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 December 31, 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 February 8, 2022, there were 135,516,513 of the registrant’s common stock outstanding.

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TABLE OF CONTENTS

		Page

Part I	Financial Information

Item 1.	Financial Statements (Unaudited)	5

	Condensed Consolidated Balance Sheets as of December 31, 2021 (Unaudited) and June 30, 2021	5

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

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

	Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2021 and 2020 (Unaudited)	9

	Notes to Condensed Consolidated Financial Statements as of December 31, 2021 (Unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4.	Controls and Procedures	44

Part II	Other Information	44

Item 1.	Legal Proceedings	44

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 3.	Defaults Upon Senior Securities	49

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

Item 6.	Exhibits	49

Exhibit Index		50

Signatures		51

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InnovAge Holding Corp. and Subsidiaries

Quarterly Report on Form 10-Q

For the quarterly period ended December 31, 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,” included in Part I, Item 2, and “Risk Factors,” included in Part II, Item 1A, but may be found in other locations as well. These statements are based upon management’s current expectations, assumptions and estimates and are not guarantees of timing, future results or performance. Therefore, you should not rely on any of these forward-looking statements as predictions of future events. Actual results may differ materially from those contemplated in these statements due to a variety of risks and uncertainties and other factors, including, among other things:

●

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

●

the 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 and recent Chief Executive Officer succession;

●

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

●

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

●

our ability to maintain our corporate culture;

●

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

●

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

●

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

●

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

●

the impact of negative publicity regarding the managed healthcare industry;

●

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

●

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

●

other factors disclosed in the section entitled “Risk Factors” in our Annual Report for the year ended June 30, 2021 filed with the Securities and Exchange Commission (the “SEC”) on September 22, 2021 as well as in this Quarterly Report on Form 10-Q.

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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)


	December 31,		June 30,
	2021		2021
Assets
Current Assets
Cash and cash equivalents	$	216,314	$	201,466
Restricted cash		2,234		2,234
Accounts receivable, net of allowance ($2,861 – December 31, 2021 and $4,350 – June 30, 2021)		33,288		32,582
Prepaid expenses and other		9,458		9,249
Income tax receivable		4,644		5,401
Total current assets		265,938		250,932
Noncurrent Assets
Property and equipment, net		152,200		142,715
Investments		5,493		3,493
Deposits and other		3,966		3,877
Goodwill		124,217		124,217
Intangible assets, net		6,187		6,518
Total noncurrent assets		292,063		280,820
Total assets	$	558,001	$	531,752
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses	$	39,223	$	32,361
Reported and estimated claims		34,607		33,234
Due to Medicaid and Medicare		8,840		7,101
Current portion of long-term debt		3,792		3,790
Current portion of capital lease obligations		2,854		2,079
Total current liabilities		89,316		78,565
Noncurrent Liabilities
Deferred tax liability, net		19,080		15,700
Capital lease obligations		8,788		5,190
Other noncurrent liabilities		2,489		2,758
Long-term debt, net of debt issuance costs		69,892		71,574
Total liabilities		189,565		173,787
Commitments and Contingencies (See Note 9)
Redeemable Noncontrolling Interests (See Note 4)		18,850		16,986
Stockholders’ Equity
Common stock, $0.001 par value; 500,000,000 authorized as of December 31, 2021 and June 30, 2021; 135,516,513 shares issued and outstanding as of both December 31, 2021 and June 30, 2021		136		136
Additional paid-in capital		325,501		323,760
Retained earnings		17,695		10,663
Total InnovAge Holding Corp.		343,332		334,559
Noncontrolling interests		6,254		6,420
Total stockholders’ equity		349,586		340,979
Total liabilities and stockholders’ equity	$	558,001	$	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 December 31,				Six Months Ended December 31,
	2021		2020		2021		2020
Revenues
Capitation revenue	$	174,964	$	156,515	$	347,518	$	308,459
Other service revenue		386		796		902		1,418
Total revenues		175,350		157,311		348,420		309,877
Expenses
External provider costs		91,033		75,145		181,045		148,826
Cost of care, excluding depreciation and amortization		42,911		38,074		83,639		76,357
Sales and marketing		6,679		4,631		12,972		8,743
Corporate, general and administrative		28,482		15,729		49,566		87,306
Depreciation and amortization		3,292		2,992		6,585		5,951
Equity loss		—		541		—		1,342
Other operating income		—		(343)		—		(1,011)
Total expenses		172,397		136,769		333,807		327,514
Operating Income (Loss)		2,953		20,542		14,613		(17,637)

Other Income (Expense)
Interest expense, net		(674)		(6,555)		(1,221)		(12,186)
Loss on extinguishment of debt		—		—		—		(991)
Other income (expense)		28		106		(465)		44
Total other expense		(646)		(6,449)		(1,686)		(13,133)
Income (Loss) Before Income Taxes		2,307		14,093		12,927		(30,770)
Provision for Income Taxes		1,201		4,486		4,197		9,423
Net Income (Loss)		1,106		9,607		8,730		(40,193)
Less: net loss attributable to noncontrolling interests		(217)		(98)		(279)		(243)
Net Income (Loss) Attributable to InnovAge Holding Corp.	$	1,323	$	9,705	$	9,009	$	(39,950)

Weighted-average number of common shares outstanding - basic		135,516,513		116,520,612		135,516,513		118,795,021
Weighted-average number of common shares outstanding - diluted		135,516,513		116,520,612		135,516,513		118,795,021

Net income (loss) per share - basic	$	0.01	$	0.08	$	0.07	$	(0.34)
Net income (loss) per share - diluted	$	0.01	$	0.08	$	0.07	$	(0.34)

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)


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


	For the Six Months Ended December 31, 2021
													Total		Redeemable
				Additional		Retained							Permanent		Noncontrolling
	Capital Stock			Paid-in		Earnings		Treasury Stock			Noncontrolling		Stockholders'		Interests
	Shares	Amount		Capital		(Deficit)		Shares	Amount		Interests		Equity		(Temporary Equity)		Net Income (Loss)

Balances, June 30, 2021	135,516,513		136		323,760		10,663	-		-		6,420		340,979		16,986
Stock-based compensation	-		-		1,741		-	-		-		-		1,741		-
Net income (loss)	-		-		-		9,009					(166)		8,843		(113)
Adjustment to redemption value	-		-		-		(1,977)	-		-		-		(1,977)		1,977	$	-
Balances, December 31, 2021	135,516,513	$	136	$	325,501	$	17,695	-	$	-	$	6,254	$	349,586	$	18,850

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	For the Three Months Ended December 31, 2020
				Additional
	Capital Stock			Paid-in		Retained		Treasury Stock			Noncontrolling
	Shares	Amount		Capital		Earnings		Shares	Amount		Interests		Total
Balances, September 30, 2020	132,718,461	$	133	$	4,026	$	5,626	16,197,849	$	(77,796)	$	6,589	$	(61,422)
Stock-based compensation	—		—		526		—	—		—		—		526
Owner contribution	—		—		20,000		—	—		—		—		20,000
Net income (loss)	—		—		—		9,705	—		—		(98)		9,607
Balances, December 31, 2020	132,718,461	$	133	$	24,552	$	15,330	16,197,849	$	(77,796)	$	6,492	$	(31,289)


	For the Six Months Ended December 31, 2020
				Additional
	Capital Stock			Paid-in		Retained		Treasury Stock			Noncontrolling
	Shares	Amount		Capital		Earnings		Shares	Amount		Interests		Total
Balances, June 30, 2020	132,718,461	$	133	$	36,338	$	64,737	102,030	$	(193)	$	6,735	$	107,750
Treasury stock transaction	—		—		—		—	16,095,819		(77,603)		—		(77,603)
Owner distribution	—		—		—		(9,457)	—		—		—		(9,457)
Time based awards- option cancelation	—		—		(32,358)		—	—		—		—		(32,358)
Stock-based compensation	—		—		572		—	—		—		—		572
Owner contribution	—		—		20,000		—	—		—		—		20,000
Net income (loss)	—		—		—		(39,950)	—		—		(243)		(40,193)
Balances, December 31, 2020	132,718,461	$	133	$	24,552	$	15,330	16,197,849	$	(77,796)	$	6,492	$	(31,289)

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 Six Months Ended December 31,
	2021		2020
Operating Activities
Net income (loss)	$	8,730	$	(40,193)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Loss on disposal of assets		465		—
Provision for uncollectible accounts		2,883		2,712
Depreciation and amortization		6,585		5,951
Loss on extinguishment of long-term debt		—		991
Amortization of deferred financing costs		215		652
Stock-based compensation		1,741		572
Deferred income taxes		3,380		6,084
Loss in equity of nonconsolidated entities		—		1,342
Change in fair value of contingent consideration		—		(1,011)
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable, net		(3,589)		4,171
Prepaid expenses and other		(209)		(385)
Income tax receivable		757		1,738
Deposits and other		(89)		(315)
Accounts payable and accrued expenses		7,596		2,351
Reported and estimated claims		1,373		6,204
Due to Medicaid and Medicare		1,739		8,393
Net cash provided by (used in) operating activities		31,577		(743)
Investing Activities
Purchases of property and equipment		(11,681)		(11,464)
Purchase of intangible assets		—		(2,000)
Purchase of cost method investment		(2,000)		—
Net cash used in investing activities	$	(13,681)	$	(13,464)
Financing Activities
Distributions to owners	$	—	$	(9,457)
Owner contributions		—		20,000
Payments on capital lease obligations		(1,154)		(1,079)
Proceeds from long-term debt		—		300,000
Principal payments on long-term debt		(1,894)		(213,390)
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		(3,048)		(21,365)

INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS & RESTRICTED CASH		14,848		(35,572)
CASH, CASH EQUIVALENTS & RESTRICTED CASH, BEGINNING OF PERIOD		203,700		114,565
CASH, CASH EQUIVALENTS & RESTRICTED CASH, END OF PERIOD	$	218,548	$	78,993

Supplemental Cash Flows Information
Interest paid	$	984	$	8,154
Income taxes paid	$	84	$	1,638
Property and equipment included in accounts payable	$	1,004	$	217
Property and equipment purchased under capital leases	$	5,653	$	3,527

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 (“IPO”), 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 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.

As of December 31, 2021, the Company served approximately 7,050 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 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 six months ended December 31, 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 condensed consolidated financial statements include the accounts of InnovAge, its wholly owned subsidiaries, variable interest entities (“VIEs”)

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

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

Restatement of Prior Period Financial Statements

Subsequent to the issuance of the Company’s condensed 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 restated 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 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 December 31, 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 December 31, 2021 and June 30, 2021:


	Estimated
dollars in thousands	Useful Lives	December 31, 2021		June 30, 2021
Land	N/A	$	11,980	$	11,980
Buildings and leasehold improvements	10 - 40 years		121,644		104,724
Software	3 - 5 years		13,964		13,316
Equipment and vehicles	3 - 7 years		43,006		35,341
Construction in progress	N/A		12,164		22,130
			202,758		187,491
Less accumulated depreciation and amortization			(50,558)		(44,776)
Total property and equipment, net		$	152,200	$	142,715

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Depreciation of $6.1 million and $5.6 million was recorded during the six months ended December 31, 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. We closed all our centers in March 2020 and transitioned to a 100% in-home and virtual care model. We believe that the general lack of in-person interaction and the reduction in healthcare personnel, and specifically, trained personnel, impacted our ability to adhere to the complex government laws and regulations that apply to our business. We remain committed to carrying out our mission of caring for our participants. We continue to closely monitor the impact of COVID-19 on all aspects of our business, including the impacts to our employees, participants and suppliers. 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 provided 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 was to 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, 2020. The Consolidated Appropriations Act, 2021, enacted December 27, 2020, extended this suspension for three more months, through March 31, 2021. H.R. 1868, enacted on April14, 2021 further extends the suspension through December 31, 2021. On December 10, 2021 the “Protecting Medicare and American Farmers from Sequester Cuts Act” extends the 2% Medicare sequester moratorium through March 31, 2022, and adjusts the sequester to 1% between April 1, 2022 and June 30, 2022.

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 during the quarter ended September 30, 2021 and it did not have a material effect on the Company’s condensed 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

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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 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 condensed consolidated financial statements.

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

Note 3:Revenue Recognition

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

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program have similar performance obligations and therefore groups them into one portfolio. This performance obligation is satisfied as the Company provides comprehensive care to its participants.

Our revenues are based on the estimated PMPM amounts we expect to be entitled to receive from the capitated fees per participant that are paid monthly by Medicaid, Medicare, the VA, and private pay sources. Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the PACE program. VA is included in “Private Pay and other” and is also capitated. Private pay includes direct payments from participants who do not qualify for the full capitated rate and have to pay all or a portion of the capitated rate.

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


	December 31,
	2021		2020
Medicaid	54	%	52	%
Medicare	46	%	47	%
Private pay and other	*	%	1	%
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 se