InnovAge Holding Corporation

02/03/2026 | Press release | Distributed by Public on 02/03/2026 16:10

Quarterly Report for Quarter Ending December 31, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. 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. Readers are cautioned not to place undue reliance on any forward-looking statements, as forward-looking statements are not guarantees of future performance and the Company's actual results may differ significantly due to numerous known and unknown risks and uncertainties, including those discussed below and in the section entitled "Cautionary Note on Forward-Looking Statements." Those known risks and uncertainties include, but are not limited to, the risk factors identified in the section titled "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2025 ("2025 10-K").
Overview
InnovAge Holding Corp. ("InnovAge") became a public company in March 2021. As of December 31, 2025, the Company served approximately 8,010 PACE participants, and operated 20 PACE centers across California, Colorado, Florida, New Mexico, Pennsylvania, and Virginia.
Trends and Uncertainties Affecting the Company
Increased cost of care and external provider costs. We anticipate increased cost of care from our third-party service providers in an effort to offset their heightened expenses resulting, in part, from budget pressures due to the OBBBA as well as budget cuts to providers from state Medicaid programs, as well as possible increases in cost of medical and other supplies used in order to provide healthcare services. While we did not experience a material increase to our cost of care during the second quarter of fiscal year 2026, we continue to monitor the situation. We believe that our clinical value initiatives and operational value initiatives, which continue to be developed, may assist us in offsetting the increased cost of care anticipated for the second half of fiscal year 2026.
Labor market and access to supportive housing facilities. The healthcare sector continues to experience workforce shortages, particularly in geriatrics, primary care and direct care roles, as well as a complex set of challenges in hiring additional professionals, which continued through the second quarter of fiscal year 2026. Competition from health systems and home health providers for nurses, drivers and caregivers, in addition to the systemic challenges related to workforce training and the pipeline of qualified professionals, has remained challenging for the Company's ability to recruit and retain staff. These labor market pressures have increased wage and benefit costs, and have also affected our staffing ability which could impact our enrollment capacity and services. To mitigate these challenges, we implemented targeted compensation in line with the markets in which we operate and focused retention programs for critical roles, along with operational measures to help improve productivity and continue reducing reliance on agency staffing. Partially as a result of increased competition and other market trends, in conjunction with increased staffing related to our growth, there was an increase in the cost of care for the second quarter of fiscal year 2026 compared to the comparable period for fiscal year 2025, as discussed in "Results of Operations" below.
In addition, a shortage of clinicians combined with an aging population creates increased demand on the limited number of existing residential facilities. As a result, the access of our participants to such facilities is uncertain, as such facilities may prioritize private payors or may be unable to accept participants at pre-determined rates. If we are unable to access residential facilities, we could be unable to continue providing PACE services to participants who require such facilities.
Census and capitation revenue.The delays and increased gaps in eligibility both for new enrollments and Medicaid redetermination applications that we experienced during fiscal years 2025 and 2024 due to processing delays and other enrollment and redetermination procedures that vary by State and county continued into the second quarter of fiscal year 2026, though to a lesser degree than experienced at the end of fiscal year 2025. While processing delays generally reduced in measure during the first half of fiscal year 2026, it is possible that these delays could persist or be exacerbated due to potential future impacts of the OBBBA. This has not yet had a material effect on the Company's financial statements or operations; however, we continue to monitor the effects.
Medicaid Spending. The OBBBA adopted in July 2025, mandates significant reductions in federal Medicaid spending, introduces new work requirements for Medicaid beneficiaries aged 19 to 64 and cost-sharing measures for certain Medicaid
beneficiaries, and requires states to conduct bi-annual eligibility verifications of Medicaid enrollees in the expansion population. With the federal funding cuts and states being prohibited from increasing provider taxes to finance their share of Medicaid spending, states may also face budgetary pressures. Such budgetary pressure may potentially lead to reductions in certain optional Medicaid benefits, reductions in the workforce for the government entities that oversee and administer Medicaid and PACE, causing delays, and downward pressure on rates, including our capitated fee payment. Finally, the new requirements may necessitate adjustments in our administrative processes to ensure compliance with the OBBBA and other reporting standards mandated by federal and state regulatory agencies. Changes in verification requirements have not yet taken effect and we expect more information to be available following each states' confirmed budgeting process.
Macroeconomic Trends. The imposition and suspension of tariffs by the U.S. government, which remain subject to change and legal challenges, retaliatory measures by other countries, and significant uncertainty surrounding trade tensions may result in higher prices for medical and other supplies and lead to supply chain disruptions and additional costs. The degree to which tariffs affect the global supply chain and our business will depend on their timing, duration and magnitude, which may be changed at any time and with little or no prior notice. We did not experience a material effect as result of these trade disputes during the first two quarters of fiscal year 2026.
California Moratorium. Effective November 20, 2025, the California Department of Health Care Services (DHCS) paused PACE applications for all PACE organizations for a minimum of two years, or until otherwise notified. The pause does not apply to the Downey and Bakersfield center applications, which are considered to be in the review process. The pause, however, would impact the opening and/or acquisition of other de novo centers in the state of California.
For additional information on the various risks posed by macroeconomic events, regulation, and employee matters, please see the section entitled "Risk Factors" included in Part I, Item 1A of our 2025 10-K.
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 believe we manage a higher acuity population, with an average risk adjustment factor ("RAF") score of 2.50 based on InnovAge data as of December 31, 2025; and (ii) we have Medicaid spend in addition to Medicare. Our participants are managed on a capitated, or at-risk basis, where InnovAge is financially responsible for all participant 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. The Medicare portion of our capitated payment is risk-based on the underlying medical conditions and frailty of each participant. We continue to strengthen our encounter data submission process so that our revenue more accurately reflects the acuity of the populations we serve.
•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 competition, costs and sanctions issued by regulators or suspensions of State attestations required to open new de novo centers.
•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. Our average participant tenure was 3.2 years as of December 31, 2025, 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 7.0% annually over the last three fiscal years.
•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. The risk pool of our population is highly acute. Various factors, including increased salaries, wages and benefits, increased staffing, annual increases in assisted living and nursing facility unit cost and general medical inflation have affected our external provider costs and cost of care, excluding depreciation and amortization, which represented approximately 78% of our revenue in the six months ended December 31, 2025.
•Center-level Contribution Margin. The Company's management uses Center-level Contribution Margin as the measure for assessing performance of its operating segments. As we serve more participants in existing centers, we anticipate being able to leverage our fixed cost base at those centers and increase the value of a center to our business over time.
•Our ability to expand via de novo centers within existing and new markets. Several factors can affect our ability to open de novo centers, including actions by local and state regulators, such as the moratorium issued in California by DHCS and any sanctions issued, legal, community or other obstacles in the construction or opening of such centers.
In response to an audit to our Sacramento center and a medical review of our San Bernardino center, which have been previously disclosed, DHCS suspended its attestations in support of the planned de novo center in Downey and Bakersfield, California. CMS has closed its process and DHCS's process is ongoing. On December 23, 2025, we received a formal Corrective Action Plan (CAP) from DHCS to remediate findings resulting from the San Bernardino medical review. We plan to work closely with the State to fulfill the obligations of the CAP. While the planned California de novo centers are precluded from opening at this time, DHCS notified us that it would consider restoring the State Attestations upon our successful remediation of the deficiencies raised in our Sacramento center and its completion of the medical review, including the resultant remediation, in our San Bernardino center.
•Execute tuck-in acquisitions, strategic transactions and partnerships.Since fiscal year 2019, we have acquired and integrated four PACE organizations for a total of eight operational centers (excluding the PACE center in Bakersfield, California, which is not yet operational). These acquisitions represent expansion of our InnovAge Platform into one new state and five new markets. By bringing acquired organizations under the InnovAge Platform, we anticipate increased revenue growth and operational efficiency and care delivery post-integration. We also have pursued and intend to continue pursuing additional relationships with key stakeholders, existing organizations and other care providers in order to form partnerships in target geographies, such as the joint ventures with Orlando Health and Tampa General Hospital relating to our Orlando PACE center and our Tampa PACE center, respectively. In fiscal year 2025, we acquired certain pharmacy assets from Tabula Rasa HealthCare Group, Inc. ("TRHC"), with the goal of supporting our growth and improving pharmacy cost-management.
•Our ability to maintain high quality of regulatory compliance. The Company's priority is to continue to maintain high quality of regulatory compliance in all its centers.
•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, in existing markets as well as 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 due, partially, to additional costs we incur in connection with our 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. Beginning in fiscal year 2024, we have made investments to increase our sophistication as a payor to drive clinical value, improve outcomes, and manage cost trends, and have continued investing in such activities in fiscal year 2026. Accordingly, in the short term, we expect these activities 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 of our business. Our operational and financial results, including medical costs and per-participant revenue true-ups, 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 and COVID-19 viruses, 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 from 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. Where there is a difference between our estimate and the final determination from CMS, we may record either an increase or decrease in true-up revenue. 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 into nor control over the timing of such payments. The variability of participant enrollments and voluntary disenrollments has also been impacted by additional offerings by MA and other competitors including PACE organizations in select markets.
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.
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 renewed annually each 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 Estimatesbelow and Note 2 "Summary of Significant Accounting Policies" to our consolidated financial statements included in our 202510-K.
Other Service Revenue.Other service revenue primarily consists of revenues derived from state food grants and rent revenues. For a discussion of our revenue recognition policies, please see Critical Accounting Estimatesbelow and Note 2, "Summary of Significant Accounting Policies" to our consolidated financial statements included in our 202510-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 and skilled nursing facility), 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 salaries, wages and benefits for IDT and other 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. Other 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, including our employee-related costs, is directly related to the number of participants cared for in a center. The remainder of our cost of care is fixed relative to the number of participants we serve, such as occupancy and insurance expenses. As a result, as revenue increases due to census growth, cost of care, excluding depreciation and amortization, moderately 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 as well as financial eligibility support for both prospective and existing participants. 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 accelerate 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 corporate office. 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.
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 our 202510-K.
Results of Operations
The following table sets forth our consolidated results of operations for the periods presented:
Three Months Ended December 31, Six Months Ended December 31,
in thousands 2025 2024 2025 2024
Revenues
Capitation revenue $ 239,620 $ 208,674 $ 475,371 $ 413,474
Other service revenue 88 325 442 667
Total revenues 239,708 208,999 475,813 414,141
Expenses
External provider costs 111,999 107,873 220,859 215,087
Cost of care, excluding depreciation and amortization 74,884 64,061 150,772 127,447
Sales and marketing 8,078 7,704 15,684 14,196
Corporate, general and administrative 26,608 28,103 56,881 55,638
Depreciation and amortization 4,877 5,319 9,962 10,730
Impairments and loss on assets held for sale - 8,495 104 8,495
Total expenses 226,446 221,555 454,262 431,593
Operating Income (Loss) 13,262 (12,556) 21,551 (17,452)
Other Income (Expense)
Interest expense, net (1,246) (760) (2,498) (1,408)
Other income (expense) 440 (157) 1,319 80
Gain on equity method investment - 16 - 16
Total other expense (806) (901) (1,179) (1,312)
Income (Loss) Before Income Taxes 12,456 (13,457) 20,372 (18,764)
Provision for Income Taxes 651 34 898 437
Net Income (Loss) 11,805 (13,491) 19,474 (19,201)
Less: net income (loss) attributable to noncontrolling interests 1,187 (270) 837 (1,051)
Net Income (Loss) Attributable to InnovAge Holding Corp. $ 10,618 $ (13,221) $ 18,637 $ (18,150)
Revenues
Three Months Ended December 31, Change Six Months Ended December 31, Change
2025 2024 $ % 2025 2024 $ %
in thousands
Capitation revenue $ 239,620 $ 208,674 $ 30,946 14.8 % $ 475,371 $ 413,474 $ 61,897 15.0 %
Other service revenue 88 325 (237) (72.9) % 442 667 (225) (33.7) %
Total revenues $ 239,708 $ 208,999 $ 30,709 14.7 % $ 475,813 $ 414,141 $ 61,672 14.9 %
Capitation revenue. Capitation revenue was $239.6 million for the three months ended December 31, 2025, an increase of $30.9 million, or 14.8%, compared to $208.7 million for the three months ended December 31, 2024. This increase was driven by a $14.5 million, or 6.4%, increase in capitation rates coupled with a $16.5 million, or 7.9%, increase in member months for the three months ended December 31, 2025 as compared to the three months ended December 31, 2024. The increase in capitation rates for the three months ended December 31, 2025 was primarily driven by (i) an 8.0% annual increase in Medicaid capitation rates as determined by the States partially offset by revenue reserve and (ii) a 4.1% increase in Medicare capitation rates. The increase in member months was primarily due to growth in our California, Florida, and Colorado centers.
Capitation revenue was $475.4 million for the six months ended December 31, 2025, an increase of $61.9 million, or 15.0%, compared to $413.5 million for the six months ended December 31, 2024. This increase was driven by a $25.1 million, or 5.6%, increase in capitation rates coupled with a $36.8 million, or 8.9%, increase in member months for the six months ended December 31, 2025 as compared to the six months ended December 31, 2024. The increase in capitation rates includes an 8.0% increase in Medicaid rates partially offset by revenue reserve and a 3.9% increase in Medicare rates. The increase in member months was primarily due to growth in our California, Florida, and Colorado centers.
Operating Expenses
Three Months Ended December 31, Change Six Months Ended December 31, Change
2025 2024 $ % 2025 2024 $ %
in thousands
External provider costs $ 111,999 $ 107,873 $ 4,126 3.8% $ 220,859 $ 215,087 $ 5,772 2.7%
Cost of care (excluding depreciation and amortization) 74,884 64,061 10,823 16.9% 150,772 127,447 23,325 18.3%
Sales and marketing 8,078 7,704 374 4.9 % 15,684 14,196 1,488 10.5 %
Corporate, general, and administrative 26,608 28,103 (1,495) (5.3)% 56,881 55,638 1,243 2.2%
Depreciation and amortization 4,877 5,319 (442) (8.3)% 9,962 10,730 (768) (7.2)%
Impairments and loss on assets held for sale - 8,495 (8,495) -% 104 8,495 (8,391) 100.0%
Total operating expenses $ 226,446 $ 221,555 $ 4,891 $ 454,262 $ 431,593 $ 22,669
External provider costs. External provider costs were $112.0 million for the three months ended December 31, 2025, an increase of $4.1 million, or 3.8%, compared to $107.9 million for the three months ended December 31, 2024. The increase was driven by an increase of $8.5 million, or 7.9%, in member months partially offset by a decrease of $4.4 million, or 3.8% in cost per participant for the three months ended December 31, 2025 as compared to the three months ended December 31, 2024. The decrease in cost per participant for the three months ended December 31, 2025 was primarily driven by a decrease in permanent nursing facility utilization, and a decrease in pharmacy expense associated with the transition to in-house pharmacy services. The decrease in cost per participant was partially offset by an annual increase in assisted living and permanent nursing facility unit cost, an increase in assisted living utilization, and an increase in inpatient unit cost.
External provider costs were $220.9 million for the six months ended December 31, 2025, an increase of $5.8 million, or 2.7%, compared to $215.1 million for the six months ended December 31, 2024. This increase was driven by an increase of $19.1 million, or 8.9%, in member months partially offset by a decrease of $13.4 million, or 5.7%, in cost per participant for the six months ended December 31, 2025 as compared to the six months ended December 31, 2024. The decrease in cost per participant was primarily driven by a decrease in permanent nursing facility utilization and a decrease in pharmacy expense associated with the transition to in-house pharmacy services. The decrease in cost per participant was partially offset by an annual increase in assisted living and permanent nursing facility unit cost, an increase in assisted living utilization, and an increase in inpatient unit cost.
Cost of care (excluding depreciation and amortization). Cost of care (excluding depreciation and amortization) expense was $74.9 million for the three months ended December 31, 2025, an increase of $10.8 million, or 16.9%, compared to $64.1 million for the three months ended December 31, 2024. This increase was driven by an increase of $5.8 million, or 8.3%, in cost per participant coupled with an increase of $5.1 million, or 7.9%, in member months. The overall increase of cost of care for the three months ended December 31, 2025 as compared to the three months ended December 31, 2024 was primarily driven by (i) a $2.0 million net increase in salaries, wages and benefits due to higher wage rates and cost associated with organizational restructure, partially offset by a reduction in headcount, (ii) $4.8 million in third party fees and shipping costs associated with in-house pharmacy services, and (iii) $3.2 million in fleet costs including contract transportation.
Cost of care (excluding depreciation and amortization) expense was $150.8 million for the six months ended December 31, 2025, an increase of $23.3 million, or 18.3%, compared to $127.4 million for the six months ended December 31, 2024. This increase was driven by an increase of $12.0 million, or 8.6%, in cost per participant coupled with an increase of $11.3 million, or 8.9%, in member months. The overall increase for the six months ended December 31,
2025 as compared to the six months ended December 31, 2024 was primarily driven by (i) a $6.4 million increase in salaries, wages, and benefits associated with higher wage rates and an increase in headcount, (ii) $9.6 million in third party fees and shipping costs associated with in-house pharmacy services, and (iii) $5.3 million in fleet costs including contract transportation.
Sales and marketing. Sales and marketing expenses were $8.1 million for the three months ended December 31, 2025, an increase of $0.4 million, or 4.9%, compared to $7.7 million for the three months ended December 31, 2024, primarily due to higher wage rates.
Sales and marketing expenses were $15.7 million for the six months ended December 31, 2025, an increase of $1.5 million, or 10.5%, compared to $14.2 million for the six months ended December 31, 2024 primarily due to increased headcount, wage rates, and marketing spend to support growth.
Corporate, general and administrative. Corporate, general and administrative expenses were $26.6 million for the three months ended December 31, 2025, a decrease of $1.5 million, or 5.3%, compared to $28.1 million for the three months ended December 31, 2024. This decrease for the three months ended December 31, 2025 as compared to the three months ended December 31, 2024 was primarily due to (i) $1.1 million decrease in legal fees and (ii) $0.6 million decrease in consulting fees.
Corporate, general and administrative expenses were $56.9 million for the six months ended December 31, 2025, an increase of $1.2 million, or 2.7%, compared to $55.6 million for the six months ended December 31, 2024. This increase for the six months ended December 31, 2025 as compared to the six months ended December 31, 2024 was primarily due to (i) $1.5 million net increase in employee compensation and benefits as the result of an organizational restructure and executive severance and an increase in headcount and wage rates, partially offset by lower variable compensation associated with the restructure (ii) $1.5 million increase in contract services, and (iii) $1.4 million increase in software license fees. These increases in cost were partially offset by (i) $2.4 million reduction in legal fees and (ii) $0.6 million reduction in consulting fees.
Impairments and loss on assets held for sale. On September 11, 2025, the Company closed on the sale of SH1 and the adjacent vacant land and recorded an additional loss on assets held for sale of $0.1 million.
Other Expense
Three Months Ended December 31, Change Six Months Ended December 31, Change
2025 2024 $ % 2025 2024 $ %
in thousands
Interest expense, net $ (1,246) $ (760) $ (486) 63.9% $ (2,498) $ (1,408) $ (1,090) 77.4%
Other income (expense) 440 (157) 597 (380.3)% 1,319 80 1,239 1548.8%
Gain on equity method investment - 16 (16) (100.0)% - 16 (16) (100.0)%
Total other expense $ (806) $ (901) $ 95 $ (1,179) $ (1,312) $ 133
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.
Other income (expense).Other income (expense) consists primarily of the net proceeds received from the sale of or disposal of property and equipment and unrealized gains and losses related to short-term investments.
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 InnovAge Senior Housing Thornton, LLC ("SH1"), InnovAge Sacramento, and InnovAge Orlando have
elected to be taxed as partnerships, and no provision (benefit) for income taxes for InnovAge Sacramento or InnovAge Orlando is included in the condensed consolidated financial statements. In addition, no provision (benefit) for income taxes for SH1 is included in the condensed consolidated financial statements through the date of the Company's sale of its partnership interest in SH1 on September 11, 2025. The Company entered into a joint venture called InnovAge Florida PACE II - Tampa on August 15, 2025 and its members elected to be taxed as a partnership. No provision (benefit) for income taxes for InnovAge Tampa is included in the condensed consolidated financial statements for activity occurring from joint venture formation date through the balance of the fiscal year.
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 (benefit) for income taxes.
During the three months ended December 31, 2025 and 2024, we reported an income tax expense of $0.7 million and $0.03 million, respectively. The increase of $0.7 million for the three months ended December 31, 2025 compared to the three months ended December 31, 2024, was primarily due to (i) our pretax book income recognized during the three months ended December 31, 2025, as compared to pretax book loss recognized during the three months ended December 31, 2024, (ii) a discrete item to account for the impact of the OBBBA, and (iii) the change in our valuation allowance.
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.
Six months ended December 31,
2025 2024
dollars in thousands
Key Business Metrics:
Centers(a)
20 20
Census(a)(b)
8,010 7,480
Total Member Months(a)(b)
47,460 43,580
Center-level Contribution Margin(c)
$ 104,182 $ 71,607
Center-level Contribution Margin as a % of revenue(c)
21.9 % 17.3 %
GAAP Measures:
Net income (loss)
$ 19,474 $ (19,201)
Net income (loss) margin
4.1 % (4.6) %
Non-GAAP Measures:
Adjusted EBITDA(c)
$ 39,794 $ 12,346
Adjusted EBITDA Margin(c)
8.4 % 3.0 %
________________________
(a)Includes InnovAge Sacramento, InnovAge Orlando and, as of August 15, 2025, InnovAge Tampa, which the Company owns and controls through joint ventures and are consolidated in our financial statements.
(b)Amounts are approximate.
(c)Center-level Contribution Margin, Center-level Contribution Margin as a percentage of revenue, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. For a definition and reconciliation of these non-GAAP measures to the most closely comparable GAAP measures for the period indicated, see below.
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
The Company's management uses Center-level Contribution Margin as the measure for assessing performance of its operating segments. 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 Center-level Contribution Margin on a center-by-center basis, we do not allocate our sales and marketing expenses or corporate, general and administrative expenses across our centers. Center-level Contribution Margin was $104.2 million and $71.6 million for the six months ended December 31, 2025 and 2024, respectively. The increase in Center-level Contribution Margin for the six months ended December 31, 2025 compared to the six months ended December 31, 2024 was primarily due to a 14.7% increase in total revenue, offset by a 8.7% increase in external provider costs and cost of care, excluding depreciation and amortization, during the same period. For more information relating to Center-level Contribution Margin, see Note 14 "Segment Reporting" to our condensed consolidated financial statements. A reconciliation of Center-level Contribution Margin to income (loss) before income taxes, the most directly comparable GAAP measure, for each of the periods is as follows:
December 31, 2025 December 31, 2024
(In thousands) PACE
All other(a)
Totals PACE
All other(a)
Totals
Capitation revenue $ 475,371 $ - $ 475,371 $ 413,474 $ - $ 413,474
Other service revenue 185 257 442 174 493 667
Total revenues 475,556 257 475,813 413,648 493 414,141
External provider costs 220,859 - 220,859 215,087 - 215,087
Cost of care, excluding depreciation and amortization 150,639 133 150,772 127,150 297 127,447
Center-Level Contribution Margin 104,058 124 104,182 71,411 196 71,607
Sales and marketing 15,684 14,196
Corporate, general and administrative 56,881 55,638
Depreciation and amortization 9,962 10,730
Impairments and loss on assets held for sale 104 8,495
Operating income (loss) 21,551 (17,452)
Other expense (1,179) (1,312)
Income (Loss) Before Income Taxes $ 20,372 $ (18,764)
Depreciation and amortization $ 9,961 $ 1 $ 9,962 $ 10,499 $ 231 $ 10,730
Income (Loss) Before Income Taxes as a % of revenue 4.3 % (4.5) %
Center- Level Contribution Margin as a % of revenue 21.9 % 17.3 %
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(a)Center-level Contribution Margin from a segment below the quantitative thresholds is attributable to the Senior Housing operating segment of the Company. This segment has never met any of the quantitative thresholds for determining reportable segments. As of September 11, 2025, the Company no longer operates Senior Housing as the remaining Senior Housing assets were sold.
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA as net income (loss) adjusted for interest expense, net, other investment income, depreciation and amortization, and provision (benefit) for income tax as well as addbacks for non-recurring expenses or exceptional items, including charges relating to management equity compensation, litigation costs and settlements, M&A diligence, transaction and integration, business optimization, loss on assets held for sale and gain on sale of assets. Adjusted EBITDA margin is Adjusted EBITDA expressed as a percentage of our total revenue. For the six months ended December 31, 2025 and 2024, net income (loss) was $19.5 million and $(19.2) million, respectively, representing a year-over-year increase of 201.4%. For the six months ended December 31, 2025, net income margin was 4.1%, as compared to net loss margin of 4.6% for the six months ended December 31, 2024. The increase in Adjusted EBITDA and Adjusted EBITDA margin was primarily due to (i) increased census, (ii) increased capitation rates and (iii) lower per participant external provider costs, partially offset by (i) increased center-level headcount and wage rates associated with census growth and a competitive labor market and (ii) increased costs associated with transition to in-house pharmacy services.
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. The use of the term Adjusted EBITDA varies from others in our industry. Effective for the year ended June 30, 2024 and going forward, the Company revised its calculation of Adjusted EBITDA to no longer exclude de novo center development costs and to reflect the impact of other investment income. The presentation for the six months ended December 31, 2024 has been recast to conform to the current presentation.
A reconciliation of net income (loss) to Adjusted EBITDA, the most directly comparable GAAP measure, for each of the periods is as follows:
Three months ended December 31, Six months ended December 31,
2025 2024 2025 2024
Net income (loss) $ 11,805 $ (13,491) $ 19,474 $ (19,201)
Interest expense, net 1,246 760 2,498 1,408
Other investment income(a)
(483) 141 (982) (95)
Depreciation and amortization 4,877 5,319 9,962 10,730
Provision for income tax 651 34 898 437
Stock-based compensation 1,216 1,873 3,524 4,035
Litigation costs and settlement(b)
1,279 1,405 2,258 4,464
M&A diligence, transaction and integration(c)
- 1,275 - 1,380
Business optimization(d)
1,560 58 2,439 693
Impairments and loss on assets held for sale(e)
- 8,495 104 8,495
Gain on sale of assets(f)
- - (381)
Adjusted EBITDA $ 22,151 $ 5,869 $ 39,794 $ 12,346
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(a)Reflects investment income related to short-term investments included in our consolidated statement of operations.
(b)Reflects charges/(credits) related to litigation by stockholders, civil investigative demands, and arbitration with our former pharmacy provider. Refer to Note 9, "Commitments and Contingencies" to our condensed consolidated financial statements for more information regarding litigation by stockholders and civil investigative demands. Costs reflected consist of litigation costs considered one-time in nature and outside of the ordinary course of business based on the following considerations which we assess regularly: (i) the frequency of similar cases that have been brought to date, or are expected to be brought within two years, (ii) complexity of the case, (iii) nature of the remedies sought, (iv) litigation posture of the Company, (v) counterparty involved, and (vi) the Company's overall litigation strategy.
(c)Reflects charges related to M&A diligence, transactions and integrations.
(d)Reflects charges related to business optimization initiatives. Such charges relate to one-time investments in projects designed to enhance our technology and compliance systems and improve and support the efficiency and effectiveness of our operations. For the three months ended December 31, 2025, this consists of costs related to organizational restructure. For the six months ended December 31, 2025, this consists of costs related to organizational restructure and executive severance. For the three months ended December 31, 2024, this primarily includes costs related to other non-recurring projects aimed at reducing costs and improving efficiencies. For the six months ended December 31, 2024, this includes (i) $0.4 million of costs associated with organizational restructure and (ii) $0.3 million related to other non-recurring projects aimed at reducing costs and improving efficiencies.
(e)For the six months ended December 31, 2025, reflects additional loss related to the Company's sale of its managing member interest in SH1 and the adjacent vacant land. For the three and six months ended December 31, 2024, reflects impairment charges related to ROU asset and construction in progress related to halting developments to a previously planned de novo center in Louisville, Kentucky that the Company is no longer pursuing.
(f)For the six months ended December 31, 2025, reflects gain on sale of center equipment that was originally purchased for the center in Louisville, Kentucky.
Liquidity and Capital Resources
General
We have financed our operations principally through cash flows from operations and through borrowings under our credit facilities. As of December 31, 2025, we had cash and cash equivalents of $83.2 million, an increase of $19.1 million from June 30, 2025, and short-term investments of $42.8 million, an increase of $1.0 million from June 30, 2025. The increase in cash and cash equivalents and short-term investments was primarily due to timing of cash receipts for services provided. Our cash and cash equivalents primarily consist of highly liquid investments in demand deposit accounts and cash. Our short-term investments primarily consist of investments in mutual funds.
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 A Facility (as defined below) due 2028, (ii) finance and operating lease obligations, which are generally paid on a monthly basis and expire on various terms from calendar year 2026 through 2039, (iii) the operations of our business, (iv) income tax payments, which are generally due on a quarterly and annual basis, (v) capital additions, which include acquisitions and de novo centers, and (vi) share repurchases authorized under the Board approved program, if any. We also will continue investing in resources and initiatives to provide necessary and quality services to our participants. 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.
On March 8, 2021, the Company entered into a credit agreement (as amended, the "Credit Agreement") that consisted 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. On August 8, 2025, the Company entered into Amendment No. 2 to the Credit Agreement. Following entry into Amendment No. 2 to the Credit Agreement, the Term Loan Facility was replaced by a $50.7 million term loan (the "Term Loan A Facility"), the commitments with respect to the Revolving Credit Facility were renewed, and the maturity dates for both the Term Loan A Facility and the Revolving Credit Facility were extended. As of December 31, 2025, we had $59.4 million of debt outstanding, which includes $50.1 million under our Term Loan A Facility and $9.4 million draw on our Revolving Credit Facility, each of which matures on August 8, 2028.
As of December 31, 2025, we had future minimum operating lease payments under non-cancellable leases through the year 2039 of $33.3 million. We also had non-cancellable finance lease agreements with third parties through the year 2030 with future minimum payments of $12.3 million. For additional information, see Note 7, "Leases", Note 8, "Long-Term Debt", and Note 9, "Commitments and Contingencies" to our condensed 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 Revolving Credit Facility, 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, and the expansion of sales and marketing activities and other costs of operating the business. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies. 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.
The borrowing capacity under the Revolving Credit Facility is subject (i) any issued amounts under our letters of credit and (ii) applicable covenant compliance restrictions and any other conditions precedent to borrowing. Principal on the Term Loan A Facility is paid each calendar quarter in an amount equal to 1.25% of the initial term loan on closing date.
Outstanding principal amounts under the Credit Agreement accrue interest at a variable interest rate. As of December 31, 2025, the interest rate on the Term Loan A Facility was 6.24%. Under the terms of the Credit Agreement, the Revolving Credit Facility fee accrues at 0.50% of the average daily unused amount and is paid quarterly. As of
December 31, 2025, we had $9.4 million of borrowings outstanding, $6.2 million of letters of credit issued, and $84.4 million of remaining borrowing capacity under the Revolving Credit Facility.
For more information about our debt, see Note 8 "Long-Term Debt" to our condensed consolidated financial statements.
We currently intend to retain substantially all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness, and do not anticipate paying any cash dividends in the foreseeable future.
Condensed Consolidated Statements of Cash Flows
Our condensed consolidated statements of cash flows for the six months ended December 31, 2025 and 2024 are summarized as follows:
Six months ended December 31,
2025 2024 $ Change
in thousands
Net cash provided by (used in) operating activities $ 25,285 $ (763) $ 26,048
Net cash (used in) provided by investing activities (3,719) 1,610 (5,329)
Net cash used in financing activities (2,411) (11,716) 9,305
Net change in cash, cash equivalents and restricted cash $ 19,155 $ (10,869) $ 30,024
Operating Activities. The change in net cash provided by (used in) operating activities for the six months ended December 31, 2025 compared to the six months ended December 31, 2024 was driven primarily by $29.0 million increase in net income, net of non-cash adjustments.
Investing Activities. The change in net cash used in investing activities for the six months ended December 31, 2025 compared to the six months ended December 31, 2024 was primarily due to a $2.9 million increase in purchases of property and equipment to support growth. In addition, the prior year included $6.3 million in proceeds from the sale of short-term investments that did not reoccur in the current year, partially offset by $3.7 million in proceeds from assets held for sale that occurred in the current year.
Financing activities. The increase in net cash used in financing activities for the six months ended December 31, 2025 compared to the six months ended December 31, 2024 was primarily due to the $3.2 million contribution from the InnovAge Tampa JV partner and $5.9 million of share repurchases that occurred in the prior year and did not reoccur in the current year.
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," which will be through the end of this fiscal year 2026, 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 stockholder 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 condensed 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 condensed 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 estimates 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 estimates to be critical accounting estimates. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances.
For a description of our estimates regarding our critical accounting estimates, see "Critical Accounting Estimates" in the 2025 10-K.
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