation cost related to profits interests units outstanding as of September 30, 2023 was $4.6 million, comprised (i) $2.1 million related to time-based unit awards expected to be recognized over a weighted-average period of 2.8 years and (ii) $2.5 million related to performance-based unit awards, which will be recorded when it is probable that the performance-based criteria will be met.
2021 Omnibus Incentive Plan
In March 2021, the compensation committee of our Board of Directors approved the InnovAge Holding Corp. 2021 Omnibus Incentive Plan (the “2021 Omnibus Incentive Plan”), pursuant to which various stock-based awards may be granted to employees, directors, consultants, and advisers. The total number of shares of the Company’s common stock authorized under the 2021 Omnibus Incentive Plan is 14,700,000 . The Company has issued time-based restricted stock units under this plan to its employees which generally vest (i) on March 4, 2023, the second anniversary of the grant date, or (ii) over a three-year period with one-third vesting on each anniversary of the date of grant. Certain other vesting periods have also been used. The grant date fair value of restricted stock units with time based vesting is based on the closing market price of our common stock on the date of grant. Certain awards under this plan vest upon achieving specific share price performance criteria and are determined to have performance-based vesting conditions. The Company has also issued time-based stock options under this plan to its employees which generally vest at various intervals over a three-year period.
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Restricted Stock Units
A summary of time-based vesting restricted stock units activity for the three months ended September 30, 2023 was as follows:
| Restricted stock units - time based | Number of awards | Weighted average grant-date fair value per share | ||||||||||||
| Outstanding balance, June 30, 2023 | $ | |||||||||||||
| Granted | $ | |||||||||||||
| Forfeited | ( | $ | ||||||||||||
| Vested | ( | $ | ||||||||||||
| Outstanding balance, September 30, 2023 | $ | |||||||||||||
The total unrecognized compensation cost related to time based restricted stock units outstanding as of September 30, 2023 was $8.0 million and is expected to be recognized over a weighted-average period of 2.1 years.
A summary of performance based vesting restricted stock units activity for the three months ended September 30, 2023 was as follows:
| Restricted stock units - performance based | Number of awards | Weighted average grant-date fair value per share | ||||||||||||
| Outstanding balance, June 30, 2023 | $ | |||||||||||||
| Granted | $ | |||||||||||||
| Forfeited | $ | |||||||||||||
| Vested | $ | |||||||||||||
| Outstanding balance, September 30, 2023 | $ | |||||||||||||
The total unrecognized compensation cost related to performance based vesting restricted stock units outstanding as of September 30, 2023 was $0.7 million and is expected to be recognized over a weighted-average period of 2.1 years.
Nonqualified Stock Options
A summary of time-based vesting stock option activity for the three months ended September 30, 2023 was as follows:
| Stock options - time based | Number of awards | Weighted average grant-date fair value per share | ||||||||||||
| Outstanding balance, June 30, 2023 | $ | |||||||||||||
| Granted | $ | |||||||||||||
| Forfeited | $ | |||||||||||||
| Exercised | $ | |||||||||||||
| Expired | $ | |||||||||||||
| Outstanding balance, September 30, 2023 | $ | |||||||||||||
| Exercisable balance, September 30, 2023 | $ | |||||||||||||
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The total unrecognized compensation cost related to time-based vesting stock options outstanding as of September 30, 2023 was $0.3 million and is expected to be recognized over a weighted-average period of 1.8 years.
A summary of performance-based vesting stock option activity for the three months ended September 30, 2023 was as follows:
| Stock options - performance based | Number of awards | Weighted average grant-date fair value per share | ||||||||||||
| Outstanding balance, June 30, 2023 | $ | |||||||||||||
| Granted | $ | |||||||||||||
| Forfeited | $ | |||||||||||||
| Vested | $ | |||||||||||||
| Outstanding balance, September 30, 2023 | $ | |||||||||||||
The total unrecognized compensation cost related to performance-based vesting stock options outstanding as of September 30, 2023 was $1.2 million and is expected to be recognized over a weighted-average period of 2.2 years.
Note 11: Income Taxes
The Company recorded an income tax expense of $0.2 million and an income tax benefit of $3.5 million for the three months ended September 30, 2023 and 2022, respectively. This represents an effective tax rate of (2.1 )% and 20.6 % for the three months ended September 30, 2023 and 2022, respectively.
The effective rate for the three months ended September 30, 2023 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, lobbying expenses, and the increase in the Company's valuation allowance against Net operating losses 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 three-month period ended September 30, 2023, 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 also determined it is not "more likely than not" that the deferred tax assets associated with certain federal net operating losses will be realized and as such has included a valuation allowance against these federal deferred tax assets. The Company has provided $14.8 million at September 30, 2023 and $8.3 million at June 30, 2023, as a valuation allowance against its deferred tax assets for federal and 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 12: Earnings per Share
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end of the reporting period. For the three months ended September 30, 2023, 348,090 potentially diluted securities 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.
The following table sets forth the computation of basic and diluted net loss per common share:
| Three months ended September 30, | |||||||||||
| in thousands, except share values | 2023 | 2022 | |||||||||
| Net loss attributable to InnovAge Holding Corp. | $ | ( | $ | ( | |||||||
| Weighted average common shares outstanding (basic) | |||||||||||
| EPS (basic) | $ | ( | $ | ( | |||||||
| Dilutive shares | |||||||||||
| Weighted average common shares outstanding (diluted) | |||||||||||
| EPS (diluted) | $ | ( | $ | ( | |||||||
Note 13: Segment Reporting
The Company applies ASC Topic 280, "Segment Reporting," which establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about operations, major customers and the geographies in which the entity holds material assets and reports revenue. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the Company’s chief executive officer, who is the chief operating decision maker (“CODM”), and for which discrete financial information is available. The Company has determined that it has three operating segments, two of which are related to the Company’s PACE offering. The PACE-related operating segments are based on two geographic divisions, which are West and East. Due to the similar economic characteristics, nature of services, and customers, we have aggregated our West and East operating segments into one reportable segment for PACE. The Company’s remaining operating segment primarily relates to Senior Housing, which is an immaterial operating segment, and shown below as "Other" along with certain corporate unallocated expenses.
The Company evaluates performance and allocates capital resources to each segment based on an operating model that is designed to maximize the quality of care provided and profitability. The Company does not review assets by segment and therefore assets by segment are not disclosed below. For the periods presented, all of the Company’s long-lived assets were located in the United States and all revenue was earned in the 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). The Company allocates corporate level expenses to its segments with a majority of the allocation going to the PACE segment.
23
The following table summarizes the operating results regularly provided to the CODM by reportable segment for the three months ended September 30, 2023 and 2022:
| September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||||||||||||||
| (In thousands) | PACE | All other(1) | Totals | PACE | All other(1) | Totals | |||||||||||||||||||||||||||||
| Capitation revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Other service revenue | |||||||||||||||||||||||||||||||||||
| Total revenues | |||||||||||||||||||||||||||||||||||
| External provider costs | |||||||||||||||||||||||||||||||||||
| Cost of care, excluding depreciation and amortization | |||||||||||||||||||||||||||||||||||
| Center-Level Contribution Margin | |||||||||||||||||||||||||||||||||||
Overhead costs(2) | |||||||||||||||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||||||||||||||
| Other income | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Loss Before Income Taxes | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||
_________________________________
(1)Center-level Contribution Margin from segments below the quantitative thresholds are primarily attributable to the Senior Housing operating segment of the Company. This segment has never met any of the quantitative thresholds for determining reportable segments.
(2)Overhead consists of the Sales and marketing and Corporate, general and administrative financial statement line items.
Note 14: Related Party Transactions
Note 15: Subsequent Events
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis 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 fiscal year ended June 30, 2023 (“2023 10-K”).
Overview
InnovAge Holding Corp. (“InnovAge”) became a public company in March 2021. As of September 30, 2023, the Company served approximately 6,580 PACE participants, and operated 17 PACE centers across Colorado, California, New Mexico, Pennsylvania, and Virginia.
Trends and Uncertainties Affecting the Company
During fiscal year 2023, the U.S. and global economies experienced adverse macroeconomic effects in part resulting from the ongoing effects of the COVID-19 pandemic. These effects included inflation and increased wages due to labor shortages. In fiscal year 2022 and 2023, 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 significantly during the second half of fiscal 2023, inflation has continued during the three months ended September 30, 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 three months ended September 30, 2023. The effects of inflation, after accounting for these mitigation strategies, were immaterial to our financial results for the three months ended September 30, 2023. Although we expect to continue mitigation efforts, there can be no assurance that our strategies will be sufficient.
Operating expenses increased $5.4 million, or 2.9%, for the three months ended September 30, 2023 compared to 2022 due to, in part, to increased cost of care and related cost per participant as a result of increased salaries, wages and benefits associated with increased headcount and higher wage rates and increased fleet and contract transportation costs due to an increase in average daily attendance and external appointments. In fiscal year 2023, we launched and conducted several initiatives intended to lower certain of our costs, including limiting corporate staffing, effecting a reduction in workforce in December 2022, and optimizing working capital. We expect to experience elevated operating expenses for the remainder of fiscal 2024 for similar reasons.
In October 2023, the Company conducted a planned reduction in workforce. The plan involved the termination of approximately 34 employees, representing approximately 1.6% of the Company's workforce. In connection with the planned reduction, the Company estimates that it will incur approximately $0.3 million to $0.4 million of charges in connection with employee severance and benefits costs, which the Company expects to incur in the second quarter of fiscal year 2024.
We will continue to evaluate increased costs and methods to mitigate or offset such costs.
Census and capitation revenue. On May 11, 2023 the President allowed the national emergency and public health emergency declarations related to the COVID-19 pandemic to expire. The declarations had been in place since early 2020, and in addition to various Congress enacted legislation allowed the federal government flexibility to waive or modify certain requirements in a range of areas, including Medicare and Medicaid. To date, we have not experienced material census attrition as a result of the expiration of the public health emergency declarations and the resumption of Medicaid’s redetermination of beneficiary eligibility. The frailty level of PACE participants coupled with the complexity of Medicaid services needed, results in a comprehensive financial qualifications review compared to the more traditional Medicaid-only population. Throughout the public health emergency, the Company continued to complete annual Medicaid redeterminations. This process enables the Company to monitor eligibility, assist with the redetermination process, address potential issues with eligibility in real time, and track future renewal dates. However, the Company has experienced and
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expects that state regulatory agencies will continue to have short-term constraints relating to their ability to process new PACE enrollments as they prioritize the need to process Medicaid redeterminations along with other obligations. While the expiration of these emergency declarations have not had a material impact to our financial results, we continue to evaluate how the expiration of these emergency declarations may affect our business outlook.
Labor market. The COVID-19 pandemic and high inflation exacerbated difficulties to hire additional healthcare professionals, causing certain of our centers to be understaffed or staffed with personnel that required training. Labor pressure mostly eased during fiscal year 2023, however, the Company continues to be affected by the increased competition in the labor market and market adjustments to increase retention and improve our ability to hire. These market adjustments contributed, in part, to an increase in cost of care for three months ended September 30, 2023, further impacted by additional staffing related to compliance and remediation efforts. This increase in conjunction with higher headcount has contributed to increased cost of care for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 as discussed in “Results of Operations” below. We continue to assess key roles and benchmarks to market while monitoring trends in the labor market.
Additionally, on October 13, 2023, California passed into law California Senate Bill No. 525 ("SB 525"), which raises the minimum wage for many California healthcare workers, effective as of June 1, 2024. Although PACE centers are not covered by SB 525, many of our contractors and other third-party providers are impacted by SB 525, and they may renegotiate agreements with our centers to cover the increased labor costs. Additionally, competition with other healthcare providers who are required to increase wages under SB 525 could materially increase our labor costs. We will continue to evaluate the impact of this legislation on our business.
Finally, on October 27, 2023, we filed a petition with the National Labor Relations Board to conduct an election to determine if the nurses in our Pennsylvania centers wish to be represented for purposes of collective bargaining with the Company. The petition originates from a request by the nurses in our Pennsylvania centers to unionize. These employees represent 1% of our total workforce. Unionization efforts, the negotiation of collective bargaining agreements and costs for unionized employees could materially impact our costs of labor.
For additional information on the various risks posed by macroeconomic events and regulation, please see the section entitled “Risk Factors” included in Part I, Item 1A of our 2023 10-K.
Key Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial performance in the future to be, driven by the following factors:
•Our ability to effectively implement post-sanction remediation efforts in our centers as a result of our recent audits and maintain high quality of regulatory compliance. The Company’s priority is to continue to remediate the deficiencies raised in audit processes and to implement post-sanction corrective actions, where required, as well as maintain high quality of regulatory compliance in all its centers. As part of its actions to do so, the Company has worked with the appropriate authorities to make the necessary changes within the Company to improve care coordination and care documentation among our centers, including working to fill critical personnel gaps at our centers, standardizing the process of our 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.
•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 2.47 based on InnovAge data as of September 30, 2023; 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
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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. We continue to work on expanding payer capabilities so that our revenue more accurately reflects the acuity of the populations we serve.
•Our ability to grow enrollment and capacity within existing centers. 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 as the ones we were subject to in our Sacramento, California and Colorado centers.
•Our ability to maintain high participant satisfaction and retention. We achieved a 86% participant satisfaction rating as of September 30, 2023, measured as composite of participant satisfaction across ten categories, and average participant tenure was 3.2 years as of September 30, 2023, measured as tenure from enrollment to disenrollment, among our centers that have been operated by us for at least five years. Furthermore, we experience low levels of voluntary disenrollment, averaging 5.9% annually over the last three fiscal years. Approximately 71% of our historical disenrollments have been involuntary, due primarily to participant death or otherwise due to participants moving out of our service areas.
•Effectively managing the cost of care for our participants. We receive capitated payments to manage the totality of a participant’s medical care across all settings. Our participants are among the most frail and medically complex individuals in the U.S. healthcare system, and average acuity rises with the passage of time. The risk pool of our population became more acute in fiscal year 2023 as we were not able to replenish our population mix with newer, lower-acuity participants as a result of State sanctions, and as a result, our external provider costs and cost of care, excluding depreciation and amortization, represented approximately 85% of our revenue in the three months ended September 30, 2023. 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. We were fully released from those sanctions in Colorado in January 2023 and in California in May 2023. Although the Company continues post sanction monitoring, the Company is currently able to enroll new participants at its 17 centers.
•Our ability to expand via de novo centers within existing and new markets. Several factors can affect our ability to open de novo centers, including sanctions issued by regulators as the ones we were subject to in our Sacramento, California and Colorado centers. As a result of such sanctions, we were precluded from, or voluntarily suspended efforts to, open de novo centers in Florida, Kentucky and Indiana. Since the Company was released from sanctions, in Florida, we have recommenced our efforts to obtain the licensure required to open a PACE center in each of Tampa and Orlando. We are also pursuing the licensure required to open another PACE center in Downey, California.
•Execute tuck-in acquisitions. From fiscal year 2019 through fiscal year 2021, we acquired and integrated three PACE organizations, expanding our InnovAge Platform to one new state and four new markets through those acquisitions. Since the Company was released from sanctions, we have recommenced our efforts to pursue tuck-in acquisitions. We remain disciplined in our approach to acquisitions and in the past have executed multiple types of transactions, including turnarounds and non-profit conversions. Historically, when integrating acquired programs, we worked closely with key constituencies, including local governments, health systems and senior housing providers, to enable continuity of high-quality care for participants.
•Contracting with government payors. 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
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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 in connection with current and future audits to our centers, remediation plans and current and potential legal and regulatory proceedings. We plan to invest in future growth judiciously and maintain focus on managing our results of operations. We have begun to invest in building capabilities to increase our sophistication as a payor to drive clinical value, improve outcomes, and manage cost trends. Accordingly, in the short term we expect the activities noted above to increase our expenses as a percentage of revenue, but in the longer term, we anticipate that these investments will positively impact our business and results of operations.
•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, specifically in 2024, we expect to see some increase in inpatient and short stay nursing home utilization as well as increased acuity of our participant mix; 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.
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, we receive fixed or capitated fees per participant that are paid monthly by Medicare, Medicaid, Veterans Affairs (“VA”) and private pay sources.
Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the PACE program. The PACE state contracts between us and the respective state Medicaid administering agency are amended annually each June 30 in all states other than California and Pennsylvania, which contract on a calendar-year basis. We are currently operating in good standing under each of our PACE state contracts. For a discussion of our revenue recognition policies, please see Critical Accounting Estimates below and Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2023 10-K.
Other Service Revenue. Other service revenue primarily consists of revenues derived from fee-for-service arrangements, state food grants, rent revenues and management fees. Prior to June 30, 2023 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 to non-PACE participants. For a discussion of our revenue recognition policies, please see Critical Accounting Estimates below and Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2023 10-K.
Operating Expenses
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 skilled nursing facility), outpatient and pharmacy. In aggregate, external provider costs represent the largest portion of our expenses.
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Cost of Care, Excluding Depreciation and Amortization. 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 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 infrastructure required to support our marketing efforts. We expect these costs to increase in absolute dollars over time as we grow our participant census. We evaluate our sales and marketing expenses relative to our participant growth and will invest more heavily in sales and marketing from time-to-time to the extent we believe such investment can accelerate our growth without negatively affecting profitability.
Corporate, General and Administrative. Corporate, general and administrative expenses include employee-related expenses, including salaries and related costs. In addition, general and administrative expenses include all corporate technology and occupancy costs associated with our corporate office. We expect our general and administrative expenses to increase in absolute dollars due to the additional legal, accounting, insurance, investor relations and other costs that we incur as a public company, as well as other costs associated with compliance and continuing to grow our business. However, we anticipate general and administrative expenses to 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 amount of these expenses.
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 useful life or lease terms, to the extent the assets are being leased.
For more information relating to the components of our results of operations, see Results of Operations below and Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2023 10-K.
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Results of Operations
The following table sets forth our consolidated results of operations for the periods presented:
| Three Months Ended September 30, | |||||||||||
| in thousands | 2023 | 2022 | |||||||||
| Revenues | |||||||||||
| Capitation revenue | $ | 182,173 | $ | 170,931 | |||||||
| Other service revenue | 312 | 287 | |||||||||
| Total revenues | 182,485 | 171,218 | |||||||||
| Expenses | |||||||||||
| External provider costs | 99,358 | 96,237 | |||||||||
| Cost of care, excluding depreciation and amortization | 55,250 | 53,557 | |||||||||
| Sales and marketing | 5,379 | 4,413 | |||||||||
| Corporate, general and administrative | 28,947 | 30,181 | |||||||||
| Depreciation and amortization | 4,269 | 3,433 | |||||||||
| Total expenses | 193,203 | 187,821 | |||||||||
Operating Loss | $ | (10,718) | $ | (16,603) | |||||||
| Other Income (Expense) | |||||||||||
| Interest expense, net | (661) | (603) | |||||||||
Other income | 643 | 37 | |||||||||
| Total other expense | (18) | (566) | |||||||||
Loss Before Income Taxes | (10,736) | (17,169) | |||||||||
| Provision (Benefit) for Income Taxes | 226 | (3,470) | |||||||||
Net Loss | $ | (10,962) | $ | (13,699) | |||||||
| Less: net loss attributable to noncontrolling interests | (658) | (626) | |||||||||
Net Loss Attributable to InnovAge Holding Corp. | $ | (10,304) | $ | (13,073) | |||||||
Revenues
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| in thousands | |||||||||||||||||||||||
| Capitation revenue | $ | 182,173 | $ | 170,931 | $ | 11,242 | 6.6 | % | |||||||||||||||
| Other service revenue | 312 | 287 | 25 | 8.7 | % | ||||||||||||||||||
| Total revenues | $ | 182,485 | $ | 171,218 | $ | 11,267 | 6.6 | % | |||||||||||||||
Capitation revenue. Capitation revenue was $182.2 million for the three months ended September 30, 2023 an increase of $11.2 million, or 6.6%, compared to $170.9 million for the three months ended September 30, 2022. This increase was driven by a 7.7% increase in capitation rates partially offset by a 1.0% decrease in member months. The increase in capitation rates was primarily driven by an annual increase in both Medicaid capitation rates as determined by the States and Medicare capitation rates as a result of increased risk score and county rates. The decrease in member months is primarily due to disenrollments partially offset by the ramp up of enrollments at our Colorado and Sacramento centers as we resumed the enrollment process.
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Operating Expenses
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| in thousands | |||||||||||||||||||||||
| External provider costs | $ | 99,358 | $ | 96,237 | $ | 3,121 | 3.2% | ||||||||||||||||
| Cost of care (excluding depreciation and amortization) | 55,250 | 53,557 | 1,693 | 3.2% | |||||||||||||||||||
| Sales and marketing | 5,379 | 4,413 | 966 | 21.9 | % | ||||||||||||||||||
| Corporate, general, and administrative | 28,947 | 30,181 | (1,234) | (4.1)% | |||||||||||||||||||
| Depreciation and amortization | 4,269 | 3,433 | 836 | 24.4% | |||||||||||||||||||
| Total operating expenses | $ | 193,203 | $ | 187,821 | $ | 5,382 | |||||||||||||||||
External provider costs. External provider costs were $99.4 million for the three months ended September 30, 2023, an increase of $3.1 million, or 3.2%, compared to $96.2 million for the three months ended September 30, 2022. The increase was primarily driven by an increase of $4.1 million, or 4.3%, in cost per participant partially offset by a decrease of $1.0 million, or 1.0% in member months. The increase in cost per participant was primarily driven by an increase in assisted living and nursing facility unit cost, assisted living utilization, and pharmacy cost. This is partially offset by a decrease in short stay skilled nursing facility utilization.
Cost of care (excluding depreciation and amortization). Cost of care (excluding depreciation and amortization) expense was $55.3 million for the three months ended September 30, 2023, an increase of $1.7 million, or 3.2%, compared to $53.6 million for the three months ended September 30, 2022, primarily due to an increase of $2.2 million, or 4.2%, in cost per participant partially offset by a decrease of $0.5 million, or 1.0%, in member months. The increase was primarily driven by (i) a $1.5 million increase in salaries, wages and benefits associated with increased headcount and higher wage rates and (ii) $1.4 million in increased fleet expense and contract transportation a result of higher average daily attendance and an increase in external appointments, partially offset by $1.5 million reduction in third party audit and compliance support.
Sales and marketing. Sales and marketing expenses were $5.4 million for the three months ended September 30, 2023, an increase of $1.0 million, or 21.9%, compared to $4.4 million for the three months ended September 30, 2022, primarily due to increased marketing spend and headcount as a result of the sanction release in our Colorado and Sacramento centers.
Corporate, general and administrative. Corporate, general and administrative expenses were $28.9 million for the three months ended September 30, 2023, an decrease of $1.2 million, or 4.1%, compared to $30.2 million for the three months ended September 30, 2022. The decrease was primarily due to (i) a $0.5 million decrease in bad debt expense, (ii) a $0.6 million reduction in insurance expense, and (iii) a $1.4 million reduction in consulting expense associated with improving organizational capabilities including the transition to a new electronic medical record ("EMR") system, and (iv) $0.4 million reduction in corporate occupancy costs. These decreases in cost were partially offset by (i) $0.6 million increase in employee compensation and benefits as the result of an increase in headcount to support compliance and bolster organizational capabilities, (ii) $0.3 million in third party legal costs, and (iii) a $1.0 million increase in software license and maintenance expense, inclusive of Epic license fees.
Other Income (Expense)
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| in thousands | |||||||||||||||||||||||
| Interest expense, net | $ | (661) | $ | (603) | $ | (58) | 9.6% | ||||||||||||||||
Other income | 643 | 37 | 606 | 1,637.8% | |||||||||||||||||||
| Total other expense | $ | (18) | $ | (566) | $ | 548 | |||||||||||||||||
Interest expense, net. Interest expense, net, consists primarily of interest payments on our outstanding borrowings, net of interest income earned on our cash and cash equivalents and restricted cash. Interest expense, net was $0.7 million for the three months ended September 30, 2023, a decrease of $0.1 million, or 9.6%, compared to $0.6 million for the three
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months ended September 30, 2022. The decrease was primarily due to interest income of $1.1 million from money market funds offsetting interest expense of $1.7 million for the three months ended September 30, 2023. Interest expense of $1.0 million was offset by interest income of $0.4 million during the three months ended September 30, 2022.
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 short-term investments. Other income for the three months ended September 30, 2023 increased $0.6 million, or 1637.8%, when compared to the three months ended September 30, 2022. The increase is primarily due to dividends received from our short-term investments.
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 September 30, 2023 and 2022, we reported provision for income taxes of $0.2 million and benefit of $3.5 million, respectively. The decrease of $3.7 million is primarily due (i) our pretax book loss recognized during the three months ended September 30, 2023, as compared to pretax book loss recognized during the three months ended September 30, 2022 and (ii) the change in our valuation allowance.
Net Loss Attributable to Noncontrolling Interests.
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 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 is recorded in the consolidated statements of operations and the share of the other noncontrolling interest holders’ earnings are recorded as net loss attributable to noncontrolling interests.
Our share of earnings are recorded in the consolidated statements of operations and the share of the other noncontrolling interest holders’ earnings are recorded as net loss attributable to noncontrolling interests.
Net Loss
During the three months ended September 30, 2023 and 2022, we reported net loss of $11.0 million and $13.7 million, respectively, consisting of (i) loss from operations of $10.7 million and $16.6 million, respectively, (ii) other expense of $0.0 million and $0.6 million, respectively, and (iii) a provision for income taxes of $0.2 million and benefit of $3.5 million, respectively, each as described above.
Key Business Metrics and Non-GAAP Measures
In addition to our 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 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
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substitute for, and should be read in conjunction with, the GAAP financial information presented herein. These measures may not be comparable to similarly-titled performance indicators used by other companies.
| Three months ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| dollars in thousands | |||||||||||
| Key Business Metrics: | |||||||||||
Centers(a) | 17 | 18 | |||||||||
Census(b) | 6,580 | 6,540 | |||||||||
Total Member Months(b) | 19,540 | 19,740 | |||||||||
| Center-level Contribution Margin | $ | 27,877 | $ | 21,424 | |||||||
| Center-level Contribution Margin as a % of revenue | 15.3 | % | 12.5 | % | |||||||
| GAAP Measures: | |||||||||||
| Net income (loss) | $ | (10,962) | $ | (13,699) | |||||||
| Net loss margin | (6.0) | % | (8.0) | % | |||||||
| Non-GAAP Measures: | |||||||||||
Adjusted EBITDA(c) | $ | 2,226 | $ | (3,815) | |||||||
Adjusted EBITDA Margin(c) | 1.2 | % | (2.2) | % | |||||||
________________________
(a)During the third quarter ended March 31, 2023, the Company consolidated its Germantown LIFE center with its Allegheny and Henry Avenue LIFE centers in Pennsylvania.
(b)Amounts are approximate due to rounding.
(c)Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. For a definition and reconciliation of these non-GAAP measures to the most closely comparable GAAP measures for the period indicated, see below under “Adjusted EBITDA and Adjusted 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
Our census is comprised of our capitated participants for whom we are financially responsible for their total healthcare costs.
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 throughout the year.
Center-level Contribution Margin
The Company's management uses Center-level Contribution Margin as the measure for assessing performance of its segments. We define Center-level Contribution Margin as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs. For purposes of evaluating Center-level Contribution Margin on a center-by-center basis, we do not allocate our sales and marketing expense or corporate, general and administrative expenses across our centers. Center-level Contribution Margin was $27.9 million and $21.4 million for the three months ended September 30, 2023 and 2022, respectively. The increase in Center-level Contribution Margin for the three months ended September 30, 2023 was primarily due to a 6.6% increase in total revenue,
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slightly offset by a 3.2% increase in external provider costs during the same period. For more information relating to Center-level Contribution Margin, see Note 13 “Segment Reporting” to our consolidated financial statements. A reconciliation of Center-level Contribution Margin to loss before income taxes, the most directly comparable GAAP measure, for each of the periods is as follows:
| September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||||||||||||||
| (In thousands) | PACE | All other | Totals | PACE | All other(1) | Totals | |||||||||||||||||||||||||||||
| Capitation revenue | $ | 182,173 | $ | — | $ | 182,173 | $ | 170,931 | $ | — | $ | 170,931 | |||||||||||||||||||||||
| Other service revenue | 86 | 226 | 312 | 77 | 210 | 287 | |||||||||||||||||||||||||||||
| Total revenues | 182,259 | 226 | 182,485 | 171,008 | 210 | 171,218 | |||||||||||||||||||||||||||||
| External provider costs | 99,358 | — | 99,358 | 96,237 | — | 96,237 | |||||||||||||||||||||||||||||
| Cost of care, excluding depreciation and amortization | 55,097 | 153 | 55,250 | 53,411 | 146 | 53,557 | |||||||||||||||||||||||||||||
| Center-Level Contribution Margin | 27,804 | 73 | 27,877 | 21,360 | 64 | 21,424 | |||||||||||||||||||||||||||||
Overhead costs(a) | 34,317 | 9 | 34,326 | 34,574 | 20 | 34,594 | |||||||||||||||||||||||||||||
| Depreciation and amortization | 4,157 | 112 | 4,269 | 3,326 | 107 | 3,433 | |||||||||||||||||||||||||||||
| Interest expense, net | 616 | 45 | 661 | 557 | 46 | 603 | |||||||||||||||||||||||||||||
| Other income | (643) | — | (643) | (37) | — | (37) | |||||||||||||||||||||||||||||
| Loss Before Income Taxes | $ | (10,643) | $ | (93) | $ | (10,736) | $ | (17,060) | $ | (109) | $ | (17,169) | |||||||||||||||||||||||
| Loss Before Income Taxes as a % of revenue | (5.9) | % | (10.0) | % | |||||||||||||||||||||||||||||||
| Center- Level Contribution Margin as a % of revenue | 15.3 | % | 12.5 | % | |||||||||||||||||||||||||||||||
_________________________________
(a)Overhead consists of the sales and marketing and corporate, general and administrative financial statement line items.
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA as net income (loss) adjusted for interest expense, depreciation and amortization, and provision (benefit) for income tax as well as addbacks for non-recurring expenses or exceptional items, including charges relating to management equity compensation, litigation costs and settlements, M&A and de novo center development, business optimization, electronic medical record ("EMR") implementation, and facility expansion, relocation and closure. Adjusted EBITDA margin is Adjusted EBITDA expressed as a percentage of our total revenue. For the three months ended September 30, 2023 and 2022, net loss was $11.0 million and $13.7 million, respectively, representing a year-over-year decrease of 20.0%. Adjusted EBITDA was $2.2 million and ($3.8 million), for the three months ended September 30, 2023 and 2022, respectively, representing a year-over-year increase of 158.3%. For the three months ended September 30, 2023, net loss margin was 6.0%, as compared to net loss margin of 8.0% for the three months ended September 30, 2022. For the three months ended September 30, 2023, our Adjusted EBITDA margin was 1.2%, as compared to our Adjusted EBITDA margin for the three months ended September 30, 2022 of negative 2.2%. The increase in Adjusted EBITDA and Adjusted EBITDA margin is primarily from (i) increased capitation rates and (ii) lower corporate, general and administrative costs partially offset by, (i) increased center-level headcount and wage rates associated with a competitive labor market, and (ii) increased housing utilization and unit cost as mandated by the states.
Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures of operating performance monitored by management that are not defined under GAAP and that do not represent, and should not be considered as, an alternative to net income (loss) and net income (loss) margin, respectively, as determined by GAAP. We believe that Adjusted EBITDA and Adjusted EBITDA margin are appropriate measures of operating performance because the metrics eliminate the impact of revenue and expenses that do not relate to our ongoing business performance and certain 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-
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GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or as a substitute for, the analysis of other GAAP financial measures, including net income (loss) and net income (loss) margin. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. 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. The use of the term Adjusted EBITDA varies from others in our industry.
A reconciliation of net loss to Adjusted EBITDA, the most directly comparable GAAP measure, for each of the periods is as follows:
| Three months ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
Net loss | $ | (10,962) | $ | (13,699) | |||||||
| Interest expense, net | 661 | 603 | |||||||||
| Depreciation and amortization | 4,269 | 3,433 | |||||||||
| Provision (benefit) for income tax | 226 | (3,470) | |||||||||
| Stock-based compensation | 1,823 | 1,300 | |||||||||
Litigation costs and settlement(a) | 1,707 | 1,668 | |||||||||
M&A and de novo center development(b) | 409 | 206 | |||||||||
Business optimization(c) | 2,159 | 5,554 | |||||||||
EMR implementation(d) | 1,934 | 590 | |||||||||
| Adjusted EBITDA | $ | 2,226 | $ | (3,815) | |||||||
________________________
(a)Reflects charges/(credits) related to litigation by stockholders, litigation related to de novo center development, and civil investigative demands. Refer to Note 9, "Commitments and Contingencies" to our condensed consolidated financial statements for more information regarding litigation by stockholders and civil investigative demands. Costs reflected consist of litigation costs considered one-time in nature and outside of the ordinary course of business based on the following considerations which we assess regularly: (i) the frequency of similar cases that have been brought to date, or are expected to be brought within two years, (ii) complexity of the case, (iii) nature of the remedies sought, (iv) litigation posture of the Company, (v) counterparty involved, and (vi) the Company's overall litigation strategy.
(b)Reflects charges related to M&A transaction and integrations, and de novo center developments.
(c)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 September 30, 2023 this includes (i) $1.8 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 (ii) $0.4 million related to other non-recurring projects aimed at reducing costs and improving efficiencies. For the three months ended September 30, 2022 this includes (i) $0.7 million related to consultants and contractors performing audit and other related services at sanctioned centers, (ii) $4.3 million of costs associated with third party consultants as we implement our core provider initiatives, assess our risk-bearing payor capabilities, and strengthen our enterprise capabilities, and (iii) $0.6 million related to other non-recurring projects aimed at reducing costs and improving efficiencies.
(d)Reflects non-recurring expenses relating to the implementation of a new EMR vendor.
Liquidity and Capital Resources
General
To date, we have financed our operations principally through cash flows from operations and through borrowings under our credit facilities, and from the sale of common stock in our IPO that occurred in March 2021. As of September 30, 2023, we had cash and cash equivalents of $88.4 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
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consolidated financial statements) due 2026, (ii) finance and operating lease obligations, which are generally paid on a monthly basis and include maturities through 2028 and 2032, respectively, (iii) the operations of our business, including special projects such as our transition to a new EMR vendor, with respect to which we incurred non-recurring implementation costs over the last three months, and expect to incur ongoing costs through 2024 and beyond, and third party support to address remediation efforts, (iv) income tax payments, which are generally due on a quarterly and annual basis, and (v) capital additions, which included costs relating to the development of de novo centers, including those in Florida and California. We also will continue investing in the effective implementation of post-sanction corrective remediation plans (CAPs) and other corrective initiatives as a result of deficiencies found during audits at some of our centers, and our ability to continually provide necessary and quality services to our participants. Collectively, these obligations are expected to represent a significant liquidity requirement of our Company on both a short-term (next 12 months) and long-term (beyond 12 months) basis.
As of September 30, 2023, we had $68.8 million of long-term debt outstanding. As of September 30, 2023, we had future minimum operating lease payments under non-cancellable leases through the year 2032 of $26.5 million. We also had non-cancellable finance lease agreements with third parties through the year 2028 with future minimum payments of $19.4 million. For additional information, see Note 7, “Leases”, Note 8, “Long Term Debt”, and Note 9, “Commitments and Contingencies” in our condensed consolidated financial statements.
We believe that our cash and cash equivalents and our cash flows from operations, available funds, and access to financing sources, including our 2021 Credit Agreement and Revolving Credit Facility (each discussed and defined below), will be sufficient to fund our operating and capital needs for the next 12 months and beyond. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, our ability to retain and grow the number of PACE participants, and the expansion of sales and marketing activities and other costs of operating the business. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies. 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.
The 2021 Credit Agreement consists of a senior secured term loan (the “Term Loan Facility”) of $75.0 million principal amount and a revolving credit facility (the “Revolving Credit Facility”) of $100.0 million maximum borrowing capacity. The borrowing capacity under the Revolving Credit Facility is subject (i) any issued amounts under our letters of credit and (ii) applicable covenant compliance restrictions and any other conditions precedent to borrowing. Principal on the Term Loan Facility is paid each calendar quarter in an amount equal to 1.25% of the initial term loan on closing date.
Outstanding principal amounts under the 2021 Credit Agreement accrue interest at a variable interest rate. As of September 30, 2023, the interest rate on the Term Loan Facility was 7.30%. 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 September 30, 2023, we had no borrowings outstanding, $2.8 million of letters of credit issued, and $97.2 million of remaining borrowing capacity under the Revolving Credit Facility. As of September 30, 2023, we also had $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” to our 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.
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Condensed Consolidated Statements of Cash Flows
Our consolidated statements of cash flows for the three months ended September 30, 2023 and 2022 are summarized as follows:
| Three months ended September 30, | |||||||||||||||||
| 2023 | 2022 | $ Change | |||||||||||||||
| in thousands | |||||||||||||||||
| Net cash (used) provided by operating activities | $ | (32,985) | $ | 13,127 | $ | (46,112) | |||||||||||
| Net cash used in investing activities | (3,141) | (7,666) | 4,525 | ||||||||||||||
| Net cash used in financing activities | (2,726) | (1,668) | (1,058) | ||||||||||||||
| Net change in cash, cash equivalents and restricted cash | $ | (38,852) | $ | 3,793 | $ | (42,645) | |||||||||||
Operating Activities. The change in net cash provided (used) by operating activities was primarily due to the net effect of (i) net loss of $11.0 million in the current year period compared to a net loss of $13.7 million in the prior year period, as described further above, and (ii) an increase in accounts receivable primarily attributable to the timing of receipt of payments for certain Medicaid receivables, and (iii) increased payments for accounts payable and accrued expenses, operating leases and reported and estimated claims.
Investing Activities. Investing activities were made up of approximately $2.6 million in purchases of property and equipment and $0.6 million for purchases of short-term investments, consisting primarily of managed income funds invested in investment grade short-term fixed and floating rate debt securities aimed at creating income while maintaining low volatility on principal. Our investment in managed income funds regularly pay dividends which are reinvested into the funds.
Financing activities. The increase in net cash used in financing activities was primarily due to an increase in taxes paid related to net share settlements of stock-based compensation awards of $0.6 million and an increase in principal payments on finance leases of $0.4 million.
Emerging Growth Company and Smaller Reporting Company
We qualify as an “emerging growth company” pursuant to the provisions of the Jumpstart Our Business Startups (“JOBS”) Act and a “smaller reporting company” as defined by the Exchange Act. For as long as we are an “emerging growth company” or a “smaller reporting company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” or “smaller reporting companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, only being required to present two years of audited financial statements, plus unaudited condensed consolidated financial statements for applicable interim periods and the related discussion in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, exemptions from the requirements of holding non-binding advisory “say-on-pay” votes on executive compensation and stockholder advisory votes on golden parachute compensation.
In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We intend to take advantage of the longer phase-in periods for the adoption of new or revised financial accounting standards under the JOBS Act until we are no longer an emerging growth company. Our election to use the phase-in periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the longer phase-in periods permitted under the JOBS Act and who will comply with new or revised financial accounting standards. If we were to subsequently elect instead to comply with public company effective dates, such election would be irrevocable pursuant to the JOBS Act.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial
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statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the 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. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances.
For a description of our estimates regarding our critical accounting estimates, see “Critical Accounting Estimates” in the 2023 10-K.
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 September 30, 2023, we had total outstanding debt of $66.6 million in principal amount under the Term Loan Facility, $2.3 million under the convertible term loan, and no outstanding debt under the Revolving Credit Facility (each as defined in Note 8, “Long-Term Debt” to our condensed consolidated financial statements). As of June 30, 2023, we had total outstanding debt of $67.5 million in principal amount under the Term Loan Facility and $2.3 million under the Convertible Term Loan. As of September 30, 2023, the interest rate on the Term Loan Facility was 7.30%. We amended our 2021 Credit Agreement during the fourth quarter ended June 30, 2023 to replace the London Interbank Offered Rate ("LIBOR") reference rate with the Secured Overnight Financing Rate ("SOFR") prior to the discontinuance of LIBOR.
We had cash and cash equivalents of $88.4 million and $127.2 million as of September 30, 2023 and June 30, 2023, 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.
We had short-term investments of $46.8 million and $46.2 million as of September 30, 2023 and June 30, 2023, respectively, which are primarily invested in managed income funds managed by major financial institutions. The funds mainly invest in investment grade, U.S. denominated short-term fixed and floating rate debt securities. Securities are subject to market risk and sensitive to changes in interest rates. While the instruments held by the funds are generally less sensitive to interest rate changes than instruments with longer maturities due to their short-term nature, the funds may face a heightened level of interest rate risk due to changes in monetary policy. During periods when interest rates are low or negative, the funds yields, and total returns may also be low, or the funds may be unable to maintain positive returns. We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on these short-term investments.
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.
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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 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. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of September 30, 2023.
Changes to our Internal Controls over Financial Reporting
There have been no changes in internal control over financial reporting during the quarter ended September 30, 2023 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
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
Except as set forth below, there have been no material changes to the risk factors previously disclosed in our 2023 10-K.
Labor relations matters could have a material adverse effect on our business, reputation, prospects, results of operations and financial condition.
On October 27, 2023, we filed a petition with the National Labor Relations Board to conduct an election to determine if the nurses in our Pennsylvania centers wish to be represented for purposes of collective bargaining with the Company. The petition originates from a request by the nurses in our Pennsylvania centers to unionize. These employees represent approximately 1% of our total workforce. Even though we are currently unaware of other unionization efforts, it is possible that additional employees in our Pennsylvania centers or in other geographies may follow. If these employees vote in favor of representation, as we negotiate the collective bargaining agreement with these employees or any other employees, work stoppages and strikes may be threatened or occur, and our labor costs may continue to increase. The unavailability of staff, or the inability of the Company to control labor costs related to these matters and future efforts to unionize, could have a material adverse effect on our business, reputation, prospects, results of operations and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
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:
EXHIBIT INDEX
| Exhibit No. | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 10.4 | ||||||||
| 10.5 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1† | ||||||||
| 32.2† | ||||||||
| 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 | |||||||
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| 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 “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.
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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.
| INNOVAGE HOLDING CORP. | ||||||||
Date: November 7, 2023 | By: | /s/ Benjamin C. Adams | ||||||
| Name: | Benjamin C. Adams | |||||||
| Title: | Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) | |||||||
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