Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and Operations
Clover Health Investments, Corp. (collectively with its affiliates and subsidiaries, "Clover" or the "Company") is singularly focused on creating great, sustainable healthcare to improve every life. Clover has centered its strategy on building and deploying technology through its flagship software platform, Clover Assistant, to help America’s seniors receive better care at lower costs.
Clover provides affordable, high-quality Medicare Advantage ("MA") plans, including Preferred Provider Organization ("PPO") and Health Maintenance Organization ("HMO") plans, through its regulated insurance subsidiaries. The Company's regulated insurance subsidiaries consist of Clover Insurance Company and Clover HMO of New Jersey Inc., which operate the Company's PPO and HMO health plans, respectively. On April 1, 2021, the Company's subsidiary, Clover Health Partners, LLC, began participating as a Direct Contracting Entity ("DCE") in the Global and Professional Direct Contracting Model ("DC Model") of the Centers for Medicare and Medicaid Services ("CMS"), an agency of the United States Department of Health and Human Services, through which the Company provides care to aligned Original Medicare beneficiaries (the "Non-Insurance Beneficiaries"). Medical Service Professionals of NJ, LLC, houses Clover's employed physicians and the related support staff for Clover's in-home care program. Clover's administrative functions and insurance operations are primarily operated by its Clover Health, LLC and Clover Health Labs, LLC subsidiaries.
Clover's approach is to combine technology, data analytics, and preventive care to lower costs and increase the quality of health and life of Medicare beneficiaries. Clover's technology platform is designed to use machine learning-powered systems to deliver data and insights to physicians at the point of care in order to improve outcomes for beneficiaries and drive down costs. Clover's MA plans generally provide access to a wide network of primary care providers, specialists, and hospitals, enabling its members to see any doctor participating in Medicare willing to accept them. Clover focuses on minimizing members' out-of-pocket costs and offers many plans that allow members to pay the same co-pays for primary care provider visits regardless of whether their physician is in- or out-of-network. Through its Non-Insurance operations, the Company assumes full risk (i.e., 100.0% shared savings and shared losses) for the total cost of care of aligned Non-Insurance Beneficiaries, empowers providers with Clover Assistant, and offers a variety of programs aimed at reducing expenditures and preserving or enhancing the quality of care for Non-Insurance Beneficiaries. For additional information related to the Company's Non-Insurance operations, see Note 16 in this report.
Clover was originally incorporated as a Cayman Islands exempted company on October 18, 2019, as a special purpose acquisition company under the name Social Capital Hedosophia Holdings Corp. III ("SCH"). On October 5, 2020, SCH entered into a Merger Agreement (the "Merger Agreement") with Clover Health Investments, Corp., a corporation originally incorporated on July 17, 2014, in the state of Delaware ("Legacy Clover"). Pursuant to the Merger Agreement, and a favorable vote of SCH's stockholders at an extraordinary general meeting on January 6, 2021 (the "Special Meeting"), on January 7, 2021, Asclepius Merger Sub Inc., a Delaware corporation and a newly formed, wholly-owned subsidiary of SCH ("Merger Sub"), merged with and into Legacy Clover. The separate corporate existence of Merger Sub ceased, Legacy Clover survived and merged with and into SCH, with SCH as the surviving corporation, and SCH was redomesticated as a Delaware corporation and renamed Clover Health Investments, Corp. (the "Business Combination"). The Business Combination was accounted for as a reverse recapitalization in accordance with generally accepted accounting principles in the United States ("GAAP"). Under the guidance in Accounting Standards Codification ("ASC") 805, Legacy Clover is treated as the "acquirer" for financial reporting purposes, Legacy Clover is deemed the accounting predecessor of the combined business, and Clover Health Investments, Corp., as the parent company of the combined business, is the successor Securities and Exchange Commission ("SEC") registrant, meaning that Legacy Clover's financial statements for previous periods are disclosed in periodic reports filed with the SEC.
The Business Combination has had and will have a significant impact on the Company's future reported financial position and results as a consequence of the reverse recapitalization. The Business Combination closed on January 7, 2021, and on the following day the Company's Class A Common Stock and then outstanding public warrants were listed on the Nasdaq Global Select Market ("Nasdaq") under the symbols "CLOV" and "CLOVW," respectively, for trading in the public market.
For additional information, see Note 1 (Organization and Operations) and Note 3 (Business Combination) included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Form 10-K").
2. Summary of Significant Accounting Policies
Basis of presentation
The Company's interim condensed consolidated financial statements have been prepared in conformity with GAAP and include the accounts of the Company and its wholly-owned subsidiaries. In the opinion of management, the Company has made all necessary
adjustments, which include normal recurring adjustments necessary for a fair presentation of its financial position and its results of operations for the interim periods presented. All material intercompany balances and transactions have been eliminated in consolidating these financial statements. Investments over which we exercise significant influence, but do not control, are accounted for using the applicable accounting treatment based on the nature of the investment. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes to the financial statements included in the 2021 Form 10-K.
Use of estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that impact the amounts reported in the condensed consolidated financial statements and the accompanying notes.
The areas involving the most significant use of estimates are the amounts of incurred but not reported claims. Many factors can cause actual outcomes to deviate from these assumptions and estimates, such as changes in economic conditions, changes in government healthcare policy, advances in medical technology, changes in treatment patterns, and changes in average lifespan. Accordingly, the Company cannot determine with precision the ultimate amounts that it will pay for, or the timing of payment of actual claims, or whether the assets supporting the liabilities will grow to the level the Company assumes prior to payment of claims. If the Company's actual experience is different from its assumptions or estimates, the Company's reserves may prove inadequate. As a result, the Company would incur a charge to operations in the period in which it determines such a shortfall exists, which could have a material adverse effect on the Company's business, results of operations, and financial condition. Other areas involving significant estimates include risk adjustment provisions related to Medicare contracts and the valuation of the Company's investment securities, goodwill and other intangible assets, reinsurance, premium deficiency reserve, warrants, embedded derivative related to convertible securities, stock-based compensation, recoveries from third parties for coordination of benefits, Direct Contracting benchmark, specifically cost trend and risk score estimates that can develop over time, and final determination of medical cost adjustment pools.
Equity method of accounting and variable interest entities
Investments in entities in which the Company does not have control but its ownership falls between 20.0% and 50.0%, or it has the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method of accounting.
The Company continuously assesses its partially-owned entities to determine if these entities are variable interest entities ("VIEs") and, if so, whether the Company is the primary beneficiary and, therefore, required to consolidate the VIE. To make this determination, the Company applies a qualitative approach to determine whether the Company has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE. If the Company has an interest in a VIE but is determined to not be the primary beneficiary, the Company accounts for the interest under the equity method of accounting.
Segment information
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker ("CODM") in deciding how to allocate resources to an individual segment and in assessing performance. The Company's CODM is its Chief Executive Officer. The Company has two reporting segments: Insurance and Non-Insurance.
Performance guarantees
Certain of the Company's arrangements with third-party providers require it to guarantee the performance of its care network to CMS. As a result of the Company's participation in the DC Model, the Company determined that it was making a performance guarantee with respect to providers under the Non-Insurance arrangement that should be recognized in the financial statements. Accordingly, a liability for the performance guarantee was recorded on the Condensed Consolidated Balance Sheet. Each month, as the performance guarantee is fulfilled, the guarantee is amortized on a straight-line basis for the amount that represents the completed performance. With respect to each performance year in which the DCE is a participant, the final consideration due to the DCE from CMS ("shared savings") or the consideration due to CMS from the DCE ("shared loss") is reconciled in the subsequent years following the performance year. The shared savings or loss is measured periodically and will be applied to the Non-Insurance performance obligation or Non-Insurance performance receivable if the Company is in a probable loss position or probable savings position, respectively. The DCE has entered into a surety bond agreement with CMS and a third-party surety to cover the reserve requirement of fifty percent. The reserve requirement is determined by CMS.
Capitalized software development costs - cloud computing arrangements
The Company's cloud computing arrangements are mostly comprised of hosting arrangements that are service contracts, whereby the Company gains remote access to use enterprise software hosted by the vendor or another third party on an as-needed basis for a period of time in exchange for a subscription fee. Implementation costs for cloud computing arrangements are capitalized if certain criteria are met and consist of internal and external costs directly attributable to developing and configuring cloud computing software for its intended use. These capitalized implementation costs are presented in the Condensed Consolidated Balance Sheets in other assets, and are generally amortized over the fixed, non-cancelable term of the associated hosting arrangement on a straight-line basis.
Deferred acquisition costs
Acquisition costs directly related to the successful acquisition of new business, which are primarily made up of commissions costs, are deferred and subsequently amortized. Deferred acquisition costs are recorded as other assets on the Condensed Consolidated Balance Sheet and are amortized over the estimated life of the related contracts. The amortization of deferred acquisition costs is recorded in general and administrative expenses in the Condensed Consolidated Statement of Operations and Comprehensive Loss. As of June 30, 2022, and December 31, 2021, there were no deferred acquisition costs as a result of the acceleration of amortization for deferred acquisition costs due to the recognition of a premium deficiency reserve. For the three and six months ended June 30, 2022, charges related to deferred acquisition costs of $1.9 million and $13.7 million, respectively, were recognized in general and administrative expenses. For the three and six months ended June 30, 2021, charges related to deferred acquisition costs of $6.7 million and $8.5 million, respectively, were recognized in general and administrative expenses.
COVID-19
The societal and economic impact of the Coronavirus Disease 2019 ("COVID-19") pandemic and its variants are continuing to evolve, and the ultimate impact on the Company's business, results of operations, financial condition, and cash flows is uncertain and difficult to predict. The global pandemic has severely impacted businesses worldwide, including many in the health insurance sector. In response to the pandemic, the Company has implemented additional steps related to its care delivery, member support, and internal policies and operations.
Recent accounting pronouncements
Accounting pronouncements effective in future periods
In August 2018, the FASB issued ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, which was subsequently amended by ASU 2019-09, Financial Services—Insurance (Topic 944): Effective Date and ASU 2020-11, Financial Services—Insurance (Topic 944): Effective Date and Early Application. ASU 2020-11 was issued in consideration of the implications of COVID-19 and to provide transition relief and additional time for implementation by deferring the effective date by one year. The amendments in ASU 2018-12 make changes to a variety of areas to simplify or improve the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. The amendments require insurers to annually review the assumptions they make about their policyholders and update the liabilities for future policy benefits if the assumptions change. The amendments also simplify the amortization of deferred acquisition costs and add new disclosure requirements about the assumptions used to measure liabilities and the potential impact to future cash flows. The amendments related to the liability for future policy benefits for traditional and limited-payment contracts and deferred acquisition costs are to be applied to contracts in force as of the beginning of the earliest period presented, with an option to apply such amendments retrospectively with a cumulative-effect adjustment to the opening balance of retained earnings as of the earliest period presented. The amendments for market risk benefits are to be applied retrospectively. ASU 2020-11 is effective for public entities beginning after December 15, 2022. The Company is currently evaluating the effects the adoption of ASU 2018-12 and ASU 2020-11 will have on its financial statements.
3. Investment Securities
The following tables present amortized cost and fair values of investments as of June 30, 2022, and December 31, 2021, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | Amortized cost | | Accumulated unrealized gains | | Accumulated unrealized losses | | Fair value |
| | (in thousands) |
Investment securities, held-to-maturity | | | | | | | | |
U.S. government and government agencies and authorities | | $ | 351 | | | $ | 36 | | | $ | (26) | | | $ | 361 | |
Investment securities, available-for-sale | | | | | | | | |
U.S. government and government agencies and authorities | | 241,182 | | | 29 | | | (8,372) | | | 232,839 | |
| Corporate debt securities | | 21,214 | | | 8 | | | (18) | | | 21,204 | |
| | | | | | | | |
Total investment securities | | $ | 262,747 | | | $ | 73 | | | $ | (8,416) | | | $ | 254,404 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Amortized cost | | Accumulated unrealized gains | | Accumulated unrealized losses | | Fair value |
| | (in thousands) |
Investment securities, held-to-maturity | | | | | | | | |
U.S. government and government agencies and authorities | | $ | 640 | | | $ | 40 | | | $ | (9) | | | $ | 671 | |
Investment securities, available-for-sale | | | | | | | | |
U.S. government and government agencies and authorities | | 198,669 | | | 10 | | | (1,944) | | | 196,735 | |
Total investment securities | | $ | 199,309 | | | $ | 50 | | | $ | (1,953) | | | $ | 197,406 | |
The following table presents the amortized cost and fair value of debt securities as of June 30, 2022, by contractual maturity:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | Held-to-maturity | | Available-for-sale |
| | Amortized cost | | Fair value | | Amortized cost | | Fair value |
| | (in thousands) |
| Due within one year | | $ | — | | | $ | — | | | $ | 80,608 | | | $ | 79,997 | |
| Due after one year through five years | | 241 | | | 215 | | | 181,788 | | | 174,046 | |
| Due after five years through ten years | | — | | | — | | | — | | | — | |
| Due after ten years | | 110 | | | 146 | | | — | | | — | |
| Total | | $ | 351 | | | $ | 361 | | | $ | 262,396 | | | $ | 254,043 | |
For the three and six months ended June 30, 2022 and 2021, respectively, net investment income, which is included within other income in the Condensed Consolidated Statements of Operations and Comprehensive Loss, was derived from the following sources:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
| | (in thousands) |
| Cash and cash equivalents | | $ | 136 | | | $ | — | | | $ | 138 | | | $ | — | | | |
| Short-term investments | | 50 | | | 40 | | | 121 | | | 77 | | | |
| Investment securities | | 277 | | | 37 | | | 514 | | | 84 | | | |
| Investment income, net | | $ | 463 | | | $ | 77 | | | $ | 773 | | | $ | 161 | | | |
Gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows at June 30, 2022, and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | Less than 12 months | | Greater than 12 months | | Total |
| Fair value | | Unrealized loss | | Fair value | | Unrealized loss | | Fair value | | Unrealized loss |
| (in thousands, except number of positions) |
| U.S. government and government agencies and authorities | $ | 189,720 | | | $ | (6,114) | | | $ | 28,462 | | | $ | (2,284) | | | $ | 218,182 | | | $ | (8,398) | |
| Corporate debt securities | 11,377 | | | (18) | | | — | | | — | | | 11,377 | | | (18) | |
| Total | $ | 201,097 | | | $ | (6,132) | | | $ | 28,462 | | | $ | (2,284) | | | $ | 229,559 | | | $ | (8,416) | |
| Number of positions | 33 | | | 8 | | | 41 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | Less than 12 months | | Greater than 12 months | | Total |
| Fair value | | Unrealized loss | | Fair value | | Unrealized loss | | Fair value | | Unrealized loss |
| (in thousands, except number of positions) |
| U.S. government and government agencies and authorities | $ | 187,251 | | | $ | (1,555) | | | $ | 7,902 | | | $ | (398) | | | $ | 195,153 | | | $ | (1,953) | |
| Total | $ | 187,251 | | | $ | (1,555) | | | $ | 7,902 | | | $ | (398) | | | $ | 195,153 | | | $ | (1,953) | |
| Number of positions | 18 | | | 4 | | | 22 | |
The Company did not record any credit allowances for debt securities that were in an unrealized loss position as of June 30, 2022, and December 31, 2021.
As of June 30, 2022, all securities were investment grade, with credit ratings of BBB+ or higher by S&P Global or as determined by other credit rating agencies within the Company's investment policy. Unrealized losses on investment grade securities are principally related to changes in interest rates or changes in issuer or sector related credit spreads since the securities were acquired. The gross unrealized investment losses as of June 30, 2022, were assessed, based on, among other things:
•The relative magnitude to which fair values of these securities have been below their amortized cost was not indicative of an impairment loss;
•The absence of compelling evidence that would cause the Company to call into question the financial condition or near-term prospects of the issuer of the applicable security; and
•The Company's ability and intent to hold the applicable security for a period of time sufficient to allow for any anticipated recovery.
Proceeds from sales and maturities of investment securities, inclusive of short-term investments, and related gross realized gains (losses) which are included within other income in the Condensed Consolidated Statements of Operations and Comprehensive Loss, were as follows for the three and six months ended June 30, 2022 and 2021, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
| | (in thousands) |
| Proceeds from sales of investment securities | | $ | 5,881 | | | $ | 19,598 | | | $ | 5,881 | | | $ | 36,865 | | | |
| Proceeds from maturities of investment securities | | 140,455 | | | 200,000 | | | 290,455 | | | 200,265 | | | |
| | | | | | | | | | |
| Gross realized gains | | 5 | | | 1 | | | 5 | | | 17 | | | |
| Gross realized losses | | (21) | | | (3) | | | (21) | | | (80) | | | |
| Net realized losses | | $ | (16) | | | $ | (2) | | | $ | (16) | | | $ | (63) | | | |
As of June 30, 2022, and December 31, 2021, the Company had $14.2 million and $11.1 million, respectively, in deposits with various states and regulatory bodies that are included as part of the Company's investment balances.
4. Fair Value Measurements
The following tables present a summary of fair value measurements for financial instruments as of June 30, 2022, and December 31, 2021, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | Level 1 | | Level 2 | | Level 3 | | Total fair value |
| | (in thousands) |
| U.S. government and government agencies | | $ | — | | | $ | 232,839 | | | $ | — | | | $ | 232,839 | |
| Corporate debt securities | | — | | | 21,204 | | | — | | | 21,204 | |
| | | | | | | | |
| Total assets at fair value | | $ | — | | | $ | 254,043 | | | $ | — | | | $ | 254,043 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Level 1 | | Level 2 | | Level 3 | | Total fair value |
| | (in thousands) |
| U.S. government and government agencies | | $ | — | | | $ | 196,735 | | | $ | — | | | $ | 196,735 | |
| Total assets at fair value | | $ | — | | | $ | 196,735 | | | $ | — | | | $ | 196,735 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
For additional information regarding the fair value measurements for financial instruments, see Note 5 (Fair Value Measurements) in the 2021 Form 10-K. For additional information regarding the liabilities, see Note 12 (Notes and Securities Payable), Note 13 (Warrants Payable), and Note 14 (Derivative Liabilities) in the 2021 Form 10-K.
The fair value of Legacy Clover's convertible securities was based on Level 3 inputs, which were unobservable and reflected management's best estimate of what market participants would use when pricing the asset or liability, including assumptions about risk. There was no fair value associated with convertible securities at June 30, 2022, due to the conversion of the securities to shares of the Company's common stock upon the completion of the Business Combination.
There were no changes in balances of Legacy Clover's Level 3 financial liabilities during the six months ended June 30, 2022. The changes in balances of Legacy Clover's Level 3 financial liabilities during the six months ended June 30, 2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Convertible securities | | Derivative liabilities | | Warrants payable | | Total |
| (in thousands) |
Balance, December 31, 2020 | $ | 949,553 | | | $ | 44,810 | | | $ | 97,782 | | | $ | 1,092,145 | |
| Issuances | — | | | — | | | — | | | — | |
| Settlements | (949,553) | | | (44,810) | | | (97,782) | | | (1,092,145) | |
| Transfers in | — | | | — | | | — | | | — | |
| Transfers out | — | | | — | | | — | | | — | |
| Total realized losses (gains) | — | | | — | | | — | | | — | |
Balance, June 30, 2021 | $ | — | | | $ | — | | | $ | — | | | $ | — | |
In addition to the Level 3 financial liabilities in the table above, on September 25, 2020, Seek Insurance Services, Inc. ("Seek"), a field marketing organization and an indirect wholly-owned subsidiary of the Company, entered into a note purchase agreement with a third-party investor and issued a note (the "Seek Convertible Note") in the principal amount of $20.0 million, for which the carrying value is approximately the same as the fair value. For additional information, see Note 8 (Notes and Securities Payable). As of June 30, 2022, and December 31, 2021, both the carrying value, which includes accrued interest, and the fair value of the Seek Convertible Note were $22.8 million and $22.0 million, respectively, and these were considered Level 3 financial liabilities. Seek is currently in the process of winding down its operations.
There were no transfers in or out of Level 3 financial assets or liabilities for the six months ended June 30, 2022 or 2021.
Warrants
Warrants were accounted for as liabilities in accordance with ASC 815-40 and are presented within warrants payable on the Condensed Consolidated Balance Sheet. The warrant liabilities were measured at fair value at inception and measured on a recurring basis, with changes in fair value presented within change in fair value of warrants payable in the Condensed Consolidated Statement
of Operations and Comprehensive Loss. The Company determined that the public warrants assumed in connection with the Business Combination were classified within Level 1 of the fair value hierarchy as the fair value was equal to the publicly traded price of the public warrants, and the private placement warrants, also assumed in connection with the Business Combination, were classified within Level 2 of the fair value hierarchy as the fair value was estimated using the price of the public warrants. On July 22, 2021, the Company issued a press release stating that it would redeem all of its public and private placement warrants. In connection with the redemption, effective August 24, 2021, the public warrants were delisted and classified within Level 2 of the fair value hierarchy as the fair value of the public warrants was based on proportional changes in the price of the Company’s common stock. The end of the redemption period was September 9, 2021, at which time the Company redeemed all unexercised public and private placement warrants at a price of $0.10 per warrant. Following the redemption, no public or private placement warrants were outstanding. For additional information, see Note 5 (Fair Value Measurements) and Note 13 (Warrants Payable) in the 2021 Form 10-K.
5. Healthcare Receivables
Healthcare receivables include pharmaceutical rebates which are accrued as they are earned and estimated based on contracted rebate rates, eligible amounts submitted to the manufacturers by the Company's pharmacy manager, pharmacy utilization volume, and historical collection patterns. Also included in healthcare receivables are Medicare Part D settlement receivables, member premium receivables, and other CMS receivables. The Company reported $78.0 million and $48.0 million of healthcare receivables at June 30, 2022, and December 31, 2021, respectively.
6. Related Party Transactions
Related party agreements
The Company has various contracts with IJKG Opco LLC (d/b/a CarePoint Health - Bayonne Medical Center), Hudson Hospital Opco, LLC (d/b/a CarePoint Health - Christ Hospital) and Hoboken University Medical Center Opco LLC (d/b/a CarePoint Health - Hoboken University Medical Center), which collectively do business as the CarePoint Health System ("CarePoint Health"), for the provision of inpatient and hospital-based outpatient services. CarePoint Health was ultimately held and controlled by Vivek Garipalli, the Company's Chief Executive Officer and a significant stockholder of the Company. In May 2022, Mr. Garipalli and his family completed a donation of their interest in CarePoint Health to a non-profit organization called CarePoint Health Systems, Inc. Following the donation, Mr. Garipalli has remained a Manager of Hudson Hospital Propco, LLC, an affiliate of Hudson Hospital Opco, LLC. Additionally, certain affiliates of Mr. Garipalli are owed certain money from CarePoint Health for prior obligations, and Mr. Garipalli has an indirect interest in Sequoia Healthcare Services, LLC, which provides healthcare services to CarePoint Health. Expenses and fees incurred related to these contracts, recorded in net medical claims incurred, were $3.1 million and $3.5 million for the three months ended June 30, 2022 and 2021, respectively, and $5.7 million and $6.7 million for the six months ended June 30, 2022 and 2021, respectively. Additionally, $1.5 million and $2.3 million were payable to CarePoint Health as of June 30, 2022, and December 31, 2021, respectively.
The Company has contracted with Rogue Trading, LLC ("Rogue"), a marketing services provider. The Company's President, Andrew Toy, is related to the Chief Executive Officer of Rogue. There were no expenses and fees related to these contracts for the three and six months ended June 30, 2022. Expenses and fees incurred related to these contracts were $0.1 million and $0.2 million for the three and six months ended June 30, 2021, respectively.
The Company has a contract with Medical Records Exchange, LLC (d/b/a ChartFast) pursuant to which the Company receives administrative services related to medical records via ChartFast's electronic applications and web portal platform. ChartFast is ultimately owned and controlled by Mr. Garipalli. Expenses and fees incurred related to this agreement were $0.1 million and less than $0.1 million for the three months ended June 30, 2022 and 2021, respectively, and $0.1 million and less than $0.1 million for the six months ended June 30, 2022 and 2021.
On July 2, 2021, the Company entered into a contract with Thyme Care, Inc. ("Thyme Care"), an oncology benefit management company, through which Thyme Care was engaged to provide concierge cancer coordination services to the Company's Insurance members in New Jersey and develop a provider network to help ensure member access to high-value oncology care. Mr. Garipalli is a member of the board of directors of Thyme Care and holds an equity interest of less than five percent (5%) of that entity. Expenses and fees incurred related to this agreement were $0.5 million and $0.9 million for the three and six months ended June 30, 2022, respectively.
7. Unpaid Claims
Activity in the liability for unpaid claims, including claims adjustment expenses, for the six months ended June 30, 2022 and 2021, is summarized as follows:
| | | | | | | | | | | | | | |
| Six Months Ended June 30, | | 2022 | | 2021 |
| | (in thousands) |
| | | | |
Gross and net balance, beginning of period (1) | | $ | 136,317 | | | $ | 103,976 | |
| Incurred related to: | | | | |
| Current year | | 529,440 | | | 424,968 | |
| Prior years | | (20,228) | | | 3,053 | |
| Total incurred | | 509,212 | | | 428,021 | |
| Paid related to: | | | | |
| Current year | | 408,580 | | | 310,717 | |
| Prior years | | 84,180 | | | 88,728 | |
| Total paid | | 492,760 | | | 399,445 | |
| | | | |
Gross and net balance, end of period (1)(2) | | $ | 152,769 | | | $ | 132,552 | |
(1) Includes amounts due to related parties.
(2) Differs from the total unpaid claims amount reported on the Condensed Consolidated Balance Sheets due to the fact the figure here excludes unpaid claims for the Company's Non-Insurance operations of $8.9 million and $4.6 million as of June 30, 2022 and December 31, 2021, respectively.
Unpaid Claims for Insurance Operations
Unpaid claims for Insurance operations were $152.8 million as of June 30, 2022. During the six months ended June 30, 2022, $84.2 million was paid for incurred claims attributable to insured events of prior years. A favorable development of $20.2 million was recognized during the six months ended June 30, 2022, resulting from the Company's actual experience with claims developing differently as compared to the Company's estimates as of December 31, 2021. An unfavorable development of $3.1 million was recognized during the six months ended June 30, 2021, resulting from the Company's actual experience with claims developing differently as compared to the Company's estimates as of December 31, 2020. Original estimates are increased or decreased, as additional information becomes known regarding individual claims. The ratio of current year medical claims paid as a percentage of current year net medical claims incurred was 77.2% for the six months ended June 30, 2022, and 73.1% for the six months ended June 30, 2021. This ratio serves as an indicator of claims processing speed, indicating that claims were processed at a faster rate during the six months ended June 30, 2022, than during the six months ended June 30, 2021.
The Company uses a variety of standard actuarial techniques to establish unpaid claims reserves. Management estimates are supported by the Company's actuarial analysis. The Company utilizes an internal actuarial team to review the adequacy of unpaid claim and unpaid claim adjustment expense. The estimation of claim costs is inherently difficult and requires significant judgment. The estimation has considerable inherent variability and can fluctuate significantly depending upon several factors, including medical cost trends and claim payment patterns, general economic conditions, and regulatory changes. The time value of money is not taken into account for the purposes of calculating the liability for unpaid claims. Management believes that the current reserves are adequate based on currently available information.
8. Notes and Securities Payable
Seek Convertible Note
On September 25, 2020, Seek issued the Seek Convertible Note in the principal amount of $20.0 million. The note bears simple interest at an annual rate of 8.0% and matures on September 25, 2023, unless earlier accelerated, converted, or paid in full. The outstanding principal and any accrued but unpaid interest will become immediately due and payable at the election of the note holder upon the occurrence of any event of default as defined in the note. The outstanding principal and accrued but unpaid interest will convert into an equity interest in Seek if prior to maturity, repayment, or conversion of the note: (1) the note holder elects to convert the note, (2) upon the closing of Seek's next equity financing; or (3) upon consummation of an initial public offering of Seek's common stock or a SPAC or reverse merger transaction with Seek. The Seek Convertible Note is not guaranteed by Clover Health Investments, Corp. or any of its subsidiaries, other than Seek.
The Company analyzed the embedded features for derivative accounting consideration and determined that the features are clearly and closely related to the debt host and do not require separate accounting as a derivative.
The carrying amount of the note was $20.0 million and $19.9 million at June 30, 2022, and December 31, 2021, respectively. The Company capitalized $0.1 million of issuance costs which are being amortized using the effective interest method over the term of the note. Unamortized debt issuance costs were less than $0.1 million and $0.1 million at June 30, 2022, and December 31, 2021. Amortization of the debt issuance costs and interest expense on the note was $0.4 million and $0.4 million during the three months ended June 30, 2022 and 2021, respectively, and $0.8 million and $0.8 million during the six months ended June 30, 2022 and 2021, respectively.
The effective interest rate was 8.2% during the three months ended June 30, 2022 and 2021, respectively, and 8.1% during the six months ended June 30, 2022 and 2021, respectively.
The below table summarizes maturities of the Company's securities payable over the next five years as of June 30, 2022:
| | | | | |
| (in thousands) |
| 2023 | $ | 20,000 | |
| 2024 | — | |
| 2025 | — | |
| 2026 | — | |
| 2027 | — | |
| Total | $ | 20,000 | |
Seek is currently in the process of winding down its operations. The Company currently expects that the Seek Convertible Note will be terminated upon the dissolution of Seek.
9. Letter of Credit
On April 19, 2018, the Company entered into a secured letter of credit agreement (the "Letter") required for its subsidiary, Clover HMO of New Jersey, Inc., for an aggregate amount of up to $2.5 million with a commercial lender that renews on an annual basis. The Letter bears interest at a rate of 0.75%. There was an unused balance of $2.5 million at both June 30, 2022, and December 31, 2021.
10. Stockholders' Equity and Convertible Preferred Stock
Stockholders’ Equity
The Company was authorized to issue up to 2,500,000,000 shares of Class A common stock as of June 30, 2022, and December 31, 2021, and up to 500,000,000 shares of Class B common stock as of June 30, 2022, and December 31, 2021. As of June 30, 2022, and December 31, 2021, there were 383,008,614 and 352,645,626 shares of Class A common stock issued and outstanding, respectively. There were 94,395,168 and 118,206,768 shares of Class B common stock issued and outstanding as of June 30, 2022, and December 31, 2021, respectively. Class B common stock has 10 votes per share, and Class A common stock has one vote per share. The Company had 1,931,537 and 14,730 shares held in treasury as of June 30, 2022, and December 31, 2021, respectively. These amounts represent shares withheld to cover taxes upon vesting of employee stock-based awards.
The Company is authorized to issue 25,000,000 shares of preferred stock having a par value of $0.0001 per share, and the Company's board of directors (the "Board") has the authority to determine the rights, preferences, privileges, and restrictions, including voting rights, of those shares. As of June 30, 2022, there were no shares of preferred stock issued and outstanding.
Issuance of Common Stock
In November 2021, the Company sold 52,173,913 shares of Class A common stock at a public offering price of $5.75 per share for gross proceeds of approximately $300.0 million, before deducting underwriting discounts and commissions and other expenses payable by the Company, of $16.2 million.
Convertible Preferred Stock
Each share of Legacy Clover's preferred stock was convertible at the option of the holder, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into fully paid and non-assessable shares of common stock.
Pursuant to the Merger Agreement, all outstanding shares of Legacy Clover's preferred stock automatically converted into 139,444,346 shares of Class B Common Stock upon the closing of the Business Combination. For additional information, see Note 3 (Business Combination) in the 2021 Form 10-K.
11. Variable Interest Entity and Equity Method of Accounting
On February 4, 2022, Character Biosciences, Inc. (f/k/a Clover Therapeutics Company) ("Character Biosciences"), a subsidiary of the Company, completed a private capital transaction in which it raised $17.9 million from the issuance of 16,210,602 shares of its preferred stock. Upon completion of the transaction, the Company owned approximately 25.46% of Character Biosciences. As a result, the Company reassessed its interest in Character Biosciences and determined that while Character Biosciences is a VIE, the Company is not considered as the primary beneficiary of the VIE because it does not have the power, through voting or similar rights and the license agreements, to direct the activities of Character Biosciences that most significantly impact Character Biosciences' economic performance.
The Company determined that it does have a significant influence over Character Biosciences and, therefore, it began accounting for its common stock investment in Character Biosciences using the equity method on February 4, 2022. The Company derecognized all of Character Biosciences' assets and liabilities from its balance sheet and its noncontrolling interest related to Character Biosciences, and recognized the retained common stock and preferred stock equity interests at fair values of $3.7 million and $4.9 million, respectively, which are included in equity method investment and other assets on the Condensed Consolidated Balance Sheets, and recognized a loss of $1.2 million and gain of $11.2 million, respectively, which is included in loss (gain) on investment on the Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2022.
As the Company applies the equity method to account for its common stock interest in Character Biosciences, the initial value of the investment is adjusted periodically to recognize (1) the proportionate share of the investee’s net income or losses after the date of investment, (2) additional contributions made and dividends or distributions received, and (3) impairment losses resulting from adjustments to net realizable value. The Company eliminates all intercompany transactions in accounting for equity method investments and records the proportionate share of the investee’s net income or loss in equity in loss on investment on the Condensed Consolidated Statements of Operations and Comprehensive Loss.
With respect to the Company's preferred stock equity interest in Character Biosciences, the Company elected the measurement alternative to value this equity investment without a readily determinable fair value in accordance with ASC 321, Investments – Equity Securities. The carrying amount of the investment is included in other assets in the Condensed Consolidated Balance Sheets. In accordance with ASC 321, for each reporting period, the Company completes a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired.
12. Employee Benefit Plans
Employee Savings Plan
The Company has a defined contribution retirement savings plan (the "401(k) Plan") covering eligible employees, which includes safe harbor matching contributions based on the amount of employees' contributions to the 401(k) Plan. The Company contributes to the 401(k) Plan annually 100.0% of the first 4.0% compensation that is contributed by the employee up to 4.0% of eligible annual compensation after one year of service. The Company's service contributions to the 401(k) Plan amounted to approximately $0.4 million and $0.2 million for the three months ended June 30, 2022 and 2021, respectively, and $0.7 million and $0.5 million for the six months ended June 30, 2022 and 2021, respectively, and are included in salaries and benefits on the Condensed Consolidated Statements of Operations and Comprehensive Loss. The Company's cash match is invested pursuant to the participant's contribution direction. Employer contributions are immediately 100.0% vested.
Stock-based Compensation
The Company's 2020 Equity Incentive Plan (the "2020 Plan") provides for grants of restricted stocks units ("RSUs") and options to acquire shares of the Company's common stock, par value $0.0001 per share, to employees, directors, officers, and consultants of the Company, and the Company's 2020 Management Incentive Plan (the "2020 MIP") provides for grants of RSUs to our Chief Executive Officer and President. During the year ended December 31, 2021, the Company approved the 2020 Plan and the 2020 MIP, and the
Company's 2014 Equity Incentive Plan (the "2014 Plan") was terminated. On March 9, 2022, the Board adopted the 2022 Inducement Award Plan (the "Inducement Plan" and, collectively with the 2020 Plan, the 2020 MIP, and the 2014 Plan, the "Plans") and reserved 11,000,000 shares of Class A common stock for issuance under the Inducement Plan. The Inducement Plan was adopted by the Board without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules. In accordance with Rule 5635(c)(4) of the Nasdaq Listing Rules, awards under the Inducement Plan may be made only to an employee who has not previously been an employee or member of the Board, or following a bona fide period of non-employment, if he or she is granted such award in connection with his or her commencement of employment with the Company, and such grant is an inducement material to his or her entering into employment with the Company.
The maximum number of shares of the Company's common stock reserved for issuance over the term of the Plans, shares outstanding under the Plans, and shares remaining under the Plans as of June 30, 2022, and December 31, 2021, were as follows:
| | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | Shares Authorized Under Plans | | Shares Outstanding Under Plans | | Shares Remaining Under Plans |
| 2014 Plan | | 54,402,264 | | | 37,106,511 | | | N/A |
| 2020 Plan | | 17,044,920 | | | 14,393,003 | | | 16,239,281 | |
| 2020 MIP | | 33,426,983 | | | 30,084,285 | | | — | |
| Inducement Plan | | 11,000,000 | | | 6,201,550 | | | 4,798,450 | |
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Shares Authorized Under Plans | | Shares Outstanding Under Plans | | Shares Remaining Under Plans |
| 2014 Plan | | 54,402,264 | | | 41,905,875 | | | N/A |
| 2020 Plan | | 30,641,401 | | | 6,690,048 | | | 23,442,323 | |
| 2020 MIP | | 33,426,983 | | | 33,426,983 | | | — | |
| | | | | | |
Effective as of the closing of the Business Combination, the 2014 Plan was terminated, at which time the outstanding awards previously granted thereunder were assumed by the Company, and no new awards are available for grant under the 2014 Plan. Shares that are expired, terminated, surrendered, or canceled under the 2014 Plan without having been fully exercised are available for awards under the 2020 Plan. Shares may be issued from authorized but unissued Company stock.
The Plans are administered by the Talent and Compensation Committee of the Board (the "Compensation Committee"). The options are subject to the terms and conditions applicable to options granted under the Plans, as described in the applicable Plan and the applicable stock option grant agreement. The exercise prices, vesting, and other restrictions applicable to the stock options are determined at the discretion of the Compensation Committee, except that the exercise price per share of incentive stock options may not be less than 100.0% of the fair value of a share of common stock on the date of grant. Stock options awarded under the Plans expire 10 years after the grant date. Incentive stock options and non-statutory options granted to employees, directors, officers, and consultants of the Company typically vest over four or five years. RSU awards are subject to the terms and conditions set forth in the Plans and the applicable RSU grant agreement. Vesting and other restrictions applicable to RSU awards are determined at the discretion of the Compensation Committee. The number of shares of common stock subject to an RSU award is determined by dividing the cash value of an RSU award by the average closing price of a share of the Company's Class A common stock over a specified period through the date of grant, and such awards typically vest over four years from the grant date. The total estimated fair value is amortized as an expense over the requisite service period as approved by the Compensation Committee.
The Company recorded stock-based compensation expense for options, RSUs, and performance restricted stock units ("PRSUs") granted under the Plans, the Inducement Plan, and discounts offered in connection with the Company's 2020 Employee Stock Purchase Plan ("ESPP") of $41.9 million and $43.0 million during the three months ended June 30, 2022 and 2021, respectively, and $82.6 million and $85.7 million during the six months ended June 30, 2022 and 2021, respectively, and such expenses are presented in salaries and benefits in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss. Compensation cost presented in salaries and benefits in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss were as follows:
| | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | 2022 | | 2021 | | |
| | (in thousands) |
| Stock options | | $ | 1,175 | | | $ | 1,375 | | | |
| RSUs | | 18,368 | | | 14,277 | | | |
| PRSUs | | 22,197 | | | 27,374 | | | |
| ESPP | | 187 | | | — | | | |
| Total compensation cost recognized for stock-based compensation plans | | $ | 41,927 | | | $ | 43,026 | | | |
| | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | 2022 | | 2021 | | |
| | (in thousands) |
| Stock options | | $ | 2,479 | | | $ | 5,069 | | | |
| RSUs | | 35,283 | | | 28,329 | | | |
| PRSUs | | 44,558 | | | 52,341 | | | |
| ESPP | | 247 | | | — | | | |
| Total compensation cost recognized for stock-based compensation plans | | $ | 82,567 | | | $ | 85,739 | | | |
As of June 30, 2022, there was approximately $388.9 million of unrecognized stock-based compensation expense related to unvested stock options, RSUs, PRSUs, and the ESPP, estimated to be recognized over a period of 3.96 years.
Stock Options
No stock options were granted during the six months ended June 30, 2022. The assumptions that the Company used in the Black-Scholes option-pricing model to determine the grant-date fair value of stock options granted for the six months ended June 30, 2021, respectively, were as follows:
| | | | | | | | | | | | |
| | | | Six Months Ended June 30, 2021 | | |
| Weighted-average risk-free interest rate | | | | 1.06 | % | | |
| Expected term (in years) | | | | 6.06 | | |
| Expected volatility | | | | 37.74 | % | | |
| Expected dividend yield | | | | — | | | |
A summary of option activity under the 2020 Plan during the six months ended June 30, 2022, is as follows:
| | | | | | | | | | | |
| Number of options | | Weighted-average exercise price |
Outstanding, January 1, 2022 | 1,753,799 | | | $ | 8.88 | |
Granted during 2022 | — | | | — | |
| Exercised | — | | | — | |
| Forfeited | (140,410) | | | (8.88) | |
Outstanding, June 30, 2022 | 1,613,389 | | | $ | 8.88 | |
A summary of option activity under the 2014 Plan during the six months ended June 30, 2022, is as follows:
| | | | | | | | | | | |
| Number of options | | Weighted-average exercise price |
Outstanding, January 1, 2022 | 31,155,742 | | | $ | 2.35 | |
Granted during 2022 | — | | | — | |
| Exercised | (4,167,956) | | | (0.21) | |
| Forfeited | (634,742) | | | (2.42) | |
Outstanding, June 30, 2022 | 26,353,044 | | | $ | 2.69 | |
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company's common stock for those stock options that had exercise prices lower than the fair value of the Company's common stock.
The weighted-average grant date fair value of stock options granted during the six months ended June 30, 2021, was $3.36 per share.
As of June 30, 2022, outstanding stock options, substantially all of which are expected to vest, had an aggregate intrinsic value of $5.0 million, and a weighted-average remaining contractual term of 6.79 years. As of June 30, 2022, there were 20,401,636 options exercisable under the Plan, with an aggregate intrinsic value of $5.0 million, a weighted-average exercise price of $2.87 per share, and a weighted-average remaining contractual term of 6.49 years. The total value of stock options exercised during the six months ended June 30, 2022 and 2021, was $11.3 million and $8.2 million, respectively. Cash received from stock option exercises during the six months ended June 30, 2022 and 2021, totaled $0.9 million and $1.6 million, respectively.
Pursuant to the terms of the applicable Plan and stock option award agreement, employees may exercise options at any time after grant while maintaining the original vesting period. The proceeds from exercise of unvested options are recorded as a liability until the option vests at which time the liability is reclassified to equity. If the employee terminates or otherwise forfeits an unvested option that has been exercised, the Company must redeem those shares at the original exercise price and remit payment of the forfeited portion of shares back to the employee.
Restricted Stock Units
A summary of total RSU activity is presented below:
| | | | | | | | | | | | | | |
| | Number of RSUs | | Weighted-average grant date fair value per share |
Outstanding, January 1, 2021 | | — | | | $ | — | |
Granted during 2021 | | 16,844,216 | | | 16.02 | |
| Released | | (95,834) | | | (16.02) | |
Outstanding, June 30, 2021 | | 16,748,382 | | | $ | 16.02 | |
| | | | |
Outstanding, January 1, 2022 | | 21,294,841 | | | $ | 14.60 | |
Granted during 2022 | | 15,774,310 | | | 2.55 | |
| Released | | (4,072,392) | | | (14.97) | |
| Forfeited | | (721,131) | | | (5.86) | |
Outstanding, June 30, 2022 | | 32,275,628 | | | $ | 8.86 | |
Performance Restricted Stock Units
The Company has granted certain PRSUs which become eligible to vest if prior to the vesting date the average closing price of one share of the Company's common stock for 90 consecutive days equals or exceeds a specified price (the "Market PRSUs"). Additionally, the Company has granted PRSUs that vest based on pre-established milestones including Company performance. The grant date fair value of the Market PRSUs is recognized as expense over the vesting period under the accelerated attribution method and is not adjusted in future periods for the success or failure to achieve the specified market condition. The Company has also
determined the requisite service period for the PRSUs with multiple performance conditions to be the longest of the explicit, implicit, or derived service period for each tranche.
There were no Market PRSUs granted prior to 2021. The grant date fair value of Market PRSUs was determined using a Monte Carlo simulation model that incorporated multiple valuation assumptions, including the probability of achieving the specified market condition and the following assumptions:
| | | | | | | | |
| Six months ended June 30, 2022 | | |
Expected volatility (1) | | 40.7 | % |
Risk-free interest rate (2) | | 0.5 | |
Dividend yield (3) | | — | |
(1) Expected volatility is based on a blend of peer group company historical data adjusted for the Company's leverage.
(2) Risk-free interest rate based on U.S. Treasury yields with a term equal to the remaining Performance Period as of the grant date.
(3) Dividend yield was assumed to be zero as the Company does not anticipate paying dividends.
A summary of PRSU activity is presented below:
| | | | | | | | | | | |
| Number of PRSUs | | Weighted-average grant date fair value per share |
Non-vested, January 1, 2021 | — | | | $ | — | |
Granted during 2021 | 27,460,364 | | | 9.59 | |
Non-vested at June 30, 2021 | 27,460,364 | | | $ | 9.59 | |
| | | |
Non-vested, January 1, 2022 | 27,818,524 | | | $ | 9.58 | |
Granted during 2022 | — | | | — | |
| Vested | (13,264) | | | (8.90) | |
| Forfeited | (265,306) | | | (9.11) | |
Non-vested at June 30, 2022 | 27,539,954 | | | $ | 9.58 | |
As of June 30, 2022, there was $129.1 million of unrecognized share-based compensation expense related to PRSUs, which is expected to be recognized over a period of 3.96 years.
2020 Employee Stock Purchase Plan
On January 6, 2021, stockholders approved the ESPP. The ESPP provides a means by which eligible employees and/or eligible service providers of either the Company or designated related companies and affiliates may be given an opportunity to purchase shares of Class A common stock at a 15.0% discount from the fair market value of the common stock as determined on specific dates at specified intervals. Subject to adjustments provided in the ESPP that are discussed below, the maximum number of shares of common stock that may be purchased under the ESPP is 6,312,038 shares, and the maximum number of shares that may be purchased on any single purchase date by any one participant is 5,000 shares. As of June 30, 2022, 6,097,241 shares of Class A common stock were available for issuance under the ESPP.
On the first day of each fiscal year, beginning with the 2022 fiscal year and ending on (and including) the first day of the 2030 fiscal year, the calculation of the maximum number of ESPP shares shall include automatic increases in an amount equal to the lesser of (i) 1.0% of the total number of shares of Class A common stock outstanding on the last day of the calendar month prior to the date of such automatic increase, and (ii) such number of shares of Class A common stock as determined by the administrator of the ESPP; provided that the maximum number of shares of Class A common stock reserved under the ESPP shall not exceed 10.0% of the total outstanding capital stock of the Company (inclusive of the shares reserved under the ESPP) as of January 7, 2021, on an as-converted basis.
The initial offering period for the ESPP was five months, commencing on September 1, 2021, and ending on January 31, 2022. The second offering period began on March 14, 2022, and will end on November 22, 2022, and the third offering period will begin on November 23, 2022, and end on May 21, 2023.
As of the date of this report, 214,797 shares of the Company's Class A common stock have been purchased or distributed pursuant to the ESPP.
The assumptions that the Company used in the Black-Scholes option-pricing model to determine the fair value of the purchase rights under the ESPP for the six months ended June 30, 2022, were as follows:
| | | | | | | | |
| Six months ended June 30, 2022 | | |
| Weighted-average risk-free interest rate | | 102.0 | % |
| Expected term (in years) | | 0.69 |
| Expected volatility | | 85.6 | % |
Equity warrants
In November 2016 and December 2017, the Company issued warrants to purchase 139,629 shares of the Company's common stock at an exercise price of $2.61 per share, and 122,052 shares of the Company's common stock at an exercise price of $3.45 per share, respectively, as part of payment to certain providers for services provided to the Company. These warrants were automatically exercised in connection with the Business Combination. For additional information, see Note 1 (Organization and Operations), Note 3 (Business Combination), and Note 18 (Employee Benefit Plans) to the financial statements in the 2021 Form 10-K.
13. Income Taxes
The consolidated effective tax rate of the Company for the three months ended June 30, 2022 and 2021, was (0.0%) and (0.0%), respectively. The consolidated effective tax rate of the Company for the six months ended June 30, 2022 and 2021, was (0.0%) and (0.0%), respectively. The Company continues to be in a net operating loss and net deferred tax asset position. As a result, and in accordance with accounting standards, the Company recorded a valuation allowance to reduce the value of the net deferred tax assets to zero. The Company believes that as of June 30, 2022, it had no material uncertain tax positions. Interest and penalties related to unrecognized tax expense (benefits) are recognized in income tax expense, when applicable.
There were no material liabilities for interest and penalties accrued as of June 30, 2022, and December 31, 2021.
14. Net Loss per Share
Net Loss per Share
Basic and diluted net loss per share attributable to Class A common stockholders and Class B common stockholders (collectively, "Common Stockholders") was calculated as follows:
| | | | | | | | | | | |
| Three Months Ended
June 30, |
| 2022 | | 2021 |
| (in thousands, except per share and share amounts) |
| Net loss | $ | (104,181) | | | $ | (317,611) | |
| Net loss attributable to Common Stockholders | (104,181) | | | (317,611) | |
| Basic and diluted weighted average number of common shares and common share equivalents outstanding | 476,061,809 | | | 408,156,682 | |
| | | |
| Net loss per share attributable to Common Stockholders—basic and diluted | $ | (0.22) | | | $ | (0.78) | |
| | | |
| | | | | | | | | | | | | | | | |
| | Six Months Ended
June 30, |
| | 2022 | | 2021 | | |
| | (in thousands, except per share and share amounts) |
| Net loss | | $ | (179,490) | | | $ | (366,028) | | | |
| Net loss attributable to Common Stockholders | | (179,490) | | | (366,028) | | | |
Basic and diluted weighted average number of common shares and common share equivalents outstanding | | 474,553,609 | | | 395,422,849 | | | |
| Net loss per share attributable to Common Stockholders—basic and diluted | | $ | (0.38) | | | $ | (0.93) | | | |
Because the Company had a net loss during the three and six months ended June 30, 2022 and 2021, the Company's potentially dilutive securities, which include stock options, RSUs, PRSUs, preferred stock, and warrants to purchase shares of common stock and preferred stock, have been excluded from the computation of diluted net loss per share, as the effect would be anti-dilutive. Therefore, during these periods, the diluted common shares outstanding equals the average common shares outstanding. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to Common Stockholders for the periods indicated because including them would have had an anti-dilutive effect:
| | | | | | | | | | | |
| Three Months Ended
June 30, |
| 2022 | | 2021 |
Options to purchase common stock | 27,966,433 | | | 36,944,571 | |
| RSUs | 32,275,628 | | | 17,524,474 | |
| PRSUs | 27,539,954 | | | — | |
Warrants to purchase common stock (as converted to common stock) | — | | | 38,533,271 | |
| | | |
| Total anti-dilutive shares excluded from computation of earnings per share | 87,782,015 | | | 93,002,316 | |
| | | | | | | | | | | | | |
| Six Months Ended
June 30, |
| 2022 | | 2021 | | |
Options to purchase common stock | 27,966,433 | | | 36,944,571 | | | |
| RSUs | 32,275,628 | | | 17,524,474 | | | |
| PRSUs | 27,539,954 | | | — | | | |
| | | | | |
Warrants to purchase common stock (as converted to common stock) | — | | | 38,533,271 | | | |
| | | | | |
| Total anti-dilutive shares excluded from computation of net loss per share | 87,782,015 | | | 93,002,316 | | | |
15. Commitments and Contingencies
Legal Actions
Various lawsuits against the Company may arise in the ordinary course of the Company's business. Contingent liabilities arising from ordinary course litigation, income taxes and other matters are not expected to be material in relation to the financial position of the Company. At June 30, 2022, and December 31, 2021, respectively, there were no material known contingent liabilities arising outside the normal course of business.
Securities Class Actions and Derivative Litigation
In February 2021, the Company and certain of its directors and officers were named as defendants in putative class actions filed in the United States District Court for the Middle District of Tennessee: Bond v. Clover Health Investments, Corp. et al., Case No. 3:21-cv-00096 (M.D. Tenn.); Kaul v. Clover Health Investments, Corp. et al., Case No. 3:21-cv-00101 (M.D. Tenn.); Yaniv v. Clover Health Investments, Corp. et al., Case No. 3:21-cv-00109 (M.D. Tenn.); and Tremblay v. Clover Health Investments, Corp. et al., Case No. 3:21-cv-00138 (M.D. Tenn.). The complaints assert violations of sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act. The Kaul action asserts additional claims under sections 11 and 15 of the Securities Act.
The complaints generally relate to allegations published in an article issued on February 4, 2021, by Hindenburg Research LLC (the "Hindenburg Article"). The complaints seek unspecified damages on behalf of all persons and entities who purchased or acquired Clover securities during the class period (which begins on October 6, 2020, and, depending on the complaint, ends on February 3, 2021, or February 4, 2021), as well as certain other costs. In April 2021, the Middle District of Tennessee class actions were consolidated under Bond v. Clover Health Investments, Corp. et al., Case No. 3:21-cv-00096 (M.D. Tenn.) as the lead case. On June 28, 2021, the plaintiffs filed an amended complaint, which also generally relates to allegations published in the Hindenburg article, but adds, among other things, allegations from confidential witnesses who purport to be former employees of the Company. The Company moved to dismiss the amended complaint on August 28, 2021; that motion was denied on February 28, 2022.
Parallel shareholder derivative actions have also been filed, naming Clover as a nominal defendant. The first action was filed in the United States District Court for the District of Delaware and is captioned Furman v. Garipalli, et al., Case No. 1:21-cv-00191 (D. Del.). The complaint asserts violations of sections 10(b) and 21D of the Exchange Act, breach of fiduciary duty, and waste of corporate assets against certain of the Company’s directors. It seeks unspecified damages and an order requiring Clover to take certain actions to enhance Clover's corporate governance policies, and procedures. The second and third actions were filed in the United States District Court for the Middle District of Tennessee and are captioned Sun v. Garipalli, et al., Case No. 3:21-cv-00311 (M.D. Tenn.), and Luthra v. Garipalli, et al., Case No. 3:21-cv-00320 (M.D. Tenn.). The complaints assert violations of section 14(a) of the Exchange Act, breach of fiduciary duty, and aiding and abetting a breach of fiduciary duty. The Sun action also asserts unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and contribution under section 11(f) of the Securities Act, and sections 10(b) and 21D of the Exchange Act. The complaints name certain current and former officers and directors as defendants. They seek unspecified damages and an order requiring Clover to take certain actions to enhance Clover's corporate governance policies and procedures.
The fourth action was filed in the United States District of Delaware and is captioned Wiegand v. Garipalli, et al., Case No. 1:21-cv-01053 (D. Del.). The initial complaint asserted violations of sections 14(a) and 20(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, and waste of corporate assets. The complaint names certain current and former officers and directors as defendants. It seeks, among other things, unspecified damages and an order requiring Clover to take certain actions to improve Clover’s corporate governance and internal procedures. The fifth action was filed in the Supreme Court of the State of New York and is captioned Sankaranarayanan v. Palihapitiya, et al., Index No. 655420/2021 (N.Y. Sup. Ct., N.Y. Cnty.). The complaint asserts breach of fiduciary duty and unjust enrichment. The complaint names certain former officers and directors as defendants. It seeks, among other things, unspecified damages and an order directing Clover to take certain actions to reform and improve its corporate governance and internal procedures.
The sixth action was filed in the Delaware Court of Chancery and is captioned Davies v. Garipalli, et al., No. 2021-1016-SG (Del. Ch.). The complaint asserts breach of fiduciary duty. The complaint names certain current and former officers and directors as defendants. It seeks, among other things, unspecified damages and an order directing Clover to take certain actions to reform and improve its corporate governance and internal procedures. The seventh action was filed in the Supreme Court of the State of New York and is captioned Uvaydov v. Palihapitiya, et al., Index No. 656978/2021 (N.Y Sup. Ct., N.Y. Cnty.). The complaint asserts breach of fiduciary duty, unjust enrichment, and aiding and abetting a breach of fiduciary duty. The complaint names certain current and former officers and directors as defendants. It seeks, among other things, unspecified damages, restitution, and disgorgement of profits obtained by defendants.
On May 10, 2021, the Middle District of Tennessee shareholder derivative actions described above were consolidated under Sun v. Garipalli, et al., Case No. 3:21-cv-00311 (M.D. Tenn.) as lead case. The court designated co-lead counsel and liaison counsel and ordered the parties to submit a proposed schedule for the initial stage of the case. On November 30, 2021, the Sun and Luthra plaintiffs filed an amended complaint, asserting violations of section 14(a) of the Exchange Act, breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and contribution under sections 10(b) and 21D of the Exchange Act. The amended complaint generally relates to the allegations published in the Hindenburg Article, and names certain current and former officers and directors as defendants. It seeks, among other things, unspecified damages and an order requiring Clover to take certain actions to enhance Clover's corporate governance policies and procedures.
On September 16, 2021, the two District of Delaware derivative actions were consolidated under In re Clover Health Investments, Corp. Derivative Litigation, Case No. 1:21-cv-00191-LPS (Consolidated). The Furman complaint was deemed the operative complaint. On April 19, 2022, the plaintiff in the Wiegand action filed an amended complaint, asserting violations of Sections 10(b), 20(a), and 21D of the Exchange Act, breach of fiduciary duty, waste of corporate assets, and unjust enrichment against certain current and former officers and directors. The amended complaint seeks, among other things, unspecified damages and an order requiring Clover to take certain actions to improve Clover’s corporate governance and internal procedures.
The parties in the New York derivative actions agreed to consolidate those two actions into one action. On February 2, 2022, the parties filed a stipulation with the court to that effect. Upon the court’s approval, the complaint in the Sankaranarayanan action will be deemed the operative complaint in the New York derivative actions.
All of these cases remain in the preliminary stages. Given the inherent uncertainty of litigation and the legal standards that must be met, including class certification and success on the merits, the Company has determined that it is not probable or estimable that an unfavorable outcome or potential loss will occur. Clover intends to vigorously defend itself against the claims asserted against it.
Guaranty Assessments
Under state guaranty assessment laws, including those related to state cooperative failures in the industry, the Company may be assessed, up to prescribed limits, for certain obligations to the policyholders and claimants of insolvent insurance companies that write the same line or lines of business as the Company.
16. Non-Insurance
In April 2021, the Company began participating in the DC Model, which utilizes a structured model intended to reduce expenditures and preserve or enhance quality of care for beneficiaries in Medicare fee-for-service ("FFS"). As a participating entity in the DC Model with a global risk arrangement, the Company assumes the responsibility of guaranteeing the performance of its care network. The DC Model is intended to reduce the administrative burden, support a focus on complex, chronically ill patients, and encourage physician organizations that have not typically participated in Medicare FFS to serve beneficiaries in Medicare FFS. The Company's operations in connection with the DC Model are included in the Non-Insurance operating segment. See Note 17 (Operating Segments) for additional information.
Performance Guarantees
Certain of the Company's arrangements with third-party providers require it to guarantee the performance of its care network to CMS, which, if not obtained, could potentially result in payment to CMS. The Non-Insurance performance year obligation and receivable are amortized on a straight-line basis for the amount that represents the completed performance. The Company is unable to estimate the maximum potential amount of future payments under the guarantee. This is attributable to the stop-loss arrangement and the corridors (tiered levels) in the arrangement. A certain percentage of these arrangements will still be the responsibility of the Company, in addition to a number of variables that are not reasonable for the Company to estimate, such as, but not limited to, risk ratings and benchmark trends that have an inestimable impact on the estimate of future payments.
For additional information, see Note 2 (Summary of Significant Accounting Policies) and Note 22 (Direct Contracting) in the 2021 Form 10-K.
The tables below include the financial statement impacts of the performance guarantee:
| | | | | | | | | | | | | | |
| | June 30, 2022 | | June 30, 2021 |
| | (in thousands) |
| Non-Insurance performance year receivable | | $ | 1,164,682 | | | $ | 436,334 | |
Non-Insurance performance year obligation (1) | | 1,214,312 | | | 455,143 | |
(1) This obligation represents the consideration due to providers, net of the shared savings or loss for the period and amortization of the liability. |
| | | | | | | | | | | | | | |
| | Three Months Ended
June 30, 2022 | | Six Months Ended June 30, 2022 |
| | (in thousands) |
| Amortization of the Non-Insurance performance year receivable | | $ | (577,968) | | | $ | (1,164,682) | |
| Amortization of the Non-Insurance performance year obligation | | 577,968 | | | 1,164,682 | |
| | | | |
| Non-Insurance revenue | | 577,370 | | | 1,172,268 | |
| | | | | | | | | | |
| | Three and Six Months Ended June 30, 2021 | | |
| | (in thousands) | | |
| Amortization of the Non-Insurance performance year receivable | | $ | (218,167) | | | |
| Amortization of the Non-Insurance performance year obligation | | 218,167 | | | |
| | | | |
| Non-Insurance revenue | | 216,373 | | | |
17. Operating Segments
The Company manages its operations based on two reportable operating segments: Insurance and Non-Insurance. Through the Insurance segment, the Company provides PPO and HMO plans to Medicare Advantage members in several states. The Company's Non-Insurance segment consists of its operations in connection with its participation in CMS' Direct Contracting program. All other clinical services and all corporate overhead not included in the Insurance or Non-Insurance segments are included within Corporate/Other. These segment groupings are consistent with information used by the Chief Executive Officer, the Company's CODM, to assess performance and allocate resources.
During the first quarter of 2022, the Company updated the names of its Medicare Advantage and Direct Contracting segments to the Insurance and Non-Insurance segments, respectively. The Company believes that this approach better reflects each segment’s current role and contribution to its business. There has been no change to the existing composition of these segments, and previously reported consolidated and segment-level financial results of the Company were not impacted by these changes.
The table below summarizes the Company's results by operating segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Insurance | | Non-Insurance | | Corporate/Other | | Eliminations | | Consolidated Total |
| Three Months Ended June 30, 2022 | | (in thousands) |
Premiums earned, net (Net of ceded premiums of $119) | | $ | 268,505 | | | $ | — | | | $ | — | | | $ | — | | | $ | 268,505 | |
| Non-Insurance revenue | | — | | | 577,370 | | | — | | | — | | | 577,370 | |
| Other income | | 220 | | | 20 | | | 15,441 | | | (14,856) | | | 825 | |
| Intersegment revenues | | — | | | — | | | 27,029 | | | (27,029) | | | — | |
| Net medical claims incurred | | 247,275 | | | 612,122 | | | 2,547 | | | (3,158) | | | 858,786 | |
| Gross profit (loss) | | $ | 21,450 | | | $ | (34,732) | | | $ | 39,923 | | | $ | (38,727) | | | $ | (12,086) | |
| | | | | | | | | | |
| Total assets | | $ | 426,723 | | | $ | 1,298,224 | | | $ | 1,143,146 | | | $ | (804,887) | | | $ | 2,063,206 | |
| | | | | | | | | | |
| | Insurance | | Non-Insurance | | Corporate/Other | | Eliminations | | Consolidated Total |
| Six Months Ended June 30, 2022 | | (in thousands) |
Premiums earned, net (Net of ceded premiums of $238) | | $ | 546,674 | | | $ | — | | | $ | — | | | $ | — | | | $ | 546,674 | |
| Non-Insurance revenue | | — | | | 1,172,268 | | | — | | | — | | | 1,172,268 | |
| Other income | | 491 | | | 20 | | | 42,840 | | | (41,214) | | | 2,137 | |
| Intersegment revenues | | — | | | — | | | 46,165 | | | (46,165) | | | — | |
| Net medical claims incurred | | 515,401 | | | 1,206,121 | | | 5,175 | | | (6,189) | | | 1,720,508 | |
| Gross profit (loss) | | $ | 31,764 | | | $ | (33,833) | | | $ | 83,830 | | | $ | (81,190) | | | $ | 571 | |
| | | | | | | | | | |
| Total assets | | $ | 426,723 | | | $ | 1,298,224 | | | $ | 1,143,146 | | | $ | (804,887) | | | $ | 2,063,206 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Insurance | | Non-Insurance | | Corporate/Other | | Eliminations | | Consolidated Total |
| Three Months Ended June 30, 2021 | | (in thousands) |
Premiums earned, (Net of ceded premiums of $126) | | $ | 195,357 | | | $ | — | | | $ | — | | | $ | — | | | $ | 195,357 | |
| Non-Insurance Revenue | | — | | | 216,373 | | | — | | | — | | | 216,373 | |
| Other income | | 41 | | | — | | | 31,400 | | | (30,699) | | | 742 | |
| Intersegment revenues | | — | | | — | | | 16,509 | | | (16,509) | | | — | |
| Net medical claims incurred | | 216,785 | | | 241,912 | | | 1,891 | | | (2,085) | | | 458,503 | |
| Gross (loss) profit | | $ | (21,387) | | | $ | (25,539) | | | $ | 46,018 | | | $ | (45,123) | | | $ | (46,031) | |
| | | | | | | | | | |
| Total assets | | $ | 274,714 | | | $ | 463,966 | | | $ | 954,539 | | | $ | (477,322) | | | $ | 1,215,897 | |
| | | | | | | | | | |
| | Insurance | | Non-Insurance | | Corporate/Other | | Eliminations | | Consolidated Total |
| Six Months Ended June 30, 2021 | | (in thousands) |
Premiums earned, (Net of ceded premiums of $250) | | $ | 394,733 | | | $ | — | | | $ | — | | | $ | — | | | $ | 394,733 | |
| Non-Insurance revenue | | — | | | 216,373 | | | — | | | — | | | 216,373 | |
| Other income | | 28 | | | — | | | 42,023 | | | (40,360) | | | 1,691 | |
| Intersegment revenues | | — | | | — | | | 23,755 | | | (23,755) | | | — | |
| Net medical claims incurred | | 431,963 | | | 241,912 | | | 2,990 | | | (3,942) | | | 672,923 | |
| Gross (loss) profit | | $ | (37,202) | | | $ | (25,539) | | | $ | 62,788 | | | $ | (60,173) | | | $ | (60,126) | |
| | | | | | | | | | |
| Total assets | | $ | 274,714 | | | $ | 463,966 | | | $ | 954,539 | | | $ | (477,322) | | | $ | 1,215,897 | |
A reconciliation of the reportable segments' gross profit to the net loss included in the Condensed Consolidated Statements of Operations and Comprehensive Loss is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
| | (in thousands) | | |
| Gross (loss) profit | | $ | (12,086) | | | $ | (46,031) | | | $ | 571 | | | $ | (60,126) | | | |
| | | | | | | | | | |
| Salaries and benefits | | 70,491 | | | 62,167 | | | 139,582 | | | 128,191 | | | |
| General and administrative expenses | | 47,040 | | | 45,646 | | | 104,737 | | | 84,264 | | | |
| Premium deficiency reserve (benefit) expense | | (27,657) | | | 27,900 | | | (55,314) | | | 27,900 | | | |
| Depreciation and amortization | | 586 | | | 118 | | | 1,412 | | | 278 | | | |
| Other expense | | — | | | — | | | — | | | 191 | | | |
| Change in fair value of warrants payable | | — | | | 134,512 | | | — | | | 49,006 | | | |
| Interest expense | | 390 | | | 1,211 | | | 793 | | | 2,386 | | | |
| Amortization of notes and securities discounts | | 18 | | | 26 | | | 18 | | | 13,686 | | | |
| | | | | | | | | | |
| Loss (gain) on investment | | 1,227 | | | — | | | (11,167) | | | — | | | |
| Net loss | | $ | (104,181) | | | $ | (317,611) | | | $ | (179,490) | | | $ | (366,028) | | | |
18. Dividend Restrictions
The Company's regulated insurance subsidiaries are subject to regulations and standards in their respective jurisdictions. These standards, among other things, require these subsidiaries to maintain specified levels of statutory capital and limit the timing and amount of dividends and other distributions that may be paid to their parent companies. Therefore, the Company's regulated insurance subsidiaries' ability to declare and pay dividends is limited by state regulations including obtaining prior approval by the New Jersey Department of Banking and Insurance. As of June 30, 2022, and December 31, 2021, neither of the regulated insurance subsidiaries had paid any dividends.