10-Q
P7D--12-31CLOVER HEALTH INVESTMENTS, CORP. 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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, 2021

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)

 

 

Delaware

98-1515192

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

725 Cool Springs Boulevard, Suite 320,

Franklin, Tennessee

 

37067

 

(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

Class A Common Stock, par value $0.0001 per share

 

CLOV

 

The NASDAQ Stock Market LLC

Redeemable Warrants, each whole warrant exercisable for one share of Class A Common Stock at an exercise price of $11.50

 

CLOVW

 

The NASDAQ Stock Market LLC

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  ☒    No  ☐

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  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

 

Accelerated filer

 

Non-accelerated filer

 

 

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  ☐    No  

As of May 10, 2021, the registrant had 148,279,247 shares of Class A Common Stock, $0.0001 par value per share, and 259,821,838 shares of Class B Common Stock, $0.0001 par value per share, issued and outstanding.

 

 

 


 

Table of Contents

 

 

 

Page

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets at March 31, 2021 and December 31, 2020

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2021 and 2020

2

 

Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the three months ended March 31, 2021 and 2020

3

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

37

 

 

 

PART II.

OTHER INFORMATION

38

 

 

 

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3.

Defaults Upon Senior Securities

38

Item 4.

Mine Safety Disclosures

38

Item 5.

Other Information

38

Item 6.

Exhibits

39

Signatures

40

 

 

 


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

CLOVER HEALTH INVESTMENTS, CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands, except share amounts)

 

 

 

March 31, 2021
(Unaudited)

 

 

December 31, 2020

 

Assets:

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

404,507

 

 

$

92,348

 

Short-term investments

 

 

279,066

 

 

 

4,098

 

Investment securities, available-for sale (Amortized cost: 2021: $1,001; 2020: $0)

 

 

1,001

 

 

 

 

Investment securities, held-to-maturity (Fair value: 2021: $0; 2020: $266)

 

 

 

 

 

265

 

Accrued retrospective premiums

 

 

54,179

 

 

 

34,829

 

Other receivables

 

 

19,211

 

 

 

11,368

 

Healthcare receivable

 

 

30,225

 

 

 

38,745

 

Other assets, current

 

 

21,260

 

 

 

8,129

 

Total current assets

 

 

809,449

 

 

 

189,782

 

Investment securities, available-for sale (Amortized cost: 2021: $35,281; 2020: $53,953)

 

 

34,798

 

 

 

53,963

 

Investment securities, held-to-maturity (Fair value: 2021: $703; 2020: $471)

 

 

695

 

 

 

429

 

Property and equipment, net

 

 

2,024

 

 

 

2,078

 

Operating lease right-of-use assets

 

 

7,102

 

 

 

7,882

 

Goodwill and other intangible assets

 

 

4,233

 

 

 

4,233

 

Other assets, non-current

 

 

8,641

 

 

 

8,885

 

Total assets

 

$

866,942

 

 

$

267,252

 

Liabilities, convertible preferred stock and stockholders' equity:

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Unpaid claims

 

$

117,582

 

 

$

103,976

 

Accounts payable and accrued expenses

 

 

18,320

 

 

 

30,671

 

Accrued salaries and benefits

 

 

10,852

 

 

 

3,978

 

Operating lease liabilities

 

 

4,841

 

 

 

4,795

 

Current portion of notes and securities payable

 

 

21,425

 

 

 

20,803

 

Other liabilities, current

 

 

5

 

 

 

5

 

Total current liabilities

 

 

173,025

 

 

 

164,228

 

Notes and securities payable, net of discounts and deferred issuance costs

 

 

24,285

 

 

 

106,413

 

Derivative liabilities

 

 

 

 

 

44,810

 

Warrants payable

 

 

62,039

 

 

 

97,782

 

Long-term operating lease liabilities

 

 

5,391

 

 

 

6,349

 

Other liabilities, non-current

 

 

13,267

 

 

 

13,116

 

Total liabilities

 

 

278,007

 

 

 

432,698

 

Commitments and Contingencies (Note 18)

 

 

 

 

 

 

Convertible Preferred stock (Series Seed A, A-1, B, C, and D), $0.0001 par value; 0 and 155,387,025 shares authorized as of March 31, 2021 and December 31, 2020, respectively; 0 and 139,444,346 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively; aggregate liquidation preference of $0 and $470,256 as of March 31, 2021 and December 31, 2020 (1)

 

 

 

 

 

447,747

 

Stockholders' equity

 

 

 

 

 

 

Class A Common Stock, $0.0001 par value; 2,500,000,000 and 0 shares authorized as of March 31, 2021, and December 31, 2020, respectively; 148,279,247 and 0 issued and outstanding as of March 31, 2021 and December 31, 2020, respectively

 

 

15

 

 

 

 

Class B Common Stock, $0.0001 par value; 500,000,000 and 351,572,668 shares authorized; 259,821,838 and 89,206,266 issued and outstanding as of March 31, 2021 and December 31, 2020, respectively (1)

 

 

26

 

 

 

4

 

Additional paid-in capital

 

 

1,662,873

 

 

 

411,872

 

Accumulated other comprehensive (income) loss

 

 

(483

)

 

 

10

 

Accumulated deficit

 

 

(1,077,399

)

 

 

(1,028,982

)

Clover stockholders’ equity (deficit)

 

 

585,032

 

 

 

(617,096

)

Non-controlling interest

 

 

3,903

 

 

 

3,903

 

Total stockholders' equity (deficit)

 

 

588,935

 

 

 

(613,193

)

Total liabilities, convertible preferred stock and stockholders' equity

 

$

866,942

 

 

$

267,252

 

 

(1) Prior period results have been adjusted to reflect the exchange of Legacy Clover's common stock for Clover Class B Common Stock at an exchange ratio of approximately 2.0681 in January 2021 as a result of the Business Combination. See Note 3, "Business combination," for details.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1


 

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,

 

 

 

2021

 

 

2020

 

Revenues:

 

 

 

 

 

 

Premiums earned, net (Net of ceded premiums of $124 and $129 for the three months ended March 31, 2021 and 2020, respectively)

 

$

199,376

 

 

$

163,710

 

Other income (1)

 

 

949

 

 

 

1,795

 

Total revenues

 

 

200,325

 

 

 

165,505

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Net medical claims incurred

 

 

214,432

 

 

 

146,328

 

Salaries and benefits

 

 

66,024

 

 

 

21,484

 

General and administrative expenses

 

 

38,606

 

 

 

28,483

 

Premium deficiency reserve benefit

 

 

 

 

 

(4,282

)

Depreciation and amortization

 

 

160

 

 

 

122

 

Other expense

 

 

191

 

 

 

 

Total operating expenses

 

 

319,413

 

 

 

192,135

 

Loss from operations

 

 

(119,088

)

 

 

(26,630

)

 

 

 

 

 

 

Change in fair value of warrants payable

 

 

(85,506

)

 

 

2,237

 

Interest expense

 

 

1,175

 

 

 

7,815

 

Amortization of notes and securities discounts

 

 

13,660

 

 

 

5,712

 

Gain on derivative

 

 

 

 

 

(14,232

)

Net loss

 

$

(48,417

)

 

$

(28,162

)

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

Net loss per share attributable to common stockholders – basic and diluted (2)

 

$

(0.13

)

 

$

(0.32

)

Weighted average number of common shares outstanding

 

 

 

 

 

 

Basic and diluted weighted average number of common shares and common share equivalents outstanding (2)

 

 

376,170,545

 

 

 

88,330,996

 

 

 

 

 

 

Unrealized (gain) loss on available-for-sale investments

 

 

(493

)

 

 

1,723

 

Comprehensive loss

 

$

(48,910

)

 

$

(26,439

)

 

(1)   In the first quarter of 2021, other income and investment income, net, were combined into a single line item for other income. Prior period balances have been revised to conform to the current period presentation.

 

(2) Prior period results have been adjusted to reflect the exchange of Legacy Clover's common stock for Clover Class B Common Stock at an exchange ratio of approximately 2.0681 in January 2021 as a result of the Business Combination. See Note 3, "Business combination," for details. Because the Corporation had a net loss in the three months ended March 31, 2021 and 2020, the Corporation’s potentially dilutive securities, which include stock options, restricted stock, 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, the weighted-average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders for these periods is the same.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2


 

CLOVER HEALTH INVESTMENTS, CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited)

(Dollars in thousands, except share amounts)

 

 

Convertible Preferred stock

 

 

 

Class A Common Stock

 

 

Class B Common Stock

 

 

Additional paid-in capital

 

 

Accumulated
deficit

 

 

Accumulated
other
comprehensive
income (loss)

 

 

Noncontrolling
interest

 

 

Total stockholders' equity (deficit)

 

 

Shares (1)

 

Amount

 

 

 

Shares

 

Amount

 

 

Shares (1)

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

139,444,346

 

$

447,747

 

 

 

 

 

$

 

 

 

88,279,119

 

$

4

 

 

$

403,046

 

 

$

(891,633

)

 

$

46

 

 

$

 

 

$

(488,537

)

Stock issuance for exercise of stock options,
   net of early exercise liability

 

 

 

 

 

 

 

 

 

 

 

 

74,587

 

 

 

 

 

155

 

 

 

 

 

 

 

 

 

 

 

 

155

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,977

 

 

 

 

 

 

 

 

 

 

 

 

1,977

 

Unrealized holdings gain on investment
   securities, available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,723

 

 

 

 

 

 

1,723

 

Beneficial conversion feature

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interests issued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,903

 

 

 

3,903

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(28,162

)

 

 

 

 

 

 

 

 

(28,162

)

Balance, March 31, 2020

 

139,444,346

 

$

447,747

 

 

 

 

 

$

 

 

 

88,353,707

 

$

4

 

 

$

405,178

 

 

$

(919,795

)

 

$

1,769

 

 

$

3,903

 

 

$

(508,941

)

Balance, December 31, 2020

 

139,444,346

 

$

447,747

 

 

 

 

 

$

 

 

 

89,206,266

 

$

4

 

 

$

411,872

 

 

$

(1,028,982

)

 

$

10

 

 

$

3,903

 

 

$

(613,193

)

Stock issuance for exercise of stock options,
   net of early exercise liability

 

 

 

 

 

 

 

761,480

 

 

 

 

 

 

 

 

 

 

1,282

 

 

 

 

 

 

 

 

 

 

 

 

1,282

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42,713

 

 

 

 

 

 

 

 

 

 

 

 

42,713

 

Unrealized holdings loss on investment
   securities, available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(493

)

 

 

 

 

 

(493

)

Preferred stock conversion

 

(139,444,346

)

 

(447,747

)

 

 

 

 

 

 

 

 

139,444,346

 

14

 

 

 

447,733

 

 

 

 

 

 

 

 

 

 

 

 

447,747

 

Common stock issued related to warrants exercised

 

 

 

 

 

 

 

 

 

 

 

 

7,205,490

 

1

 

 

 

97,781

 

 

 

 

 

 

 

 

 

 

 

 

97,782

 

Convertible debt conversion and other issuances

 

 

 

 

 

 

 

 

 

 

 

 

75,084,703

 

7

 

 

 

16,052

 

 

 

 

 

 

 

 

 

 

 

 

16,059

 

Issuance of Common Stock in connection with Business Combination and PIPE offering

 

 

 

 

 

 

 

146,373,904

 

15

 

 

 

(49,975,104

)

 

 

 

 

666,227

 

 

 

 

 

 

 

 

 

 

 

 

666,242

 

Conversion from Class B Common Stock to Class A Common Stock

 

 

 

 

 

 

 

1,143,863

 

 

 

 

 

(1,143,863

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital contribution for extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

126,795

 

 

 

 

 

 

 

 

 

 

 

 

126,795

 

Acquisition of Public and Private Placement Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(147,582

)

 

 

 

 

 

 

 

 

 

 

 

(147,582

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(48,417

)

 

 

 

 

 

 

 

 

(48,417

)

Balance, March 31, 2021

 

 

$

 

 

 

 

148,279,247

 

$

15

 

 

 

259,821,838

 

$

26

 

 

$

1,662,873

 

 

$

(1,077,399

)

 

$

(483

)

 

$

3,903

 

 

$

588,935

 

 

(1) Prior period results have been adjusted to reflect the exchange of Legacy Clover's common stock for Clover Class B Common Stock at an exchange ratio of approximately 2.0681 in January 2021 as a result of the Business Combination. See Note 3, "Business combination," for details.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

CLOVER HEALTH INVESTMENTS, CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(48,417

)

 

$

(28,162

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization expense

 

 

160

 

 

 

122

 

Amortization of notes and securities discounts

 

 

13,654

 

 

 

5,678

 

Stock-based compensation expense

 

 

42,713

 

 

 

1,977

 

Paid in kind interest

 

 

 

 

 

5,001

 

Change in fair value of warrants payable

 

 

(85,543

)

 

 

2,173

 

Change in derivative liabilities

 

 

 

 

 

(14,232

)

Accretion, net of amortization

 

 

52

 

 

 

(369

)

Net realized losses (gains) on investment securities

 

 

75

 

 

 

(35

)

Amortization of warrants

 

 

38

 

 

 

64

 

Amortization of debt issuance costs

 

 

6

 

 

 

34

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accrued retrospective premiums

 

 

(19,350

)

 

 

(14,344

)

Other receivables

 

 

(7,843

)

 

 

(865

)

Other assets

 

 

(12,931

)

 

 

(591

)

Healthcare receivables

 

 

8,520

 

 

 

762

 

Operating lease right-of-use assets

 

 

881

 

 

 

797

 

Unpaid claims

 

 

13,606

 

 

 

12,467

 

Accounts payable and accrued expenses

 

 

(4,502

)

 

 

(4,820

)

Accrued salaries and benefits

 

 

6,874

 

 

 

271

 

Premium deficiency reserve

 

 

 

 

 

(4,282

)

Other liabilities

 

 

151

 

 

 

2,066

 

Operating lease liabilities

 

 

(1,013

)

 

 

(888

)

Net cash used in operating activities

 

 

(92,869

)

 

 

(37,176

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of available-for-sale securities

 

 

(274,909

)

 

 

(19,326

)

Proceeds from sales of available-for-sale securities

 

 

17,267

 

 

 

69,977

 

Proceeds from maturities of available-for-sale securities

 

 

265

 

 

 

32,101

 

Purchases of property and equipment

 

 

(99

)

 

 

(242

)

Net cash (used in) provided by investing activities

 

 

(257,476

)

 

 

82,510

 

Cash flows from financing activities:

 

 

 

 

 

 

Payment of notes payable principal

 

 

(5,020

)

 

 

(4,496

)

Issuance of common stock, net of early exercise liability

 

 

1,282

 

 

 

155

 

Proceeds from reverse capitalization, net of transaction costs

 

 

666,242

 

 

 

 

Acquisition of noncontrolling interest

 

 

 

 

 

3,903

 

Net cash provided by (used in) financing activities

 

 

662,504

 

 

 

(438

)

Net increase in cash and cash equivalents

 

 

312,159

 

 

 

44,896

 

Cash and cash equivalents, beginning of period

 

 

92,348

 

 

 

67,598

 

Cash and cash equivalents, end of period

 

$

404,507

 

 

$

112,494

 

Supplemental cash flow disclosures

 

 

 

 

 

 

Cash paid during the period for interest

 

$

812

 

 

$

1,306

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

Conversion of preferred stock to common stock

 

$

447,747

 

 

$

 

Issuance of common stock related to convertible debt

 

$

16,059

 

 

$

 

Capital contribution for extinguishment of debt

 

$

126,795

 

 

$

 

Issuance of common stock related to warrants exercised

 

$

97,782

 

 

$

 

Acquisition of Public and Private Warrants

 

$

147,582

 

 

$

 

Right-of-use assets obtained in exchange for lease liabilities

 

$

101

 

 

$

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

CLOVER HEALTH INVESTMENTS, CORP. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization and operations

Clover Health Investments, Corp. (collectively with its affiliates and subsidiaries, "Clover" or the "Corporation") is singularly focused on creating great, sustainable healthcare to improve every life. Clover has centered its strategy on building and deploying technology that it believes will enable it to solve a significant data problem while avoiding the limitations of legacy approaches. Clover leverages its flagship software platform, the Clover Assistant, to help America’s seniors receive better care at lower costs.

Clover provides affordable, high-quality Medicare Advantage ("MA") plans, including Preferred Provider Organization ("PPO") and Health Maintenance Organization ("HMO") plans through its regulated insurance subsidiaries. The Corporation's regulated insurance subsidiaries consist of Clover Insurance Company and Clover HMO of New Jersey Inc., which operate the Corporation's PPO and HMO health plans, respectively. On April 8, 2021, the Centers for Medicare and Medicaid Services ("CMS"), an agency of the United States Department of Health and Human Services, announced that the Corporation's subsidiary Clover Health Partners, LLC, began participating as a Direct Contracting Entity in the CMS's Global and Professional Direct Contracting Model on April 1, 2021. 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 uses machine learning-powered systems to deliver data and insights to physicians at the point of care in order to improve outcomes for beneficiaries and drive down costs. Clover's MA plans generally provide access to a wide network of primary care physicians, 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 physician visits regardless of whether their physician is in- or out-of-network. Clover's Direct Contracting Entity, which assumes full risk (i.e., 100% shared savings and shared losses) for the total cost of care of aligned Original Medicare beneficiaries, also focuses on its technology platform to enhance health care delivery, reduce expenditures, and improve care for Original Medicare beneficiaries.

Clover was originally incorporated as a Cayman Islands exempted company on October 18, 2020, as a special purpose acquisition company ("SPAC") under the name Social Capital Hedosophia Holdings Corp. III ("SCH"). On October 5, 2020, SCH entered into a Merger Agreement (the "Merger Agreement") with Clover Health Investments, Inc., a corporation originally incorporated on July 17, 2014, in the state of Delaware ("Legacy Clover"). Pursuant to the Merger Agreement, and a favorable vote of SCH's stockholders on January 6, 2021, Asclepius Merger Sub Inc., a Delaware corporation and a newly formed, wholly owned subsidiary of SCH ("Merger Sub"), was merged with and into Legacy Clover. Upon consummation of the business combination, the separate corporate existence of Merger Sub ceased, the Corporation survived and merged with and into SCH, with SCH as the surviving corporation, and SCH was redomesticated as a Delaware corporation and renamed Clover Health Investments, Corp. (the "Business Combination"). The Business Combination is accounted for as a reverse recapitalization in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). Under the guidance in Accounting Standards Codification ("ASC") 805, Legacy Clover is treated as the "acquirer" for financial reporting purposes. Legacy Clover is deemed the accounting predecessor of the combined business, and Clover, as the parent company of the combined business, is the successor SEC registrant, meaning that Legacy Clover's financial statements for previous periods will be disclosed in the registrant's periodic reports filed with the SEC from here forward. As a result of the Business Combination, there were simultaneous changes to Legacy Clover's convertible securities, warrants, and convertible preferred stock. See Note 9, "Notes and securities payable," Note 10, "Warrants payable," and Note 14, "Convertible preferred stock" for additional information regarding these changes. See also Note 3, "Business combination" for additional information related to the Business Combination.

5


 

 

2. Summary of significant accounting policies

Basis of presentation

The Corporation's interim Condensed Consolidated Financial Statements have been prepared in conformity with U.S. GAAP and include the accounts of the Corporation and its wholly owned subsidiaries. In the opinion of management, the Corporation 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. These interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the years ended December 31, 2020 and 2019 included in Exhibit 99.5 of Amendment No. 1 to the Current Report on Form 8-K (the "Form 8-K/A") filed with the Securities and Exchange Commission ("SEC") on April 1, 2021.

Unaudited interim financial information

In the opinion of the Corporation, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of its financial position and its results of operations, changes in convertible preferred stock and stockholders' equity (deficit) and cash flows. The Condensed Consolidated Balance Sheet at December 31, 2020, was derived from the Corporation's Audited Annual Financial Statements but does not contain all of the footnote disclosures from the annual financial statements.

Use of estimates

The preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes.

The areas involving the most significant use of estimates are the amounts of incurred but not reported ("IBNR") 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 Corporation 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 Corporation assumes prior to payment of claims. If the Corporation's actual experience is different from its assumptions or estimates, the Corporation's reserves may prove inadequate. As a result, the Corporation 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 Corporation'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 Corporation's investment securities, goodwill and other intangible assets, warrants, the embedded derivative related to the convertible securities, stock-based compensation, recoveries from third parties for coordination of benefits, and final determination of medical cost adjustment pools.

Capitalized Software Development Costs - Cloud Computing Arrangements

The Corporation's cloud computing arrangements primarily comprise hosting arrangements which are service contracts, whereby the Corporation 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 Sheet in other assets, and are generally amortized over the fixed, non-cancelable term of the associated hosting arrangement on a straight-line basis.

Acquisition costs

 

Acquisition costs directly related to the successful acquisition of new business, which is primarily made up of commissions costs, are deferred and subsequently amortized. Deferred acquisition costs are recorded as other assets on the Condensed Consolidated Balance Sheet and are amortized over the estimated life of the related contracts. The amortization of deferred acquisition costs is recorded in general and administrative expenses in the Condensed Consolidated Statement of Operations and Comprehensive Loss. As of March 31, 2021, deferred acquisition costs net of accumulated amortization had a balance of $5.7 million. For the three months ended March 31, 2021, amortization of deferred acquisition costs of $1.8 million were recognized in general and administrative expenses.

 

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To the extent that a premium deficiency is identified after writing down unamortized deferred acquisition costs, a liability for premium deficiency reserve is established and reported on the Consolidated Balance Sheets.

 

COVID-19

 

The societal and economic impact of the novel coronavirus ("COVID-19") pandemic is continuing to evolve, and the ultimate impact on our business, results of operations, financial condition and cash flows is uncertain and difficult to predict. The global pandemic has severely impacted businesses worldwide, including many in the health insurance sector. In response to the pandemic, we have implemented additional steps related to our care delivery, our member support, and our internal policies and operations.

 

Recent accounting pronouncements

 

Recently adopted accounting pronouncements

 

Emerging Growth Company

 

The Corporation currently qualifies as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). Accordingly, the Corporation has the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods applicable to private companies. The Corporation has elected to adopt new or revised accounting guidance within the same time period as private companies, unless, as indicated below, management determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance.

 

Fair value measurements

 

In August 2018, the Financial Accounting Standards Board (the "FASB") issued Accounting Standard Update ("ASU") 2018-13, Changes to Disclosure Requirements for Fair Value Measurements, the purpose of which is to improve the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements and is in effect for all entities in fiscal years beginning after December 15, 2019. This standard became effective for the Corporation on January 1, 2020 and did not have a material impact on the Corporation's disclosures.

 

Cloud computing arrangements

 

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other (Topic 350) – Internal Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This update changes the accounting guidance for cloud computing arrangements. If a cloud computing arrangement includes a license to internal-use software, the software license is accounted for by the customer by recognizing an intangible asset for the software license and, to the extent that the payments attributable to the software license are made over time, recognizing a corresponding liability. If a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract and should expense any fees associated with the hosting element (service) of the arrangement as incurred. ASU 2018-15 is effective for nonpublic entities for fiscal years beginning after December 15, 2020, with early adoption permitted. The Corporation adopted ASU 2018-15 on January 1, 2021 on a prospective basis. The Corporation's cloud computing arrangements relate to the set-up of various platforms, including but not limited to clinical data repositories and other system integrations. The capitalized implementation costs are presented in the Condensed Consolidated Balance Sheet in other assets, current and are amortized on a straight-line basis over the term of the underlying cloud computing hosting contract, which is the noncancelable term of the arrangement plus any reasonably certain renewal periods. As of March 31, 2021, $0.9 million was recorded in other assets, current, as deferred implementation costs. No amortization expense associated with the Corporation's cloud computing arrangements has been recognized during the three months ended March 31, 2021. No impairment has been recognized during the three months ended March 31, 2021, as there were no events or changes in circumstances to indicate that the carrying amount of the Corporation's cloud computing arrangements may not be recoverable.

 

Accounting pronouncements effective in future periods

 

Credit losses

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was subsequently modified by several ASUs issued in 2018 and 2019. This standard introduces a new current expected credit loss ("CECL") model for measuring expected credit losses for certain types of financial instruments measured at amortized cost and replaces the incurred loss model. The CECL model requires an entity to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount the entity expects to collect over the instrument's contractual life after consideration of historical experience, current conditions, and reasonable and supportable forecasts.

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This standard also introduces targeted changes to the available-for-sale debt securities impairment model. It eliminates the concept of other-than-temporary impairment and requires an entity to determine whether any impairment is the result of a credit loss or other factors. ASU 2016-13 is effective for nonpublic entities in fiscal years beginning after December 15, 2022 and public entities beginning after December 15, 2019. Early adoption is permitted. The Corporation has evaluated the impact of ASU 2016-13 on the Condensed Consolidated Financial Statements and determined the impact to be immaterial.

 

Goodwill and other intangible assets

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This update removes Step 2 of the goodwill impairment test under current guidance, which requires a hypothetical purchase price allocation. The new guidance requires an impairment charge to be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. Upon adoption, the guidance is to be applied prospectively. ASU 2017-04 is effective for nonpublic entities in fiscal years beginning after December 15, 2021 and public entities beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Corporation is currently evaluating the impact of the adoption of ASU 2017-04 on the Condensed Consolidated Financial Statements, but does not expect for this to have a material impact on the Condensed Consolidated Financial Statements.

 

Income taxes

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 remove certain exceptions to the general principles in ASC Topic 740. The amendments also clarify and amend existing guidance to improve consistent application. The amendments are effective for nonpublic entities in fiscal years beginning after December 15, 2021 and public entities beginning after December 15, 2020. Early adoption is permitted. The transition method (retrospective, modified retrospective, or prospective basis) related to the amendments depends on the applicable guidance, and all amendments for which there is no transition guidance specified are to be applied on a prospective basis. The Corporation is currently evaluating the impact of ASU 2019-12 on the Condensed Consolidated Financial Statements, but does not expect for this to have a material impact on the Condensed Consolidated Financial Statements.

 

Accounting for convertible instruments and contracts in an entity's own equity

 

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40). The amendments in ASU 2020-06 simplify the accounting for convertible instruments by removing certain separation models for convertible instruments. Under the amendments in ASU 2020-06, the embedded conversion features no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, and a convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. ASU 2020-06 is effective for nonpublic entities for fiscal years beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020 and public entities beginning after December 15, 2021. The Corporation is currently evaluating the impact of the adoption of ASU 2020-06 on the Condensed Consolidated Financial Statements, but does not expect for this to have a material impact on the Condensed Consolidated Financial Statements.

 

3. Business combination

On October 5, 2020, Legacy Clover entered into a Merger Agreement with SCH, a SPAC, and Merger Sub. On January 7, 2021, as contemplated by the Merger Agreement and following approval by SCH's shareholders at an extraordinary general meeting held January 6, 2021 (the "Special Meeting"):

 

SCH filed a notice of deregistration with the Cayman Islands Registrar of Companies, together with the necessary accompanying documents, and filed a certificate of incorporation and a certificate of corporate domestication with the Secretary of State of the State of Delaware, under which SCH was domesticated and continued as a Delaware corporation (the "Domestication"); and

 

Merger Sub merged with and into Legacy Clover, the separate corporate existence of Merger Sub ceased and Legacy Clover became the surviving corporation and a wholly owned subsidiary of SCH (the "First Merger") and Legacy Clover merged with and into SCH, the separate corporate existence of Legacy Clover ceased and SCH became the surviving corporation, changing its name to "Clover Health Investments, Corp." (together with the First Merger, the "Mergers", and collectively with the Domestication, the Business Combination).

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As a result of the Mergers, among other things, (i) all outstanding shares of common stock of Legacy Clover immediately prior to the effective time of the First Merger were cancelled in exchange for the right to receive, at the election of the holders thereof (except with respect to the shares held by entities controlled by Vivek Garipalli and the holders of convertible securities previously issued by Legacy Clover to certain holders who received only shares of Class B Common Stock, par value $0.0001 per share, of Clover ("Class B Common Stock"), which are entitled to 10 votes per share), an amount in cash, shares of Class B Common Stock, or a combination thereof, as adjusted in accordance with the Merger Agreement, which equaled in the aggregate $499.8 million in cash and 260,965,701 shares of Class B Common Stock (at a deemed value of $10.00 per share); (ii) shares of Legacy Clover held by entities controlled by Vivek Garipalli and the holders of the convertible securities immediately prior to the effective time of the First Merger were cancelled in exchange for the right to receive shares of Class B Common Stock based on an Exchange Ratio (as defined in the Merger Agreement) of approximately 2.0681; and (iii) all shares of common stock of Legacy Clover reserved in respect of Legacy Clover stock options and restricted stock units ("RSUs") outstanding as of immediately prior to the effective time of the First Merger, were converted, based on the Exchange Ratio, into awards based on shares of Class B Common Stock. The consideration that a Clover stockholder received was subject to pro rata adjustment depending on the election made by such stockholder, if any, in accordance with the terms of the Merger Agreement. The pro rata adjustments were made based on an Actual Cash/Stock Ratio (as defined in the Merger Agreement) of 32.3%.

 

In connection with the consummation of the Business Combination (the "Closing"), (i) each issued and outstanding Class A ordinary share, par value $0.0001 per share, of SCH ("SCH Class A ordinary shares") converted automatically, on a one-for-one basis, into a share of Class A Common Stock, par value $0.0001 per share, of Clover (the "Class A Common Stock", and together with the Class B Common Stock, the "Common Stock"), which will be entitled to one vote per share, (ii) each of the issued and outstanding Class B ordinary shares, par value $0.0001 per share, of SCH, converted automatically, on a one-for-one basis, into a share of Class A Common Stock, (iii) each issued and outstanding warrant of SCH converted automatically into a warrant to acquire one share of Class A Common Stock ("Warrant"), pursuant to the Warrant Agreement, dated April 21, 2020, between SCH and Continental Stock Transfer & Trust Company, as warrant agent, and (iv) each issued and outstanding unit of SCH ("SCH unit") that has not been previously separated into the underlying Class A ordinary share and underlying warrant of SCH upon the request of the holder thereof, was cancelled and the holder thereof is entitled to one share of Class A Common Stock and one-third of one Warrant. As of January 7, 2021, there were public Warrants outstanding to purchase an aggregate of 27,599,938 shares of Class A Common Stock (the "Public Warrants") and private placement Warrants outstanding to purchase an aggregate of 10,933,333 shares of Class A Common Stock (the "Private Placement Warrants"). Each whole Warrant entitles the registered holder to purchase one whole share of Class A Common Stock at a price of $11.50 per share, subject to adjustment at any time commencing on April 24, 2021, which is 12 months from the closing of SCH's initial public offering.

 

Pursuant to the subscription agreements (the "Subscription Agreements") entered into on October 5, 2020, by and among SCH and certain investors (collectively, the "PIPE Investors"), Clover issued and sold to the PIPE Investors (substantially concurrently with the consummation of the Mergers) an aggregate of 40,000,000 shares of Class A Common Stock for an aggregate purchase price equal to $400.0 million (the "PIPE Investment"), of which 15,200,000 shares were purchased by affiliates of SCH Sponsor III LLC (the "Sponsor", and collectively, the "Sponsor Related PIPE Investors").

 

The Business Combination and PIPE Investment were approved by the SCH shareholders at the "Special Meeting". Prior to and in connection with the Special Meeting, holders of 24,892 shares of SCH Class A ordinary shares (including those that underlie the SCH units) that were registered pursuant to the Registration Statements on Form S-1 (333-236776 and 333-237777) and the shares of Class A Common Stock issued as a matter of law upon the conversion thereof on the effective date of the Domestication (the "Public Shares") exercised their right to redeem those shares for cash at a price of $10.00 per share, for an aggregate of $0.2 million. The per share redemption price of $10.00 for public shareholders electing redemption was paid out of the SCH Trust Account, which after taking into account the redemptions, had a balance immediately prior to the Closing of $827.9 million, which cash balance was used to pay the $499.8 million cash component of the merger consideration.

 

Immediately after giving effect to the Business Combination and the PIPE Investment, there were 143,475,108 shares of Class A Common Stock, 260,965,701 shares of Class B Common Stock and 38,533,271 Warrants outstanding, equaling 404,440,809 total shares of common stock outstanding and 38,533,271 Warrants outstanding.

 

The Corporation is authorized to issue 25,000,000 shares of preferred stock having a par value of $0.0001 per share, and the Corporation's board of directors has the authority to determine the rights, preferences, privileges and restrictions, including voting rights, of those shares. As of March 31, 2021, there were no shares of preferred stock issued and outstanding.

 

The Business Combination was accounted for as a reverse recapitalization in accordance with GAAP. Under the guidance in ASC 805, Legacy Clover is treated as the "acquirer" for financial reporting purposes. As such, Legacy Clover is deemed the accounting predecessor of the combined business, and Clover, as the parent company of the combined business, is the successor SEC registrant, meaning that Legacy Clover's financial statements for previous periods will be disclosed in the registrant's periodic reports filed with the SEC from here forward. The Business Combination will have a significant impact on the Corporation's future reported financial position and results

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as a consequence of the reverse recapitalization. The most significant change in Clover's future reported financial position and results is an estimated net increase in cash (as compared to the Corporation's consolidated balance sheet at December 31, 2020) of approximately $670.0 million. The redemption included approximately $400.0 million in proceeds from the PIPE Investment that was consummated substantially simultaneously with the Business Combination, offset by additional transaction costs incurred in connection with the Business Combination. The estimated transaction costs for the Business Combination were approximately $61.0 million, of which $29.0 million represents deferred underwriter fees related to SCH's initial public offering.

 

The transaction closed on January 7, 2021, and on the following day the Corporation's Class A Common Stock and Public Warrants were listed on the Nasdaq Global Select Market ("Nasdaq") under the symbols "CLOV" and "CLOVW", respectively, for trading in the public market.

 

See also Note 9, "Notes and securities payable," Note 10, "Warrants payable," and Note 14, "Convertible preferred stock" for additional information regarding changes to the instruments as a result of the Business Combination.

 

 

4. Investment securities

 

The following tables present cost or amortized cost and fair values of investments as of March 31, 2021 and December 31, 2020, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2021

 

Amortized cost