Clover Health Investments, Corp. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Clover Health operates Medicare Advantage PPO and HMO plans and uses its Clover Assistant technology platform to support providers and manage care. In April 2021, the company began participating in the CMS Global and Professional Direct Contracting Model, assuming full risk for the cost of care of aligned Original Medicare beneficiaries.
This filing covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. The January 7, 2021 SPAC business combination was accounted for as a reverse recapitalization, with Legacy Clover treated as the accounting predecessor; therefore, reported historical periods reflect Legacy Clover results.
At June 30, 2021, Clover had 66,566 Medicare Advantage members, 62,025 aligned Direct Contracting beneficiaries, approximately 1,800 contracted providers, and approximately 129,000 total lives under management.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $412.5 million | $172.1 million | $612.8 million | $337.6 million |
| Medicare Advantage premiums earned, net | $195.4 million | $170.3 million | $394.7 million | $334.0 million |
| Direct Contracting revenue | $216.4 million | — | $216.4 million | — |
| Net medical claims incurred | $458.5 million | $119.4 million | $673.0 million | $265.7 million |
| Loss from operations | $(181.9) million | $23.2 million | $(301.0) million | $(3.5) million |
| Net loss | $(317.6) million | $5.4 million | $(366.0) million | $(22.8) million |
| Net loss per share | $(0.78) | $0.02 basic | $(0.93) | $(0.26) |
| Net cash used in operating activities | Not separately reported | Not separately reported | $(157.0) million | $(23.9) million |
Medicare Advantage net medical care ratio was 111.0% in Q2 2021, compared with 70.1% in Q2 2020, and 109.4% for the first six months of 2021, compared with 79.5% in the prior-year period. Direct Contracting net medical claims were $241.9 million for the six months ended June 30, 2021, versus $216.4 million of related revenue, producing a reported Direct Contracting margin metric of 111.8%.
At June 30, 2021, cash and cash equivalents were $485.7 million, short-term investments were $104.4 million, and available-for-sale and held-to-maturity investment securities totaled approximately $40.1 million. Total assets were $1.216 billion and total stockholders’ equity was $314.9 million.
Debt consisted primarily of a $21.2 million convertible note. The company repaid the remaining $20.7 million principal under its term loan facility on June 29, 2021, terminating that facility. Warrant liabilities were $196.5 million at quarter-end.
Material changes versus the prior comparable period
- Total revenue increased 139.7% in Q2 and 81.5% for the first six months, primarily because of the launch of Direct Contracting and Medicare Advantage membership growth.
- Medicare Advantage premiums increased 14.7% in Q2 and 18.2% year to date, principally reflecting a 17.2% increase in members from 56,815 at June 30, 2020, to 66,566 at June 30, 2021.
- Medical claims increased substantially because of Direct Contracting, membership growth, higher utilization, COVID-19-related costs, and care deferred during earlier pandemic periods. Management reported increased utilization for deferred services, diagnoses, and treatment.
- The company recorded a $27.9 million premium deficiency reserve expense in Q2 and year to date, compared with benefits of $11.3 million and $15.6 million, respectively, in the prior-year periods.
- Salaries and benefits rose to $62.2 million in Q2 and $128.2 million year to date. Stock-based compensation was $43.0 million in Q2 and $85.7 million year to date, compared with $1.5 million and $3.4 million, respectively, in the prior-year periods.
- General and administrative expense increased to $45.6 million in Q2 and $84.2 million year to date, reflecting public-company costs, professional fees, software and platform investment, and deferred acquisition cost amortization.
- The company recognized a $134.5 million Q2 loss and a $49.0 million year-to-date loss from changes in the fair value of public and private placement warrant liabilities.
- The business combination and PIPE financing generated approximately $666.2 million of net financing cash inflow during the first six months. The transaction increased cash by approximately $670.0 million relative to December 31, 2020, before considering subsequent operating uses.
- Convertible securities and related derivatives were converted or extinguished in connection with the business combination. The company’s prior convertible preferred stock was also converted into Class B common stock.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide a clear quantitative revenue, earnings, or membership forecast in the filing. The company announced plans, subject to CMS approval, to expand Medicare Advantage availability to an additional 101 counties and one additional state in 2022, potentially reaching 209 counties across nine states.
Management stated that existing cash, investments, and expected operating cash flows should be sufficient to meet projected operating and regulatory requirements for at least the next 12 months, while noting that additional equity or debt financing may be required for growth or unforeseen needs.
- Direct Contracting exposes Clover to full shared savings and shared losses, CMS rule changes, benchmark and risk-score uncertainty, provider performance guarantees, and potential program termination. The company recorded a $455.1 million Direct Contracting performance obligation and a $436.3 million receivable at June 30, 2021; the maximum future payment under the guarantee was not estimable.
- COVID-19 continues to create uncertainty, including direct treatment costs, deferred-care utilization, member health risks, provider disruption, and possible effects on risk-adjustment documentation and future revenue.
- The company recorded a premium deficiency reserve based on anticipated losses on certain Medicare Advantage contracts. Additional reserves may be required if claims experience or CMS payment rates deteriorate.
- In February 2021, Clover and certain officers and directors were named in securities class actions and shareholder derivative actions relating generally to allegations in a Hindenburg Research article. The company also disclosed an SEC subpoena and cooperation with an SEC investigation concerning aspects of its business and related matters. The litigation was in preliminary stages, and management determined that an unfavorable outcome was not probable or estimable.
- The company disclosed that a previously identified material weakness related to derivative accounting was remediated when the embedded derivative was extinguished upon completion of the business combination. Disclosure controls and procedures were deemed effective as of June 30, 2021.
- On July 22, 2021, after quarter-end, Clover announced redemption of all public and private placement warrants on August 23, 2021, at $0.10 per warrant. Holders could exercise at $11.50 per share in cash or on a cashless basis under the stated terms.
Most important facts for an investor to verify
- Whether Medicare Advantage claims trends and the 111.0% Q2 medical care ratio improve sufficiently to support sustainable margins.
- The financial performance and ultimate shared-savings or shared-loss outcome of the Direct Contracting program, including the $455.1 million performance obligation and $436.3 million receivable.
- The adequacy of unpaid claims reserves, the $27.9 million premium deficiency reserve, and the potential impact of COVID-19-related deferred care.
- Cash burn, restricted subsidiary liquidity, statutory capital requirements, and whether additional financing will be needed despite reported liquidity.
- The dilution and accounting effects of stock-based compensation, outstanding options, restricted stock units, performance units, and warrant exercises or redemption.
- Developments in the SEC investigation, securities class actions, derivative litigation, and any related regulatory or legal reserves.
- CMS approval and execution of the proposed 2022 geographic expansion and any changes to the Direct Contracting model.