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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________
FORM 10-Q
_______________________________________________________
(Mark One)
x                     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2023
or
o                     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
_______________________________________________________
1.jpg
InnovAge Holding Corp.
(Exact name of registrant as specified in its charter)
_______________________________________________________
Delaware81-0710819
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par valueINNV
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 x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated fileroAccelerated filerx
Non-accelerated fileroSmaller reporting companyxEmerging growth companyx
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of February 5, 2024, there were 135,899,435 of the registrant’s common stock outstanding.


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InnovAge Holding Corp. and Subsidiaries
Quarterly Report on Form 10-Q
For the quarterly period ended December 31, 2023
Cautionary Note on Forward-Looking Statements
Throughout this Quarterly Report on Form 10-Q, we make “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as “may,” “will,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect,” “anticipate,” “target,” “should,” “could,” “potential,” “opportunity,” “goal” or similar terminology. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business, including with respect to current audits and legal proceedings and actions, relationships and discussions with regulatory agencies, our expectations with respect to correcting deficiencies raised in audits and other processes, and our expectations to increase the number of participants we serve, to grow enrollment and capacity within existing centers, to build or open de novo centers, and other similar statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q are generally located under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in Part I, Item 2, and “Risk Factors,” included in Part II, Item 1A, but may be found in other locations as well. These statements are based upon management’s current expectations, projections, assumptions and estimates and are not guarantees of timing, future results or performance. Therefore, you should not rely on any of these forward-looking statements as predictions of future events. Actual results may differ materially from those contemplated in these statements due to a variety of risks and uncertainties and other factors, including, among other things:
the viability of our growth strategy, including our ability to obtain licenses to open our de novo centers in Downey and Bakersfield, California;
our ability to identify and successfully complete and integrate acquisitions;
our ability to attract new participants and retain existing participants and grow our revenue throughout our existing centers;
the results of periodic inspections, reviews, audits and investigations under the federal and state government programs, such as the audit of our Sacramento, California center and the targeted medical review of our San Bernardino, California center, and our ability to sufficiently cure any new and recurring deficiencies identified by the respective federal and state government programs;
the adverse impact of inspections, reviews, audits, investigations, legal proceedings, enforcement actions and litigation, including the current civil investigative demands initiated by federal and state agencies, as well as the litigation and other proceedings initiated by, or on behalf, of our stockholders;
the risk that the cost of providing services will exceed our compensation under the Program of All Inclusive Care for the Elderly (“PACE”);
our increased costs and expenditures in the future and our inability to execute or realize the benefits of our clinical value initiatives;
the impact on our business from ongoing macroeconomic related challenges, including labor shortages and inflation;
the dependence of our revenues and operations upon a limited number of government payors;
the risk that our submissions to government payors may contain inaccurate or unsupportable information, including regarding risk adjustment scores of participants;
the impact on our business of renegotiation, non-renewal or termination of capitation agreements with government payors;
the difficulty to predict our future results, which could cause such results to fall below any guidance we provide;
the impact of state and federal efforts to reduce healthcare spending;
the effects of a pandemic, epidemic or outbreak of an infectious disease, such as COVID-19;
our dependence on our senior management team and other key employees;
the impact of failures by our suppliers or limitations on our ability to access new technology or medical products;
the concentration of our presence in Colorado;
our ability to manage our operations effectively, execute our business plan, maintain effective levels of service and participant satisfaction and adequately address competitive challenges;
our ability to compete in the healthcare industry;
our ability to establish a presence in new geographic markets;
the impact of competition for physicians and other clinical personnel and related increases in our labor costs;
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labor relations matters, including unionization efforts;
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 effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems;
our ability to accurately estimate incurred but not reported medical expense or the risk scores of our participants;
risks associated with our use of “open-source” software;
the impact on our business of the termination of our leases, increases in rent or inability to renew or extend leases;
the impact of weather and other factors beyond our control;
the effect of our relatively limited operating history as a for-profit company on investors' ability to evaluate our current business and future prospects;
our ability to adhere to complex and changing government laws and regulations in the healthcare industry, including U.S. Healthcare reform, the regulation of the corporate practice of medicine and the Health Information Technology for Economic and Clinical Health Act of 2009 (the “HITECH Act”), and their implementing regulations (collectively, “HIPAA”), the California Consumer Privacy Act (“CCPA”) and other privacy laws and regulations in the healthcare industry;
our status as a “controlled company”;
our ability to maintain effective internal controls over financial reporting and other enhanced requirements of being a public company;
our ability to maintain and enhance our reputation and brand recognition;
the impact on our business of disruptions in our disaster recovery systems or business continuity planning;
impact of negative publicity regarding the managed healthcare industry; and
other factors disclosed in the section entitled “Risk Factors” in our Annual Report for the year ended June 30, 2023 filed with the Securities and Exchange Commission (the “SEC”) on September 12, 2023, and our subsequent filings with the SEC.
We 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,
2023
June 30,
2023
Assets
Current Assets
Cash and cash equivalents$54,081 $127,249 
Short-term investments44,690 46,213 
Restricted cash15 16 
Accounts receivable, net of allowance ($5,134 – December 31, 2023 and $4,161 – June 30, 2023)
43,456 24,344 
Prepaid expenses14,460 17,145 
Income tax receivable262 262 
Total current assets156,964 215,229 
Noncurrent Assets  
Property and equipment, net195,623 192,188 
Operating lease assets26,477 21,210 
Investments3,611 5,493 
Deposits and other5,154 3,823 
Goodwill141,565 124,217 
Other intangible assets, net4,868 5,198 
Total noncurrent assets377,298 352,129 
Total assets$534,262 $567,358 
Liabilities and Stockholders' Equity  
Current Liabilities  
Accounts payable and accrued expenses$52,372 $54,935 
Reported and estimated claims47,247 42,999 
Due to Medicaid and Medicare10,264 9,142 
Income tax payable1,212 1,212 
Current portion of long-term debt3,795 3,795 
Current portion of finance lease obligations4,526 4,722 
Current portion of operating lease obligations3,716 3,530 
Deferred revenue 28,115 
Total current liabilities123,132 148,450 
Noncurrent Liabilities  
Deferred tax liability, net6,555 6,236 
Finance lease obligations11,311 13,114 
Operating lease obligations25,943 18,828 
Other noncurrent liabilities1,187 1,086 
Long-term debt, net of debt issuance costs63,162 64,844 
Total liabilities231,290 252,558 
Commitments and Contingencies (See Note 9)  
Redeemable Noncontrolling Interests (See Note 4)11,831 12,708 
Stockholders’ Equity  
Common stock, $0.001 par value; 500,000,000 authorized as of December 31, 2023 and June 30, 2023; 135,893,070 and 135,639,845 issued shares as of December 31, 2023 and June 30, 2023, respectively
136 136 
Additional paid-in capital335,062 332,107 
Retained deficit(49,695)(35,944)
Total InnovAge Holding Corp. 285,503 296,299 
Noncontrolling interests5,638 5,793 
Total stockholders’ equity291,141 302,092 
Total liabilities and stockholders’ equity$534,262 $567,358 
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,
2023202220232022
Revenues
Capitation revenue$188,561 $167,140 $370,734 $338,071 
Other service revenue337 316 648 603 
Total revenues188,898 167,456 371,382 338,674 
Expenses  
External provider costs100,964 93,507 200,322 189,744 
Cost of care, excluding depreciation and amortization54,321 51,376 109,570 104,933 
Sales and marketing5,859 3,774 11,237 8,187 
Corporate, general and administrative25,249 28,817 54,197 58,999 
Depreciation and amortization4,290 3,662 8,559 7,095 
Total expenses190,683 181,136 383,885 368,958 
Operating Loss(1,785)(13,680)(12,503)(30,284)
Other Income (Expense)  
Interest expense, net(935)(223)(1,596)(826)
Other income874 444 1,517 480 
Other expense(1,882) (1,882) 
Total other expense(1,943)221 (1,961)(346)
Loss Before Income Taxes(3,728)(13,459)(14,464)(30,630)
Provision (Benefit) for Income Taxes93 (2,912)319 (6,383)
Net Loss(3,821)(10,547)(14,783)(24,247)
Less: net loss attributable to noncontrolling interests(374)(754)(1,032)(1,381)
Net Loss Attributable to InnovAge Holding Corp.$(3,447)$(9,793)$(13,751)$(22,866)
Weighted-average number of common shares outstanding - basic135,887,613135,578,888135,839,007135,572,503
Weighted-average number of common shares outstanding - diluted135,887,613135,578,888135,839,007135,572,503
Net loss per share - basic$(0.03)$(0.07)$(0.10)$(0.17)
Net loss per share - diluted$(0.03)$(0.07)$(0.10)$(0.17)
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 share amounts)
(Unaudited)
For the Three Months Ended December 31, 2023
Capital StockAdditional
Paid-in
Capital
Retained
Earnings
(Deficit)
Noncontrolling
Interests
Total
Permanent
Stockholders' Equity
Redeemable
Noncontrolling Interests
(Temporary Equity)
Net Income
(Loss)
SharesAmount
Balances, September 30, 2023135,884,840$136 $333,316 $(46,248)$5,705 $292,909 12,138 
Stock-based compensation11,552 — 1,766 — — 1,766 — 
Tax withholding related to net share settlements of stock-based compensation awards(3,322)— (20)— — (20)— 
Net loss— — (3,447)(67)(3,514)(307)(3,821)
Balances, December 31, 2023135,893,070$136 $335,062 $(49,695)$5,638 $291,141 $11,831  
For the Six Months Ended December 31, 2023
Capital StockAdditional
Paid-in
Capital
Retained
Earnings
(Deficit)
Noncontrolling
Interests
Total
Permanent
Stockholders' Equity
Redeemable
Noncontrolling Interests
(Temporary Equity)
Net Income
(Loss)
SharesAmount
Balances, June 30, 2023135,639,845$136 $332,107 $(35,944)$5,793 $302,092 12,708 
Stock-based compensation359,401 — 3,589 — — 3,589 — 
Tax withholding related to net share settlements of stock-based compensation awards(106,176)— (634)— — (634)— 
Net loss— — (13,751)(155)(13,906)(877)(14,783)
Balances, December 31, 2023135,893,070 $136 $335,062 $(49,695)$5,638 $291,141 $11,831  
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For the Three Months Ended December 31, 2022
Capital StockAdditional
Paid-in
Capital
Retained
Earnings
(Deficit)
Noncontrolling
Interests
Total
Permanent
Stockholders' Equity
Redeemable
Noncontrolling Interests
(Temporary Equity)
Net Income
(Loss)
SharesAmount
Balances, September 30, 2022135,570,078$136 $328,708 $(8,344)$6,020 $326,520 14,734 
Stock-based compensation26,147— 1,069 — — 1,069 — 
Adjustments to redemption value— — — — — — 
Net loss— — (9,793)(75)(9,868)(680)(10,547)
Balances, December 31, 2022135,596,225$136 $329,777 $(18,137)$5,945 $317,721 $14,054 $ 
For the Six Months Ended December 31, 2022
Capital StockAdditional
Paid-in
Capital
Retained
Earnings
(Deficit)
Noncontrolling
Interests
Total
Permanent
Stockholders' Equity
Redeemable
Noncontrolling Interests
(Temporary Equity)
Net Income
(Loss)
SharesAmount
Balances, June 30, 2022135,532,811$136 $327,499 $4,729 $6,102 $338,466 15,278 
Stock-based compensation63,414— 2,278 — — 2,278 — 
Adjustments to redemption value— — — — — — 
Net loss— — (22,866)(157)(23,023)(1,224)(24,247)
Balances, December 31, 2022135,596,225$136 $329,777 $(18,137)$5,945 $317,721 $14,054 $ 

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,
20232022
Operating Activities
Net loss$(14,783)$(24,247)
Adjustments to reconcile net loss to net cash used in operating activities  
Gain on disposal of assets(21)(53)
Provision for uncollectible accounts2,881 2,244 
Depreciation and amortization8,559 7,095 
Operating lease rentals2,346 2,335 
Amortization of deferred financing costs215 215 
Stock-based compensation3,589 2,278 
Loss on minority equity interest investment1,882  
Deferred income taxes319 (6,381)
Other9 (424)
Changes in operating assets and liabilities  
Accounts receivable, net(21,430)(4,980)
Prepaid expenses3,014 1,631 
Income tax receivable 3,027 
Deposits and other(1,396)(533)
Accounts payable and accrued expenses(2,245)(544)
Reported and estimated claims4,137 (3,339)
Due to Medicaid and Medicare1,122 1,946 
Operating lease liabilities(2,362)(2,260)
Deferred revenue(28,115) 
Net cash used by operating activities(42,279)(21,990)
Investing Activities  
Purchases of property and equipment(4,157)(14,632)
Purchases of short-term investments(1,179)(45,000)
Proceeds from sale of short-term investments3,000  
Acquisition of business(23,916) 
Net cash used in investing activities$(26,252)$(59,632)
Financing Activities
Payments for finance lease obligations(2,107)(1,452)
Principal payments on long-term debt(1,897)(1,895)
Taxes paid related to net share settlements of stock-based compensation awards(634) 
Net cash used in financing activities(4,638)(3,347)
DECREASE IN CASH, CASH EQUIVALENTS & RESTRICTED CASH(73,169)(84,969)
CASH, CASH EQUIVALENTS & RESTRICTED CASH, BEGINNING OF PERIOD127,265 184,446 
CASH, CASH EQUIVALENTS & RESTRICTED CASH, END OF PERIOD$54,096 $99,477 
Supplemental Cash Flows Information  
Interest paid$1,254 $1,726 
Income taxes paid$ $13 
Property and equipment included in accounts payable$470 $53 
Property and equipment purchased under finance leases$113 $1,541 
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. and its subsidiaries (the "Company") are headquartered in Denver, Colorado. The Company fulfills a broad range of medical and ancillary services for seniors in need of care and support to safely live independently in their communities, including in-center services such as primary care, physical therapy, occupational therapy, speech therapy, dental services, mental health and psychiatric services, meals, and activities; transportation to the Program of All-Inclusive Care for the Elderly (“PACE”) center and third-party medical appointments; and care management. The Company manages its business as one reportable segment, PACE.
As of December 31, 2023, the Company served approximately 6,780 PACE participants, making it the largest PACE provider in the United States of America (the “U.S.”) based upon participants served, and operated 18 PACE centers across California, Colorado, New Mexico, Pennsylvania and Virginia.
PACE is a fully-capitated managed care program, which serves the frail elderly, and predominantly dual-eligible, population in a community-based service model. We define dual-eligible seniors as individuals who are 55+ and qualify for benefits under both Medicare and Medicaid. InnovAge provides all needed healthcare services through an all-inclusive, coordinated model of care, and the Company is at risk for 100% of healthcare costs incurred with respect to the care of its participants. PACE programs receive capitation payments directly from Medicare Parts C and D, Medicaid, Veterans Affairs (“VA”), and private pay sources. Additionally, under the Medicare Prescription Drug Plan, the Centers for Medicare and Medicaid Services (“CMS”) share part of the risk for providing prescription medication to the Company’s participants.
The Company’s common stock is traded 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, 2023 (“2023 10-K”). With the exception of Recently Adopted Accounting Pronouncements described below, there were no significant changes to those accounting policies during the six months ended December 31, 2023.
Basis of Preparation and Principles of Consolidation
The unaudited interim condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such regulations. These financial statements have been prepared on a basis consistent with the accounting principles applied for the fiscal year ended June 30, 2023. In the opinion of management, all adjustments (consisting of all normal and recurring adjustments) considered necessary for a fair presentation have been included. The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, variable interest entities (“VIEs”) for which it is the primary beneficiary and entities for which it has a controlling interest. All intercompany accounts and transactions have been eliminated in consolidation.
The Company does not have any components of comprehensive income and comprehensive income is equal to net loss reported in the statements of operations for all periods presented.
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Property and Equipment
Property and equipment were comprised of the following as of December 31, 2023 and June 30, 2023:
dollars in thousandsEstimated
Useful Lives
December 31, 2023June 30, 2023
LandN/A$11,970 $11,970 
Buildings and leasehold improvements
10 - 40 years
132,553 124,262 
Software
3 - 5 years
29,598 26,656 
Equipment and vehicles
3 - 7 years
60,687 57,754 
Construction in progressN/A40,898 42,223 
275,706 262,865 
Less: accumulated depreciation and amortization(80,083)(70,677)
Total property and equipment, net$195,623 $192,188 
Depreciation of $4.1 million and $3.3 million was recorded during the three months ended December 31, 2023 and 2022, respectively. Depreciation of $8.2 million and $6.5 million was recorded during the six months ended December 31, 2023 and December 31, 2022, respectively.
Recently Adopted Accounting Pronouncements
Financial Instruments
In April 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”), which requires entities to use a current expected credit loss (“CECL”) model to measure impairment for most financial assets that are not recorded at fair value through net income. Under the CECL model, an entity will estimate lifetime expected credit losses considering available relevant information about historical events, current conditions and supportable forecasts. The CECL model does not apply to available-for-sale debt securities. The CECL model is expected to result in more timely recognition of credit losses. The Company adopted the standard on July 1, 2023. Our adoption of the standard did not have a material impact to the condensed consolidated financial statements. The Company makes estimates of expected credit losses based on a combination of factors, including historical losses adjusted for current market conditions, delinquency trends, aging behaviors of receivables and credit and liquidity indicators, and future market and economic conditions and regularly reviews the adequacy of the allowance for credit losses.
Recent Accounting Pronouncements Not Yet Adopted
Segment Reporting
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ASU 2023-07 improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker. Additionally, ASU 2023-07 requires that all existing annual segment disclosures be provided on an interim basis and clarifies that single reportable segment entities are subject to the disclosure requirement under Topic 280 in its entirety. ASU 2023-07 will be applied retrospectively and is effective for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024. Early adoption is permitted. The Company is evaluating the impact of ASU 2023-07 on our condensed consolidated financial statements.
Income Taxes
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 requires additional disclosures related to rate reconciliation, income taxes paid, and other disclosures. ASU 2023-09 requires public companies to annually (i) disclose specific categories in the rate reconciliation and (ii) provide additional information for reconciling items that meet a quantitative threshold. Additionally, ASU 2023-09 requires public companies to annually disclose the amount of income taxes paid, disaggregated by federal, state, and
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foreign taxes, as well as the amount of income taxes paid by individual jurisdiction. For public companies, ASU 2023-09 is effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact of ASU 2023-09 on our 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
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition, the Company performs the following five steps: (i) Identify the contract(s) with a customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance obligations in the contract; and (v) Recognize revenue as the entity satisfies a performance obligation.
Capitation Revenue and Accounts Receivable
Our capitation revenue relates to contracts with participants in which our performance obligation is to provide healthcare services to the participants. Revenues are recorded during the period our obligations to provide healthcare services are satisfied as noted below within each service type. The Company contracts directly with Medicare and Medicaid on a per member, per month (“PMPM”) basis. We receive 100% of the pooled capitated payment to directly provide or manage the healthcare needs of our participants.
Fees are recorded gross in revenues because the Company is acting as a principal in providing for or overseeing comprehensive care provided to the participants. Neither the Company nor any of its affiliates is a registered insurance company because state law in the states in which it operates does not require such registration for risk-bearing providers.
In general, a participant enrolls in the PACE program and is considered a customer of InnovAge. The Company considers all contracts with participants as a single performance obligation to provide comprehensive medical, health, and social services that integrate acute and long-term care. The Company identified that contracts with customers in the PACE program have similar performance obligations and therefore groups them into one portfolio. This performance obligation is satisfied as the Company provides comprehensive care to its participants.
Our revenues are based on the estimated PMPM amounts we expect to be entitled to receive from the capitated fees per participant that are paid monthly by Medicaid, Medicare, the VA, and private pay sources. Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the PACE program. VA is included in “Private Pay and other” and is also capitated. Private pay includes direct payments from participants who do not qualify for the full capitated rate and have to pay all or a portion of the capitated rate. Costs to obtain contracts consist of sales commissions for new enrollees and are included in deposits and other on our condensed consolidated balance sheets. These costs are amortized over a three-year period which corresponds to the average time a participant is enrolled in the PACE program. As of December 31, 2023 and June 30, 2023, contract assets included within deposits and other were $1.9 million and $1.0 million, respectively.
The Company disaggregates capitation revenue from the following sources for the six months ended:
December 31,
20232022
Medicaid55 %55 %
Medicare45 %45 %
Private pay and other*%*%
Total100 %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
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based on various factors. The Company estimates the amount of the adjustment and records it monthly on a straight-line basis. These adjustments are not expected to be material.
The capitation revenues are recognized based on the estimated PMPM transaction price to transfer the service for a distinct increment of the series (i.e. month). We recognize revenue in the month in which participants are entitled to receive comprehensive care benefits during the contract term. As the period between the time of service and time of payment is typically one year or less, the Company elected the practical expedient under ASC 606-10-32-18 and did not adjust for the effects of a significant financing component.
The Company also provides prescription drug benefits in accordance with Medicare Part D. Monthly payments received from CMS and the participants represent the bid amount for providing prescription drug coverage. The portion received from CMS is subject to risk sharing through Medicare Part D risk-sharing corridor provisions. These risk-sharing corridor provisions compare costs targeted in the Company’s bid to actual prescription drug costs. The Company estimates and records a monthly adjustment to Medicare Part D revenues associated with these risk-sharing corridor provisions. Medicare Part D comprised 12% of capitation revenues for each of the three months ended December 31, 2023 and 2022. Medicare Part D comprised of 12% of capitation revenues for each of the six months ended December 31, 2023 and 2022.
Our accounts receivable as of December 31, 2023 and June 30, 2023 are primarily from capitation revenue arrangements. The concentration of net receivables from participants and third-party payers was as follows:
December 31,
2023
June 30,
2023
Medicaid57 %61 %
Medicare36 %29 %
Private pay and other7 %10 %
Total100 %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 $5.1 million as of December 31, 2023, compared to $4.2 million as of June 30, 2023. Accounts are written off as bad debts when they are deemed uncollectible based upon individual credit evaluations and specific circumstances underlying the accounts.
Other Service Revenue and Accounts Receivable
Other service revenue is comprised of rents earned related to Senior Housing and other fee for service revenue. Other service revenue was 0.2% of total revenue for each of the three months ended December 31, 2023 and 2022. Other service revenue was 0.2% of total revenue for each of the six months ended December 31, 2023 and 2022. Accounts receivable related to other service revenue was not significant as of both December 31, 2023 and June 30, 2023.
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to change, as well as government review. Failure to comply with these laws can expose the entity to significant regulatory action, including fines, penalties, and exclusion from the Medicare and Medicaid programs. See Note 9, “Commitments and Contingencies.”
Note 4: Cost Method and Equity Method Investments
The Company holds cost method and equity method investments as of:
in thousandsDecember 31,
2023
June 30,
2023
Cost method investments$2,763 $4,645 
Equity method investments848 848 
Total investments$3,611 $5,493 
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Nonconsolidated Entities
Cost Method Investments
The Company maintains two investments that are accounted for using the cost method. Our ownership interests are less than 20% of the voting stock of the investments and we do not have the ability to exercise significant influence over the operating and financial policies of the investments. 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 and six months ended December 31, 2023 we noted indicators of impairment in one of our investments, and recognized impairment loss of $1.9 million, respectively, and is presented as other expense on our condensed consolidated Statements of Operation. During the three and six months ended December 31, 2022, there were no observable price changes or impairments recorded.
Jetdoc
In August 2021, the Company acquired a minority interest equal to 806,481 shares of the outstanding common stock of Jetdoc, Inc. (“Jetdoc”), a telehealth and virtual urgent care app dedicated to effectively connecting users with medical professionals, for cash consideration of $2.0 million. Subsequent to December 31, 2023, we noted indicators of impairment in our minority equity investment. We determined that indicators were present as of the reporting date and recognized impairment loss of $1.9 million during the three and six months ended December 31, 2023, which are presented as other expense on our condensed consolidated Statements of Operation. During the three and six months ended December 31, 2022, there were no observable price changes or impairment recorded. The balance of the Company’s investment in Jetdoc as of December 31, 2023 is $0.1 million, which represents the maximum exposure to loss.
DispatchHealth
On June 14, 2019, the Company invested $1.5 million in DispatchHealth Holdings, Inc. ("DispatchHealth"), through the purchase of a portion of its outstanding Series B Preferred Stock. On April 2, 2020, the Company invested an additional $1.1 million through the purchase of a portion of its outstanding Series C Preferred Stock. The balance of the Company’s investment as of December 31, 2023 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 insignificant. As of December 31, 2023, the balance of the Company’s investment in PWD was $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
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housing facility. The Company has provided a subordinated loan to SH1 and has provided a guarantee for a convertible term loan held by SH1.
Redeemable Noncontrolling Interest
InnovAge Sacramento
On March 18, 2019, in connection with the formation of InnovAge Sacramento, the joint venture with Adventist Health System/West (“Adventist”) and Eskaton Properties, Incorporated (“Eskaton”), the Company contributed $9.0 million in cash and land valued at $4.2 million for a 59.9% membership interest in the joint venture. Further, Adventist contributed $5.8 million in cash and Eskaton contributed $3.0 million in cash for membership interests of 26.4% and 13.7%, respectively. In fiscal year 2021, the Company made an additional contribution of $52,000 and obtained an additional 0.1% membership interest in the joint venture, which resulted in the Company obtaining control and consolidating InnovAge Sacramento as of January 1, 2021.
The InnovAge California PACE-Sacramento LLC Limited Liability Company Agreement (the “JV Agreement”) includes numerous provisions whereby, if certain conditions are met, the joint venture may be required to purchase, at fair market value, certain members’ interests or certain members may be required to purchase, at fair market value, the interests of certain other members. As of December 31, 2023, none of the conditions specified in the JV Agreement had been met. At the time the Company became a publicly traded company these put rights held by the noncontrolling interests of the joint venture were required to be presented as temporary equity and are recorded as redeemable noncontrolling interests on our condensed consolidated Balance Sheets. Redeemable noncontrolling interest of $11.8 million and $12.7 million were recorded at carrying value as of December 31, 2023 and June 30, 2023, respectively.
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 1Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date
Level 2Quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the assets or liabilities
Level 3Unobservable inputs to the valuation techniques that are significant to the fair value measurements of the assets or liabilities
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The following table shows the Company’s cash, cash equivalents and marketable securities by significant investment category as of December 31, 2023 and June 30, 2023:
December 31, 2023
in thousandsAmortized
Cost
Fair
Value
Cash and
Cash
Equivalents
Short-
term
Investments
Cash $8,038 $8,038 $8,038 $ 
Level 1
Money market funds46,043 46,043 46,043  
Mutual funds44,368 44,690  44,690 
Total$98,449 $98,771 $54,081 $44,690 
June 30, 2023
in thousandsAmortized
Cost
Fair
Value
Cash and
Cash
Equivalents
Short-
term
Investments
Cash$49,775 $49,775 $49,775 $ 
Level 1
Money market funds77,474 77,474 77,474  
Mutual funds46,170 46,213  46,213 
Total$173,419 $173,462 $127,249 $46,213 
Recurring Measurements
The Company’s investment in InnovAge Sacramento includes a put right for the noncontrolling interest holders to require the Company to repurchase the interest of the noncontrolling interest holders at fair value, after the initial term of the management services agreement in 2028. As a result, at each fiscal period end the Company reports this put right at the greater of (i) carrying value of the redeemable noncontrolling interest or (ii) fair value of the redeemable noncontrolling interest. Because this asset does not have observable inputs, Level 3 inputs are used to measure fair value. The fair value of the redeemable noncontrolling interest is determined utilizing a discounted cash flow model. As of December 31, 2023 and June 30, 2023, the Company’s redeemable noncontrolling interest was recorded at carrying value of $11.8 million and $12.7 million, respectively.
There were no transfers in and out of Level 3 during the six months ended December 31, 2023 or 2022.
Note 6: Goodwill and Intangible Assets
Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill amounted to $141.6 million and $124.2 million at each of December 31, 2023 and June 30, 2023. 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 two reporting units. There were no indicators of impairment identified and no goodwill impairments recorded during the six months ended December 31, 2023 and 2022.
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Intangible assets consisted of the following as of:
in thousandsDecember 31,
2023
June 30,
2023
Definite-lived intangible assets$6,600 $6,600 
Indefinite-lived intangible assets2,000 2,000 
Total intangible assets8,600 8,600 
Accumulated amortization(3,732)(3,402)
Balance as of end of period$4,868 $5,198 
Intangible assets consist primarily of customer relationships acquired through business acquisitions. The Company recorded amortization expense of $0.2 million for each of the three months ended December 31, 2023 and 2022. The Company recorded amortization expense of $0.3 million for each of the six months ended December 31, 2023 and 2022.
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 six months ended December 31, 2023 and 2022.
Note 7: Leases
Leasing Arrangements as Lessee
The Company leases certain property and equipment under various third-party operating and finance lease agreements. The Company determines if an arrangement is or contains a lease at the lease inception date by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. The leases are noncancelable and expire on various terms from 2024 through 2032. We determine if an arrangement is a lease upon commencement of the contract. If an arrangement is determined to be a long-term lease (greater than 12 months), we recognize a right-of-use ("ROU") asset and lease liability based on the present value of the future minimum lease payments over the lease term at the commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Our lease terms may also include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have elected to apply the short-term lease exception for contracts that have a lease term of twelve months or less and do not include an option to purchase the underlying asset. Therefore, we do not recognize an ROU asset or lease liability for such contracts. We recognize short-term lease payments as expense on a straight-line basis over the lease term. Variable lease payments that do not depend on an index or rate are recognized as expense. Certain leases include escalations based on inflation indexes and fair market value adjustments. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement for such leases.
The following table presents the components of our ROU assets and their classification in our Balance Sheet at December 31, 2023:
Component of Lease BalancesBalance Sheet Line ItemsDecember 31,
2023
June 30, 2023
in thousands
Assets:
Operating lease assetsOperating lease assets$26,477 $21,210 
Finance lease assetsProperty and equipment, net14,191 16,378 
Total leased assets$40,668 $37,588 
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The following table presents the components of our lease cost and the classification of such costs in our Statements of Operations for the six months ended December 31:
Six Months Ended December 31,
Component of Lease CostStatements of Operations Line Items 20232022
in thousands
Operating lease costCost of care excluding depreciation and amortization and Corporate, general and administrative$2,382 $2,557 
Finance lease expense:
Amortization of leased assetsDepreciation and amortization2,301 1,685 
Interest on lease liabilitiesInterest expense, net 562 
Variable lease costCost of care excluding depreciation and amortization and Corporate, general and administrative52  
Short-term lease costCost of care excluding depreciation and amortization and Corporate, general and administrative94 17 
Total lease expense$4,829 $4,821 
The following table includes the weighted-average lease terms and discount rates for operating and finance leases as of December 31:
Weighted average remaining lease term:December 31,
2023
December 31,
2022
Operating leases14.7 years8.8 years
Finance leases3.5 years3.8 years
Weighted average discount rate:December 31,
2023
December 31,
2022
Operating leases12.85 %6.61 %
Finance leases7.95 %8.53 %
The following table includes the future maturities of lease payments for operating leases and finance leases for periods subsequent to December 31, 2023:
in thousandsOperating
Lease
Finance
Lease
Total
Amount remaining in 2024$3,202 $3,374 $6,576 
20255,660 5,325 10,985 
20265,612 4,302 9,914 
20275,346 3,576 8,922 
20284,545 1,767 6,312 
Thereafter13,089  13,089 
Total lease payments37,454 18,344 55,798 
Less liability accretion / imputed interest(7,795)(2,507)(10,302)
Total lease liabilities29,659 15,837 45,496 
Less: Current lease liabilities3,716 4,526 8,242 
Total long-term lease liabilities$25,943 $11,311 $37,254 
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Note 8. Long-Term Debt
Long-term debt consisted of the following at December 31, 2023 and June 30, 2023:
December 31,
2023
June 30,
2023
in thousands
Senior secured borrowings:
Term Loan Facility$65,625 $67,500 
Convertible term loan2,262 2,284 
Total debt67,887 69,784 
Less: unamortized debt issuance costs930 1,145 
Less: current maturities3,795 3,795 
Noncurrent maturities$63,162 $64,844 
2021 Credit Agreement
On March 8, 2021, the Company entered into a credit agreement (as amended, the “2021 Credit Agreement”) that replaced its prior credit agreement. The 2021 Credit Agreement consists of a senior secured term loan (the “Term Loan Facility”) of $75.0 million principal amount and a revolving credit facility (the “Revolving Credit Facility”) of $100.0 million maximum borrowing capacity, each with a maturity date of March 8, 2026. Borrowing capacity under the Revolving Credit Facility is subject to (i) any issued amounts under our letters of credit, which as of December 31, 2023 was $3.1 million, and (ii) applicable covenant compliance restrictions and any other conditions precedent to borrowing. Loans under the 2021 Credit Agreement are secured by substantially all of the Company’s assets. Principal on the Term Loan Facility is paid each calendar quarter in an amount equal to 1.25% of the initial term loan on closing date.
Outstanding principal amounts under the 2021 Credit Agreement accrue interest at a variable interest rate. As of December 31, 2023, the interest rate on the Term Loan Facility was 7.30%. Under the terms of the 2021 Credit Agreement, the Revolving Credit Facility fee accrues at 0.25% of the average daily unused amount and is paid quarterly. As of December 31, 2023, we had no borrowings outstanding, $3.1 million of letters of credit issued, and $96.9 million of remaining capacity under the Revolving Credit Facility.
The 2021 Credit Agreement requires the Company to meet certain operational and reporting requirements, including, but not limited to, a secured net leverage ratio. Additionally, annual capital expenditures and permitted investments, including acquisitions, are limited to amounts specified in the 2021 Credit Agreement. The 2021 Credit Agreement also provides certain restrictions on dividend payments and other equity transactions and requires the Company to make prepayments under specified circumstances. As of December 31, 2023, the Company was in compliance with the covenants of the 2021 Credit Agreement.
The deferred financing costs of $2.0 million are amortized over the term of the underlying debt and unamortized amounts have been offset against long-term debt in the condensed consolidated balance sheets. Total amortization of deferred financing costs was $0.1 million for each of the three months ended December 31, 2023 and 2022. Total amortization of deferred financing costs was $0.2 million for each of the six months ended December 31, 2023 and 2022.
Convertible Term Loan
On June 29, 2015, SH1 entered into a convertible term loan. Monthly principal and interest payments of $0.02 million commenced on September 1, 2015. The loan bears interest at an annual rate of 6.68%, with the remaining principal balance due upon maturity at August 20, 2030. The loan is secured by a deed of trust to Public Trustee, assignment of leases and rents, security agreements, and SH1’s fixture filing.
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Note 9: Commitments and Contingencies
Professional Liability
The Company pays fixed premiums for annual professional liability insurance coverage under a claims-made policy. Under such policy, only claims made and reported to the insurer are covered during the policy term, regardless of when the incident giving rise to the claim occurred. The Company records claim liabilities and expected recoveries, if any, at gross amounts. The Company is not currently aware of any unasserted claims or unreported incidents that are expected to exceed medical malpractice insurance coverage limits.
Litigation
From time to time, in the normal course of business, the Company is involved in, or subject to, legal proceedings related to its business, including those described below. The Company regularly evaluates the status of claims and legal proceedings in which it is involved in order to assess whether a loss is probable or there is a reasonable possibility that a loss may have been incurred, and to determine whether accruals are appropriate. The Company expenses legal costs as such costs are incurred.
Civil Investigative Demands
In July 2021, the Company received a civil investigative demand from the Attorney General for the State of Colorado under the Colorado Medicaid False Claims Act. The demand requests information and documents regarding Medicaid billing, patient services and referrals in connection with the Company’s PACE program in Colorado. We continue to fully cooperate with the Attorney General and produce the requested information and documentation. We are currently unable to predict the outcome of this investigation.
In February 2022, the Company received a civil investigative demand from the Department of Justice (“DOJ”) under the Federal False Claims Act on similar subject matter. The demand requests information and documents regarding audits, billing, orders tracking, and quality and timeliness of patient services in connection with the Company’s PACE programs in the states where the Company operates (California, Colorado, New Mexico, Pennsylvania, and Virginia). In December 2022, the Company received a supplemental civil investigative demand requesting supplemental information on the same matters. The Company continues to fully cooperate with the DOJ and produce the requested information and documentation. We are currently unable to predict the outcome of this investigation.
Stockholder Lawsuits
On October 14, 2021, and subsequently amended on June 21, 2022, the Company was named as a defendant in a putative class action complaint filed in the District Court for the District of Colorado on behalf of individuals who purchased or acquired shares of the Company’s common stock during a specified period (the "Securities Action"). Through the complaint, plaintiffs are asserting claims against the Company, certain of the Company’s officers and directors, Apax Partners, L.P., Welsh, Carson, Anderson & Stowe and the underwriters in the Company’s IPO, alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 for making allegedly inaccurate and misleading statements and omissions in connection with the Company’s IPO and subsequent earnings calls and public filings, and seeking compensatory damages, among other things. On September 13, 2022, the Company and the officer and director defendants and Apax Partners, L.P. and Welsh, Carson, Anderson & Stowe filed a motion to dismiss the amended complaint for failure to state a claim upon which relief can be granted. On December 22, 2023, the District Court granted in part and denied in part the motion to dismiss. The action is now proceeding to discovery.
On April 20, 2022, the Board of Directors of the Company received a books and records demand pursuant to Section 220 of the Delaware General Corporation Law, from a purported stockholder of the Company, Brian Hall, in connection with the stockholder’s investigation of, among other matters, potential breaches of fiduciary duty, mismanagement, self-dealing, corporate waste or other violations of law by the Company’s Board with respect to these matters. On May 15, 2023, Mr. Hall filed a lawsuit in the Delaware Court of Chancery asserting derivative claims for breach of fiduciary duty against certain of the Company’s current and former officers and directors generally relating to alleged failures by the defendants to take remedial actions to address the matters that resulted in sanctions by CMS at certain of the Company’s centers, and alleged misstatements in the Company’s public filings relating to those matters. On June 28, 2023, upon stipulation of the parties, the court entered an order staying the litigation pending the resolution of the motion to dismiss in
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the Securities Action or upon fifteen days’ notice by any party to the litigation. On January 22, 2024, upon stipulation of the parties, the court entered an order further staying the litigation pending the close of fact discovery in the Securities Action.
We are currently unable to predict the outcome of these matters.
Other Matters
In the third fiscal quarter of 2023, the Company agreed to settle a wage and hour class action lawsuit in the State of California for a cash payment of $1.2 million. Subsequently, the Company was notified of certain additional individual claims and has agreed to include such claims within the class. As a result, in October 2023, the Company agreed to increase the settlement amount to a total of $1.3 million. The agreement is subject to court approval, which we expect to occur in the second half of fiscal 2024.
Because the results of legal proceedings and claims are inherently unpredictable and uncertain, we are currently unable to predict whether the legal proceedings we are involved in will, either individually or in the aggregate, have a material adverse effect on our business, financial condition, or cash flows. The outcomes of legal proceedings and claims could be material to the Company’s operating results for any particular period, depending in part, upon the operating results of such period. Regardless of the outcome, litigation has the potential to have an adverse impact on us due to any related defense and settlement costs, diversion of management resources, and other factors.
Note 10: Stock-based Compensation
A summary of our aggregate stock-based compensation expense is set forth below. Stock-based compensation expense is included in corporate, general and administrative expenses on our condensed consolidated Statements of Operations.
Three months ended December 31,Six months ended December 31,
2023202220232022
in thousandsin thousands
Stock options$216 $261 $439 $533 
Profits interests units253 202 629 456 
Restricted stock units1,297 749 2,521 1,523 
Total stock-based compensation expense$1,766 $1,212 $3,589 $2,512 
2020 Equity Incentive Plan
Profits Interests
TCO Group Holdings, L.P. (the “LP”), the Company’s largest shareholder and prior to the IPO, the Company’s parent, maintains the TCO Group Holdings, L.P. Equity Incentive Plan (the "2020 Equity Incentive Plan") pursuant to which interests in the LP in the form of Class B Units (profits interests) can be granted to employees, directors, consultants, advisers, and other service providers (including partners) of the LP or any of its affiliates, including the Company. A maximum number of 16,162,177 Class B Units are authorized for grant under the 2020 Equity Incentive Plan, and both performance-based and time-based units have been issued under the plan. As of December 31, 2023, a total of 15,222,837 profits interests units had been granted under the 2020 Equity Incentive Plan.
The Company used the Monte Carlo option model to determine the fair value of the profits interests units at the time of the grant. A total of 2,213,700 Class B Units were awarded during the six months ended December 31, 2023 to the Company's Chief Executive Officer, Chief Financial Officer, and Chief Legal Officer. The assumptions under the Monte Carlo model related to the profits interests units, presented on a weighted-average basis, are provided below:
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2023
Expected volatility
74.0-76.0
%
Expected life (years) - time vesting units
3.0 - 3.1
Interest rate
4.52 - 4.57
%
Dividend yield 
Weighted-average fair value$
1.95 - 2.17
Fair value of underlying stock$
5.53 - 7.27
A summary of profits interests activity for the six months ended December 31, 2023 is as follows:
Time-based unit awardsNumber of
units
Weighted average
grant date fair value
Outstanding balance, June 30, 20231,264,337$1.28 
Granted1,106,850$6.21 
Forfeited(380,679)$1.28 
Vested(703,395)$1.28 
Outstanding balance, December 31, 20231,287,113$5.52 
Performance-based unit awardsNumber of
units
Weighted average
grant date fair value
Outstanding balance, June 30, 20232,118,558$0.57 
Granted1,106,850$1.85 
Forfeited(1,853,737)$0.57 
Vested$ 
Outstanding balance, December 31, 20231,371,671$1.60 
The total unrecognized compensation cost related to profits interests units outstanding as of December 31, 2023 was $4.0 million, comprised (i) $1.8 million related to time-based unit awards expected to be recognized over a weighted-average period of 2.9 years and (ii) $2.2 million related to performance-based unit awards, which will be recorded when it is probable that the performance-based criteria will be met.
2021 Omnibus Incentive Plan
In March 2021, the compensation committee of our Board of Directors approved the InnovAge Holding Corp. 2021 Omnibus Incentive Plan (the “2021 Omnibus Incentive Plan”), pursuant to which various stock-based awards may be granted to employees, directors, consultants, and advisers. The total number of shares of the Company’s common stock authorized under the 2021 Omnibus Incentive Plan is 14,700,000. The Company has issued time-based restricted stock units under this plan to its employees which generally vest (i) on March 4, 2023, the second anniversary of the grant date, or (ii) over a three-year period with one-third vesting on each anniversary of the date of grant. Certain other vesting periods have also been used. The grant date fair value of restricted stock units with time based vesting is based on the closing market price of our common stock on the date of grant. Certain awards under this plan vest upon achieving specific share price performance criteria and are determined to have performance-based vesting conditions. The Company has also issued time-based stock options under this plan to its employees which generally vest at various intervals over a three-year period.
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Restricted Stock Units
A summary of time-based vesting restricted stock units activity for the six months ended December 31, 2023 is as follows:
Restricted stock units - time basedNumber of
awards
Weighted
average
grant-date fair
value per share
Outstanding balance, June 30, 20231,873,794$10.10 
Granted437,248$5.53 
Forfeited(23,493)$4.56 
Vested(329,707)$5.88 
Outstanding balance, December 31, 20231,957,842$9.86 
The total unrecognized compensation cost related to time based restricted stock units outstanding as of December 31, 2023 was $7.6 million and is expected to be recognized over a weighted-average period of 1.9 years.
A summary of performance based vesting restricted stock units activity for the six months ended December 31, 2023 is as follows:
Restricted stock units - performance basedNumber of
awards
Weighted
average
grant-date fair
value per share
Outstanding balance, June 30, 2023258,767$5.18 
Granted$ 
Forfeited$ 
Vested$ 
Outstanding balance, December 31, 2023258,767$5.18 
The total unrecognized compensation cost related to performance based vesting restricted stock units outstanding as of December 31, 2023 was $0.6 million and is expected to be recognized over a weighted-average period of 1.9 years.
Nonqualified Stock Options
A summary of time-based vesting stock option activity for the six months ended December 31, 2023 is as follows:
Stock options - time basedNumber of
awards
Weighted
average
grant-date fair
value per share
Outstanding balance, June 30, 2023716,661$1.43 
Granted$ 
Forfeited$ 
Exercised$ 
Expired$ 
Outstanding balance, December 31, 2023716,661$1.43 
Exercisable balance, December 31, 2023330,761$0.18 
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The total unrecognized compensation cost related to time-based vesting stock options outstanding as of December 31, 2023 was $0.2 million and is expected to be recognized over a weighted-average period of 1.8 years.
A summary of performance-based vesting stock option activity for the six months ended December 31, 2023 is as follows:
Stock options - performance basedNumber of
awards
Weighted
average
grant-date fair
value per share
Outstanding balance, June 30, 2023776,299$3.08 
Granted$ 
Forfeited$ 
Vested$ 
Outstanding balance, December 31, 2023776,299$3.08 
The total unrecognized compensation cost related to performance-based vesting stock options outstanding as of December 31, 2023 was $1.1 million and is expected to be recognized over a weighted-average period of 2.0 years.
Note 11: Acquisitions
On December 1, 2023, the Company acquired all of the issued and outstanding membership interests of two California-based PACE programs, ConcertoCare PACE of Bakersfield, LLC and ConcertoHealth PACE of Los Angeles, LLC (collectively "Concerto"), from Perfect Health, Inc. d/b/a ConcertoCare, a tech-enabled, value-based provider of at-home, comprehensive care for seniors and other adults with unmet health and social needs, for $23.9 million. We believe the Concerto acquisition compliments our California PACE centers. The acquisition was funded through cash on hand. Results of operations from the acquisition are included in our condensed consolidated Statements of Operations for the three and six months ended December 31, 2023 and were not significant to our results. We incurred costs related to the acquisition of approximately $0.1 million during the six months ended December 31, 2023. Acquisition related costs were expensed as incurred and have been recorded in corporate, general and administrative expenses in our condensed consolidated Statements of Operations.
The Concerto acquisition was accounted for using the purchase method of accounting. The purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The fair values of assets acquired and liabilities assumed may change as the valuation of intangible assets and overall purchase price allocation is being finalized. Goodwill represents the excess of the purchase price over the fair value
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of net assets acquired. Goodwill recognized represents the estimated future economic benefits arising from expected growth opportunities for the Company and is not deductible for income tax purposes.
The following table presents a preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date:
December 1,
2023
in thousands
Cash Consideration$23,916 
Total Consideration$23,916 
Accounts receivable, net$563 
Prepaid expenses330 
Property and equipment, net7,969 
Operating lease assets6,892 
Goodwill17,348 
Deposits and other343 
Accounts payable and accrued expenses(353)
Reported and estimated claims(111)
Operating lease obligations(8,941)
Finance lease obligations(124)
Fair value of assets and liabilities$23,916 
Note 12: Income Taxes
The Company recorded an income tax expense of $0.1 million and an income tax benefit of $2.9 million for the three months ended December 31, 2023 and 2022, respectively. The Company recorded an income tax expense of $0.3 million and an income tax benefit of $6.4 million for the six months ended December 31, 2023 and 2022, respectively. This represents an effective tax rate of (2.5)% and 20.9% for the three months ended December 31, 2023 and 2022, respectively. This represents an effective tax rate of (2.2)% and 20.9% for the six months ended December 31, 2023 and 2022, respectively.
The effective rate for the six months ended December 31, 2023 was different from the federal statutory rate primarily due to the Company’s book loss offset partially by disallowed officers’ compensation under Internal Revenue Code (“IRC”) Section 162(m), disallowed stock options related to the profit interest units, exclusion of losses from entities not subject to tax, lobbying expenses, and the increase in the Company's valuation allowance against Net operating losses which occurred during the three-month period.
The Company assesses the valuation allowance recorded against deferred tax assets at each reporting date. The determination of whether a valuation allowance for deferred tax assets is appropriate requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize deferred tax assets, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating income taxes, the Company assesses the relative merits and risks of the appropriate income tax treatment of transactions taking into account statutory, judicial, and regulatory guidance. As of the six-month period ended December 31, 2023, the Company determined that it is not “more likely than not” that the deferred tax assets associated with certain state net operating losses will be realized and as such continues to maintain a valuation allowance against these state deferred tax assets. The Company also determined it is not "more likely than not" that the deferred tax assets associated with certain federal net operating losses will be realized and as such has included a valuation allowance against these federal deferred tax assets. The Company has provided $16.8 million at December 31, 2023 and $8.3 million at June 30, 2023, as a valuation allowance against its deferred tax assets for federal and state net operating losses where there is not sufficient positive evidence to substantiate that these deferred tax assets will be realized at a more-likely-than-not level of assurance.
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Note 13: Earnings per Share
Basic earnings (loss) per share (“EPS”) is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding options, using the treasury stock method and the average market price of the Company’s common stock during the applicable period. When a loss from continuing operations exists, all dilutive securities and potentially dilutive securities are anti-dilutive and are therefore excluded from the computation of diluted EPS. When net income from continuing operations exists, performance-based units, are omitted from the calculation of diluted EPS until it is determined that the performance criteria has been met at the end of the reporting period. For the three and six months ended December 31, 2023, 391,598 and 377,025 potentially diluted securities were excluded from the weighted-average shares used to calculate the diluted net loss per common share, respectively, as they would have an anti-dilutive effect. During the three and six months ended December 31, 2022, 424,316 and 14,076 potentially dilutive securities were excluded from the weighted average shares used to calculate the diluted net loss per common share, respectively, as they would have an anti-dilutive effect.
The following table sets forth the computation of basic and diluted net loss per common share:
Three months ended December 31,Six months ended December 31,
in thousands, except share values2023202220232022
Net loss attributable to InnovAge Holding Corp.$(3,447)$(9,793)$(13,751)$(22,866)
Weighted average common shares outstanding (basic)135,887,613135,578,888135,839,007135,572,503
EPS (basic)$(0.03)$(0.07)$(0.10)$(0.17)
Dilutive shares
Weighted average common shares outstanding (diluted)135,887,613135,578,888135,839,007135,572,503
EPS (diluted)$(0.03)$(0.07)$(0.10)$(0.17)
Note 14: Segment Reporting
The Company applies ASC Topic 280, "Segment Reporting," which establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about operations, major customers and the geographies in which the entity holds material assets and reports revenue. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the Company’s chief executive officer, who is the chief operating decision maker (“CODM”), and for which discrete financial information is available. The Company has determined that it has three operating segments, two of which are related to the Company’s PACE offering. The PACE-related operating segments are based on two geographic divisions, which are East and West. Due to the similar economic characteristics, nature of services, and customers, we have aggregated our East and West operating segments into one reportable segment for PACE. The Company’s remaining operating segment primarily relates to Senior Housing, which is an immaterial operating segment, and shown below as "Other" along with certain corporate unallocated expenses.
The Company evaluates performance and allocates capital resources to each segment based on an operating model that is designed to maximize the quality of care provided and profitability. The Company does not review assets by segment and therefore assets by segment are not disclosed below. For the periods presented, all of the Company’s long-lived assets were located in the United States and all revenue was earned in the United States.
The Company’s management uses Center-level Contribution Margin as the measure for assessing performance of its operating segments. Center-level Contribution Margin is defined as total segment revenues less external provider costs and cost of care (excluding depreciation and amortization). The Company allocates corporate level expenses to its segments with a majority of the allocation going to the PACE segment.
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Table of Contents
The following table summarizes the operating results regularly provided to the CODM by reportable segment for the three months ended December 31, 2023 and 2022:
December 31, 2023December 31, 2022
(In thousands)PACE
All other(1)
TotalsPACE
All other(1)
Totals
Capitation revenue$188,561 $ $188,561 $167,140 $ $167,140 
Other service revenue68 269 337 99 217 316 
Total revenues188,629 269 188,898 167,239 217 167,456 
External provider costs100,964  100,964 93,507  93,507 
Cost of care, excluding depreciation and amortization54,171 150 54,321 51,184 192 51,376 
Center-Level Contribution Margin33,494 119 33,613 22,548 25 22,573 
Overhead costs(2)
31,108  31,108 32,532 59 32,591 
Depreciation and amortization4,178 112 4,290 3,555 107 3,662 
Interest expense, net890 45 935 177 46 223 
Other income(874) (874)(444) (444)
Other expense1,882  1,882    
Loss Before Income Taxes$(3,690)$(38)$(3,728)$(13,272)$(187)$(13,459)
The following table summarizes the operating results regularly provided to the CODM by reportable segment for the six months ended December 31, 2023 and 2022:
December 31, 2023December 31, 2022
in thousandsPACE
All other(1)
TotalsPACE
All other(1)
Totals
Capitation revenue$370,734 $ $370,734 $338,071 $ $338,071 
Other service revenue153 495 648 176 427 603 
Total revenues370,887 495 371,382 338,247 427 338,674 
External provider costs200,322  200,322 189,744  189,744 
Cost of care, excluding depreciation and amortization109,267 303 109,570 104,595 338 104,933 
Center-Level Contribution Margin61,298 192 61,490 43,908 89 43,997 
Overhead costs(2)
65,425 9 65,434 67,107 79 67,186 
Depreciation and amortization8,334 225 8,559 6,881 214 7,095 
Interest expense, net1,506 90 1,596 735 91 826 
Other income(1,517) (1,517)(480) (480)
Other expense1,882  1,882