InnovAge Holding Corp. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2021, the company’s fiscal first quarter of fiscal 2022; comparative period is the three months ended September 30, 2020. Amounts below are in millions unless noted.
Business context
InnovAge operates PACE programs, providing coordinated medical and support services to frail seniors under capitated Medicare, Medicaid and other arrangements. It served approximately 6,990 participants at 18 centers in five states. The company bears responsibility for participants’ healthcare costs. Its Sacramento center was consolidated beginning January 1, 2021, so the current quarter includes Sacramento results while the comparative quarter does not.
Financial and operating performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $173.1 | $152.6 |
| Operating income (loss) | $11.7 | $(38.2) |
| Net income (loss) | $7.6 | $(49.8) |
| Net income (loss) attributable to InnovAge | $7.7; $0.06 per share | $(49.7); $(0.41) per share |
| Operating cash flow | $20.6 | $(18.1) |
| Adjusted EBITDA (non-GAAP) | $18.2 | $23.1 |
| Adjusted EBITDA margin (non-GAAP) | 10.5% | 15.1% |
- Revenue increased 13.4%, including capitation revenue growth of 13.6% to $172.6 million. Management attributed capitation growth to a 5.1% increase in rates and an 8.1% increase in member months.
- External provider costs rose 22.2% to $90.0 million, reflecting higher cost per participant (up 13.0%) and increased member months (up 8.1%). Cost of care excluding depreciation and amortization increased 6.4% to $40.7 million.
- Center-level contribution margin was $42.3 million, or 24.5% of revenue, versus $40.6 million, or 26.7%. Management said the lower margin percentage reflected normalization as COVID-19 transmission rates declined.
- GAAP operating margin was approximately 6.7%, compared with a loss margin of approximately 25.0% in the prior-year quarter; net margin was 4.4%, versus negative 32.6%.
- Prior-year results included $45.4 million of expense related to cancellation of stock options and $13.1 million of transaction costs. Excluding those and other specified adjustments, Adjusted EBITDA decreased 21.2%, with management citing higher sales and marketing and public-company costs, as well as normalized center contribution margin.
- Cash and cash equivalents were $215.5 million at September 30, 2021, versus $201.5 million at June 30, 2021. Current assets were $260.6 million and current liabilities $81.2 million.
- Gross debt principal was $76.4 million: $74.1 million under the term loan and $2.4 million under a convertible loan. The company had no revolver borrowings and reported $100.0 million of revolving capacity, subject to letters of credit, covenants and other borrowing conditions. The term loan rate was 1.84% at quarter end.
- Investing cash outflow was $5.0 million, including $3.0 million of property and equipment purchases and a $2.0 million investment in Jetdoc. Financing cash outflow was $1.5 million. Cash, cash equivalents and restricted cash increased $14.1 million.
Outlook, risks and unusual items
- Management said existing cash and expected operating cash flows should fund operating and capital needs for at least the next 12 months, while cautioning that estimates depend on assumptions and future capital needs could vary. No specific earnings or revenue guidance was provided.
- The company intends to invest in centers, sales and marketing, and growth, including potential de novo centers. It expects absolute expenses to rise in the near term, including public-company and electronic medical record implementation costs.
- CMS notified InnovAge on September 17, 2021, and California on September 30, that new enrollments at the Sacramento center were suspended following audit deficiencies related to participant quality of care. The suspension remains until regulators are satisfied with remediation. The company submitted a corrective action plan in October; the review was ongoing as of the filing.
- Colorado agencies and CMS conducted audits of the company’s Colorado programs. Preliminary results included issues in two of six validation areas, and the matter was referred to CMS’s Compliance and Enforcement Division. Final reports were expected in early 2022; possible sanctions were uncertain. InnovAge also received a Colorado Attorney General civil investigative demand regarding Medicaid billing, patient services and referrals.
- A putative securities class action was filed October 14, 2021, alleging inaccurate or misleading IPO disclosures. The company said it could not predict the outcome. It also noted potential exposure to regulatory penalties, enrollment restrictions, refunds, litigation costs and reputational harm.
- The company restated the June 30, 2021 presentation of $17.0 million of redeemable noncontrolling interests, reclassifying it from permanent equity to temporary equity and recording a related $0.6 million redemption-value adjustment. Management concluded the error was not material to the prior period.
- COVID-19 continued to affect operations and supply chains; management cited higher prices for medical supplies and said the pandemic’s ultimate financial impact could not be reliably estimated.
Important facts for investors to verify
- Progress and regulatory acceptance of Sacramento’s corrective actions, and the duration and financial effect of its enrollment suspension.
- Outcomes of the Colorado audits and Attorney General investigation, including any sanctions or required refunds.
- Enrollment, member-month and capitation-rate trends against rising provider costs, and their effect on contribution and Adjusted EBITDA margins.
- Whether operating cash generation and available liquidity remain sufficient amid growth investment, lease commitments and debt service.
- The treatment and potential impact of the IPO-related securities lawsuit, and the company’s restated equity presentation.