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

General

InnovAge Holding Corp. ("InnovAge"), formerly TCO Group Holdings, Inc., became a
public company in March 2021. The Company serves approximately 6,650 PACE
participants, making it the largest PACE provider in the U.S. based upon
participants served, and operates 18 PACE centers across Colorado, California,
New Mexico, Pennsylvania and Virginia.

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 the U.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 ended June 30, 2022 and 2021, we
acquired significantly greater quantities of medical supplies at significantly
higher

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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. 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 manage a higher acuity population, with an average RAF score of 2.40

based on InnovAge data as of June 30, 2022, compared to an average RAF score of

1.08 for Medicare fee-for-service non-dual enrollees, as calculated in an

? analysis by Avalere Health in June 2020 of a cohort of individuals enrolled in

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 InnovAge is financially responsible for all of their 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 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 California, Colorado and New

Mexico. 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

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 Sacramento, California

and all our centers in Colorado, and our return to growth. For more

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 Centers for Medicare and Medicaid Services (“CMS”) and state

agencies have suspended new enrollments at our Sacramento, California center

   and at our centers in the State of Colorado. See Item 1A.


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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% participant

satisfaction rating as of January 1, 2022 and average participant tenure of

? 3.7 years as of June 30, 2022, 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 5% annually over the last three fiscal years. Approximately 75% 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 U.S. healthcare system, our external

provider costs and cost of care, excluding depreciation and amortization,

? represented approximately 79% of our revenue in the year ended June 30, 2022.

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 Sacramento, California and Colorado limit our ability to

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 January 7, 2022, the Department of

Health Care Services (“DHCS”) of the State of California notified us that it

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 State of California until such time as the

corrective action plans (“CAPs”) and the remediation and validation processes

for our Sacramento center have been successfully completed and the enrollment

? sanctions are lifted. In addition, on February 9, 2022, we received notice from

the Cabinet for Health and Family Services of the State of Kentucky informing

us that they no longer intend to enter into an agreement with us to be a PACE

provider in the State of Kentucky. On February 14, 2022, CMS denied our

application to develop the previously announced PACE center in Terre

Haute, Indiana, which was projected to open in fiscal year 2024 based on

deficiencies detected during CMS’s 2021 audits of our Sacramento and Colorado

PACE programs. In addition, we have committed to CMS and the Agency for

Healthcare Administration in the State of Florida, that we will proactively

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 InnovAge

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 and Colorado and on our ability to open


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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 SEC and the listing

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 %    53 %
Medicare                   46 %    47 %
Private pay and other       * %     * %
Total                     100 %   100 %


        * denotes less than 1%

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

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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 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.

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Equity Loss. Equity loss relates to our equity method investment in InnovAge
Sacramento, which began operations in July 2020 and subsequently became a
consolidated entity effective January 1, 2021.

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)


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Revenues

                           Year ended June 30,
                            2022          2021       $ Change     % Change

                                           in thousands

Capitation revenue       $   696,998    $ 635,322    $  61,676        9.7 %
Other service revenue          1,642        2,478        (836)     (33.7) %
Total revenues           $   698,640    $ 637,800    $  60,840        9.5 %


Capitation revenue. Capitation revenue was $697.0 million for the year ended
June 30, 2022, an increase of $61.7 million, or 9.7%, compared to $635.3 million
for the year ended June 30, 2021. This increase was driven by (i) an increase in
capitation rates and (ii) a 4.3% 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 ended
June 30, 2022, a decrease of $0.8 million, or 33.7%, from $2.5 million for the
year ended June 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 ended June
30, 2022 when compared to the same period in 2021.

Expenses

                                                   Year ended June 30,
                                                    2022          2021        $ Change      % Change

                                                                    in thousands

External provider costs                          $   383,046    $ 309,317    $    73,729       23.8 %
Cost of care (excluding depreciation and
amortization)                                        180,222      154,403         25,819       16.7 %
Sales and marketing                                   24,201       22,236          1,965        8.8 %
Corporate, general, and administrative               101,653      132,333  
    (30,680)     (23.2) %
Depreciation and amortization                         13,924       12,294          1,630       13.3 %
Equity loss                                                -        1,343        (1,343)    (100.0) %
Other operating expenses                                   -       18,211       (18,211)    (100.0) %
Total operating expenses                         $   703,046    $ 650,137    $    52,909        8.1 %


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%, compared
to $309.3 million for the year ended June 30, 2021. The increase was primarily
driven by (i) an increase of 18.8% in cost per participant and (ii) an increase
of 4.3% 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%, 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% in member months and (ii) an increase of 11.9% 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 ended June 30, 2022, an increase of $2.0 million, or 8.8%, compared to
$22.2 million for the year ended June 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 ended June 30, 2022, a
decrease of $30.7 million, or 23.2%, compared to $132.3 million for the year
ended June 30, 2021. The decrease was primarily due to the fees incurred during
fiscal year 2021 as a result of the July 27, 2020 transaction between us, Ignite
Aggregator LP (an investment vehicle owned by certain funds advised by Apax
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 ended June 30, 2022, an increase of $1.6 million, or
13.3%, compared to $12.3 million for the year ended June 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 ended June 30, 2021,
which related to our equity method investment in InnovAge Sacramento. InnovAge
Sacramento began operations in July 2020 and was subsequently consolidated into
operations effective January 1, 2021, therefore there were no equity earnings
for the year ended June 30, 2022.

Other operating expenses. Other operating expenses were $18.2 million for the
year ended June 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 ended
June 30, 2021. There were no such payments during the year ended June 30, 2022.

Other Income (Expense)

                                      Year ended June 30,
                                       2022          2021        $ Change      % Change

                                                       in thousands

Interest expense, net               $  (2,526)    $ (16,787)    $    14,261       85.0 %
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 %
Total other expense                 $  (2,831)    $ (22,632)    $    19,801       87.5 %


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%, 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%, 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% 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 ended June 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.

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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 % of revenue          19.4 %        27.3 %

Non-GAAP Measures:
Adjusted EBITDA(c)                                    $   34,253     $  85,333
Adjusted EBITDA Margin(c)                                    4.9 %        13.4 %

(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 ended June 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% and 16.7%, respectively. This was slightly offset by a 9.5% 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%, and Adjusted EBITDA was $34.3 million and $85.3 million, respectively,
representing a year-over-year decline of 59.9%.

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 June 30, 2021, reflects the CMS settlement payment of
(a) approximately $2.2 million related to end-stage renal disease beneficiaries

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 June 30, 2021, this primarily represents (i) $45.4 million
(d) related to the cancellation of options and the redemption of shares and (ii)

$13.1 million of transaction fees and expenses recognized in connection with

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 June 30, 2022, third party

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) $4.0 million of charges related to

government investigations, and (iii) $3.0 million of costs associated with third

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 ended June
30, 2022, our net loss margin was 1.1%, as compared to our net loss margin of
7.0% for the year ended June 30, 2021. For the year ended June 30, 2022, our
Adjusted EBITDA margin was 4.9%, as compared to our Adjusted EBITDA margin for
the year ended June 30, 2021 of 13.4%.

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 in March 2021. As of the
years ended June 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 our Colorado and
Sacramento 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.

On May 13, 2016, we entered into a credit agreement with Capital One Financial
Corporation (together with all amendments thereto, the "2016 Credit Agreement").
In March 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.

On March 8, 2021, concurrently with the closing of the IPO, the Company entered
into a new credit agreement (the "2021 Credit Agreement") that replaced the 2016
Credit Agreement. The 2021 Credit Agreement consists of a senior secured term
loan (the "Term Loan Facility") of $75.0 million principal amount and a
revolving credit facility (the "Revolving Credit Facility") of $100.0 million
maximum borrowing capacity. Principal on the Term Loan Facility is paid each
calendar quarter in an amount equal to 1.25% of the initial term loan on closing
date. 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 of June 30, 2022, the interest rate on
the Term Loan Facility was 3.83%. Under the terms of the 2021 Credit Agreement,
the Revolving Credit Facility fee accrues at 0.25% of the average daily unused
amount and is paid quarterly. As of June 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 of June 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%. The remaining principal
balance is due upon maturity, which is August 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) $ 73,577 $ 3,793 $

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 July 1, 2022, the results of which are not reflected.

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, the U.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 June 30, 2022 and
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 $ (108,389)


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 ended June 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 the Colorado 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 ended June 30,
2021 compared to net repayments of debt of $3.8 million during the year ended
June 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 ended June
30, 2021.

Emerging Growth Company and Smaller Reporting Company

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 May 2014, the FASB issued Accounting Standards Update 2014-09 (“ASU
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, the VA, 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 at June 30, 2022 were to differ by +/- 5%, 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.

Goodwill and other intangible assets

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 on April 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 ended June 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.

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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 of June 30, 2022 and 2021,
respectively. Our recorded medical claims expense estimate is approximately
within +/- 5-10% of actual medical claims expense incurred, or less than 1% of
our total operating expense.

The following tables provide information about incurred and paid claims
reporting and development as of June 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% and 3%
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


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  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 June 30,

                                       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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