CLOVER HEALTH INVESTMENTS, CORP. /DE 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Clover Health Investments, Corp. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Clover Health Investments, Corp. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss , changes in convertible preferred stock and stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ( 2013 framework), and our report dated March 1, 2023expressed an unqualified opinion thereon . Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 70 Valuation of incurred but not reported reserves Description of the Matter As of December 31, 2022, the Company’s unpaid claims were $137.4 million, of which, a significant portion is incurred but not reported reserves. As discussed in Notes 1 and 10 to the consolidated financial statements, the Company’s incurred but not reported (IBNR) liability for its Medicare Advantage and Direct Contracting Entity programs is determined by using actuarial methods that include a number of factors and assumptions, including completion factors, which seek to measure the cumulative percentage of claims expense that have been paid as of the reporting date based on historical claim payment patterns, and assumed medical cost trend factors, which represent an estimate of claims expense based on recent claims expense levels and medical cost levels. There is significant uncertainty inherent in determining management’s best estimate of completion and trend factors, which are used to calculate actuarial estimates of IBNR Auditing management’s best estimate of the IBNR was complex and required the involvement of our actuarial specialists due to the highly judgmental nature of completion and trend factor assumptions used in the valuation process. These assumptions have a significant effect on the valuation of the IBNR liability. We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s actuarial process for estimating the liability for incurred but not paid claims. These audit procedures included among others, testing management review controls over the application of the actuarial assumptions within the reserve models and the review and approval processes that management has in place for estimating the liability for incurred but not paid claims. How We Addressed the Matter in Our Audit To test the Company’s liability for IBNR, our audit procedures included, among others, testing the completeness and accuracy of data used in the calculation by testing reconciliations of underlying claims and membership data recorded in source systems to the actuarial reserving calculations, and comparing a sample of claims to source documentation. We involved actuarial specialists to assist with our audit procedures, which included, among others, evaluating the methodologies applied by the Company in determining the IBNR, evaluating the Company’s actuarial assumptions used in their analysis by comparing the significant assumptions to the Company’s historical claim experience, and independently calculating a range of IBNR estimates for comparison to management’s actuarial best estimate of the IBNR. Additionally, we performed a review of the prior period IBNR liabilities to subsequent claims development. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2018. New York, NY March 1, 2023 71 CLOVER HEALTH INVESTMENTS, CORP. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts) December 31, 2022 December 31, 2021 Assets Current assets Cash and cash equivalents $ 103,791 $ 299,968 Short-term investments 41,457 293,851 Investment securities, available-for-sale (Amortized cost: 2022: $ 193,300 ; 2021: $ 21,142 ) 189,498 21,131 Investment securities, held-to-maturity (Fair value: 2022: $ 15 ; 2021: $ 307 ) 15 305 Accrued retrospective premiums 20,387 34,923 Other receivables 23,596 14,282 Healthcare receivables 70,607 48,042 Non-Insurance receivable 52,955 12,170 Surety bonds and deposits 100,502 10,656 Prepaid expenses 18,146 14,693 Other assets, current 4,043 2,525 Total current assets 624,997 752,546 Investment securities, available-for-sale (Amortized cost: 2022: $ 142,940 ; 2021: $ 177,527 ) 137,368 175,604 Investment securities, held-to-maturity (Fair value: 2022: $ 636 ; 2021: $ 364 ) 742 335 Property and equipment, net 5,753 2,287 Operating lease right-of-use assets 4,025 5,367 Goodwill and other intangible assets 20,000 4,233 Other assets, non-current 15,735 10,432 Total assets $ 808,620 $ 950,804 The accompanying notes are an integral part of these consolidated financial statements. 72 CLOVER HEALTH INVESTMENTS, CORP. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts) December 31, 2022 December 31, 2021 Liabilities and Stockholders' Equity Current liabilities Unpaid claims $ 141,947 $ 138,604 Due to related parties, net 1,566 2,320 Non-Insurance performance year obligation, current 73,844 36,891 Non-Insurance payable 148,191 37,773 Accounts payable and accrued expenses 32,445 28,129 Accrued salaries and benefits 23,962 15,147 Operating lease liabilities 1,827 3,059 Premium deficiency reserve 16,388 110,628 Other liabilities, current 486 73 Total current liabilities 440,656 372,624 Notes and securities payable, net of discounts and deferred issuance costs — 19,938 Long-term operating lease liabilities 4,033 4,830 Other liabilities, non-current 16,193 14,095 Total liabilities 460,882 411,487 Commitments and Contingencies (Note 21) Stockholders' equity Class A Common Stock, $ 0.0001 par value; 2,500,000,000 shares authorized at December 31, 2022 and 2021; 383,998,718 and 352,645,626 issued and outstanding at December 31, 2022 and 2021, respectively 37 34 Class B Common Stock, $ 0.0001 par value; 500,000,000 shares authorized at December 31, 2022 and 2021; 94,394,852 and 118,206,768 issued and outstanding at December 31, 2022 and 2021, respectively 9 12 Additional paid-in capital 2,319,157 2,154,187 Accumulated other comprehensive loss ( 9,374 ) ( 1,934 ) Accumulated deficit ( 1,955,582 ) ( 1,616,738 ) Less: Treasury stock, at cost; 2,072,752 and 14,730 shares held at December 31, 2022 and 2021, respectively ( 6,509 ) ( 147 ) Clover stockholders' equity 347,738 535,414 Noncontrolling interest — 3,903 Total stockholders' equity 347,738 539,317 Total liabilities and stockholders' equity $ 808,620 $ 950,804 The accompanying notes are an integral part of these consolidated financial statements. 73 CLOVER HEALTH INVESTMENTS, CORP. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Dollars in thousands, except per share and share amounts) Years ended December 31, 2022 2021 2020 Revenues: Premiums earned, net (Net of ceded premiums of $ 470 , $ 489 , and $ 599 for the years ended December 31, 2022, 2021, and 2020, respectively) $ 1,084,869 $ 799,414 $ 665,698 Non-Insurance revenue 2,380,135 667,639 — Other income 11,683 4,943 7,190 Total revenues 3,476,687 1,471,996 672,888 Operating expenses: Net medical claims incurred 3,453,952 1,551,178 590,082 Salaries and benefits 278,725 260,458 71,256 General and administrative expenses 207,917 185,287 120,830 Premium deficiency reserve (benefit) expense ( 94,240 ) 110,628 ( 17,128 ) Depreciation and amortization 1,187 1,246 555 Other expense 70 191 — Total operating expenses 3,847,611 2,108,988 765,595 Loss from operations ( 370,924 ) ( 636,992 ) ( 92,707 ) Change in fair value of warrants ( 900 ) ( 66,146 ) 80,328 Interest expense 1,333 3,193 35,990 Amortization of notes and securities discounts 30 13,717 21,118 Gain on derivative — — ( 93,751 ) Gain on investment ( 9,217 ) — — Gain on extinguishment of note payable $ ( 23,326 ) $ — $ — Net loss $ ( 338,844 ) $ ( 587,756 ) $ ( 136,392 ) Per share data: Net loss per share attributable to Class A and Class B common stockholders – basic and diluted (1) $ ( 0.71 ) $ ( 1.42 ) $ ( 1.54 ) Weighted average number of common shares outstanding Basic and diluted weighted average number of Class A and Class B common shares and common share equivalents outstanding (1) 476,244,262 412,922,424 88,691,582 Net unrealized loss on available-for-sale investments $ ( 7,440 ) $ ( 1,944 ) $ ( 36 ) Comprehensive loss $ ( 346,284 ) $ ( 589,700 ) $ ( 136,428 ) (1) 2020 results have been adjusted to reflect the exchange of Legacy Clover's common stock for Clover Class B Common Stock at an exchange ratio of approximately 2.0681 in January 2021 as a result of the 2021 Business Combination. See Note 3 (Business Combination) for additional information. Because the Company had a Net loss during the years ended December 31, 2022, 2021, and 2020 the Company's potentially dilutive securities, which include stock options, restricted stock, preferred stock, and warrants to purchase shares of common stock and preferred stock, have been excluded from the computation of diluted net loss per share, as the effect would be anti-dilutive. The accompanying notes are an integral part of these consolidated financial statements. 74 CLOVER HEALTH INVESTMENTS, CORP. CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Dollars in thousands, except share amounts) Convertible Preferred stock Class A Common Stock Class B Common Stock Treasury Stock Additional paid-in capital Accumulated deficit Accumulated other comprehensive income (loss) Noncontrolling interest Total stockholders' equity (deficit) Shares Amount Shares Amount Shares Amount Shares Amount Balance, December 31, 2019 139,444,346 $ 447,747 — $ — 88,279,119 $ 9 — $ — $ 403,041 $ ( 891,633 ) $ 46 $ — $ ( 488,537 ) Stock issuance for exercise of stock options, net of early exercise liability — — — — 1,297,977 — — — 1,748 — — — 1,748 Stock-based compensation — — — — — — — — 7,078 — — — 7,078 Buyback and subsequent cancellation of common shares — — — — ( 370,830 ) — — — — ( 957 ) — — ( 957 ) Unrealized holdings gain on investment securities, available-for-sale — — — — — — — — — ( 36 ) — ( 36 ) Interests issued — — — — — — — — — — — 3,903 3,903 Net loss — — — — — — — — — ( 136,392 ) — — ( 136,392 ) Balance, December 31, 2020 139,444,346 $ 447,747 — $ — 89,206,266 $ 9 — $ — $ 411,867 $ ( 1,028,982 ) $ 10 $ 3,903 $ ( 613,193 ) Stock issuance for exercise of stock options, net of early exercise liability — — 4,303,062 — — — — — 6,144 — — — 6,144 Stock-based compensation — — — — — — — — 163,723 — — — 163,723 Vested restricted stock units — — 541,076 — — — — — — — — — — Unrealized holdings gain on investment securities, available-for-sale — — — — — — — — — — ( 1,944 ) — ( 1,944 ) Preferred stock conversion ( 139,444,346 ) ( 447,747 ) — — 139,444,346 14 — — 447,733 — — — 447,747 Issuance of common stock related to exercises of legacy warrants — — — — 7,205,490 1 — — 97,781 — — — 97,782 Convertible debt conversion and other issuances — — — — 75,084,703 7 — — 16,052 — — — 16,059 Issuance of common stock in connection with 2021 Business Combination and PIPE offering — — 143,475,108 14 ( 49,975,104 ) ( 5 ) — — 666,232 — — — 666,241 Conversion from Class B Common Stock to Class A Common Stock — — 231,273,129 23 ( 231,273,129 ) ( 23 ) — — — — — — — Conversion from Class A Common Stock to Class B Common Stock — — ( 88,514,196 ) ( 9 ) 88,514,196 9 — — — — — — — Capital contribution for extinguishment of debt — — — — — — — — 126,795 — — — 126,795 Acquisition of Public and Private Placement Warrants — — — — — — — — ( 147,582 ) — — — ( 147,582 ) Issuance of common stock related to exercises of Public and Private Placement Warrants — — 9,408,264 1 — — — — 81,672 — — — 81,673 Issuance of common stock, net of stock issuance costs — — 52,173,913 5 — — — — 283,770 — — — 283,775 Treasury stock acquired — — ( 14,730 ) — — — 14,730 ( 147 ) — — — — ( 147 ) Net loss — — — — — — — — — ( 587,756 ) — — ( 587,756 ) Balance, December 31, 2021 — $ — 352,645,626 $ 34 118,206,768 $ 12 14,730 $ ( 147 ) $ 2,154,187 $ ( 1,616,738 ) $ ( 1,934 ) $ 3,903 $ 539,317 75 Convertible Preferred stock Class A Common Stock Class B Common Stock Treasury Stock Additional paid-in capital Accumulated deficit Accumulated other comprehensive income (loss) Noncontrolling interest Total stockholders' equity (deficit) Shares Amount Shares Amount Shares Amount Shares Amount Stock issuance for exercise of stock options, net of early exercise liability — — 4,367,985 — — — — — 1,400 — — — 1,400 Stock-based compensation — — — — — — — — 164,305 — — — 164,305 Vested restricted stock units — — 2,974,581 — 1,677,873 — — — — — — — — Vested performance stock units — — 8,951 — — — — — — — — — — Unrealized holdings gain on investment securities, available for sale — — — — — — — — — — ( 7,440 ) — ( 7,440 ) Conversion from Class B Common Stock to Class A Common Stock — — 25,489,789 3 ( 25,489,789 ) ( 3 ) — — — — — — — Treasury Stock — — ( 2,058,022 ) — — — 2,058,022 ( 6,362 ) — — — — ( 6,362 ) Issuance of Common Stock under Employee Stock Purchase Plan — — 569,808 — — — — — — — — — — Activities from Seek Dissolution — — — — — — — — ( 735 ) — — — ( 735 ) Derecognition of Non-controlling interest — — — — — — — — — — — ( 3,903 ) ( 3,903 ) Net loss — — — — — — — — — ( 338,844 ) — — ( 338,844 ) Balance, December 31, 2022 — $ — 383,998,718 $ 37 94,394,852 $ 9 2,072,752 $ ( 6,509 ) $ 2,319,157 $ ( 1,955,582 ) $ ( 9,374 ) $ — $ 347,738 The accompanying notes are an integral part of these consolidated financial statements. 76 CLOVER HEALTH INVESTMENTS, CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Years ended December 31, 2022 2021 2020 Cash flows from operating activities: Net loss $ ( 338,844 ) $ ( 587,756 ) $ ( 136,392 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense 1,187 1,246 555 Amortization of notes and securities discounts and debt issuance costs 30 13,717 21,118 Stock-based compensation expense 164,305 163,723 7,078 Paid-in-kind interest — — 28,334 Change in fair value of warrants and amortization of warrants ( 900 ) ( 66,146 ) 80,328 Change in derivative liabilities — — ( 93,751 ) Accretion, net of amortization ( 1,503 ) 200 ( 195 ) Net realized losses on investment securities 267 53 ( 1,114 ) Gain on extinguishment of note payable ( 23,326 ) — — Gain on investment ( 9,217 ) — — Premium deficiency reserve ( 94,240 ) 110,628 ( 17,128 ) Changes in operating assets and liabilities: Accrued retrospective premiums 14,536 ( 94 ) ( 21,604 ) Other receivables ( 8,988 ) ( 2,914 ) ( 5,865 ) Reinsurance recoverable — ( 96 ) 481 Surety bonds and deposits ( 7,424 ) ( 10,656 ) — Prepaid expenses ( 3,415 ) ( 6,863 ) ( 6,473 ) Other assets ( 1,204 ) ( 4,296 ) 1,003 Healthcare receivables ( 22,565 ) ( 9,297 ) ( 12,926 ) Non-Insurance receivable ( 40,785 ) ( 12,170 ) — Operating lease right-of-use assets 1,984 3,591 3,257 Unpaid claims 2,589 36,948 26,090 Accounts payable and accrued expenses 7,635 5,307 10,845 Accrued salaries and benefits 8,784 11,169 186 Deferred rent — 68 — Other liabilities 2,468 979 1,378 Performance year obligation 36,953 36,891 Non-Insurance payable 110,418 37,773 — Operating lease liabilities ( 2,671 ) ( 4,331 ) ( 3,703 ) Net cash used in operating activities ( 203,926 ) ( 282,326 ) ( 118,498 ) Cash flows from investing activities: Purchases of short-term investments, available-for-sale, and held-to-maturity securities ( 369,396 ) ( 876,252 ) ( 174,318 ) Proceeds from sales of short-term investments and available-for-sale securities 13,348 126,862 248,664 Proceeds from maturities of short-term investments, available-for-sale, and held-to-maturity securities 472,098 314,666 63,751 Acquisition of business, net of cash acquired ( 16,200 ) — — Purchases of property and equipment ( 4,467 ) ( 723 ) ( 693 ) Acquisition of Character Biosciences, Inc. Series A preferred shares ( 250 ) — — Net cash provided by (used in) investing activities 95,133 ( 435,447 ) 137,404 Cash flows from financing activities: Proceeds from issuance of convertible notes — — 20,000 Deferred financing costs — — ( 98 ) Payment of notes payable principal — ( 30,925 ) ( 18,752 ) Issuance of common stock, net of early exercise liability 1,400 6,144 1,748 Proceeds from reverse recapitalization, net of transaction costs — 666,241 — Buyback and subsequent cancellation of common shares — — ( 957 ) Proceeds received for the exercise of public and private warrants — 390 — Issuance of common stock, net of stock issuance costs — 283,775 — Payment for the redemptions of public warrants — ( 85 ) — Treasury stock acquired ( 6,362 ) ( 147 ) — Acquisition of noncontrolling interest — — 3,903 Net cash (used in) provided by financing activities ( 4,962 ) 925,393 5,844 Net (decrease) increase in cash, cash equivalents, and restricted cash ( 113,755 ) 207,620 24,750 Cash, cash equivalents, and restricted cash, beginning of period 299,968 92,348 67,598 Cash, cash equivalents, and restricted cash , end of period $ 186,213 $ 299,968 $ 92,348 77 Reconciliation of cash and cash equivalents and restricted cash Cash and cash equivalents 103,791 299,968 92,348 Restricted cash 82,422 — — Total cash, cash equivalents, and restricted cash 186,213 299,968 92,348 Supplemental cash flow disclosures Cash paid during the period for interest $ — $ 1,677 $ 4,578 Cash paid during the year for health insurance industry fee — — 8,022 Supplemental disclosure of non-cash activities Conversion of preferred stock to common stock — 447,747 — Issuance of common stock related to convertible debt — 16,059 — Capital contribution for extinguishment of debt — 126,795 — Activities from Seek Dissolution 735 — — Issuance of common stock related to warrants exercised — 97,782 — Acquisition of public and private warrants — 147,582 — Issuance of common stock related to the exercise of public and private warrants — 81,283 — Right-of-use assets obtained in exchange for lease liabilities 642 1,076 42 Recognition of equity method investments and preferred stock 8,644 — — Derecognition of noncontrolling interest 3,903 — — Conversion of Character Biosciences, Inc. convertible note to preferred stock 250 — — The accompanying notes are an integral part of these consolidated financial statements. 78 CLOVER HEALTH INVESTMENTS, CORP. AND SUBSIDIARIES Notes to Audited Consolidated Financial Statements 1. Organization and Operations Clover Health Investments, Corp. (collectively with its affiliates and subsidiaries, "Clover" or the "Company") is focused on empowering physicians to identify and manage chronic diseases early. Clover has centered its strategy on building and deploying technology through its flagship software platform, Clover Assistant, to help America's seniors receive better care at lower costs. Clover provides affordable, high-quality Medicare Advantage plans, including Preferred Provider Organization ("PPO") and Health Maintenance Organization ("HMO") plans, through its regulated insurance subsidiaries. The Company's regulated insurance subsidiaries consist of Clover Insurance Company and Clover HMO of New Jersey Inc., which operate the Company's PPO and HMO health plans, respectively. On April 1, 2021, the Company's 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, through which the Company provides care to aligned Original Medicare beneficiaries (the "Non-Insurance Beneficiaries"). Medical Service Professionals of NJ, LLC, houses Clover's employed physicians and the related support staff for Clover's in-home care program. Clover's administrative functions and insurance operations are primarily operated by its Clover Health, LLC and Clover Health Labs, LLC subsidiaries. Clover's approach is to combine technology, data analytics, and preventive care to lower costs and increase the quality of health and life of Medicare beneficiaries. Clover's technology platform is designed to use machine learning-powered systems to deliver data and insights to physicians in order to improve outcomes for beneficiaries and drive down costs. Clover's MA plans generally provide access to a wide network of primary care providers, specialists, and hospitals, enabling its members to see any doctor participating in Medicare willing to accept them. Clover focuses on minimizing members' out-of-pocket costs and offers many plans that allow members to pay the same co-pays for primary care provider visits regardless of whether their physician is in- or out-of-network. Through its Non-Insurance operations, the Company assumes full risk (i.e., 100.0 % shared savings and shared losses) for the total cost of care of aligned Non-Insurance Beneficiaries, empowers providers with Clover Assistant, and offers a variety of programs aimed at reducing expenditures and preserving or enhancing the quality of care for Non-Insurance Beneficiaries. For additional information related to the Company's Non-Insurance operations, see Note 22 (Non-Insurance) in these financial statements. The Company was originally incorporated as a Cayman Islands exempted company on October 18, 2019, as a special purpose acquisition company under the name Social Capital Hedosophia Holdings Corp. III ("SCH"). On October 5, 2020, SCH entered into a Merger Agreement (the "Merger Agreement") with Clover Health Investments, Corp., a corporation originally incorporated on July 17, 2014, in the state of Delaware ("Legacy Clover"). Pursuant to the Merger Agreement, on January 7, 2021, Asclepius Merger Sub Inc., a Delaware corporation and a newly formed, wholly-owned subsidiary of SCH ("Merger Sub"), merged with and into Legacy Clover. The separate corporate existence of Merger Sub ceased, Legacy Clover survived and merged with and into SCH, with SCH as the surviving corporation, and SCH was redomesticated as a Delaware corporation and renamed Clover Health Investments, Corp. (the "2021 Business Combination"). The 2021 Business Combination was accounted for as a reverse recapitalization in accordance with generally accepted accounting principles in the United States ("GAAP"). Under the guidance in Accounting Standards Codification ("ASC") 805, Legacy Clover is treated as the "acquirer" for financial reporting purposes, Legacy Clover is deemed the accounting predecessor of the combined business, and Clover Health Investments, Corp., as the parent company of the combined business, is the successor Securities and Exchange Commission ("SEC") registrant, meaning that Legacy Clover's financial statements for previous periods are disclosed in periodic reports filed with the SEC. As a result of the 2021 Business Combination, there were simultaneous changes to Legacy Clover's convertible securities, warrants, and convertible preferred stock. See Note 5 (Fair Value Measurements), Note 12 (Notes and Securities Payable), and Note 16 (Stockholders' Equity and Convertible Preferred Stock) for additional information regarding these changes. See also Note 3 (Business Combination) for additional information related to the 2021 Business Combination. The 2021 Business Combination has had a significant impact on the Company's reported financial condition and results of operations as a consequence of the reverse recapitalization. The 2021 Business Combination closed on January 7, 2021, and on the following day the Company's Class A Common Stock and then outstanding public warrants were listed on the Nasdaq Global Select Market ("Nasdaq") for trading in the public market. 79 2. Summary of Significant Accounting Policies Basis of presentation The Company's consolidated financial statements have been prepared in conformity with GAAP and include the accounts of the Company and its wholly-owned subsidiaries. In the opinion of management, the Company has made all necessary adjustments, which include normal recurring adjustments, necessary for a fair presentation of its financial condition and its results of operations for the periods presented. All material intercompany balances and transactions have been eliminated in consolidating these financial statements. Investments over which we exercise significant influence, but do not control, are accounted for using the applicable accounting treatment based on the nature of the investment. Use of estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that impact the amounts reported in the consolidated financial statements and the accompanying notes. The areas involving the most significant use of estimates are the amounts of incurred but not reported claims. Many factors can cause actual outcomes to deviate from these assumptions and estimates, such as changes in economic conditions, changes in government healthcare policy, advances in medical technology, changes in treatment patterns, and changes in average lifespan. Accordingly, the Company cannot determine with precision the ultimate amounts that it will pay for, or the timing of payment of actual claims, or whether the assets supporting the liabilities will grow to the level the Company assumes prior to payment of claims. If the Company's actual experience is different from its assumptions or estimates, the Company's reserves may prove inadequate. As a result, the Company would incur a charge to operations in the period in which it determines such a shortfall exists, which could have a material adverse effect on the Company's business, results of operations, and financial condition. Other areas involving significant estimates include risk adjustment provisions related to Medicare contracts and the valuation of the Company's investment securities, goodwill and other intangible assets, reinsurance, premium deficiency reserve, warrants, embedded derivative related to convertible securities, stock-based compensation, recoveries from third parties for coordination of benefits, Direct Contracting benchmark, specifically cost trend and risk score estimates that can develop over time, and final determination of medical cost adjustment pools. Reclassifications Certain amounts in the prior years' Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Loss, and Consolidated Statements of Cash Flows have been reclassified to conform to the current year's presentation, primarily related to Surety bonds and deposits, Prepaid expenses, Property and equipment, net, Non-Insurance payable, and Other assets, current, Depreciation and amortization, and General and administrative expenses. Additionally, amounts within the prior years' Consolidated Statements of Operations and Comprehensive Loss related to Medicare Advantage ("MA") net medical claims incurred, direct contracting ("DC") net medical claims incurred, and other medical costs, have been combined to conform to the current year's presentation. These reclassifications had no material effect on the previously reported Consolidated Financial Statements. Deferred revenue Premiums earned, net is recognized as income in the period members are entitled to receive services, risk adjustment revenue, and other ancillary income. Premiums received in advance of the service period are reported as deferred revenue on the Consolidated Balance Sheets and recognized within Premiums earned, net once earned. Premiums anticipated to be received within twelve months based on the documented diagnostic criteria of the Company's members are estimated and included in revenue for the period including the member months for which the payment is designated by CMS. Equity method of accounting and variable interest entities Investments in entities in which the Company does not have control but its ownership falls between 20.0% and 50.0%, or it has the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method of accounting. The Company continuously assesses its partially-owned entities to determine if these entities are variable interest entities ("VIEs") and, if so, whether the Company is the primary beneficiary and, therefore, required to consolidate the VIE. To make this determination, the Company applies a qualitative approach to determine whether the Company has both the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE. If the Company has an interest in a VIE but is determined to not be the primary beneficiary, the Company accounts for the interest under the equity method of accounting. 80 When the Company's carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company's consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. Business Combinations The Company accounts for business acquisitions under ASC 805, Business Combinations. The total purchase consideration for an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities assumed at the acquisition date. Costs that are directly attributable to the acquisition are expensed as incurred. Identifiable assets (including intangible assets) and liabilities assumed (including contingent liabilities) in an acquisition are measured initially at their fair values at the acquisition date. The Company recognizes goodwill to the extent that the fair value of the total purchase consideration is in excess of the net fair value of the identifiable assets acquired and the liabilities assumed. The Company includes the results of operations of the acquired business in the consolidated financial statements beginning on the acquisition date. Segment information Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker ("CODM") in deciding how to allocate resources to an individual segment and in assessing performance. The Company's CODM is its Chief Executive Officer. The Company has two reporting segments: Insurance and Non-Insurance. Performance guarantees Certain of the Company's arrangements with third-party providers require it to guarantee the performance of its care network to CMS. As a result of the Company's participation in the DC Model, the Company determined that it was making a performance guarantee with respect to providers under the Non-Insurance arrangement that should be recognized in the financial statements. The performance guarantee identified relates to the Company guaranteeing the performance of the third-party medical providers. Thus, the contract with CMS is accounted for as a performance guarantee under ASC 460-Guarantees. At the inception of the performance year, the Company measures and recognizes the performance guarantee receivable and obligation, issued in this standalone arm's length transaction, using the practical expedient to fair value as set forth in ASC 460-10-30-2(a). The Company estimates the annualized benchmark, which is the amount recognized in both the Non-Insurance performance year receivable and the Non-Insurance performance year obligation, current. This is consistent with ASC 460-10-25-4, which provides that a guarantor shall recognize in its statement of financial position a liability for that guarantee. In addition, when the guarantee is issued in a standalone transaction for a premium, the offsetting entry should be considered received (such as cash or a receivable) according to ASC 460-10-25-4. Thus the Company recognizes the Non-Insurance performance year receivable on its Consolidated Balance Sheets. To subsequently measure and recognize the performance guarantee, the Company follows ASC 460-10-35-2(b) and applies a systematic and rational approach to reflect its release from risk. Under this approach, the Company amortizes on a straight-line basis over the performance year, the obligation. The Company has determined this systematic and rational method is appropriate, as it matches the period in which the guarantee is fulfilled. In addition, ASC 460-10-35-2 provides further guidance on the subsequent measurement related to the Company's performance guarantee. Per ASC 460-10-35-2, depending on the nature of the guarantee, the guarantor's release from risk typically can be recognized over the term of the guarantee using one of three methods: (1) upon expiration or settlement, (2) by systematic or rational amortization, or (3) as the fair value of the guarantee changes. The Company has determined that method (2) is the appropriate method of recognition as discussed above. With respect to each performance year in which the DCE is a participant, the final consideration due to the DCE from CMS ("shared savings") or the consideration due to CMS from the DCE ("shared loss") is reconciled in the subsequent years following the performance year. The shared savings or loss is measured periodically and will be applied to the Non-Insurance performance obligation, current or Non-Insurance performance receivable if the Company is in a probable loss position or probable savings position, respectively. The DCE has entered into an agreement with CMS and a third-party to cover the financial threshold determined by CMS. Within Surety bonds and deposits on the Consolidated Balance Sheets, the Company includes amounts held in escrow related to the financial guarantee as required with CMS, which is considered restricted cash in nature which is shown on the Company's Consolidated Statements of Cash Flow. Cash and cash equivalents Cash and cash equivalents include cash on hand, amounts due from banks, money market instruments and other highly liquid investments with original maturities of 90 days or less. The carrying values of these instruments approximate their respective fair value due to the short-term maturity of these investments. 81 At December 31, 2022 and 2021, the Company had Cash and cash equivalents at financial institutions, which are insured by the Federal Deposit Insurance Corporation (FDIC). At times, balances may exceed the FDIC insured limits. Management believes that credit risk related to those balances is minimal. Investment securities Short-term investments Short-term investments consist of investments that the Company expects to convert into cash within one year of the balance sheet date, including time deposits and debt securities, which have original maturities greater than 90 days. Short-term investments are measured at their amortized cost. The carrying values of these instruments approximate their respective fair value due to the short-term maturity of these investments. Investment securities, available-for-sale Investment securities, which consist entirely of debt securities with fixed or determinable payments and fixed maturity dates, that the Company purchases that are not classified as held-to-maturity, are classified as available-for-sale financial assets. The Company's available-for-sale investments are U.S. Treasury fixed maturity securities. Available-for-sale investments are measured at fair value, and unrealized gains and losses, if any, are recorded in other comprehensive income, net of applicable income taxes, until realized from a sale or an expected credit loss is recognized. Investment securities, held-to-maturity Investment securities, which consist entirely of debt securities with fixed or determinable payments and fixed maturity dates, where the Company has a positive intent and ability to hold to maturity, are classified as held-to-maturity financial assets. The Company's held-to-maturity investments are comprised of U.S. Treasury fixed maturity securities. The held-to-maturity investments are measured at amortized cost using the effective interest method less impairment. Unrealized holding gains or losses are not recognized. Impairment of investment securities Effective January 1, 2021, the Company adopted the provisions of ASC 326 and modified its accounting policy for the assessment of available-for-sale and held-to-maturity securities for impairment, as further described below. Prior to January 1, 2021, the Company applied the other-than-temporary impairment model for available-for-sale securities in an unrealized loss position which did not result in impairments for 2020 or 2019. Beginning on January 1, 2021, the Company adopted ASC 326, which retained many similarities from the previous other-than-temporary impairment model but eliminated the consideration of the length of time over which the fair value had been less than cost. Additionally, under ASC 326, the expected losses on securities are recognized through an allowance for credit losses rather than as a reduction in the amortized cost of the security. The Company identifies securities that are in an unrealized loss position and could potentially have an impairment. This process involves monitoring market events that could impact issuers' credit ratings, business climate, management changes, litigation and government actions, and other similar factors. This process also involves monitoring late payments, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit risks. The Company considers relevant facts and circumstances in evaluating the impairment of a security. Relevant facts and circumstances considered include (1) the extent to which the fair value has been below cost or amortized cost, (2) adverse conditions specifically related to the financial condition of the issuer or to the industry, (3) geographic area of the issuer, or the underlying collateral of a security including the current and future impact of any specific events, (4) the payment structure of the security, (5) changes in credit rating of the security by the rating agencies, and (6) the volatility of the fair value changes. There are a number of significant risks and uncertainties inherent in the process of monitoring impairments. These risks and uncertainties include (1) the risk that management's assessment of an issuer's ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer, (2) the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated, (3) erroneous information or fraudulent financial statements could be provided to the Company's management to determine the fair value estimates and impairments, and (4) the risk that new information obtained by the Company, or changes in other facts and circumstances, could lead the Company to change its intent to hold the security to maturity or until it recovers in value. Any of these situations could result in a charge to operations in a future period. For available-for-sale securities whose fair value is less than their amortized cost that the Company does not intend to sell or is not required to sell, management evaluates the expected cash flows to be received as compared to amortized cost and determines if an expected credit loss has occurred. If an expected credit loss occurs, only the amount of the impairment related to the expected credit loss is recognized in income with the remainder, if any, of the loss recognized in other comprehensive income. 82 To the extent the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis, management recognizes an impairment loss in income in an amount equal to the full difference between the amortized cost basis and the fair value. Expected cash flows to be received are evaluated as compared to amortized cost to determine if a credit loss has occurred. The amount of the credit loss component of the security is estimated as the difference between the amortized cost and the present value of the expected cash flows of the security. In developing the expected recovery analysis for debt securities, the Company reviews business prospects, credit ratings and available information from asset managers and rating agencies for individual securities. The present value is determined using the best estimate of future cash flows discounted at the implicit interest rate at the date of purchase. For the years ended December 31, 2022, 2021, and 2020, there was no impairment loss reported. Held-to-maturity securities are evaluated for potential credit loss on a collective basis. The estimate of credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Allowance for expected credit losses The Company assesses outstanding receivables at each period for credit risk. The majority of receivables are from CMS, a United States government entity that presents very limited credit risk. Other income Other income consists of income from operating subleases, miscellaneous revenue, investment income, commissions, and realized gains and losses. Investment income includes interest, dividends received or accrued on investments, and realized gains or losses. Investment income is reported as earned and is presented net of related investment expenses and expected credit losses. Realized gains or losses are recognized based on the specific identification method. Purchases and sales are recorded on a trade-date basis. Fair value measurements Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between willing, able and knowledgeable market participants at the measurement date. Fair value measurements are not adjusted for transaction costs. To determine the fair value of its investments, the Company utilizes third-party valuation service providers to gather, analyze and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments. Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested under the terms of service agreements. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, currency rates and other market observable information, as applicable. The valuation models consider, among other things, observable market information as of the measurement date as well as the specific attributes of the security being valued including its term, interest rate, credit rating, industry sector and, when applicable, collateral quality and other issue or issuer specific information. When market transactions or other observable market data is limited, the extent to which judgment is applied in determining fair value is greatly increased. Assets and liabilities measured at fair value are categorized into a fair value hierarchy based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs are those that market participants operating within the same marketplace as the Company would use in pricing the Company's assets or liabilities based on independently derived and observable market data. Unobservable inputs are inputs that cannot be sourced from a broad active market in which assets or liabilities identical or similar to those of the Company are traded. The fair value hierarchy includes three levels of inputs based on the degree to which the exit price is independently observable or determinable that may be used to measure fair value as described below: Level 1 – Valuations are based on quoted (unadjusted) market prices in active markets for identical assets or liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis; 83 Level 2 – Valuations are based on observable inputs other than Level 1 prices such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; Level 3 – Valuations are based on techniques that use significant inputs that are unobservable and reflect management's best estimate of what market participants would use when pricing the asset or liability, including assumptions about risk. The valuation of Level 3 assets and liabilities requires the greatest degree of judgment. These measurements may be made under circumstances in which there is little, if any, market activity for the asset or liability. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, the Company considers factors specific to the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Fair values of actively traded investments securities are based on quoted market prices. Fair values of other investment securities are based on quoted market prices of identical or similar securities or based on observable inputs, like interest rates generally using a market valuation approach, or, less frequently, an income valuation approach, and are generally classified as Level 2. The Company obtains at least one price for each security from a third-party pricing service. These prices are generally derived from recently reported trades for identical or similar securities, including adjustments through the reporting date based upon observable market information. When quoted prices are not available, the third-party pricing service may use quoted market prices of comparable securities or a discounted cash flow analysis, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include benchmark yields, reported trades, credit spreads, broker quotes, default rates, and prepayment speeds. Concentrations of credit risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of Cash and cash equivalents. Cash and cash equivalents are held with financial institutions of high quality. Balances may exceed the amount of insurance provided on such balances. The ceding of insurance does not legally discharge the Company from its primary liability for the full amount of the policy coverage, and therefore the Company will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. To minimize exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk with its reinsurers. Capitalized software development costs - cloud computing arrangements The Company's cloud computing arrangements are mostly comprised of hosting arrangements that are service contracts, whereby the Company gains remote access to use enterprise software hosted by the vendor or another third party on an as-needed basis for a period of time in exchange for a subscription fee. Implementation costs for cloud computing arrangements are capitalized if certain criteria are met and consist of internal and external costs directly attributable to developing and configuring cloud computing software for its intended use. These capitalized implementation costs are presented in the Consolidated Balance Sheets within Prepaid expenses, and are generally amortized over the fixed, non-cancelable term of the associated hosting arrangement on a straight-line basis. Deferred acquisition costs Acquisition costs directly related to the successful acquisition of new business, which are primarily made up of commissions costs, are deferred and subsequently amortized. Deferred acquisition costs are recorded within Other assets, current on the Consolidated Balance Sheets and are amortized over the estimated life of the related contracts. The amortization of deferred acquisition costs is recorded within General and administrative expenses within the Consolidated Statement of Operations and Comprehensive Loss. At December 31, 2022 and 2021, there were no deferred acquisition costs as a result of the acceleration of amortization for deferred acquisition costs due to the recognition of a premium deficiency reserve. For the years ended December 31, 2022 and 2021, charges related to deferred acquisition costs of $ 16.3 million, and $ 10.7 million, respectively, were recognized within General and administrative expenses. There was no amortization expense of deferred acquisition costs for the year ended December 31, 2020. 84 Property and equipment, net Property and equipment, net is reported at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets, which are generally three to seven years. Leasehold improvements are amortized over the shorter of the remaining lease term or estimated useful life of the leasehold improvement. Repairs and maintenance costs are expensed as incurred. Costs related to the development of internal-use software that do not meet capitalization criteria are expensed as incurred. Gains and losses on sales or disposals of property and equipment are included within Other income (loss). Property and equipment is reviewed for impairment periodically whenever adverse events or changes in circumstances indicate the carrying value of the asset may not be recoverable. Losses are recognized in operations when the undiscounted future cash flows expected to result from the use of the asset are less than its carrying value. An impairment loss is recognized based on the excess of the carrying value over the fair value of the asset. Goodwill and other intangible assets Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment on an annual basis at a level of reporting referred to as the reporting unit, and more frequently if adverse events or changes in circumstances indicate that the asset may be impaired. A component is considered a reporting unit if the component constitutes a business for which discrete financial information is available that is regularly reviewed by management. Management aggregates components into one reporting unit if they have similar economic characteristics. Goodwill is assigned to the reporting units that are expected to benefit from the specific synergies of the business combination. Management reviews goodwill for impairment to determine both the existence and amount of goodwill impairment, if any. Impairment tests are performed, at a minimum, in the fourth quarter of each year. Management first uses a qualitative assessment to determine if it is more likely than not that a reporting unit is impaired. The qualitative test is used as a screening to help determine if it is necessary to perform the quantitative test. If there are indicators that the fair value is less than the carrying amount of any reporting unit, management performs a quantitative assessment where management allocates the fair value of the reporting units to the assets and liabilities with the unallocated fair value representing an implied fair value of goodwill which is then compared to the carrying amount of goodwill. The impairment review requires management to make judgments in determining various assumptions with respect to changes in economic conditions, revenues, operating margins, growth rates and discount rates. There was no impairment of goodwill during the years ended December 31, 2022, 2021, and 2020. Other intangible assets arising from business combinations are initially recognized at fair value at the date of acquisition. Other intangible assets with indefinite useful lives are tested for impairment at least annually, or more frequently if events or changes in circumstances indicate that the assets may be impaired. The annual impairment test for indefinite-lived intangible assets may be completed through a qualitative assessment to determine if the fair value of the indefinite-lived intangible assets is more likely than not greater than the carrying amount. The Company may elect to bypass a qualitative assessment, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value exceeds the fair value, the Company will test for impairment using a quantitative process. If the Company determines that impairment of its intangible assets may exist, the amount of impairment loss is measured as the excess of carrying value over fair value. The estimates in the determination of the fair value of indefinite-lived intangible assets include the anticipated future revenues of the Company and the resulting cash flows. At December 31, 2022 and 2021, there were no circumstances that indicate that the carrying amount of intangible assets deemed to have an indefinite useful life may not be recoverable. Reinsurance In the normal course of business, the Company seeks to reduce losses by reinsuring certain levels of risk in areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. To minimize exposure to losses related to a reinsurer's inability to pay, the financial condition of such reinsurer is evaluated initially upon placement of the reinsurance and periodically thereafter. In addition to considering the financial condition of a reinsurer, the expected credit losses of Reinsurance recoverable is evaluated based upon a number of factors. Such factors include the amounts outstanding, history of losses, ratings of reinsurers, disputes, any collateral or letters of credit held and other relevant factors. The Company had no material credit allowances for Reinsurance recoverable at December 31, 2022 and 2021. Amounts recoverable from reinsurers are estimated in a manner consistent with the liability associated with the reinsured business and consistent with the terms of the underlying contracts. Although reinsurance agreements contractually obligate reinsurers to reimburse the Company for their share of losses, they do not discharge the primary liability of the Company. The Company remains liable for unpaid claims and claims adjustment expenses associated with ceded insured risks if the assuming reinsurers fail to meet their contractual obligations. The costs of the reinsurance are recognized over the life of the contract in a manner consistent with the earning of premiums on the underlying policies subject to the reinsurance contracts. 85 Unpaid claims Unpaid claims and unpaid claims adjustment expenses include reported claims and incurred but not yet reported ("IBNR") claims, as well as the estimated expense of processing these claims. Management develops an estimate for IBNR using actuarial methodologies and assumptions, primarily based upon historical claim experience. Although there is considerable variability in such estimates, management believes that the unpaid claims and unpaid claims adjustment expense liability is adequate and represents management's best estimate of the ultimate cost of all reported and unreported claims incurred through the balance sheet date. The estimates are continually reviewed and adjusted as experience develops or new information becomes known. Changes in estimates are reflected in current consolidated operating results. Liabilities for both reported claims and IBNR not yet processed through the Company's systems are determined in the aggregate, employing actuarial methods that are commonly used by health insurance actuaries and meet actuarial standards of practice. Actuarial standards of practice require that the claim liabilities be appropriate under moderately adverse circumstances. Clover determines the amount of the liability for incurred but not paid claims by following a detailed actuarial process that uses both historical claim payment patterns as well as emerging medical cost trends to project the best estimate of claim liabilities. Under this process, historical paid claims data is formatted into "claim triangles," which compare claim incurred dates to the dates of claim payments. This information is analyzed to create "completion factors" that 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. Actuarial estimates of incurred but not paid claim liabilities are then determined by subtracting the actual paid claims from the estimate of the ultimate incurred claims. The Company's reserving practice is to consistently recognize an actuarial best estimate inclusive of a provision for moderately adverse conditions. This provision is reported as part of incurred claims. Medical claims incurred The Company recognizes the cost of medical claims in the period in which services are provided, including an estimate of the cost of medical claims IBNR. This methodology is applied for both the Company's Insurance and Non-Insurance operations. Medical claim expense reported within the Consolidated Statements of Operations and Comprehensive Loss includes direct medical expenses. Direct medical expenses include amounts paid or payable to hospitals, physicians, pharmacy benefit managers, providers of ancillary services, mandatory supplemental benefits, and is inclusive of the medical expense related to the Company's employed clinicians providing in-home care. Recorded direct medical expenses are reduced by the amount of pharmacy rebates earned, which are estimated based on historical utilization of specific pharmaceuticals, current utilization and contract terms. Pharmacy rebates earned but not yet received from pharmaceutical manufacturers are included within Healthcare receivables within the Consolidated Balance Sheets. Overpayments to providers are recognized as a contra medical expense and reported within Other receivables within the Consolidated Balance Sheets. Premium deficiency reserve A liability for premium deficiency reserves is an actuarial estimate for anticipated losses on the Company's MA and MA Part D ("MAPD") business. Management reassesses the profitability of contracts for providing insurance coverage to members when operating results or forecasts indicate probable future losses. Management establishes a premium deficiency reserve in current operations to the extent that the sum of expected future costs, claim adjustment expenses, and maintenance costs exceeds related future premiums under contracts without consideration of investment income. For purposes of calculating premium deficiency reserves, management groups contracts in a manner consistent with the method of acquiring, servicing, and measuring the profitability of such contracts. Losses recognized as a premium deficiency are recorded in the period in which such losses were identified and reflected within the Consolidated Statements of Operations and Comprehensive Loss. Losses recognized as a premium deficiency result in a beneficial effect in subsequent periods as operating losses under these contracts are charged to the liability previously established. The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010 (the "Health Care Reform Law") enacted significant reforms to various aspects of the U.S. health insurance industry. As part of the Health Care Reform Law, insurance industry assessments were established, including an annual health insurance industry fee ("HIF"), which became effective in 2014. The HIF was applicable in 2018, suspended in 2019, and resumed for calendar year 2020. The HIF is not deductible for income tax purposes. The 2019 Premium deficiency reserve was inclusive of the 2020 HIF. The Company estimates a liability for 86 the HIF and records it in full once qualifying insurance coverage is provided in the applicable calendar year in which the fee is payable, with a corresponding deferred cost that is amortized ratably to expense over the same calendar year. The deferred cost is recorded within other assets on the Consolidated Balance Sheets. The Company paid the federal government approximately $ 8.0 million for the HIF in 2020, which is reflected within the Consolidated Statements of Operations and Comprehensive Loss. The HIF was repealed and no longer effective in years subsequent to 2020. Notes and securities payable Debt issuance costs Costs incurred in connection with Company's debt financings are capitalized and amortized to Interest expense over the life of the related debt using the effective interest method. Debt issuance costs are presented as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts. Revenue recognition Premiums earned, net Premiums revenue is recognized as income in the period members are entitled to receive services, and is net of estimated uncollectible amounts, retroactive membership adjustments, and any adjustments to recognize rebates under the minimum benefit ratios required under the Health Care Reform Law. Premiums received in advance of the service period are reported within other liabilities on the Consolidated Balance Sheets and recognized as revenue when earned. Premiums anticipated to be received within twelve months based on the documented diagnostic criteria of the Company's enrollees are estimated and included in revenue for the period including the member months for which the payment is designated by CMS. CMS uses a risk-adjustment model which adjusts premiums paid to MA contracts, based on risk scores that are compared with the overall average risk scores for the relevant state and market pool. Generally, if a risk score is below the average risk score the Company is required to make a risk adjustment payment into the risk pool, and if a risk score is above the average risk score the Company receives a risk adjustment payment from the risk pool. Risk adjustments can have a positive or negative retroactive impact to rates. Under this model, rates paid to MA plans are based on actuarially determined bids, which include a process whereby prospective payments are based on the Company's estimated cost of providing standard Medicare-covered benefits to a member with an average risk profile. That baseline payment amount is adjusted to reflect the health status of enrolled membership. Under the risk-adjustment methodology, all MA plans must collect and submit the necessary diagnosis code information to CMS within prescribed deadlines. Estimated audit settlements are recorded as a reduction of premiums revenue within the Company's Consolidated Statements of Operations and Comprehensive Loss, based upon available information. Retrospective premiums involve the evaluation of past claims experience for the purpose of determining the actual cost of providing insurance for the customer. This evaluation is performed once every year and retrospective premiums are recognized in the year earned. MAPD revenue Payments received from CMS and members from Clover's participation in the MAPD program are determined from the Company's annual bid and represent amounts for providing prescription drug insurance coverage and are recognized as premium revenue ratably over the term of the annual contract. Such CMS payments are subject to risk sharing through risk corridor provisions. The risk corridor provisions compare costs targeted in bids to actual prescription drug costs, limited to actual costs that would have been incurred under the standard coverage as defined by CMS. Variances exceeding certain thresholds may result in CMS making additional payments to the Company or require the Company to refund to CMS a portion of the premiums received. As risk corridor provisions are considered in the overall annual bid process, management estimates and recognizes an adjustment to premiums revenue related to these provisions based upon pharmacy claims experience. Management records a receivable or payable at the contract level on the Consolidated Balance Sheets. Reinsurance and low-income cost subsidies represent funding from CMS in connection with the MAPD program for which Clover assumes no risk. Reinsurance subsidies represent funding from CMS for its portion of prescription drug costs which exceed the member's out-of-pocket threshold, or the catastrophic coverage level. Low-income cost subsidies represent funding from CMS for all or a portion of the deductible, the coinsurance and co-payment amounts above the out-of-pocket threshold for low-income beneficiaries. 87 Payments from CMS for reinsurance and low-income cost subsidies are based on assumptions submitted with the annual bid. A reconciliation and related settlement of CMS' prospective subsidies against actual prescription drug costs paid is made after the end of the year. Consumer discounts of 50.0% on brand name prescription drugs for participants in the coverage gap are funded by CMS and pharmaceutical manufacturers. The Company accounts for these subsidies and discounts within other assets in the Consolidated Balance Sheets and as an operating activity in the Consolidated Statements of Cash Flows. The Company does not recognize premiums revenue or claim expenses for these subsidies or discounts. Leases At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement including the use of an identified asset(s) and the Company's control over the use of that identified asset. The Company does not recognize leases with a lease term of one year or less on its Consolidated Balance Sheets. Leases with a term greater than one year are recognized on the balance sheet as right-of-use ("ROU") assets and lease liabilities. The Company has sublease arrangements and recognizes sublease income from leasing excess space. Sublease income is recognized on a straight-line basis over the sublease term. At December 31, 2022 and 2021, the Company did not have any financing leases. Lease liabilities and their corresponding ROU assets are initially recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the ROU asset may be required for items such as incentives received or initial direct costs. When an option to extend the lease exists, a determination is made whether that option is reasonably certain of exercise based on economic factors present at the measurement date and as circumstances may change. At December 31, 2022 and 2021, the Company did not include optional extension periods in the measurement of its leases as they were not reasonably certain of exercise. The Company monitors its plans to renew its material leases on a quarterly basis. Where the rates implicit in the Company's leases are not readily determinable, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment over the lease term. Historically, the rate implicit in the leases has not been readily determinable and the appropriate incremental borrowing rate has been utilized. To estimate the appropriate incremental borrowing rate, a credit rating applicable to the Company is estimated using a synthetic credit rating analysis since the Company does not currently have a rating agency-based credit rating. Components of a lease are split into three categories: lease components, non-lease components, and non-components. The fixed and in-substance fixed contract consideration (including any consideration related to non-components) are allocated, based on the respective relative fair values, to the lease components and non-lease components. The Company has elected to account for lease and non-lease components together as a single lease component for all underlying assets and allocate all of the contract consideration to the lease component only. In determining the classification of a lease as operating or finance, ASC 842, Leases , allows for the use of judgment in determining whether the assumed lease term is for a major part of the remaining economic life of the underlying asset and whether the present value of lease payments represents substantially all of the fair value of the underlying asset. The Company applies the bright line thresholds referenced in the lease guidance of 75.0% to represent "a major part" and 90.0% to represent "substantially all" as allowed in ASC 842 in evaluating leases for appropriate classification. These are applied consistently to the Company's entire portfolio of leases. Stock-based compensation The Company accounts for all stock-based payment awards granted to employees and non-employees as stock-based compensation expense at fair value. The Company's stock-based payments include stock options, restricted stock units, and grants of common stock, including common stock subject to vesting. The measurement date for employee awards is the grant date, and stock-based compensation costs are recognized as expense over the employees' requisite service periods, which are the vesting periods, on a straight-line basis. Nonemployee share-based payment equity awards are measured at the grant-date fair value of the equity instruments, similar to employee share-based payment equity awards. 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 within the accompanying Consolidated Statements of Operations and Comprehensive Loss within Salaries and benefits. The Company recognizes stock-based compensation expense for the portion of awards that have vested. Forfeitures are recorded as they occur. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The expected term of the Company's stock options has been determined utilizing the "simplified" method for awards that qualify as "plain-vanilla" options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future. 88 Comprehensive income Comprehensive income is a measurement of certain changes within Stockholders' equity that results from transactions and other economic events other than transactions with the stockholders. The cumulative amount of these changes is reported on the Consolidated Balance Sheets. Contingent liabilities The Company records a provision for a contingent liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. Federal income taxes The Company recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets or liabilities and their reported amounts in the consolidated financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. The Company also recognizes the future tax benefits such as net operating and capital loss carryforwards as deferred tax assets. A valuation allowance is provided against these deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. Future years' tax expense may be increased or decreased by adjustments to the valuation allowance or to the estimated accrual for income taxes. Deferred tax assets and deferred tax liabilities are further adjusted for changes in the enacted tax rates. At December 31, 2022 and 2021, sufficient doubt existed over the Company's ability to generate sufficient taxable income to realize its deferred income tax assets, and accordingly, the Company provided a full valuation allowance against its deferred tax assets. The Company records tax benefits when it is more likely than not that the tax return position taken with respect to a particular transaction will be sustained. A liability for an uncertain tax position, if recorded, is not considered resolved until the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired, or the tax position is ultimately settled through examination, negotiation, or litigation. The Company did not have any material uncertain tax positions during the years ended December 31, 2022 and 2021. The Company classifies interest and penalties associated with uncertain tax positions in its provision for income taxes. The Company did no t incur or record any interest and penalties related to uncertain tax positions at or during the years ended December 31, 2022, 2021, and 2020. General and administrative expenses General and administrative expenses include professional service fees, outside legal, tax and accounting service fees, insurance, software application and system expenses, advertising and marketing, lease and occupancy costs and other overhead costs. General and administrative expenses also include claim adjudication and processing costs. Net loss per share The Company follows the two-class method when computing net loss per share as the Company has issued shares that meet the definition of participating securities. The two-class method determines net loss per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss attributable to common stockholders is computed by adjusting net loss attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net loss per share attributable to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potentially dilutive common shares. For purposes of this calculation, outstanding stock options, convertible preferred stock and warrants to purchase shares of convertible preferred stock are considered potential dilutive common shares. The Company's convertible preferred stock contractually entitled the holders of such shares to participate in dividends but did not contractually require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reported a net loss attributable to common stockholders, such losses were not allocated to such participating securities. In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not 89 assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss attributable to common stockholders for the years ended December 31, 2022, 2021, and 2020. Recent accounting pronouncements Recently adopted accounting pronouncements There have been no new accounting pronouncements adopted since the filing of the Annual Report on Form 10-K for the year ended December 31, 2021 that are expected to materially impact the Company's consolidated financial statements. Accounting pronouncements effective in future periods In August 2018, the FASB issued ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, which was subsequently amended by ASU 2019-09, Financial Services—Insurance (Topic 944): Effective Date and ASU 2020-11, Financial Services—Insurance (Topic 944): Effective Date and Early Application . ASU 2020-11 was issued in consideration of the implications of COVID-19 and to provide transition relief and additional time for implementation by deferring the effective date by one year. The amendments in ASU 2018-12 make changes to a variety of areas to simplify or improve the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. The amendments require insurers to annually review the assumptions they make about their policyholders and update the liabilities for future policy benefits if the assumptions change. The amendments also simplify the amortization of deferred acquisition costs and add new disclosure requirements about the assumptions used to measure liabilities and the potential impact to future cash flows. The amendments related to the liability for future policy benefits for traditional and limited-payment contracts and deferred acquisition costs are to be applied to contracts in force as of the beginning of the earliest period presented, with an option to apply such amendments retrospectively with a cumulative-effect adjustment to the opening balance of retained earnings as of the earliest period presented. The amendments for market risk benefits are to be applied retrospectively. ASU 2020-11 is effective for public entities for periods beginning after December 15, 2022. The Company adopted this standard on January 1, 2023. The adoption of ASU 2018-12 and related amendments is not expected to have a material impact on the Company's financial statements. 3. Business Combinations 2022 Business Combination On November 14, 2022, the Company entered into a securities purchase agreement with an electronic health record software provider, Juxly, Inc. ("Juxly"), to acquire 100 % of the outstanding equity interests of Juxly, for a total purchase price of approximately $ 16.5 million of which $ 3.0 million is considered contingent consideration and the maximum amount estimated to be paid (the "2022 Business Combination"). The acquisition of Juxly was entered into as part of Clover's broader strategy of integrating Clover Assistant into existing electronic health record platforms deployed in the health care environment. The goodwill resulting from the transaction that was recorded by the Company was approximately $ 10.5 million. The total acquisition related costs were $ 0.2 million and were recognized in the Company's Consolidated Statement of Operations and Comprehensive Loss within General and administrative expenses. The acquisition described above was accounted for using the acquisition method of accounting, which requires, among other things, the assets acquired and the liabilities assumed be recognized at their fair values as of the acquisition date. The results of the acquisition were included within the consolidated financial statements commencing on the respective acquisition date. 90 The following table summarizes the fair value estimates of the assets acquired and liabilities assumed for the Juxly acquisition. November 14, 2022 (in thousands) Cash and cash equivalents $ 320 Prepaid expenses 38 Accounts receivable 326 Current assets 684 Property and equipment, net 47 Goodwill and other intangible assets (1) (2) 15,907 Total assets acquired $ 16,638 Accounts payable and accrued expenses $ 38 Accrued salaries and benefits 31 Current taxes payable 43 Total liabilities assumed $ 112 Fair value of net assets acquired $ 16,526 Fair value of acquisition consideration $ 16,526 (1) Includes the fair value of Juxly's developed technology, which is being amortized on a straight-line basis over 5 years. The developed technology was valued using the cost approach and the useful life was estimated based on the time to recover the related future discounted cash flows. (2) Includes the difference between the purchase price over the net identifiable tangible and intangible assets acquired allocated to goodwill, which is not deductible for tax purposes. Goodwill was assigned to Corporate/Other. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of Juxly. Juxly's results of operations have been included in the Company's consolidated financial statements beginning on November 14, 2022. Juxly contributed revenue of $ 0.1 million and net loss of $ 0.4 million (after amortization of non-cash purchase accounting adjustments and transition and transaction costs) for the period from the date of acquisition through December 31, 2022. 2021 Business Combination As a result of the Merger Agreement, among other things, (i) all outstanding shares of common stock of Legacy Clover immediately prior to the effective time of the First Merger were canceled in exchange for the right to receive, at the election of the holders thereof (except with respect to the shares held by entities controlled by Vivek Garipalli and the holders of convertible securities previously issued by Legacy Clover to certain holders who received only shares of Class B Common Stock, par value $ 0.0001 per share, of Clover (Class B Common Stock), which are entitled to 10 votes per share), an amount in cash, shares of Class B Common Stock, or a combination thereof, as adjusted in accordance with the Merger Agreement, which equaled in the aggregate $ 499.8 million in cash and 260,965,701 shares of Class B Common Stock (at a deemed value of $ 10.00 per share); (ii) shares of Legacy Clover held by entities controlled by Vivek Garipalli and the holders of the convertible securities immediately prior to the effective time of the First Merger were canceled in exchange for the right to receive shares of Class B Common Stock based on an Exchange Ratio (as defined in the Merger Agreement) of approximately 2.0681 ; and (iii) all shares of common stock of Legacy Clover reserved in respect of Legacy Clover stock options and restricted stock units outstanding as of immediately prior to the effective time of the First Merger, were converted, based on the Exchange Ratio, into awards based on shares of Class B Common Stock. The consideration that a Clover stockholder received was subject to pro rata adjustment depending on the election made by such stockholder, if any, in accordance with the terms of the Merger Agreement. The pro rata adjustments were made based on an Actual Cash/Stock Ratio (as defined in the Merger Agreement) of 32.3 %. Immediately after giving effect to the 2021 Business Combination and the PIPE Investment, there were 143,475,108 shares of Class A Common Stock, 260,965,701 shares of Class B Common Stock and 38,533,271 warrants outstanding, equaling 404,440,809 total shares of common stock outstanding and 38,533,271 warrants outstanding. The transaction closed on January 7, 2021, and on the following day the Company's Class A Common Stock and public warrants were listed on the Nasdaq Global Select Market (Nasdaq) under the symbols "CLOV" and "CLOVW," respectively, for trading in the public market. 91 See also Note 5 (Fair Value Measurements), Note 12 (Notes and Securities Payable), and Note 17 (Stockholders' Equity and Convertible Preferred Stock) for additional information regarding changes to the instruments as a result of the 2021 Business Combination. 4. Investment Securities The following tables present amortized cost and fair values of investments at December 31, 2022 and 2021, respectively: December 31, 2022 Amortized cost Accumulated unrealized gains Accumulated unrealized losses Fair value (in thousands) Investment securities, held-to-maturity U.S. government and government agencies and authorities $ 757 $ — $ ( 106 ) $ 651 Investment securities, available-for-sale U.S. government and government agencies and authorities 237,457 10 ( 9,000 ) 228,467 Corporate debt securities 98,783 38 ( 422 ) 98,399 Total held-to-maturity and available-for-sale investment securities $ 336,997 $ 48 $ ( 9,528 ) $ 327,517 December 31, 2021 Amortized cost Accumulated unrealized gains Accumulated unrealized losses Fair value (in thousands) Investment securities, held-to-maturity U.S. government and government agencies and authorities $ 640 $ 40 $ ( 9 ) $ 671 Investment securities, available-for-sale U.S. government and government agencies and authorities 198,669 10 ( 1,944 ) 196,735 Total held-to-maturity and available-for-sale investment securities $ 199,309 $ 50 $ ( 1,953 ) $ 197,406 The following table presents the amortized cost and fair value of debt securities at December 31, 2022, by contractual maturity: December 31, 2022 Held-to-maturity Available-for-sale Amortized cost Fair value Amortized cost Fair value (in thousands) Due within one year $ 15 $ 15 $ 193,300 $ 189,498 Due after one year through five years 632 543 142,940 137,368 Due after five years through ten years — — — — Due after ten years 110 93 — — Total $ 757 $ 651 $ 336,240 $ 326,866 92 For the years ended December 31, 2022, 2021, and 2020, respectively, net investment income, which is included within Other income within the Consolidated Statements of Operations and Comprehensive Loss, was derived from the following sources: Years ended December 31, 2022 2021 2020 (in thousands) Cash and cash equivalents $ 3,619 $ 1 $ 108 Short-term investments 1,797 195 1,722 Investment securities 2,127 348 1,146 Investment income, net $ 7,543 $ 544 $ 2,976 Gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows at December 31, 2022, and December 31, 2021, respectively: December 31, 2022 Less than 12 months Greater than 12 months Total Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss (in thousands, except number of positions) U.S. government and government agencies and authorities $ 64,261 $ ( 958 ) $ 147,757 $ ( 8,148 ) $ 212,018 $ ( 9,106 ) Corporate debt securities 78,292 ( 422 ) — — 78,292 ( 422 ) Total $ 142,553 $ ( 1,380 ) $ 147,757 $ ( 8,148 ) $ 290,310 $ ( 9,528 ) Number of positions 92 24 116 December 31, 2021 Less than 12 months Greater than 12 months Total Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss (in thousands, except number of positions) U.S. government and government agencies and authorities $ 187,251 $ ( 1,555 ) $ 7,902 $ ( 398 ) $ 195,153 $ ( 1,953 ) Total $ 187,251 $ ( 1,555 ) $ 7,902 $ ( 398 ) $ 195,153 $ ( 1,953 ) Number of positions 18 4 22 The Company did no t record any credit allowances for debt securities that were in an unrealized loss position at December 31, 2022 and 2021. At December 31, 2022, all securities were investment grade, with credit ratings of BBB+ or higher by S&P Global or as determined by other credit rating agencies within the Company's investment policy. Unrealized losses on investment grade securities are principally related to changes in interest rates or changes in issuer or sector related credit spreads since the securities were acquired. The gross unrealized investment losses at December 31, 2022, were assessed, based on, among other things: • The relative magnitude to which fair values of these securities have been below their amortized cost was not indicative of an impairment loss; • The absence of compelling evidence that would cause the Company to call into question the financial condition or near-term prospects of the issuer of the applicable security; and • The Company's ability and intent to hold the applicable security for a period of time sufficient to allow for any anticipated recovery. 93 Proceeds from sales and maturities of investment securities, inclusive of Short-term investments, and related gross realized gains (losses) which are included within Other income within the Consolidated Statements of Operations and Comprehensive Loss, were as follows for the years ended December 31, 2022, 2021, and 2020, respectively: Years ended December 31, 2022 2021 2020 (in thousands) Proceeds from sales of investment securities $ 13,348 $ 126,862 $ 248,664 Proceeds from maturities of investment securities 472,098 314,666 63,751 Gross realized gains 7 24 1,117 Gross realized losses ( 274 ) ( 77 ) ( 3 ) Net realized losses $ ( 267 ) $ ( 53 ) $ 1,114 At December 31, 2022 and 2021, the Company had $ 14.3 million and $ 11.1 million, respectively, in deposits with various states and regulatory bodies that are included as part of the Company's investment balances. 5. Fair Value Measurements The following tables present a summary of fair value measurements for financial instruments at December 31, 2022 and 2021, respectively: December 31, 2022 Level 1 Level 2 Level 3 Total fair value (in thousands) U.S. government and government agencies $ — $ 228,467 $ — $ 228,467 Corporate debt securities — 98,399 — 98,399 Warrants receivable — — 900 900 Total assets at fair value $ — $ 326,866 $ 900 $ 327,766 December 31, 2021 Level 1 Level 2 Level 3 Total fair value (in thousands) U.S. government and government agencies $ — $ 196,735 $ — $ 196,735 Total assets at fair value $ — $ 196,735 $ — $ 196,735 94 The changes in balances of Legacy Clover's Level 3 financial assets and liabilities during the years ended December 31, 2022 and 2021, were as follows: Warrants receivable Total (in thousands) Balance, December 31, 2021 $ — $ — Receipts 900 900 Settlements — — Transfers in — — Transfers out — — Total realized losses (gains) — — Balance, December 31, 2022 $ 900 $ 900 Convertible securities Derivative liabilities Warrants payable Total (in thousands) Balance, December 31, 2020 $ 949,553 $ 44,810 $ 97,782 $ 1,092,145 Issuances — — — — Settlements ( 949,553 ) ( 44,810 ) ( 97,782 ) ( 1,092,145 ) Transfers in — — — — Transfers out — — — — Total realized losses (gains) — — — — Balance, December 31, 2021 $ — $ — $ — $ — In addition to the Level 3 financial liabilities in the table above, on September 25, 2020, Seek Insurance Services, Inc. ("Seek"), a field marketing organization and an indirect wholly-owned subsidiary of the Company, entered into a note purchase agreement with a third-party investor and issued a note (the "Seek Convertible Note") in the principal amount of $ 20.0 million, for which the carrying value is approximately the same as the fair value. At December 31, 2022, upon the dissolution of Seek, all outstanding amounts related to the Seek note were canceled and forgiven. At December 31, 2021, the carrying value, which includes accrued interest, and the fair value of the Seek Convertible Note was $ 22.0 million, and was considered a Level 3 financial liability. For additional information, see Note 12 (Notes and Securities Payable). On November 14, 2022, the Company recognized contingent consideration of $ 3.0 million, for which the carrying value is approximately the same as the fair value, and was included as part of the consideration transferred for the 2022 Business Combination. For additional information, see Note 3 (Business Combination). There were no transfers in or out of Level 3 financial assets or liabilities for the years ended December 31, 2022 or December 31, 2021. Legacy Warrants On October 5, 2020, the Company entered into the Merger Agreement with SCH and simultaneously amended the warrants to be automatically exercisable for common stock in connection with the 2021 Business Combination. Pursuant to the Merger Agreement, the Loan Facility warrants and the September 2015 warrants automatically converted into 3,484,154 shares of Legacy Clover common stock and, after giving effect to the Exchange Ratio, converted into 7,205,490 shares of Class B Common Stock upon the closing of the 2021 Business Combination. Public Warrants and Private Placement Warrants As a result of the 2021 Business Combination, the Company assumed, at January 7, 2021, public warrants to purchase an aggregate of 27,599,938 shares of the Company's Class A Common Stock and private placement warrants to purchase an aggregate of 10,933,333 shares of the Company's Class A Common Stock. Each whole warrant entitled the registered holder to purchase one whole share of Class A Common Stock at a price of $ 11.50 per share, at any time commencing on April 24, 2021. 95 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. These warrants at initial measurement date, December 31, 2022, were assessed to have a fair value of $ 0.9 million, with no other activity for the year ended December 31, 2022. Liability Measurement 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 were measured at fair value at inception and measured on a recurring basis, with changes in fair value presented within Change in fair value of warrants within the Consolidated Statements of Operations and Comprehensive Loss. The Company determined that the public warrants assumed in connection with the 2021 Business Combination were classified within Level 1 of the fair value hierarchy as the fair value was equal to the publicly traded price of the public warrants, and the private placement warrants, also assumed in connection with the 2021 Business Combination, were classified within Level 2 of the fair value hierarchy as the fair value was estimated using the price of the public warrants. On July 22, 2021, the Company issued a press release stating that it would redeem all of its public 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 the Company's common stock. The end of the redemption period was September 9, 2021, at which time the Company redeemed all unexercised public and private placement warrants at a price of $ 0.10 per warrant. Following the redemption, no public or private placement warrants were outstanding. The following table presents the changes in the fair value of warrants payable: December 31, 2021 Public and Private Placement Warrants (in thousands) Initial measurement, January 7, 2021 $ 147,582 Mark-to-market adjustment ( 66,214 ) Warrants payable balance, Warrants exercised ( 81,283 ) Warrants payable balance, Warrant redemption ( 85 ) Warrants payable balance, December 31, 2021 $ — 6. Healthcare Receivables Healthcare receivables include pharmaceutical rebates which are accrued as they are earned and estimated based on contracted rebate rates, eligible amounts submitted to the manufacturers by the Company's pharmacy manager, pharmacy utilization volume, and historical collection patterns. Also included within Healthcare receivables are Medicare Part D settlement receivables, member premium receivables, and other CMS receivables. The Company reported $ 70.6 million and $ 48.0 million within Healthcare receivables at December 31, 2022, and December 31, 2021, respectively. 7. Related Party Transactions Related party agreements The Company has various contracts with IJKG Opco LLC (d/b/a CarePoint Health - Bayonne Medical Center), Hudson Hospital Opco, LLC (d/b/a CarePoint Health - Christ Hospital) and Hoboken University Medical Center Opco LLC (d/b/a CarePoint Health - Hoboken University Medical Center), which collectively do business as the CarePoint Health System ("CarePoint Health"), for the provision of inpatient and hospital-based outpatient services. CarePoint Health was ultimately held and controlled by Vivek Garipalli, the Company's Executive Chairman and a significant stockholder of the Company. In May 2022, Mr. Garipalli and his family completed a donation of their interest in CarePoint Health to a non-profit organization called CarePoint Health Systems, Inc. Following the donation, Mr. Garipalli has remained a Manager of Hudson Hospital Propco, LLC, an affiliate of Hudson Hospital Opco, LLC. Additionally, certain affiliates of Mr. Garipalli are owed certain money from CarePoint Health for prior obligations, and Mr. Garipalli has an indirect interest in Sequoia Healthcare Services, LLC, which provides healthcare services to CarePoint Health. Expenses and fees incurred related to Clover's contracts with CarePoint Health, recorded within Net medical claims incurred, were 96 $ 12.6 million, $ 12.7 million, and $ 11.1 million for the years ended December 31, 2022, 2021, and 2020, respectively. Additionally, $ 1.6 million and $ 2.3 million were payable to CarePoint Health at December 31, 2022, and December 31, 2021, respectively. The Company has contracted with Rogue Trading, LLC ("Rogue"), a marketing services provider. The Company's Chief Executive Officer and a Director, Andrew Toy, is related to the Chief Executive Officer of Rogue. There were no expenses and fees related to these contracts for the year ended December 31, 2022. Expenses and fees incurred related to these contracts were $ 0.3 million, and $ 0.3 million for the years ended December 31, 2021, and 2020, respectively. The Company has a contract with Medical Records Exchange, LLC (d/b/a ChartFast) pursuant to which the Company receives administrative services related to medical records via ChartFast's electronic applications and web portal platform. ChartFast is ultimately owned and controlled by Mr. Garipalli. Expenses and fees incurred related to this agreement were $ 0.3 million and $ 0.2 million for the years ended December 31, 2022 and 2021, respectively. There were no expenses and fees incurred related to this agreement for the year ended December 31, 2020. On July 2, 2021, the Company entered into a contract with Thyme Care, Inc. ("Thyme Care"), an oncology benefit management company, through which Thyme Care was engaged to provide concierge cancer coordination services to the Company's Insurance members in New Jersey and develop a provider network to help ensure member access to high-value oncology care. Mr. Garipalli is a member of the Board of Thyme Care and holds an equity interest of less than five percent ( 5 %) of that entity. Expenses and fees incurred related to this agreement were $ 1.6 million and $ 0.3 million for the years ended December 31, 2022 and 2021, respectively. Additionally, $ 0.3 million and $ 0.1 million were payable to Thyme Care at December 31, 2022, and December 31, 2021, respectively. 8. Property and Equipment, Net Property and equipment, net consisted of the following: December 31, 2022 2021 (in thousands) Capitalized software $ 4,705 $ 1,416 Leasehold improvements 3,035 3,035 Office furniture and fixtures 36 35 Equipment 288 113 Property and equipment, gross 8,064 4,599 Less: accumulated depreciation and amortization ( 2,311 ) ( 2,312 ) Property and equipment, net $ 5,753 $ 2,287 Depreciation expense recorded by the Company was approximately $ 0.4 million, $ 0.3 million, and $ 0.5 million for the years ended December 31, 2022, 2021, and 2020, respectively. Amortization expense recorded by the Company was approximately $ 0.8 million, $ 0.2 million, and $ 0.1 million for the years ended December 31, 2022, 2021, and 2020, respectively. 9. Goodwill and Other Intangible Assets Changes in the carrying amount of goodwill for the Company's reportable segments for the years ended December 31, 2022 and 2021, respectively, were as follows: Corporate/Other Total (in thousands) Balance at January 1, 2021 $ 1,243 $ 1,243 Acquisitions — — Balance at December 31, 2021 1,243 1,243 Acquisitions 10,507 10,507 Balance at December 31, 2022 $ 11,749 $ 11,749 97 The following table presents details of the Company's other intangible assets at December 31, 2022 and 2021, respectively: 2022 2021 Weighted Average life Cost Accumulated Amortization Net Carrying Amount Cost Accumulated Amortization Net Carrying Amount (in thousands) Other intangible assets: Licenses Indefinite 2,990 — 2,990 2,990 — 2,990 Developed Technology 5 5,400 139 5,261 — — — Amortization expense for other intangible assets was approximately $ 0.1 million in 2022. The following table presents the Company's estimate of amortization expense for each of the five next succeeding fiscal years: (in thousands) 2023 1,080 2024 1,080 2025 1,080 2026 1,080 2027 941 The licenses with indefinite useful lives are related to Certificates of Operating Authority in 45 states and the District of Columbia. Intangible assets with indefinite useful lives and goodwill are not amortized but are tested for impairment in the fourth quarter, or more frequently if events or changes in circumstances indicate that the assets may be impaired. At December 31, 2022 and 2021, there were no circumstances that indicate that the carrying amount within goodwill and intangible assets deemed to have an indefinite or definite useful life may not be recoverable. No impairment was recorded during the years ended December 31, 2022, 2021, and 2020. 10. Unpaid Claims Activity within the liability for Unpaid claims, including claims adjustment expenses, for the years ended December 31, 2022 and 2021, respectively, is summarized as follows: Years ended December 31, 2022 2021 (in thousands) Gross and net balance, beginning of period (1) $ 136,317 $ 103,976 Incurred related to: Current year 1,023,355 822,300 Prior years ( 39,324 ) 15,834 Total incurred 984,031 838,134 Paid related to: Current year 892,495 692,116 Prior years 90,458 113,677 Total paid 982,953 805,793 Gross and net balance, end of period (1)(2) $ 137,395 $ 136,317 (1) Includes amounts due to related parties. (2) Differs from the total Unpaid claims amount reported on the Consolidated Balance Sheets due to the fact the figure here excludes unpaid claims for the Company's Non-Insurance operations of $ 6.1 million and $ 4.6 million at December 31, 2022 and 2021, respectively. The Company uses a variety of standard actuarial techniques to establish unpaid claims reserves. Management estimates are supported by the Company's actuarial analysis. The Company utilizes an internal actuarial team to review the adequacy of unpaid claim and unpaid claim adjustment expense. The estimation of claim costs is inherently difficult and requires significant judgment. The estimation has considerable inherent variability and can fluctuate significantly depending upon several factors, including medical cost trends and claim payment patterns, general economic conditions, and regulatory changes. The time value of money is not taken into 98 account for the purposes of calculating the liability for unpaid claims. Management believes that the current reserves are adequate based on currently available information. Unpaid Claims for Insurance Operations Unpaid claims for Insurance operations were $ 137.4 million at December 31, 2022. During the year ended December 31, 2022, $ 90.5 million was paid for incurred claims attributable to insured events of prior years. A favorable development of $ 39.3 million was recognized during the year ended December 31, 2022, resulting from the Company's actual experience with claims developing differently as compared to the Company's estimates at December 31, 2021. An unfavorable development of $ 15.8 million was recognized during the year ended December 31, 2021, resulting from the Company's actual experience with claims developing differently as compared to the Company's estimates at December 31, 2020. Original estimates are increased or decreased, as additional information becomes known regarding individual claims. The ratio of current year medical claims paid as a percentage of current year Net medical claims incurred was 87.2 % for the year ended December 31, 2022, and 84.2 % for the year ended December 31, 2021. This ratio serves as an indicator of claims processing speed, indicating that claims were processed at a faster rate during the year ended December 31, 2022, than during the year ended December 31, 2021. The following tables provide information regarding incurred and paid claims development for medical claims, as well as cumulative claim frequency and the total of incurred but not reported liabilities at December 31, 2022: Cumulative incurred claims for the years ended December 31, Incurred year 2020* 2021* 2022 Total IBNR (1) Number of reported claims (in thousands) (in ones) 2020 and prior $ 1,547,806 $ 1,563,639 $ 1,559,073 $ 1,010 1,433,039 2021 — 822,300 787,543 3,524 2,384,691 2022 — — 1,023,355 132,861 2,937,039 Total $ 1,547,806 $ 2,385,940 $ 3,369,971 $ 137,395 6,754,769 (1) Differs from the total Unpaid claims amount reported on the Consolidated Balance Sheets due to the fact the figure here excludes the Company's Non-Insurance unpaid claims of $ 6.1 million at December 31, 2022. * Unaudited supplemental information Cumulative net paid claims through December 31, Paid year 2020* 2021* 2022 (in thousands) Incurred year 2020 and prior $ 1,443,830 $ 1,557,507 $ 1,562,766 2021 — 692,116 777,315 2022 — — 892,495 Total $ 1,443,830 $ 2,249,623 $ 3,232,576 * Unaudited supplemental information The reconciliation of net incurred and paid claims development tables to unpaid claims and claims adjustment expenses for medical claims on the Consolidated Balance Sheets is as follows: December 31, 2022 (in thousands) Cumulative incurred claims, net $ 3,369,971 Less: cumulative paid claims, net 3,232,576 Net unpaid claims, including claims adjustment expenses (1) $ 137,395 (1) The following balance reflects the unpaid claims for Insurance operations only. The Non-Insurance and other medical unpaid claims should be included in order to reconcile to the total Unpaid claims on the Consolidated Balance Sheets. 99 11. Reinsurance Medicare Advantage Reinsurance Agreement On January 1, 2021, the Company renewed a specific excess loss reinsurance agreement to reinsure its MA plan liabilities in excess of approximately $ 0.6 million, $ 0.6 million, and $ 0.5 million per covered person per agreement terms for the years ended December 31, 2022, 2021, and 2020, respectively. The effects of the reinsurance agreements on the accompanying consolidated financial statements for the years ended December 31, 2022, 2021, and 2020, respectively, are as follows: Years ended December 31, 2022 2021 2020 (in thousands) Premiums earned, gross $ 1,085,339 $ 799,903 $ 666,297 Premiums earned, ceded ( 470 ) ( 489 ) ( 599 ) Net premiums earned $ 1,084,869 $ 799,414 $ 665,698 Years ended December 31, 2022 2021 2020 (in thousands) Claims incurred, gross $ 985,197 $ 839,136 $ 585,915 Claims incurred, ceded ( 1,166 ) ( 1,002 ) ( 483 ) Net claims incurred $ 984,031 $ 838,134 $ 585,432 Reinsurance recoverable for the MA plan at December 31, 2022 and 2021, respectively, were comprised of the following: Years ended December 31, 2022 2021 (in thousands) Reinsurance recoverable on paid claims, gross and net $ 500 $ 96 Direct Contracting Reinsurance Arrangement Within the DCE arrangement there is an option for each DCE participant to elect participation in a reinsurance arrangement, which is not a separate contract and is included in the current DCE arrangement. The stop loss (charges) premiums and recoupments are incurred in accordance with the regulations set forth in the participation agreement in direct relation to the direct contracting program and will reduce the exposure of high dollar claims to the Company. The premiums (recoupments) are recognized as revenue (contra-revenue), respectively, within Non-Insurance revenue on the Statement of Operations as there is a right to the recoupments as the point of attachment in the stop loss agreement. The effects of the DCE reinsurance arrangements on the accompanying consolidated financial statements for the years ended December 31, 2022 and 2021, respectively, were as follows: Years ended December 31, 2022 2021 (in thousands) Non-Insurance revenue, gross and net $ 2,380,135 $ 667,639 Claims incurred, gross and net 2,460,879 705,407 Reinsurance recoverable, gross and net 52,955 12,170 Reinsurance recoverable represents the portion of paid claims and unpaid claims that are covered by reinsurance. Amounts recoverable from reinsurers are estimated in a manner consistent with the methods used to determine unpaid claims as detailed in Note 2 (Summary of Significant Accounting Policies). Life Policies and Annuity Contracts Clover acquired certain policies and related reinsurance agreements with the purchase of stock of Union Life Labor Insurance Company (Ullico) in April 2016. Ullico originally underwrote those policies which are primarily life policies and annuity contracts, prior to entering "run-off." All of the underwriting risk related to those policies and contracts has been ceded to third party reinsurers. 100 A large portion of these cessions are in the form of 100 % coinsurance where, in addition to the underwriting risk, administrative responsibilities, including premium collections and claim payments, are ceded to third party reinsurers. Approximately $ 5.4 million and $ 5.3 million of life insurance reserves at both December 31, 2022 and 2021, respectively, related to life insurance policies originally issued by Ullico are 100 % coinsured with Southern Financial Life Insurance Company (SFLIC), a Louisiana domestic company, in full transfer of risk related to these policies. The life reserves are computed principally in accordance with Net Level Premium Method using mortality and persistency assumptions based upon the Company's experience and industry data. Interest rate assumptions used in establishing such reserves range from less than 1.0 % to 4.5 %. Under the arrangement, SFLIC is required to hold in trust an amount that covers all of the outstanding liabilities as of the reporting date. Approximately $ 0.9 million and $ 0.9 million of annuity reserves at both December 31, 2022 and 2021, respectively, related to annuity contracts originally issued by Ullico, are 100 % ceded to Sagicor Life Insurance Company, a Texas domestic company, in full transfer of risk related to these contracts. The annuity reserves are computed principally using assumptions based on the Company's experience and industry data. Interest rate assumptions used in establishing such reserves range from less than 1.0 % to 5.8 %. Ceded life insurance and annuity reserves are included within other assets and gross life insurance and annuity reserves are included within other liabilities on the Consolidated Balance Sheets, respectively. A reinsurance agreement between two entities transfers the underwriting risk and liabilities to the reinsurer while the insurer retains the contractual relationship with the ultimate insured. As such, these reinsurance agreements do not completely relieve the Company of its potential liability to the ultimate insured. However, given the transfer of underwriting risk, such potential liability is limited to the credit exposure which exists should the reinsurer be unable to meet its obligations under these reinsurance agreements. The Company evaluates its reinsurers on a regular basis including their ratings and financial conditions. 12. Notes and Securities Payable Convertible Securities Pursuant to the Convertible Agreement, dated December 27, 2018, between the Company and certain qualified institutional buyers, including entities affiliated with the Company, for an aggregate principal amount of up to $ 500.0 million (the "Convertible Agreement"). On January 7, 2021, the 2021 Business Combination was completed and the convertible securities were redeemed or converted into a total of 36,117,708 shares of Class Z common stock. After giving effect to the Exchange Ratio, pursuant to the terms of the Merger Agreement, these shares of Class Z common stock were converted into 74,694,107 shares of Class B Common Stock upon the closing of the 2021 Business Combination. See Note 3 (Business Combination) for additional information on the 2021 Business Combination. Dissolution of Seek and Associated Convertible Note Seek operated as a wholly owned subsidiary of Clover Health Corp., a wholly owned subsidiary of the Company. On September 25, 2020, Seek entered into a Convertible Note Purchase Agreement (the "Agreement") to issue the convertible note (the "Note") to Well Ventures, LLC (or the "Holder" or "Well") for $ 20.0 million in exchange for cash. On October 11, 2022, Seek's board of directors approved the wind down and dissolution of Seek. Seek then obtained written consent approving and authorizing the dissolution on October 19, 2022. Subsequently, on October 25, 2022, Clover's board of directors approved the dissolution of Seek. As a result of the planned liquidation of the entity, it was recorded in accordance with ASC 205-30 - Liquidation Basis of Accounting . In accordance with the accounting guidance, all Seek related assets and liabilities not related to the Note were written-off to $ 0 . The cumulative impact of these adjustments was not material. Liquidation of the entity was completed by December 31, 2022. In addition, and as a direct result of the dissolution of Seek, all amounts outstanding under the Note under the note were waived, and by all other rights, covenants, and obligations under the Note were terminated. Therefore, the forgiveness of the Note was treated as an extinguishment. As a result, the Company recognized a $ 23.3 million gain on extinguishment. 13. Derivative Liabilities In connection with the $ 373.8 million of convertible securities issued in 2019, the Company determined that certain of the conversion and redemption features were embedded derivatives and were bifurcated from the host instrument and accounted for as embedded derivative instruments. In connection with the convertible securities, the Company recognized a capital contribution of $ 44.8 million during the year ended December 31, 2021. This capital contribution of $ 44.8 million was recorded as an increase in additional paid in capital as the notes were issued to affiliates of the Company. The Company recognized a gain of $ 93.8 million from activity related to derivative liabilities in connection with the convertible securities during the year ended December 31, 2020, which was recognized within Gain on derivative in the Consolidated Statement of Operations and Comprehensive Loss. Upon the completion of the 2021 101 Business Combination with SCH on January 7, 2021, the derivative balance was extinguished at January 7, 2021. See Note 3 (Business Combination) and Note 5 (Fair Value Measurements) for additional information. 14. Letter of Credit On April 19, 2018, the Company entered into a secured letter of credit agreement (the "Letter") required for its subsidiary, Clover HMO of New Jersey, Inc., for an aggregate amount of up to $ 2.5 million. The Letter is with a commercial lender and it renews on an annual basis. The Letter bears interest at a rate of 0.75 %. There was an unused balance of $ 2.5 million at both December 31, 2022, and December 31, 2021. 15. Leases Operating Leases The Company leases office space in New Jersey, Tennessee, Georgia, and Hong Kong under non-cancelable operating leases. At December 31, 2022, the remaining terms of the operating leases were between one month and 63 months, and certain lease agreements contain provisions for future rent increases. For each lease the Company recorded a right-of-use (ROU) asset and lease liability at the earlier of the ASC 842 effective date or lease commencement date. The Company utilizes the straight-line method of recognizing lease expense. However, the Company is required to pay certain variable executory costs including common area maintenance, real estate taxes, and insurance that are expensed as incurred. These variable costs are excluded from the measurement of leases. Certain of the Company's leases include options to renew, with renewal terms that can extend the lease term. The exercise of lease renewal options is at the Company's sole discretion. The ability to terminate a lease is determined by the applicable lease terms and conditions. The Company is not reasonably certain that it will exercise the renewal or termination options. Therefore, these options are not recognized as part of the ROU asset and lease liability. The Company subleases certain of its leases to third parties for which it receives rental income to manage occupancy costs. These subleases are classified as operating leases. Summary of Lease Costs Recognized Under ASC 842: The following table contains a summary of the lease costs recognized under ASC 842 and other information pertaining to the Company's operating leases for the years ended December 31, 2022, 2021, and 2020, respectively: Years ended December 31, 2022 2021 2020 (in thousands) Operating lease cost $ 2,651 $ 4,515 $ 4,533 Variable lease cost 56 515 632 Short-term lease cost — 45 20 Sublease income ( 1,124 ) ( 2,727 ) ( 3,098 ) Total lease cost $ 1,583 $ 2,348 $ 2,087 Other information Cash paid for amounts included in the measurement of lease liabilities $ 3,340 $ 5,248 $ 4,979 Weighted-average remaining lease term 5.2 years 5.0 years 4.4 years Weighted-average discount rate 10.65 % 10.36 % 10.17 % 102 The following table summarizes the Company's future lease payments for non-cancelable Operating lease liabilities at December 31, 2022: (in thousands) 2023 $ 1,907 2024 1,568 2025 1,234 2026 1,155 2027 1,190 Thereafter 303 Total lease payments 7,357 Less: imputed interest ( 1,497 ) Total $ 5,860 16. Stockholders' Equity and Convertible Preferred Stock Stockholders' Equity The Company was authorized to issue up to 2,500,000,000 shares of Class A common stock at December 31, 2022 and 2021, and up to 500,000,000 shares of Class B common stock at December 31, 2022 and 2021. At December 31, 2022 and 2021, there were 383,998,718 and 352,645,626 shares of Class A common stock issued and outstanding, respectively. There were 94,394,852 and 118,206,768 shares of Class B common stock issued and outstanding at December 31, 2022 and 2021, respectively. Class B common stock has 10 votes per share, and Class A common stock has one vote per share. The Company had 2,072,752 and 14,730 shares held in treasury at December 31, 2022 and 2021, respectively. These amounts represent shares withheld to cover taxes upon vesting of employee stock-based awards. At December 31, 2022, the Company was authorized to issue 25,000,000 shares of preferred stock having a par value of $ 0.0001 per share, and the Company's Board has the authority to determine the rights, preferences, privileges, and restrictions, including voting rights, of those shares. At December 31, 2022, there were no shares of preferred stock issued and outstanding. Issuance of Common Stock In November 2021, the Company sold 52,173,913 shares of Class A common stock at a public offering price of $ 5.75 per share for gross proceeds of approximately $ 300.0 million, before deducting underwriting discounts and commissions and other expenses payable by the Company, of $ 16.2 million. Convertible Preferred Stock Each share of Legacy Clover's preferred stock was convertible at the option of the holder, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into fully paid and non-assessable shares of common stock. Pursuant to the Merger Agreement, all outstanding shares of Legacy Clover's preferred stock automatically converted into 139,444,346 shares of Class B Common Stock upon the closing of the 2021 Business Combination. For additional information, see Note 3 (Business Combination). 17. Variable Interest Entity and Equity Method of Accounting On February 4, 2022, Character Biosciences, Inc. (f/k/a Clover Therapeutics Company) ("Character Biosciences"), an affiliate of the Company, completed a private capital transaction in which it raised $ 17.9 million from the issuance of 16,210,602 shares of its preferred stock. Upon completion of the transaction, the Company owned approximately 25.46 % of Character Biosciences. As a result, the Company reassessed its interest in Character Biosciences and determined that while Character Biosciences is a VIE, the Company is not considered as the primary beneficiary of the VIE because it does not have the power, through voting or similar rights and the license agreements, to direct the activities of Character Biosciences that most significantly impact Character Biosciences' economic performance. The Company determined that it does have a significant influence over Character Biosciences and, therefore, it began accounting for its common stock investment in Character Biosciences using the equity method on February 4, 2022. The Company derecognized all 103 of Character Biosciences' assets and liabilities from its balance sheet and its noncontrolling interest related to Character Biosciences, and recognized the retained common stock and preferred stock equity interests at fair values of $ 3.7 million and $ 4.9 million, respectively, which are included in Equity method investment and Other assets, non-current on the Consolidated Balance Sheets, and recognized a gain of $ 9.2 million, which is included within Gain on investment on the Consolidated Statements of Operations and Comprehensive Loss for the year ended December 31, 2022. As the Company applies the equity method to account for its common stock interest in Character Biosciences, the initial value of the investment is adjusted periodically to recognize (i) the proportionate share of the investee's net income or losses after the date of investment, (ii) additional contributions made and dividends or distributions received, and (iii) impairment losses resulting from adjustments to net realizable value. The Company eliminates all intercompany transactions in accounting for equity method investments and records the proportionate share of the investee's net income or loss in equity within loss on investment on the Consolidated Statements of Operations and Comprehensive Loss. With respect to the Company's preferred stock equity interest in Character Biosciences, the Company elected the measurement alternative to value this equity investment without a readily determinable fair value in accordance with ASC 321, Investments – Equity Securities . The carrying amount of the investment is included within Other assets, non-current in the Consolidated Balance Sheets. In accordance with ASC 321, for each reporting period, the Company completes a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired. In accordance with ASC 323, for the year ended December 31, 2022, the Company recognized the proportionate share of Character Bioscience's net losses up to the investment carrying amount. At December 31, 2022, the Company discontinued applying the equity method to account for its common stock interest in Character Biosciences as the Company's net losses exceeded the Company's investment carrying amount. The equity method investment in Character Biosciences was reduced to zero and no further losses were recorded in the Company's consolidated financial statements as the Company did not guarantee obligations of the investee company nor has not committed additional funding. The Company will begin recognizing its share of net income only when it is greater than the cumulative net losses not recognized during the period the equity method was suspended. On January 23, 2023, Character Biosciences, completed a second private capital transaction in which it raised an additional capital from the issuance of additional shares of its preferred stock. Upon completion of this transaction, the Company's ownership percentage in Character Biosciences decreased. 18. Employee Benefit Plans Employee Savings Plan The Company has a defined contribution retirement savings plan (the "401(k) Plan") covering eligible employees, which includes safe harbor matching contributions based on the amount of employees' contributions to the 401(k) Plan. The Company contributes to the 401(k) Plan annually 100.0 % of the first 4.0 % compensation that is contributed by the employee up to 4.0 % of eligible annual compensation after one year of service. The Company's service contributions to the 401(k) Plan amounted to approximately $ 1.6 million, $ 1.2 million, and $ 1.2 million for the years ended December 31, 2022, 2021, and 2020, respectively, and are included within Salaries and benefits on the Consolidated Statements of Operations and Comprehensive Loss. The Company's cash match is invested pursuant to the participant's contribution direction. Employer contributions are immediately 100.0 % vested. Stock-based Compensation The Company's 2020 Equity Incentive Plan (the "2020 Plan") provides for grants of restricted stocks units ("RSUs") and options to acquire shares of the Company's common stock, par value $ 0.0001 per share, to employees, directors, officers, and consultants of the Company, and the Company's 2020 Management Incentive Plan (the "2020 MIP") provides for grants of RSUs to our Executive Chair and CEO. During the year ended December 31, 2021, the Company approved the 2020 Plan and the 2020 MIP, and the Company's 2014 Equity Incentive Plan (the "2014 Plan") was terminated. On March 9, 2022, the Board adopted the 2022 Inducement Award Plan (the "Inducement Plan" and, collectively with the 2020 Plan, the 2020 MIP, and the 2014 Plan, the "Plans") and reserved 11,000,000 shares of Class A common stock for issuance under the Inducement Plan. The Inducement Plan was adopted by the Board without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules. In accordance with Rule 5635(c)(4) of the Nasdaq Listing Rules, awards under the Inducement Plan may be made only to an employee who has not previously been an employee or member of the Board, or following a bona fide period of non-employment, if he or she is granted such award in connection with his or 104 her commencement of employment with the Company, and such grant is an inducement material to his or her entering into employment with the Company. The 2020 Plan has an evergreen provision that requires the number of shares available for issuance under the plan to be increased on the first day of each fiscal year beginning with the 2022 fiscal year and ending on (and including) the last day of the 2024 fiscal year, in each case, in an amount equal to the lesser of (i) seven percent ( 7 %) of the outstanding shares of Class A Common Stock on the last day of the immediately preceding fiscal year and (ii) such number of shares of Class A Common Stock determined by the Board; provided that for each fiscal year beginning with the 2025 fiscal year through the fiscal year that includes the expiration date of the plan, each such increase shall be reduced to the lesser of five percent ( 5 %) of the outstanding shares of Class A Common Stock on the last day of the immediately preceding fiscal year or such number of shares determined by the Board. The maximum number of shares of the Company's common stock reserved for issuance over the term of the Plans, shares outstanding under the Plans, and shares remaining under the Plans at December 31, 2022 and 2021, respectively, were as follows: December 31, 2022 Shares Authorized Under Plans Shares Outstanding Under Plans Shares Remaining Under Plans 2014 Plan 54,402,264 36,378,558 N/A 2020 Plan 31,884,272 29,805,319 242,473 2020 MIP 33,426,983 30,084,285 — Inducement Plan 11,000,000 11,000,000 — December 31, 2021 Shares Authorized Under Plans Shares Outstanding Under Plans Shares Remaining Under Plans 2014 Plan 54,402,264 41,905,875 N/A 2020 Plan 30,641,401 6,690,048 23,442,323 2020 MIP 33,426,983 33,426,983 — Effective as of the closing of the 2021 Business Combination, the 2014 Plan was terminated, at which time the outstanding awards previously granted thereunder were assumed by the Company, and no new awards are available for grant under the 2014 Plan. Shares that are expired, terminated, surrendered, or canceled under the 2014 Plan without having been fully exercised are available for awards under the 2020 Plan. Shares may be issued from authorized but unissued Company stock. The Plans are administered by the Talent and Compensation Committee of the Board (the "Compensation Committee"). The options are subject to the terms and conditions applicable to options granted under the Plans, as described in the applicable Plan and the applicable stock option grant agreement. The exercise prices, vesting, and other restrictions applicable to the stock options are determined at the discretion of the Compensation Committee, except that the exercise price per share of incentive stock options may not be less than 100.0 % of the fair value of a share of common stock on the date of grant. Stock options awarded under the Plans expire 10 years after the grant date. Incentive stock options and non-statutory options granted to employees, directors, officers, and consultants of the Company typically vest over four or five years . RSU awards are subject to the terms and conditions set forth in the Plans and the applicable RSU grant agreement. Vesting and other restrictions applicable to RSU awards are determined at the discretion of the Compensation Committee. The number of shares of common stock subject to an RSU award is determined by dividing the cash value of an RSU award by the average closing price of a share of the Company's Class A common stock over a specified period through the date of grant, and such awards typically vest over four years from the grant date. The total estimated fair value is amortized as an expense over the requisite service period as approved by the Compensation Committee. The Company recorded Stock-based compensation expense for options, RSUs, and performance restricted stock units ("PRSUs") granted under the Plans, the Inducement Plan, and discounts offered in connection with the Company's 2020 Employee Stock Purchase Plan ("ESPP") of $ 164.3 million, $ 163.7 million, and $ 7.1 million during the years ended December 31, 2022, 2021, and 2020, respectively, and such expenses are presented within Salaries and benefits in the accompanying Consolidated Statements of Operations and Comprehensive Loss. 105 Compensation cost presented within Salaries and benefits within the accompanying Consolidated Statements of Operations and Comprehensive Loss were as follows: Years ended December 31, 2022 2021 2020 (in thousands) Stock options $ 3,445 $ 7,998 $ 7,078 RSUs 75,312 65,514 — PRSUs 85,270 89,930 — ESPP 278 281 — Total compensation cost recognized for stock-based compensation plans $ 164,305 $ 163,723 $ 7,078 At December 31, 2022, there was approximately $ 340.5 million of unrecognized stock-based compensation expense related to unvested stock options, RSUs, PRSUs, and the ESPP, estimated to be recognized over a period of 4.00 years. The Company recognized $ 85.3 million and $ 89.9 million in share-based based compensation related to PRSUs for the years ended December 31, 2022 and 2021, respectively. The Company has granted PRSUs to certain executives, which become eligible to vest if prior to the vesting date the average closing price of one share of the Company's common stock for 90 consecutive days equals or exceeds a specified price (the "Market PRSUs"). The expense referenced above is mainly attributable to Market PRSUs that vest based on pre-established milestones including Company performance. These milestones primarily consist of the volume-weighted average stock closing price ranging from $ 20 to $ 30 for 90 consecutive days. 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. At December 31, 2022, the market condition component of these awards has not been met, so the awards have not been earned. This expense represents more than 50 % of the total compensation cost recognized for stock-based compensation plans presented within Salaries and benefits within the accompanying Consolidated Statements of Operations and Comprehensive Loss. Stock Options The assumptions that the Company used in the Black-Scholes option-pricing model to determine the grant-date fair value of stock options granted for the years ended December 31, 2021 and December 31, 2020, respectively, were as follows: Years ended December 31, 2021 2020 Weighted-average risk-free interest rate 1.06 % 0.84 % Expected term (in years) 6.06 4.68 Expected volatility 37.74 % 34.66 % Expected dividend yield — — A summary of option activity under the 2020 Plan during the year ended December 31, 2022, was as follows: Number of options Weighted-average exercise price Outstanding, January 1, 2022 1,753,799 $ 8.88 Granted during 2022 — — Exercised — — Forfeited ( 388,977 ) 8.88 Outstanding, December 31, 2022 1,364,822 $ 8.88 106 A summary of option activity under the 2014 Plan during the year ended December 31, 2022, was as follows: Number of options Weighted-average exercise price Outstanding, January 1, 2022 31,155,742 $ 2.35 Granted during 2022 — — Exercised ( 4,367,985 ) 0.13 Forfeited ( 1,156,072 ) 1.85 Outstanding, December 31, 2022 25,631,685 $ 2.69 The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company's common stock for those stock options that had exercise prices lower than the fair value of the Company's common stock. The weighted-average grant date fair value of stock options granted during the years ended December 31, 2021 and December 31, 2020 were $ 3.36 and $ 1.04 per share, respectively. At December 31, 2022, outstanding stock options, substantially all of which are expected to vest, had an aggregate intrinsic value of $ 340.5 million, and a weighted-average remaining contractual term of 4.00 years. At December 31, 2022, there were 21,662,878 options exercisable under the Plan, with an aggregate intrinsic value of $ 0.1 million, a weighted-average exercise price of $ 2.85 per share, and a weighted-average remaining contractual term of 6.13 years. The total value of stock options exercised during the years ended December 31, 2022, 2021, and 2020 was $ 11.3 million, $ 39.3 million, and $ 5.8 million, respectively. Cash received from stock option exercises during the years ended December 31, 2022, 2021, and 2020 totaled $ 1.0 million, $ 6.1 million, and $ 2.1 million, respectively. Pursuant to the terms of the applicable Plan and stock option award agreement, employees may exercise options at any time after grant while maintaining the original vesting period. The proceeds from exercise of unvested options are recorded as a liability until the option vests at which time the liability is reclassified to equity. If the employee terminates or otherwise forfeits an unvested option that has been exercised early, the Company must redeem those shares at the original exercise price and remit payment of the forfeited portion of shares back to the employee. Restricted Stock Units A summary of total RSU activity is presented below: Number of RSUs Weighted-average grant date fair value per share Outstanding, January 1, 2021 — $ — Granted during 2021 22,031,869 14.34 Released ( 639,752 ) 6.64 Forfeited ( 97,276 ) 8.42 Outstanding, December 31, 2021 21,294,841 $ 14.60 Outstanding, January 1, 2022 21,294,841 $ 14.60 Granted during 2022 34,706,132 2.45 Released ( 4,656,884 ) 14.09 Forfeited ( 1,726,890 ) 5.12 Outstanding, December 31, 2022 49,617,199 $ 6.48 Performance Restricted Stock Units Additionally, the Company has granted PRSUs that vest based on pre-established milestones including Company performance. 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 Company has also 107 determined the requisite service period for the PRSUs with multiple performance conditions to be the longest of the explicit, implicit, or derived service period for each tranche. There were no Market PRSUs granted prior to 2021. The grant date fair value of Market PRSUs was determined using a Monte Carlo simulation model that incorporated multiple valuation assumptions, including the probability of achieving the specified market condition and the following assumptions: Year ended December 31, 2022 Expected volatility (1) 40.7 % Risk-free interest rate (2) 0.5 Dividend yield (3) — (1) Expected volatility is based on a blend of peer group company historical data adjusted for the Company's leverage. (2) Risk-free interest rate based on U.S. Treasury yields with a term equal to the remaining Performance Period as of the grant date. (3) Dividend yield was assumed to be zero as the Company does not anticipate paying dividends. A summary of PRSU activity is presented below: Number of PRSUs Weighted-average grant date fair value per share Non-vested, January 1, 2021 — $ — Granted during 2021 27,818,524 9.58 Non-vested at December 31, 2021 27,818,524 $ 9.58 Non-vested, January 1, 2022 27,818,524 $ 9.58 Granted during 2022 2,405,281 1.38 Vested ( 13,264 ) 8.90 Forfeited ( 265,306 ) 9.11 Non-vested at December 31, 2022 29,945,235 $ 8.92 At December 31, 2022, there was $ 79.9 million of unrecognized share-based compensation expense related to PRSUs, which is expected to be recognized over a period of 4.00 years. 2020 Employee Stock Purchase Plan On January 6, 2021, stockholders approved the ESPP. The ESPP provides a means by which eligible employees and/or eligible service providers of either the Company or designated related companies and affiliates may be given an opportunity to purchase shares of Class A common stock at a 15.0 % discount from the fair market value of the common stock as determined on specific dates at specified intervals. Subject to adjustments provided in the ESPP that are discussed below, the maximum number of shares of common stock that may be purchased under the ESPP is 6,312,038 shares, and the maximum number of shares that may be purchased on any single purchase date by any one participant is 5,000 shares. At December 31, 2022, 5,742,230 shares of Class A common stock were available for issuance under the ESPP. The ESPP includes an evergreen provision that limits the maximum number of shares of Class A common stock that may be issued under the plan, to 2,785,582 shares, plus the number of shares of Class A common stock that are automatically added on the first day of each fiscal year beginning with the 2022 fiscal year and ending on (and including) the first day of the 2030 fiscal year, in an amount equal to the lesser of (i) one percent ( 1 %) of the total number of shares of Class A common stock outstanding on the last day of the calendar month prior to the date of such automatic increase, and (ii) such number of shares of Class A common stock as determined by the Board; provided that the maximum number of shares of Class A common stock reserved under the ESPP shall not exceed 10.0 % of the total outstanding capital stock of the Company (inclusive of the shares reserved under the ESPP) as of January 7, 2021, on an as-converted basis. The initial offering period for the ESPP was five months , which commenced on September 1, 2021, and ended on January 31, 2022. The second offering period began on March 14, 2022, and ended November 22, 2022, and the third offering period began on November 23, 2022, and will end on May 21, 2023. 108 At December 31, 2022, 569,808 shares of the Company's Class A common stock have been purchased or distributed pursuant to the ESPP. The assumptions that the Company used in the Black-Scholes option-pricing model to determine the fair value of the purchase rights under the ESPP for the year ended December 31, 2022, is as follows: Year ended December 31, 2022 Weighted-average risk-free interest rate 467.0 % Expected term (in years) 0.49 Expected volatility 78.4 % Equity warrants In November 2016 and December 2017, the Company issued warrants to purchase 139,629 shares of the Company's common stock at an exercise price of $ 2.61 per share, and 122,052 shares of the Company's common stock at an exercise price of $ 3.45 per share, respectively, as part of payment to certain providers for services provided to the Company. These warrants were automatically exercised in connection with the 2021 Business Combination. 19. Income Taxes The provision for income taxes consisted of the following for the years ended December 31, 2022, 2021, and 2020, respectively: Years ended December 31, 2022 2021 2020 (in thousands) Current provision $ — $ — $ ( 2 ) Deferred expense — — 2 Provision for income taxes $ — $ — $ — The provision for income taxes was different from the amount computed using the federal statutory rate of 21% for the years ended December 31, 2022, 2021, and 2020, respectively, due to the following: Years ended December 31, 2022 2021 2020 (in thousands) Income tax provision at federal statutory rate (21%) $ ( 71,157 ) $ ( 123,429 ) $ ( 28,642 ) Interest on convertible securities — — 6,537 Interest on convertible securities discount — 2,867 4,423 Debt issuance cost related to convertible securities — — — Derivative liability related to convertible securities — — ( 19,688 ) Warrant expense ( 189 ) 13,905 16,823 Meals and entertainment 21 26 13 Health insurance industry fee — — 2,715 Stock based compensation 7,989 ( 5,665 ) 350 Prior year true-up ( 30,646 ) — — Other, net 317 ( 365 ) ( 1,116 ) Valuation allowance 93,665 112,661 18,585 Provision for income taxes $ — $ — $ — The Company issued convertible securities for which the interest expense recorded in 2022 and 2021 was none , and approximately $ 31.1 million for 2020. This interest expense is not deductible for tax purposes. Deferred income tax balances reflect the impact of temporary differences between the tax bases of assets or liabilities and their reported amounts in the consolidated financial statements and are stated at enacted tax rates expected to be in effect when the reported amounts are actually recovered or settled. 109 Principal components of net deferred tax balances at December 31, 2022 and 2021, respectively, were as follows: Years ended December 31, 2022 2021 (in thousands) Deferred income tax assets: Net operating loss carryforward (NOL) $ 294,335 $ 207,713 Stock based compensation 56,743 35,374 Premium deficiency reserve 3,442 23,232 Unpaid claim reserve discounting 384 404 Operating lease liability 1,231 1,657 Fixed assets and intangible assets 1,589 2,267 Accruals 9,927 2,950 Other 4,692 3,434 Total deferred income tax assets 372,343 277,031 Less: valuation allowance ( 369,530 ) ( 275,865 ) Total deferred income tax assets, net of valuation allowance 2,813 1,166 Deferred income tax liabilities: Operating lease right-of-use assets ( 845 ) ( 1,127 ) Nontaxable gain on deconsolidation of entity ( 1,936 ) — Other ( 32 ) ( 39 ) Total deferred income tax liabilities ( 2,813 ) ( 1,166 ) Net deferred income tax assets $ — $ — Operating loss and tax credit carryforwards and protective tax deposits The Company has unused operating loss carryforwards available of approximately $ 1,401.6 million and $ 989.1 million at December 31, 2022 and 2021, respectively, that may be applied against future taxable income. Losses incurred before 2018 in the amount of approximately $ 295.1 million begin to expire in 2033. The total net operating losses ("NOL") is made up of NOLs generated by the consolidated group and NOLs obtained with the 2014 reorganization. A portion of the pre-consolidated NOLs may be limited by special rules known as Separate Return Limitation Year ("SRLY") rules. SRLY NOLs can only be used in years that both the consolidated group and the entity that created the SRLY NOLs have taxable income. Due to these limitations and uncertainty regarding the Company's ability to use the loss carryforwards and other deferred tax assets, valuation allowances of approximately $ 369.5 million and $ 275.9 million were established in 2022 and 2021, respectively. The Company does not have deposits admitted under Section 6603 of the Internal Revenue Code. Impact of tax planning strategies The Company does not have any tax planning strategies that include the use of reinsurance and there are no deferred tax liabilities not recognized. The Company files income tax returns in the United States. The U.S. Internal Revenue Service ("IRS") is not currently conducting any income tax audits of the Company's returns. The Company's federal income tax returns filed related to tax years subsequent to 2019 remain subject to examination by the IRS. The Company is not aware of any material adjustments that may be proposed as a result of any ongoing or future examinations and does not have material uncertain tax positions reflected in the Consolidated Balance Sheets. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law in the U.S. to provide certain relief in connection with the COVID-19 pandemic. In addition, governments around the world have enacted or implemented various forms of tax relief measures in response to the economic conditions in the wake of COVID-19. On December 27, 2020, the "Consolidated Appropriations Act, 2021" was signed into law in the U.S. to amend or extend several significant COVID related relief provisions of the CARES Act. The Company has determined that neither the CARES Act and Consolidated Appropriations Act, nor changes to income tax laws or regulations in other jurisdictions, had a significant impact on the Company's effective tax rate. 110 20. Net Loss per Share Net Loss per Share Basic and diluted net loss per share attributable to Class A common stockholders and Class B common stockholders (collectively, "Common Stockholders") for the years indicated was calculated as follows: Years ended December 31, 2022 2021 2020 (in thousands, except per share and share amounts) Net loss $ ( 338,844 ) $ ( 587,756 ) $ ( 136,392 ) Net loss attributable to Common Stockholders ( 338,844 ) ( 587,756 ) ( 136,392 ) Basic and diluted weighted average number of common shares and common share equivalents outstanding 476,244,262 412,922,424 88,691,582 Net loss per share attributable to Common Stockholders—basic and diluted $ ( 0.71 ) $ ( 1.42 ) $ ( 1.54 ) Because the Company had a Net loss during the years ended December 31, 2022, 2021, and 2020, the Company's potentially dilutive securities, which include stock options, RSUs, PRSUs, preferred stock, and warrants to purchase shares of common stock and preferred stock, have been excluded from the computation of diluted net loss per share, as the effect would be anti-dilutive. Therefore, during these periods, the diluted common shares outstanding equals the average common shares outstanding. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to Common Stockholders for the periods indicated because including them would have had an anti-dilutive effect: Years ended December 31, 2022 2021 2020 Options to purchase common stock 26,996,507 32,879,626 36,557,759 RSUs 49,617,199 21,294,841 — PRSUs 29,945,235 27,818,524 — Convertible preferred stock (as converted to common stock) — — 139,444,346 Warrants to purchase common stock (as converted to common stock) — — 7,502,902 Total anti-dilutive shares excluded from computation of net loss per share 106,558,941 81,992,991 183,505,007 21. Commitments and Contingencies Legal Actions Various lawsuits against the Company may arise in the ordinary course of the Company's business. Contingent liabilities arising from ordinary course litigation, income taxes and other matters are not expected to be material in relation to the financial position of the Company. At December 31, 2022, and December 31, 2021, respectively, there were no material known contingent liabilities arising outside the normal course of business other than as set forth below. Securities Class Actions, Derivative Litigation and Investigations Since February 2021, the Company has received subpoenas from the SEC related to certain disclosures and aspects of our business as well as certain matters described in an article issued on February 4, 2021, by Hindenburg Research LLC (the "Hindenburg Article"). The Company is cooperating with the SEC's investigation. The Hindenburg Article, which discussed, among other things, an inquiry by the U.S. Attorney's Office for the Eastern District of Pennsylvania relating to, among other things, certain of the Company’s arrangements with providers participating in its network and programs, and Clover Assistant, was the subject of the Company’s Current Report on Form 8-K dated February 5, 2021. In February 2021, the Company and certain of its directors and officers were named as defendants in putative class actions filed in the United States District Court for the Middle District of Tennessee: Bond v. Clover Health Investments, Corp. et al., Case No. 3:21-cv-00096 (M.D. Tenn.); Kaul v. Clover Health Investments, Corp. et al., Case No. 3:21-cv-00101 (M.D. Tenn.); Yaniv v. Clover 111 Health Investments, Corp. et al., Case No. 3:21-cv-00109 (M.D. Tenn.); and Tremblay v. Clover Health Investments, Corp. et al., Case No. 3:21-cv-00138 (M.D. Tenn.). The complaints assert violations of sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act. The Kaul action asserts additional claims under sections 11 and 15 of the Securities Act. The complaints generally relate to allegations published in the Hindenburg Article. The complaints seek unspecified damages on behalf of all persons and entities who purchased or acquired Clover securities during the class period (which begins on October 6, 2020, and, depending on the complaint, ends on February 3, 2021, or February 4, 2021), as well as certain other costs. In April 2021, the Middle District of Tennessee class actions were consolidated under Bond v. Clover Health Investments, Corp. et al., Case No. 3:21-cv-00096 (M.D. Tenn.) as the lead case. On June 28, 2021, the plaintiffs filed an amended complaint, which also generally relates to allegations published in the Hindenburg Article, but adds, among other things, allegations from confidential witnesses who purport to be former employees of the Company. The Company moved to dismiss the amended complaint on August 28, 2021; that motion was denied on February 28, 2022. On February 14, 2023, the court granted the plaintiffs' motion for class certification. Parallel shareholder derivative actions have also been filed, naming Clover as a nominal defendant. The first action was filed in the United States District Court for the District of Delaware and is captioned Furman v. Garipalli, et al., Case No. 1:21-cv-00191 (D. Del.). The complaint asserts violations of sections 10(b) and 21D of the Exchange Act, breach of fiduciary duty, and waste of corporate assets against certain of the Company's directors. It seeks unspecified damages and an order requiring Clover to take certain actions to enhance Clover's corporate governance policies, and procedures. The second and third actions were filed in the United States District Court for the Middle District of Tennessee and are captioned Sun v. Garipalli, et al., Case No. 3:21-cv-00311 (M.D. Tenn.), and Luthra v. Garipalli, et al., Case No. 3:21-cv-00320 (M.D. Tenn.). The complaints assert violations of section 14(a) of the Exchange Act, breach of fiduciary duty, and aiding and abetting a breach of fiduciary duty. The Sun action also asserts unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and contribution under section 11(f) of the Securities Act, and sections 10(b) and 21D of the Exchange Act. The complaints name certain current and former officers and directors as defendants. They seek unspecified damages and an order requiring Clover to take certain actions to enhance Clover's corporate governance policies and procedures. The fourth action was filed in the United States District of Delaware and is captioned Wiegand v. Garipalli, et al., Case No. 1:21-cv-01053 (D. Del.). The initial complaint asserted violations of sections 14(a) and 20(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, and waste of corporate assets. The complaint names certain current and former officers and directors as defendants. It seeks, among other things, unspecified damages and an order requiring Clover to take certain actions to improve Clover's corporate governance and internal procedures. The fifth action was filed in the Supreme Court of the State of New York and is captioned Sankaranarayanan v. Palihapitiya, et al., Index No. 655420/2021 (N.Y. Sup. Ct., N.Y. Cnty.). The complaint asserts breach of fiduciary duty and unjust enrichment. The complaint names certain former officers and directors as defendants. It seeks, among other things, unspecified damages and an order directing Clover to take certain actions to reform and improve its corporate governance and internal procedures. The sixth action was filed in the Delaware Court of Chancery and is captioned Davies v. Garipalli, et al., No. 2021-1016-SG (Del. Ch.). The complaint asserts breach of fiduciary duty. The complaint names certain current and former officers and directors as defendants. It seeks, among other things, unspecified damages and an order directing Clover to take certain actions to reform and improve its corporate governance and internal procedures. The seventh action was filed in the Supreme Court of the State of New York and is captioned Uvaydov v. Palihapitiya, et al., Index No. 656978/2021 (N.Y Sup. Ct., N.Y. Cnty.). The complaint asserts breach of fiduciary duty, unjust enrichment, and aiding and abetting a breach of fiduciary duty. The complaint names certain current and former officers and directors as defendants. It seeks, among other things, unspecified damages, restitution, and disgorgement of profits obtained by defendants. On May 10, 2021, the Middle District of Tennessee shareholder derivative actions described above were consolidated under Sun v. Garipalli, et al., Case No. 3:21-cv-00311 (M.D. Tenn.) as lead case. The court designated co-lead counsel and liaison counsel and ordered the parties to submit a proposed schedule for the initial stage of the case. On November 30, 2021, the Sun and Luthra plaintiffs filed an amended complaint, asserting violations of section 14(a) of the Exchange Act, breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and contribution under sections 10(b) and 21D of the Exchange Act. The amended complaint generally relates to the allegations published in the Hindenburg Article, and names certain current and former officers and directors as defendants. It seeks, among other things, unspecified damages and an order requiring Clover to take certain actions to enhance Clover's corporate governance policies and procedures. On September 16, 2021, the two District of Delaware derivative actions were consolidated under In re Clover Health Investments, Corp. Derivative Litigation, Case No. 1:21-cv-00191-LPS (Consolidated). The Furman complaint was deemed the operative complaint. On April 19, 2022, the plaintiff in the Wiegand action filed an amended complaint, asserting violations of Sections 10(b), 20(a), and 21D of the Exchange Act, breach of fiduciary duty, waste of corporate assets, and unjust enrichment against certain current and former officers and directors. The amended complaint seeks, among other things, unspecified damages and an order requiring Clover to take certain actions to improve Clover's corporate governance and internal procedures. 112 On August 19, 2022, the two derivative actions filed in New York state court were consolidated under In re Clover Health Investments, Corp. Stockholder Derivative Litig., Index No. 655420/2021. On November 3, 2022, the plaintiffs in this action filed a consolidated complaint, asserting breach of fiduciary duty, and unjust enrichment, and naming certain former officers and directors as defendants. The complaint seeks, among other things, unspecified damages, restitution, the disgorgement of profits obtained by defendants, and an order directing Clover to take certain actions to reform and improve its corporate governance and internal procedures. All of these cases remain in the preliminary stages. Given the inherent uncertainty of litigation and the legal standards that must be met, including class certification and success on the merits, the Company has determined that it is not probable or estimable that an unfavorable outcome or potential loss will occur. Clover intends to vigorously defend itself against the claims asserted against it. Guaranty Assessments Under state guaranty assessment laws, including those related to state cooperative failures in the industry, the Company may be assessed, up to prescribed limits, for certain obligations to the policyholders and claimants of insolvent insurance companies that write the same line or lines of business as the Company. 22. Non-Insurance In April 2021, the Company began participating in the DC Model of the Centers for Medicare & Medicaid Services ("CMS"), which utilizes a structured model intended to reduce expenditures and preserve or enhance quality of care for beneficiaries in Medicare fee-for-service ("FFS"). CMS redesigned the DC Model and renamed the model the ACO Realizing Equity, Access, and Community Health (REACH) Model ("ACO REACH Model") effective January 1, 2023. As a participating entity in the DC Model, referred to as the ACO REACH Model at January 1, 2023, with a global risk arrangement, the Company assumes the responsibility of guaranteeing the performance of its care network. The ACO REACH Model is intended to reduce the administrative burden, support a focus on complex, chronically ill patients, and encourage physician organizations that have not typically participated in Medicare FFS to serve beneficiaries in Medicare FFS. The Company's operations in connection with the DC Model are included in the Non-Insurance operating segment. See Note 23 (Operating Segments) for additional information. Key components of the financial agreement for Non-Insurance include: • Performance Year Benchmark. The target amount for Medicare expenditures on covered items and services (Medicare Part A and B) furnished to an Accountable Care Organization's ("ACO's") aligned beneficiaries during a performance year. The Performance Year Benchmark will be compared to the ACO's performance year expenditures. This comparison will be used to calculate shared savings and shared losses. The Performance Year Benchmark is established at the beginning of the performance year utilizing prospective trend estimates and is subject to retrospective trend adjustments, if warranted, before the Financial Reconciliation. • Performance Year. A calendar year except for the commencement year, which began on April 1, 2021, and ended on December 31, 2021. • Risk-Sharing Arrangements. Used in determining the percent of savings and losses that ACOs are eligible to receive as shared savings or may be required to repay as shared losses. • Financial Reconciliation. The process by which CMS determines shared savings or shared losses by comparing the calculated total benchmark expenditure for a given ACO's aligned population to the actual expenditures of that ACO's aligned beneficiaries over the course of a performance year that includes various risk-mitigation options such as stop-loss reinsurance and risk corridors. • Risk-Mitigation Options. ACOs may elect a "stop-loss arrangement" each performance year, which is designed to reduce the financial uncertainty associated with high-cost expenditures of individual beneficiaries. The Company has elected participation in the program for the current performance year. Additionally, CMS has created a mandatory risk corridor program that allocates the ACO's shared savings and losses in bands of percentage thresholds, after a deviation of greater than 25 % of the Performance Year Benchmark. Performance Guarantees Certain of the Company's arrangements with third-party providers require it to guarantee the performance of its care network to CMS, which, if not obtained, could potentially result in payment to CMS. The Non-Insurance performance year obligation and receivable are 113 amortized on a straight-line basis for the amount that represents the completed performance. The Company is unable to estimate the maximum potential amount of future payments under the guarantee. This is attributable to the stop-loss arrangement and the corridors (tiered levels) in the arrangement. A certain percentage of these arrangements will still be the responsibility of the Company, in addition to a number of variables that are not reasonable for the Company to estimate, such as, but not limited to, risk ratings and benchmark trends that have an inestimable impact on the estimate of future payments. The tables below include the financial statement impacts of the performance guarantee: December 31, 2022 2021 (in thousands) Non-Insurance performance year obligation (1) 73,844 36,891 (1) This obligation represents the consideration due to providers, net of the shared savings or loss for the period and amortization of the liability. Years ended December 31, 2022 2021 (in thousands) Amortization of the Non-Insurance performance year receivable $ ( 2,385,116 ) $ ( 664,224 ) Amortization of the Non-Insurance performance year obligation 2,385,116 664,224 Non-Insurance revenue 2,380,135 667,639 23. Operating Segments The Company manages its operations based on two reportable operating segments: Insurance and Non-Insurance. Through the Insurance segment, the Company provides PPO and HMO plans to Medicare Advantage members in several states. The Company's Non-Insurance segment consists of its operations in connection with its participation in CMS' Direct Contracting program. All other clinical services and all corporate overhead not included in the Insurance or Non-Insurance segments are included within Corporate/Other. These segment groupings are consistent with information used by the Chief Executive Officer, the Company's CODM, to assess performance and allocate resources. The operations of the Company are organized into the following two segments: • Insurance Segment includes operations related to the Company's MA plans, which generally provide access to a wide network of primary care providers, specialists, and hospitals. • Non-Insurance Segment includes the Company's operations relating to CMS' DC Model, which provides options aimed at reducing expenditures and preserving or enhancing quality of care for beneficiaries. Corporate/Other includes other clinical services not included in Medicare Advantage and 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. During the first quarter of 2022, the Company updated the names of its Medicare Advantage and Direct Contracting segments to the Insurance and Non-Insurance segments, respectively. The Company believes that this approach better reflects each segment's current role and contribution to its business. There has been no change to the existing composition of these segments, and previously reported consolidated and segment-level financial results of the Company were not impacted by these changes. 114 The table below summarizes the Company's results by operating segment: Insurance Non-Insurance Corporate/Other Eliminations Consolidated Total Year ended December 31, 2022 (in thousands) Premiums earned, net (Net of ceded premiums of $ 470 ) $ 1,084,869 $ — $ — $ — $ 1,084,869 Non-Insurance revenue — 2,380,135 — — 2,380,135 Other income 2,577 1,311 74,610 ( 66,815 ) 11,683 Intersegment revenues — — 108,249 ( 108,249 ) — Net medical claims incurred 996,410 2,460,879 9,042 ( 12,379 ) 3,453,952 Gross profit (loss) $ 91,036 $ ( 79,433 ) $ 173,817 $ ( 162,685 ) $ 22,735 Total assets $ 354,748 $ 156,754 $ 957,483 $ ( 660,365 ) $ 808,620 Insurance Non-Insurance Corporate/Other Eliminations Consolidated Total Year ended December 31, 2021 (in thousands) Premiums earned, net (Net of ceded premiums of $ 489 ) $ 799,414 $ — $ — $ — $ 799,414 Non-Insurance revenue — 667,639 — — 667,639 Other income 216 — 94,090 ( 89,363 ) 4,943 Intersegment revenues — — 41,932 ( 41,932 ) — Net medical claims incurred 847,286 705,407 7,637 ( 9,152 ) 1,551,178 Gross (loss) profit $ ( 47,656 ) $ ( 37,768 ) $ 128,385 $ ( 122,143 ) $ ( 79,182 ) Total assets $ 416,947 $ 58,027 $ 1,116,331 $ ( 640,501 ) $ 950,804 A reconciliation of the reportable segments' gross profit to the Net loss included in the Consolidated Statements of Operations and Comprehensive Loss is as follows: Years ended December 31, 2022 2021 (in thousands) Gross profit (loss) $ 22,735 $ ( 79,182 ) Salaries and benefits 278,725 260,458 General and administrative expenses 207,917 185,287 Premium deficiency reserve (benefit) expense ( 94,240 ) 110,628 Depreciation and amortization 1,187 1,246 Other expense 70 191 Change in fair value of warrants ( 900 ) ( 66,146 ) Interest expense 1,333 3,193 Amortization of notes and securities discounts 30 13,717 Gain on investment ( 9,217 ) — Gain on debt extinguishment on note payable ( 23,326 ) — Net loss $ ( 338,844 ) $ ( 587,756 ) 115 24. Dividend Restrictions The Company's regulated insurance subsidiaries are subject to regulations and standards in their respective jurisdictions. These standards, among other things, require these subsidiaries to maintain specified levels of statutory capital and limit the timing and amount of dividends and other distributions that may be paid to their parent companies. Therefore, the Company's regulated insurance subsidiaries' ability to declare and pay dividends is limited by state regulations including obtaining prior approval by the New Jersey Department of Banking and Insurance. At December 31, 2022 and 2021, neither of the regulated insurance subsidiaries had been authorized nor paid any dividends. 25. Statutory Equity Applicable insurance department regulations require that the Company's regulated insurance subsidiaries prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the department of insurance of the respective state of domicile. These practices vary in some aspects from U.S. GAAP, with significant differences including that (a) certain assets are not included in statutory surplus, (b) certain statutory reserves are established by a direct charge to surplus, and (c) certain charges are reported as charges to capital and surplus, rather than as a component of net income. The regulated insurance subsidiaries are subject to certain Risk-Based Capital (RBC) requirements specified by the National Association of Insurance Commissioners (NAIC). Under those requirements, the amount of capital and surplus maintained by the Company's regulated insurance subsidiaries is to be determined based on various risk factors, such as (a) asset quality, (b) asset and liability matching, (c) loss reserve adequacy, and other business factors. Regulatory compliance is determined by a ratio of the Company's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Generally, a ratio in excess of the regulatory threshold requires no corrective actions by the Company or regulators. At December 31, 2022 and 2021, the regulated insurance subsidiaries' capital and surplus of $ 141.4 million and $ 128.9 million, respectively, exceeded the minimum RBC requirements of approximately $ 120.6 million and $ 99.7 million, respectively. 26. Regulatory Matters The Company operates in a highly regulated environment. It is regulated by federal and state of New Jersey regulators. The Company's regulated insurance subsidiaries must be licensed by and are subject to regulation by New Jersey Department of Banking and Insurance, which requires periodic financial reports and enforces minimum capital and/or reserve requirements. The laws and regulations governing the Company's business and interpretations of those laws and regulations are subject to frequent change. Legislative, administrative, and public policy changes to the Health Care Reform Law continue to be debated, and the Company cannot predict if the Health Care Reform Law will be further modified, repealed, or replaced. The broad latitude given to the agencies administering, interpreting and enforcing current and future regulations governing the Company's business could require the Company to change how it conducts its business, restrict revenue and enrollment growth, increase health care and administrative costs and capital requirements, or expose the Company to increased liability in the courts for coverage determinations, contract interpretation and other actions. The health care industry is also regularly subject to negative publicity, including as a result of governmental investigations, adverse media coverage and political debate surrounding industry regulation. Negative publicity may adversely affect the Company's financial position, results of operations and cash flows and damage its reputation. 116 CLOVER HEALTH INVESTMENTS, CORP. CONDENSED BALANCE SHEETS (PARENT COMPANY) (Dollars in thousands, except share amounts) Schedule I December 31, 2022 December 31, 2021 Assets Current assets Cash and cash equivalents $ 69,718 $ 115,894 Short-term investments 31,725 234,986 Investment securities, available-for sale 117,834 79,268 Investment securities, held-to-maturity — 59 Other assets, current 5,704 38 Total current assets 224,981 430,245 Intercompany interest receivable 4,958 4,958 Intercompany note receivable 40,000 40,000 Investment securities, available-for-sale 18,708 — Investments in consolidated subsidiaries 106,422 140,834 Total assets $ 395,069 $ 616,037 Liabilities, Convertible Preferred Stock, and Stockholders' Equity Current liabilities Accounts payable and accrued expenses $ 865 $ 1,199 Accrued salaries and benefits 6,576 1,640 Total current liabilities 7,441 2,839 Intercompany payable 39,530 76,211 Notes payable, net of discount and deferred issuance costs 360 — Other liabilities — 360 Total liabilities 47,331 79,410 Stockholders' equity Class A Common Stock, $ 0.0001 par value; 2,500,000,000 shares authorized at December 31, 2022 and 2021; 383,998,718 and 352,645,626 issued and outstanding at December 31, 2022 and 2021, respectively 37 34 Class B Common Stock, $ 0.0001 par value; 500,000,000 shares authorized at December 31, 2022 and 2021; 94,394,852 and 118,206,768 issued and outstanding at December 31, 2022 and 2021, respectively (1) 9 12 Additional paid-in capital 2,319,157 2,153,909 Accumulated other comprehensive loss ( 9,374 ) ( 443 ) Accumulated deficit ( 1,955,582 ) ( 1,616,738 ) Less: Treasury stock, at cost; 2,072,752 and 14,730 shares held at December 31, 2022 and 2021, respectively ( 6,509 ) ( 147 ) Total stockholders' equity 347,738 536,627 Total liabilities, convertible preferred stock, and stockholders' equity $ 395,069 $ 616,037 117 CLOVER HEALTH INVESTMENTS, CORP. CONDENSED STATEMENTS OF OPERATIONS (PARENT COMPANY) (Dollars in thousands, except share amounts) Years ended December 31, 2022 2021 2020 Revenues: Other income $ 5,898 $ 3,938 $ 3,685 Total revenues 5,898 3,938 3,685 Operating expenses: General and administrative expenses 784 187 4,831 Total operating expenses 784 187 4,831 Income (loss) from operations 5,114 3,751 ( 1,146 ) Change in fair value of warrants — ( 66,146 ) 80,328 Interest expense — 1,593 35,556 Amortization of notes and securities discount — 13,681 21,118 Gain on derivative — — ( 93,751 ) Gain on equity investment ( 5,314 ) — — Gain on extinguishment of note payable ( 23,326 ) — — Equity in net losses of consolidated subsidiaries 372,598 648,580 91,995 Net loss $ ( 338,844 ) $ ( 593,957 ) $ ( 136,392 ) 118 CLOVER HEALTH INVESTMENTS, CORP. CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY) (Dollars in thousands, except share amounts) Years ended December 31, 2022 2021 2020 Cash flows from operating activities: Net loss $ ( 338,844 ) $ ( 593,957 ) $ ( 136,392 ) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of notes and securities discount and debt issuance costs — 13,681 21,118 Intercompany stock-based compensation expense 164,305 163,470 7,078 Paid in kind interest — — 28,334 Change in fair value of warrants and amortization of warrants — ( 66,146 ) 80,328 Gain on extinguishment of note payable ( 23,326 ) — — Change in derivative liabilities — — ( 93,751 ) Accretion, net of amortization ( 1,648 ) ( 163 ) — Net realized losses on investment securities ( 6,613 ) ( 53 ) — Changes in operating assets and liabilities: Other assets ( 6,339 ) 165 214 Accounts payable and accrued expenses ( 334 ) ( 4,092 ) 7,669 Intercompany accrued salaries and benefits 4,936 1,411 229 Intercompany interest receivable — — ( 1,208 ) Intercompany payable ( 36,681 ) 48,960 23,158 Net cash used in operating activities ( 244,544 ) ( 436,724 ) ( 63,223 ) Cash flows from investing activities: Purchases of short-term investments and available-for-sale securities ( 250,030 ) ( 689,582 ) — Proceeds from sales of short-term investments and available-for-sale securities 3,829 89,997 — Proceeds from maturities of short-term investments available-for-sale securities 391,643 285,000 — Investments in consolidated subsidiaries 57,888 ( 63,622 ) 82,047 Net cash provided by (used in) investing activities 203,330 ( 378,207 ) 82,047 Cash flows from financing activities: Payment of notes payable principal — ( 30,925 ) ( 18,752 ) Issuance of common stock, net of early exercise liability 1,400 6,144 1,748 Buyback and subsequent cancellation of common stock — — ( 957 ) Proceeds from reverse recapitalization, net of transaction costs — 666,241 — Proceeds received for the exercise of Public and Private Warrants — 390 — Issuance of common stock, net of stock issuance costs — 283,775 — Payment for the redemptions of Public Warrants — ( 85 ) — Purchase of Treasury stock ( 6,362 ) ( 147 ) — Net cash (used in) provided by financing activities ( 4,962 ) 925,393 ( 17,961 ) Net (decrease) increase in Cash and cash equivalents ( 46,176 ) 110,462 863 Cash and cash equivalents, beginning of year 115,894 5,432 4,569 Cash and cash equivalents, end of year $ 69,718 $ 115,894 $ 5,432 Supplemental cash flow disclosures Cash paid during the period for interest — 1,677 4,578 Cash paid during the year for health insurance industry fee — — 8,022 Supplemental disclosure of non-cash investing and financing activities Conversion of preferred stock to common stock — 447,747 — Issuance of common stock related to convertible debt — 16,059 — Capital contribution for extinguishment of debt — 126,795 — Activities from Seek Dissolution 735 — — Issuance of common stock related to warrants exercised — 97,782 — Acquisition of public and private warrants — 147,582 — Issuance of common stock related to the exercise of Public and Private Warrants — 81,283 — 119 CLOVER HEALTH INVESTMENTS, CORP. Notes to Condensed Financial Statements (Parent Company) 1. Organization and Operations Clover Health Investments, Corp. (the "Company") is a holding company incorporated on July 17, 2014, in the state of Delaware. 2. Summary of Significant Accounting Policies The accompanying Condensed Financial Statements have been prepared using the equity method. Under the equity method, the investment in consolidated subsidiaries is stated at cost plus equity in undistributed earnings of consolidated subsidiaries since the date of acquisition. These Condensed Financial Statements should be read in conjunction with the Company's consolidated financial statements. Use of estimates The preparation of the Condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Those estimates are inherently subject to change, and actual results may ultimately differ from those estimates. 3. Insurance Subsidiaries Investments in consolidated subsidiaries include regulated insurance subsidiaries and unregulated subsidiaries. The Company holds $ 249.7 million and $ 485.9 million of cash, cash equivalents, and investment securities at the parent and unregulated subsidiaries at December 31, 2022 and 2021, respectively. The Company holds $ 224.8 million and $ 305.3 million of cash, cash equivalents, and investment securities in regulated insurance subsidiaries at December 31, 2022 and 2021, respectively. 4. Surplus Note Effective December 22, 2016, the Company contributed $ 40.0 million to Clover Insurance Company, a wholly-owned subsidiary, in exchange for a surplus note. The outstanding balance, including accrued interest, was due and payable on December 31, 2020, but remains unpaid with the payment terms under review for extension until December 31, 2024, by the Commissioner of Banking and Insurance of the State of New Jersey. No payment of principal or interest on the surplus note shall be made without the prior written approval of the Commissioner of Banking and Insurance of the State of New Jersey. 120 Schedule II CLOVER HEALTH INVESTMENTS, CORP. VALUATION AND QUALIFYING ACCOUNTS Additions Balance at beginning of period Charged to costs and expenses Charge to other accounts (Deductions) Balance at end of period (in thousands) Year ended December 31, 2021 Valuation allowance for deferred tax assets $ 163,204 $ 112,661 $ — $ — $ 275,865 Year ended December 31, 2022 Valuation allowance for deferred tax assets 275,865 93,665 — — 369,530 The accompanying notes are an integral part of these financial statements. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.