CLOVER HEALTH INVESTMENTS, CORP. quarterly report, Q1 FY2022

Clover Health Investments, Corp. — Q1 2022 Form 10-Q Summary

Business context and reporting period

Clover Health provides Medicare Advantage PPO and HMO plans through its Insurance segment and participates in CMS’s Direct Contracting Model through its Non-Insurance segment. The company uses its Clover Assistant technology platform to support providers and manage care costs. This filing covers the three months ended March 31, 2022, with comparison to the three months ended March 31, 2021.

• Insurance members: 85,026, up 28.2% from 66,348 at March 31, 2021.
• Non-Insurance beneficiaries: 172,416.
• Total lives under Clover management: 257,442.
• Insurance operations covered nine states and 209 counties; Non-Insurance operations expanded to 22 states.

Key financial metrics

Metric	Q1 2022	Q1 2021	Change
Total revenue	$874.4 million	$200.3 million	Up 336.5%
Premiums earned, net	$278.2 million	$199.4 million	Up 39.5%
Non-Insurance revenue	$594.9 million	—	New segment activity
Net medical claims incurred	$861.7 million	$214.4 million	Up 301.9%
Loss from operations	$(87.3) million	$(119.1) million	Improved by $31.8 million
Net loss	$(75.3) million	$(48.4) million	Loss increased $26.9 million
Net loss per share	$(0.16)	$(0.13)	Loss per share increased
Operating margin	(10.0%)	(59.4%)	Improved
Net margin	(8.6%)	(24.2%)	Declined

• Insurance medical care ratio was 96.4%, compared with 107.9% in Q1 2021.
• Non-Insurance medical care ratio was 99.8% for Q1 2022.
• Gross profit was $12.7 million, including $10.3 million from Insurance and $0.9 million from Non-Insurance before corporate and elimination items.
• Salaries and benefits were $69.1 million, including $40.6 million of stock-based compensation.
• General and administrative expense was $57.7 million, up 49.4%, driven partly by legal, professional, public-company, and residual commission costs.
• A $27.7 million premium deficiency reserve benefit reduced operating expenses.
• A $12.4 million gain resulted from the change in accounting for Clover Therapeutics following its financing and the company’s loss of control.

Cash flow, liquidity, debt, and capital

• Cash and cash equivalents were $273.8 million at March 31, 2022, compared with $300.0 million at December 31, 2021.
• Cash, cash equivalents, and short-term investments totaled $486.1 million; additional available-for-sale and held-to-maturity securities totaled $236.8 million.
• Net cash used in operating activities was $57.0 million, improved from $92.9 million in Q1 2021.
• Net cash provided by investing activities was $36.5 million, primarily reflecting $150.0 million of investment maturities offset by $113.1 million of investment purchases.
• Net cash used in financing activities was $5.6 million, principally due to $5.9 million of treasury stock purchases.
• The company reported $19.9 million of notes and securities payable on the balance sheet. A Seek convertible note had $20.0 million of principal, accrued interest, and a September 2023 maturity; Seek is being wound down.
• Total assets were $2.68 billion and total stockholders’ equity was $489.8 million at March 31, 2022.
• Management stated that cash, investments, and projected cash flows are expected to meet projected operating and regulatory requirements for the next 12 months, while noting that additional financing could become necessary.
• Regulated insurance subsidiaries had $147.0 million of cash, cash equivalents, and short-term investments plus $134.2 million of investment securities. Their ability to pay dividends to the parent is subject to regulatory restrictions, and no dividends were paid.

Material changes versus the prior comparable period

• Revenue growth was primarily attributable to the launch and expansion of Direct Contracting, which generated $594.9 million of Non-Insurance revenue in Q1 2022, and 28.2% Insurance membership growth.
• Medical claims increased substantially because Non-Insurance operations were not active in Q1 2021 and Insurance membership increased.
• Insurance medical care performance improved materially, with the MCR declining to 96.4% from 107.9%.
• Operating loss improved despite higher revenue and claims, but net loss increased because Q1 2021 benefited from an $85.5 million favorable change in warrant fair value and $13.7 million of note and securities discount amortization that did not recur.
• In February 2022, Clover Therapeutics raised $17.9 million. Clover began equity-method accounting, derecognized the subsidiary’s assets and liabilities, and recognized a $12.4 million gain.
• Total assets and current liabilities increased substantially because of $1.76 billion of Non-Insurance performance-year receivables and $1.78 billion of related performance-year obligations.
• The company adopted a new inducement award plan reserving 11 million Class A shares and recorded $40.6 million of stock-based compensation expense.

Guidance, outlook, commentary, risks, and unusual items

• No formal financial guidance was provided in the filing. Management expects current liquidity and projected cash flows to support operations and regulatory requirements for at least the next 12 months.
• The Direct Contracting Model is expected to transition to the ACO Reach Model in 2023.
• The company assumes full risk for the total cost of care of Non-Insurance beneficiaries. The maximum potential future payments under its performance guarantee could not be estimated because of stop-loss arrangements, risk ratings, benchmark trends, and other variables.
• The Non-Insurance performance-year obligation was $1.78 billion at March 31, 2022, and is a significant exposure relative to the company’s equity and liquidity.
• COVID-19 continued to increase medical utilization and costs, including costs associated with deferred diagnoses and treatment and CMS’s 20% inpatient payment increase for COVID-19-diagnosed patients.
• Claim reserves, Medicare risk adjustment, Direct Contracting benchmarks, medical cost trends, and shared savings or losses involve significant estimates and could materially affect future results.
• The company is a defendant in securities class actions and shareholder derivative actions related principally to allegations discussed in the Hindenburg Research article. The cases remain in preliminary stages; the company stated that an unfavorable outcome was not probable or estimable.
• The SEC has issued subpoenas concerning certain disclosures and aspects of the company’s business. The company is cooperating with the investigation.
• Management reported that a previously identified material weakness related to accounting for certain performance restricted stock units was remediated during Q1 2022.
• The filing identifies related-party transactions with entities controlled by or affiliated with company directors or executives, including CarePoint Health, ChartFast, and Thyme Care.

Important facts for investors to verify

• Whether the Non-Insurance performance-year receivable and $1.78 billion performance-year obligation will ultimately produce shared savings, shared losses, or material cash payments.
• Whether Insurance MCR remains below 100% as membership expands and medical utilization normalizes after COVID-19 effects.
• The timing and outcome of the SEC investigation and securities and derivative litigation.
• Parent-company liquidity versus cash held in regulated insurance subsidiaries, including the practical availability of subsidiary funds.
• Whether operating cash flow can improve sufficiently to reduce reliance on existing investments or future equity or debt financing.
• The effect of the 2023 transition from Direct Contracting to ACO Reach on beneficiary alignment, risk sharing, benchmarks, and revenue recognition.
• Future dilution from outstanding options, restricted stock units, performance restricted stock units, and other equity awards; 91.5 million potentially dilutive shares were excluded from Q1 2022 loss-per-share calculations.