UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
________________________________________
FORM 10-Q
________________________________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2024
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ________ to ________
Commission File Number: 001-39252
________________________________________
Clover Health Investments, Corp.
(Exact Name of Registrant as Specified in its Charter)
________________________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| (Address of principal executive offices) | (Zip Code) | ||||
Registrant's telephone number, including area code: (201 ) 432-2133
________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | x | ||||||||||||
| Non-accelerated filer | o | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
At April 29, 2024, the registrant had 406,788,098 shares of Class A Common Stock, $0.0001 par value per share, and 89,649,365 shares of Class B Common Stock, $0.0001 par value per share, issued and outstanding.
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As used in this report, "Company," "Clover," "Clover Health," "we," "us," "our," "our company," and similar terms refer to Clover Health Investments, Corp. and its consolidated subsidiaries, unless otherwise noted or the context otherwise requires.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements contained in this document other than statements of historical fact, including statements regarding our future results of operations, financial position, market size and opportunity, our business strategy and plans, the factors affecting our performance and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "could," "should," "would," "can," "expect," "project," "outlook," "forecast," "objective," "plan," "potential," "seek," "grow," "target," "if," and the negative or plural of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including the risk factors described in our filings with the Securities and Exchange Commission (the "SEC"). Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this document may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Forward-looking statements contained in this document involve a number of judgments, risks and uncertainties, including, without limitation, risks related to:
•our expectations regarding results of operations, financial condition, and cash flows;
•our expectations regarding the development and management of our Insurance business;
•our ability to successfully enter new service markets and manage our operations;
•anticipated trends and challenges in our business and in the markets in which we operate;
•our ability to effectively manage our beneficiary base and provider network;
•our ability to maintain and increase adoption and use of Clover Assistant;
•the anticipated benefits associated with the use of Clover Assistant, including our ability to utilize the platform to manage our medical care ratios;
•our expectations regarding costs and expenses associated with our exit from the ACO Reach Program;
•our ability to maintain or improve our Star Ratings or otherwise continue to improve the financial performance of our business;
•our ability to develop new features and functionality that meet market needs and achieve market acceptance;
•our ability to retain and hire necessary employees and staff our operations appropriately;
•the timing and amount of certain investments in growth;
•the outcome of any known and unknown litigation and regulatory proceedings;
•any current, pending, or future legislation, regulations or policies that could have a negative effect on our revenue and businesses, including rules, regulations, and policies relating to healthcare and Medicare;
•fluctuations in the price of our Class A common stock and our ability to comply with Nasdaq's listing requirements;
•our ability to maintain, protect, and enhance our intellectual property;
•general economic conditions and uncertainty;
•persistent high inflation and interest rates; and
•geopolitical uncertainty and instability.
We caution you that the foregoing list of judgments, risks, and uncertainties that may cause actual results to differ materially from those in the forward-looking statements may not be complete. You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur or may be materially different from what we expect. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we undertake no obligation to update any of these forward-looking statements after the date of this document or to conform these statements to actual results or revised expectations.
This document contains estimates, projections, and other information concerning our industry, our business, and the markets for our products. We obtained the industry, market, and similar data set forth in this document from our own internal estimates and research and from industry research, publications, surveys, and studies conducted by third parties, including governmental agencies, and such information is inherently subject to uncertainties. Actual events or circumstances may differ materially from events and circumstances that are assumed in this information. You are cautioned not to give undue weight to any such information, projections, or estimates.
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As a result of a number of known and unknown risks and uncertainties, including without limitation, the important factors described in our reports filed with the SEC, including the discussion under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements.
Additional Information
Our website address is www.cloverhealth.com. Our filings with the SEC are posted on our website and available free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The content on our website or on any other website referred to in this document is not incorporated by reference in this document. Further, the Company's references to website URLs are intended to be inactive textual references only.
Channels for Disclosure of Information
Investors and others should note that we routinely announce material information to investors and the marketplace using filings with the SEC, press releases, public conference calls, presentations, webcasts, and the investor relations page of our website at investors.cloverhealth.com. We use the investor relations page of our website for purposes of compliance with Regulation FD and as a routine channel for distribution of important information, including news releases, analyst presentations, financial information, and corporate governance practices. We also use certain social media channels as a means of disclosing information about the Company and our products to our customers, investors, and the public, including @CloverHealth and #CloverHealth on X (formerly known as Twitter), and the LinkedIn account of our Chief Executive Officer, Andrew Toy. The information posted on social media channels is not incorporated by reference in this report or in any other report or document we file with the SEC. While not all of the information that we post to the investor relations page of our website or to social media accounts is of a material nature, some information could be deemed to be material. Accordingly, we encourage investors, the media, and others interested in the Company to review the information that we share on our investor relations page of our website at investors.cloverhealth.com and to sign up for and regularly follow our social media accounts. Users may automatically receive email alerts and other information about the Company when enrolling an email address by visiting "Email Alerts" in the "Investor Resources" section of our website at investors.cloverhealth.com.
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Part I
Item 1. Financial Statements and Supplementary Data
CLOVER HEALTH INVESTMENTS, CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
March 31, 2024 (Unaudited) | December 31, 2023 | ||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
Investment securities, available-for-sale (Amortized cost: 2024: $ | |||||||||||
Investment securities, held-to-maturity (Fair value: 2024: $ | |||||||||||
| Accrued retrospective premiums | |||||||||||
| Other receivables | |||||||||||
| Healthcare receivables | |||||||||||
| Surety bonds and deposits | |||||||||||
| Prepaid expenses | |||||||||||
| Other assets, current | |||||||||||
Assets related to discontinued operations (Note 17) | |||||||||||
| Total current assets | |||||||||||
Investment securities, available-for-sale (Amortized cost: 2024: $ | |||||||||||
Investment securities, held-to-maturity (Fair value: 2024: $ | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
Other intangible assets | |||||||||||
| Other assets, non-current | |||||||||||
| Total assets | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLOVER HEALTH INVESTMENTS, CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
March 31, 2024 (Unaudited) | December 31, 2023 | ||||||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities | |||||||||||
| Unpaid claims | $ | $ | |||||||||
| Due to related parties, net | |||||||||||
| Accounts payable and accrued expenses | |||||||||||
| Accrued salaries and benefits | |||||||||||
| Deferred revenue | |||||||||||
| Operating lease liabilities | |||||||||||
| Other liabilities, current | |||||||||||
Liabilities related to discontinued operations (Note 17) | |||||||||||
| Total current liabilities | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Other liabilities, non-current | |||||||||||
| Total liabilities | |||||||||||
Commitments and Contingencies (Note 13) | |||||||||||
| Stockholders' equity | |||||||||||
Class A Common Stock, $ | |||||||||||
Class B Common Stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
Less: Treasury stock, at cost; | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLOVER HEALTH INVESTMENTS, CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)
(Dollars in thousands, except per share and share amounts)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenues: | |||||||||||
Premiums earned, net (Net of ceded premiums of $ | $ | $ | |||||||||
| Other income | |||||||||||
| Total revenues | |||||||||||
| Operating expenses: | |||||||||||
| Net medical claims incurred | |||||||||||
| Salaries and benefits | |||||||||||
| General and administrative expenses | |||||||||||
Premium deficiency reserve benefit | ( | ||||||||||
| Depreciation and amortization | |||||||||||
| Restructuring costs | |||||||||||
| Total operating expenses | |||||||||||
Loss from continuing operations | ( | ( | |||||||||
Loss on investment | |||||||||||
Net loss from continuing operations | ( | ( | |||||||||
Net income from discontinued operations (Note 17) | |||||||||||
Net loss | $ | ( | $ | ( | |||||||
| Per share data: | |||||||||||
Continuing Operations: | |||||||||||
Basic and diluted weighted average number of Class A and Class B common shares and common share equivalents outstanding | |||||||||||
Basic and diluted net loss per share | $ | ( | $ | ( | |||||||
Discontinued operations: | |||||||||||
Basic weighted average number of Class A and Class B common shares and common share equivalents outstanding | |||||||||||
Diluted weighted average number of Class A and Class B common shares and common share equivalents outstanding | |||||||||||
Basic earnings per share | $ | $ | |||||||||
Diluted earnings per share | $ | $ | |||||||||
Net unrealized (loss) gain on available-for-sale investments | ( | ||||||||||
| Comprehensive loss | $ | ( | $ | ( | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLOVER HEALTH INVESTMENTS, CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands, except share amounts)
| Class A Common Stock | Class B Common Stock | Treasury Stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income (loss) | Total stockholders' equity (deficit) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Change in accounting policy | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Adjusted balance, beginning of period | $ | $ | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issuance for exercise of stock options, net of early exercise liability | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock units | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized holdings gain on investment securities, available for sale | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion from Class B Common Stock to Class A Common Stock | — | ( | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock acquired | ( | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issuance for exercise of stock options, net of early exercise liability | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock units | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized holdings gain on investment securities, available for sale | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion from Class B Common Stock to Class A Common Stock | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock acquired | ( | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock under Employee Stock Purchase Plan | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLOVER HEALTH INVESTMENTS, CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization expense | |||||||||||
| Stock-based compensation expense | |||||||||||
| Accretion, net of amortization | ( | ( | |||||||||
| Accrued interest earned | ( | ( | |||||||||
Net unrealized (losses) gains on investment securities | ( | ||||||||||
| Gain on investment | |||||||||||
| Premium deficiency reserve | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accrued retrospective premiums | ( | ( | |||||||||
| Other receivables | ( | ( | |||||||||
| Surety bonds and deposits | ( | ||||||||||
| Prepaid expenses | ( | ||||||||||
| Other assets | ( | ||||||||||
| Healthcare receivables | ( | ||||||||||
| Operating lease right-of-use assets | ( | ||||||||||
| Unpaid claims | |||||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Accrued salaries and benefits | |||||||||||
| Deferred revenue | ( | ||||||||||
| Other liabilities | ( | ||||||||||
| Operating lease liabilities | ( | ( | |||||||||
Discontinued operations (Note 17) | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of short-term investments, available-for-sale, and held-to-maturity securities | ( | ( | |||||||||
| Proceeds from sales of short-term investments and available-for-sale securities | |||||||||||
| Proceeds from maturities of short-term investments, available-for-sale, and held-to-maturity securities | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Net cash provided by investing activities | |||||||||||
| Cash flows from financing activities: | |||||||||||
| Issuance of common stock, net of early exercise liability | |||||||||||
| Treasury stock acquired | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
Net increase in cash, cash equivalents, and restricted cash for discontinued and continuing operations | |||||||||||
Cash, cash equivalents, and restricted cash, beginning of period for discontinued and continuing operations | |||||||||||
Cash, cash equivalents, and restricted cash, end of period for discontinued and continuing operations | $ | $ | |||||||||
Reconciliation of cash and cash equivalents and restricted cash for discontinued and continuing operations | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
Total cash, cash equivalents, and restricted cash for discontinued and continuing operations | $ | $ | |||||||||
| Supplemental disclosure of non-cash activities | |||||||||||
| Performance year receivable | $ | $ | ( | ||||||||
| Performance year obligation | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLOVER HEALTH INVESTMENTS, CORP.
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 had previously provided care to aligned Medicare fee-for-service ("FFS") beneficiaries (the "Non-Insurance Beneficiaries") through our prior participation in ACO REACH Program, as defined herein. CMS redesigned the DC Model and renamed it the Accountable Care Organization ("ACO") Realizing Equity, Access, and Community Health ("REACH") ("ACO REACH") Model effective January 1, 2023. On December 1, 2023, the Company notified CMS that it will no longer participate as a REACH ACO in the CMS ACO Reach Program, effective as of the end of the 2023 performance year. The Company’s exit from the ACO REACH Program follows its November 2022 announcement of a strategic reduction in the number of ACO REACH participating physicians in 2023, and was made after the Company determined that it is in the Company's best interest to fully exit the ACO REACH Program starting with the 2024 performance year. The activity recognized during 2024 relates to prior performance years with CMS and are presented within discontinued operations for all periods presented within the condensed consolidated financial statements. See Note 17 for further discussion of discontinued operations. 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.
For any information following the aforementioned paragraph, the Company will refer to its participation in ACO REACH Model or the Company's participation in the predecessor DC Model as ACO REACH Model henceforth.
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 through the early identification and management of chronic disease 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.
For additional information, see Note 1 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 (the "2023 Form 10-K").
2. Summary of Significant Accounting Policies
Basis of presentation
The Company's 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 condition and its results of operations for the 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 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 2023 Form 10-K.
Use of estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that impact the amounts reported in the unaudited condensed consolidated financial statements and the accompanying notes.
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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, reinsurance, premium deficiency reserve, stock-based compensation, recoveries from third parties for coordination of benefits, and final determination of medical cost adjustment pools.
Reclassifications
Certain amounts in the prior years' Condensed Consolidated Statements of Cash Flows have been reclassified to conform to the current year's presentation, primarily related to Surety bonds and deposits and Change in restricted cash related to surety bonds, deposits, and escrow accounts. In addition, certain amounts have also been reclassified related to Accretion, net of amortization, Accrued interest earned and Net unrealized (losses) gains on investment securities.
Certain amounts in the prior years' Condensed Consolidated Statements of Operations and Comprehensive Loss have been reclassified to conform to current year's presentation, these amounts relate to the Company's restructuring costs which were previously included within Salaries and benefits as well as General and administrative expenses. These expenses are now recognized within Restructuring costs.
Discontinued Operations
The results of operations for the Company's former Non-Insurance segment have been reclassified as discontinued operations for all periods presented in the Condensed Consolidated Statements of Operations and Comprehensive Loss. Assets and liabilities related to the Company's former Non-Insurance segment have been reclassified as discontinued operations for all periods presented in the Condensed Consolidated Balance Sheets. Refer to Note 17 - Discontinued Operations for additional information.
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 unaudited condensed 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. At March 31, 2024, the Company has one reporting segment, Insurance. At the end of 2023, the Company exited the ACO REACH Model and as a direct result, the reportable operating segment formerly known as Non-Insurance no longer meets the criteria of a required reportable operating segment starting in 2024.
11
Capitalized software development costs - cloud computing arrangements
The Company's cloud computing arrangements are mostly comprised of hosting arrangements that are mostly 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 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
Restructuring Activities
Restructuring related expenses, which are recorded within Restructuring costs on the Condensed Consolidated Statements of Operations, include employee termination benefits, vendor costs associated with restructuring activities, and other costs associated with the business transformation initiatives. Restructuring costs are determined based on estimates, which are prepared at the time the restructuring actions are approved by management and are periodically reviewed and updated for changes in estimates. The Company applies the provisions of ASC 420, Exit or Disposal Cost Obligations ("ASC 420") as these costs meet the criteria of a one-time benefit. Under ASC 420-10, the Company establishes a liability for a cost associated with an exit or disposal activity, including employee termination benefits and other restructuring related costs, when the liability is incurred, rather than at the date that the Company commits to an exit plan. At each reporting date, there is an evaluation of the liability to ensure the amount is still appropriate. See Note 16 (Restructuring costs) for further discussion.
Recent accounting pronouncements
Recently adopted accounting pronouncements
There have been no new accounting pronouncements adopted during the three months ended March 31, 2024 that are expected to materially impact the Company's unaudited condensed consolidated financial statements.
Accounting pronouncements effective in future periods
In July 2023, the FASB issued ASU 2023-03, Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718); Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock (“ASU 2023-03”). This ASU amends or supersedes various SEC paragraphs within the applicable codification to conform to past SEC staff announcements. This ASU does not provide any new guidance. ASU 2023-03 will become effective for the Company once the addition to the FASB Codification is made available. The Company is currently evaluating the impact of the update on the Company’s unaudited condensed consolidated financial statements and related disclosures.
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In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments in this update aim to improve reportable segment disclosures by requiring enhanced disclosures around significant segment expenses that are regularly provided to the chief operating decision maker. Additionally, ASU 2023-07 requires that all existing annual disclosures about segment profit or loss must be provided on an interim basis and clarifies that single reportable segment entities are subject to the disclosure requirement under Topic 280 in its entirety. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within those fiscal years beginning after December 15, 2024. A public entity should apply ASU 2023-07 retrospectively to all prior periods presented in the financial statements. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2023-07 on its unaudited condensed consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in this update aim to provide more transparency regarding tax disclosures mainly related to the rate reconciliation and income taxes paid information. The Company is currently evaluating the impact of ASU 2023-09 on its unaudited condensed consolidated financial statements and related disclosures.
3. Investment Securities
The following tables present amortized cost and fair values of investments at March 31, 2024 and December 31, 2023, respectively:
| March 31, 2024 | 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 | $ | $ | $ | ( | $ | |||||||||||||||||||||
Investment securities, available-for-sale | ||||||||||||||||||||||||||
U.S. government and government agencies and authorities | ( | |||||||||||||||||||||||||
| Corporate debt securities | ( | |||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||
Total held-to-maturity and available-for-sale investment securities | $ | $ | $ | ( | $ | |||||||||||||||||||||
| December 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 | $ | $ | $ | ( | $ | |||||||||||||||||||||
Investment securities, available-for-sale | ||||||||||||||||||||||||||
U.S. government and government agencies and authorities | ( | |||||||||||||||||||||||||
| Corporate debt | ( | |||||||||||||||||||||||||
| Other | ( | |||||||||||||||||||||||||
Total held-to-maturity and available-for-sale investment securities | $ | $ | $ | ( | $ | |||||||||||||||||||||
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The following table presents the amortized cost and fair value of debt securities at March 31, 2024, by contractual maturity:
| March 31, 2024 | Held-to-maturity | Available-for-sale | ||||||||||||||||||||||||
| Amortized cost | Fair value | Amortized cost | Fair value | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Due within one year | $ | $ | $ | $ | ||||||||||||||||||||||
| Due after one year through five years | ||||||||||||||||||||||||||
| Due after five years through ten years | ||||||||||||||||||||||||||
| Due after ten years | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
For the three months ended March 31, 2024 and 2023, respectively, net investment income, which is included within Other income within the Condensed Consolidated Statements of Operations and Comprehensive Loss, was derived from the following sources:
| Three Months Ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Short-term investments | ||||||||||||||
| Investment securities | ||||||||||||||
| Investment income, net | $ | $ | ||||||||||||
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, 2024, and December 31, 2023, respectively:
| March 31, 2024 | 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 | $ | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
| Corporate debt securities | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
| Number of positions | ||||||||||||||||||||||||||||||||||||||
| December 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 | $ | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
| Corporate debt securities | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
| Number of positions | ||||||||||||||||||||||||||||||||||||||
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The Company did no
At March 31, 2024, 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, 2024, 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 Condensed Consolidated Statements of Operations and Comprehensive Loss, were as follows for the three months ended March 31, 2024 and 2023, respectively:
| Three Months Ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Proceeds from sales of investment securities | $ | $ | ||||||||||||
| Proceeds from maturities of investment securities | ||||||||||||||
| Gross realized gains | ||||||||||||||
| Gross realized losses | ||||||||||||||
Net realized gains (losses) | $ | $ | ||||||||||||
At March 31, 2024 and December 31, 2023, the Company had $14.8 million and $14.7 million, respectively, in deposits with various states and regulatory bodies that are included as part of the Company's investment balances.
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4. Fair Value Measurements
The following tables present a summary of fair value measurements for financial instruments at March 31, 2024 and December 31, 2023, respectively:
| March 31, 2024 | Level 1 | Level 2 | Level 3 | Total fair value | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| U.S. government and government agencies | $ | $ | $ | $ | ||||||||||||||||||||||
| Corporate debt securities | ||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||
| Warrants receivable | ||||||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||||||||||||
| December 31, 2023 | Level 1 | Level 2 | Level 3 | Total fair value | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| U.S. government and government agencies | $ | $ | $ | $ | ||||||||||||||||||||||
| Corporate debt securities | ||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||
| Warrants receivable | ||||||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||||||||||||
The changes in balances of Clover's Level 3 financial assets and liabilities during the three months ended March 31, 2024 were as follows:
Warrants receivable | Total | ||||||||||
| (in thousands) | |||||||||||
Balance, December 31, 2023 | $ | $ | |||||||||
| Receipts | |||||||||||
| Settlements | |||||||||||
| Transfers in | |||||||||||
| Transfers out | |||||||||||
Balance, March 31, 2024 | $ | $ | |||||||||
There were no
Private Warrants
At March 31, 2024, 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 Unaudited Condensed 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 Unaudited Condensed 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 measurement date, December 31, 2023, were assessed to have a fair value of $0.8 million, with no other activity for the three months ended March 31, 2024. The Company reassesses the fair values of the warrants based on updated estimates and for the three months ended March 31, 2024 there were no unrealized gains or losses recognized.
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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 $83.9 million and $64.2 million within Healthcare receivables at March 31, 2024, and December 31, 2023, 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 and Sequoia Healthcare Management, LLC, which both provide services to CarePoint Health. Expenses and fees incurred related to Clover's contracts with CarePoint Health, recorded within Net medical claims incurred, were $0.5 million and $3.7 million for the three months ended March 31, 2024 and 2023 respectively. Additionally, $0.9 million and $1.4 million were payable to CarePoint Health at March 31, 2024, and December 31, 2023, respectively.
The Company has a contract with Medical Records Exchange, LLC (formerly known as "ChartFast," now d/b/a Credo) pursuant to which the Company receives administrative services related to medical records retrieval via Credo's electronic applications and web portal platform. Expenses and fees incurred related to this agreement were $0.1 million and $0.1 million for the three months ended March 31, 2024 and 2023 respectively. Vivek Garipalli, the Company's Executive Chairman and significant stockholder of the Company, is an indirect owner of Medical Records Exchange, LLC.
Since July 2, 2021, the Company has contracted with Thyme Care, Inc. ("Thyme Care"), an oncology care management company, through which Thyme Care was engaged to provide cancer care management 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. The Company and Thyme Care have amended the terms of the engagement, effective April 1, 2023, to include additional clinical services available to Clover members as well as the value based payment terms. The Company entered into an agreement with Thyme Care effective September 23, 2020 where the Company purchased 1,773,049 shares (less than five percent (5 %) of its class A common stock). The fair value of these shares is $0.5 million at March 31, 2024, and is recognized within Other assets, non-current, on the Condensed Consolidated Balance Sheet. In accordance with ASC 321, any changes in fair value associated with these shares are recognized within the Condensed Consolidated Statements of Operations and Comprehensive Loss. 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 none and $0.5 million for the three months ended March 31, 2024 and 2023, respectively. Additionally, none and $0.2 million were payable to Thyme Care at March 31, 2024, and December 31, 2023, respectively.
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7. Unpaid Claims
Activity within the liability for Unpaid claims, including claims adjustment expenses, for the three months ended March 31, 2024 and 2023, respectively, is summarized as follows:
| Three Months Ended March 31, | 2024 | 2023 | ||||||||||||
| (in thousands) | ||||||||||||||
Gross and net balance, beginning of period (1) | $ | $ | ||||||||||||
| Incurred related to: | ||||||||||||||
| Current year | ||||||||||||||
| Prior years | ( | |||||||||||||
| Total incurred | ||||||||||||||
| Paid related to: | ||||||||||||||
| Current year | ||||||||||||||
| Prior years | ||||||||||||||
| Total paid | ||||||||||||||
Gross and net balance, end of period (1) | $ | $ | ||||||||||||
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 $239.5 million at March 31, 2024. During the three months ended March 31, 2024, $73.3 million was paid for incurred claims attributable to insured events of prior years. A favorable development of $17.6 million was recognized during the three months ended March 31, 2024, resulting from the Company's actual experience with claims developing differently as compared to the Company's estimates at December 31, 2023. 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. 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 30.4 % for the three months ended March 31, 2024, and 61.5 % for the three months ended March 31, 2023. This ratio serves as an indicator of claims processing speed, indicating that claims were processed at a slower rate during the three months ended March 31, 2024, than during the three months ended March 31, 2023. As a result of slower claims processing, unpaid claims liability increased which increase was primarily due to claim submission and payment process disruptions related to a third-party cyber incident.
8. Stockholders' Equity and Convertible Preferred Stock
Stockholders' Equity
The Company was authorized to issue up to 2,500,000,000 500,000,000 406,155,332 401,183,882 89,649,365 87,867,732 10 votes per share, and Class A common stock has one vote per share. The Company had 11,613,745 and 7,912,750 shares held in treasury at March 31, 2024 and December 31, 2023, respectively. These amounts represent shares withheld to cover taxes upon vesting of employee stock-based awards.
At March 31, 2024, 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, 2024, there were no
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9. 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 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. On January 23, 2023, Character Biosciences, completed a second private capital transaction in which it raised 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 %.
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 Condensed Consolidated Balance Sheets. For the year ended December 31, 2022, the Company recognized a gain on investment of $9.2 million which is included within Loss (gain) on investment on the audited Consolidated Statements of Operations and Comprehensive Loss. For the year ended December 31, 2023, the Company recognized a loss on investment of $4.7 million.
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 audited Consolidated Statements of Operations and Comprehensive Loss.
In accordance with ASC 323, the Company recognized the proportionate share of Character Bioscience's net loss up to the investment carrying amount. As a result the Company recognized a shared loss of $0.5 million and zero for the three months ended March 31, 2024 and 2023.
10. 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 $0.5 million and $0.5 million for the three months ended March 31, 2024 and 2023, respectively, and are included within 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"), performance-based restricted stock units ("PRSUs") and stock options to acquire shares of the Company's common stock, to employees, directors, officers, and non-employee consultants of the Company and its affiliates, and the Company's 2020 Management Incentive Plan (the "2020 MIP") provides for grants of RSUs and PRSUs to the Company's 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. When the 2014 Plan was terminated, 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. On March 9, 2022, the Board adopted the Company's 2022 Inducement Award Plan (the "Inducement Plan" and, collectively with the 2020 Plan, the 2020 MIP, and the 2014 Plan, the "Plans") without stockholder approval in accordance with Nasdaq Listing Rules. Under the Inducement Plan, the Company may grant non-qualified stock options, RSUs, stock appreciation rights, and other stock or cash-based awards to an employee in connection with his or her commencement of employment, or following a bona fide period of non-employment, with the Company or an affiliate.
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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 as 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, 2024 were as follows:
| March 31, 2024 | Shares Authorized Under Plans | Shares Outstanding Under Plans | Shares Remaining Under Plans | |||||||||||||||||
| 2014 Plan | N/A | |||||||||||||||||||
| 2020 Plan | ||||||||||||||||||||
| 2020 MIP | ||||||||||||||||||||
| Inducement Plan | ||||||||||||||||||||
The Plans are administered by the Talent and Compensation Committee of the Board (the "Compensation Committee"). Stock options granted under the Plans are subject to the terms and conditions 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 market 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 and generally vest over or five years . The number of stock options granted is determined by dividing the approved grant date dollar value of an option by the Black Scholes option pricing value per share (as further discussed below). 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, but generally vest over to four years from the date of the grant. The number of RSUs granted 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. The total estimated grant date fair value is amortized over the requisite service period.
The Company recorded Stock-based compensation expense for stock options, RSUs, and PRSUs granted under the Plans, and discounts offered in connection with the Company's 2020 Employee Stock Purchase Plan ("ESPP") of $28.8 million and $38.6 million during the three months ended March 31, 2024 and 2023, respectively, and such expenses are presented within Salaries and benefits in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss.
Compensation cost presented within Salaries and benefits within the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss were as follows:
| Three Months Ended March 31, | 2024 | 2023 | ||||||||||||
| (in thousands) | ||||||||||||||
| Stock options | $ | $ | ||||||||||||
| RSUs | ||||||||||||||
| PRSUs | ||||||||||||||
| ESPP | ||||||||||||||
| Total compensation cost recognized for stock-based compensation plans | $ | $ | ||||||||||||
At March 31, 2024, there was approximately $421.0 million of unrecognized stock-based compensation expense related to unvested stock options, unvested RSUs, unvested PRSUs, and the ESPP, estimated to be recognized over a period of four years .
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Stock Options
The Company did not
A summary of option activity under the 2020 Plan during the three months ended March 31, 2024, was as follows:
| Number of stock options | Weighted-average exercise price | ||||||||||
Outstanding, January 1, 2024 | $ | ||||||||||
Granted | |||||||||||
| Exercised | |||||||||||
| Forfeited | ( | ||||||||||
Outstanding, March 31, 2024 | $ | ||||||||||
A summary of stock option activity under the 2014 Plan during the three months ended March 31, 2024, was as follows:
| Number of stock options | Weighted-average exercise price | ||||||||||
Outstanding, January 1, 2024 | $ | ||||||||||
Granted | |||||||||||
| Exercised | |||||||||||
| Forfeited | ( | ||||||||||
Outstanding, March 31, 2024 | $ | ||||||||||
At March 31, 2024, outstanding stock options, substantially all of which are expected to vest, had an aggregate intrinsic value of less than $0.1 million, and a weighted-average remaining contractual term of four years . At March 31, 2024, there were 23,752,137 options exercisable under the Plan, with an aggregate intrinsic value of less than $0.1 million, a weighted-average exercise price of $2.86 per share, and a weighted-average remaining contractual term of 5.15 years. The total value of stock options exercised during the three months ended March 31, 2024 and 2023 was none . Cash received from stock option exercises during the three months ended March 31, 2024 and 2023 totaled none .
21
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, 2024 | $ | |||||||||||||
Granted during 2024 | ||||||||||||||
| Released | ( | |||||||||||||
| Forfeited | ( | |||||||||||||
Outstanding, March 31, 2024 | $ | |||||||||||||
Performance Restricted Stock Units
The Company has granted PRSUs to certain executives and key employees, which become eligible to vest based on achievement of certain Company or individual performance milestones (“Non-Market PRSUs”) and certain Company stock price targets (“Market PRSUs”), each as determined by the Compensation Committee. Market PRSUs will 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 expense referenced above is mainly attributable to Market PRSUs that vest based on pre-established milestones that 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 Non-Market PRSUs was based on the closing price of the Company’s Class A common stock and recognized as expense over the requisite performance period under the accelerated attribution method and is adjusted in future periods for the success or failure to achieve the specified performance condition. The grant date fair value of the Market PRSUs was determined using a Monte Carlo simulation model that incorporated multiple valuation assumptions, including the probability of achieving the specified market condition. Expense for Market PRSUs is recognized over the derived service 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 assumptions that the Company used in the Monte Carlo model to determine the grant date fair value of Market PRSUs granted for the year ended December 31, 2021, were as follows:
| Year ended December 31, 2021 | ||||||||
Expected volatility (1) | % | |||||||
Risk-free interest rate (2) | ||||||||
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.
At March 31, 2024, the market condition component of these PRSUs has not been met, so the awards have not been earned. This expense represents most of the PRSU expense recognized for the three months ended March 31, 2024 related to stock-based compensation plans which is presented within Salaries and benefits in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss. 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.
22
A summary of PRSU activity is presented below:
| Number of PRSUs | Weighted-average grant date fair value per share | |||||||||||||
Non-vested, January 1, 2024 | $ | |||||||||||||
Granted during 2024 | ||||||||||||||
| Vested | ( | |||||||||||||
| Forfeited | ( | |||||||||||||
Non-vested at March 31, 2024 | $ | |||||||||||||
At March 31, 2024, there was $31.0 million of unrecognized share-based compensation expense related to PRSUs, which is expected to be recognized over a period of four years .
2020 Employee Stock Purchase Plan
On January 6, 2021, the Board adopted and the Company's stockholders approved the ESPP, which permits eligible employees and service providers of either the Company or designated related companies and affiliates to contribute up to 15 % of their eligible compensation during defined offering periods to purchase shares of the Company’s Class A common stock at a 15 % discount from the fair market value of the common stock as determined on specific dates at specific 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 14,163,863 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, 2024, 13,078,532 shares of Class A common stock were available for issuance under the ESPP.
The ESPP includes an evergreen provision that limits 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) as of January 7, 2021, on an as-converted basis.
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 most recent offering period, is as follows:
Offering period from November 23, 2023 to May 21, 2024 | ||||||||
| Weighted-average risk-free interest rate | % | |||||||
| Expected term (in years) | ||||||||
| Expected volatility | % | |||||||
11. Income Taxes
The consolidated effective tax rate of the Company for the three months ended March 31, 2024 and 2023, was 0.0 zero . The Company believes that at March 31, 2024, 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
23
12. Net Loss per Share
Net Loss per Share - Continuing Operations
Basic and diluted net loss per share from continuing operations attributable to Class A common stockholders and Class B common stockholders (collectively, "Common Stockholders") for the years indicated were calculated as follows:
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
(in thousands, except per share and share amounts) | |||||||||||
Net loss from continuing operations attributable to Common Stockholders | $ | ( | $ | ( | |||||||
Basic and diluted weighted average number of common shares and common share equivalents outstanding | |||||||||||
Basic and diluted net loss per share | $ | ( | $ | ( | |||||||
Because the Company had a Net loss during the three months ended March 31, 2024 and 2023, the Company's potentially dilutive securities, which include 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, | |||||||||||
| 2024 | 2023 | ||||||||||
Options to purchase common stock | |||||||||||
| RSUs | |||||||||||
| PRSUs | |||||||||||
| Total anti-dilutive shares excluded from computation of net loss per share | |||||||||||
Net Income per Share - Discontinued Operations
Basic and diluted net loss per share from discontinued operations attributable to Class A common stockholders and Class B common stockholders (collectively, "Common Stockholders") for the years indicated were calculated as follows:
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
(in thousands, except per share and share amounts) | |||||||||||
Net income from discontinued operations attributable to Common Stockholders | $ | $ | |||||||||
Basic weighted average number of common shares and common share equivalents outstanding | |||||||||||
Potential dilutive shares: | |||||||||||
RSU | |||||||||||
PRSU | |||||||||||
Stock Options | |||||||||||
Weighted average shares used in computing net income per share of common stock, diluted | |||||||||||
Basic earnings per share | $ | $ | |||||||||
Diluted earnings per share | $ | $ | |||||||||
24
The following table presents the potentially dilutive shares that were excluded from the computation of diluted net income per share of common stock:
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
Options to purchase common stock | |||||||||||
13. 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, 2024, and December 31, 2023, respectively, there were no
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 action. The Court approved the settlement and dismissed the action with prejudice on October 3, 2023. Under the settlement, the class will receive $22 million dollars (less an award of fees and expenses to the plaintiffs’ counsel), and the defendants (including the Company) received customary releases. The Company used $19.5 million in insurance proceeds to fund the settlement. 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 oppose any efforts by the carrier defendants to recoup insurance proceeds that they have advanced to date.
25
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. 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.
26
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.
On June 21, 2023, the plaintiffs in the derivative lawsuits, on the one hand, and the Company, on the other hand, entered into a binding memorandum of understanding providing for the settlement of the derivative actions. On February 5, 2024, the parties executed a stipulation of settlement which, subject to final court approval, will provide the defendants in the derivative lawsuits with customary releases and will require the Company to implement a suite of corporate governance enhancements. On March 5, 2024, the United States District Court for the Middle District of Tennessee entered an Order Preliminarily Approving Settlement and Providing for Notice, and scheduled a hearing for July 11, 2024 to determine whether to give final approval to the Settlement. The settlement does not involve any monetary payment, other than payment of an award of fees and expenses to plaintiffs’ counsel in the amount of $2,500,000 , which amount is subject to court approval.
14. Operating Segments
Starting in 2024, the Company manages its operations based on one reportable operating segment: Insurance. Through the Insurance segment, the Company provides PPO and HMO plans to Medicare Advantage members in several states. 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 one segment:
•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.
Corporate/Other includes other clinical services not included in Medicare Advantage and all other corporate overhead. Clinical services is comprised of Clover Home Care and other clinical services that are offered to eligible beneficiaries.
The table below summarizes the Company's results by operating segment:
| Insurance | Corporate/Other | Eliminations | Consolidated Total | |||||||||||||||||||||||
| Three months ended March 31, 2024 | (in thousands) | |||||||||||||||||||||||||
Premiums earned, net (net of ceded premiums of $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Other income | ( | |||||||||||||||||||||||||
| Intersegment revenues | ( | — | ||||||||||||||||||||||||
| Net medical claims incurred | ( | |||||||||||||||||||||||||
| Gross profit (loss) | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Total assets | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Insurance | Corporate/Other | Eliminations | Consolidated Total | |||||||||||||||||||||||
| Three months ended March 31, 2023 | (in thousands) | |||||||||||||||||||||||||
Premiums earned, net (net of ceded premiums of $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Other income | ( | |||||||||||||||||||||||||
| Intersegment revenues | ( | — | ||||||||||||||||||||||||
| Net medical claims incurred | ( | |||||||||||||||||||||||||
| Gross profit (loss) | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Total assets | $ | $ | $ | ( | $ | |||||||||||||||||||||