Clover Health Investments, Corp. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended March 31, 2021. Clover operates Medicare Advantage PPO and HMO plans and uses its Clover Assistant technology platform to support care delivery and risk management. At March 31, 2021, Clover had 66,348 Medicare Advantage members, operated in 108 markets across eight states, and had PPO licenses in 45 states and the District of Columbia. On April 1, 2021, its subsidiary began participating as a Direct Contracting Entity in the CMS Global and Professional Direct Contracting Model.
The January 7, 2021 business combination with Social Capital Hedosophia Holdings Corp. III was accounted for as a reverse recapitalization, with Legacy Clover treated as the accounting predecessor. Clover became publicly listed on Nasdaq under CLOV and CLOVW.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Premiums earned, net | $199.4 million | $163.7 million | Up 22% |
| Total revenue | $200.3 million | $165.5 million | Up 21% |
| Net medical claims incurred | $214.4 million | $146.3 million | Up 47% |
| Medical care ratio | 107.6% | 89.4% | Up 18.2 percentage points |
| Operating loss | $119.1 million | $26.6 million | Loss increased |
| Net loss | $48.4 million | $28.2 million | Loss increased 72% |
| Net loss per share | $0.13 | $0.32 | Per-share loss declined, affected by recapitalization share count |
| Net cash used in operating activities | $92.9 million | $37.2 million | Use increased |
Operating expenses were $319.4 million, or approximately 159% of revenue, producing an operating margin of approximately negative 59.4%. Salaries and benefits increased to $66.0 million, including $42.7 million of stock-based compensation. General and administrative expenses were $38.6 million.
The reported net loss was reduced by an $85.5 million gain from the change in fair value of warrant liabilities. This non-cash gain largely reflected the mark-to-market remeasurement of Public and Private Placement Warrants. Warrants payable were $62.0 million at March 31, 2021.
At March 31, 2021, cash and cash equivalents were $404.5 million, short-term investments were $279.1 million, and available-for-sale and held-to-maturity securities totaled approximately $36.5 million. Management reported approximately $683.6 million of cash, cash equivalents, and short-term investments and stated that available liquidity and expected operating cash flows should fund projected operating and regulatory requirements for at least the next 12 months.
Total assets were $866.9 million and total liabilities were $278.0 million. Debt included approximately $26.1 million of Term Loan Notes and $19.9 million of Seek convertible notes. The $373.8 million of Legacy Clover convertible securities converted into common stock in connection with the business combination. The company was in compliance with applicable financing covenants.
Material changes versus the prior comparable period
- Membership increased 18%, from 56,268 to 66,348 members, driving higher premiums.
- Medical claims increased faster than revenue, resulting in a medical care ratio above 100%. Management attributed the deterioration to membership growth, higher utilization across care settings, and COVID-19-related claims without the offsetting utilization reductions experienced in Q2 2020.
- Salaries and benefits rose 207%, primarily because of higher stock-based compensation and bonus expense. General and administrative expenses rose 36%, mainly from legal, professional, public-company compliance, software, and technology costs.
- Operating cash use increased to $92.9 million. Investing cash use of $257.5 million primarily reflected $274.9 million of purchases of investment securities.
- Financing cash flow was $662.5 million, primarily reflecting $666.2 million of net proceeds from the reverse capitalization, partially offset by $5.0 million of debt principal repayment.
- The business combination materially strengthened the balance sheet, eliminated Legacy Clover preferred stock and convertible securities, and increased common equity to $588.9 million from a deficit of $613.2 million at December 31, 2020.
- Unrecognized stock-based compensation increased to approximately $511.5 million, expected to be recognized over approximately 4.78 years.
Guidance, outlook, risks, contingencies, and unusual items
- No quantitative revenue, earnings, membership, or margin guidance is provided in the filing.
- Management expects additional public-company costs, including compliance, insurance, director fees, investor relations, accounting, legal, and administrative expenses.
- COVID-19 remains a material uncertainty. The company incurred additional COVID-19 claims in Q1 2021 and warned that disruptions could affect utilization, care costs, risk-adjustment documentation, revenue, cash flow, and results.
- Medical claim reserves involve significant actuarial estimates, including incurred-but-not-reported claims. An unfavorable prior-year claims development of $1.3 million was recognized in Q1 2021.
- Regulated insurance subsidiaries are subject to statutory capital requirements and restrictions on dividends or other distributions to the parent. No dividends were paid to the parent in the periods presented.
- Clover disclosed an SEC subpoena concerning aspects of its business and matters discussed in a February 2021 Hindenburg Research article. The company is cooperating with the investigation.
- Putative securities class actions and shareholder derivative actions were filed in February 2021 and remained in preliminary stages. The company determined that any potential loss was not probable or estimable and intends to defend the claims.
- A prior material weakness related to derivative accounting was reported as remediated because the relevant embedded derivative was extinguished upon completion of the business combination. Management concluded that disclosure controls were effective as of March 31, 2021.
Facts investors should verify
- Whether medical care ratios can improve from the Q1 2021 level of 107.6% as COVID-19 effects and utilization trends normalize.
- The sustainability of membership growth and the economics of new versus returning Medicare Advantage members.
- The company’s cash burn, operating cash flow, and liquidity after increased medical costs and public-company expenses.
- The outcome and potential financial or operational impact of the SEC investigation and related securities and derivative litigation.
- The timing and economic impact of the CMS Direct Contracting Entity program, including exposure to full shared savings and shared losses.
- The potential dilution and earnings volatility associated with approximately 38.5 million outstanding warrants, stock options, RSUs, and PRSUs.
- Whether large non-cash items, including the $85.5 million warrant fair-value gain and $42.7 million of stock-based compensation, obscure underlying operating performance.