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 focused on empowering physicians to identify and manage chronic diseases early. 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 aims to provide affordable, high-quality Medicare Advantage 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 ("Health Partners"), 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"). CMS redesigned the DC Model and renamed it the Accountable Care Organization ("ACO") Realizing Equity, Access, and Community Health ("REACH") ("ACO REACH Model" or "ACO REACH") Model effective January 1, 2023. 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 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 15 (Non-Insurance) in these financial statements.
For additional information, see Note 1 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 (the "2022 Form 10-K").
2. Summary of Significant Accounting Policies
Basis of presentation
The Company's interim unaudited 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 unaudited 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 2022 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 area involving the most significant use of estimates is the amount 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, ACO REACH Benchmark, specifically cost trend and risk score estimates that can develop over time, and final determination of medical cost adjustment pools.
Reclassifications
Certain amounts in the prior years' Consolidated Balance Sheets and Consolidated Statements of Cash Flows have been reclassified to conform to the current year's presentation, primarily related to Non-Insurance receivable, Other assets, current, and Performance year obligation. In addition amounts in the prior years' Consolidated Statements of Cash Flows have been reclassified to confirm with the current year's presentation related to cash used by Performance year obligation.
Change in Accounting Policy
In the first quarter of 2023, the Company changed the method for determining premium deficiency reserves whereby anticipated net investment income is now included in the determination of premium deficiency reserves. The accounting policy election to include net investment income is preferable because it provides a better representation of the Company’s business model reflecting the fact that all cash flows, including investment income, are used to meet the Company’s obligations. The Company also believes that this change improves comparability with industry peers. This change is considered a change in accounting principle that requires retrospective application to all financial statement periods presented. This change decreased Accumulated deficit by $0.7 million to $1,616 million at January 1, 2022.
The effect of the changes made to the Company's Condensed Consolidated Statements of Comprehensive Income was as follows:
| | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 | | As Reported | Effect of Change | As Adjusted |
| | (in thousands) |
| Premium deficiency reserve benefit | | $ | (27,657) | | $ | 181 | | $ | (27,476) | |
| Total operating expenses | | 961,679 | | 181 | | 961,860 | |
| Loss from operations | | (87,300) | | (181) | | (87,481) | |
| Net loss | | $ | (75,309) | | $ | (181) | | $ | (75,490) | |
| | | | |
| Per share data: | | | | |
| Net loss per share attributable to Class A and B common stockholders - basic and diluted | | $ | (0.16) | | $ | — | | $ | (0.16) | |
The cumulative effect of the changes made to the Company's Condensed Consolidated Balance Sheets was as follows:
| | | | | | | | | | | | | | |
| December 31, 2022 | | As Reported | Effect of Change | As Adjusted |
| | (in thousands) |
| Premium deficiency reserve | | $ | 16,388 | | $ | (9,149) | | $ | 7,239 | |
| Total current liabilities | | 440,656 | | (9,149) | | 431,507 | |
| Total liabilities | | 460,882 | | (9,149) | | 451,733 | |
| Accumulated deficit | | (1,955,582) | | 9,149 | | (1,946,433) | |
| Total stockholders' equity | | 347,738 | | 9,149 | | 356,887 | |
| Total liabilities and stockholders' equity | | 808,620 | | — | | 808,620 | |
| | | | | | | | | | | | | | |
| December 31, 2021 | | As Reported | Effect of Change | As Adjusted |
| | (in thousands) |
| Premium deficiency reserve | | $ | 110,628 | | $ | (723) | | $ | 109,905 | |
| Total current liabilities | | 372,624 | | (723) | | 371,901 | |
| Total liabilities | | 411,487 | | (723) | | 410,764 | |
| Accumulated deficit | | (1,616,738) | | 723 | | (1,616,015) | |
| Total stockholders' equity | | 539,317 | | 723 | | 540,040 | |
| Total liabilities and stockholders' equity | | 950,804 | | — | | 950,804 | |
There was no impact on total net cash used in operating activities.
The following table compares the amounts currently reported to amounts that would have been reported where the determination of the premium deficiency reserves excludes anticipated net investment income in the Condensed Consolidated Statements of Comprehensive Income.
| | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | As Reported | As computed excluding anticipated net investment income | Effect of Change |
| | (in thousands) |
| Premium deficiency reserve benefit | | $ | (1,810) | | $ | (4,097) | | $ | 2,287 | |
| Total operating expenses | | 600,381 | | 598,094 | | 2,287 | |
| Loss from operations | | (72,606) | | (70,319) | | (2,287) | |
| Net loss | | $ | (72,606) | | $ | (70,319) | | $ | (2,287) | |
| | | | |
| Per share data: | | | | |
| Net loss per share attributable to Class A and B common stockholders - basic and diluted | | $ | (0.15) | | $ | (0.15) | | $ | — | |
The following table compares the amounts currently reported to amounts that would have been reported where the determination of the premium deficiency reserves excludes anticipated net investment income in the Condensed Consolidated Balance Sheets.
| | | | | | | | | | | | | | |
| March 31, 2023 | | As Reported | As computed excluding anticipated net investment income | Effect of Change |
| | (in thousands) |
| Premium deficiency reserve | | $ | 5,430 | | $ | 12,292 | | $ | (6,862) | |
| Total current liabilities | | 1,110,374 | | 1,117,236 | | (6,862) | |
| Total liabilities | | 1,130,482 | | 1,137,344 | | (6,862) | |
| Accumulated deficit | | (2,019,039) | | (2,025,901) | | 6,862 | |
| Total stockholders' equity | | 323,107 | | 316,245 | | 6,862 | |
| Total liabilities and stockholders' equity | | 1,453,589 | | 1,453,589 | | — | |
There was no impact on the Condensed Consolidated Statements of Cash Flows.
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.
When the Company's carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company's consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.
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
In April 2021, the Company began participating in the DC Model of the Centers for Medicare & Medicaid Services ("CMS"), which utilizes a structured model intended to reduce expenditures and preserve or enhance quality of care for beneficiaries in Medicare fee-for-service ("FFS"). CMS redesigned the DC Model and renamed the model the ACO Realizing Equity, Access, and Community Health (REACH) Model ("ACO REACH Model") effective January 1, 2023. As a participating entity in the DC Model, referred to as the ACO REACH Model at January 1, 2023, with a global risk arrangement, the Company assumes the responsibility of guaranteeing the performance of its care network. The ACO REACH 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 both the DC Model and ACO REACH Model are included in the Non-Insurance operating segment. See Note 16 (Operating Segments) for additional information.
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. The performance guarantee identified relates to the Company guaranteeing the performance of the third-party medical providers. Thus, the contract with CMS is accounted for as a performance guarantee under ASC 460-Guarantees. At the inception of the performance year, the Company measures and recognizes the performance guarantee receivable and obligation, issued in this standalone arm's length transaction, using the practical expedient to fair value as set forth in ASC 460-10-30-2(a). The Company estimates the annualized benchmark, which is the amount recognized in both the Non-Insurance performance year receivable and the Non-Insurance performance year obligation, current. This is consistent with ASC 460-10-25-4, which provides that a guarantor shall recognize in its statement of financial position a liability for that guarantee. In addition, when the guarantee is issued in a standalone transaction for a premium, the offsetting entry should be considered received (such as cash or a receivable) according to ASC 460-10-25-4. Thus the Company recognizes the Non-Insurance performance year receivable on its Consolidated Balance Sheets.
To subsequently measure and recognize the performance guarantee, the Company follows ASC 460-10-35-2(b) and applies a systematic and rational approach to reflect its release from risk. Under this approach, the Company amortizes on a straight-line basis over the performance year, the obligation. The Company has determined this systematic and rational method is appropriate, as it matches the period in which the guarantee is fulfilled. In addition, ASC 460-10-35-2 provides further guidance on the subsequent measurement related to the Company's performance guarantee. Per ASC 460-10-35-2, depending on the nature of the guarantee, the guarantor's release from risk typically can be recognized over the term of the guarantee using one of three methods: (1) upon expiration or settlement, (2) by systematic or rational amortization, or (3) as the fair value of the guarantee changes. The Company has determined that method (2) is the appropriate method of recognition as discussed above.
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, current or Non-Insurance performance receivable if the Company is in a probable loss position or probable savings position, respectively.
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 Consolidated Balance Sheets within Prepaid expenses, 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 within Other assets, current on the Consolidated Balance Sheets and are amortized over the estimated life of the related contracts. The amortization of deferred acquisition costs is recorded within General and administrative expenses within the Consolidated Statements of Operations and Comprehensive Loss. At March 31, 2023 and December 31, 2022, 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 months ended March 31, 2023 and 2022, charges related to deferred acquisition costs of $3.9 million, and $11.8 million, respectively, were recognized within General and administrative expenses.
Recent accounting pronouncements
Recently adopted accounting pronouncements
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 at 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 at the earliest period presented. The amendments for market risk benefits are to be applied retrospectively. ASU 2020-11 is effective for public entities for periods beginning after December 15, 2022. The Company adopted this standard on January 1, 2023. The adoption of ASU 2018-12 and related amendments did not have a material impact on the Company's financial statements.
Accounting pronouncements effective in future periods
None.
3. Investment Securities
The following tables present amortized cost and fair values of investments at March 31, 2023 and December 31, 2022, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | 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 | | $ | 756 | | | $ | — | | | $ | (90) | | | $ | 666 | |
Investment securities, available-for-sale | | | | | | | | |
U.S. government and government agencies and authorities | | 192,016 | | | 60 | | | (6,687) | | | 185,389 | |
| Corporate debt securities | | 106,689 | | | 95 | | | (499) | | | 106,285 | |
| | | | | | | | |
Total held-to-maturity and available-for-sale investment securities | | $ | 299,461 | | | $ | 155 | | | $ | (7,276) | | | $ | 292,340 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 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 | | $ | 757 | | | $ | — | | | $ | (106) | | | $ | 651 | |
Investment securities, available-for-sale | | | | | | | | |
U.S. government and government agencies and authorities | | 237,457 | | | 10 | | | (9,000) | | | 228,467 | |
| Corporate debt | | 98,783 | | | 38 | | | (422) | | | 98,399 | |
| | | | | | | | |
Total held-to-maturity and available-for-sale investment securities | | $ | 336,997 | | | $ | 48 | | | $ | (9,528) | | | $ | 327,517 | |
The following table presents the amortized cost and fair value of debt securities at March 31, 2023, by contractual maturity:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | Held-to-maturity | | Available-for-sale |
| | Amortized cost | | Fair value | | Amortized cost | | Fair value |
| | (in thousands) |
| Due within one year | | $ | 15 | | | $ | 15 | | | $ | 159,062 | | | $ | 156,542 | |
| Due after one year through five years | | 631 | | | 553 | | | 139,643 | | | 135,132 | |
| Due after five years through ten years | | — | | | — | | | — | | | — | |
| Due after ten years | | 110 | | | 98 | | | — | | | — | |
| Total | | $ | 756 | | | $ | 666 | | | $ | 298,705 | | | $ | 291,674 | |
For the three months ended March 31, 2023 and 2022, respectively, net investment income, which is included within Other income within the Consolidated Statements of Operations and Comprehensive Loss, was derived from the following sources:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| | 2023 | | 2022 | | | | | | |
| | (in thousands) |
| Cash and cash equivalents | | $ | 1,629 | | | $ | 2 | | | | | | | |
| Short-term investments | | 492 | | | 71 | | | | | | | |
| Investment securities | | 1,814 | | | 237 | | | | | | | |
| Investment income, net | | $ | 3,935 | | | $ | 310 | | | | | | | |
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 March 31, 2023, and December 31, 2022, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | 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 | | $ | 11,535 | | | $ | (76) | | | $ | 155,066 | | | $ | (6,701) | | | $ | 166,601 | | | $ | (6,777) | |
| Corporate debt securities | | 72,854 | | | (499) | | | — | | | — | | | 72,854 | | | (499) | |
| Total | | $ | 84,389 | | | $ | (575) | | | $ | 155,066 | | | $ | (6,701) | | | $ | 239,455 | | | $ | (7,276) | |
| Number of positions | | 79 | | | 25 | | | 104 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 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 | | $ | 64,261 | | | $ | (958) | | | $ | 147,757 | | | $ | (8,148) | | | $ | 212,018 | | | $ | (9,106) | |
| Corporate debt securities | | 78,292 | | | (422) | | | — | | | — | | | 78,292 | | | (422) | |
| Total | | $ | 142,553 | | | $ | (1,380) | | | $ | 147,757 | | | $ | (8,148) | | | $ | 290,310 | | | $ | (9,528) | |
| Number of positions | | 92 | | | 24 | | | 116 | |
The Company did not record any credit allowances for debt securities that were in an unrealized loss position at March 31, 2023 and December 31, 2022.
At March 31, 2023, 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 at March 31, 2023, 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 within the Consolidated Statements of Operations and Comprehensive Loss, were as follows for the three months ended March 31, 2023 and 2022, respectively:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, |
| | 2023 | | 2022 | | | | | | |
| | (in thousands) |
| Proceeds from sales of investment securities | | $ | 15,001 | | | $ | — | | | | | | | |
| Proceeds from maturities of investment securities | | 63,324 | | | 150,000 | | | | | | | |
| | | | | | | | | | |
| Gross realized gains | | — | | | — | | | | | | | |
| Gross realized losses | | — | | | — | | | | | | | |
| Net realized losses | | $ | — | | | $ | — | | | | | | | |
At March 31, 2023 and December 31, 2022, the Company had $14.4 million and $14.3 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 at March 31, 2023 and December 31, 2022, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | Level 1 | | Level 2 | | Level 3 | | Total fair value |
| | (in thousands) |
| U.S. government and government agencies | | $ | — | | | $ | 185,389 | | | $ | — | | | $ | 185,389 | |
| Corporate debt securities | | — | | | 106,285 | | | — | | | 106,285 | |
| Warrants receivable | | — | | | — | | | 900 | | | 900 | |
| Total assets at fair value | | $ | — | | | $ | 291,674 | | | $ | 900 | | | $ | 292,574 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | Level 1 | | Level 2 | | Level 3 | | Total fair value |
| | (in thousands) |
| U.S. government and government agencies | | $ | — | | | $ | 228,467 | | | $ | — | | | $ | 228,467 | |
| Corporate debt securities | | — | | | 98,399 | | | — | | | 98,399 | |
| Warrants receivable | | — | | | — | | | 900 | | | 900 | |
| Total assets at fair value | | $ | — | | | $ | 326,866 | | | $ | 900 | | | $ | 327,766 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
There were no changes in the balances of Clover's Level 3 financial assets and liabilities during the three months ended March 31, 2022. The changes in balances of Clover's Level 3 financial assets and liabilities during the three months ended March 31, 2023 were as follows:
| | | | | | | | | | | | | | | |
| | | | | Warrants receivable | | Total |
| | | | | (in thousands) |
Balance, December 31, 2022 | | | | | $ | 900 | | | $ | 900 | |
| Receipts | | | | | — | | | — | |
| Settlements | | | | | — | | | — | |
| Transfers in | | | | | — | | | — | |
| Transfers out | | | | | — | | | — | |
| Total realized losses (gains) | | | | | — | | | — | |
Balance, March 31, 2023 | | | | | $ | 900 | | | $ | 900 | |
There were no transfers in or out of Level 3 financial assets or liabilities for the three months ended March 31, 2023 or March 31, 2022.
Private Warrants
At March 31, 2023, the Company had exercisable private warrants which were embedded in several agreements as derivatives. These private warrants were accounted for as assets in accordance with ASC 815-40 and are presented within Other assets, non-current on the Consolidated Balance Sheets. The warrant assets are measured at fair value at inception and on a recurring basis until redeemed, with changes in fair value presented within Change in fair value of warrants within the Consolidated Statements of Operations and Comprehensive Loss. These private warrants were classified within Level 3 due to the subjectivity and use of estimates in the calculation of their fair value. These warrants at initial measurement date, December 31, 2022, were assessed to have a fair value of $0.9 million. At March 31, 2023, these warrants had a fair value of $0.9 million.
5. Healthcare Receivables
Healthcare receivables include pharmaceutical rebates that 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 within Healthcare receivables are Medicare Part D settlement receivables, member premium receivables, and other CMS receivables. The Company reported $56.9 million and $70.6 million within Healthcare receivables at March 31, 2023, and December 31, 2022, 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 Executive Chairman 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 Clover's contracts with CarePoint Health, recorded within Net medical claims incurred, were $3.7 million and $2.6 million, for the three months ended March 31, 2023 and 2022, respectively. Additionally, $1.3 million and $1.6 million were payable to CarePoint Health at March 31, 2023, and December 31, 2022, 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 less than $0.1 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively.
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 $0.4 million for the three months ended March 31, 2023 and 2022, respectively. Additionally, $0.2 million and $0.3 million were payable to Thyme Care at March 31, 2023, and December 31, 2022, respectively.
7. Unpaid Claims
Activity within the liability for Unpaid claims, including claims adjustment expenses, for the three months ended March 31, 2023 and 2022, respectively, is summarized as follows:
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | | 2023 | | 2022 |
| | (in thousands) |
| | | | |
Gross and net balance, beginning of period (1) | | $ | 137,395 | | | $ | 136,137 | |
| Incurred related to: | | | | |
| Current year | | 272,258 | | | 272,151 | |
| Prior years | | 804 | | | (7,056) | |
| Total incurred | | 273,062 | | | 265,095 | |
| Paid related to: | | | | |
| Current year | | 167,360 | | | 164,034 | |
| Prior years | | 104,581 | | | 84,180 | |
| Total paid | | 271,941 | | | 248,214 | |
| | | | |
Gross and net balance, end of period (1)(2) | | $ | 138,516 | | | $ | 153,018 | |
(1) Includes amounts due to related parties.
(2) Differs from the total Unpaid claims amount reported on the Consolidated Balance Sheets due to the fact the figure here excludes unpaid claims for the Company's Non-Insurance operations of $4.1 million and $13.2 million at March 31, 2023 and 2022, respectively.
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.
Unpaid Claims for Insurance Operations
Unpaid claims for Insurance operations were $138.5 million at March 31, 2023. During the three months ended March 31, 2023, $104.6 million was paid for incurred claims attributable to insured events of prior years. An unfavorable development of $0.8 million was recognized during the three months ended March 31, 2023, resulting from the Company's actual experience with claims developing differently as compared to the Company's estimates at December 31, 2022. A favorable development of $7.1 million was recognized during the three months ended March 31, 2022, resulting from the Company's actual experience with claims developing differently as compared to the Company's estimates at December 31, 2021. 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 61.5% for the three months ended March 31, 2023, and 60.3% for the three months ended March 31, 2022. This ratio serves as an indicator of claims processing speed, indicating that claims were processed at a faster rate during the three months ended March 31, 2023, than during the three months ended March 31, 2022.
8. 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. The Letter is with a commercial lender and it 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 March 31, 2023, and December 31, 2022.
9. Stockholders' Equity and Convertible Preferred Stock
Stockholders' Equity
The Company was authorized to issue up to 2,500,000,000 and 2,500,000,000 shares of Class A common stock at March 31, 2023 and December 31, 2022, respectively, and up to 500,000,000 shares of Class B common stock at March 31, 2023 and December 31, 2022. At March 31, 2023 and December 31, 2022, there were 394,129,673 and 383,998,718 shares of Class A common stock issued and outstanding, respectively. There were 88,495,493 and 94,394,852 shares of Class B common stock issued and outstanding at March 31, 2023 and December 31, 2022, respectively. Class B common stock has 10 votes per share, and Class A common stock has one vote per share. The Company had 5,006,473 and 2,072,752 shares held in treasury at March 31, 2023 and December 31, 2022, respectively. These amounts represent shares withheld to cover taxes upon vesting of employee stock-based awards.
At March 31, 2023, the Company was authorized to issue 25,000,000 shares of preferred stock having a par value of $0.0001 per share, and the Company's Board has the authority to determine the rights, preferences, privileges, and restrictions, including voting rights, of those shares. At March 31, 2023, there were no shares of preferred stock issued and outstanding.
10. Variable Interest Entity and Equity Method of Accounting
On February 4, 2022, Character Biosciences, Inc. (f/k/a Clover Therapeutics Company) ("Character Biosciences"), an affiliate 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, non-current on the Consolidated Balance Sheets, and recognized a gain of $12.4 million for the three months ended March 31, 2022, which is included within Gain on investment on the Consolidated Statements of Operations and Comprehensive Loss.
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 (i) the proportionate share of the investee's net income or losses after the date of investment, (ii) additional contributions made and dividends or distributions received, and (iii) 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 within gain on investment on the 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 within Other assets, non-current in the 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.
In accordance with ASC 323, the Company recognized the proportionate share of Character Bioscience's net losses up to the investment carrying amount, at December 31, 2022, the Company discontinued applying the equity method to account for its common stock interest in Character Biosciences as the Company's net losses exceeded the Company's investment carrying amount. The equity method investment in Character Biosciences was reduced to zero and no further losses were recorded in the Company's consolidated financial statements as the Company did not guarantee obligations of the investee company nor has not committed additional funding. The Company will begin recognizing its share of net income only when it is greater than the cumulative net losses not recognized during the period the equity method was suspended.
On January 23, 2023, Character Biosciences, completed a second private capital transaction in which it raised an additional capital from the issuance of additional shares of its preferred stock. Upon completion of this transaction, the Company's ownership percentage in Character Biosciences decreased to 23.92%.
11. Employee Benefit Plans
Employee Retirement 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 $0.5 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively, and are included within Salaries and benefits on the 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 Executive Chair and CEO. 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 2020 Plan has an evergreen provision that requires the number of shares available for issuance under the plan to be increased on the first day of each fiscal year beginning with the 2022 fiscal year and ending on (and including) the last day of the 2024 fiscal year, in each case, in an amount equal to the lesser of (i) seven percent (7%) of the outstanding shares of Class A Common Stock on the last day of the immediately preceding fiscal year and (ii) such number of shares of Class A Common Stock determined by the Board; provided that for each fiscal year beginning with the 2025 fiscal year through the fiscal year that includes the expiration date of the plan, each such increase shall be reduced to the lesser of five percent (5%) of the outstanding shares of Class A Common Stock on the last day of the immediately preceding fiscal year or such number of shares determined by the Board.
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 at March 31, 2023 and December 31, 2022, respectively, were as follows:
| | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | Shares Authorized Under Plans | | Shares Outstanding Under Plans | | Shares Remaining Under Plans |
| 2014 Plan | | 54,402,264 | | | 35,353,101 | | | N/A |
| 2020 Plan | | 58,521,709 | | | 42,687,562 | | | 11,726,676 | |
| 2020 MIP | | 33,426,983 | | | 26,741,587 | | | — | |
| Inducement Plan | | 11,000,000 | | | 9,449,612 | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | Shares Authorized Under Plans | | Shares Outstanding Under Plans | | Shares Remaining Under Plans |
| 2014 Plan | | 54,402,264 | | | 36,378,558 | | | N/A |
| 2020 Plan | | 31,884,272 | | | 29,805,319 | | | 242,473 | |
| 2020 MIP | | 33,426,983 | | | 30,084,285 | | | — | |
| Inducement Plan | | 11,000,000 | | | 11,000,000 | | | — | |
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 restricted units with performance-based vesting ("PRSUs") granted under the Plans, the Inducement Plan, and discounts offered in connection with the Company's 2020 Employee Stock Purchase Plan ("ESPP") of $38.6 million and $40.6 million during the three months ended March 31, 2023 and 2022, respectively, and such expenses are presented within Salaries and benefits in the accompanying Consolidated Statements of Operations and Comprehensive Loss.
Compensation cost presented within Salaries and benefits within the accompanying Consolidated Statements of Operations and Comprehensive Loss were as follows:
| | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | 2023 | | 2022 | | |
| | (in thousands) |
| Stock options | | $ | 1,341 | | | $ | 1,304 | | | |
| RSUs | | 21,000 | | | 16,915 | | | |
| PRSUs | | 16,195 | | | 22,361 | | | |
| ESPP | | 81 | | | 60 | | | |
| Total compensation cost recognized for stock-based compensation plans | | $ | 38,617 | | | $ | 40,640 | | | |
At March 31, 2023, there was approximately $507.5 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 4 years. The Company recognized $16.2 million and $22.4 million in share-based compensation related to PRSUs for the three months ended March 31, 2023 and 2022, respectively. The Company has granted PRSUs to certain executives, 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"). The expense referenced above is mainly attributable to Market PRSUs that vest based on pre-established milestones including Company performance. These milestones primarily consist of the volume-weighted average stock closing price ranging from $20 to $30 for 90 consecutive days. 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. At March 31, 2023, the market condition component of these awards has not been met, so the awards have not been earned. This expense represents more than 40% of the total compensation cost recognized for stock-based compensation plans presented within Salaries and benefits within the accompanying Consolidated Statements of Operations and Comprehensive Loss.
Stock Options
There were no stock options granted for the three months ended March 31, 2023 and 2022.
A summary of option activity under the 2020 Plan during the three months ended March 31, 2023, was as follows:
| | | | | | | | | | | |
| Number of options | | Weighted-average exercise price |
Outstanding, January 1, 2023 | 1,364,822 | | | $ | 8.88 | |
Granted during 2023 | — | | | — | |
| Exercised | — | | | — | |
| Forfeited | (136,249) | | | 8.88 | |
Outstanding, March 31, 2023 | 1,228,573 | | | $ | 8.88 | |
A summary of option activity under the 2014 Plan during the three months ended March 31, 2023, was as follows:
| | | | | | | | | | | |
| Number of options | | Weighted-average exercise price |
Outstanding, January 1, 2023 | 25,631,685 | | | $ | 2.35 | |
Granted during 2023 | — | | | — | |
| Exercised | (1,240) | | | 1.52 | |
| Forfeited | (1,024,215) | | | 2.24 | |
Outstanding, March 31, 2023 | 24,606,230 | | | $ | 2.71 | |
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.
At March 31, 2023, outstanding stock options, substantially all of which are expected to vest, had an aggregate intrinsic value of $507.5 million, and a weighted-average remaining contractual term of 4 years. At March 31, 2023, there were 22,138,777 options exercisable under the Plan, with an aggregate intrinsic value of $0.1 million, a weighted-average exercise price of $2.88 per share, and a weighted-average remaining contractual term of 5.96 years. The total value of stock options exercised during the three months ended March 31, 2023 and 2022, was none and $39.8 million, respectively. Cash received from stock option exercises during the three months ended March 31, 2023 and 2022, was none and $6.4 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 early, 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, 2022 | | 21,294,841 | | | $ | 14.60 | |
Granted during 2022 | | 14,276,763 | | | 2.57 | |
| Released | | (3,949,754) | | | 15.10 | |
| Forfeited | | (109,453) | | | 12.07 | |
Outstanding, March 31, 2022 | | 31,512,397 | | | $ | 9.10 | |
| | | | |
Outstanding, January 1, 2023 | | 49,617,199 | | | $ | 6.48 | |
Granted during 2023 | | 16,194,103 | | | 0.98 | |
| Released | | (7,164,077) | | | 9.39 | |
| Forfeited | | (904,620) | | | 3.18 | |
Outstanding, March 31, 2023 | | 57,742,605 | | | $ | 4.63 | |
Performance Restricted Stock Units
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.
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:
| | | | | | | | |
| Three months ended March 31, 2023 | | |
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 at 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, 2022 | | 27,818,524 | | | $ | 9.58 | |
Granted during 2022 | | — | | | — | |
| Vested | | (13,264) | | | 8.90 | |
| Forfeited | | (265,306) | | | 9.11 | |
Non-vested at March 31, 2022 | | 27,539,954 | | | $ | 9.58 | |
| | | | |
Non-vested, January 1, 2023 | | 29,945,235 | | | $ | 8.92 | |
Granted during 2023 | | — | | | — | |
| Vested | | — | | | — | |
| Forfeited | | — | | | — | |
Non-vested at March 31, 2023 | | 29,945,235 | | | $ | 8.92 | |
At March 31, 2023, there was $68.7 million of unrecognized share-based compensation expense related to PRSUs, which is expected to be recognized over a period of 4 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 10,512,025 shares, and the maximum number of shares that may be purchased on any single purchase date by any one participant is 5,000 shares. At March 31, 2023, 9,582,217 shares of Class A common stock were available for issuance under the ESPP.
The ESPP includes an evergreen provision that sets the maximum number of shares of Class A common stock that may be issued under the plan, to 2,785,582 shares, plus the number of shares of Class A common stock that are automatically added 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, in an amount equal to the lesser of (i) one percent (1%) 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 Board; 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) at January 7, 2021, on an as-converted basis.
The initial offering period for the ESPP was five months, which commenced on September 1, 2021, and ended on January 31, 2022. The second offering period began on March 14, 2022, and ended November 22, 2022, and the third offering period began on November 23, 2022, and will end on May 21, 2023.
At March 31, 2023, 569,808 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 three months ended March 31, 2023, are as follows:
| | | | | | | | |
| Three months ended March 31, 2023 | | |
| Weighted-average risk-free interest rate | | 4.7 | % |
| Expected term (in years) | | 0.49 |
| Expected volatility | | 78.4 | % |
12. Income Taxes
The consolidated effective tax rate of the Company for the three months ended March 31, 2023 and 2022, was 0.0%. 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 at March 31, 2023, 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 at March 31, 2023 and December 31, 2022.
13. 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") for the years indicated was calculated as follows:
| | | | | | | | | | | | | |
| Three Months Ended
March 31, |
| 2023 | | 2022 | | |
| (in thousands, except per share and share amounts) |
| Net loss | $ | (72,606) | | | $ | (75,490) | | | |
| Net loss attributable to Common Stockholders | (72,606) | | | (75,490) | | | |
Basic and diluted weighted average number of common shares and common share equivalents outstanding | 478,805,067 | | | 473,028,651 | | | |
| Net loss per share attributable to Common Stockholders—basic and diluted | $ | (0.15) | | | $ | (0.16) | | | |
Because the Company had a Net loss during the three months ended March 31, 2023 and 2022, 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
March 31, |
| 2023 | | 2022 | | |
Options to purchase common stock | 25,834,803 | | | 32,410,176 | | | |
| RSUs | 57,742,605 | | | 31,512,397 | | | |
| PRSUs | 29,945,235 | | | 27,539,954 | | | |
| | | | | |
| | | | | |
| | | | | |
| Total anti-dilutive shares excluded from computation of net loss per share | 113,522,643 | | | 91,462,527 | | | |
14. 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 March 31, 2023, and December 31, 2022, respectively, there were no material known contingent liabilities arising outside the normal course of business other than as set forth below.
Securities Class Actions, Derivative Litigation and Investigations
Since February 2021, the Company has received subpoenas from the SEC related to certain disclosures and aspects of our business as well as certain matters described in an article issued on February 4, 2021, by Hindenburg Research LLC (the "Hindenburg Article"). The Company is cooperating with the SEC's investigation. The Hindenburg Article, which discussed, among other things, an inquiry by the U.S. Attorney's Office for the Eastern District of Pennsylvania relating to, among other things, certain of the Company’s arrangements with providers participating in its network and programs, and Clover Assistant, was the subject of the Company’s Current Report on Form 8-K dated February 5, 2021.
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 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. On February 14, 2023, the court granted the plaintiffs' motion for class certification.
On April 21, 2023, the parties to the securities class action entered into a memorandum of understanding providing for the settlement of the class action. Subject to negotiation of definitive documentation and final court approval, the class will receive $22 million dollars (less an award of fees and expenses to the plaintiffs’ counsel, as determined by the court), the defendants (including the Company) will receive customary releases, and the litigation will be concluded. The Company will use insurance proceeds totaling $19.5 million that have been advanced or have been committed to be advanced by the Company’s insurers to fund the settlement. The Company expects to pay $2.5 million of out-of-pocket costs to fund the settlement. As of March 31, 2023 and December 31, 2022 the Company has recorded reserves of $2,500,000 and $500,000, respectively. The Company previously filed a lawsuit in Delaware state court against certain of its insurers for full payment of its liabilities related to this securities litigation. The Company intends to continue to pursue that litigation against the insurance carrier defendants to seek to recover additional funds, and it intends to oppose any efforts by the carrier defendants to recoup any insurance proceeds that they have advanced or committed to advance to date. See “Note 18—Subsequent Events.”
Shareholder derivative actions parallel to the securities class action 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.
On August 19, 2022, the two derivative actions filed in New York state court were consolidated under In re Clover Health Investments, Corp. Stockholder Derivative Litig., Index No. 655420/2021. On November 3, 2022, the plaintiffs in this action filed a consolidated complaint, asserting breach of fiduciary duty, and unjust enrichment, and naming certain former officers and directors as defendants. The complaint seeks, among other things, unspecified damages, restitution, the disgorgement of profits obtained by defendants, and an order directing Clover to take certain actions to reform and improve its corporate governance and internal procedures.
All of these derivative actions 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.
15. Non-Insurance
In April 2021, the Company began participating in the DC Model of the Centers for Medicare & Medicaid Services ("CMS"), which utilizes a structured model intended to reduce expenditures and preserve or enhance quality of care for beneficiaries in Medicare fee-for-service ("FFS"). CMS redesigned the DC Model and renamed the model the ACO Realizing Equity, Access, and Community Health (REACH) Model ("ACO REACH Model") effective January 1, 2023. As a participating entity in the DC Model, referred to as the ACO REACH Model at January 1, 2023, with a global risk arrangement, the Company assumes the responsibility of guaranteeing the performance of its care network. The ACO REACH 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 both the DC Model and ACO REACH Model are included in the Non-Insurance operating segment. See Note 16 (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 (Non-Insurance) in the 2022 Form 10-K.
The tables below include the financial statement impacts of the performance guarantee:
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | (in thousands) |
| Non-Insurance performance year receivable | | $ | 552,620 | | | $ | — | |
Non-Insurance performance year obligation (1) | | 613,057 | | | 73,844 | |
(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 March 31, 2023 | | Three months ended March 31, 2022 |
| | | | (in thousands) |
| Amortization of the Non-Insurance performance year receivable | | | | $ | (184,207) | | | $ | (586,715) | |
| Amortization of the Non-Insurance performance year obligation | | | | 184,207 | | | 586,715 | |
| | | | | | |
| Non-Insurance revenue | | | | 205,783 | | | 594,898 | |
16. 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 and ACO REACH programs. 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.
The operations of the Company are organized into the following two segments:
•Insurance Segment includes operations related to the Company's MA plans, which generally provide access to a wide network of primary care providers, specialists, and hospitals.
•Non-Insurance Segment includes the Company's operations relating to CMS' ACO REACH model and DC Model, which provides options aimed at reducing expenditures and preserving or enhancing quality of care for beneficiaries.
Corporate/Other includes other clinical services not included in Medicare Advantage and Direct Contracting and all other corporate overhead. Clinical services is comprised of Clover Home Care and other clinical services that are offered to eligible beneficiaries.
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 March 31, 2023 | | (in thousands) |
Premiums earned, net (net of ceded premiums of $122) | | $ | 317,086 | | | $ | — | | | $ | — | | | $ | — | | | $ | 317,086 | |
| Non-Insurance revenue | | — | | | 205,783 | | | — | | | — | | | 205,783 | |
| Other income | | 1,839 | | | 428 | | | 17,310 | | | (14,671) | | | 4,906 | |
| Intersegment revenues | | — | | | — | | | 23,231 | | | (23,231) | | | — | |
| Net medical claims incurred | | 274,504 | | | 197,701 | | | 3,448 | | | (3,163) | | | 472,490 | |
| Gross profit (loss) | | $ | 44,421 | | | $ | 8,510 | | | $ | 37,093 | | | $ | (34,739) | | | $ | 55,285 | |
| | | | | | | | | | |
| Total assets | | $ | 467,392 | | | $ | 716,104 | | | $ | 936,903 | | | $ | (666,810) | | | $ | 1,453,589 | |
| | | | | | | | | | |
| | Insurance | | Non-Insurance | | Corporate/Other | | Eliminations | | Consolidated Total |
| Three months ended March 31, 2022 | | (in thousands) |
Premiums earned, net (net of ceded premiums of $119) | | $ | 278,169 | | | $ | — | | | $ | — | | | $ | — | | | $ | 278,169 | |
| Non-Insurance revenue | | — | | | 594,898 | | | — | | | — | | | 594,898 | |
| Other income | | 271 | | | — | | | 27,399 | | | (26,358) | | | 1,312 | |
| Intersegment revenues | | — | | | — | | | 19,136 | | | (19,136) | | | — | |
| Net medical claims incurred | | 268,126 | | | 593,999 | | | 2,628 | | | (3,031) | | | 861,722 | |
| Gross profit (loss) | | $ | 10,314 | | | $ | 899 | | | $ | 43,907 | | | $ | (42,463) | | | $ | 12,657 | |
| | | | | | | | | | |
| Total assets | | $ | 406,167 | | | $ | 1,859,741 | | | $ | 1,113,735 | | | $ | (699,749) | | | $ | 2,679,894 | |
A reconciliation of the reportable segments' gross profit to the Net loss included in the Consolidated Statements of Operations and Comprehensive Loss is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | 2023 | | 2022 | | |
| | | | | | | (in thousands) | | |
| Gross profit | | | | | | | $ | 55,285 | | | $ | 12,657 | | | |
| | | | | | | | | | | |
| Salaries and benefits | | | | | | | 70,207 | | | 69,091 | | | |
| General and administrative expenses | | | | | | | 59,215 | | | 57,697 | | | |
| Premium deficiency reserve benefit | | | | | | | (1,810) | | | (27,476) | | | |
| Depreciation and amortization | | | | | | | 279 | | | 826 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Interest expense | | | | | | | — | | | 403 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Gain on investment | | | | | | | — | | | (12,394) | | | |
| | | | | | | | | | | |
| Net loss | | | | | | | $ | (72,606) | | | $ | (75,490) | | | |
17. 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. At March 31, 2023 and December 31, 2022, neither of the regulated insurance subsidiaries had been authorized nor paid any dividends.
18. Subsequent Events
Certain Business Transformation Initiatives
On April 17, 2023, Clover announced it would implement certain business transformation initiatives, including an agreement to move its core plan operations to UST HealthProof’s (“UST HealthProof’) integrated technology platform and additional corporate restructuring actions. The agreement with UST HealthProof includes the transition of certain of the Company’s plan operation functions in support of its Medicare Advantage members pursuant to a master services agreement (the “Master Services Agreement”).
On April 16, 2023, the Company entered into the Master Services Agreement, effective as of April 14, 2023, pursuant to which UST HealthProof will perform certain of the Company’s plan operation functions in support of its Medicare Advantage members, including claims, enrollment, contact center, medical management, payment integrity, revenue integrity, print, fulfillment, and related configuration and certain IT functions (the “Services”). The initial term of the services UST HealthProof will provide under the Master Services Agreement continues through December 31, 2028, and is then renewable at the option of the Company for two successive one-year terms unless earlier terminated by either party in accordance with the terms of the Master Services Agreement. The Company will pay UST HealthProof for the Services primarily through a fixed monthly charge per member. The Company may also engage UST HealthProof on a time and materials basis to perform discretionary enhancements and other ancillary project work. The Master Services Agreement is non-exclusive and the Company is entitled to remove any of the Services from UST HealthProof, subject to payment of certain minimum charges.
In addition to its arrangement with UST HealthProof, the Company also announced a recently conducted reduction in force to better align its SG&A cost structure with its revenue base. This restructuring resulted in the elimination of approximately 10% of the Company’s workforce.
Notice of Potential Nasdaq Delisting
On April 20, 2023, Clover received a written notice (the “Notice”) from The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, for the last 30 consecutive business days, the bid price for the Company’s Class A common stock (the “Common Stock”) had closed below the $1.00 per share minimum bid price requirement for continued inclusion on The Nasdaq Global Select Market pursuant to Nasdaq Listing Rule 5450(a)(1) (the “Minimum Bid Price Requirement”). The Notice has no immediate effect on the listing of the Common Stock, which continues to trade on The Nasdaq Global Select Market under the symbol “CLOV”.
In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has a period of 180 calendar days, or until October 17, 2023, to regain compliance with the Minimum Bid Price Requirement. To regain compliance, the closing bid price of the Company’s Common Stock must be at least $1.00 per share for a minimum of 10 consecutive business days as required under Nasdaq Listing Rule 5810(c)(3)(A) (unless the Nasdaq staff exercises its discretion to extend this 10-day period pursuant to Nasdaq Listing Rule 5810(c)(3)(H)) during the 180-day period prior to October 17, 2023.
If the Company does not regain compliance by October 17, 2023, the Company may be eligible for an additional 180-calendar day compliance period if it elects (and meets the listing standards) to transfer to The Nasdaq Capital Market to take advantage of the additional compliance period offered on that market. To qualify, the Company would be required, among other things, to meet the continued listing requirement for market value of publicly held shares as well as all other standards for initial listing on The Nasdaq Capital Market, with the exception of the bid price requirement, and would need to provide written notice of its intention to cure the bid price deficiency during the second compliance period. If the Company fails to regain compliance during the compliance period (including a second compliance period provided by a transfer to The Nasdaq Capital Market, if applicable), then Nasdaq will notify the Company of its determination to delist its Common Stock, at which point the Company may appeal Nasdaq’s delisting determination to a Nasdaq hearing panel.
Agreement to Settle Securities Class Action Litigation
On April 24, 2023, the Company announced that, on April 21, 2023, it entered into a memorandum of understanding providing for the settlement of the securities class action captioned Bond v. Clover Health Investments, Corp. et al., Case No. 3:21-CV-00096 (M.D. Tenn.) (the “securities class action”), which was filed in February 2021. The proposed settlement contains no admission of liability or wrongdoing by any of the defendants, including the Company, and is subject to definitive documentation and final court approval.
Subject to negotiation of definitive documentation and final court approval, the class will receive $22 million dollars (less an award of fees and expenses to the plaintiffs’ counsel, as determined by the court), the defendants (including the Company) will receive customary releases, and the litigation will be concluded. The Company will use insurance proceeds totaling $19.5 million that have been advanced or have been committed to be advanced by the Company’s insurers to fund the settlement. The Company expects to pay $2.5 million of out-of-pocket costs to fund the settlement. As of March 31, 2023 and December 31, 2022 the Company has recorded reserves of $2,500,000 and $500,000, respectively.
The Company previously filed a lawsuit in Delaware state court against certain of its insurers for full payment of its liabilities related to this securities class action, as well as certain liabilities relating to other matters. The Company intends to continue to pursue that litigation against the insurance carrier defendants to seek to recover additional funds, and it intends to oppose any efforts by the carrier defendants to recoup any insurance proceeds that they have advanced or committed to advance to date.