SEC Filing | InnovAge

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

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

EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-40159

InnovAge Holding Corp.

(Exact name of registrant as specified in its charter)


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

(844) 803-8745

(Registrant’s telephone number, including area code)

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


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

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

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

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


Large accelerated filer	☐	Accelerated filer	☐

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

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

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

As of November 5, 2021, there were 135,516,513 of the registrant’s common stock outstanding.

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		Page

Part I	Financial Information

Item 1.	Financial Statements (Unaudited)	5

	Condensed Consolidated Balance Sheets as of September 30, 2021 and June 30, 2021 (Unaudited)	5

	Condensed Consolidated Statements of Operations for the three months ended September 30, 2021 and 2020 (Unaudited)	6

	Condensed Consolidated Statements of Stockholders’ Equity for the three months ended September 30, 2021 and 2020 (Unaudited)	7

	Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2021 and 2020 (Unaudited)	8

	Notes to Condensed Consolidated Financial Statements as of September 30, 2021 (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40

Item 4.	Controls and Procedures	40

Part II	Other Information	41

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	44

Item 4.	Mine Safety Disclosures	44

Item 5.	Other Information	44

Item 6.	Exhibits	44

Exhibit Index		46

Signatures		47

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InnovAge Holding Corp. and Subsidiaries

Quarterly Report on Form 10-Q

For the quarterly period ended September 30, 2021

Cautionary Note on Forward-Looking Statements

Throughout this Quarterly Report on Form 10-Q, we make “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as “may,” “will,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect,” “anticipate,” “target,” “should,” “could,” “potential,” “opportunity,” “goal” or similar terminology. Forward-looking statements may be identified by the fact that they do not relate strictly to historical or current facts and may include statements about our expectations 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” but may be found in other locations as well. These statements are based upon management’s current expectations, assumptions and estimates and are not guarantees of timing, future results or performance. Therefore, you should not rely on any of these forward-looking statements as predictions of future events. Actual results may differ materially from those contemplated in these statements due to a variety of risks and uncertainties and other factors, including, among other things:

●

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

●

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

●

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

●

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

●

our ability to attract and retain highly qualified personnel;

●

our management team’s limited experience managing a public company;

●

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

●

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

●

our ability to maintain our corporate culture;

●

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

●

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

●

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

●

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

●

the impact of negative publicity regarding the managed healthcare industry;

●

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

●

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

●

other factors disclosed in the section entitled “Risk Factors” in the prospectus dated March 3, 2021, which forms part of the Registration Statement on Form S-1 declared effective as of the same date (the “IPO Prospectus”) and in this Quarterly Report on Form 10-Q.

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

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

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Unless otherwise mentioned or unless the context requires otherwise, all references in this Quarterly Report on Form 10-Q to “InnovAge,” “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,		June 30,
	2021		2021
Assets
Current Assets
Cash and cash equivalents	$	215,530	$	201,466
Restricted cash		2,235		2,234
Accounts receivable, net of allowance ($5,193 – September 30, 2021 and $4,350 – June 30, 2021)		28,386		32,582
Prepaid expenses and other		10,846		9,249
Income tax receivable		3,635		5,401
Total current assets		260,632		250,932
Noncurrent Assets
Property and equipment, net		141,992		142,715
Investments		5,493		3,493
Deposits and other		4,186		3,877
Goodwill		124,217		124,217
Intangible assets, net		6,353		6,518
Total noncurrent assets		282,241		280,820
Total assets	$	542,873	$	531,752
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses	$	33,347	$	32,361
Reported and estimated claims		33,339		33,234
Due to Medicaid and Medicare		8,545		7,101
Current portion of long-term debt		3,791		3,790
Current portion of capital lease obligations		2,129		2,079
Total current liabilities		81,151		78,565
Noncurrent Liabilities
Deferred tax liability, net		16,930		15,700
Capital lease obligations		4,763		5,190
Other noncurrent liabilities		2,749		2,758
Long-term debt, net of debt issuance costs		70,733		71,574
Total liabilities		176,326		173,787
Commitments and Contingencies (See Note 9)
Redeemable Noncontrolling Interests (See Note 4)		16,431		16,986
Stockholders’ Equity
Common stock, $0.001 par value; 500,000,000 authorized as of September 30, 2021 and June 30, 2021; 135,516,513 shares issued and outstanding as of both September 30, 2021 and June 30, 2021		136		136
Additional paid-in capital		324,718		323,760
Retained earnings		18,936		10,663
Total InnovAge Holding Corp.		343,790		334,559
Noncontrolling interests		6,326		6,420
Total stockholders’ equity		350,116		340,979
Total liabilities and stockholders’ equity	$	542,873	$	531,752

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

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INNOVAGE HOLDING CORP. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

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

(Unaudited)


	Three Months Ended September 30,
	2021		2020
Revenues
Capitation revenue	$	172,554	$	151,944
Other service revenue		516		622
Total revenues		173,070		152,566
Expenses
External provider costs		90,012		73,681
Cost of care, excluding depreciation and amortization		40,728		38,283
Sales and marketing		6,293		4,112
Corporate, general and administrative		21,084		71,577
Depreciation and amortization		3,293		2,959
Equity loss		—		801
Other operating income		—		(668)
Total expenses		161,410		190,745
Operating Income (Loss)		11,660		(38,179)

Other Income (Expense)
Interest expense, net		(547)		(5,631)
Loss on extinguishment of debt		—		(991)
Other expense		(493)		(62)
Total other expense		(1,040)		(6,684)
Income (Loss) Before Income Taxes		10,620		(44,863)
Provision for Income Taxes		2,996		4,937
Net Income (Loss)		7,624		(49,800)
Less: net loss attributable to noncontrolling interests		(62)		(146)
Net Income (Loss) Attributable to InnovAge Holding Corp.	$	7,686	$	(49,654)

Weighted-average number of common shares outstanding - basic		135,516,513		121,119,417
Weighted-average number of common shares outstanding - diluted		135,516,513		121,119,417

Net income (loss) per share - basic	$	0.06	$	(0.41)
Net income (loss) per share - diluted	$	0.06	$	(0.41)

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 Stockholders’ Equity

(In thousands, except per share data)

(Unaudited)


													Total		Redeemable
				Additional		Retained							Permanent		Noncontrolling
	Capital Stock			Paid-in		Earnings		Treasury Stock			Noncontrolling		Stockholders'		Interests
	Shares	Amount		Capital		(Deficit)		Shares	Amount		Interests		Equity		(Temporary Equity)		Net Income

Balances, June 30, 2020	132,718,461		133		36,338		64,737	102,030		(193)		6,735		107,750		-
Treasury stock transaction	-		-		-		-	16,095,819		(77,603)		-		(77,603)		-
Time based awards-option cancellation	-		-		(29,201)		-	-		-		-		(29,201)		-
Stock option cancellation and owners distribution	-		-		(3,157)		(9,457)	-		-		-		(12,614)		-
Stock-based compensation	-		-		46		-	-		-		-		46		-
Net loss	-		-		-		(49,654)	-		-		(146)		(49,800)		-	$	(49,800)
Balances, September 30, 2020	132,718,461	$	133	$	4,026	$	5,626	16,197,849	$	(77,796)	$	6,589	$	(61,422)	$	-

Balances, June 30, 2021	135,516,513		136		323,760		10,663	-		-		6,420		340,979		16,986
Stock-based compensation	-		-		958		-	-		-		-		958		-
Adjustment to redemption value	-		-		-		587	-		-		-		587		(587)
Net income (loss)	-		-		-		7,686	-		-		(94)		7,592		32	$	7,624
Balances, September 30, 2021	135,516,513	$	136	$	324,718	$	18,936	-	$	-	$	6,326	$	350,116	$	16,431

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,
	2021		2020
Operating Activities
Net income (loss)	$	7,624	$	(49,800)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Loss on disposal of assets		493		—
Provision for uncollectible accounts		1,268		838
Depreciation and amortization		3,293		2,959
Loss on extinguishment of long-term debt		—		991
Amortization of deferred financing costs		107		261
Stock-based compensation		958		46
Deferred income taxes		1,230		3,283
Loss in equity of nonconsolidated entities		—		801
Change in fair value of contingent consideration		—		(668)
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable, net		2,929		8,272
Prepaid expenses and other		(1,597)		141
Income tax receivable		1,766		1,500
Deposits and other		(309)		(76)
Accounts payable and accrued expenses		1,248		5,798
Reported and estimated claims		106		4,924
Due to Medicaid and Medicare		1,443		2,672
Net cash provided by (used in) operating activities		20,559		(18,058)
Investing Activities
Purchases of property and equipment		(3,042)		(4,629)
Purchase of cost method investment		(2,000)		—
Net cash used in investing activities	$	(5,042)	$	(4,629)
Financing Activities
Distributions to owners	$	—	$	(9,457)
Payments on capital lease obligations		(505)		(480)
Proceeds from long-term debt		—		300,000
Principal payments on long-term debt		(947)		(212,625)
Payment of financing costs and debt premiums		—		(7,478)
Treasury stock purchases		—		(77,603)
Payments related to option cancellation		—		(32,358)
Net cash used in financing activities		(1,452)		(40,001)

INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS & RESTRICTED CASH		14,065		(62,688)
CASH, CASH EQUIVALENTS & RESTRICTED CASH, BEGINNING OF PERIOD		203,700		114,565
CASH, CASH EQUIVALENTS & RESTRICTED CASH, END OF PERIOD	$	217,765	$	51,877

Supplemental Cash Flows Information
Interest paid	$	573	$	2,954
Income taxes paid	$	—	$	188
Property and equipment included in accounts payable	$	272	$	298
Property and equipment purchased under capital leases	$	127	$	2,737

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

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INNOVAGE HOLDING CORP. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1:Business

InnovAge Holding Corp. (formerly, TCO Group Holdings, Inc.) was formed May 13, 2016, to acquire the business of Total Community Options, Inc. d/b/a InnovAge, which was formed in May 2007. In connection with the Company’s initial public offering, which occurred in March 2021, we changed the name of our Company from TCO Group Holdings, Inc. to InnovAge Holding Corp.

InnovAge Holding Corp. and its subsidiaries, which are headquartered in Denver, Colorado have a strong record of innovation, quality, and sensitivity to the needs of participants and staff. The Company manages, and in many cases directly provides, a broad range of medical and ancillary services for seniors in need of care and support to safely live independently in their homes and communities, including in-home care services (skilled, unskilled and personal care); in-center services such as primary care, physical therapy, occupational therapy, speech therapy, dental services, mental health and psychiatric services, meals, and activities; transportation to the Program of All-Inclusive Care for the Elderly (“PACE”) center and third-party medical appointments; and care management. The Company manages its business as one reportable segment, PACE.

The Company serves approximately 6,990 PACE participants, making it the largest PACE provider in the United States of America (the “U.S.”) based upon participants served, and operates 18 PACE centers across Colorado, California, New Mexico, Pennsylvania and Virginia.

PACE is a fully-capitated managed care program, which serves the frail elderly, and predominantly dual-eligible, population in a community-based service model. InnovAge is obligated to provide and participants receive all needed healthcare services through an all-inclusive, coordinated model of care, and the Company is at risk for 100% of healthcare costs incurred with respect to the care of its participants. PACE programs receive capitation payments directly from Medicare Parts C and D, Medicaid, Veterans Administration (“VA”), and private pay sources. Additionally, under the Medicare Prescription Drug Plan, the Centers for Medicare and Medicaid Services (“CMS”) share part of the risk for providing prescription medication to the Company’s participants.

On March 8, 2021, we completed our initial public offering (“IPO”). The Company’s common stock began trading on the Nasdaq Stock Market LLC (“NASDAQ”) under the ticker symbol “INNV”.

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, 2021 (“2021 10-K”). During the three months ended September 30, 2021, there were no significant changes to those accounting policies.

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, 2021. In the opinion of management, all adjustments (consisting of all normal and recurring adjustments) considered necessary for a fair presentation have been included. The consolidated financial statements include the accounts of InnovAge, its wholly owned subsidiaries, variable interest entities (“VIEs”) for which

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

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

Restatement of Prior Period Financial Statements

Subsequent to the issuance of the Company’s consolidated financial statements as of and for the year ended June 30, 2021, we identified an error in our consolidated balance sheet and statement of stockholders’ equity as of June 30, 2021 related to the presentation of redeemable noncontrolling interests. The Company incorrectly recorded redeemable noncontrolling interests of $17.0 million as permanent equity rather than temporary equity as of June 30, 2021. As a result, the Company is restating the June 30, 2021 condensed consolidated financial statements to reflect this reclassification from permanent to temporary equity and to record the related adjustment to redemption value as of June 30, 2021. Management has evaluated the materiality of this misstatement and concluded that it is not material to the prior period. The effect of the restatement on the consolidated balance sheet as of June 30, 2021 is as follows (in thousands):


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

The effect of the restatement on the balances as of June 30, 2021 included in the consolidated statement of stockholders’ equity as of September 30, 2021 is as follows (in thousands):


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

Property and Equipment

Property and equipment were comprised of the following as of September 30, 2021 and June 30, 2021:


	Estimated
dollars in thousands	Useful Lives	September 30, 2021		June 30, 2021
Land	N/A	$	11,980	$	11,980
Buildings and leasehold improvements	10 - 40 years		112,311		104,724
Software	3 - 5 years		13,906		13,316
Equipment and vehicles	3 - 7 years		36,477		35,341
Construction in progress	N/A		15,043		22,130
			189,717		187,491
Less accumulated depreciation and amortization			(47,725)		(44,776)
Total property and equipment, net		$	141,992	$	142,715

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Depreciation of $3.1 million and $2.8 million was recorded during the three months ended September 30, 2021 and 2020, respectively.

Coronavirus Pandemic (“COVID-19”)

In March 2020, the World Health Organization declared COVID-19 a pandemic. The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption. Governments in affected regions have implemented, and may continue to implement, safety precautions which include quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures as they deem necessary. Many organizations and individuals, including the Company and its employees, continue to take additional steps to avoid or reduce infection, including limiting travel and working from home. These measures are disrupting normal business operations both in and outside of affected areas and have had significant negative impacts on businesses worldwide. As a PACE organization, we have been and will continue to be impacted by the effects of COVID-19; however, we remain committed to carrying out our mission of caring for our participants. We continue to closely monitor the impact of COVID-19 on all aspects of our business, including the impacts to our employees, participants and suppliers; due to the numerous evolving factors, we are unable to reliably estimate the ultimate impact the pandemic will have on our consolidated financial condition, results of operations or cash flows.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into legislation. The CARES Act provides for $100.0 billion to healthcare providers, including hospitals on the front lines of the COVID-19 pandemic. Under the CARES Act, the state of Pennsylvania signed into law the Act 24 of 2020, which allocated $10.0 million of funding from the federal CARES Act to managed long term care organizations. Funding from the Act 24 of 2020 must be used to cover necessary COVID-19 related costs incurred between March 1, 2020 and November 30, 2020 for entities in operation as of March 31, 2020. We received $1.0 million in funding under the Act 24 of 2020, which was allocated to InnovAge centers in Pennsylvania. Of the $1.0 million, $0.7 million was recognized prior June 30, 2020 and the remaining balance of $0.3 million was recognized during the year ended June 30, 2021. The CARES Act also provides for the temporary suspension of the automatic 2% reduction of Medicare claim reimbursements (sequestration) for the period of May 1, 2020 through December 31, 2021.

Recently Adopted Accounting Pronouncements

Income Taxes

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes Topic 740-Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application of Topic 740. This guidance is effective for companies with fiscal years beginning after December 15, 2020, including interim periods therein, and early adoption is permitted. The Company adopted ASU 2019-12 in the current quarter and it did not have a material effect on the Company’s consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

Leases

In February 2016, the FASB issued ASU 2016-02 Leases (“ASU 2016-02”), which was intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than 12 months. Additionally, this guidance will require disclosures to help investors and other financial statement users to better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. The guidance should be applied under a modified retrospective transition approach for leases existing at the beginning of the earliest comparative period presented in the adoption-period financial statements. Any

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leases that expire before the initial application date will not require any accounting adjustment. In June 2020, FASB issued ASU 2020-05 Revenue from contracts with customers (Topic 606) and leases (Topic 842)—Effective dates for certain entities which deferred the new lease standard effective date for the Company to December 15, 2022, with early adoption permitted. The Company will adopt this ASU in the fiscal year beginning July 1, 2022 and has not yet determined the effect of the standard on its ongoing financial reporting.

Financial Instruments

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”), which requires entities to use a current expected credit loss (“CECL”) model to measure impairment for most financial assets that are not recorded at fair value through net income. Under the CECL model, an entity will estimate lifetime expected credit losses considering available relevant information about historical events, current conditions and supportable forecasts. The CECL model does not apply to available-for-sale debt securities. This guidance also expands the required credit loss disclosures and will be applied using a modified retrospective approach by recording a cumulative effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU 2019-04 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company will adopt this guidance for the annual and interim reporting periods beginning July 1, 2023. The Company has not determined the effect of the standard on its consolidated financial statements.

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

Note 3:Revenue Recognition

Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performed the following five steps: (i) Identify the contract(s) with a customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance obligations in the contract; and (v) Recognize revenue as the entity satisfies a performance obligation.

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.

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

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other” and is also capitated. Private pay includes direct payments from participants who do not qualify for the full capitated rate and have to pay all or a portion of the capitated rate.

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


	September 30,
	2021		2020
Medicaid	53	%	53	%
Medicare	47	%	47	%
Private pay and other	*	%	*	%
Total	100	%	100	%

______________

* Less than 1%

The Company determined the transaction price for these contracts is the amount we expect to be entitled to, which is the most likely amount. For certain capitation payments, the Company is subject to retroactive premium risk adjustments based on various factors. The Company estimates the amount of the adjustment and records it monthly on a straight-line basis. These adjustments are not expected to be material.

The capitation revenues are recognized based on the estimated PMPM transaction price to transfer the service for a distinct increment of the series (i.e. month). We recognize revenue in the month in which participants are entitled to receive comprehensive care benefits during the contract term. As the period between the time of service and time of payment is typically one year or less, the Company elected the practical expedient under ASC 606-10-32-18 and did not adjust for the effects of a significant financing component.

The Company also provides prescription drug benefits in accordance with Medicare Part D. Monthly payments received from CMS and the participants represent the bid amount for providing prescription drug coverage. The portion received from CMS is subject to risk sharing through Medicare Part D risk-sharing corridor provisions. These risk-sharing corridor provisions compare costs targeted in the Company’s bid to actual prescription drug costs. The Company estimates and records a monthly adjustment to Medicare Part D revenues associated with these risk-sharing corridor provisions. Medicare Part D comprised (i) 12% of capitation revenues for both the three months ended September 30, 2021 and 2020 and (ii) 19% and 21% of external provider costs for the three months ended September 30, 2021 and 2020, respectively.

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


	September 30,		June 30,
	2021		2021
Medicaid	59	%	60	%
Medicare	31	%	20	%
Private pay and other	10	%	20	%
Total	100	%	100	%

The Company records accounts receivable at net realizable value, which includes an allowance for estimated uncollectible accounts. The allowance for uncollectible accounts reflects the Company’s best estimate of probable losses considering eligibility, historical experience, and existing economic conditions. The balance of the allowance for uncollectible accounts was $5.2 million as of September 30, 2021, compared to $4.4 million as of June 30, 2021. Accounts are written off as bad debts when they are deemed uncollectible based upon individual credit evaluations and specific circumstances underlying the accounts.

Other Service Revenue and Accounts Receivable

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Other service revenue is comprised of rents earned related to Senior Housing and other fee for service revenue. Other service revenue was 0.3% and 0.4% of total revenue for the three months ended September 30, 2021 and 2020, respectively. Accounts receivable related to other service revenue were not significant as of both September 30, 2021 and June 30, 2021.

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:Investments

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


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

Nonconsolidated Entities

Cost Method Investments

The Company maintains 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, 2021 and 2020, there were no observable price changes or impairments recorded.

Jetdoc

In August 2021, the Company acquired a minority interest equal to 806,481 shares of the outstanding common

stock of Jetdoc, Inc. (“Jetdoc”), a telehealth and virtual urgent care app dedicated to effectively connecting users with medical professionals, for cash consideration of $2.0 million. The balance of the Company’s investment in Jetdoc is $2.0 million which represents the maximum exposure to loss.

Dispatch Health

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

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, 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

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insignificant. As of September 30, 2021, the balance of the Company’s investment in PWD is $0.8 million which represents the maximum exposure to loss.

Noncontrolling Interest

Senior Housing

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

SH1 is a VIE. The Company is the primary beneficiary of SH1 and consolidates SH1. The Company is the primary beneficiary of SH1 as it has the power to direct the activities that are most significant to SH1 and has an obligation to absorb losses or the right to receive benefits from SH1. The most significant activity of SH1 is the operation of the senior housing facility. The Company has provided a subordinated loan to SH1 and has provided a guarantee for a convertible term loan held by SH1.

Redeemable Noncontrolling Interest

InnovAge Sacramento

On March 18, 2019, in connection with the formation of InnovAge Sacramento, the joint venture with 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.

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

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

Before consolidation, the Company recorded it’s proportionate share of net loss, which was a loss of $0.8 million for the three months ended September 30, 2020, as equity loss in the statement of operations.

On February 9, 2021, we entered into an amendment agreement with Adventist to amend the Sacramento Warrants. The amendment removes the Investment Threshold requirement and grants Adventist the right to purchase up to $15.0 million of our common stock at an exercise price equal to the initial public offering price. The warrant is exercisable for one year beginning March 8, 2021, the date of the consummation of our IPO. As of September 30, 2021, Adventist had not exercised any warrants.

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

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equity. A charge of $2.3 million, representing the fair value of the Sacramento Warrants from inception through the date of completion of the IPO, was recorded in other income (expense) in the condensed consolidated statement of operations.

As described above, we obtained control of InnovAge Sacramento through acquisition of an additional 0.1% membership interest, which we consider to be a step acquisition, whereby the Company remeasured the previously held equity method investment to fair value. The amount by which the purchase price exceeds the fair value of the net assets acquired is recorded as goodwill. The fair value of the previously held equity investments was determined using a discounted cash flow model. This resulted in recording a gain on consolidation of $10.9 million during the third quarter of fiscal year 2021.

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, 2021, 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. The carrying value of the redeemable noncontrolling interest as of September 30, 2021 was $16.4 million.

Note 5:Fair Value Measurements

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants, at the measurement date. A fair value hierarchy was established that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources outside the reporting entity. Unobservable inputs are inputs that reflect the Company’s own assumptions based on market data and assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The sensitivity to changes in inputs and their impact on fair value measurements can be significant.

The three levels of inputs that may be used to measure fair value are:

Level 1

Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date

Level 2

Quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the assets or liabilities

Level 3

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

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, each period end the Company reports this put right at the greater of i) carrying value of the redeemable noncontrolling interest or ii) fair value of the redeemable noncontrolling interest. Because this asset does not have observable inputs, level 3 inputs are used to measure fair value. For the three months ended September 30, 2021, the Company did not record any fair value adjustments as the fair value of the redeemable noncontrolling interest was not greater than the carrying value of the redeemable noncontrolling interest.

Effective August 7, 2018, the Company finalized the acquisition of NewCourtland LIFE Program (“NewCourtland”) in Pennsylvania. The Company paid a base purchase price of $30.0 million, subject to certain net working capital and closing adjustments plus contingent consideration of up to $20.0 million. On March 8 2021 we completed our IPO, which

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

Changes in fair value of $0.7 million were recorded in other operating expense (income) for the three months ended September 30, 2020. As of June 30, 2021 and September 30, 2021, there are no amounts of contingent consideration outstanding.

There were no transfers in and out of Level 3 during the three months ended September 30, 2020 or 2021.

Note 6:Goodwill and Intangible Assets

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

Pursuant to ASC 350, “Intangibles – Goodwill and Other,” we review the recoverability of goodwill annually as of April 1 or whenever significant events or changes occur which might impair the recovery of recorded amounts. For purposes of the annual goodwill impairment assessment, the Company has identified three reporting units. There were no indicators of impairment identified and no goodwill impairments recorded during the three months ended September 30, 2021 and 2020.

Intangibles assets consisted of the following as of:


		September 30,		June 30,
in thousands	2021		2021
Definite-lived intangible assets	$	6,600	$	6,600
Indefinite-lived intangible assets		2,000		2,000
Total intangible assets		8,600		8,600
Accumulated amortization		(2,247)		(2,082)
Balance as of end of period	$	6,353	$	6,518

Intangible assets consist of customer relationships acquired through business acquisitions. The Company recorded amortization expense of $0.2 million for both the three months ended September 30, 2021 and 2020, respectively.

We review the recoverability of other intangible assets in conjunction with long-lived assets whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. There were no intangible asset impairments recorded during the three months ended September 30, 2021 and 2020.

During the quarter ended September 30, 2021, the market value of our common stock declined below the carrying value of equity. We were required to qualitatively assess whether a triggering event had occurred and whether it was more likely than not that our goodwill was impaired as of September 30, 2021. On September 17, 2021, we were notified that CMS had determined to suspend new enrollments at our Sacramento center based on deficiencies detected in an audit related to participant quality of care, and on September 30, 2021, we were further notified that the State of California had followed in the determination of such sanctions. The suspension will remain in effect until CMS and the State of California determine that we have remediated the deficiencies to their satisfaction. We believe this decline in common stock price was the market reaction to the new enrollment suspension at our Sacramento center as of September 18, 2021.

Based on our interim qualitative assessment as of September 30, 2021, we determined that it was more-likely-than-not that the fair value of the Company was greater than the net book value and that we did not have a “triggering event”

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requiring a quantitative or Step 1 assessment of Goodwill. Our review of macroeconomic and industry considerations, as well as the Company's financial results of the west region for the first quarter of fiscal year 2022 and projections for the full fiscal year 2022, inclusive of a sustained impact of the enrollment suspension at Sacramento, were consistent with the expectations and sensitivities assessed as part of our annual goodwill impairment performed in the fourth quarter of fiscal year 2021. If assumptions or estimates in the fair value calculations change or if future cash flows vary from what was expected, including those assumptions relating to the duration and severity of the financial impact of the enrollment suspension at Sacramento, this may impact the impairment analysis and could reduce the underlying cash flows used to estimate fair values and result in a decline in fair value that may trigger future impairment charges.

Note 7:Leases

Property and equipment includes property under various capital leases. These leases have expiration dates ranging from January 2022 to September 2027, varying interest rates, and generally include an option to purchase the equipment at the end of the underlying lease period. The Company’s capital leases included the following at September 30, 2021 and June 30, 2021:


	September 30, 2021		June 30, 2021
in thousands
Equipment	$	11,204	$	13,302
Less accumulated depreciation		(5,866)		(7,081)
Total capital leases	$	5,338	$	6,221

Certain of the Company’s property and equipment is leased under operating leases. Total rental expense under operating leases was $1.0 million for the each of three months ended September 30, 2021, and 2020.

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


			Operating Leases
	Capital Leases		Minimum Lease
in thousands	Obligations		Payments
Amount remaining in 2022	$	1,915	$	2,813
2023		2,496		4,266
2024		1,970		3,905
2025		1,197		3,439
2026		163		3,361
Thereafter		7		13,619
Total		7,748	$	31,403
Less amount representing interest		(856)
Total minimum lease payments		6,892
Less current maturities		(2,129)
Noncurrent maturities	$	4,763

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Note 8. Long Term Debt

Long-term debt consisted of the following at September 30, 2021 and June 30, 2021:


	Interest rate	Maturity date	September 30, 2021		June 30, 2021

			in thousands
Senior secured borrowings:
Term Loan Facility	(a)	March 8, 2026	$	74,063	$	75,000
Revolving Credit Facility (b)	(a)	March 8, 2026		—		—
Convertible term loan	6.68%	August 20, 2030		2,357		2,367
Total debt				76,420		77,367
Less unamortized debt issuance costs				1,896		2,003
Less current maturities				3,791		3,790
Noncurrent maturities			$	70,733	$	71,574

(a)

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

(b)

The remaining capacity under the Revolving Credit Facility as of September 30, 2021 was $100.0 million, subject to (i) any issued amounts under our letters of credit, which as of September 30, 2021 was $2.2 million, and (ii) applicable covenant compliance restrictions and any other conditions precedent to borrowing.

2016 Credit Agreement

The Company originally entered into a senior secured borrowing agreement (the “2016 Credit Agreement”) on May 13, 2016, that consisted of a senior secured term loan for $75.0 million and a revolving credit facility for $20.0 million. The 2016 Credit Agreement was subsequently amended (i) on May 2, 2019 to increase the senior secured term loan to $190.0 million and a revolving credit facility for $30.0 million and a delayed draw term loan facility (“DDTL”) for $45.0 million and (ii) on July 27, 2020, to increase the senior secured term loan to $300.0 million, the revolving credit facility to $40.0 million and to terminate the DDTL. The structure of the July 27, 2020 amendment to the 2016 Credit Agreement led to an extinguishment of debt for certain lenders and a modification of debt for other lenders. The total debt structure extinguishment for certain lenders was $57.1 million, and the write off of $1.0 million in debt issuance costs was recorded in loss on extinguishment of debt for the three months ended September 30 30, 2020. The total debt structure that was modified was $250.0 million, while the new debt issued was $50.0 million, which resulted in $9.1 million of capitalized debt issuance costs. Total amortization of deferred financing costs was $0.3 million for the three months ended September 30, 2020.

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

2021 Credit Agreement

On March 8, 2021, concurrently with the closing of the IPO, the Company entered into a new credit agreement (the “2021 Credit Agreement”) that replaced the 2016 Credit Agreement. The 2021 Credit Agreement consists of a senior secured term loan (the “Term Loan Facility”) of $75.0 million principal amount and a revolving credit facility (the “Revolving Credit Facility”) of $100.0 million maximum borrowing capacity. Loans under the 2021 Credit Agreement are secured by substantially all of the Company’s assets. Principal on the Term Loan Facility is paid each calendar quarter beginning September 2021 in an amount equal to 1.25% of the initial term loan on closing date. Proceeds of the Term Loan Facility, together with proceeds from the IPO, were used to repay amounts outstanding under the 2016 Credit Agreement.

Outstanding principal amounts under the 2021 Credit Agreement accrue interest at a variable interest rate. As of September 30, 2021, the interest rate on the Term Loan Facility was 1.84%. Under the terms of the 2021 Credit Agreement,

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the Revolving Credit Facility fee accrues at 0.25% of the average daily unused amount and is paid quarterly. As of September 30, 2021, we had no borrowings outstanding under the Revolving Credit Facility.

The 2021 Credit Agreement requires the Company to meet certain operational and reporting requirements, including, but not limited to, a secured net leverage ratio. Additionally, annual capital expenditures and permitted investments, including acquisitions, are limited to amounts specified in the 2021 Credit Agreement. The 2021 Credit Agreement also provides certain restrictions on dividend payments and other equity transactions and requires the Company to make prepayments under specified circumstances. As of September 30, 2021, the Company was in compliance with the covenants of the 2021 Credit Agreement.

The deferred financing costs of $2.0 million are amortized over the term of the underlying debt and unamortized amounts have been offset against long-term debt in the consolidated balance sheets. Total amortization of deferred financing costs was $0.1 million for the three months ended September 30, 2021.

Convertible Term Loan

On June 29, 2015, SH1 entered into a convertible term loan. Monthly principal and interest payments of $0.02 million commenced on September 1, 2015. The loan is secured by a deed of trust to Public Trustee, assignment of leases and rents, security agreements, and SH1’s fixture filing.

Note 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.

In July 2021, the Company received a civil investigative demand (“CID”) from the Attorney General for the State of Colorado. The CID requests information and documents regarding Medicaid billing, patient services and referrals at InnovAge’s Colorado program. 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.

On October 14, 2021, the Company was named as a defendant in a putative class action complaint filed in the District Court for the District of Colorado on behalf of individuals who purchased or acquired shares of the Company’s common stock during a specified period. Through the complaint, plaintiffs are asserting claims against the Company, certain of the Company’s officers and the underwriters in the Company’s IPO, alleging violations of Sections 11 and 15 of the Securities Act of 1933 for making allegedly inaccurate and misleading statements and omissions in connection with the Company’s IPO and seeking compensatory damages, among other things.

Although the results of legal proceedings and claims are inherently unpredictable and uncertain, we do not believe that the outcomes of the legal proceedings with which we are currently involved, based on the currently available information, either individually or in the aggregate, will have a material adverse effect on our business, financial condition, or cash flows, though the outcomes could be material to the firms operating results for any particular period; depending in part, upon the operating results of such period. Regardless of the outcome, litigation

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has the potential to have an adverse impact on us due to any related defense and settlement costs, diversion of management resources, and other factors.

Note 10: Equity

Equity Owner Transaction

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

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

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

As part of the transaction, for the three months ended September 30, 2020, the Company incurred $22.6 million in transaction costs, of which $13.1 million was recognized as Corporate, general and administrative expense and $9.5 million was recognized as a distribution to owners as the costs were paid on behalf of the owners. These costs were recorded during the three months ended September 30, 2020.

Note 11: Stock-based Compensation

A summary of our aggregate share-based compensation expense is set forth below. Stock-based compensat