InnovAge Holding Corp

Previous wording

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to our management. Readers are cautioned not to place undue reliance on any forward-looking statements, as forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly due to numerous known and unknown risks and uncertainties, including those discussed below and in the section entitled “Cautionary Note on Forward-Looking Statements.” Those known risks and uncertainties include, but are not limited to, the risk factors identified in the section titled “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (“2023 10-K”).

Current wording

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to our management. Readers are cautioned not to place undue reliance on any forward-looking statements, as forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly due to numerous known and unknown risks and uncertainties, including those discussed below and in the section entitled “Cautionary Note on Forward-Looking Statements.” Those known risks and uncertainties include, but are not limited to, the risk factors identified in the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2024 (“2024 10-K”).

Previous wording

InnovAge Holding Corp. (“InnovAge”) became a public company in March 2021. As of March 31, 2024, the Company served approximately 6,820 PACE participants, and operated 19 PACE centers across California, Colorado, Florida, New Mexico, Pennsylvania, and Virginia.

Current wording

InnovAge Holding Corp. (“InnovAge”) became a public company in March 2021. As of September 30, 2024, the Company served approximately 7,210 PACE participants, and operated 20 PACE centers across California, Colorado, Florida, New Mexico, Pennsylvania, and Virginia.

Previous wording

Census and capitation revenue. On May 11, 2023 the President allowed the national emergency and public health emergency declarations related to the COVID-19 pandemic to expire. While states have resumed processing new Medicaid applications and redeterminations of beneficiary eligibility, the healthcare industry, including the Company, has experienced increased delays in the processing of such applications. As a result of such delays, the Company has experienced an increase in gaps of eligibility with redetermination applications. While the participants continue to receive care and remain enrolled with the Company during this time, the effect of such delays temporarily halts Medicaid revenue related to any closed application and simultaneously increases our risk of revenue recovery. In an effort to mitigate these risks, the Company utilizes State approved third-party eligibility partners to expedite applications, escalate delayed cases to State administrators, and pursue safe discharges for individuals who are truly ineligible. There has not been a material effect on the Company’s financial statements or operations due to this situation. The Company is seeing trends of aging report accounts and financial losses normalizing to pre-public health emergency levels.

Current wording

Census and capitation revenue. We experienced increased gaps of eligibility with redetermination applications during fiscal year 2024 as a result of regulatory agencies processing delays. These gaps of eligibility began to ease during the first quarter of fiscal year 2025 and we continue to partner with State administrators with the intent to further reduce delays through the remainder of the fiscal year. There has not been a material effect on the Company's financial statements or operations due to this situation. The Company expects to continue mitigating measures, which include utilizing State approved third-party eligibility partners to expedite applications, escalate delayed cases to State administrators, and pursue safe discharges for individuals who are truly ineligible, during fiscal year 2025, and will continue to assess the situation as it evolves.

Previous wording

Labor market. The healthcare sector continues to experience a complex set of challenges in hiring additional professionals. We believe these challenges are a result of a combination of factors beyond the direct impact of the COVID-19 pandemic. Specifically, the demand for healthcare services has been steadily increasing due to an aging population and a greater focus on health and wellness in society. In addition, there are systemic challenges related to workforce training and the pipeline of qualified professionals, which have not kept pace with this growing demand. Furthermore, high inflation experienced during fiscal year 2023 and which has continued through fiscal year 2024 has increased the cost of living, and subsequently, wage pressure for healthcare professionals, with a shift towards an employee-centric market with an emphasis on competitive compensation, flexibility and professional growth opportunities, which has contributed to an increasingly competitive labor market. In an effort to mitigate the effects of these challenges, we have adopted strategies to offer competitive compensation packages. Partially as a result of increased competition and other market trends, in conjunction with increased staffing related to compliance and remediation efforts in our centers, there has been an increase in the cost of care for the nine months ended March 31, 2024 compared to the comparable period last year, as discussed in "Results of Operations" below.

Current wording

Labor market. The healthcare sector continues to experience a complex set of challenges in hiring additional professionals. Specifically, the demand for healthcare services has been steadily increasing due to an aging population and a greater focus on health and wellness in society. In addition, there are systemic challenges related to workforce training and the pipeline of qualified professionals, which have not kept pace with this growing demand. Wage pressure in the healthcare industry is a significant concern. Wage pressure arises when there is a high demand for healthcare services but a limited supply of qualified professionals, leading to increased competition for workers and upward pressure on wages. The rapidly aging population has increased the demand for healthcare services, especially for geriatrics. Simultaneously, many experienced healthcare workers are reaching retirement age, reducing the workforce supply.

Previous wording

Additionally, on October 13, 2023, California passed into law California Senate Bill No. 525 ("SB 525"), which raises the minimum wage for many California healthcare workers, effective as of June 1, 2024. Although PACE centers are not covered by SB 525, many of our contractors and other third-party providers are impacted by SB 525, and due to this and other macroeconomic factors, our California centers have started receiving provider requests to increase rates to cover their increased costs. SB 525 has also had the effect of increasing provider rates from our California housing providers. Competition with other healthcare providers who are required to increase wages under SB 525 could materially increase our labor costs. We will continue to evaluate the impact of this legislation on our business. For the nine months ended March 31, 2024, we did not suffer a material impact to our financial statements or operations related to this trend.

Current wording

Additionally, as a result of the adoption of California Senate Bill No. 525 ("SB 525"), which raises minimum wage for many California healthcare workers and will impact many of our contractors and other third-party providers, combined with other macroeconomic factors, our California centers have received provider requests to increase rates to cover their increased labor costs. As a result of competition generated by SB 525 and other California market conditions, we have increased our wages for healthcare workers and other comparable market positions in the California market. These increases did not have a material impact on our labor costs, financial statements or operations for fiscal year 2024 or the three months ended September 30, 2024. We will continue to evaluate the impact of this legislation on our business.

Previous wording

For additional information on the various risks posed by macroeconomic events, regulation, and employee matters, please see the section entitled “Risk Factors” included in Part I, Item 1A of our 2023 10-K and in Part II, Item 1A of this Form 10-Q.

Current wording

For additional information on the various risks posed by macroeconomic events, regulation, and employee matters, please see the section entitled “Risk Factors” included in Part I, Item 1A of our 2024 10-K.

Previous wording

Medicare-eligible patients, including those in Medicare Advantage (“MA”) programs. As a result, we receive larger payments for our participants compared to MA participants. This is driven by two factors: (i) we manage a higher acuity population, with an average risk adjustment factor (“RAF”) score of 2.47 based on InnovAge data as of March 31, 2024; and (ii) we manage Medicaid spend in addition to Medicare. Our participants are managed on a capitated, or at-risk basis, where InnovAge is financially responsible for all of participant medical costs. Our comprehensive care model and globally capitated payments are designed to cover participants from enrollment until the end of life, including coverage for participants requiring hospice and palliative care. For dual-eligible participants, we receive per member, per month (“PMPM”) payments directly from Medicare and Medicaid, which provides recurring revenue streams and significant visibility into our revenue. The Medicare portion of our capitated payment is risk-based, taking into account the underlying medical conditions and frailty of each participant. We continue to work on expanding payer capabilities so that our revenue more accurately reflects the acuity of the populations we serve.

Current wording

•Our participants. We focus on providing all-inclusive care to frail, high-cost, dual-eligible seniors. We directly contract with government payors, such as Medicare and Medicaid, through PACE and receive a capitated risk-adjusted payment to manage the totality of a participant’s medical care across all settings. InnovAge manages participants that are, on average, more complex and medically fragile than other Medicare-eligible patients, including those in Medicare Advantage (“MA”) programs. As a result, we receive larger payments for our participants compared to MA participants. This is driven by two factors: (i) we believe we manage a higher acuity population, with an average risk adjustment factor (“RAF”) score of 2.57 based on InnovAge data as of September 30, 2024; and (ii) we have Medicaid spend in addition to Medicare. Our participants are managed on a capitated, or at-risk basis, where InnovAge is financially responsible for all participant medical costs. Our comprehensive care model and globally capitated payments are designed to cover participants from enrollment until the end of life, including coverage for participants requiring hospice and palliative care. For dual-eligible participants, we receive per member, per month (“PMPM”) payments directly from Medicare and Medicaid, which provides recurring revenue streams and significant visibility into our revenue. The Medicare portion of our capitated payment is risk-based on the underlying medical conditions and frailty of each participant. We continue to strengthen our expanding payer capabilities so that our revenue more accurately reflects the acuity of the populations we serve.

Previous wording

•Our ability to grow enrollment and capacity within existing centers. We believe all seniors should have access to the type of all-inclusive care offered by the PACE model. Several factors can affect our ability to grow enrollment and capacity within existing centers, including sanctions issued by regulators, such as the ones we were subject to in our Sacramento, California and Colorado centers.

Current wording

•Our ability to grow enrollment and capacity within existing centers. We believe all seniors should have access to the type of all-inclusive care offered by the PACE model. Several factors can affect our ability to grow enrollment and capacity within existing centers, including sanctions issued by regulators or suspensions of State attestations required to open new de novo centers.

Previous wording

•Our ability to maintain high participant satisfaction and retention. We achieved an 86% participant satisfaction rating as of September 30, 2023, measured as composite of participant satisfaction across ten categories, and average participant tenure was 3.1 years as of March 31, 2024, measured as tenure from enrollment to disenrollment, among our centers that have been operated by us for at least five years. Furthermore, we experience low levels of controllable disenrollment, averaging 6.0% annually over the last three fiscal years.

Current wording

•Our ability to maintain high participant satisfaction and retention. Our comprehensive individualized care model and frequency of interaction with participants generates high levels of participant satisfaction. Our average participant tenure was 3.1 years as of September 30, 2024, measured as tenure from enrollment to disenrollment, among our centers that have been operated by us for at least five years. Furthermore, we experience low levels of voluntary disenrollment, averaging 6.9% annually over the last three fiscal years.

Previous wording

•Effectively managing the cost of care for our participants. We receive capitated payments to manage the totality of a participant’s medical care across all settings. The risk pool of our population became more acute in fiscal year 2023 as we were not able to replenish our population mix with newer, lower-acuity participants as a result of State sanctions. As a result of this dynamic, together with the factors disclosed above (increased salaries, wages and benefits, increased fleet and contract transportation costs, annual increases in assisted living and nursing facility unit cost and general medical inflation) our external provider costs and cost of care, excluding depreciation and amortization, represented approximately 83% of our revenue in the nine months ended March 31, 2024. While we are liable for potentially large medical claims, our care model focuses on delivering high-quality medical care in cost efficient, community-based settings as a means of avoiding costly inpatient and outpatient services. However, our participants retain the freedom to seek care at sites of their choice, including hospitals and emergency rooms; we do not restrict participant access to care.

Current wording

•Effectively managing the cost of care for our participants. We receive capitated payments to manage the totality of a participant’s medical care across all settings. The risk pool of our population became more acute in fiscal year 2023 as we were not able to replenish our population mix with newer, lower-acuity participants as a result of State sanctions. Together with the factors disclosed above (increased salaries, wages and benefits, increased fleet and contract transportation costs, annual increases in assisted living and nursing facility unit cost and general medical inflation) our external provider costs and cost of care, excluding depreciation and amortization, represented approximately 83% of our revenue in the three months ended September 30, 2024.

Previous wording

•Center-level Contribution Margin. As we serve more participants in existing centers, we leverage our fixed cost base at those centers and the value of a center to our business increases over time. For the nine months ended March 31, 2024, census has grown 8.1% compared to the nine months ended March 31, 2023.

Current wording

•Center-level Contribution Margin. The Company's management uses Center-level Contribution Margin as the measure for assessing performance of its operating segments. As we serve more participants in existing centers, we expect to leverage our fixed cost base at those centers and increase the value of a center to our business increases over time.

Previous wording

All new PACE centers are subject to annual federal and state audits for the first three years after opening. In October 2023, CMS and the California Department of Health Care Services (“DHCS") conducted a joint routine audit of our Sacramento center. On January 23, 2024, DHCS notified us of their preliminary audit findings at our Sacramento center and that, based on concerns that it had been alerted to, it would be conducting a medical review of our San Bernardino center. In response to both of these matters, DHCS notified us that it was suspending its attestations in support of the planned de novo center in Downey and the recently acquired planned de novo center in Bakersfield. On February 1, 2024, we received the final audit results from DHCS notifying us of identified deficiencies at our Sacramento center, some of which fall under the same categories as those that formed the basis of the enrollment freeze in 2021. On March 4, 2024, we submitted a CAP to DHCS. On March 19, 2024, CMS released us from the approved CAP and officially closed its portion of the Sacramento audit on April 4, 2024. DHCS's process is ongoing. While the planned California de novo centers are precluded from opening at this time, DHCS notified us that it would consider restoring the State Attestations upon our successful remediation of the deficiencies raised in our Sacramento center and its completion of the medical review (and any potential resultant remediation that may be required)

Current wording

•Our ability to expand via de novo centers within existing and new markets. Several factors can affect our ability to open de novo centers, including sanctions issued by regulators, legal, community or other obstacles in the construction of such centers, and our ability to hire and train enough workers to ramp up these centers to maturity. In response to an audit to our Sacramento center and a medical review of our San Bernardino center, which have been previously disclosed, the California Department of Health Care Services (“DHCS") notified us that it was suspending its attestations in support of the planned de novo center in Downey and the recently acquired planned de novo center in Bakersfield. CMS has closed its process and DHCS's process is ongoing. While the planned California de novo centers are precluded from opening at this time, DHCS notified us that it would consider restoring the State Attestations upon our successful remediation of the deficiencies raised in our Sacramento center and its completion of the medical review (and any potential resultant remediation that may be required) in our San Bernardino center.

Previous wording

•Our ability to effectively implement post-sanction remediation efforts in our centers as a result of our recent audits and maintain high quality of regulatory compliance. The Company’s priority is to continue to remediate the deficiencies raised in audit processes (including recent and new audits) and to implement post-sanction corrective actions, where required, as well as maintain high quality of regulatory compliance in all its centers. As part of its actions to do so, the Company has worked with the appropriate authorities to make the necessary changes within the Company to improve care coordination and care documentation among our centers, including working to fill critical personnel gaps at our centers, standardizing the process of our Interdisciplinary Care Teams (“IDTs”), strengthening our home care network and reliability, improving timelines of scheduling and coordinating care with providers outside our centers, among others.

Current wording

•Our ability to maintain high quality of regulatory compliance. The Company's priority is to continue to maintain high quality of regulatory compliance in all its centers.

Previous wording

•Investing to support growth. We intend to continue investing in our centers, value-based care model, and sales and marketing organization to support long-term growth. We expect our expenses to increase in absolute dollars for the foreseeable future to support our growth and due to additional costs we are incurring or expect to incur in connection with our current and future audits to our centers, our post-audit remediation plans and current and potential legal and regulatory proceedings. We plan to invest in future growth judiciously and maintain focus on managing our results of operations. We are building capabilities to increase our sophistication as a payor to drive clinical value, improve outcomes, and manage cost trends. Accordingly, in the short term, we expect the activities noted above to increase our expenses as a percentage of revenue, but in the longer term, we anticipate that these investments will positively impact our business and results of operations.

Current wording

•Investing to support growth. We intend to continue investing in our centers, value-based care model, and sales and marketing organization to support long-term growth. We expect our expenses to increase in absolute dollars for the foreseeable future to support our growth due, partially, to additional costs we incur in connection with our audits to our centers, remediation plans and current and potential legal and regulatory proceedings. We plan to invest in future growth judiciously and maintain focus on managing our results of operations. We are investing to increase our sophistication as a payor to drive clinical value, improve outcomes, and manage cost trends. Accordingly, in the short term, we expect the activities noted above to increase our expenses as a percentage of revenue, but in the longer term, we anticipate that these investments will positively impact our business and results of operations.

Previous wording

•Seasonality of our business. Our operational and financial results, including medical costs and per-participant revenue true-ups, experience some variability depending upon the time of year in which they are measured. Medical costs vary most significantly as a result of (i) the weather, with certain illnesses, such as the influenza virus, being more prevalent during colder months of the year, which generally increases per-participant costs, and (ii) the number of business days in a period, with shorter periods generally having lower medical costs, all else equal. Per-participant revenue true-ups represent the difference between our estimate of per-participant capitation revenue to be received and actual revenue received by CMS, which is based on CMS’s determination of a participant’s RAF score as measured twice per year and is based on the evolving acuity of a participant. Where there is a difference between our estimate and the final determination from CMS, we may receive incremental true-up revenue or be required to repay certain amounts. Historically, these true-up payments typically occur between May and August, but the timing of these payments is determined by CMS, and we have neither visibility into nor control over the timing of such payments. The variability of participant enrollments during the open enrollment period has also been impacted by additional offerings by MA and other competitors. We believe that, as a result of these additional offerings, we experienced higher than expected disenrollments during the third quarter of fiscal 2024.

Current wording

•Seasonality of our business. Our operational and financial results, including medical costs and per-participant revenue true-ups, will experience some variability depending upon the time of year in which they are measured. Medical costs vary most significantly as a result of (i) the weather, with certain illnesses, such as the influenza and COVID-19 viruses, being more prevalent during colder months of the year, which generally increases per-participant costs, and (ii) the number of business days in a period, with shorter periods generally having lower medical costs, all else equal. Per-participant revenue true-ups represent the difference between our estimate of per-participant capitation revenue to be received and actual revenue received from CMS, which is based on CMS’s determination of a participant’s RAF score as measured twice per year and is based on the evolving acuity of a participant. Where there is a difference between our estimate and the final determination from CMS, we may record either an increase or decrease in true-up revenue. Historically, these true-up payments typically occur between May and August, but the timing of these payments is determined by CMS, and we have neither visibility into nor control over the timing of such payments. The variability of participant enrollments during the open enrollment period has also been impacted by additional offerings by MA and other competitors. We believe that, as a result of these additional offerings, we experienced higher than expected disenrollments during the third quarter of fiscal 2024.

Previous wording

Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the PACE program. The PACE state contracts between us and the respective state Medicaid administering agency are renewed annually each June 30 in all states other than California and Pennsylvania, which contract on a calendar-year basis. We are currently operating in good standing under each of our PACE state contracts. For a discussion of our revenue recognition policies, please see Critical

Current wording

Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the PACE program. The PACE state contracts between us and the respective state Medicaid administering agency are renewed annually each June 30 in all states other than California and Pennsylvania, which contract on a calendar-year basis. We are currently operating in good standing under each of our PACE state contracts. For a discussion of our revenue recognition policies, please see Critical Accounting Estimates below and Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2024 10-K.

Previous wording

Other Service Revenue. Other service revenue primarily consists of revenues derived from fee-for-service arrangements, state food grants, rent revenues and management fees. For a discussion of our revenue recognition policies, please see Critical Accounting Estimates below and Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2023 10-K.

Current wording

Other Service Revenue. Other service revenue primarily consists of revenues derived from state food grants and rent revenues. For a discussion of our revenue recognition policies, please see Critical Accounting Estimates below and Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2024 10-K.

Previous wording

Sales and Marketing. Sales and marketing expenses consist of employee-related expenses, including salaries, commissions, and employee benefits costs, for all employees engaged in marketing, sales, community outreach and sales support. These employee-related expenses capture all costs for both our field-based and corporate sales and marketing teams. Sales and marketing expenses also include local and centralized advertising costs, as well as the infrastructure required to support our marketing efforts. We expect these costs to increase in absolute dollars over time as we grow our participant census. We evaluate our sales and marketing expenses relative to our participant growth and will invest more heavily in sales and marketing from time-to-time to the extent we believe such investment can accelerate our growth without negatively affecting profitability.

Current wording

Sales and Marketing. Sales and marketing expenses consist of employee-related expenses, including salaries, commissions, and employee benefits costs, for all employees engaged in marketing, sales, community outreach and sales support as well as financial eligibility support for both prospective and existing participants. These employee-related expenses capture all costs for both our field-based and corporate sales and marketing teams. Sales and marketing expenses also include local and centralized advertising costs, as well as the infrastructure required to support our marketing efforts. We expect these costs to increase in absolute dollars over time as we continue to grow our participant census. We evaluate our sales and marketing expenses relative to our participant growth and will invest more heavily in sales and marketing from time-to-time to the extent we believe such investment can accelerate our growth without negatively affecting profitability.

Previous wording

Corporate, General and Administrative. Corporate, general and administrative expenses include employee-related expenses, including salaries and related costs. In addition, general and administrative expenses include all corporate technology and occupancy costs associated with our corporate office. We expect our general and administrative expenses to increase in absolute dollars due to the additional legal, accounting, insurance, investor relations and other costs that we incur as a public company, as well as other costs associated with compliance and continuing to grow our business. However, we anticipate general and administrative expenses to decrease as a percentage of revenue over the long term, although such expenses may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses.

Current wording

Corporate, General and Administrative Expenses. Corporate, general and administrative expenses include employee-related expenses, including salaries and related costs. In addition, general and administrative expenses include all corporate technology and occupancy costs associated with our corporate office. We expect our general and administrative expenses to increase in absolute dollars due to the additional legal, accounting, insurance, investor relations and other costs that we incur as a public company, as well as other costs associated with compliance and continuing to grow our business. However, we anticipate general and administrative expenses to decrease as a percentage of revenue over the long term, although such expenses may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses.

Previous wording

Capitation revenue. Capitation revenue was $192.8 million for the three months ended March 31, 2024, an increase of $20.6 million, or 11.9%, compared to $172.2 million for the three months ended March 31, 2023. This increase was driven by an $8.8 million, or 4.8%, increase in capitation rates coupled with $11.8 million, or 6.8%, increase in member months. The increase in capitation rates was primarily driven by (i) a 6.7% annual increase in Medicaid capitation rates as determined by the States and (ii) a 2.7% increase in Medicare capitation rates as a result of increased risk score and county rates. The increase in member months is primarily due to the release from sanctions at our Colorado and Sacramento centers.

Current wording

Capitation revenue. Capitation revenue was $204.8 million for the three months ended September 30, 2024, an increase of $22.6 million, or 12.4%, compared to $182.2 million for the three months ended September 30, 2023. This increase was driven by a $5.4 million, or 2.7%, increase in capitation rates coupled with $17.2 million, or 9.4%, increase in member months. The increase in capitation rates was primarily driven by (i) a 4.3% annual increase in Medicaid capitation rates as determined by the States and (ii) a 0.8% increase in Medicare capitation rates as a result of increased risk score and county rates. The increase in member months is primarily due to growth in our California and Colorado centers and to a lesser extent due to the addition of de novo centers in Florida and the Concerto acquisition.

Previous wording

External provider costs. External provider costs were $100.0 million for the three months ended March 31, 2024, an increase of $10.2 million, or 11.3%, compared to $89.8 million for the three months ended March 31, 2023. The increase was primarily driven by an increase of $4.1 million, or 4.2%, in cost per participant coupled with an increase of $6.1 million, or 6.8% in member months. The increase in cost per participant was primarily driven by an annual increase in pharmacy cost, an increase in assisted living utilization and unit cost, and an increase in professional services utilization. This was partially offset by a decrease in permanent nursing facility utilization.

Current wording

External provider costs. External provider costs were $107.2 million for the three months ended September 30, 2024, an increase of $7.9 million, or 7.9%, compared to $99.4 million for the three months ended September 30, 2023. The increase was primarily driven by an increase of $9.4 million, or 9.4%, in member months partially offset by a decrease of $1.5 million, or 1.4% in cost per participant. The decrease in cost per participant was primarily driven by a decrease in permanent nursing facility utilization and a decrease in external hospice care associated with the transition of this function to internal clinical resources. This is partially offset by an annual increase in pharmacy cost, and an annual increase in assisted living and permanent nursing facility unit cost.

Previous wording

Cost of care (excluding depreciation and amortization). Cost of care (excluding depreciation and amortization) expense was $59.1 million for the three months ended March 31, 2024, an increase of $5.1 million, or 9.5%, compared to $53.9 million for the three months ended March 31, 2023, primarily due to an increase of $1.4 million, or 2.5%, in cost per participant coupled with an increase of $3.7 million, or 6.8%, in member months. The increase was primarily driven by (i) a $3.2 million increase in salaries, wages and benefits associated with increased headcount and higher wage rates, (ii) $0.9 million in increased software license fees, and (iii) $0.4 million in increased fleet expense and contract transportation a result of an increase in external appointments, (iv) $0.6 million in contract provider expense in California associated with growth, and (v) $0.8 million in de novo occupancy and administrative expense associated with opening centers in Florida and the Concerto acquisition, partially offset by $1.1 million reduction in third party audit and compliance support.

Current wording

Cost of care (excluding depreciation and amortization). Cost of care (excluding depreciation and amortization) expense was $63.4 million for the three months ended September 30, 2024, an increase of $8.1 million, or 14.7%, compared to $55.3 million for the three months ended September 30, 2023, primarily due to an increase of $2.9 million, or 4.8%, in cost per participant coupled with an increase of $5.2 million, or 9.4%, in member months. The increase was primarily driven by (i) a $5.6 million increase in salaries, wages and benefits associated with increased headcount and higher wage rates, (ii) $0.8 million in increased software license fees, (iii) $0.6 million in contract provider expense in California associated with growth, (iv) $0.5 million in contract provider recruiting and (v) $0.8 million in de novo occupancy and administrative expense associated with opening centers in Florida and the Concerto acquisition, partially offset by $0.8 million reduction in contract transportation associated with transition of services to internal transportation resources.

Previous wording

Sales and marketing. Sales and marketing expenses were $7.2 million for the three months ended March 31, 2024, an increase of $1.9 million, or 35.1%, compared to $5.3 million for the three months ended March 31, 2023, primarily due to increased marketing spend and headcount as a result of the sanction release in our Colorado and Sacramento centers.

Current wording

Sales and marketing. Sales and marketing expenses were $6.5 million for the three months ended September 30, 2024, an increase of $1.1 million, or 20.7%, compared to $5.4 million for the three months ended September 30, 2023, primarily due to increased headcount to support growth.

Previous wording

Corporate, general and administrative. Corporate, general and administrative expenses were $27.5 million for the three months ended March 31, 2024, a decrease of $0.1 million, or 0.4%, compared to $27.6 million for the three months ended March 31, 2023. The decrease was primarily due to (i) $1.7 million reduction in third party legal expense, (ii) $0.4 million reduction in insurance expense, (iii) $0.8 million reduction in consulting expense associated with improving organizational capabilities including the transition to a new electronic medical record ("EMR") system, and (iv) $0.8 million reduction in software license and maintenance expense, inclusive of Epic license fees. These decreases in cost were partially offset by (i) $0.6 million increase in employee compensation and benefits as the result of an increase in headcount to support compliance and bolster organizational capabilities, (ii) $0.2 million in consulting costs associated with Sarbanes-Oxley Act of 2002 compliance and internal audit, (iii) $0.4 million in administrative and travel expense, and (iv) $2.3 million in bad debt expense.

Current wording

Corporate, general and administrative. Corporate, general and administrative expenses were $27.5 million for the three months ended September 30, 2024, a decrease of $1.4 million, or 4.9%, compared to $28.9 million for the three months ended September 30, 2023. The decrease was primarily due to (i) $0.5 million reduction in insurance expense, (ii) $2.7 million reduction in consulting expense associated with improving organizational capabilities including the transition to a new electronic medical record ("EMR") system, and (iii) $0.4 million reduction in consulting costs associated with Sarbanes-Oxley Act of 2002 compliance and internal audit. These decreases in cost were partially offset by a $2.4 million increase in employee compensation and benefits as the result of an increase in headcount to support compliance and bolster organizational capabilities.

Previous wording

Interest expense, net. Interest expense, net, consists primarily of interest payments on our outstanding borrowings, net of interest income earned on our cash and cash equivalents and restricted cash. Interest expense, net was $1.0 million for the three months ended March 31, 2024, an increase of $0.6 million, or 152.3%, compared to $0.4 million for the three months ended March 31, 2023. The increase was primarily due to interest expense of $1.7 million, which was offset by interest income of $0.7 million from money market funds for the three months ended March 31, 2024. Interest expense of $1.4 million was offset by interest income of $1.0 million during the three months ended March 31, 2023.

Current wording

Interest expense, net. Interest expense, net, consists primarily of interest payments on our outstanding borrowings, net of interest income earned on our cash and cash equivalents and restricted cash. Interest expense, net was $1.2 million for the three months ended September 30, 2024, an increase of $0.6 million, or 88.0%, compared to $0.7 million for the three months ended September 30, 2023. The increase was primarily due to interest expense of $1.7 million, which was offset by interest income of $0.5 million from money market funds for the three months ended September 30, 2024. Interest expense of $1.7 million was offset by interest income of $1.1 million during the three months ended September 30, 2023.

Previous wording

Other income (expense). Other income (expense) consists primarily of the net proceeds received from the sale of or disposal of property and equipment and unrealized gains and losses related to short-term investments. Other income (expense) for the three months ended March 31, 2024 increased $0.6 million, or 619.8%, when compared to the three months ended March 31, 2023. The increase was primarily due to dividends received from our short-term investments of $0.6 million for the three months ended March 31, 2024 compared to dividends of $0.4 million, offset by a loss of $0.6 million related to the termination of the Germantown, Pennsylvania center lease upon consolidation of the center with other centers, for the three months ended March 31, 2023.

Current wording

Other income. Other income consists primarily of the net proceeds received from the sale of or disposal of property and equipment, unrealized gains and losses and investment income related to short-term investments. Other income for the three months ended September 30, 2024 increased $0.2 million, or 29.5%, when compared to the three months ended September 30, 2023. The increase was primarily due to unrealized gains of $0.2 million for the three months ended September 30, 2024.

Previous wording

The Company and its subsidiaries calculate federal and state income taxes currently payable and for deferred income taxes arising from temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured pursuant to enacted tax laws and rates applicable to periods in which those temporary differences are expected to be recovered or settled. The impact on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment. The members of InnovAge Senior Housing Thornton, LLC ("SH1") and InnovAge Sacramento have elected to be taxed as partnerships, and no provision for income taxes for SH1 or InnovAge Sacramento is included in these condensed consolidated financial statements.

Current wording

The Company and its subsidiaries calculate federal and state income taxes currently payable and for deferred income taxes arising from temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured pursuant to enacted tax laws and rates applicable to periods in which those temporary differences are expected to be recovered or settled. The impact on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment. The members of InnovAge Senior Housing Thornton, LLC ("SH1") and InnovAge Sacramento have elected to be taxed as partnerships, and no provision (benefit) for income taxes for SH1 or InnovAge Sacramento is included in the condensed consolidated financial statements. Further, the Company entered into a joint venture called InnovAge Florida PACE – Orlando on May 28, 2024 and its members elected to be taxed as a partnership. No provision (benefit) for income taxes for InnovAge Orlando is included in the condensed consolidated financial statements for activity occurring from joint venture formation date through the balance of the fiscal year.

Previous wording

A valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized. Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination based on the technical merits of the position. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalty expense associated with uncertain tax positions as a component of provision for income taxes.

Current wording

A valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized. Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination based on the technical merits of the position. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalty expense associated with uncertain tax positions as a component of provision (benefit) for income taxes.

Previous wording

During the three months ended March 31, 2024 and 2023, we reported a benefit for income taxes of $0.2 million and $1.4 million, respectively. During the nine months ended March 31, 2024 and 2023, we reported a provision for income taxes of $0.1 million and benefit of $(7.7) million, respectively. The decrease of $7.8 million is primarily due (i) our pretax book loss recognized during the nine months ended March 31, 2024, as compared to pretax book loss recognized during the nine months ended March 31, 2023 and (ii) the change in our valuation allowance.

Current wording

During the three months ended September 30, 2024 and 2023, we reported an income tax expense of $0.4 million and $0.2 million, respectively. The increase of $0.2 million is primarily due to (i) our pretax book loss recognized during the three months ended September 30, 2024, as compared to pretax book loss recognized during the three months ended September 30, 2023, (ii) a discrete item to account for the impact of the decreasing Pennsylvania tax rate on our state deferred tax liabilities, and (iii) the change in our valuation allowance.

Previous wording

During the nine months ended March 31, 2024 and 2023, we reported net loss of $21.0 million and $31.6 million, respectively, consisting of (i) loss from operations of $18.3 million and $38.5 million, respectively, (ii) other expense of $2.6 million and $0.9 million, respectively, and (iii) a provision for income taxes of $0.1 million and benefit of $7.7 million, respectively, each as described above.

Current wording

During the three months ended September 30, 2024 and 2023, we reported net loss of $5.7 million and $11.0 million, respectively, consisting of (i) operating loss of $4.9 million and $10.7 million, respectively, (ii) other expense of $0.4 million and zero, respectively, and (iii) a provision for income taxes of $0.4 million and $0.2 million, respectively, each as described above.

Previous wording

(b)Amounts are approximate due to rounding.

Current wording

(b)Amounts are approximate.

Previous wording

(c)Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. For a definition and reconciliation of these non-GAAP measures to the most closely comparable GAAP measures for the period indicated, see below under “Adjusted EBITDA and Adjusted EBITDA Margin.”

Current wording

(c)Center-level Contribution Margin, Center-level Contribution Margin as a percentage of revenue, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. For a definition and reconciliation of these non-GAAP measures to the most closely comparable GAAP measures for the period indicated, see below.

Previous wording

The Company's management uses Center-level Contribution Margin as the measure for assessing performance of its operating segments. We define Center-level Contribution Margin as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs. For purposes of evaluating Center-level Contribution Margin on a center-by-center basis, we do not allocate our sales and marketing expenses or corporate, general and administrative expenses across our centers. Center-level Contribution Margin was $95.5 million and $72.8 million for the nine months ended March 31, 2024 and 2023, respectively. The increase in Center-level Contribution

Current wording

The Company's management uses Center-level Contribution Margin as the measure for assessing performance of its operating segments. We define Center-level Contribution Margin as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs. For purposes of evaluating Center-level Contribution Margin on a center-by-center basis, we do not allocate our sales and marketing expenses or corporate, general and administrative expenses across our centers. Center-level Contribution Margin was $34.5 million and $27.9 million for the three months ended September 30, 2024 and 2023, respectively. The increase in Center-level Contribution Margin for the three months ended September 30, 2024 was primarily due to a 12.4% increase in total revenue, offset by a 10.3% increase in external provider costs and cost of care, excluding depreciation and amortization, during the same period. For more information relating to Center-level Contribution Margin, see Note 14 “Segment Reporting” to our condensed consolidated financial statements. A reconciliation of Center-level Contribution Margin to loss before income taxes, the most directly comparable GAAP measure, for each of the periods is as follows:

Previous wording

We define Adjusted EBITDA as net income (loss) adjusted for interest expense, net, depreciation and amortization, and provision (benefit) for income tax as well as addbacks for non-recurring expenses or exceptional items, including charges relating to management equity compensation, litigation costs and settlements, M&A and de novo center development, business optimization, electronic medical record ("EMR") implementation and loss on minority equity interest investment. Adjusted EBITDA margin is Adjusted EBITDA expressed as a percentage of our total revenue. For the nine months ended March 31, 2024 and 2023, net loss was $21.0 million and $31.6 million, respectively, representing a year-over-year decrease of 33.6%. Adjusted EBITDA was $13.6 million and ($2.0 million), for the nine months ended March 31, 2024 and 2023, respectively, representing a year-over-year increase of 788.1%. For the nine months ended March 31, 2024, net loss margin was 3.7%, as compared to net loss margin of 6.2% for the nine months ended March 31, 2023. For the nine months ended March 31, 2024, our Adjusted EBITDA margin was 2.4%, as compared to our Adjusted EBITDA margin for the nine months ended March 31, 2023 of negative 0.4%. The increase in Adjusted EBITDA and Adjusted EBITDA margin is primarily from (i) increased capitation rates and (ii) lower corporate, general and administrative costs partially offset by, (i) increased center-level headcount and wage rates associated with a competitive labor market, and (ii) increased housing utilization and unit cost as mandated by the states.

Current wording

We define Adjusted EBITDA as net loss adjusted for interest expense, net, other investment income, depreciation and amortization, and provision (benefit) for income tax as well as addbacks for non-recurring expenses or exceptional items, including charges relating to management equity compensation, litigation costs and settlements, M&A diligence, transaction and integration, business optimization and EMR implementation. Adjusted EBITDA margin is Adjusted EBITDA expressed as a percentage of our total revenue. For the three months ended September 30, 2024 and 2023, net loss was $5.7 million and $11.0 million, respectively, representing a year-over-year decrease of (47.9)%. Adjusted EBITDA was $6.5 million and $1.3 million, for the three months ended September 30, 2024 and 2023, respectively, representing a year-over-year increase of 395.9%. For the three months ended September 30, 2024, net loss margin was 2.8%, as compared to net loss margin of 6.0% for the three months ended September 30, 2023. For the three months ended September 30, 2024, our Adjusted EBITDA margin was 3.2%, as compared to our Adjusted EBITDA margin for the three months ended September 30, 2023 of 0.7%. The increase in Adjusted EBITDA and Adjusted EBITDA margin is primarily from (i) increased capitation rates and (ii) lower corporate, general and administrative costs partially offset by, (i) increased center-level headcount and wage rates associated with a competitive labor market, and (ii) increased housing utilization and unit cost as mandated by the states.

Previous wording

EBITDA and Adjusted EBITDA margin help investors and analysts in comparing our results across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or as a substitute for, the analysis of other GAAP financial measures, including net income (loss) and net income (loss) margin. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by the types of items excluded from the calculation of Adjusted EBITDA. The use of the term Adjusted EBITDA varies from others in our industry.

Current wording

Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures of operating performance monitored by management that are not defined under GAAP and that do not represent, and should not be considered as, an alternative to net loss and net loss margin, respectively, as determined by GAAP. We believe that Adjusted EBITDA and Adjusted EBITDA margin are appropriate measures of operating performance because the metrics eliminate the impact of revenue and expenses that do not relate to our ongoing business performance and certain noncash expenses, allowing us to more effectively evaluate our core operating performance and trends from period to period. We believe that Adjusted EBITDA and Adjusted EBITDA margin help investors and analysts in comparing our results across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or as a substitute for, the analysis of other GAAP financial measures, including net loss and net loss margin. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by the types of items excluded from the calculation of Adjusted EBITDA. The use of the term Adjusted EBITDA varies from others in our industry. Effective for the year ended June 30, 2024 and going forward, the Company revised its calculation of Adjusted EBITDA to no longer exclude de novo center development costs and to reflect the impact of other investment income. The presentation for the three months ended September 30, 2023 has been recast to conform to the current presentation.

Previous wording

(a)Reflects charges/(credits) related to litigation by stockholders, litigation related to de novo center development, and civil investigative demands. Refer to Note 9, "Commitments and Contingencies" to our condensed consolidated financial statements for more information regarding litigation by stockholders and civil investigative demands. Costs reflected consist of litigation costs considered one-time in nature and outside of the ordinary course of business based on the following considerations which we assess regularly: (i) the frequency of similar cases that have been brought to date, or are expected to be brought within two years, (ii) complexity of the case, (iii) nature of the remedies sought, (iv) litigation posture of the Company, (v) counterparty involved, and (vi) the Company's overall litigation strategy.

Current wording

(b)Reflects charges/(credits) related to litigation by stockholders, litigation related to de novo center, and civil investigative demands. Refer to Note 9, "Commitments and Contingencies" to our condensed consolidated financial statements for more information regarding litigation by stockholders and civil investigative demands. Costs reflected consist of litigation costs considered one-time in nature and outside of the ordinary course of business based on the following considerations which we assess regularly: (i) the frequency of similar cases that have been brought to date, or are expected to be brought within two years, (ii) complexity of the case, (iii) nature of the remedies sought, (iv) litigation posture of the Company, (v) counterparty involved, and (vi) the Company's overall litigation strategy.

Previous wording

(b)Reflects charges related to M&A transaction and integrations, and de novo center developments.

Current wording

(c)Reflects charges related to M&A transaction and integrations. The presentation for the three months ended September 30, 2023 has been recast to no longer exclude de novo center development costs.

Previous wording

(c)Reflects charges related to business optimization initiatives. Such charges related to one-time investments in projects designed to enhance our technology and compliance systems, improve and support the efficiency and effectiveness of our operations, and third party support to address efforts to remediate deficiencies in audits. For the three months ended March 31, 2024, this includes (i) $0.4 million of costs associated with third party consultants as we implement our core provider initiatives, assess our risk-bearing payor capabilities, and strengthen our enterprise capabilities and (ii) $0.3 million related to other non-recurring charges. For the three months ended March 31, 2023, this includes (i) $0.3 million related to consultants and contractors performing audit and other related services at sanctioned centers, (ii) $0.2 million of costs associated with third party consultants as we implement our core provider initiatives, assess our risk-bearing payor capabilities, and strengthen our enterprise capabilities, (iii) $0.6 million in the consolidation of the Germantown, Pennsylvania center, and (iv) $0.3 million related to other non-recurring projects aimed at reducing costs and improving efficiencies. For the nine months ended March 31, 2024, this includes (i) $2.6 million of costs associated with third party consultants as we implement our core provider initiatives, assess our risk-bearing payor capabilities, and strengthen our enterprise capabilities (ii) $0.3 million of costs related to severance and other organizational costs and (iii) $0.8 million related to charges for technology improvements, environmental, sustainability, and governance reporting, and other non-recurring charges. For the nine months ended March 31, 2023, this includes (i) $1.5 million related to consultants and contractors performing audit and other related services at sanctioned centers, (ii) $5.3 million of costs associated with third party consultants as we implement our core provider initiatives, assess our risk-bearing payor capabilities, and strengthen our enterprise capabilities, (iii) $0.6 million in the consolidation of the Germantown center and (iv) $1.0 million related to other non-recurring projects aimed at reducing costs and improving efficiencies.

Current wording

(d)Reflects charges related to business optimization initiatives. Such charges related to one-time investments in projects designed to enhance our technology and compliance systems and improve and support the efficiency and effectiveness of our operations. For the three months ended September 30, 2024, this includes (i) $0.4 million of costs associated with organizational restructure and (ii) $0.2 million related to other non-recurring projects aimed at reducing costs and improving efficiencies. For the three months ended September 30, 2023, this includes (i) $1.8 million of costs associated with third party consultants as we implement our core provider initiatives, assess our risk-bearing capabilities, and strengthen our enterprise capabilities and (ii) $0.4 million related to other non-recurring projects aimed at reducing costs and improving efficiencies.

Previous wording

(d)Reflects non-recurring expenses relating to the implementation of a new EMR vendor.

Current wording

(e)Reflects non-recurring expenses relating to the implementation of a new EMR vendor.

Previous wording

To date, we have financed our operations principally through cash flows from operations and through borrowings under our credit facilities, and from the sale of common stock in our IPO that occurred in March 2021. As of March 31, 2024, we had cash and cash equivalents of $54.1 million, a decrease of $73.1 million from June 30, 2023. The decrease in cash and cash equivalents was primarily due to a payment of $23.9 million for the acquisition of the ConcertoCare PACE centers during the second quarter of fiscal year 2024 and timing of cash receipts for services provided. Our cash and cash equivalents primarily consist of highly liquid investments in demand deposit accounts and cash.

Current wording

To date, we have financed our operations principally through cash flows from operations and through borrowings under our credit facilities, and from the sale of common stock in our IPO that occurred in March 2021. As of September 30, 2024, we had cash and cash equivalents of $39.0 million, a decrease of $17.9 million from June 30, 2024. The decrease in cash and cash equivalents was primarily due to timing of cash receipts for services provided and share repurchase activity. Our cash and cash equivalents primarily consist of highly liquid investments in demand deposit accounts and cash.