InnovAge (INNV) - 2022 Q2 - Quarterly Report

Cautionary Note on Forward-Looking Statements Forward-Looking Statements The report contains forward-looking statements about future performance, which are subject to risks and uncertainties - Forward-looking statements describe future expectations, plans, results, or strategies, including increasing participant numbers, growing enrollment and capacity, and building de novo centers[7] - Actual results may differ materially due to risks such as periodic inspections and audits (e.g., ongoing audit of Albuquerque center, sanctions in Colorado and Sacramento), security breaches, internal control deficiencies, and competition for personnel[7][8] - The Company undertakes no obligation to update or revise any forward-looking statement unless required by law[10] Part I — Financial Information Item 1. Financial Statements (Unaudited) This section presents unaudited condensed consolidated financial statements and accompanying notes for the period Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | December 31, 2021 | June 30, 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $558,001 | $531,752 | $26,249 | 4.9% | | Total Liabilities | $189,565 | $173,787 | $15,778 | 9.1% | | Total Stockholders' Equity | $349,586 | $340,979 | $8,607 | 2.5% | | Cash and cash equivalents | $216,314 | $201,466 | $14,848 | 7.4% | | Accounts receivable, net | $33,288 | $32,582 | $706 | 2.2% | | Total current liabilities | $89,316 | $78,565 | $10,751 | 13.7% | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $175,350 | $157,311 | $348,420 | $309,877 | | Total Expenses | $172,397 | $136,769 | $333,807 | $327,514 | | Operating Income (Loss) | $2,953 | $20,542 | $14,613 | $(17,637) | | Net Income (Loss) | $1,106 | $9,607 | $8,730 | $(40,193) | | Net Income (Loss) Attributable to InnovAge Holding Corp. | $1,323 | $9,705 | $9,009 | $(39,950) | | Net income (loss) per share - basic | $0.01 | $0.08 | $0.07 | $(0.34) | | Net income (loss) per share - diluted | $0.01 | $0.08 | $0.07 | $(0.34) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' Equity Changes (in thousands) | Metric | Balances, June 30, 2021 | Balances, December 31, 2021 | | :--- | :--- | :--- | | Common stock | $136 | $136 | | Additional paid-in capital | $323,760 | $325,501 | | Retained earnings | $10,663 | $17,695 | | Noncontrolling interests | $6,420 | $6,254 | | Total stockholders' equity | $340,979 | $349,586 | - The Company restated prior period financial statements to reclassify redeemable noncontrolling interests from permanent to temporary equity, impacting retained earnings and total stockholders' equity as of June 30, 2021[33] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | Six Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2020 | Change ($) | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $31,577 | $(743) | $32,320 | | Net cash used in investing activities | $(13,681) | $(13,464) | $(217) | | Net cash used in financing activities | $(3,048) | $(21,365) | $18,317 | | INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS & RESTRICTED CASH | $14,848 | $(35,572) | $50,420 | | CASH, CASH EQUIVALENTS & RESTRICTED CASH, END OF PERIOD | $218,548 | $78,993 | $139,555 | Notes to Condensed Consolidated Financial Statements Note 1: Business - InnovAge Holding Corp. (formerly TCO Group Holdings, Inc.) was formed in 2016 and became a public company in March 2021, trading on NASDAQ under 'INNV'[25][29] - The Company is the largest PACE (Program of All-Inclusive Care for the Elderly) provider in the U.S., serving approximately 7,050 participants across 18 centers in five states as of December 31, 2021[27] - InnovAge operates as one reportable segment, PACE, providing comprehensive medical and ancillary services to frail elderly, predominantly dual-eligible, individuals through a fully-capitated managed care program[26][28] Note 2: Summary of Significant Accounting Policies - The unaudited interim condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information[31] - The Company restated its June 30, 2021 balance sheet and statement of stockholders' equity to reclassify $17.0 million of redeemable noncontrolling interests from permanent to temporary equity[33] - COVID-19 led to center closures and a transition to in-home/virtual care, impacting adherence to regulations and causing global supply chain disruptions and higher medical supply prices[36] - The CARES Act and subsequent legislation extended the 2% Medicare sequestration moratorium through March 31, 2022, and adjusted it to 1% between April 1, 2022, and June 30, 2022[37] - The Company adopted ASU 2019-12 (Income Taxes) in Q1 FY2022 with no material effect and plans to adopt ASU 2016-02 (Leases) in FY2023 and ASU 2019-04 (Financial Instruments - Credit Losses) in FY2024[38][40][41] Note 3: Revenue Recognition - Capitation revenue is recognized when the Company satisfies its performance obligation to provide healthcare services to participants, based on estimated PMPM amounts from Medicare, Medicaid, VA, and private pay sources[44][48] Capitation Revenue Sources (Six Months Ended December 31) | Source | 2021 | 2020 | | :--- | :--- | :--- | | Medicaid | 54 % | 52 % | | Medicare | 46 % | 47 % | | Private pay and other | <1 % | 1 % | | Total | 100 % | 100 % | - Medicare Part D comprised 12% of capitation revenues for both six-month periods ended December 31, 2021 and 2020, and 19% and 20% of external provider costs, respectively[51] Accounts Receivable Concentration (December 31) | Source | 2021 | 2021 | | :--- | :--- | :--- | | Medicaid | 49 % | 60 % | | Medicare | 42 % | 20 % | | Private pay and other | 9 % | 20 % | | Total | 100 % | 100 % | - The allowance for uncollectible accounts decreased from $4.4 million as of June 30, 2021, to $2.9 million as of December 31, 2021[52] Note 4: Investments Total Investments (in thousands) | Investment Type | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | | Cost method investments | $4,645 | $2,645 | | Equity method investments | $848 | $848 | | Total investments | $5,493 | $3,493 | - In August 2021, the Company acquired a minority interest in Jetdoc, Inc. for $2.0 million, accounted for using the cost method[58] - The Company consolidated InnovAge Sacramento effective January 1, 2021, after acquiring an additional 0.1% membership interest, resulting in a $10.9 million gain on consolidation[66][72] - Redeemable noncontrolling interests in InnovAge Sacramento were $18.9 million as of December 31, 2021, presented as temporary equity due to put rights held by noncontrolling interest holders[73] Note 5: Fair Value Measurements - Fair value measurements are categorized into Level 1, 2, or 3 inputs, with Level 3 inputs used for the redeemable noncontrolling interest in InnovAge Sacramento due to unobservable inputs[74][75][76] - An adjustment of $2.6 million was recorded to redemption value related to the redeemable noncontrolling interest as of December 31, 2021, representing the excess of fair value over carrying value[76] - Contingent consideration related to the NewCourtland acquisition was fully paid in March 2021, with no outstanding amounts as of December 31, 2021[77][78] Note 6: Goodwill and Intangible Assets - Goodwill remained at $124.2 million as of December 31, 2021, with no impairment recorded during the six months ended December 31, 2021 and 2020[80][81] Intangible Assets (in thousands) | Asset Type | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | | Definite-lived intangible assets | $6,600 | $6,600 | | Indefinite-lived intangible assets | $2,000 | $2,000 | | Total intangible assets | $8,600 | $8,600 | | Accumulated amortization | $(2,413) | $(2,082) | | Balance as of end of period | $6,187 | $6,518 | - Enrollment suspensions at Sacramento (September 2021) and Colorado centers (December 2021) due to quality of care deficiencies led to a decline in common stock price, but a qualitative assessment determined no goodwill impairment was more-likely-than-not as of December 31, 2021[83][84] Note 7: Leases Capital Leases (in thousands) | Metric | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | | Equipment | $16,412 | $13,302 | | Less accumulated depreciation | $(6,284) | $(7,081) | | Total capital leases | $10,128 | $6,221 | - Total rental expense under operating leases was $2.1 million for the six months ended December 31, 2021, compared to $2.3 million for the same period in 2020[85] Future Minimum Lease Payments (in thousands) | Fiscal Year | Operating Leases Obligations | Capital Leases Minimum Lease Payments | | :--- | :--- | :--- | | Amount remaining in 2022 | $1,831 | $2,188 | | 2023 | $3,780 | $4,829 | | 2024 | $3,253 | $4,556 | | 2025 | $2,477 | $4,110 | | 2026 | $1,446 | $4,051 | | Thereafter | $1,819 | $14,029 | | Total | $14,606 | $33,763 | | Less amount representing interest | | $(2,964) | | Total minimum lease payments | | $11,642 | | Less current maturities | | $(2,854) | | Noncurrent maturities | | $8,788 | Note 8: Long Term Debt Long-Term Debt (in thousands) | Debt Type | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | | Term Loan Facility | $73,125 | $75,000 | | Revolving Credit Facility | $0 | $0 | | Convertible term loan | $2,348 | $2,367 | | Total debt | $75,473 | $77,367 | | Less unamortized debt issuance costs | $1,788 | $2,003 | | Less current maturities | $3,792 | $3,790 | | Noncurrent maturities | $69,892 | $71,574 | - The Company entered into a new $75.0 million Term Loan Facility and $100.0 million Revolving Credit Facility (unused) on March 8, 2021, replacing the 2016 Credit Agreement. The Term Loan Facility interest rate was 1.84% as of December 31, 2021[92][93] - The Company was in compliance with all covenants of the 2021 Credit Agreement as of December 31, 2021[94] Note 9: Commitments and Contingencies - The Company is involved in a putative class action complaint filed October 14, 2021, alleging violations of the Securities Act of 1933 related to its IPO[100] - A civil investigative demand was received from the Colorado Attorney General in July 2021 regarding Medicaid billing and patient services in Colorado[101] - A civil investigative demand was received from the Department of Justice (DOJ) in February 2022 under the Federal False Claims Act, requesting information on PACE programs across all operating states[102] - Management does not believe the outcomes of current legal proceedings will have a material adverse effect on the business, financial condition, or cash flows, though they could impact operating results for a particular period[103] Note 10: Equity - On July 27, 2020, the Company repurchased 16,095,819 shares of common stock for $77.6 million and canceled 16,994,975 stock option awards for $74.6 million, resulting in $45.4 million recorded as Corporate, general and administrative expense and $32.4 million as a reduction to Additional paid-in capital[105][106][107] - Transaction costs of $22.6 million were incurred for the six months ended December 31, 2020, with $13.1 million expensed as Corporate, general and administrative and $9.5 million as a distribution to owners[108] Note 11: Stock-based Compensation Stock-based Compensation Expense (in thousands) | Type | Six Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2020 | | :--- | :--- | :--- | | Stock options | $90 | $45,387 | | Profits interests units | $1,029 | $572 | | Restricted stock units | $622 | $0 | | Total stock-based compensation expense | $1,741 | $45,959 | - The 2016 Equity Incentive Plan was canceled and replaced by the 2020 Equity Incentive Plan (for profits interests) and the 2021 Omnibus Incentive Plan (for restricted stock units and stock options)[111][112][115] - Total unrecognized compensation cost for profits interests units was $8.2 million as of December 31, 2021, with $5.0 million for time-based awards (0.9 years weighted-average period) and $3.2 million for performance-based awards[114] - Total unrecognized compensation cost for time-based restricted stock units was $3.0 million (2.0 years weighted-average period) and for performance-based restricted stock units was $1.3 million (3.8 years weighted-average period) as of December 31, 2021[117][120] Note 12: Income Taxes Income Tax Provision and Effective Rate (Six Months Ended December 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Tax provision | $4.2 million | $9.4 million | | Effective tax rate | 32.5 % | (30.6)% | - The effective tax rate for H1 FY2022 was impacted by disallowed officers' compensation and lobbying expenses[122] - A valuation allowance is maintained against deferred tax assets associated with certain state net operating losses, as their realization is not considered 'more likely than not'[124] Note 13: Earnings per Share Earnings per Share (Six Months Ended December 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net income (loss) attributable to InnovAge Holding Corp. | $9,009 | $(39,950) | | Weighted average common shares outstanding (basic) | 135,516,513 | 118,795,021 | | Earnings (loss) per share - basic | $0.07 | $(0.34) | | Weighted average common shares outstanding (diluted) | 135,516,513 | 118,795,021 | | Earnings (loss) per share - diluted | $0.07 | $(0.34) | Note 14: Segment Reporting - The Company has five operating segments (West, Central, East PACE, Homecare, Senior Housing) but aggregates the three PACE segments into one reportable segment due to similar economic characteristics[128] - As of December 31, 2021, InnovAge served approximately 7,050 PACE participants across 18 centers, making it the largest PACE provider in the U.S[129] - Center-level Contribution Margin is the key performance measure, defined as total revenues less external provider costs and cost of care (excluding depreciation and amortization)[131] Segment Operating Results (Six Months Ended December 31, in thousands) | Metric | PACE (2021) | All other (2021) | Totals (2021) | PACE (2020) | All other (2020) | Totals (2020) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenues | $347,587 | $833 | $348,420 | $308,736 | $1,141 | $309,877 | | External provider costs | $181,045 | $0 | $181,045 | $148,826 | $0 | $148,826 | | Cost of care, excluding D&A | $82,579 | $1,060 | $83,639 | $74,712 | $1,645 | $76,357 | | Center-level Contribution Margin | $83,963 | $(227) | $83,736 | $85,198 | $(504) | $84,694 | | Income (Loss) Before Income Taxes | $13,458 | $(531) | $12,927 | $(30,027) | $(743) | $(30,770) | Note 15: Related-party - A subsidiary of the Company, as general partner of Pinewood Lodge, LLP (PWD), provided a $0.7 million loan to fund operating deficits and receives an annual administration fee of $35,000[135] Note 16: Subsequent Events - The Company evaluated subsequent events through February 9, 2022, the issuance date of the financial statements[136] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operational results, key performance drivers, and liquidity Overview - InnovAge became a public company in March 2021 and serves approximately 7,050 PACE participants across 18 centers in five states[139] Impact of COVID-19 - COVID-19 disproportionately impacts older adults, the Company's participant base, leading to center closures in March 2020 and a transition to a 100% in-home and virtual care model[140][141] - The pandemic impacted the Company's ability to adhere to complex government regulations and caused global supply chain disruptions, resulting in higher prices for medical supplies[141] Key Factors Affecting Our Performance - InnovAge focuses on all-inclusive care for frail, high-cost, dual-eligible seniors, receiving larger risk-adjusted payments due to a higher acuity population (average RAF score of 2.36)[143] - Growth in enrollment and capacity is affected by regulatory sanctions, such as new enrollment suspensions at Sacramento and Colorado centers[144] - The Company maintains high participant satisfaction (83% as of July 1, 2021) and retention (average tenure 3.1 years, 5% annual voluntary disenrollment)[144] - Effective management of care costs is crucial, with external provider costs and cost of care representing approximately 76% of revenue in the six months ended December 31, 2021[144] - Expansion via acquisition or de novo centers is a strategy, but regulatory actions can hinder this growth[144] Components of Results of Operations - Capitation revenue is derived from fixed PMPM fees from Medicare, Medicaid, VA, and private pay sources, with state contracts amended annually[147][148] - External provider costs, the largest expense, include inpatient, housing, outpatient, and pharmacy services[151] - Cost of care (excluding D&A) includes expenses for care delivery, such as IDT salaries, transportation, and medical supplies, with a portion being fixed[152] - Sales and marketing expenses cover employee compensation, advertising, and infrastructure, expected to increase with participant census growth[153] - Corporate, general and administrative expenses are expected to increase in absolute dollars due to public company costs and business growth, but decrease as a percentage of revenue long-term[154] - Equity loss relates to the InnovAge Sacramento investment, which became consolidated effective January 1, 2021[156] Results of Operations Revenue Performance (in thousands) | Metric | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | Change ($) | Change (%) | Six Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Capitation revenue | $174,964 | $156,515 | $18,449 | 11.8 % | $347,518 | $308,459 | $39,059 | 12.7 % | | Other service revenue | $386 | $796 | $(410) | (51.5)% | $902 | $1,418 | $(516) | (36.4)% | | Total revenues | $175,350 | $157,311 | $18,039 | 11.5 % | $348,420 | $309,877 | $38,543 | 12.4 % | - Capitation revenue increased due to a 7.3% (three months) / 7.7% (six months) increase in member months and a 4.2% (three months) / 4.6% (six months) increase in capitation rates, primarily from Medicaid[159][161] Operating Expenses Performance (in thousands) | Expense Type | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | Change ($) | Change (%) | Six Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | External provider costs | $91,033 | $75,145 | $15,888 | 21.1 % | $181,045 | $148,826 | $32,219 | 21.6 % | | Cost of care (excl. D&A) | $42,911 | $38,074 | $4,837 | 12.7 % | $83,639 | $76,357 | $7,282 | 9.5 % | | Sales and marketing | $6,679 | $4,631 | $2,048 | 44.2 % | $12,972 | $8,743 | $4,229 | 48.4 % | | Corporate, general, and administrative | $28,482 | $15,729 | $12,753 | 81.1 % | $49,566 | $87,306 | $(37,740) | (43.2)% | | Depreciation and amortization | $3,292 | $2,992 | $300 | 10.0 % | $6,585 | $5,951 | $634 | 10.7 % | | Equity loss | $0 | $541 | $(541) | * | $0 | $1,342 | $(1,342) | * | | Other operating income | $0 | $(343) | $343 | * | $0 | $(1,011) | $1,011 | * | | Total operating expenses | $172,397 | $136,769 | $35,628 | * | $333,807 | $327,514 | $6,293 | * | - External provider costs increased due to a 12.9% (three months) / 13.0% (six months) increase in cost per participant and higher member months, driven by delayed healthcare services and increased housing rates[164] - Corporate, general and administrative expenses increased significantly in the three-month period due to higher employee compensation, compliance, legal, executive severance, and public company costs, but decreased in the six-month period due to one-time Apax Transaction fees in the prior year[169][170] - Interest expense, net, decreased by 89.7% (three months) / 90.0% (six months) due to a lower outstanding debt balance and a lower average interest rate[176] Key Business Metrics and Non-GAAP Measures Key Business Metrics and Non-GAAP Measures (Six Months Ended December 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Centers | 18 | 17 | | Census | 7,050 | 6,600 | | Total Member Months | 42,095 | 39,092 | | Center-level Contribution Margin | $83,736 | $84,694 | | Center-level Contribution Margin as a % of revenue | 24.0 % | 27.3 % | | Adjusted EBITDA | $32,962 | $45,673 | | Adjusted EBITDA Margin | 9.5 % | 14.8 % | - Adjusted EBITDA decreased by 27.8% year-over-year, primarily due to normalization of center-level contribution margin, increased sales and marketing, and higher corporate, general and administrative expenses[193] Adjusted EBITDA Reconciliation (in thousands) | Item | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $1,106 | $9,607 | $8,730 | $(40,193) | | Interest expense, net | $674 | $6,555 | $1,221 | $12,186 | | Depreciation and amortization | $3,292 | $2,992 | $6,585 | $5,951 | | Provision for income tax | $1,201 | $4,486 | $4,197 | $9,423 | | Stock-based compensation | $783 | $526 | $1,741 | $572 | | Rate determination | $0 | $(2,158) | $0 | $(2,158) | | Executive severance and recruitment | $4,123 | $0 | $4,123 | $0 | | Class action litigation | $45 | $0 | $45 | $0 | | M&A diligence, transaction and integration | $513 | $446 | $840 | $58,784 | | Business optimization | $2,671 | $356 | $4,788 | $859 | | EMR implementation | $342 | $97 | $692 | $269 | | Financing-related fees | $0 | $0 | $0 | $991 | | Contingent consideration | $0 | $(343) | $0 | $(1,011) | | Adjusted EBITDA | $14,750 | $22,564 | $32,962 | $45,673 | Liquidity and Capital Resources - As of December 31, 2021, the Company had $218.5 million in cash and cash equivalents, primarily funding operations through cash flows, credit facilities, and IPO proceeds[198] - Capital resources are used for debt service, lease obligations, business operations (including EMR transition costs), income tax payments, and capital additions for de novo centers[199] - The Company believes current cash and cash flows will be sufficient for operating and capital needs for at least the next 12 months, but future capital requirements depend on growth rate and expansion activities[201] - The 2021 Credit Agreement includes a $75.0 million Term Loan Facility and a $100.0 million Revolving Credit Facility (unused as of Dec 31, 2021)[202][203] - Net cash provided by operating activities increased significantly to $31.6 million for the six months ended December 31, 2021, from a net use of $(0.7) million in the prior year, driven by net income and working capital changes[205][206] - The decrease in net cash used in financing activities was primarily due to the non-recurrence of the Apax Transaction-related payments from the prior fiscal year[208] Critical Accounting Policies and Estimates - The financial statements require management to make significant estimates and judgments that affect reported asset and liability amounts and revenue/expense recognition[213] - There have been no significant changes in critical accounting policies, estimates, or methodologies to the condensed consolidated financial statements[215] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's primary market risk exposure stems from potential changes in interest rates and inflation - The Company's market risk exposure is primarily due to potential changes in inflation or interest rates; it does not hold financial instruments for trading[217] - As of December 31, 2021, outstanding debt included $73.1 million under the Term Loan Facility (1.84% interest rate) and $2.4 million under the convertible term loan[218] - A 100 basis point increase or decrease in interest rates is not expected to have a material effect on the Company's business, financial condition, or results of operations[219] - Inflation has not had a material effect on operating results for the periods presented, but future inflation could have an adverse impact[220] Item 4. Controls and Procedures Disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of December 31, 2021[221] - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2021[222] Part II — Other Information Item 1. Legal Proceedings The Company faces a class action lawsuit and civil investigative demands from state and federal authorities - A putative class action complaint was filed on October 14, 2021, alleging violations of the Securities Act of 1933 in connection with the Company's IPO[225] - The Company received a civil investigative demand from the Colorado Attorney General in July 2021 regarding Medicaid billing, patient services, and referrals[226] - A civil investigative demand was received from the Department of Justice in February 2022 under the Federal False Claims Act, concerning PACE programs in all operating states[227] - Management believes current legal proceedings will not have a material adverse effect on the business, operating results, cash flows, or financial condition, despite potential defense and settlement costs[228] Item 1A. Risk Factors This section updates risks related to legal proceedings, regulatory sanctions, and their impact on business operations Risks Related to our Business - The Company is subject to legal proceedings, enforcement actions, and litigation, including a class action complaint related to its IPO, which are costly to defend and could harm the business[230] - Adverse outcomes from litigation or regulatory proceedings could result in significant settlement costs, judgments, penalties, fines, sanctions, and enrollment restrictions (e.g., Sacramento, Colorado centers)[231] - The Company faces lawsuits under the False Claims Act (FCA) and state equivalents, with ongoing civil investigative demands from the Colorado Attorney General and the Department of Justice[234][235][236] - Dependence on senior management and key employees means the loss of such personnel or an inability to attract and retain skilled employees could harm the business, especially with recent executive changes[239][240] Risks Related to Regulation - CMS suspended new enrollments at Colorado centers effective December 23, 2021, and the Colorado Department of Health Care Policy and Financing (HCPF) imposed similar sanctions due to quality of care deficiencies[242] - CMS and the California Department of Health Care Services (DHCS) suspended new enrollments at the Sacramento center effective September 2021 due to audit deficiencies[243] - DHCS suspended State Attestations for de novo centers in California on January 7, 2022, hindering planned expansion until Sacramento's issues are resolved[244] - The State of Kentucky notified the Company on February 9, 2022, of its intent not to enter into a PACE provider agreement[245] - An ongoing routine audit of the Albuquerque, New Mexico center identified preliminary deficiencies, with the outcome and potential sanctions currently uncertain[246] - Failure to remediate deficiencies or satisfy agency concerns could lead to additional sanctions, including enrollment sanctions, refunds, fines, debarment, and damage to reputation, adversely impacting growth strategy[247][248] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales occurred, and the planned use of IPO proceeds remains materially unchanged - No unregistered sales of equity securities occurred during the six months ended December 31, 2021[249] - There have been no material changes in the planned use of proceeds from the IPO completed on March 8, 2021[251] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[252] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable - Mine safety disclosures are not applicable[253] Item 5. Other Information This section indicates that there is no other information to report - No other information to report[254] Item 6. Exhibits This section lists exhibits filed with the report, including governance documents and certifications - The exhibit index includes the Second Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, Employment Agreement for Patrick Blair, Separation Letter, CEO/CFO certifications (302 and 906), and Inline XBRL documents[257] Signatures The report was duly signed on behalf of the Company by its Chief Financial Officer - The report was signed by Barbara Gutierrez, Chief Financial Officer, on behalf of InnovAge Holding Corp. on February 9, 2022[260]