InnovAge Holding Corp. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2022 (the second quarter and first half of fiscal 2023). Unaudited results are compared with the corresponding 2021 periods. InnovAge operates PACE programs for seniors, serving approximately 6,460 participants through 18 centers in five states at period-end.
Financial performance
- Revenue: Second-quarter revenue was $167.5 million, down 4.5% year over year; first-half revenue was $338.7 million, down 2.8%. Capitation revenue, substantially all revenue, declined 4.5% for the quarter and 2.7% for the half year. Lower member months drove the declines, partly offset by higher capitation rates.
- Profitability: Second-quarter operating loss was $13.7 million, versus operating income of $3.0 million a year earlier. Net loss was $10.5 million, or $0.07 per share; loss attributable to InnovAge was $9.8 million. First-half operating loss was $30.3 million and net loss was $24.2 million, versus prior-year operating income of $14.6 million and net income of $8.7 million. Parent-company loss was $22.9 million, or $0.17 per share.
- Costs and margins: First-half external provider costs rose 4.8% to $189.7 million, and cost of care rose 25.5% to $104.9 million. Together these costs were approximately 87% of revenue. Center-level Contribution Margin fell to $44.0 million, or 13.0% of revenue, from $83.7 million, or 24.0%. First-half Adjusted EBITDA was negative $5.8 million (negative 1.7% margin), versus $33.0 million (9.5%) a year earlier. These are non-GAAP measures.
- Cash flow: First-half operating cash flow was negative $22.0 million, versus positive $31.6 million in the prior year. Investing cash outflow was $59.6 million, including $45.0 million of short-term investment purchases and $14.6 million of capital expenditures. Financing cash outflow was $3.3 million. Cash, cash equivalents and restricted cash decreased $85.0 million to $99.5 million.
- Liquidity and debt: At December 31, cash and cash equivalents were $99.5 million and short-term investments were $45.4 million. Total debt principal was $71.7 million; the term loan rate was 6.14%. The company had no revolver borrowings and $97.2 million of remaining capacity, subject to covenants and other borrowing conditions. It reported compliance with debt covenants. Operating and finance lease liabilities totaled $36.4 million.
- Balance sheet: Total assets were $546.1 million and stockholders’ equity was $317.7 million at December 31, 2022.
Material changes and management commentary
- Participant census was approximately 6,460 versus 7,050 a year earlier; first-half member months declined to 39,210 from 42,095. Management attributed weaker enrollment and member months primarily to sanctions at Colorado and Sacramento centers.
- First-half operating expenses increased $35.2 million, or 10.5%. Management cited higher wages and staffing, increased housing utilization and rates, transportation costs, audit and compliance support, and corporate initiatives. It expects elevated operating expenses through the remainder of fiscal 2023; no numerical earnings or revenue guidance is provided.
- CMS and Colorado’s HCPF lifted enrollment sanctions at all Colorado centers on January 23, 2023, after the reporting date. Post-sanction corrective action and monitoring remain required. At Sacramento, CMS lifted the Medicare enrollment sanction in November 2022, but California’s DHCS sanction on Medicaid enrollment remained in place; Medicaid enrollment is needed to enroll dual-eligible participants.
- Management says it believes cash, operating cash flows, available funds and financing access will meet operating and capital needs for the next 12 months and beyond, while cautioning that assumptions may prove inaccurate. Capital needs include debt service, leases, remediation, capital spending and implementation of a new electronic medical record system.
Risks, contingencies and unusual items
- Government audits and investigations remain significant risks. The company is cooperating with Colorado and federal DOJ civil investigative demands concerning Medicaid billing, services, referrals, audits, and care quality and timeliness. Audit activity also includes California and New Mexico centers; outcomes and timing are uncertain.
- A putative securities class action alleges misleading statements and omissions in connection with the IPO and later disclosures. The company and certain defendants moved to dismiss; the company said it could not predict the outcome. A stockholder books-and-records demand is also pending. The company cannot predict whether legal matters will materially affect results.
- PACE is fully capitated: InnovAge bears financial responsibility for participants’ healthcare costs. Key risks include medical-cost overruns, reliance on Medicare and Medicaid, regulatory changes, staffing constraints, and limits on enrollment or expansion. California enrollment restrictions and pauses or impediments to planned de novo centers constrain growth.
- The company adopted lease accounting standard ASC 842 on July 1, 2022, recognizing $25.1 million of operating lease liabilities and $23.6 million of operating lease assets; management said the adoption did not materially affect operations or cash flows.
- Management reported disclosure controls and procedures were effective as of December 31, 2022, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Progress and validation results for corrective actions, particularly whether California DHCS lifts the Sacramento Medicaid enrollment sanction.
- Whether enrollment recovery in Colorado and Sacramento improves census, member months, and capitation revenue.
- Trends in provider costs, cost of care, labor expense, and center-level contribution margin against management’s stated expectation of elevated costs.
- Cash use, operating cash flow, and liquidity needs, including the distinction between cash and short-term investments and the conditions on revolver availability.
- Developments in the DOJ and state investigations, securities litigation, and any resulting financial or operational consequences.