INNOVAGE HOLDING CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)
The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. 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. Our historical results are not necessarily indicative of the results that may occur in the future and actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and in the sections entitled "Risk Factors" and "Forward-Looking Statements" included in this Annual Report on
Form 10-K. Overview GeneralInnovAge Holding Corp. ("InnovAge"), formerlyTCO Group Holdings, Inc. , became a public company inMarch 2021 . The Company serves approximately 6,650 PACE participants, making it the largest PACE provider in theU.S. based upon participants served, and operates 18 PACE centers acrossColorado ,California ,New Mexico ,Pennsylvania andVirginia .
Operations
InnovAge aims to allow frail seniors to live life on their terms by aging in place, in their own homes and communities, for as long as safely possible. Through our Program of All-Inclusive Care for the Elderly ("PACE"), we manage, and in many cases directly provide, a broad range of medical and ancillary services for seniors, including in-home care services (skilled, unskilled and personal care); in-center services such as primary care, physical therapy, occupational therapy, speech therapy, dental services, mental health and psychiatric services, meals, and activities; transportation to the PACE center and third-party medical appointments; and care management. The Company manages its business as one reportable segment, PACE. We are the leading healthcare delivery platform by number of participants focused on providing all-inclusive, capitated care to high-cost, dual-eligible seniors. Our programs are designed to directly address two of the most pressing challenges facing theU.S. healthcare industry: rising costs and poor outcomes. Our participant-centered care delivery approach is designed to improve the quality of care our participants receive, while keeping them in their homes for as long as safely possible and reducing over-utilization of high-cost care settings such as hospitals and nursing homes. Our participant-centered approach is led by our Interdisciplinary Care Teams ("IDTs"), who design, manage and coordinate each participant's personalized care plan. We directly manage and are responsible for all healthcare needs and associated costs for our participants, including housing costs, where applicable. We directly contract with government payors, such as Medicare and Medicaid, and do not rely on third-party administrative organizations or health plans. We believe our model aligns with how healthcare is evolving, namely (i) the shift toward value-based care, in which coordinated, outcomes-driven, quality care is delivered while reducing unnecessary spend, (ii) eliminating excessive administrative costs by contracting directly with the government, (iii) focusing on the participant experience and (iv) addressing social determinants of health.
Impact of COVID-19 and Macroeconomic Conditions
The COVID-19 pandemic altered the behavior of businesses and people, the effects
of which continue on federal, state and local economies.
Expenses. The virus has and continues to disproportionately impact older adults, especially those with chronic illnesses, which describes our participants.The United States continues to experience supply chain issues with respect to personal protective equipment ("PPE") and other medical supplies used to prevent transmission of COVID-19. During the years endedJune 30, 2022 and 2021, we acquired significantly greater quantities of medical supplies at significantly higher 59 Table of Contents
prices than pre-pandemic rates to ensure the safety of our employees and our
participants. These costs did not have a material effect on our business or
expenses.
Labor market. The COVID-19 pandemic has and continues to exacerbate difficulties to hire additional healthcare professionals, causing certain of our centers to be understaffed or staffed with personnel that requires training. The labor shortage has also contributed to the increased wage pressure to retain and attract such healthcare professionals. The combination of increased wage pressure and labor shortage amongst healthcare personnel, and specifically, trained personnel, has impacted and may continue to impact our expenses and ability to adhere to the complex government laws and regulations that apply to our business. Additionally, geopolitical events have contributed to adverse macroeconomic conditions, including but not limited to inflation, new or increased tariffs, changes to fiscal monetary policy, higher interest rates, potential global security issues and market volatility. None of these factors has had a material effect on our operations to date.
Key Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial
performance in the future to be, driven by the following factors:
Our 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.
medically fragile than other Medicare-eligible patients, including those in
Medicare Advantage (“MA”) programs. As a result, we receive larger payments for
our participants compared to MA participants. This is driven by two factors:
(i) we manage a higher acuity population, with an average RAF score of 2.40
based on
1.08 for Medicare fee-for-service non-dual enrollees, as calculated in an
? analysis by
Medicare Fee-for-Service in 2020; and (ii) we manage Medicaid spend in addition
to Medicare. Our participants are managed on a capitated, or at-risk, basis,
where
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 PMPM payments directly from Medicare and Medicaid,
which provides recurring revenue streams and significant visibility into our
revenue growth trajectory. The Medicare portion of our capitated payment is
risk-based on the underlying medical conditions and frailty of each participant.
Our ability to effectively implement remediation efforts in our centers as a
result of our recent audits. The Company’s priority is to remediate the
deficiencies raised in the audit processes in
appropriate authorities to make the necessary changes within the Company to
increase care coordination and care documentation among our centers, including
working to fill critical personnel gaps at our centers, standardizing the
? process of our IDTs, strengthening our home care network and reliability,
improving timelines of scheduling and coordinating care with providers outside
our centers, among others. For more information, see Item 1. “Business.” We
expect that our ability effectively implement remediation initiatives will have
an impact on our efforts to lift the sanctions imposed by regulatory agencies
on our ability to increase enrollments at our centers in
and all our centers in
information, see Item 1A. Risk Factors, “Risks Related to Our Business-Our
business strategy may not realize expected returns.”
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.
Currently, the
agencies have suspended new enrollments at our
and at our centers in theState of Colorado . See Item 1A. 60 Table of Contents
Risk Factors, “Risks Related to Our Business-We face inspections, reviews,
audits and investigations under federal and state government programs and
contracts. These audits require corrective actions and have resulted in adverse
findings that have negatively affected and may continue to affect our business,
including our results of operations, liquidity, financial condition and reputation." 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. We have
multiple touch points with participants and their families, which enhances
participant receptivity to our services, leading to an 81{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} participant
satisfaction rating as of
? 3.7 years as of
disenrollment, among our centers that have been operated by us for at least
five years. Furthermore, we experience low levels of voluntary disenrollment,
averaging 5{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} annually over the last three fiscal years. Approximately 75{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} of
our historical disenrollments have been involuntary, due primarily to
participant death and otherwise to participants moving out of our service
areas. Effectively managing the cost of care for our participants. We receive
capitated payments to manage the totality of a participant’s medical care
across all settings. Because our participants are among the most frail and
medically complex individuals in the
provider costs and cost of care, excluding depreciation and amortization,
? represented approximately 79{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} of our revenue in the year ended
While we are liable for potentially large medical claims, our care model
focuses on delivering high-quality medical care in cost efficient,
community-based settings as a means of avoiding costly inpatient and outpatient
services. However, our participants retain the freedom to seek care at sites of
their choice, including hospitals and emergency rooms; we do not restrict
participant access to care.
Center-level Contribution Margin. As we serve more participants in existing
centers, we leverage our fixed cost base at those centers and the value of a
center to our business increases over time. At this time, the enrollment
sanctions in place in
grow our participant census and impact Center-level Contribution Margin. See
? Item 1A. Risk Factors, “Risks Related to Our Business-We face inspections,
reviews, audits and investigations under federal and state government programs
and contracts. These audits require corrective actions and have resulted in
adverse findings that have negatively affected and may continue to affect our
business, including our results of operations, liquidity, financial condition
and reputation.”
Our ability to expand via acquisition or de novo centers within existing and
new markets. Several factors can affect our ability to open de novo centers,
including sanctions issued by regulators. On
Health Care Services (“DHCS”) of the
was suspending the State’s previously provided assurances that it would enter
into a PACE program agreement with the Company (State Attestations) with
respect to de novo centers in the
corrective action plans (“CAPs”) and the remediation and validation processes
for our
? sanctions are lifted. In addition, on
the
us that they no longer intend to enter into an agreement with us to be a PACE
provider in the
application to develop the previously announced PACE center in Terre
Haute,
deficiencies detected during CMS’s 2021 audits of our
PACE programs. In addition, we have committed to CMS and the Agency for
pause remaining steps with respect to de novo centers to focus on remediating
deficiencies raised in the audit processes.
Execute tuck-in acquisitions. From fiscal year 2019 through fiscal year 2021,
we acquired and integrated three PACE organizations, expanding our
Platform to one new state and four new markets through those acquisitions. When
? integrating acquired programs, we work closely with key constituencies,
including local governments, health systems and senior housing providers, to
enable continuity of quality care for our participants. Once restrictions on
our ability to enroll participants as a result of the audits of our centers in
Sacramento, California andColorado and on our ability to open 61 Table of Contents
de novo centers as a result of actions taken by other states or us, are lifted
or resolved, we believe there is a robust landscape of potential tuck-in acquisitions to supplement our organic growth.
Contracting with government payors. Our economic model relies on our capitated
arrangements with government payors, namely Medicare and Medicaid. We view the
? government not only as a payor but also as a key partner in our efforts to
expand into new geographies and access more participants in our existing
markets. Maintaining, supporting and growing these relationships, particularly
as we enter new geographies, is critical to our long-term success.
Investing to support growth. We intend to continue investing in our centers,
value-based care model, and sales and marketing organization to support
long-term growth. We expect our expenses to increase in absolute dollars for
the foreseeable future to support our growth and due to additional costs we are
incurring and expect to incur as a public company, including expenses related
to compliance with the rules and regulations of the
standards of Nasdaq, additional corporate and director and officer insurance,
? investor relations and increased legal, audit, reporting and consulting fees.
We also expect to incur additional expenses for the foreseeable future in
connection with current and future audits to our centers, remediation plans and
current and potential legal and regulatory proceedings. We plan to invest in
future growth judiciously and maintain focus on managing our results of
operations. Accordingly, in the short term we expect the activities noted above
to increase our expenses as a percentage of revenue, but in the longer term, we
anticipate that these investments will positively impact our business and
results of operations.
Seasonality to our business. Our operational and financial results, including
medical costs and per-participant revenue true-ups, will experience some
variability depending upon the time of year in which they are measured. Medical
costs vary most significantly as a result of (i) the weather, with certain
illnesses, such as the influenza virus and possibly COVID-19, 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. Based on the difference between our estimate and the final
determination from CMS, we may receive incremental true up revenue or be
required to repay certain amounts. Historically, these true-up payments
typically occur between May and August, but the timing of these payments is
determined by CMS, and we have neither visibility nor control over the timing
of such payments.
Components of Results of Operations
Revenue
Capitation Revenue. In order to provide comprehensive services to manage the totality of a participant's medical care across all settings, we receive fixed or capitated fees per participant that are paid monthly by Medicare, Medicaid,Veterans Affairs ("VA") and private pay sources. The concentration of capitation revenue from our various payors was: 2022 2021 Medicaid 54 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} 53 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} Medicare 46 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} 47 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} Private pay and other * {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} * {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} Total 100 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} 100 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} * denotes less than 1{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the PACE program. The PACE state contracts between us and the respective state Medicaid administering agency are amended annually each 62
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June 30 in all states other thanCalifornia andPennsylvania , 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 Policies and Estimates below and Note 2 "Summary of Significant Accounting Policies" to our consolidated financial statements included in this Annual Report on Form 10-K. Other Service Revenue. Other service revenue primarily consists of revenues derived from fee-for-service arrangements, state food grants, rent revenues and management fees. We generate fee-for-service revenue from providing home-care services to non-PACE patients in their homes, for which we bill the patient or their insurance plan on a fee-for-service basis. For a discussion of our revenue recognition policies, please see Critical Accounting Policies and Estimates below and Note 2 "Summary of Significant Accounting Policies" to our consolidated financial statements included in this Annual Report on Form 10-K.
Operating Expenses
External Provider Costs. External provider costs consist primarily of the costs for medical care provided by non-InnovAge providers. We separate external provider costs into four categories: inpatient (e.g., hospital), housing (e.g., assisted living), outpatient and pharmacy. In aggregate, external provider costs represent the largest portion of our expenses. Cost of Care, Excluding Depreciation and Amortization. Cost of care, excluding depreciation and amortization, includes the costs we incur to operate our care delivery model. This includes costs related to IDTs, salaries, wages and benefits for center-level staff, participant transportation, medical supplies, occupancy, insurance and other operating costs. IDT employees include medical doctors, registered nurses, social workers, physical, occupational, and speech therapists, nursing assistants, and transportation workers. Center-level employees include clinic managers, dieticians, activity assistants and certified nursing assistants. Cost of care excludes any expenses associated with sales and marketing activities incurred at a local level as well as any allocation of our corporate, general and administrative expenses. A portion of our cost of care is fixed relative to the number of participants we serve, such as occupancy and insurance expenses. The remainder of our cost of care, including our employee-related costs, is directly related to the number of participants cared for in a center. As a result, as revenue increases due to census growth, cost of care, excluding depreciation and amortization, typically decreases as a percentage of revenue. As we open new centers, we expect cost of care, excluding depreciation and amortization, to increase in absolute dollars due to higher census and facility related costs. Sales and Marketing. Sales and marketing expenses consist of employee-related expenses, including salaries, commissions, and employee benefits costs, for all employees engaged in marketing, sales, community outreach and sales support. These employee-related expenses capture all costs for both our field-based and corporate sales and marketing teams. Sales and marketing expenses also include local and centralized advertising costs, as well as the infrastructure required to support our marketing efforts. We expect these costs to increase in absolute dollars over time as we 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 further our growth without negatively affecting profitability. 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 regional corporate offices. We expect our general and administrative expenses to increase in absolute dollars due to the additional legal, accounting, insurance, investor relations and other costs that we incur as a public company, as well as other costs associated with compliance and continuing to grow our business. However, we anticipate general and administrative expenses to decrease as a percentage of revenue over the long term, although such expenses may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses. Depreciation and Amortization. Depreciation and amortization expenses are primarily attributable to our buildings and leasehold improvements and our equipment and vehicles. Depreciation and amortization are recorded using the straight-line method over the shorter of estimated useful life or lease terms, to the extent the assets are being leased. 63
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Equity Loss. Equity loss relates to our equity method investment in InnovAge
Sacramento, which began operations in
consolidated entity effective
Other Operating Expenses (Income). Other operating expenses (income) consists of
the payment and re-measurement of contingent consideration to fair value
relating to our acquisition of NewCourtland LIFE Program (“NewCourtland”).
For more information relating to the components of our results of operations, see Results of Operations below and Note 2 "Summary of Significant Accounting Policies" to our consolidated financial statements included in this Annual Report on Form 10-K for more detailed information regarding our critical accounting policies.
Results of Operations
The following table sets forth our results of operations for the periods
presented.
Year ended June 30,
2022 2021
in thousands
Revenues
Capitation revenue $ 696,998 $ 635,322
Other service revenue 1,642 2,478
Total revenues 698,640 637,800
Expenses
External provider costs 383,046 309,317
Cost of care, excluding depreciation and amortization 180,222
154,403
Sales and marketing 24,201
22,236
Corporate, general and administrative 101,653
132,333
Depreciation and amortization 13,924
12,294 Equity loss - 1,343 Other operating expense - 18,211 Total expenses 703,046 650,137 Operating Income (Loss)$ (4,406) $ (12,337) Other Income (Expense) Interest expense, net (2,526) (16,787)
Loss on extinguishment of debt -
(14,479)
Gain on equity method investment -
10,871 Other expense (305) (2,237) Total other expense (2,831) (22,632)
Income (Loss) Before Income Taxes (7,237)
(34,969) Provision for Income Taxes 723 9,771 Net Income (Loss)$ (7,960) $ (44,740)
Less: net loss attributable to noncontrolling interests (1,439)
(754)
Net Income (Loss) Attributable to InnovAge Holding Corp.$ (6,521) $ (43,986) 64 Table of Contents Revenues Year ended June 30, 2022 2021 $ Change {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} Change in thousands Capitation revenue$ 696,998 $ 635,322 $ 61,676 9.7 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} Other service revenue 1,642 2,478 (836) (33.7) {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} Total revenues$ 698,640 $ 637,800 $ 60,840 9.5 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} Capitation revenue. Capitation revenue was$697.0 million for the year endedJune 30, 2022 , an increase of$61.7 million , or 9.7{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}, compared to$635.3 million for the year endedJune 30, 2021 . This increase was driven by (i) an increase in capitation rates and (ii) a 4.3{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} increase total in member months (as defined below under "Key Business Metrics and non-GAAP Measures - Total member months"). The increase in capitation rates was primarily driven by an annual increase in Medicaid capitation rates as determined by the States and Medicare capitation rates as a result of increased risk score and county rates. Other service revenue. Other service revenue was$1.6 million for the year endedJune 30, 2022 , a decrease of$0.8 million , or 33.7{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}, from$2.5 million for the year endedJune 30, 2021 . The decrease is primarily due to less fee-for-service revenue as a result of winding down our in-home care services and a decrease in food grant revenue as a result of fewer meals provided for the year endedJune 30, 2022 when compared to the same period in 2021. Expenses Year ended June 30, 2022 2021 $ Change {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} Change in thousands External provider costs$ 383,046 $ 309,317 $ 73,729 23.8 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} Cost of care (excluding depreciation and amortization) 180,222 154,403 25,819 16.7 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} Sales and marketing 24,201 22,236 1,965 8.8 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} Corporate, general, and administrative 101,653 132,333
(30,680) (23.2) {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}
Depreciation and amortization 13,924 12,294 1,630 13.3 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}
Equity loss - 1,343 (1,343) (100.0) {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}
Other operating expenses - 18,211 (18,211) (100.0) {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}
Total operating expenses $ 703,046 $ 650,137 $ 52,909 8.1 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}
External provider costs. External provider costs were $383.0 million for
the year ended June 30, 2022 , an increase of $73.7 million , or 23.8{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}, compared
to $309.3 million for the year ended June 30, 2021 . The increase was primarily
driven by (i) an increase of 18.8{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} in cost per participant and (ii) an increase
of 4.3{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} in member months. The increase in cost per participant was primarily
driven by the net effect of (i) an increase in inpatient and medical respite
utilization and cost as a result of the Omicron COVID-19 surge, (ii) an increase
in post-acute care utilization and cost, (iii) increased housing utilization,
(iv) increased housing rates as mandated by certain states, and (v) an increase
in outpatient and specialist care expenses, in part as a result of our
participants seeking healthcare services that were delayed during the COVID-19
pandemic.
Cost of care, excluding depreciation and amortization. Cost of care, excluding
depreciation and amortization expense was $180.2 million for the year ended June
30, 2022 , an increase of $25.8 million , or 16.7{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}, compared to $154.4 million for
the year ended June 30, 2021 , primarily due to the net effect of (i) an increase
of 4.3{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} in member months and (ii) an increase of 11.9{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} in cost per participant.
The increase in cost per participant was driven by an increase in operational
costs of reopening our centers following shutdowns as a result of COVID-19,
pre-opening losses associated with de novo locations, increased labor costs
associated with ongoing audit remediation and compliance efforts, and an
increase in headcount and wage rates.
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Sales and marketing. Sales and marketing expenses were$24.2 million for the year endedJune 30, 2022 , an increase of$2.0 million , or 8.8{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}, compared to$22.2 million for the year endedJune 30, 2021 , primarily due to an increase in (i) employee compensation and benefits due to an increase in FTEs and (ii) costs associated with organizational realignment. Corporate, general and administrative expenses. Corporate, general and administrative expenses were$101.7 million for the year endedJune 30, 2022 , a decrease of$30.7 million , or 23.2{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}, compared to$132.3 million for the year endedJune 30, 2021 . The decrease was primarily due to the fees incurred during fiscal year 2021 as a result of theJuly 27, 2020 transaction between us,Ignite Aggregator LP (an investment vehicle owned by certain funds advised byApax Partners LLP ) and our then-existing equity holders entering into a Securities Purchase Agreement (the "Apax Transaction"). In connection with the Apax Transaction,$45.4 million was recorded related to the cancellation of 16,994,975 common stock options outstanding under the Company's 2016 Equity Incentive Plan and$13.1 million of transaction related costs were recorded as corporate, general and administrative expenses. Offsetting the decrease of$58.5 million related to the Apax Transaction were expenses related to (i) employee compensation and benefits as the result of an increase in FTEs, (ii) compliance-related expense, (iii) costs associated with organizational realignment, (iv) increased legal costs, (v) costs associated with executive severance and recruiting and (vi) increased costs associated with being a publicly traded company. Depreciation and amortization. Depreciation and amortization expense was$13.9 million for the year endedJune 30, 2022 , an increase of$1.6 million , or 13.3{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}, compared to$12.3 million for the year endedJune 30, 2021 . The increase in depreciation expense was a result of capital additions in the normal course of business. Equity loss. Equity loss was$1.3 million for the year endedJune 30, 2021 , which related to our equity method investment in InnovAge Sacramento.InnovAge Sacramento began operations inJuly 2020 and was subsequently consolidated into operations effectiveJanuary 1, 2021 , therefore there were no equity earnings for the year endedJune 30, 2022 . Other operating expenses. Other operating expenses were$18.2 million for the year endedJune 30, 2021 , primarily due to the payment of$20.0 million , and related change in fair value of contingent consideration, made under the acquisition agreement of the NewCourtland LIFE Program during the year endedJune 30, 2021 . There were no such payments during the year endedJune 30, 2022 . Other Income (Expense) Year ended June 30, 2022 2021 $ Change {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} Change in thousands Interest expense, net$ (2,526) $ (16,787) $ 14,261 85.0 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}
Loss on extinguishment of debt - (14,479) 14,479
N/A
Gain on equity method investment - 10,871 (10,871)
N/A
Other expense (305) (2,237) 1,932 86.4 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}
Total other expense $ (2,831) $ (22,632) $ 19,801 87.5 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}
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
$2.5 million for the year ended June 30, 2022 , a decrease of $14.3 million , or
85.0{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}, compared to $16.8 million for the year ended June 30, 2021 . The decrease
was primarily due to a lower average outstanding debt balance. For additional
information regarding our outstanding indebtedness, see Note 8 "Long-term Debt"
to our consolidated financial statements.
Loss on extinguishment of debt. We recognized a loss on extinguishment of debt
of $14.5 million for the year ended June 30, 2021 and no loss on extinguishment
of debt for the year ended June 30, 2022 . On July 27, 2020 , we amended and
restated our 2016 Credit Agreement, which led to an extinguishment of debt for
certain lenders and a modification of debt for other lenders. The total debt
structure extinguishment for certain lenders led to the write-off of $1.0
million in debt
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issuance costs. On March 8, 2021 , we entered into the 2021 Credit Agreement,
which led to an extinguishment of debt of $13.5 million , including $6.0 million
of a prepayment penalty.
Gain on equity method investment. We recognized a gain on equity method
investment of $10.9 million for the year ended June 30, 2021 , which was related
to InnovAge Sacramento becoming a consolidated entity as of January 1, 2021 , and
no gain on equity method investment for the year ended June 30, 2022 .
Other. Other expense was $0.3 million for the year ended June 30, 2022 , a
decrease of $1.9 million , or 86.4{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}, compared to $2.2 million for the year ended
June 30, 2021 , due primarily to an amendment of the warrants issued by the
Company to Adventist Health System/West ("Sacramento Warrants") resulting in
additional expense of $2.3 million in 2021.
Provision for Income Taxes.
The Company and its subsidiaries calculate federal and state income taxes
currently payable and for deferred income taxes arising from temporary
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured pursuant to enacted tax laws and rates applicable to
periods in which those temporary differences are expected to be recovered or
settled. The impact on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the date of enactment.
The members of SH1 (as defined below under "-Net Loss Attributable to
Noncontrolling Interests") 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 consolidated financial statements
A valuation allowance is provided to the extent that it is more likely than not
that deferred tax assets will not be realized. Tax benefits from uncertain tax
positions are recognized when it is more likely than not that the position will
be sustained upon examination based on the technical merits of the position. The
amount recognized is measured as the largest amount of benefit that has a
greater than 50{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} likelihood of being realized upon settlement. The Company
recognizes interest and penalty expense associated with uncertain tax positions
as a component of provision for income taxes.
During the years ended June 30, 2022 and 2021, we reported provision for income
taxes of $0.7 million and $9.8 million , respectively. The decrease of $9.1
million is primarily due to (i) pretax book loss recognized during the year
ended June 30, 2022 , as compared to the pretax book loss recognized during the
year ended June 30, 2021 and (ii) certain permanent differences between the
financial and tax accounting treatment of (a) the Section 162(m) limitation on
compensation of five highest paid officers, (b) transaction costs associated
with the Apax Transaction in the prior year and (c) the change in our valuation
allowance. There were no transactions during the year ended June 30, 2022 , and
thus considerably less of an addback for the permanent differences discussed.
Net Loss Attributable to Noncontrolling Interests.
InnovAge Senior Housing Thornton, LLC ("SH1") is a variable interest entity ("VIE"). The Company is the primary beneficiary of SH1 and consolidates SH1. The Company is the primary beneficiary of SH1 because it has the power to direct the activities that are most significant to SH1 and has an obligation to absorb losses or the right to receive benefits from SH1. The most significant activity of SH1 is the operation of the housing facility. The Company has provided a subordinated loan to SH1 and has provided a guarantee for the convertible term loan held by SH1. The SH1 interest is reflected within equity as noncontrolling interests. Our share of earnings is recorded in the consolidated statements of operations as net loss attributable to noncontrolling interests.
Net Income (Loss)
During the years endedJune 30, 2022 and 2021, we reported net loss of$8.0 million and$44.7 million , respectively, consisting of (i) loss from operations of$4.4 million and$12.3 million , respectively, (ii) other expense of$2.8 million and$22.6 million , respectively, and (iii) provision for income taxes of$0.7 million and$9.8 million , respectively, each as described above. 67
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For more information relating to our accounting policies, see Note 2 “Summary of
Significant Accounting Policies” to our consolidated financial statements
included in this Annual Report on Form 10-K.
Key Business Metrics and Non-GAAP Measures
In addition to our GAAP financial information, we review a number of operating
and financial metrics, including the following key metrics and non-GAAP
measures, to evaluate our business, measure our performance, identify trends
affecting our business, formulate business plans and make strategic decisions.
We believe these metrics provide additional perspective and insights when
analyzing our core operating performance from period to period and evaluating
trends in historical operating results. These key business metrics and non-GAAP
measures should not be considered superior to, or a substitute for, and should
be read in conjunction with, the GAAP financial information presented herein.
These measures may not be comparable to similarly-titled performance indicators
used by other companies.
Year ended June 30,
2022 2021
dollars in thousands
Key Business Metrics:
Centers(a) 18 18
Census(a)(b) 6,650 6,850
Total Member Months(a) 82,820 79,430
Center-level Contribution Margin $ 135,372 $
174,080
Center-level Contribution Margin as a {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} of revenue 19.4 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} 27.3 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}
Non-GAAP Measures:
Adjusted EBITDA(c) $ 34,253 $ 85,333
Adjusted EBITDA Margin(c) 4.9 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} 13.4 {d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}
(a) Includes InnovAge Sacramento, which the Company owns and controls through a
joint venture and is consolidated in our financial statements.
(b) Participant numbers are approximate.
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. For a
(c) definition and reconciliation of these non-GAAP measures to the most closely
comparable GAAP measures for the period indicated, see below under “-Adjusted
EBITDA."
Centers
We define our centers as those centers open for business and attending to
participants at the end of a particular period.
Census
Our census is comprised of our capitated participants for whom we are
financially responsible for their total healthcare costs.
Total member months
We define Total Member Months as the total number of participants multiplied by the number of months within a year in which each participant was enrolled in our program. We believe this is a useful metric as it more precisely tracks the number of participants we serve throughout the year.
Center-level Contribution Margin
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
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Center-level Contribution Margin on a center-by-center basis, we do not allocate our sales and marketing expense or corporate, general and administrative expenses across our centers. Center-level Contribution Margin was$135.4 million and$174.1 million for the years endedJune 30, 2022 and 2021, respectively. The decrease in Center-level Contribution Margin for fiscal year 2022 was primarily due to a year-over-year increase in external provider costs and cost of care of 23.8{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} and 16.7{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}, respectively. This was slightly offset by a 9.5{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} increase in total revenue during the same period. For more information relating to Center-level Contribution Margin, see Note 14 "Segment Reporting" to our consolidated financial statements.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) adjusted for interest expense,
depreciation and amortization, and provision for income tax as well as addbacks
for non-recurring expenses or exceptional items, including charges relating to
management equity compensation, final determination of rates, executive
severance and recruitment, litigation, M&A transaction and integration, business
optimization, electronic medical record ("EMR") implementation, gain on
consolidation of equity investee, financing-related fees and contingent
consideration. For the years ended June 30, 2022 and 2021, our net loss was $8.0
million and $44.7 million , respectively, representing a year-over-year decline
of 82.2{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}, and Adjusted EBITDA was $34.3 million and $85.3 million , respectively,
representing a year-over-year decline of 59.9{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}.
A reconciliation of Adjusted EBITDA to net income (loss), the most directly
comparable GAAP measure, for each of the periods is as follows:
Year ended June 30,
2022 2021
in thousands
Net income (loss) $ (7,960) $ (44,740)
Interest expense, net 2,526 16,787
Depreciation and amortization 13,924 12,294
Provision for income tax 723 9,771
Stock-based compensation 3,739 1,664
Rate determination(a) - (2,158)
Executive severance and recruitment(b) 4,123 -
Class action litigation(c) 408 -
M&A transaction and integration(d) 1,764 67,606
Business optimization(e) 12,983 1,829
EMR implementation(f) 2,023 461
Gain on consolidation of equity investee(g) - (10,871)
Financing-related(h) - 14,479
Contingent consideration(i) - 18,211
Adjusted EBITDA $ 34,253 $ 85,333
For the year ended
(a) approximately
for calendar years 2010 through 2020.
(b) Reflects charges related to executive severance and recruiting.
(c) Reflects charges related to litigation by shareholders. See Item 3, “Legal
Proceedings” included in this Annual Report on Form 10-K.
For the year ended
(d) related to the cancellation of options and the redemption of shares and (ii)
the Apax Transaction.
Reflects charges related to business optimization initiatives. Such charges
relate to one-time investments in projects designed to enhance our technology
and compliance systems, improve and support the efficiency and effectiveness
(e) of our operations, and, for the fiscal year ended
support to address efforts to remediate deficiencies in audits, including (i)
$1.8 million paid to consultants and contractors performing audit and other
related
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services at sanctioned centers, (ii)
government investigations, and (iii)
party consultants to strengthen enterprise capabilities.
(f) Reflects non-recurring expenses relating to the implementation of a new EMR
vendor.
(g) Reflects non-recurring expense related to the gain on consolidation of
InnovAge Sacramento.
(h) Reflects fees and expenses incurred in connection with amendments to our
credit agreements. See Note 8 to the consolidated financial statements.
(i) Reflects the contingent consideration fair value adjustment made during
fiscal year 2021 associated with our acquisition of NewCourtland.
Adjusted EBITDA margin
Adjusted EBITDA margin is Adjusted EBITDA expressed as a percentage of our total revenue less any exceptional, one-time revenue items. For the year endedJune 30, 2022 , our net loss margin was 1.1{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}, as compared to our net loss margin of 7.0{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} for the year endedJune 30, 2021 . For the year endedJune 30, 2022 , our Adjusted EBITDA margin was 4.9{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}, as compared to our Adjusted EBITDA margin for the year endedJune 30, 2021 of 13.4{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}. Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures of operating performance monitored by management that are not defined under GAAP and that do not represent, and should not be considered as, an alternative to net income (loss) and net income (loss) margin, respectively, as determined by GAAP. We believe that Adjusted EBITDA and Adjusted EBITDA margin are appropriate measures of operating performance because the metrics eliminate the impact of revenue and expenses that do not relate to our ongoing business performance and certain noncash expenses, allowing us to more effectively evaluate our core operating performance and trends from period to period. We believe that Adjusted EBITDA and Adjusted EBITDA margin help investors and analysts in comparing our results across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. These non-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. Our use of the term Adjusted EBITDA varies from others in our industry.
Liquidity and capital resources
General
To date, we have financed our operations principally through cash flows from operations and through borrowings under our credit facilities, and most recently from the sale of common stock in our IPO that occurred inMarch 2021 . As of the years endedJune 30, 2022 and 2021, we had cash and cash equivalents of$184.4 million and$201.5 million , respectively, a decrease of$17.1 million primarily due to purchases of property and equipment offset by cash received from operations. In each case, our cash and cash equivalents primarily consist of highly liquid investments in demand deposit accounts and cash. Our capital resources are generally used to fund (i) debt service requirements, the majority of which relate to the quarterly principal payments of the Term Loan Facility (as defined in Note 8 "Long-term Debt" to the consolidated financial statements) due 2026, (ii) capital and operating lease obligations, which are generally paid on a monthly basis and include maturities through 2025 and 2032, respectively, (iii) the operations of our business, including special projects such as our transition to a new EMR vendor, with respect to which we expect to incur non-recurring implementation costs over the next 12 months, and ongoing costs through 2026, and third party support to address remediation efforts, and (iv) income tax payments, which are generally due on a quarterly and annual basis. We also will continue investing in the effective implementation of corrective remediation plans (CAPs) and other corrective initiatives as a result of deficiencies found during audits at some of our centers, and our ability to continually provide necessary and quality services to our participants. In the long-term, we also expect to use capital resources for capital additions, which we expect to primarily relate to the development of de novo centers, to the extent and if they are opened. Collectively, these obligations are expected to represent a significant liquidity requirement of our Company on both a short-term (next 12 months) and long-term (beyond 12 months) basis. For additional information regarding our lease obligations, debt and
commitments, see
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Notes 7 “Leases,” 8 “Long-term Debt,” and 10 “Commitments and Contingencies,”
respectively, to our Audited Consolidated Financial Statements.
We believe that our cash and cash equivalents and our cash flows from operations, available funds and access to financing sources, including our 2021 Credit Agreement and Revolving Credit Facility (each as discussed and defined below), will be sufficient to fund our operating and capital needs for the next 12 months and beyond. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, our ability to retain and grow the number of PACE participants, subject to our ability to effectively remediate deficiencies identified in ourColorado andSacramento centers, and the expansion of sales and marketing activities. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected. OnMay 13, 2016 , we entered into a credit agreement with Capital One Financial Corporation (together with all amendments thereto, the "2016 Credit Agreement"). InMarch 2020 , we borrowed$25.0 million under the revolving credit facility to ensure sufficient funds available due to the uncertainty relating to the COVID-19 pandemic and for general corporate purposes. Those borrowings were repaid in full in connection with the entry into the 2021 Credit Agreement (as defined and discussed below) and the closing of our IPO. OnMarch 8, 2021 , concurrently with the closing of the IPO, the Company entered into a new credit agreement (the "2021 Credit Agreement") that replaced the 2016 Credit Agreement. The 2021 Credit Agreement consists of a senior secured term loan (the "Term Loan Facility") of$75.0 million principal amount and a revolving credit facility (the "Revolving Credit Facility") of$100.0 million maximum borrowing capacity. Principal on the Term Loan Facility is paid each calendar quarter in an amount equal to 1.25{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} of the initial term loan on closing date. Proceeds of the Term Loan Facility, together with proceeds from the IPO, were used to repay amounts outstanding under the 2016 Credit Agreement. Any outstanding principal amounts under the 2021 Credit Agreement accrue interest at a variable interest rate. As ofJune 30, 2022 , the interest rate on the Term Loan Facility was 3.83{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}. Under the terms of the 2021 Credit Agreement, the Revolving Credit Facility fee accrues at 0.25{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} of the average daily unused amount and is paid quarterly. As ofJune 30, 2022 , we had no borrowings outstanding under the Revolving Credit Facility and, therefore, had full capacity thereunder, subject to applicable covenant compliance restrictions and any other conditions precedent to borrowing. As ofJune 30, 2022 , we also had$2.4 million principal amount outstanding under our convertible term loan. Monthly principal and interest payments are approximately$0.02 million , and the loan bears interest at an annual rate of 6.68{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}. The remaining principal balance is due upon maturity, which isAugust 20, 2030 .
For more information about our debt, see Note 8 “Long-term Debt” to our audited
Consolidated Financial Statements.
Our material cash requirements from known contractual and other obligations
primarily relate to long-term debt and lease obligations. Expected timing of
those payments are as follows:
Total Next 12 Months
Beyond 12 Months
in thousands
Long-term debt (excluding interest)(1)
69,784
Operating leases(2) 31,666 4,873
26,793
Capital leases (excluding interest) 15,460 4,405
11,055 Total$ 120,703 $ 13,071 $ 107,632
(1) Represents principal amounts related to the credit agreements.
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We have not adopted ASU 2016-02, which requires lessees to recognize almost
all leases on the balance sheet. We will be adopting this guidance for the
(2) fiscal year beginning
See Note 2 “Summary of Significant Accounting Policies” to our Consolidated
Financial Statements.
We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness and, therefore, we do not anticipate paying any cash dividends in the foreseeable future. Trends and Uncertainties
During fiscal year 2022, theU.S. and global economies experienced adverse macroeconomic effects in part resulting from the ongoing effects of the COVID-19 pandemic. These effects included inflation and increase in wages due to labor shortages. In fiscal year 2022, in response to high levels of inflation, we began to implement various mitigation strategies to reduce costs of operation, including consolidating services and price negotiations with providers. The effects of inflation, after accounting for these mitigation strategies, were immaterial to our financial results for the fiscal year 2022. However, we expect inflation is likely to continue for most or all of fiscal year 2023, and even though we expect to continue mitigation efforts, there can be no assurance that our strategies will continue to achieve the same degree of success as in fiscal year 2022. In addition, in fiscal year 2022, we experienced workforce and labor shortages, within all of our centers. We recognize that our participant-facing staff is critical to delivering quality care. As such, we made market adjustments to certain roles to increase retention and improve our ability to hire. These adjustments resulted in an increase in cost of care further impacted by additional staffing related to compliance and remediation efforts. This increase did not have a material effect on our financial results. We continue to assess key roles and benchmarks to market while monitoring trends in the labor market where we continue to see wage inflation in fiscal year 2023.
Consolidated Statements of Cash Flows
Our consolidated statements of cash flows for the year ended
2021 are summarized as follows:
Year ended June 30,
2022 2021 $ Change
in thousands
Net cash provided by (used in) operating activities$ 27,302 $ (7,548) $ 34,850 Net cash used in investing activities (40,238) (19,541) (20,697) Net cash provided by (used in) financing activities (6,318) 116,224 (122,542) Net change in cash, cash equivalents and restricted cash$ (19,254) $
89,135
Operating Activities. The change in net cash provided by (used in) operating activities was primarily due to the net effect of (i) a net loss of$8.0 million for the year endedJune 30, 2022 compared to a net loss of$44.7 million in the prior period, as described further above, (ii) an increase of$18.2 million in the change in accounts payable and accrued expenses during fiscal year 2022 due to timing of payments, and the impact of the completion of HCPF's reconciliation during fiscal year 2021, as described below, (iii) the$10.9 million gain on equity method investment recognized during 2021, as described further above, with no gain recognized in 2022, (iv) an increase of$7.2 million in the change in amounts due to Medicaid, (v) slightly offset by a$14.5 million loss on extinguishment of long-term debt recognized during 2021, as described further above, with no loss recognized in 2022. In fiscal year 2021, the Company and theColorado Department of Health Care Policy & Financing ("HCPF") completed the reconciliation for fiscal years 2018 and 2019. The reconciliation resulted in a reduction of accounts receivable of$17.0 million and due to Medicaid of$13.6 million , which was recorded in fiscal year 2021. The Company does not expect adjustments related to the reconciliation to be significant in future periods.
Investing Activities. The increase in net cash used in investing activities was
primarily due to an increase in cash used for growth-related capital
expenditures and implementation of an integrated EMR system.
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Financing activities. The decrease in net cash provided by financing activities was primarily due to the net effect of (i) an increase in cash provided of$370.5 million related to the net proceeds received from our IPO in 2021, (ii) offset by net cash outflows of$137.7 million due to net repayments on long-term debt in excess of proceeds from long-term debt during the year endedJune 30, 2021 compared to net repayments of debt of$3.8 million during the year endedJune 30, 2022 , (iii) a decrease in cash provided of$77.6 million related to treasury stock purchases in 2021, and (iv) a decrease in cash provided of$29.2 million related to stock option cancellation payments during the year endedJune 30, 2021 .
Emerging Growth Company and
We qualify as an "emerging growth company" pursuant to the provisions of the
Jumpstart Our Business Startups ("JOBS") Act and a "smaller reporting company"
as defined by the Exchange Act. For as long as we are an "emerging growth
company" or a "smaller reporting company," we may take advantage of certain
exemptions from various reporting requirements that are applicable to other
public companies that are not "emerging growth companies" or "smaller reporting
companies," including, but not limited to, not being required to comply with the
auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act,
only being required to present two years of audited financial statements, plus
unaudited condensed consolidated financial statements for applicable interim
periods and the related discussion in the section titled "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
reduced disclosure obligations regarding executive compensation in our periodic
reports, proxy statements and registration statements, exemptions from the
requirements of holding non-binding advisory "say-on-pay" votes on executive
compensation and shareholder advisory votes on golden parachute compensation.
In addition, under the JOBS Act, emerging growth companies can delay adopting
new or revised accounting standards until such time as those standards apply to
private companies. We intend to take advantage of the longer phase-in periods
for the adoption of new or revised financial accounting standards under the JOBS
Act until we are no longer an emerging growth company. Our election to use the
phase-in periods permitted by this election may make it difficult to compare our
financial statements to those of non-emerging growth companies and other
emerging growth companies that have opted out of the longer phase-in periods
permitted under the JOBS Act and who will comply with new or revised financial
accounting standards. If we were to subsequently elect instead to comply with
public company effective dates, such election would be irrevocable pursuant to
the JOBS Act.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions, impacting our reported results of operations and financial condition. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of assets and liabilities and the recognition of income and expenses. We consider these accounting policies to be critical accounting policies. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. While our significant accounting policies are described in more detail in Note 2 "Summary of Significant Accounting Policies" to our audited Consolidated Financial Statements, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and require management to make subjective and complex judgments and estimates in the preparation of our consolidated financial statements.
Revenue recognition
In
2014-09”), and has since issued various amendments which provide additional
clarification and implementation guidance, to Topic 606, Revenue from Contracts
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with Customers, which superseded revenue recognition guidance in ASC 605. ASU
2014-09 requires an entity to recognize the amount of revenue to which it
expects to be entitled for the transfer of promised goods or services to
customers. This guidance became effective for annual reporting periods beginning
July 1, 2020 , and interim reporting periods within the annual reporting period
beginning July 1, 2021 . Effective July 1, 2020 , the Company adopted ASU 2014-09
using the modified retrospective method applied to those contracts which were
not completed as of June 30, 2020 . As a result of electing the modified
retrospective adoption approach, results for reporting periods beginning after
July 1, 2020 are presented under ASC 606. There was no material impact upon the
adoption of ASC 606, therefore the Company did not record any adjustments to
retained earnings at July 1, 2020 or for any periods previously presented.
Accordingly, comparative periods have not been adjusted and continue to be
reported under FASB ASC Topic 605, Revenue Recognition.
Management estimates related to revenue are discussed below in more detail.
Capitation revenue
Our PACE operating unit provides comprehensive health care services to participants on the basis of estimated PMPM amounts we expect to be entitled to receive from the capitated fees per participant that are paid monthly by Medicare, Medicaid, theVA , and private pay sources. We recognize capitation revenues 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. Medicaid and Medicare capitation revenues are based on PMPM capitation rates under the PACE program, and Medicare rates can fluctuate throughout the contract based on the acuity of each individual participant. In certain contracts, PMPM rates also include "risk adjustments" based on various factors. For certain capitation payments, the Company is subject to retroactive premium risk adjustments based on various factors. The Company estimates the amount of the adjustment based on participant medical status and historical experience. Such estimates are then recorded monthly on a straight-line basis. We review our assumptions and adjust these estimates accordingly on a quarterly basis. Our consolidated financial statements could be materially impacted if actual risk scores are different from the estimated risk scores. If our accrual estimates for risk scores atJune 30, 2022 were to differ by +/- 5{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}, the impact on revenues would be approximately$0.5 million . These adjustments are not expected to be material. Certain third-party payor contracts include a Medicare Part D payment related to pharmacy claims, which is subject to risk sharing through accepted risk corridor provisions. Under certain agreements the fund risk allocation is established whereby we, as the contracted provider, receive only a portion of the risk and the associated surplus or deficit. We estimate and recognize an adjustment monthly to Part D capitation revenues related to these risk corridor provisions based upon pharmacy claims experience to date, as if the annual risk contract were to terminate at the end of the reporting period.
Intangible assets consist of customer relationships acquired through business acquisitions.Goodwill represents the excess of consideration paid over the fair value of net assets acquired through business acquisitions.Goodwill is not amortized but is tested for impairment at least annually. We test goodwill for impairment annually onApril 1 or more frequently if triggering events occur or other impairment indicators arise which might impair recoverability. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale, disposition of a significant portion of the business, or other factors. Impairment of goodwill is evaluated at the reporting unit level. A reporting unit is defined as an operating segment (i.e. before aggregation or combination), or one level below an operating segment (i.e. a component). For purposes of the annual goodwill impairment assessment, the Company has identified three reporting units. There were no indicators of impairment identified and no goodwill impairments recorded during the years endedJune 30, 2022 and 2021. In determining the fair value of our reporting units, we estimate a number of factors including anticipated future cash flows and discount rates. Although we believe these estimates are reasonable, actual results could differ from those estimates due to the inherent uncertainty involved in making such estimates. 74 Table of Contents
Additionally, the customer relationships represent the estimated values of
customer relationships of acquired businesses and have definite lives. We
amortize these intangible assets on a straight-line basis over their ten-year
estimated useful life. ASC 360, Property, Plant, and Equipment ("ASC 360"),
provides guidance for impairment related to definite life assets including,
customer relationships, for which we reviewed for impairment in conjunction with
long-lived assets. We test for recoverability of the customer relationships
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Changes in assumptions concerning future financial
results or other underlying assumptions could have a significant impact on the
determination of the fair value. Judgment is also required in determining the
intangible asset's useful life.
Reported and estimated claims
Reported and estimated claims expenses are costs for third-party healthcare service providers that provide medical care to our participants for which we are contractually obligated to pay (through our full-risk capitation arrangements). The estimated reserve for unpaid claims liability is included in the liability for reported and estimated claims in the consolidated balance sheets and requires estimates including actual member utilization of health care services, unit cost trends, participant acuity, changes in net census, known outbreaks of disease, including COVID-19 or increased incidence of illness such as influenza and other factors. We periodically assess our estimates with an independent actuarial expert to ensure our estimates represent the best, most reasonable estimate given the data available to us at the time the estimates are made. We have included incurred but not reported claims of approximately$38.5 million and$33.2 million on our balance sheet as ofJune 30, 2022 and 2021, respectively. Our recorded medical claims expense estimate is approximately within +/- 5-10{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} of actual medical claims expense incurred, or less than 1{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} of our total operating expense. The following tables provide information about incurred and paid claims reporting and development as ofJune 30, 2022 (except as otherwise noted). The expenses recorded table reflects the amount of claims reported in our consolidated statements of operations as of the end of the applicable fiscal year based on our best and most reasonable estimates and actuarial assessment at the time of such determination. The cumulative actual incurred claims table represents the actual amount of claims incurred by the Company with the benefit of the passage of time. The variance between the expense recorded and the cumulative actual incurred claims ranges between approximately 1{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} and 3{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} of actual total incurred claims over the periods presented, and such variance may vary based on the factors described above in this section. Expenses Recorded for the Fiscal Years Ended June 30, 2018 2019 2020 2021 2022 in thousands Claims incurred year: FY 2018$ 123,821 FY 2019$ 171,128 FY 2020$ 211,381 FY 2021$ 234,070 FY 2022$ 299,432 Total$ 123,821 $ 171,128 $ 211,381 $ 234,070 $ 299,432 Pharmacy expense 83,614 External provider costs$ 383,046 75 Table of Contents Cumulative Actual Incurred Claims for the Fiscal Years Ended June 30, 2018 2019 2020 2021 2022 in thousands Claims incurred year: FY 2018$ 119,687 $ 119,687 $ 119,687 $ 119,862 $ 119,860 FY 2019 173,047 173,061 172,855 172,802 FY 2020 210,512 205,633 205,550 FY 2021 239,207 238,488 FY 2022 291,315 Total$ 119,687 $ 292,734 $ 503,260 $ 737,557 $ 1,028,015 Cumulative Actual Paid Claims
for the Fiscal Years Ended
2018 2019 2020 2021 2022
in thousands
Claims incurred year:
FY 2018 $ 109,022 $ 119,759 $ 119,687 $ 119,862 $ 119,860
FY 2019 144,943 173,048 172,855 172,803
FY 2020 179,616 205,601 205,550
FY 2021 205,356 238,476
FY 2022 252,665
Total $ 109,022 $ 264,702 $ 472,351 $ 703,674 $ 989,354
Other claims-related liabilities
(207) Reported and estimated claims$ 38,454
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements “Summary of Significant
Accounting Policies-Recent Accounting Pronouncements” for more information.
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