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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-02-28 · 284 added, 346 removed, 217 unchanged (74% of the section changed)

2 unchanged sentences

The discussion should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2022, contained in this Annual Report on Form 10-K (the "Form 10-K").

This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of this document.

The following discussion and analysis does not include certain items related to the year ended December 31, 2021, including year-to-year comparisons between the year ended December 31, 2021 and the year ended December 31, 2020.

For a discussion of these items and comparison of our results of operations for the fiscal years ended December 31, 2021 and December 31, 2020, see Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022.

This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of this Form 10-K.

Actual results may differ materially from those contained in any forward-looking statements.

Unless the context otherwise requires, references in this "Management’s Discussion and Analysis of Financial Condition and Results of Operations” to "we," "us,” "our," "Clover," the “Company,” and the “Corporation" are intended to mean the business and operations of Clover Health Investments, Corp.

and its consolidated subsidiaries subsequent to the closing of the Business Combination (as defined below).

At Clover Health, we are singularly focused on creating great, sustainable healthcare to improve every life.

We have centered our strategy on building and deploying technology that we believe will enable us to solve a significant data problem while avoiding the limitations of legacy approaches.

We leverage our flagship software platform, the Clover Assistant, to help America’s seniors receive better care at lower costs.

By empowering physicians with data-driven, personalized insights at the point of care through our software, we believe we can improve clinical decision making.

See "Cautionary Note Regarding Forward-Looking Statements" for additional information.

Unless the context otherwise requires, references in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" to "we," "us," "our," "Clover," "Clover Health," and the "Company" mean the business and operations of Clover Health Investments, Corp.

and its consolidated subsidiaries.

At Clover Health, our vision is to empower Medicare physicians to identify and manage chronic diseases early.

Our strategy is to improve the care of our Medicare beneficiaries, develop wide physician networks, and provide technology to help empower physicians.

Our proprietary software platform, Clover Assistant, helps us execute this strategy by enabling physicians to detect, identify, and manage chronic diseases earlier than they otherwise could.

This technology is a cloud-based software platform that provides physicians with access to data-driven and personalized insights for the patients they treat.

This software is used in both our Insurance segment and our Non-Insurance segment.

We operate Preferred Provider Organization ("PPO") and Health Maintenance Organization ("HMO") Medicare Advantage ("MA") plans for Medicare-eligible consumers.

We call our plans "Obvious" because we aim to provide great, affordable healthcare for all—we offer most of our MA members (the “members”) the lowest average out-of-pocket costs for primary care provider co-pays, specialist co-pays, drug deductibles and drug costs in their markets.

Unlike most MA plans, we deeply believe in providing our members provider choice, and we consider our PPO plan to be our flagship insurance plan.

An important feature of our MA product is wide network access, and we often offer the same cost-sharing (co-pays and deductibles) for visits with primary care providers who are in- and out-of-network.

We believe the use of the Clover Assistant and related data insights allows us to improve clinical decision-making through a highly scalable asset-light approach.

As of January 1, 2022, we operated our MA plans in nine states and 209 counties, with 84,403 MA members.

On April 1, 2021, our 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.

Our DCE assumes full risk (i.e., 100.0% shared savings and shared losses) for the total cost of care of aligned Original Medicare beneficiaries (the “DCE Beneficiaries” and, collectively with the members, “Lives under Clover Management” or the “beneficiaries”).

We operate our Direct Contracting (DC) operations through Health Partners, which focuses on our technology platform, the Clover Assistant, to enhance healthcare delivery, reduce expenditures, and improve care for DCE Beneficiaries.

As of December 31, 2021, we had approximately 720 contracted participating providers who manage primary care for our DCE Beneficiaries.

Additionally, as of December 31, 2021, we had approximately 635 preferred providers and preferred facilities in our DCE network.

Our participation in the DC Model has enabled us to moved beyond the MA market and target the Medicare fee-for-service (FFS) market, which is the largest segment of Medicare.

We believe that expanding into the FFS market is not only a strategic milestone for Clover but also demonstrates the scalability of the Clover Assistant.

Additionally, in 2021, we announced our plans to scale our in-home primary care program, Clover Home Care, through our DC operations.

Clover Home Care was designed to better identify and care for our most medically complex members, with a focus on health outcomes improvement and medical expense reduction rather than risk adjustment.

As of December 31, 2021, we were partnering with providers to care for 129,996 Lives under Clover Management, which included 68,120 Medicare Advantage members and 61,876 aligned DCE Beneficiaries.

The number of Lives under Clover Management as of December 31, 2021, was approximately double the number of Lives under Clover Management as of January 1, 2021.

We aim to provide high-quality, affordable healthcare for all Medicare beneficiaries.

We offer most members in our MA plans (the "members") among the lowest average out-of-pocket costs for primary care provider and specialist co-pays, drug deductibles and drug costs in their markets.

We strongly believe in providing our members provider choice, and we consider our PPO plan to be our flagship insurance product.

An important feature of our MA product is wide network access.

We believe the use of Clover Assistant and related data insights allows us to improve clinical decision-making through a highly scalable platform.

At January 1, 2023, we operated our MA plans in eight states and 220 counties, with 84,138 members.

On April 1, 2021, our 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"), which transitioned to the Accountable Care Organization Realizing Equity, Access, and Community Health Model ("ACO REACH Model" or "ACO REACH") in January 2023.

Our DCE assumes full risk (i.e., 100.0% shared savings and shared losses) for the total cost of care of aligned Original Medicare beneficiaries (the "Non-Insurance Beneficiaries" and, collectively with the members, "Lives under Clover Management" or the "beneficiaries").

Through our Direct Contracting operations, we focus on leveraging Clover Assistant to enhance healthcare delivery, reduce expenditures, and improve care for our Non-Insurance Beneficiaries.

At December 31, 2022, we had approximately 1,560 contracted participant providers who manage primary care for our Non-Insurance Beneficiaries in 21 states.

Additionally, at December 31, 2022, we had approximately 1,675 preferred providers and preferred facilities in our DCE network.

In connection with the 2023 performance year, we strategically reduced the number of ACO REACH participating physicians, which resulted in a shift in our beneficiary alignment.

At the beginning of January 2023, we had approximately 605 contracted participant providers who manage primary care for our Non-Insurance Beneficiaries in 13 states.

Additionally, at the beginning of January 2023, we had approximately 1,540 preferred providers and preferred facilities in our ACO REACH network.

Our participation in the DC Model has enabled us to move beyond the MA market and target the Medicare fee-for-service ("FFS") market, which is the largest segment of Medicare.

We believe that expanding into the FFS market is not only a strategic milestone for Clover but also demonstrates the scalability of Clover Assistant.

Furthermore, we believe that offering providers multiple options within CMS' "Pathways to Success" will enable us to be accessible to more practices.

Beyond ACO REACH, exploring other additional plans such as MSSP-A ("Medicare Shared Savings Program BASIC level A") and Medicare Shared Savings Plan ENHANCED ("MSSP Enhanced"), would diversify our portfolio, allow for potential growth in lives under management, and provide an opportunity for better balancing the overall risk profile of the business.

At December 31, 2022, we were partnering with providers to care for 253,514 Lives under Clover Management, which included 88,627 Insurance members and 164,887 aligned Non-Insurance Beneficiaries.

Recent Developments

Geographic Expansion

In January 2022, we launched our MA plans in 101 new counties and an additional state, and we announced that our MA membership had grown by over 25% versus the beginning of 2021.

This expansion makes our MA plans available in a total of 209 counties across nine states.

Additionally, after launching our DCE in eight states in April 2021, we have grown our Direct Contracting presence to 22 states in 2022.

Issuance of Common Stock

In November 2021, we completed an underwritten public offering of 52,173,913 shares of Class A Common Stock at $5.75 per share.

We received net proceeds of $283.8 million, after deducting underwriting discounts and commissions and other offering costs.

On October 8, 2021, we announced that CMS assigned Clover’s PPO plan 3.5 stars on the Medicare Star Ratings for its MA plans for the 2020 measurement year.

Over 90% of our MA membership is served through our PPO plan.

The higher rating could positively impact the reimbursement rate for our PPO plan beginning in 2023 as well as potentially positively impact the plan’s image in the market.

Higher-rated plans may offer enhanced benefits and additional enrollment opportunities compared to lower-rated plans.

Business Combination

On January 7, 2021, we consummated the previously announced domestication and mergers (the "Business Combination") pursuant to that certain Agreement and Plan of Merger, dated October 5, 2020 (the "Merger Agreement"), by and among Social Capital Hedosophia Holdings Corp III, a Cayman Islands exempted company (SCH), Asclepius Merger Sub Inc., a Delaware corporation and a direct wholly-owned subsidiary of SCH, and Clover Health Investments, Inc., a corporation originally incorporated on July 17, 2014, in the state of Delaware (Legacy Clover), and us.

Additionally, in connection with the Business Combination, we issued and sold to certain investors an aggregate of 40,000,000 shares of our Class A Common Stock for an aggregate purchase price equal to $400.0 million (the "PIPE Investment") concurrently with the completion of the Business Combination.

As a result of the Business Combination, we became the successor to a public company, which required us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices.

For additional information regarding the impacts of the Business Combination, see Note 3 (Business Combination), Note 12 (Notes and Securities Payable), Note 13 (Warrants Payable), and Note 17 (Stockholders' Equity and Convertible Preferred Stock) to Financial Statements in this report.

On July 14, 2022, we announced plans to make our MA plans available in 13 new counties beginning in 2023.

This expansion makes our MA plans available in a total of 220 counties across eight states.

Impact of COVID-19

The societal and economic impact of the COVID-19 pandemic continues 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.

The Coronavirus Disease 2019 ("COVID-19") pandemic and its variants continues to evolve, and the impact on our business, results of operations, financial condition, and cash flows stabilized during the year ended December 31, 2022.

We are continuing to monitor the ongoing financial impact of COVID-19 on our business and operations and are making adjustments accordingly.

A large portion of our membership is elderly and generally in the high-risk category for COVID-19, and we have worked closely with our network of providers to ensure that members are receiving necessary care.

During 2021, we incurred elevated costs as compared to 2020 to care for those members who have contracted the virus, and indirect costs attributable to the COVID-19 pandemic increased as well, as deferral of services and increased costs related to conditions that were exacerbated by a lack of diagnoses and treatment in the earlier periods of the pandemic contributed to increased utilization.

We will continue to monitor the pandemic’s emerging treatment-related trends as well as the impact on our beneficiaries.

Additionally, CMS risk adjustment requires that a member’s health issues be documented annually regardless of the permanence of the underlying causes.

Historically, this documentation was required to be completed during an in-person visit with a patient.

As part of relief measures adopted pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), CMS is allowing documentation prepared during video visits with patients to serve as support for CMS risk adjustments.

While our ability to document health conditions was adversely impacted in 2020 and early 2021, the comprehensiveness of the documentation improved throughout 2021.

We intend to leverage the Clover Assistant to increase in-person and video visits for our members and document their health conditions on a timely basis, which we expect to have a positive impact on risk adjustment and revenue for the applicable populations.

The information presented in the following table illustrates the financial results for our MA segment as impacted by COVID-19:

Years ended December 31, 2021 2020

Total PMPM (1)

(dollars in thousands, except PMPM amounts)

Premiums earned, net $ 799,414 $ 996 $ 665,698 $ 976

Medicare Advantage net medical claims incurred 847,286 (2)

1,056 591,038 866

Medical care ratio, net (MCR) (3)

106.0 % N/A 88.8 % N/A

(1) Calculated per member per month (PMPM) figures are based on the applicable amount divided by member months in the given period.

Member months represents the number of months members are enrolled in a Clover Health Plan in the period.

(2) Net medical claims incurred reported for Medicare Advantage differs from the corresponding amount reported on the Consolidated Statements of Operations and Comprehensive Loss due to the impacts of eliminations.

(3) Defined as MA net medical claims incurred divided by premiums earned, net.

For additional information regarding the risks to our business and results of operations related to the COVID-19 pandemic, see the section entitled "Risk Factors—Risks Related to Clover’s Business and Industry—We are subject to risks associated with the COVID-19 pandemic, which could have a material adverse effect on our business, results of operations, financial condition and financial performance" in Part I, Item IA of this document.

During the years ended December 31, 2022 and 2021, we incurred elevated costs as compared to prior to the outbreak of the pandemic in 2020 to diagnose and care for those members who had contracted the virus.

Indirect costs attributable to the COVID-19 pandemic were elevated as well, as deferral of services and increased costs related to conditions that were exacerbated by a lack of diagnosis and treatment in the earlier periods of the pandemic contributed to increased utilization.

Key Performance Measures of Our Operating Segments

Operating Segments

We manage our business with two reportable segments:

Medicare Advantage and Direct Contracting.

The reportable segments are distinguished based on the healthcare delivery business model.

Our MA segment is an insurance business model that focuses on leveraging the Clover Assistant at the point of care.

Our DC segment is similar to a cost management and care coordination model accounted for as a performance guarantee, where Clover is responsible for coordinating care, managing costs, and providing support to providers and their DCE Beneficiaries through the use of Clover Assistant.

These segment groupings are consistent with information used by our Chief Executive Officer, our chief operating decision maker, to assess performance and allocate resources.

The Medicare Advantage segment consists of MA plans that generally provide access to a wide network of primary care providers, specialists, and hospitals.

The Direct Contracting segment consists of our operations in connection with the DC Model, which provides options aimed at reducing expenditures and preserving or enhancing quality of care for DCE Beneficiaries.

We manage our operations based on two reportable operating segments:

Insurance and Non-Insurance.

Through our Insurance segment, we provide PPO and HMO plans to Medicare Advantage members in several states.

Our Non-Insurance segment consists of our operations in connection with our participation in the DC Model, which transitioned to the ACO REACH Model beginning in 2023.

All other clinical services and all corporate overhead not included in the reportable segments are included within Corporate/Other.

These segment groupings are consistent with the information used by our Chief Executive Officer (identified as our chief operating decision maker) to assess performance and allocate the Company's resources.

We review several key performance measures, discussed below, to evaluate our business and results, measure performance, identify trends, formulate plans, and make strategic decisions.

We believe that the presentation of such metrics is useful to management and counterparties to model the performance of healthcare companies such as Clover.

Medicare Advantage

Through its MA operating segment, the Corporation provides PPO and HMO plans that generally provide access to a wide network of primary care providers, specialists, and hospitals.

We seek to improve care and lower costs by empowering physicians with data-driven, personalized insights at the point of care through our software platform, the Clover Assistant.

Insurance segment

Through our Insurance segment, we provide PPO and HMO plans to members in several states.

We seek to improve care and lower costs for our Insurance members by empowering providers with data-driven, personalized insights to support treatment of members through our software platform, Clover Assistant.

Years ended December 31, 2022 2021

Medicare Advantage Data (Premium and expense amounts in thousands, except PMPM amounts)

Members as of period end (#) 68,120 N/A 58,056 N/A

Total PMPM (1)

(Premium and expense amounts in thousands, except PMPM amounts)

Insurance members as of period end (#) 88,627 N/A 68,120 N/A

Premiums earned, gross $ 1,085,339 $ 1,041 $ 799,903 $ 997

Premiums earned, net 1,084,869 1,041 799,414 996

MA medical claim expense incurred, gross 848,288 1,057 591,521 867

MA net medical claims incurred 847,286 (1)

1,056 591,038 866

Insurance medical claim expense incurred, gross 997,576 957 848,288 1,057

Insurance net medical claims incurred 996,410 956 847,286 1,056

Medical care ratio, gross (2)

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Medical care ratio, net 91.8 N/A 106.0 N/A

(1) Net medical claims incurred reported for Medicare Advantage differs from the corresponding amount reported on the Consolidated Statements of Operations and Comprehensive Loss due to the impacts of eliminations.

(2) Defined as our MA gross medical claims incurred divided by premiums earned, gross.

(1) Calculated per member per month ("PMPM") figures are based on the applicable amount divided by member months in the given period.

Member months represents the number of months members are enrolled in a Clover Health plan in the period.

(2) Defined as Insurance gross medical claims incurred divided by premiums earned, gross.

Membership and associated premiums earned and medical claim expenses.

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Any member who joins a Clover plan after July 1 in a given year is considered a new member for the entirety of the following calendar year.

We view our number of members and associated PMPM premiums earned and medical claim expenses, in the aggregate and on a PMPM basis, as important metrics to assess our financial performance because member growth aligns with our mission, drives our total revenues, expands brand awareness, deepens our market penetration, creates additional opportunities to inform our data-driven insights to improve care and decrease medical claim expenses, and generates additional data to continue to improve the functioning of the Clover Assistant.

Among other things, the longer a member is enrolled in one of our MA plans, the more data we collect and synthesize and the more actionable insights we generate.

We view our number of members and associated PMPM premiums earned and medical claim expenses, in the aggregate and on a PMPM basis, as important metrics to assess our financial performance;

member growth aligns with our mission, drives our Total revenues, expands brand awareness, deepens our market penetration, creates additional opportunities to inform our data-driven insights to improve care and decrease medical claim expenses, and generates additional data to continue to improve the functioning of Clover Assistant.

Among other things, the longer a member is enrolled in one of our insurance plans, the more data we collect and synthesize and the more actionable insights we generate.

We believe these data-driven insights lead to better care delivery as well as improved identification and documentation of members' chronic conditions, helping to lower PMPM medical claim expenses.

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We believe premiums earned, gross provides useful insight into the gross economic benefit generated by our business operations and allows us to evaluate our underwriting performance without regard to changes in our underlying reinsurance structure.

Premiums earned, gross excludes the effects of premiums ceded to reinsurers, and therefore should not be used as a substitute for premiums earned, net, total revenue or any other measure presented in accordance with GAAP.

Premiums earned, gross excludes the effects of premiums ceded to reinsurers, and therefore should not be used as a substitute for Premiums earned, net, Total revenues, or any other measure presented in accordance with generally accepted accounting principles in the United States ("GAAP").

Premiums earned, net.

Premiums earned, net represents the earned portion of our premiums earned, gross, less the earned portion that is ceded to third-party reinsurers under our reinsurance agreements.

Premiums are earned in the period in which members are entitled to receive services, and are net of estimated uncollectible amounts, retroactive membership adjustments, and any adjustments to recognize rebates under the minimum benefit ratios required under the Patient Protection and Affordable Care Act (ACA).

Premiums earned, gross is the amount received, or to be received, for insurance policies written by us during a specific period of time without reduction for premiums ceded to reinsurance.

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We receive premiums from CMS on a monthly basis based on our actuarial bid and the risk-adjustment model used by CMS.

Premiums anticipated to be received within twelve months based on the documented diagnostic criteria of our members are estimated and included in revenue for the period including the member months for which the payment is designated by CMS.

Premiums anticipated to be received within twelve months based on the documented diagnostic criteria of our members are estimated and included in revenues for the period, including the member months for which the payment is designated by CMS.

Premiums ceded is the amount of premiums earned, gross ceded to reinsurers.

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Under these agreements, the "reinsurer," agrees to cover a portion of the claims of another insurer, i.e., us, the "primary insurer," in return for a portion of their premium.

earned premiums are earned over the reinsurance contract period in proportion to the period of risk covered.

Ceded earned premiums are earned over the reinsurance contract period in proportion to the period of risk covered.

The volume of our ceded earned premium is impacted by the level of our premiums earned, gross and any decision we make to adjust our reinsurance agreements.

MA Gross Medical Claims Incurred

MA gross medical claims incurred reflects claims incurred excluding amounts ceded to reinsurers and the costs associated with processing those claims.

Insurance gross medical claims incurred.

Insurance gross medical claims incurred reflects claims incurred, excluding amounts ceded to reinsurers, and the costs associated with processing those claims.

We believe gross medical claims incurred provides useful insight into the gross medical expense incurred by members and allows us to evaluate our underwriting performance without regard to changes in our underlying reinsurance structure.

MA gross medical claims incurred excludes the effects of medical claims and associated costs ceded to reinsurers, and therefore should not be used as a substitute for net claims incurred, total expenses or any other measure presented in accordance with GAAP.

MA Net Medical Claims Incurred

MA net medical claims incurred are our medical expenses and consists of the costs of claims, including the costs incurred for claims net of amounts ceded to reinsurers.

Insurance gross medical claims incurred excludes the effects of medical claims and associated costs ceded to reinsurers, and therefore should not be used as a substitute for Net claims incurred, Total operating expenses, or any other measure presented in accordance with GAAP.

Insurance net medical claims incurred.

Insurance net medical claims incurred are our medical expenses and consist of the costs of claims, including the costs incurred for claims net of amounts ceded to reinsurers.

We enter into reinsurance contracts to limit our exposure to potential catastrophic losses.

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Medical care ratio, gross and net.

We calculate our medical care ratio by dividing total MA medical claim expenses incurred by premiums earned, in each case on a gross or net basis, as the case may be, in a given period.

We believe our MCR is an indicator of our gross margin for our MA plans and the ability of our Clover Assistant platform to capture and analyze data over time to generate actionable insights for returning members to improve care and reduce medical expenses.

Direct Contracting

Our DC segment consists of operations in connection with the DC Model.

provides a variety of programs aimed at reducing expenditures and preserving or enhancing quality of care for DCE Beneficiaries.

We measure Direct Contracting revenue and medical claims on a per-beneficiary per-month (PBPM) basis.

In the aggregate, we view these as important metrics to assess our financial performance, including our ability to reduce expenditures and preserve or enhance quality of care for DCE Beneficiaries.

We calculate our medical care ratio ("MCR") by dividing total Insurance medical claim expenses incurred by premiums earned, in each case on a gross or net basis, as the case may be, in a given period.

We believe our MCR is an indicator of our gross margin for

our Insurance plans and the ability of our Clover Assistant platform to capture and analyze data over time to generate actionable insights for returning members to improve care and reduce medical expenses.

Non-Insurance segment

Our Non-Insurance segment consists of operations in connection with our participation in the Direct Contracting program, which we began in April 2021 and which transitioned to the ACO REACH Model beginning in 2023.

As part of our Non-Insurance operations, we empower providers with Clover Assistant and offer a variety of programs aimed at reducing expenditures and preserving or enhancing the quality of care for our Non-Insurance Beneficiaries.

Year ended December 31, 2022 2022 2021

Direct Contracting Data (1)

Total PBPM (1)

(Revenue and claims amounts in thousands, except PBPM amounts)

Beneficiaries as of period end (#) 61,876 N/A

Direct Contracting revenue $ 667,639 $ 1,194

Direct Contracting net medical claims incurred 705,407 1,262

Direct Contracting margin (2)

(1) We began participating in Direct Contracting in April 2021.

(2) Defined as Direct Contracting net medical claims incurred divided by Direct Contracting revenue.

Beneficiaries

A beneficiary is defined as an eligible Original Medicare covered life that has been aligned to our DCE, Health Partners, via attribution to a DCE-participating provider through alignment based on claims data or by beneficiary election through voluntary alignment.

Non-Insurance Beneficiaries as of period end (#) 164,887 N/A 61,876 N/A

Non-Insurance revenue $ 2,380,135 $ 1,175 $ 667,639 $ 1,194

Non-Insurance net medical claims incurred 2,460,879 1,214 705,407 1,262

Non-Insurance MCR (2)

103.4 % N/A 105.7 % N/A

(1) Calculated per beneficiary per month ("PBPM") figures are based on the applicable amount divided by beneficiary months in the given period.

Beneficiary months represents the number of months beneficiaries are aligned to our DCE in the period.

(2) Defined as Non-Insurance net medical claims incurred divided by Non-Insurance revenues.

Non-Insurance Beneficiaries.

A Non-Insurance Beneficiary is defined as an eligible Original Medicare covered life that has been aligned to our DCE, Health Partners, via attribution to a DCE-participant provider through alignment based on claims data or by beneficiary election through voluntary alignment.

A beneficiary alignment is effective as of the first of the month, for the full calendar month, regardless of whether eligibility is lost during the course of the month.

Direct Contracting Revenue

Direct Contracting revenue represents CMS’ total expense incurred for medical services provided on behalf of DCE Beneficiaries during months in which they were alignment eligible during the performance year.

Direct Contracting revenue is calculated by taking the sum of the capitation payments made to us for services within the scope of our capitation arrangement and FFS payments made to providers directly from CMS.

Direct Contracting revenue is also known in the DC Model as performance year expenditures and is the primary component used to calculate shared savings or shared loss versus the performance year benchmark.

Direct Contracting revenue includes a direct reduction or increase of shared savings or loss, as applicable.

Premiums and recoupments incurred in direct relation to the DC Model are recognized as a reduction or increase in Direct Contracting revenue, as applicable.

We believe Direct

Contracting revenue provides useful insight into the gross economic benefit generated by our business operations and allows us to evaluate our performance without regard to changes in our underlying reinsurance structure.

Direct Contracting Net Medical Claims Incurred

Direct Contracting net medical claims incurred consists of the total incurred expense that CMS and we will remit for medical services provided on behalf of DCE Beneficiaries during the months in which they are alignment eligible and aligned to the DCE.

Additionally, Direct Contracting net medical claims incurred is inclusive of fees paid to providers for Clover Assistant usage, care coordination, and any shared savings or shared loss agreements with providers.

Direct Contracting net medical claims incurred is presented on our Consolidated Statements of Operations and Comprehensive Loss in accordance with GAAP.

Direct Contracting Margin (DCM)

We calculate our DCM by dividing Direct Contracting net medical claims incurred by Direct Contracting revenue in a given period.

We believe our DCM is an indicator of our gross profitability and the ability to capture and analyze data over time to generate actionable insights for returning beneficiaries to improve care and reduce medical expenses.

Components of Our Results of Operations

In addition to the components described below, additional components of our results of operations include Premiums Earned, Net, Direct Contracting Revenue, MA Net Medical Claims Incurred, and Direct Contracting Net Medical Claims Incurred, which are described in the “Key Performance Measures of Our Operating Segments” section above.

Other income mostly consists of income earned from rental agreements with third parties for subleases of our leased office facilities.

In addition, other income includes income generated from ceded allowances under reinsurance agreements, which are amounts paid by the reinsurers to help cover certain expenses incurred by the ceding party in relation to the ceded contracts, and an immaterial amount of other income from commissions related to premiums ceded under our reinsurance agreements.

Commissions from premiums ceded under reinsurance agreements are earned when ceded to reinsurers over the period of policies.

The amount of commissions we earn is dependent upon the terms of our reinsurance contracts and the amount of premiums ceded.

Other income also includes interest earned from fixed-maturity securities, short-term securities and other investments, the gains or losses on sales and maturities of investments.

Our cash and invested assets primarily consist of fixed-maturity securities, and may also include cash and cash equivalents, equity securities, and short-term investments.

The principal factors that influence net investment income are the size of our investment portfolio and the yield on that portfolio.

As measured by amortized cost (which excludes changes in fair value, such as changes in interest rates), the size of our investment portfolio is mainly a function of our invested equity capital along with premiums we receive less amounts paid in costs of care.

Other Medical Costs

Other medical costs consist of other clinical services not included in Medicare Advantage or Direct Contracting, and all other corporate overhead.

Clinical services is comprised of Clover Home Care and other clinical services that are offered to eligible beneficiaries.

Salaries and Benefits

Salaries and benefits consist of salaries, sales commissions, stock-based compensation expense, employee benefit costs, severance costs, and payroll taxes for employees.

Following the consummation of the Business Combination, we have incurred and expect to continue to incur significant additional expenses for salaries and benefits as a result of expanding our headcount to support our increased compliance requirements associated with operating as a public company or otherwise and the growth of our business.

As a result, we expect that our salaries and benefits will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue.

General and Administrative Expense

General and administrative expense consists of legal, accounting, tax and other professional fees, consulting fees, hardware and software costs, payments to our third-party cloud infrastructure providers for hosting our software, travel expenses, recruiting fees, certain tax, license and insurance-related expenses, including industry assessments, advertising and marketing costs, membership-

driven administrative costs, lease and occupancy costs, statutory and other fees, and other overhead costs.

Membership-driven administrative costs consist of enrollment-related costs, broker commissions, and call center expenses.

We are subject to the ACA, which established insurance industry assessments, including an annual health insurance industry fee.

The annual health insurance industry fee was suspended in 2019.

In 2020, the fee incurred and paid by the Corporation was approximately $8.0 million.

The fee has been permanently repealed beginning in 2021.

Following the consummation of the Business Combination, we have incurred and expect to continue to incur significant additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and the listing standards of Nasdaq, additional corporate, director and officer insurance expenses, greater investor relations expenses, and increased professional service fees.

As a result, we expect that our general and administrative expenses will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue.

Premium Deficiency Reserve Expense (Benefit)

Premium deficiency reserves are established to the extent that the sum of expected future costs, claim adjustment expenses, and maintenance costs exceeds related future premiums.

We assess the profitability of our contracts with CMS to identify those contracts where current operating results or forecasts indicate probable future losses.

Premium deficiency reserve expense (benefit) is recognized in the period in which the losses are identified.

Premium deficiency reserves are then amortized over the period in which losses were expected to occur.

The amortization is expected to have an offsetting impact to the operating losses in that period.

We may identify and recognize additional premium deficiency reserves depending on the rates that are paid to us by CMS based on our actuarial bids and the utilization of healthcare services by our members.

Depreciation and Amortization

Depreciation and amortization consists of all depreciation and amortization expenses associated with our property and equipment.

Depreciation includes expenses associated with property and equipment.

Amortization includes expenses associated with leasehold improvements.

Other Expense

Other expense consists primarily of debt issuance costs incurred in connection with the issuance of an aggregate of $373.8 million initial principal amount of convertible securities (Convertible Securities) in February, March, May, and August 2019.

The Convertible Securities were converted into shares of the Corporation's Class B common stock upon the completion of the Business Combination on January 7, 2021.

Change in Fair Value of Warrants Payable

Change in fair value of warrants payable is related to a mark-to-market adjustment associated with warrants to purchase our capital stock.

In connection with the Closing, the warrants of Legacy Clover automatically converted into shares of Class B Common Stock, and we are no longer required to re-measure the value of those warrants.

Change in fair value of warrants payable for our public warrants (the “Public Warrants”) and private placements warrants (the “Private Placement Warrants”) assumed in connection with the Business Combination reflects the mark-to-market adjustment associated with warrants to purchase our Class A Common Stock from January 7, 2021, through the end of the reporting period.

The change in fair value of warrants payable is inclusive of the warrant amortization expense associated with the warrants payable in each period.

We had no Warrants outstanding following the exercises and redemptions of our Public Warrants and Private Placement Warrants in the third quarter of 2021.

Interest Expense

Interest expense consists mostly of interest expense associated with our previously outstanding non-convertible notes (Term Loan Notes) under a term loan facility entered into by us on March 21, 2017, for an aggregate principal amount of $60.0 million (the “Loan Facility”).

All remaining principal and accrued interest under the Loan Facility was voluntarily paid, and the facility was terminated, as of June 29, 2021.

We also have interest expense associated with the Seek Convertible Note entered into by Seek, an indirect wholly-owned subsidiary, on September 25, 2020, for an aggregate principal amount of $20.0 million.

Amortization of Notes and Securities Discounts

Amortization of notes and securities discounts consists of amortization of the debt discount associated with the Convertible Securities, warrants and debt issuance costs associated with the Term Loan Notes.

(Gain) Loss on Derivative

(Gain) loss on derivative activity primarily consists of (gain) loss on the embedded derivatives contained in the Convertible Securities.

The embedded derivatives related to the conversion features of the Convertible Securities, which reflected a premium above the principal and accrued interest thereon.

We recorded gains or losses on those derivatives based on the changes in fair value of the embedded derivatives contained in the Convertible Securities.

The carrying amounts of these embedded derivatives were recorded at fair value at issuance, marked-to-market as of each balance sheet date, and changes in fair value were reported as either income or expense during the period.

To estimate the fair value attributable to these features, we estimated the value of the Convertible Securities (i) with the embedded derivatives and (ii) without the embedded derivatives.

The incremental difference between the two values was then used to estimate the fair value of the embedded derivatives.

A probability-weighted present value of expected future returns model was then used to estimate the value of the conversion features under various probable scenarios.

The assumptions used to arrive at the estimated fair value generally included the stock price, strike price, volatility, risk-free rate, and time to maturity, among others.

On January 7, 2021, in connection with the Closing, the Convertible Securities converted to shares of the Corporation's common stock and the associated derivative liability was eliminated.

Non-Insurance revenue.

Non-Insurance revenue represents CMS' total expense incurred for medical services provided on behalf of Non-Insurance Beneficiaries during months in which they were alignment eligible during the performance year.

Non-Insurance revenue is the sum of the capitation payments made to us for services within the scope of our capitation arrangement and FFS payments made to providers directly from CMS.

Non-Insurance revenue is also known in the DC Model as performance year expenditures and is the primary component used to calculate shared savings or shared loss versus the performance year benchmark.

Non-Insurance revenue includes a direct reduction or increase of shared savings or loss, as applicable.

Premiums and recoupments incurred in direct relation to the DC Model are recognized as a reduction or increase in Non-Insurance revenue, as applicable.

We believe Non-Insurance revenue provides useful insight into the gross economic benefit generated by our business operations and allows us to evaluate our performance without regard to changes in our underlying reinsurance structure.

Non-Insurance net medical claims incurred.

Non-Insurance net medical claims incurred consist of the total incurred expense that CMS and we will remit for medical services provided on behalf of Non-Insurance Beneficiaries during the months in which they are alignment eligible and aligned to the DCE.

Additionally, Non-Insurance net medical claims incurred are inclusive of fees paid to providers for Clover Assistant usage, care coordination, and any shared savings or shared loss agreements with providers.

Non-Insurance MCR.

We calculate our MCR by dividing Non-Insurance net medical claims incurred by Non-Insurance revenue in a given period.

We believe our MCR is an indicator of our gross profitability and the ability to capture and analyze data over time to generate actionable insights for returning beneficiaries to improve care and reduce medical expenses.

Results of Operations

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The period-to-period comparison of results is not necessarily indicative of results for future periods.

Years ended December 31, Change between

December 31, Change between

2022 and 2021

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Premiums earned, net (Net of ceded premiums of $470 and $489 for the years ended December 31, 2022 and 2021, respectively)

Direct Contracting revenue 667,639 — 667,639 *

$ 1,084,869 $ 799,414 $ 285,455 35.7 %

Non-Insurance revenue 2,380,135 667,639 1,712,496 256.5

11,683 4,943 6,740 136.4

Total revenues 3,476,687 1,471,996 2,004,691 136.2

Operating expenses

Medicare Advantage net medical claims incurred 838,134 585,432 252,702 43.2

Direct Contracting net medical claims incurred 705,407 — 705,407 *

Other medical costs 7,637 4,650 2,987 64.2

Net medical claims incurred 3,453,952 1,551,178 1,902,774 122.7

Salaries and benefits

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General and administrative expenses 207,917 185,287 22,630 12.2

Premium deficiency reserve expense (benefit) 110,628 (17,128) 127,756 745.9

Premium deficiency reserve (benefit) expense (94,240) 110,628 (204,868) *

Depreciation and amortization 1,187 1,246 (59) (4.7)

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Loss from operations (370,924) (636,992) 266,068 (41.8)

Change in fair value of warrants payable (66,146) 80,328 (146,474) (182.3)

Change in fair value of warrants (900) (66,146) 65,246 *

Interest expense 1,333 3,193 (1,860) (58.3)

Amortization of notes and securities discount 30 13,717 (13,687) (99.8)

(Gain) loss on derivative — (93,751) 93,751 (100.0)

Gain on extinguishment of note payable (23,326) — (23,326) *

Gain on investment (9,217) — (9,217) *

Net loss $ (338,844) $ (587,756) $ 248,912 (42.3) %

* Not presented because the prior period amount is zero or the amount for the line item changed from a gain to a loss (or vice versa) and thus yields a result that is not meaningful.

* Not presented because the current or prior period amount is zero or the amount for the line item changed from a gain to a loss (or vice versa) and thus yields a result that is not meaningful.

Premiums earned, net

Premiums earned, net increased $285.5 million, or 35.7%, to $1,084.9 million for the year ended December 31, 2022, compared to the year ended December 31, 2021.

The increase was primarily due to membership growth of 17.3% from 58,056 Medicare Advantage members at December 31, 2020, to 68,120 Medicare Advantage members at December 31, 2021.

Additional risk adjustment revenue of $7.8 million was recognized during the year ended December 31, 2021.

Direct Contracting Revenue

Our participation in Direct Contracting launched in April 2021.

Revenue related to Direct Contracting was $667.6 million for the year ended December 31, 2021.

This revenue was attributable to the alignment of Original Medicare beneficiaries to our DCE, which numbered 61,876 at December 31, 2021.

Other income decreased $2.2 million, or 31.3%, to $4.9 million for the year ended December 31, 2021, compared to the year ended December 31, 2020.

The decrease was primarily due to lower net investment income of $2.4 million and decreased rental income of $0.4 million during the year ended December 31, 2021, and the receipt of a $0.5 million state subsidy during the year ended December 31, 2020, that was not received in the year ended December 31, 2021.

MA Net Medical Claims Incurred

MA net medical claims incurred increased $252.7 million, or 43.2%, to $838.1 million for the year ended December 31, 2021, compared to the year ended December 31, 2020.

The increase was primarily due to MA membership growth, the impact of COVID-19 related treatment costs, and the return of healthcare utilization that was reduced in 2020 in connection with the COVID-19 pandemic.

Direct Contracting Net Medical Claims Incurred

Our participation in Direct Contracting launched in April 2021.

Direct Contracting net medical claims incurred of $705.4 million for the year ended December 31, 2021, was attributable to the alignment of Original Medicare beneficiaries to our DCE.

Other Medical Costs

Other medical costs increased $3.0 million, or 64.2%, to $7.6 million for the year ended December 31, 2021, compared to the year ended December 31, 2020.

The increase was primarily related to an increase in beneficiaries receiving in-home care services for a flat monthly fee.

The increase was primarily due to membership growth of 30.1% from 68,120 Insurance members at December 31, 2021, to 88,627 Insurance members at December 31, 2022.

The remaining increase is primarily driven by an increase in accrued risk adjustment revenue recognized during the year ended December 31, 2022.

Non-Insurance revenue

Our Non-Insurance revenue increased $1,712.5 million, or 256.5%, to $2,380.1 million for the year ended December 31, 2022, compared to the year ended December 31, 2021.

The increase was primarily driven by an increase in the number of our aligned Non-Insurance Beneficiaries from 61,876 at December 31, 2021, to 164,887 at December 31, 2022, due to the fact that our DCE did not begin participation in Direct Contracting until the second quarter of 2021.

Other income increased $6.7 million, or 136.4%, to $11.7 million for the year ended December 31, 2022, compared to the year ended December 31, 2021.

The increase was largely due to a $7.1 million increase in net investment income, partially offset by a $1.2 million decrease in rental income.

Net medical claims incurred

Net medical claims incurred increased $1,902.8 million, or 122.7%, to $3,454.0 million for the year ended December 31, 2022, compared to the year ended December 31, 2021.

The increase was primarily driven by an increase in net medical claims attributable to our Non-Insurance Beneficiaries from $705.4 million for the year ended December 31, 2021, to $2,460.9 million for the year ended December 31, 2022, which was driven by an increase in the number of our aligned Non-Insurance Beneficiaries from 61,876 at December 31, 2021, to 164,887 at December 31, 2022.

This was partially due to the fact that our DCE did not begin participation in Direct Contracting until the second quarter of 2021.

We also experienced an increase of $149.1 million in net medical claims attributable to our Insurance members, which was primarily driven by an increase in Insurance members from 68,120 Insurance members at December 31, 2021, to 88,627 Insurance members at December 31, 2022.

Salaries and benefits

Salaries and benefits increased $18.3 million, or 7.0%, to $278.7 million for the year ended December 31, 2022, compared to the year ended December 31, 2021.

The increase was primarily driven by higher year-over-year stock-based compensation expense of $156.6 million due to the issuance of stock-based compensation, increased headcount, and additional awards issued in connection with the Business Combination.

The increase was primarily driven by an increase in average headcount which is primarily attributable to the build out of DCE.

General and administrative expenses

General and administrative expenses increased $22.6 million, or 12.2%, to $207.9 million for the year ended December 31, 2022, compared to the year ended December 31, 2021.

The increase was driven in part by increases in legal and other professional fees to support our growth and additional costs related to operating as a public company and higher costs associated with obtaining and maintaining directors’ and officers’ liability insurance, partially offset by the absence in 2021 of the ACA’s health insurance industry fee of $8.0 million that we incurred in 2020.

Legal and professional fees increased $23.6 million for the year ended December 31, 2021, compared to the year ended December 31, 2020, and directors’ and officers’ liability insurance costs increased $12.7 million over the same periods.

Software application expense also increased due to the continued development of platform and information technology capabilities within the organization.

For the year ended December 31, 2021, we also recognized $10.7 million in amortization expense related to deferred acquisition costs.

There was no amortization expense related to deferred acquisition costs recognized for the year ended December 31, 2020.

Premium Deficiency Reserve Expense (Benefit)

A $110.6 million premium deficiency reserve expense was recorded for the year ended December 31, 2021, compared to a benefit of $17.1 million for the year ended December 31, 2020.

This expense includes amortization associated with a previously recorded

reserve, which has been fully amortized, and a reserve deemed necessary for fiscal year 2022.

The change was due to management’s assessment of actual and anticipated experience related to the profitability of contracts.

Change in Fair Value of Warrants Payable

We reported an increase of $66.1 million on the change in fair value of warrants payable for the year ended December 31, 2021, compared to a decrease of $80.3 million for the year ended December 31, 2020.

The increase for the year ended December 31, 2021, was due to the mark-to-market adjustment of the Public Warrants and Private Placement Warrants recognized for the year ended December 31, 2021 prior to being fully exercised and redeemed, compared to the initial measurement value as of January 7, 2021.

The decrease for the year ended December 31, 2020, was related to an increase in the valuation of the legacy warrants during the period.

For additional information, see Note 5 (Fair Value Measurements) and Note 13 (Warrants Payable) to Financial Statements in this report.

The increase was primarily driven by increases in professional fees related to supporting the administrative needs of a larger member and Non-Insurance beneficiary groups as compared to the prior period.

Professional fees increased $11.3 million for the year ended December 31, 2022, compared to the year ended December 31, 2021.

In addition, total commissions, which are attributable to acquiring new and retaining existing members to our plans, increased by $9.5 million.

Premium deficiency reserve (benefit) expense

A $94.2 million premium deficiency reserve benefit was recorded for the year ended December 31, 2022, which was primarily driven by amortization associated with the 2021 recorded reserve.

This was partially offset by the establishment of the new Premium deficiency reserve related to 2023.

A $110.6 million premium deficiency reserve expense was recorded for the year ended December 31, 2021, which included amortization associated with a previously recorded reserve and the reserve deemed necessary for the remainder of 2022.

The increase in the premium deficiency benefit for the year ended December 31, 2022 was primarily driven by an 11% decrease in the allocable administrative expenses and a 9% benefit in projected MCR as compared to the projected MCR for the year ended December 31, 2021.

The Company received a higher contracted rate with CMS under Clover's 3.5 quality star rating for its PPO plan as well as maturation of Clover's core clinical programs, which favorably impacted projected MCR.

Change in fair value of warrants

Change in fair value of warrants totaled $0.9 million for the year ended December 31, 2022.

The $65.2 million increase as compared to the year ended December 31, 2021 is primarily driven by the mark-to-market adjustments and subsequent redemption of all the Public Warrants and Private Warrants during the prior period.

Interest expense

Interest expense decreased $32.8 million, or 91.0%, to $3.2 million for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily related to the conversion of the Convertible Securities to shares of the Corporation’s common stock in connection with the completion of the Business Combination on January 7, 2021.

Interest expense decreased $1.9 million, or 58.3%, to $1.3 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to the voluntary prepayment and termination of the remaining principal and interest associated with our Term Loan Notes.

Amortization of notes and securities discounts

Amortization of notes and securities discounts decreased $7.4 million, or 35.2%, to $13.7 million for the year ended December 31, 2021, compared to the year ended December 31, 2020.

The decrease primarily relates to the completion of the Business Combination on January 7, 2021, whereby the unamortized discount associated with the August 2019 tranche of the Convertible Securities was accelerated.

The decrease was also driven by $0.6 million of amortization of debt discount associated with the Convertible Securities during the period from January 1, 2021, to January 7, 2021.

Gain (loss) on Derivative

There was no gain on derivative for the year ended December 31, 2021, as compared to a $93.8 million gain on derivative for the year ended December 31, 2020.

This change relates to the capital contribution treatment of the elimination of the derivative associated with the convertible securities upon completion of the Business Combination on January 7, 2021.

Amortization of notes and securities discounts decreased by $13.7 million, or 99.8%, in the year ended December 31, 2022, compared to the year ended December 31, 2021.

This was primarily due to the completion of the 2021 Business Combination on January 7, 2021, whereby the unamortized discount associated with the August 2019 tranche of the Convertible Securities was accelerated, as well as the termination of our Term Loan Notes during the year ended December 31, 2021.

Gain on extinguishment of note payable

Gain on extinguishment of note payable increased by $23.3 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021.

This increase is a direct result of the Company's dissolution of Seek Insurance Services, Inc.

("Seek"), a field marketing organization and an indirect wholly-owned subsidiary of the Company.

In connection with the dissolution, all amounts

outstanding under a convertible note issued by Seek in 2020 were waived and all other rights, covenants, and obligations under the note were terminated.

As a result, the Company recognized a $23.3 million gain on extinguishment.

Gain on investment

In February 2022, Character Biosciences completed a private capital transaction in which it raised $17.9 million from the issuance of 16,210,602 shares of its preferred stock.

After evaluating our ownership interest in Character Biosciences, we began applying the equity method of accounting during the year ended December 31, 2022, and recorded a gain on investment of $9.2 million, which is attributable to our proportionate share of the gain on equity of that entity during that period.

Prior to the first quarter of 2022, this entity was consolidated on our financial statements, and therefore we did not recognize a loss or gain on investment in this entity for the year ended December 31, 2021.

In accordance with ASC 323, for the year ended December 31, 2022, we recognized the proportionate share of Character Bioscience's net losses up to the investment carrying amount.

At December 31, 2022, we discontinued applying the equity method to account for our common stock interest in Character Biosciences as our net losses exceeded the investment carrying amount.

The equity method investment in Character Biosciences was reduced to zero and no further losses were recorded in our consolidated financial statements as we did not guarantee obligations of the investee company or commit additional funding.

Liquidity and Capital Resources

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We continually forecast and manage our cash, investments, working capital balances, and capital structure to meet the short-term and long-term obligations of our businesses while seeking to maintain liquidity and financial flexibility.

As of December 31, 2021, we had cash, cash equivalents, and short-term investments of $593.8 million.

Additionally, as of December 31, 2021, we had $197.4 million of available-for-sale and held-to-maturity investment securities, an outstanding balance of $22.0 million on convertible notes issued by an indirect wholly-owned subsidiary, and no outstanding balance on our Term Loan Notes.

Our cash equivalents, short-term investments, and investment securities consist primarily of money market funds and U.S.

government debt securities.

Since inception, we have financed our operations primarily from the proceeds we received through public and private sales of equity securities, funds received in connection with the Business Combination, issuances of convertible notes, premiums earned under our MA plans, borrowings under our term loan facility and, most recently, with our Direct Contracting revenues.

We expect that our cash, cash equivalents, short-term investments, and our current projections of cash flows, taken together, will be sufficient to meet our projected operating and regulatory requirements for the next 12 months based on our current plans.

Historically, we have financed our operations primarily from the proceeds we received through public and private sales of equity securities, funds received in connection with the 2021 Business Combination, issuances of convertible notes, premiums earned under our MA plans, and with our Non-Insurance revenue.

We expect that our cash, cash equivalents, restricted cash, short-term investments, and our current projections of cash flows, taken together, will be sufficient to meet our projected operating and regulatory requirements for the next 12 months based on our current plans.

Our future capital requirements will depend on many factors, including our needs to support our business growth, to respond to business opportunities, challenges or unforeseen circumstances, or for other reasons.

We may be required to seek additional equity or debt financing.

In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all.

We may be required to seek additional equity or debt financing to provide the capital required to maintain or expand our operations.

Any future equity financing may be dilutive to our existing investors, and any future debt financing may include debt service requirements and financial and other restrictive covenants that may constrain our operations and growth strategies.

If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all.

If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be adversely affected.

At December 31, 2022, total cash, cash equivalents, restricted cash, and investments were $555.3 million.

We had cash, cash equivalents, restricted cash, and short-term investments of $227.7 million.

Additionally, at December 31, 2022, we had $327.6 million of available-for-sale and held-to-maturity investment securities.

Our cash equivalents and investment securities consist primarily of money market funds, U.S.

government debt securities, and corporate debt securities.

Unregulated Entities

At December 31, 2022, total cash, cash equivalents, restricted cash, and investments for the parent company, Clover Health Investments, Corp., and unregulated subsidiaries were $331.7 million.

We operate as a holding company in a highly regulated industry.

As such, we may receive dividends and administrative expense reimbursements from our subsidiaries, two of which are subject to regulatory restrictions.

We continue to maintain significant levels of aggregate excess statutory capital and surplus in our state-regulated operating subsidiaries.

Cash, cash equivalents, and short-term investments at the parent company were $350.9 million and $5.4 million as of December 31, 2021, and December 31, 2020, respectively.

This increase at the parent company primarily reflects proceeds from the Business Combination offset by capital

contributions made to insurance subsidiaries, operating expenses, and repayment of debt.

Our unregulated subsidiaries held $55.7 million and $44.6 million of cash, cash equivalents, and short-term investments as of December 31, 2021, and December 31, 2020, respectively.

Our regulated insurance subsidiaries held $187.2 million and $46.4 million of cash, cash equivalents, and short-term investments as of December 31, 2021, and December 31, 2020, respectively.

Additionally, our regulated insurance subsidiaries held $118.0 million and $54.7 million of available-for-sale and held-to-maturity investment securities as of December 31, 2021, and December 31, 2020, respectively.

Our use of operating cash derived from our non-insurance subsidiaries is generally not restricted by departments of insurance (or comparable state regulatory agencies).

We continue to maintain significant levels of aggregate excess statutory capital and surplus in our state-regulated insurance subsidiaries.

Cash, cash equivalents, and short-term investments at the parent company, Clover Health Investments, Corp., were $101.4 million and $350.9 million at December 31, 2022 and 2021, respectively.

This decrease at the parent company primarily reflects operating expenses and capital contributions made to our regulated insurance subsidiaries.

Additionally, the parent company held $136.5 million and $79.3 million of available-for-sale and held-to-maturity investment securities at December 31, 2022 and 2021.

Our unregulated subsidiaries held $93.7 million and $52.2 million of cash, cash equivalents, restricted cash, and short-term investments at December 31, 2022 and 2021, respectively.

Our unregulated subsidiaries held no available-for-sale and held-to-maturity securities at either December 31, 2022 or 2021.

Regulated Entities

Our regulated insurance subsidiaries held $32.5 million and $190.7 million of cash, cash equivalents, and short-term investments at December 31, 2022 and 2021, respectively.

Additionally, our regulated insurance subsidiaries held $191.1 million and $118.0 million

of available-for-sale and held-to-maturity investment securities at December 31, 2022 and 2021, respectively.

Our use of operating cash derived from our unregulated subsidiaries is generally not restricted by departments of insurance (or comparable state regulatory agencies).

Our regulated insurance subsidiaries have not paid dividends to the parent, and applicable insurance laws restrict the ability of our regulated insurance subsidiary to declare and pay dividends to the parent.

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State insurance regulatory authorities that have jurisdiction over the payment of dividends by our regulated insurance subsidiary may in the future adopt statutory provisions more restrictive than those currently in effect.

For additional information, please refer to the parent company financial statements and accompanying notes in Schedule II—Parent Company Financial Information contained in our consolidated financial statements included in this Form 10-K.

For a detailed discussion of our regulatory requirements, including aggregate statutory capital and surplus as well as dividends paid from the subsidiaries to the parent, please refer to Notes 24, 25, and 26 to our Consolidated Financial Statements included in this Form 10-K.

For a detailed discussion of our regulatory requirements, including aggregate statutory capital and surplus as well as dividends paid from the subsidiaries to the parent, please refer to Notes 24 (Dividend Restrictions), 25 (Statutory Equity), and 26 (Regulatory Matters) to the consolidated financial statements included in this Form 10-K, as well as Item 1 Business.

The following table summarizes our consolidated cash flows for the years ended December 31, 2022 and 2021.

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(in thousands)

Consolidated Statements of Cash Flows Data:

Cash Flows Data:

Net cash used in operating activities $ (203,926) $ (282,326)

Net cash (used in) provided by investing activities (435,447) 137,404

Net cash provided by financing activities 925,393 5,844

2021 Cash Flows Compared to 2020 Cash Flows

Increased cash flows provided by finance activities were primarily driven by the business combination proceeds received in January 2021 and the underwritten public offering proceeds received in November 2021.

A significant portion of these proceeds were invested for future use by the company.

This was also partly offset by net cash operating outflows due to higher medical claims disbursements in 2021 due to COVID-19 and higher operating costs since becoming a public company.

Net cash provided by (used in) investing activities 95,133 (435,447)

Net cash (used in) provided by financing activities (4,962) 925,393

(Decrease) increase in cash, cash equivalents, and restricted cash $ (113,755) $ 207,620

Cash Requirements

Our cash requirements within the next twelve months include medical claims payable, accounts payable and accrued liabilities, current liabilities, purchase commitments, and other obligations.

We expect the cash required to meet these obligations to be primarily generated through cash flows from current operations and cash available for general corporate use.

We expect the cash required to meet these obligations to be primarily generated through cash, cash equivalents, restricted cash, short-term investments, and our current projections of cash flows from operations.

Operating Activities

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Our primary uses of cash from operating activities are payments for medical benefits and payments of Operating expenses.

For the year ended December 31, 2021, net cash used in operating activities was $282.3 million, which reflects net loss of $587.8 million.

Non-cash activities included a $66.1 million gain as a result of the change in fair value of warrants payable and a $163.7 million charge to stock-based compensation expense.

Changes to our working capital included a $110.6 million charge to our premium deficiency reserve and an increase of $12.6 million in surety bonds and deposits related to Direct Contracting.

For the year ended December 31, 2022, Net cash used in operating activities was $203.9 million, which reflects a Net loss of $338.8 million.

Non-cash activities primarily consisted of a $93.8 million gain on derivative, an $80.1 million loss on the change in fair value of warrants payable, $28.3 million in paid-in-kind interest expense, $21.1 million in amortization of notes and securities discount , and $7.1 million of stock-based compensation expense.

Non-cash activities included a $164.3 million charge to Stock-based compensation expense, $94.2 million of amortization of the 2022 Premium deficiency reserve, and a $9.2 million Gain on investment related to the change in the equity structure of Character Biosciences.

Payments due to CMS related to our Non-Insurance operations increased by $110.4 million.

Change in our working capital included an increase within Surety bonds and deposits related to Non-Insurance.

For the year ended December 31, 2021, Net cash used in operating activities was $282.3 million, which reflects a Net loss of $587.8 million.

Non-cash activities included a $66.1 million gain as a result of the Change in fair value of warrants and a $163.7 million charge to Stock-based compensation expense.

Changes to our working capital included a $110.6 million charge to our Premium deficiency reserve and an increase of $10.7 million within Surety bonds and deposits related to Non-Insurance.

At the conclusion of the year ended December 31, 2022, we deposited $82.4 million into an escrow account to comply with the standard financial guarantee requirements for participants in the DC Model for performance year 2022.

We view this impact as short-term in nature as we expect to settle the performance year 2022 obligation during the third quarter of the year ending December 31, 2023, after which we expect the associated financial guarantee to be released by CMS.

Furthermore, we also paid the provisional settlement for the 2021 performance year of Direct Contracting of $60.3 million in 2022.

After the year ended December 31, 2022, but prior to the filing date of this Form 10-K, we received approximately $20.8 million related to our performance year 2021 collateral guarantee with CMS.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2021, of $435.4 million was primarily due to $876.3 million used to purchase investment securities, offset by $441.5 million provided from the sale and maturity of investment securities.

Net cash provided by investing activities for the year ended December 31, 2020, of $137.4 million was primarily due to $312.4 million provided from the sale and maturity of investment securities, partially offset by $174.3 million used to purchase investment securities.

For additional information regarding our investing activities, please refer to Notes 2 and 4 to our Consolidated Financial Statements included in this Form 10-K.

Net cash provided by investing activities for the year ended December 31, 2022, of $95.1 million was primarily due to $485.4 million provided from the sale and maturity of investment securities.

This was offset by $369.4 million used to purchase investments and

$16.2 million used in connection with the 2022 Business Combination.

See Note 3 (Business Combination) to the consolidated financial statements included in this Form 10-K..

Net cash used in investing activities for the year ended December 31, 2021, of $435.4 million was primarily due to $876.3 million used to purchase investment securities.

This was partially offset by $441.5 million provided from the sale and maturity of investment securities.

For additional information regarding our investing activities, please refer to Note 4 (Investment Securities) to our consolidated financial statements included in this Form 10-K.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2021, of $925.4 million was the result of $666.2 million in proceeds from the reverse recapitalization in connection with the Business Combination, net of transaction costs, and $283.8 million in proceeds from the Class A common stock offering, net of fees, partially offset by $30.9 million in principal payments on our outstanding Term Loan Notes.

Net cash provided by financing activities for the year ended December 31, 2020, of $5.8 million was primarily the result of $20.0 million in proceeds from the issuance of the Convertible Securities, $3.9 million from the acquisition of our noncontrolling interest, and $1.7 million in proceeds from the issuance of common stock, offset by $18.8 million in principal payments on our outstanding Term Loan Notes and $1.0 million in payments associated with the buyback and subsequent cancellation of common stock.

Net cash used in financing activities for the year ended December 31, 2022 of $5.0 million was primarily the result of the acquisition of $6.4 million in Treasury stock.

Net cash provided by financing activities for the year ended December 31, 2021 of $925.4 million was primarily the result of $666.2 million in proceeds from the reverse capitalization in connection with the 2021 Business Combination, net of transaction costs, and $6.1 million in proceeds from the issuance of common stock.

These factors were partially offset by $30.9 million in principal payments on our outstanding Term Loan Notes.

Financing Arrangements

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We entered into a loan and security agreement with a commercial lender in March 2017, which provided for term loans in an aggregate principal amount of up to $60.0 million.

At that time, we borrowed $40.0 million as a term loan under the agreement which was subject to an interest rate of 11.0%, payable monthly, and had a maturity date of March 1, 2022.

In October 2017, we borrowed the remaining $20.0 million as a term loan under the agreement which was subject to an interest rate of 11.25%, payable monthly, and had a maturity date of October 1, 2022.

At that time, we borrowed $40.0 million as a term loan under the agreement that was subject to an interest rate of 11.0%, payable monthly, and had a maturity date of March 1, 2022.

In October 2017, we borrowed the remaining $20.0 million as a term loan under the agreement that was subject to an interest rate of 11.25%, payable monthly, and had a maturity date of October 1, 2022.

Each loan was payable in monthly installments of interest only for the first 24 months, and thereafter interest and principal were payable in 36 equal monthly installments.

The loans were secured by substantially all of our assets, including our intellectual property, and equity interests in our unregulated subsidiaries.

On June 29, 2021, the Corporation voluntarily paid the remaining principal of $20.7 million and interest of $0.2 million, thereby terminating the Loan Facility.

On June 29, 2021, we voluntarily paid the remaining principal of $20.7 million and interest of $0.2 million, thereby terminating the loan.

Convertible Securities

In December 2018, we entered into a convertible securities purchase agreement with qualified institutional buyers, including entities affiliated with our Chief Executive Officer and other holders of more than 5.0% of our common stock, for an aggregate principal amount of up to $500.0 million.

In February, March, May, and August 2019, we issued an aggregate of $373.8 million initial principal amount of convertible securities, or the Convertible Securities, under the agreement.

In December 2018, we entered into a convertible securities purchase agreement with qualified institutional buyers, including entities affiliated with our then-Chief Executive Officer and other holders of more than 5.0% of our common stock, for an aggregate principal amount of up to $500.0 million.

In February, March, May, and August 2019, we issued an aggregate of $373.8 million initial principal amount of convertible securities (the "Convertible Securities") under the agreement.

In connection with and upon the closing of the 2021 Business Combination, the Convertible Securities mandatorily converted into 74,694,107 shares of the Corporation's Class B Common Stock.

For additional information about the Convertible Securities and the conversion of the Convertible Securities upon the closing of the Business Combination, see Note 12 (Notes and Securities Payable) to Financial Statements in this report.

For additional information about the Convertible Securities and the conversion of the Convertible Securities upon the closing of the 2021 Business Combination, see Note 12 (Notes and Securities Payable) to the consolidated financial statements included in this Form 10-K.

Contractual Obligations and Commitments

We believe that funds from future operating cash flows, cash, and investments will be sufficient for future operations and commitments, and for capital acquisitions and other strategic transactions, over at least the next 12 months.

Material cash requirements from known contractual obligations and commitments as of December 31, 2021 include:

(1) the recognition of a performance guarantee of $36.9 million in connection with the Corporation’s participation in the DC Model, (2) operating lease obligations of $7.9 million, and (3) the outstanding principal balance related to the Seek Convertible Note of $20.0 million.

These commitments are associated with contracts that were enforceable and legally binding as of December 31, 2021, and that specified all significant terms, including fixed or minimum serves to be used, fixed, minimum, or variable price provisions, and the approximate timing of the actions under the contracts.

There were no other material cash requirements from known contractual

obligations and commitments.

For additional information regarding our remaining estimated contractual obligations and commitments, see Note 12 (Notes and Securities Payable), Note 16 (Leases), Note 21 (Commitments and Contingencies), and Note 22 (Direct Contracting) to Financial Statements in this report.

We believe that funds from projected future operating cash flows, cash, cash equivalents, and investments will be sufficient for future operations and commitments, and for capital acquisitions and other strategic transactions, over at least the next 12 months.

Material cash requirements from known contractual obligations and commitments at December 31, 2022 include:

(1) the recognition of a performance guarantee of $73.8 million in connection with the Company's participation in the DC Model and (2) operating lease obligations of $5.9 million.

These commitments are associated with contracts that were enforceable and legally binding at December 31, 2022, and that specified all significant terms, including fixed or minimum serves to be used, fixed, minimum, or variable price provisions, and the approximate timing of the actions under the contracts.

There were no other material cash requirements from known contractual obligations and commitments at December 31, 2022.

For additional information regarding our remaining estimated contractual obligations and commitments, see Note 12 (Notes and Securities Payable), Note 15 (Leases), Note 21 (Commitments and Contingencies), and Note 22 (Non-Insurance) to the consolidated financial statements included in this Form 10-K.

Indemnification Agreements

In the ordinary course of business, we enter into agreements, with various parties (providers, vendors, consultants, etc.), of varying scope and terms pursuant to which we agree to defend, indemnify, and hold harmless the other parties from any claim, demand, loss, lawsuit, settlement, judgment, fine, or other liability, and all related expenses which may accrue there from (including reasonable attorney’s fees), arising from or in connection with third party claims, including, but not limited to, negligence, recklessness, willful misconduct, fraud, or otherwise wrongful act or omission with respect to our obligations under the applicable Agreement.

In the ordinary course of business, we enter into agreements, with various parties (providers, vendors, consultants, etc.), with varying scope and terms, pursuant to which we may agree to defend, indemnify, and hold harmless the other parties from any claim, demand, loss, lawsuit, settlement, judgment, fine, or other liability, and all related expenses that may accrue therefrom (including reasonable attorney's fees), arising from or in connection with third party claims, including, but not limited to, negligence, recklessness, willful misconduct, fraud, or otherwise wrongful act or omission with respect to our obligations under the applicable agreements.

Off-balance Sheet Arrangements

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Our consolidated financial statements are prepared in accordance with GAAP.

The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the period.

We evaluate, on an ongoing basis, our significant accounting estimates, which include, but are not limited to, net claims and claims adjustment expense and revenue recognition, including the risk adjustment provisions related to Medicare contracts.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results could differ from those estimates under different assumptions or conditions, impacting our reported results of operations and financial condition.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.

The results form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results could differ from those estimates under different assumptions or conditions, which could impact our reported results of operations and financial condition.

We believe that the accounting policies and estimates described below involve a significant degree of judgment and complexity.

Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

For further information, see Note 2 (Summary of Significant Accounting Policies) to the Financial Statements in this Form 10-K.

MA Net Medical Claims Incurred

MA net medical claims incurred is recognized in the period in which services are provided and includes paid claims and an estimate of the cost of services which have been incurred but not yet reported (IBNR) and certain other unpaid claims and adjustments.

For further information, see Note 2 (Summary of Significant Accounting Policies) to the consolidated financial statements included in this Form 10-K.

Insurance Net Medical Claims Incurred

Insurance net medical claims incurred is recognized in the period in which services are provided and includes paid claims and an estimate of the cost of services that have been incurred but not yet reported ("IBNR") and certain other unpaid claims and adjustments.

IBNR represents a substantial portion of our unpaid claims, as reflected below:

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These data and trends include historical data adjusted for claims receipt and payment patterns, cost trends, product mix, seasonality, utilization of healthcare services, changes in membership, provider billing practices, benefit changes, known outbreaks of disease, including COVID-19, or increased incidence of illness such as influenza, the incidence of high-dollar or catastrophic claims, and other relevant factors.

These factors are used to determine our lag-dependent completion factors, which represent the average percentage of total incurred claims that have been paid

through a given date after being incurred.

These factors are used to determine our lag-dependent completion factors, which represent the average percentage of total incurred claims that have been paid through a given date after being incurred.

Completion factors are applied to claims paid through the period-end date to estimate the ultimate claim expense incurred for the period.

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We continually adjust our completion factor with our knowledge of recent events that may impact current completion factors when establishing our reserves.

Because our reserving practice is to consistently recognize the actuarial best estimate using an assumption of moderately adverse conditions as required by actuarial standards, there is a reasonable possibility that there could be variances between actual completion factors and those assumed in our December 31, 2021 and 2020, unpaid claim estimates.

Because our reserving practice is to consistently recognize the actuarial best estimate using an assumption of moderately adverse conditions as required by

actuarial standards, there is a reasonable possibility that there could be variances between actual completion factors and those assumed in our December 31, 2022 and 2021, unpaid claim estimates.

Actuarial standards require the use of assumptions based on moderately adverse experience, and as such, a provision for adverse deviation ("PAD") is recognized on current reserves and released on prior reserves.

For further discussion of our reserving methodology, including our use of completion factors to estimate IBNR, refer to Note 2 (Summary of Significant Accounting Policies) within the Financial Statements in this Form 10-K.

Direct Contracting Net Medical Claims Incurred

Direct Contracting net medical claims incurred is recognized in the period in which services are provided and includes paid claims and an estimate of the cost of services which have been incurred but not yet reported and certain other unpaid claims and adjustments.

IBNR represents a substantial portion of our unpaid claims, as reflected below:

For further discussion of our reserving methodology, including our use of completion factors to estimate IBNR, refer to Note 2 (Summary of Significant Accounting Policies) in the consolidated financial statements included in this Form 10-K.

Non-Insurance Net Medical Claims Incurred

Non-Insurance net medical claims incurred is recognized in the period in which services are provided and includes paid claims and an estimate of the cost of services that have been incurred but not yet reported and certain other unpaid claims and adjustments.

IBNR represented all of our unpaid claims, as reflected below:

Years ended December 31,

Total % Total %

(dollars in thousands)

IBNR $ 6,119 100.0 % $ 4,607 100.0 %

Other unpaid claims — —

Claims adjustment expense — —

Total unpaid claims and claims adjustment expense $ 6,119 100.0 % $ 4,607 100.0 %

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Our actuaries also consider this population's history of observed completion percentages in estimating ultimate claims incurred, using completion percentages that are consistent with historical ranges and informed by new information with other functional departments.

Clover’s reserving practice is to recognize the actuarial best estimate of our ultimate liability for claims.

Our reserving practice is to recognize the actuarial best estimate of our ultimate liability for claims.

Actuarial standards require the use of assumptions based on moderately adverse experience, and as such, a provision for adverse deviation is recognized on current reserves and released on prior reserves.

The PAD is lower for DCE than MA;

for DCE, claims submission and payment patterns support more precise estimates than are observed in MA.

Premium Deficiency Reserve Expense (Benefit)

The PAD is lower for Non-Insurance than Insurance;

for Non-Insurance, claims submission and payment patterns support more precise estimates than are observed in the Insurance business.

Premium Deficiency Reserve (Benefit) Expense

A premium deficiency reserve is established when future premiums and current reserves are not sufficient to cover future claim payments and expenses for the remainder of a contract period.

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We assess the profitability of our MA contracts to identify where current operating results or forecasts indicate potential future losses.

We do not assess the impacts of the premium deficiency reserve for our Direct Contracting operations as that business segment is not an insurance plan and is not accounted for under ASC 944- Financial Services—Insurance.

The reserve is derived from the assessments performed and provides the amount that insurance related expenses are expected to exceed insurance revenues.

We do not assess the impacts of the premium deficiency reserve for our Non-Insurance operations as that business segment is not an insurance plan and is not accounted for under ASC 944- Financial Services—Insurance.

The reserve is derived from the assessments performed and provides the amount by which insurance-related expenses are expected to exceed insurance revenues.

There are key financial statement line items and associated drivers considered in determining the reserve.

The most significant of financial statement line items considered when performing reserve assessments are premiums earned and MA net medical claims incurred.

The most significant of financial statement line items considered when performing reserve assessments are premiums earned and Insurance net medical claims incurred.

Key inputs considered for premiums earned include expected enrollment changes, revenue rates, risk adjustment, and risk score forecasts.

Key metrics considered for MA net medical claims incurred include claims experience, benefit changes, membership mix, membership changes, and medical management programs.

Administrative expenses are assessed for expenses directly and indirectly incurred in order to operate the insurance entities and cannot exceed a percentage of regulatory entity premiums earned due to contractual agreements.

Key metrics considered for Insurance net medical claims incurred include claims experience, benefit changes, membership mix, membership changes, and medical management programs.

Administrative expenses are assessed for expenses directly and indirectly incurred in order to operate the insurance entities and cannot exceed a percentage of

regulatory entity premiums earned due to contractual agreements.

There are other operating activities that are considered in accordance with regulatory guidelines.

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The amortization of the reserve occurs ratably over the assessed contract period and will offset expected future losses .

Revenue Recognition - MA

Revenue Recognition - Insurance

We receive monthly premiums from the federal government according to government-specified payment rates and various contractual terms.

Revenue from premiums earned is recognized as income in the period in which members are entitled to receive services.

Premiums received in advance of the service period are reported as other liabilities and subsequently recognized as revenue in the period earned.

CMS uses a risk-adjustment model which adjusts premiums paid to MA contracts, based on member risk scores, which are meant to compensate plans that enroll beneficiaries with higher-than-average health risks and to reduce payments for healthier beneficiaries who have lower health risks.

Premiums received in advance of the service period are reported within other liabilities and subsequently recognized as revenue in the period earned.

CMS uses a risk-adjustment model that adjusts premiums paid to MA contracts, based on member risk scores, which are meant to compensate plans that enroll Medicare members with higher-than-average health risks and to reduce payments for healthier Medicare beneficiaries who have lower health risks.

Risk scores are based on member diagnoses from the previous year and are periodically adjusted retroactively based on additional plan data collection.

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Management records a receivable or payable at the end of the year based on these items.

Revenue Recognition - DCE

Direct Contracting revenue includes a direct reduction or increase of shared savings or loss, which is calculated as the difference between the total benchmark and the total cost of care.

Premiums and recoupments incurred in direct relation to the DC Model are recognized as a reduction or increase in Direct Contracting revenue.

Direct Contracting Receivable and Performance Year Obligation

Revenue Recognition - Non-Insurance

Non-Insurance revenue is calculated as the sum of the capitation payments made to us for services within the scope of our capitation arrangement plus FFS payments made to providers directly from CMS.

Non-Insurance revenue includes a direct reduction or increase of shared savings or loss, which is calculated as the difference between the total benchmark and

the total cost of care.

Premiums and recoupments incurred in direct relation to the DC Model are recognized as a reduction or increase in Non-Insurance revenue.

Non-Insurance Receivable and Performance Year Obligation

Performance year receivable and obligation represents the average Medicare beneficiary's total cost of care for beneficiaries aligned to our DCE and refers to the target expenditure amount that will be compared to Medicare expenditures for items and services furnished to aligned beneficiaries during a performance year.

This comparison will be used to calculate shared savings and shared losses.

The key inputs in determining the performance year receivable and obligation are trends, risk score, and the number of beneficiaries aligned to the DCE.

We begin our benchmark estimation process with benchmark reports delivered from the Centers for Medicare & Medicaid Services Innovation Center (CMMI) on a quarterly basis, which drive the determination of whether certain inputs to that calculation need to be adjusted or accrued as a result of more accurate data.

Prospective and retrospective trends are set at a national level, and while it is unlikely we would deviate from CMMI’s estimates, we could adjust from the benchmark report due to new information received directly from CMMI, national studies we complete ourselves, or other anticipated policy updates that we believe are probable and estimable.

The key inputs in determining the performance year receivable and obligation are both driven by the benchmark, which is impacted by the retrospective trend adjustments ("RTA"s), risk score, and the number of beneficiaries aligned to the DCE.

We begin our benchmark estimation process with reports from the Centers for Medicare & Medicaid Services Innovation Center ("CMMI") on a quarterly basis.

Prospective and retrospective trends are set at a national level.

We can make adjustments from the benchmark report due to new information received directly from CMMI, national studies we complete ourselves, or other anticipated policy updates that we believe are probable and estimable.

The preliminary benchmark is set based on risk scores with data captured as of a certain point in time.

Once new data is received, an updated analysis of claims provides an opportunity for the benchmark to be adjusted.

Lastly, beneficiary counts are updated through the year and represent a timing difference between CMMI reporting, for which we accrue.

For the initial performance year, seasonality was assessed in the calculation of the benchmark.

Lastly, Non-Insurance Beneficiary counts are updated through the year and represent a timing difference between CMMI reporting, for which we accrue.

The following table summarizes the impacts of the key inputs to the Non-Insurance receivable and Non-Insurance performance year obligation that contribute to the change in the benchmark from beginning of the 2022 performance year:

Increase (Decrease) in the adjustment to Non-Insurance Receivable/Obligation

% Change $ Change

(in thousands)

Change in Beneficiary Alignment (0.7) % $ (17,670)

Retrospective Trend Adjustment 0.1 3,308

Normalized Risk Score (0.1) (2,422)

All others (including change in total cost of care trend) 0.1 2,856

Total (0.6) % $ (13,928)

Legacy Warrants

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The September 2015 warrants and the Loan Facility warrants were determined to be freestanding instruments as they were detachable and separately exercisable.

These warrants were accounted for as derivative instruments in accordance with ASC 815-40 and were presented within warrants payable on the Consolidated Balance Sheet.

The warrant liabilities were 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 payable in the Consolidated Statement of Operations and Comprehensive Loss.

In November 2016 and December 2017, we issued warrants to purchase 261,681 shares of our common stock to a service provider for services performed.

For warrants issued to non-employees as payment for services, such as the November 2016 and December 2017 warrants, we consider the warrants to be in scope of stock-based compensation guidance to non-employees.

To determine whether the warrants should be classified as liabilities or equity awards, we evaluate the criteria for debt accounting guidance because share-based payments classified as liabilities under this guidance would also be classified as liabilities under the stock-based accounting guidance.

As the November 2016 and December 2017 warrants did not meet any of the criteria to be accounted for as debt, they were classified as equity awards.

On the grant date, these warrants were measured by estimating the fair value of the equity instruments to be issued.

Stock-based compensation expense was recorded for the vested portion of the warrants.

On October 5, 2020, we entered into the Merger Agreement with SCH and simultaneously amended the terms of the legacy warrants, and they were automatically converted into common stock in connection with the 2021 Business Combination.

For additional information related to the Legacy Warrants, please refer to Item 7.

Management's Discussion and Analysis of Critical Accounting Policies and Estimates of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022.

Public Warrants and Private Placement Warrants

We assumed, in connection with the Business Combination, public warrants and private placement warrants to purchase shares of our Class A Common Stock.

These warrants were accounted for as liabilities in accordance with ASC 815-40 and are presented within warrants payable on the Consolidated Balance Sheet.

The Public Warrants were classified within Level 1 of the fair value hierarchy because the fair value was equal to the publicly traded price of the Public Warrants, and the Private Placement Warrants

were classified within Level 2 of the fair value hierarchy because the fair value was estimated using the price of the Public Warrant.

We assumed, in connection with the 2021 Business Combination, public warrants and private placement warrants to purchase shares of our Class A Common Stock (the "Public Warrants" and the "Private Placement Warrants," respectively).

These warrants were accounted for as liabilities in accordance with ASC 815-40 and are presented within warrants payable on the Consolidated Balance Sheets.

The warrant liabilities 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 Consolidated Statements of Operations and Comprehensive Loss.

The Public Warrants were classified within Level 1 of the fair value hierarchy because the fair value was equal to the publicly traded price of the Public Warrants.

The Private Placement Warrants were classified within Level 2 of the fair value hierarchy because the fair value was estimated using the price of the Public Warrants.

On July 22, 2021, we issued a press release stating that we would redeem all unexercised Public Warrants and Private Placement Warrants.

In connection with the redemption, effective August 24, 2021, the Public Warrants were delisted and classified within Level 2 of the fair value hierarchy as the fair value of the Public Warrants was based on proportional changes in the price of our common stock.

There were no Private Warrants outstanding at August 24, 2021.

In connection with the redemption, effective August 24, 2021, the Public Warrants were delisted and classified within Level 2 of the fair value hierarchy as the fair value of the Public

Warrants was based on proportional changes in the price of our common stock.

There were no Private Placement Warrants outstanding at August 24, 2021.

Private Warrants

At December 31, 2022, 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 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 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.

Derivative Liabilities

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The embedded derivatives associated with the Convertible Securities were recognized as derivative liabilities and recorded at fair value.

For additional information around the fair value and inputs used in the modeling related to the liability-classified warrants, please see Note 13 (Warrants Payable) to our Consolidated Financial Statements in this report.

Fair values of the Legacy warrants and derivative liabilities related to the Convertible Securities were estimated using a probability-weighted expected return method, where the values of various instruments were estimated based on an analysis of future values of our business, assuming various future outcomes.

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An evaluation of multiple scenarios for future payoffs for the underlying Convertible Securities was performed using option pricing models, and probability-weighted average value indications were used to arrive at the estimated fair values.

For information on fair values of the Public Warrants and Private Warrants, please refer to the section entitled “Warrants” above.

For information on fair values of the Public Warrants and Private Placement Warrants, please refer to the section entitled "Warrants" above.

Stock-based Compensation

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The fair value of each stock option and ESPP opportunity granted is estimated using the Black-Scholes option-pricing model.

The fair value of each RSU is based on the estimated fair value of our common stock on the date of grant.

The fair value of each restricted stock unit ("RSU") is based on the estimated fair value of our common stock on the date of grant.

The measurement date for employee awards is the date of grant, and stock-based compensation costs are recognized as expense over the employees' requisite service period, which is the vesting period, on a straight-line basis.

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Stock-based compensation costs for non-employees are recognized as expense over the vesting period on a straight-line basis.

Stock-based compensation expense is classified in the Consolidated Statements of Operations and Comprehensive Loss within salaries and benefits.

Stock-based compensation expense is classified within the Consolidated Statements of Operations and Comprehensive Loss within Salaries and benefits.

We recognize stock-based compensation expense for the portion of awards that have vested.

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The grant date fair value of the Market PRSUs is recognized as expense over the vesting 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 Corporation 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.

We have also determined the requisite service period for the Market PRSUs with multiple performance conditions to be the longest of the explicit, implicit, or derived service period.

The determination of the grant-date fair value using an option-pricing model is affected by the estimated fair value of our common stock as well as assumptions regarding a number of other complex and subjective variables.

These variables include expected stock price volatility over an expected term, actual and projected employee stock option exercise behaviors, the risk-free interest rate for an expected term, and expected dividends.

These variables include expected stock price volatility over an expected term, actual and projected

employee stock option exercise behaviors, the risk-free interest rate for an expected term, and expected dividends.

The assumptions used in our option-pricing model represent our best estimates.

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Expected term - For stock options considered to be "plain vanilla" options, we estimate the expected term based on the simplified method, which is essentially the weighted average of the vesting period and contractual term, as our historical option exercise experience does not provide a reasonable basis upon which to estimate the expected term.

Expected volatility - We perform an analysis of using the average volatility of a peer group of representative public companies with sufficient trading history over the expected term to develop an expected volatility assumption.

Expected volatility - We perform an analysis of the average volatility of a peer group of representative public companies with sufficient trading history over the expected term to develop an expected volatility assumption.

The grant date fair value of Market PRSUs is determined using a Monte Carlo simulation model that incorporates multiple valuation assumptions, including the probability of achieving the specified market condition, expected volatility and risk-free interest rate.

See Note 18 (Employee Benefit Plans) to our Consolidated Financial Statements in this report for a complete description of the accounting for stock-based compensation awards.

See Note 18 (Employee Benefit Plans) to the Consolidated Financial Statements included in this Form 10-K for a complete description of the accounting for stock-based compensation awards.

Recently Issued and Adopted Accounting Pronouncements

See Note 2 (Summary of Significant Accounting Policies) to the Financial Statements in this report for a discussion of accounting pronouncements recently adopted and recently issued accounting pronouncements not yet adopted and their potential impact to our financial statements.

See Note 2 (Summary of Significant Accounting Policies) to the consolidated financial statements in this form 10-K for a discussion of accounting pronouncements recently adopted and recently issued accounting pronouncements not yet adopted and their potential impact to our consolidated financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis