10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-39445

 

MSP Recovery, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

84-4117825

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

2710 Le Jeune Road

Floor 10

Coral Gables, Florida

33134

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (305) 614-2222

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Class A common stock, $0.0001 par value per share

 

LIFW

 

The Nasdaq Global Market

Redeemable warrants, each whole warrant exercisable for one share of Class A common stock at an exercise price of $11.50 per share

 

LIFWW

 

The Nasdaq Global Market

Redeemable warrants, each whole warrant exercisable for one share of Class A common stock at an exercise price of $0.0001 per share

 

LIFWZ

 

The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of August 17, 2023, the registrant had 332,445,943 shares of Class A common stock, $0.0001 par value per share, and 3,106,616,119 shares of Class V common stock, $0.0001 par value per share, outstanding.

 

 

 


 

Table of Contents

 

Page

PART I.

FINANCIAL INFORMATION

5

Item 1.

Financial Statements (Unaudited)

5

Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022

5

Condensed Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022

6

Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2023 and 2022

7

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022

8

Notes to Unaudited Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

Item 4.

Controls and Procedures

40

PART II.

OTHER INFORMATION

43

Item 1.

Legal Proceedings

43

Item 1A.

Risk Factors

43

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 3.

Defaults Upon Senior Securities

43

Item 4.

Mine Safety Disclosures

44

Item 5.

Other Information

44

Item 6.

Exhibits

45

Signatures

46

 

1


 

DEFINITIONS

Unless otherwise stated or unless the context otherwise requires, the terms “we,” “us,” “our,” the “Company,” and “LifeWallet” refer to MSP Recovery, Inc. d/b/a LifeWallet. As used in this Quarterly Report on Form 10-Q, unless otherwise noted or the context otherwise requires, the terms below are defined as follows:

 

“2022 Form 10-K” means the Annual Report on Form 10-K for the year ended December 31, 2022, which was filed by the Company on July 27, 2023.

 

“Algorithm” refers to a set of instructions that perform a particular action. Our team of data scientists and medical professionals create proprietary instruction sets, or “Algorithms,” to identify recovery opportunities within the data sets of our Assignors’ Claims. Our proprietary algorithms incorporate various data points within the data sets of our Assignors’ Claims, which may include, but are not limited to, medical coding classification systems such as diagnosis codes (e.g., ICD-8/ICD-9/ICD-10 codes), procedure codes (e.g., CPT codes), and drug codes (e.g., NDC codes); non-medical data such as demographics and date ranges; and data from public sources such as crash reports, offense incident reports, and other reports that provide details as to an occurrence. These Algorithms are then applied to our Assignors’ aggregated Claims data, filtering through the billions of lines of data from our Assignors to identify recoverable opportunities consistent with a given Algorithm’s criteria. Identified potential recoveries are then further quality reviewed by our medical team.

“Billed Amount” (a/k/a the charged amount or retail price) is the full commercial value of services billed by the provider, or the full charge that the provider would ordinarily bill for the service provided. The Billed Amount for a specific procedure code is based on the provider and varies from location to location. The Company uses historical data from Claims submitted by providers to determine the Billed Amount when a Billed Amount is not provided in the data received from the Assignor.

“Board of Directors” or “Board” means the board of directors of the Company;

“Business Combination” means the business combination pursuant to that certain Membership Interest Purchase Agreement, dated as of July 11, 2021, as described in more detail in Note 3 Business Combination of this Form 10-Q;

“CF” means Cantor Fitzgerald, L.P., a New York based investment bank.;

 

“Claim” means the right, title to, and/or interest in, any and all claims or potential claims, including all related reimbursement and recovery rights, which the Company has, may have had, or may have in the future assigned to it (whether or not asserted), including all rights to causes of action and remedies against any third-party, whether a primary payer or responsible party, at law or in equity. The term “Claim” includes but is not limited to: (i) claims arising under consumer protection statutes and laws; (ii) claims arising under the Medicare and Medicare Advantage secondary payer statutes, whether based in contract, tort, statutory right, or otherwise, in connection with the payment to provide healthcare services or supplies; (iii) claims arising under any state statutes and common laws irrespective of the rights that are conferred to MSP through assignment or otherwise; and (iv) all right, title, and interest to any recovery rights that may exist for any potential cause of action where a responsible party or primary payer is liable, even where it has not been established because liability is not yet proven as of the date that the Claim is identified or discovered, together with all receivables, general intangibles, payment intangibles, and other rights to payment now existing or hereafter arising and all products and proceeds of the foregoing;

“Class A Common Stock” means the shares of the Company’s Class A common stock, par value $0.0001 per share;

“Class V Common Stock” means the shares of the Company’s Class V common stock, par value $0.0001 per share;

“Class B Unit” means the non-voting economic Class B Units of the Company, as described in more detail in Note 3, Business Combination of this Form 10-Q;

“Closing” means the closing of the Business Combination, as described in more detail in Note 3 Business Combination of this Form 10-Q;

“Company” means the registrant, MSP Recovery, Inc. d/b/a LifeWallet, a Delaware corporation.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended;

2


 

“Existing Warrant Agreement” means the Warrant Agreement dated as of August 13, 2020, by and between the Company and Continental Stock Transfer & Trust Company;

“GAAP” means generally accepted accounting principles in the United States, as applied on a consistent basis;

 

“Hazel” means Hazel Holdings I LLC, a Delaware limited liability company, together with its affiliates;

“Working Capital Credit Facility” means the credit agreement as described in more detail in Note 10, Claims Financing Obligations and Notes Payable of this Form 10-Q;

 

“IPO” means the initial public offering by the Company;

“Legacy MSP” means MSP Recovery as it was organized in 2014 as a Medicaid and Medicare Secondary Pay Act recovery specialist.

 

“LLC Agreement” means the first amended and restated limited liability company agreement of Opco;

“Members’ Representative” means John H. Ruiz, solely in his capacity as the representative of the Members;

“MIPA” means the Membership Interest Purchase Agreement, dated as of July 11, 2021, as described in more detail in Note 3 Business Combination of this Form 10-Q;

“MSP Recovery” means MSP Recovery, LLC, a Florida limited liability company;

“MSP RH Series 01” means MSP Recovery Holdings Series 01, LLC, a Delaware limited liability company;

“MSP RH Series 01 Recovery Services Agreement” means the Recovery Services Agreement dated as of October 23, 2020 by and between MSP RH Series 01 and MSP Recovery;

“New Warrants” means 1,029,000,000 warrants, each to purchase one share of Class A Common Stock issued as a dividend to the holders of record of Class A Common Stock as of the close of business on the date of Closing;

“Nomura” means Nomura Securities International, Inc.;

“Opco” means Lionheart II Holdings, LLC, a wholly owned subsidiary of the Company;

 

“OTC Equity Prepaid Forward Transaction” means an agreement between the Company and CF in which CF agreed to (a) transfer to the Company for cancellation any warrants to purchase shares received as a result of being the stockholder of record of a share as of the close of business on the closing date of the Business Combination, pursuant to the previously announced and declared LCAP dividend and (b) waive any redemption right that would require the redemption of the Subject Shares (as defined below) in exchange for a pro rata amount of the funds held in LCAP’s trust account.

“Paid Amount,” (a/k/a Medicare Paid Rate or wholesale price) means the amount paid to the provider from the health plan or insurer. This amount varies based on the party making payment. For example, Medicare typically pays a lower fee for service rate than commercial insurers. The Paid Amount is derived from the Claims data we receive from our Assignors. In the limited instances where the data received lacks a paid value, our team calculates the Paid Amount with a formula. The formula used provides rates for outpatient services and is derived from the customary rate at the 95th percentile as it appears from standard industry commercial rates or, where that data is unavailable, the billed amount if present in the data. These amounts are then adjusted to account for the customary Medicare adjustment to arrive at the calculated Paid Amount. Management believes that this formula provides a conservative estimate for the Medicare paid amount rate, based on industry studies which show the range of differences between private insurers and Medicare rates for outpatient services.

 

We periodically update this formula to enhance the calculated paid amount where that information is not provided in the Assignor data. Management believes this measure provides a useful baseline for potential recoveries, but it is not a measure of the total amount that may be recovered in respect of potentially recoverable Claims, which in turn may be influenced by any applicable potential statutory recoveries such as double damages or fines, as described below. This calculation accounts for an approximate 7% increase in the total Paid Amount. Where we have to extrapolate a Paid Amount to establish damages, the calculated amount may be contested by opposing parties.

“Public Units” means units comprised of one share of Class A Common Stock and one-half of one Public Warrant issued in the IPO;

3


 

“Public Warrants” means warrants included in the Public Units issued in the IPO, each of which is exercisable for one share of Class A Common Stock, in accordance with its terms, as described in more detail in Note 3 Business Combination of this Form 10-Q;

“PVPRC” means the cumulative Paid Amount value of potentially recoverable Claims. We analyze our Claims portfolio and identify potentially recoverable Claims using Algorithms that comb through historical paid Claims data and search for potential recoveries. The PVPRC is a measure of the Paid Amount in respect of those potentially recoverable Claims. In the limited instances where the data received from our Assignors lacks a paid value, the adjustment formula described in the definition of Paid Amount is applied and increases PVPRC by approximately 7%.

 

“Recovery Proceeds” means, with respect to any Claim, any and all of the gross proceeds recovered, including compensation, interest, penalties, and fees which may be paid or payable with respect to such Claim (including any and all cash, securities, instruments or other property which may be paid or issued by defendants or third parties in litigation proceedings in satisfaction of such Claim).

 

“SEC” means the U.S. Securities and Exchange Commission;

“Securities Act” means the Securities Act of 1933, as amended;

“Series MRCS” means Series MRCS, a series of MDA, Series LLC, a Delaware series limited liability company;

“Trust Account” means the trust account established by the Company for the benefit of its stockholders with Continental Stock Transfer & Trust Company;

“Up-C Unit” means each pair consisting of one share of Class V Common Stock and one Class B Unit, as described in more detail in Note 3 Business Combination of this Form 10-Q.

“Virage” means Virage Capital Management LP, a Delaware limited partnership;

“VRM” means Virage Recovery Master LP, a Delaware limited partnership and affiliate of Virage; and

“VRM MSP” means VRM MSP Recovery Partners LLC, a Delaware limited liability company and joint investment vehicle of VRM and Series MRCS.

4


Table of Contents

Part I - Financial Information

Item 1. Financial Statements

MSP RECOVERY, INC. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

March 31,

 

 

December 31,

 

(In thousands except per share amounts)

 

2023

 

 

2022

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

21,583

 

 

$

3,661

 

Restricted cash

 

 

 

 

 

11,420

 

Accounts receivable, net

 

 

4,508

 

 

 

6,195

 

Affiliate receivable (1)

 

 

330

 

 

 

2,425

 

Prepaid expenses and other current assets (1)

 

 

23,744

 

 

 

27,656

 

Total current assets

 

 

50,165

 

 

 

51,357

 

Property, plant and equipment, net

 

 

4,116

 

 

 

3,432

 

Intangible assets, net (2)

 

 

3,495,519

 

 

 

3,363,156

 

Total assets

 

$

3,549,800

 

 

$

3,417,945

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

5,516

 

 

$

8,422

 

Affiliate payable (1)

 

 

19,861

 

 

 

19,822

 

Commission payable

 

 

735

 

 

 

545

 

Derivative liability

 

 

 

 

 

9,613

 

Warrant liability

 

 

2,733

 

 

 

5,311

 

Other current liabilities

 

 

80,567

 

 

 

72,002

 

Total current liabilities

 

 

109,412

 

 

 

115,715

 

Guaranty obligation (1)

 

 

825,010

 

 

 

787,945

 

Claims financing obligation and notes payable (1)

 

 

466,653

 

 

 

198,489

 

Loan from related parties (1)

 

 

130,709

 

 

 

125,759

 

Interest payable (1)

 

 

4,473

 

 

 

2,765

 

Total liabilities

 

$

1,536,257

 

 

$

1,230,673

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A common stock subject to possible redemption, 1,129,589 shares at redemption value as of December 31, 2022 (None as of March 31, 2023)

 

 

 

 

 

1,807

 

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

 

Class A common stock, $0.0001 par value; 5,500,000,000 shares authorized; 96,002,855 and 74,605,284 issued and outstanding as of March 31, 2023 and December 31, 2022, respectively

 

$

9

 

 

$

7

 

Class V common stock, $0.0001 par value; 3,250,000,000 shares authorized; 3,128,121,511 and 3,147,979,494 issued and outstanding as of March 31, 2023 and December 31, 2022, respectively

 

 

313

 

 

 

315

 

Additional paid-in capital

 

 

153,332

 

 

 

136,760

 

Members’ equity

 

 

-

 

 

 

-

 

Accumulated deficit

 

 

(34,119

)

 

 

(29,203

)

Total Stockholders’ Equity (Deficit)

 

 

119,535

 

 

 

107,879

 

Non-controlling interest

 

 

1,894,008

 

 

 

2,077,586

 

Total equity

 

$

2,013,543

 

 

$

2,185,465

 

Total liabilities and equity

 

$

3,549,800

 

 

$

3,417,945

 

 

(1)
As of March 31, 2023 and December 31, 2022, the total affiliate receivable, affiliate payable, guaranty obligation and loan from related parties balances are with related parties. In addition, the prepaid expenses and other current assets, claims financing obligation and notes payable, and interest payable includes balances with related parties. See Note 13, Related Party Transactions, for further details.
(2)
As of March 31, 2023 and December 31, 2022, intangible assets, net included $2.5 billion and $2.3 billion, respectively, related to a consolidated VIE. See Note 9, Variable Interest Entities, for further details.

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Table of Contents

MSP RECOVERY, INC. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

Three months ended March 31,

 

(In thousands except per share amounts)

 

2023

 

 

2022

 

Claims recovery income

 

$

3,497

 

 

$

109

 

Claims recovery service income (1)

 

 

498

 

 

 

8,076

 

Total Claims Recovery

 

$

3,995

 

 

$

8,185

 

Operating expenses

 

 

 

 

 

 

Cost of claim recoveries (2)

 

 

1,021

 

 

 

7

 

Claims amortization expense

 

 

113,469

 

 

 

2,717

 

General and administrative (3)

 

 

6,855

 

 

 

4,446

 

Professional fees

 

 

9,728

 

 

 

1,938

 

Professional fees - legal (4)

 

 

8,551

 

 

 

2,472

 

Allowance for credit losses

 

 

5,000

 

 

 

 

Depreciation and amortization

 

 

9

 

 

 

79

 

Total operating expenses

 

 

144,633

 

 

 

11,659

 

Operating Loss

 

$

(140,638

)

 

$

(3,474

)

Interest expense

 

 

(42,390

)

 

 

(10,415

)

Other income (expense), net

 

 

6,627

 

 

 

(2

)

Change in fair value of warrant and derivative liabilities

 

 

2,255

 

 

 

 

Net loss before provision for income taxes

 

$

(174,146

)

 

$

(13,891

)

Provision for income tax expense

 

 

 

 

 

 

Net loss

 

$

(174,146

)

 

$

(13,891

)

Less: Net (income) loss attributable to non-controlling members

 

 

169,230

 

 

 

 

Net loss attributable to controlling members

 

$

(4,916

)

 

$

(13,891

)

 

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding, Class A Common Stock (5)

 

 

88,609,528

 

 

N/A

 

Basic and diluted net loss per share, Class A Common Stock (5)

 

$

(0.06

)

 

N/A

 

 

(1)
For the three months ended March 31, 2023 and 2022, claims recovery service income included $0 million and $7.3 million, respectively, of claims recovery service income from VRM MSP. See Note 13, Related Party Transactions, for further details.
(2)
For the three months ended March 31, 2022, cost of claim recoveries included $40.5 thousand of related party expenses. This relates to contingent legal expenses earned from claims recovery income pursuant to legal service agreements with the La Ley con John H. Ruiz P.A., d/b/a MSP Recovery Law Firm (the “Law Firm”). No such related party expenses were present for the three months ended March 31, 2023. See Note 13, Related Party Transactions, for further details.
(3)
For the months ended March 31, 2022, general and administrative expenses included $0.1 million of related party expenses. See Note 13, Related Party Transactions, for further details. No such related party expenses were present for the three months ended March 31, 2023.
(4)
For the three months ended March 31, 2023 and 2022, professional fees - legal included $4.2 million and $4.7 thousand, respectively, of related party expenses related to the Law Firm. See Note 13, Related Party Transactions, for further details.
(5)
Earnings per share information has not been presented for periods prior to the Business Combination (as defined in Note 3, Business Combination), as it resulted in values that would not be meaningful to the users of these unaudited condensed consolidated financial statements. Refer to Note 14, Net Loss Per Common Share for further information.

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

MSP RECOVERY, INC. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity

(Unaudited)

 

Three Months Ended March 31, 2023

 

 

 

Class A Common Stock

 

 

Class V Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands except shares)

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Additional Paid-in Capital

 

 

Members' Deficit

 

 

Accumulated Deficit

 

 

Non- Controlling Interests

 

 

Total Equity

 

Balance at December 31, 2022

 

 

74,605,284

 

 

$

7

 

 

 

3,147,979,494

 

 

$

315

 

 

$

136,760

 

 

$

 

 

$

(29,203

)

 

$

2,077,586

 

 

$

2,185,465

 

Conversion of Warrants

 

 

104,152

 

 

 

 

 

 

 

 

 

 

 

 

336

 

 

 

 

 

 

 

 

 

(170

)

 

 

166

 

Class A Issuances

 

 

21,293,419

 

 

 

2

 

 

 

(19,857,983

)

 

 

(2

)

 

 

16,236

 

 

 

 

 

 

 

 

 

(14,178

)

 

 

2,058

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,916

)

 

 

(169,230

)

 

 

(174,146

)

Balance at March 31, 2023

 

 

96,002,855

 

 

$

9

 

 

 

3,128,121,511

 

 

$

313

 

 

$

153,332

 

 

$

 

 

$

(34,119

)

 

$

1,894,008

 

 

$

2,013,543

 

 

Three Months Ended March 31, 2022

 

(In thousands)

 

Members’ Deficit

 

 

Non- Controlling Interests

 

 

Total Equity

 

Balance at December 31, 2021

 

$

(155,756

)

 

$

4,348

 

 

$

(151,408

)

Contributions

 

 

 

 

 

 

 

 

 

Distributions

 

 

(102

)

 

 

 

 

 

(102

)

Net loss

 

 

(13,891

)

 

 

 

 

 

(13,891

)

Balance at March 31, 2022

 

$

(169,749

)

 

$

4,348

 

 

$

(165,401

)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Table of Contents

MSP RECOVERY, INC. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

Three months ended March 31,

 

(In thousands)

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss (1)

 

$

(174,146

)

 

$

(13,891

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

9

 

 

 

79

 

Claims amortization expense

 

 

113,469

 

 

 

2,717

 

Paid in kind interest

 

 

41,937

 

 

 

10,392

 

Change in fair value of derivatives

 

 

(158

)

 

 

 

Change in fair value of warrant liability

 

 

(2,413

)

 

 

 

Allowance for credit losses

 

 

5,000

 

 

 

 

Gain sale of intangible assets

 

 

(4,599

)

 

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(3,313

)

 

 

 

Affiliate receivable (1)

 

 

2,096

 

 

 

(83

)

Affiliate payable (1)

 

 

39

 

 

 

3,013

 

Prepaid expenses and other assets

 

 

4,038

 

 

 

(194

)

Commission payable

 

 

190

 

 

 

 

Accounts payable, accrued liabilities and other current liabilities

 

 

7,875

 

 

 

1,400

 

Deferred service fee income

 

 

 

 

 

(249

)

Net cash (used in) provided by operating activities

 

 

(9,976

)

 

 

3,184

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property, plant, and equipment

 

 

(693

)

 

 

(133

)

Purchases of intangible assets

 

 

(1,234

)

 

 

(2,000

)

Proceeds from sale of intangible assets

 

 

10,000

 

 

 

 

Net cash provided by (used in) investing activities

 

 

8,073

 

 

 

(2,133

)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from debt financing

 

 

15,000

 

 

 

 

Deferred financing costs

 

 

(125

)

 

 

(823

)

Proceeds from related party loan (1)

 

 

4,950

 

 

 

 

Release of temporary equity

 

 

(11,420

)

 

 

 

Distributions to members

 

 

 

 

 

(102

)

Net cash provided (used in) by financing activities

 

 

8,405

 

 

 

(925

)

Increase in cash and cash equivalents and restricted cash

 

 

6,502

 

 

 

126

 

Cash and cash equivalents and restricted cash at beginning of year

 

 

15,081

 

 

 

1,664

 

Cash and cash equivalents at end of period

 

$

21,583

 

 

$

1,790

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Sale of intangible assets

 

$

30,897

 

 

$

 

Purchase of intangible asset financed by note payable

 

$

250,000

 

 

$

 

Release of temporary equity

 

$

1,807

 

 

$

 

Original issue discount

 

$

10,000

 

 

$

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

 

 

$

23

 

 

(1)
Balances include related party transactions. See Note 13, Related Party Transactions, for further details.

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Table of Contents

MSP RECOVERY, INC. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. DESCRIPTION OF BUSINESS

 

On May 23, 2022 (the “Closing Date”), MSP Recovery, Inc. d/b/a LifeWallet, a Delaware corporation (formerly known as Lionheart Acquisition Corporation II (“LCAP”) consummated the previously announced business combination pursuant to that certain Membership Interest Purchase Agreement, dated as of July 11, 2021 (as amended, the “MIPA”), by and among the Company, Lionheart II Holdings, LLC, a wholly owned subsidiary of the Company, MSP Recovery, LLC and combined and consolidated subsidiaries (“Legacy MSP”), the members of Legacy MSP (the “Members”), and John H. Ruiz, in his capacity as the representative of the Members (the “Members’ Representative”). Pursuant to the MIPA, the Members sold and assigned all of their membership interests in Legacy MSP to the Company in exchange for non-economic voting shares of Class V common stock, par value $0.0001, of the Company (“Class V Common Stock”) and non-voting economic Class B Units of the Company (“Class B Units,” and each pair consisting of one share of Class V Common Stock and one Class B Unit, an “Up-C Unit”) (such transaction, the “Business Combination”). The Up-C Units are convertible into Class A Common Stock of the Company at the discretion of the holder of the Up-C Unit. See Note 3, Business Combination for details. Subsequent to the Closing Date, the Company’s sole asset is its equity interest in MSP Recovery, LLC. The Company is the managing member and therefore consolidates Legacy MSP.

Legacy MSP was organized in 2014 as a Medicaid and Medicare Secondary Pay Act recovery specialist. The Company utilizes its proprietary internal data analytics platform to review health Claims assigned by secondary payers such as health plans, management service organizations , providers of medical services and independent physicians association s. This platform allows the Company to identify Claims cost recovery rights with potential recovery paths where Claims either should not have been paid by the secondary payers or should have been reimbursed by third-party entities.

The Company is assigned recovery rights to Claims by secondary payers via Claims Cost Recovery Agreements (“CCRAs”). Prior to executing a CCRA, the Company utilizes its proprietary internal data analytics platform to review the set of Claims of a prospective assignor to identify Claims with probable recovery paths. MSP’s assets are these irrevocable broad assignments of health Claims recovery rights that are supported by federal and state laws and regulations. MSP’s operations are primarily conducted in the U.S. and Puerto Rico.

LifeWallet

As of March 31, 2023, the Company’s investment related to LifeWallet included in the condensed consolidated statement of operations was limited to activity and expenses incurred during the three months ended March 31, 2023, which amounted to $1.2 million.

Committed Equity Facility

On May 17, 2022, the Company entered into a Company Common Stock Purchase Agreement (the “CF Agreement”) with an affiliate of Cantor Fitzgerald (“CF”). Pursuant to the CF Agreement, after the closing of the Business Combination, the Company will have the right to sell to CF, from time to time at its option, up to $1 billion in Class A Common Stock shares, subject to the terms, conditions and limitations set forth in the CF Agreement.

On January 6, 2023, the Company entered into a Company Common Stock Purchase Agreement (the “Yorkville Purchase Agreement”) with YA II PN, Ltd., a Cayman Island exempted company (“Yorkville”), which replaced the CF Agreement noted above. Pursuant to the Yorkville Purchase Agreement, the Company has the right to sell to Yorkville from time to time at its option up to $1 billion in shares of the Company’s Class A Common Stock, subject to the terms, conditions and limitations set forth in the Yorkville Purchase Agreement. Sales of the shares of the Class A Common Stock to Yorkville under the Yorkville Purchase Agreement, and the timing of any such sales, will be determined by the Company from time to time in its sole discretion and will depend on a variety of factors, including, among other things, market conditions, the trading price of the Class A Common Stock, as well as determinations by the Company about the use of proceeds of such stock sales. The net proceeds from any such sales under the Yorkville Purchase Agreement will depend on the frequency with, and the price at, which the shares of Class A Common Stock are sold to Yorkville. Upon the initial satisfaction of the conditions to Yorkville’s obligation to purchase shares of Class A Common Stock set forth under the Yorkville Purchase Agreement (the “Commencement”), including that a registration statement registering the resale by Yorkville of the shares of Class A Common Stock under the Securities Act, purchased pursuant to the Yorkville Purchase Agreement (the “Resale Registration Statement”) is declared effective by the SEC and a final prospectus relating thereto is filed with the SEC, the Company will have the right, but not the obligation, from time to time, at its sole discretion and on the terms and subject to the limitations contained in the Yorkville Purchase Agreement, until no later than the first day of the month following the 36 month anniversary of the date that the Resale Registration Statement is declared effective, to direct Yorkville to purchase a number of shares of Common Stock, in an amount not to exceed 33% of the total trading volume during the applicable purchase period and not to exceed a total beneficial ownership for Yorkville of 4.99% of outstanding voting shares, by delivering written notice to Yorkville prior to the commencement of trading on any trading day. The purchase price of the Class A Common Stock that the Company elects to sell to Yorkville pursuant to the Yorkville Purchase Agreement will be 98% of the volume-weighted average price (“VWAP”) of the stock during the applicable

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Table of Contents

MSP RECOVERY, INC. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

purchase date on which the Company has timely delivered a written notice to Yorkville, directing it to purchase common stock under the Yorkville Purchase Agreement.

In connection with the Yorkville Purchase Agreement, the CF Agreement has been terminated.

Liquidity

As an early-stage growth company, the Company has incurred substantial net losses since inception. As of March 31, 2023, the Company had unrestricted cash and cash equivalents totaling $21.6 million. The Company has incurred recurring losses and negative cash flows since inception and has an accumulated deficit of $34.1 million as of March 31, 2023. For the three months ended March 31, 2023, the Company used approximately $10.0 million of cash in operations. The Company’s liquidity will depend on the ability to generate substantial Claims recovery income and Claims recovery services income in the near future, the timing of which is uncertain, as well as its ability to secure funding from capital sources. The Company’s principal liquidity needs have been capital expenditures, working capital, debt service and Claims financing obligations.

The Company anticipates sources of liquidity to include the Working Capital Credit Facility as disclosed in Note 10, Claims Financing Obligations and Notes Payable. The Company anticipates having funding through this source and has taken several actions to address liquidity concerns, including:

In response to these conditions, the Company undertook several actions to address these concerns, including:

1.
On March 29, 2023, the Company entered into the Working Capital Credit Facility consisting of commitments to fund up to $48 million in proceeds. See summary in Hazel Transactions” in Note 10, Claims Financing Obligations and Notes Payable.
2.
On April 12, 2023, the Company entered into the Virage MTA Amendment, which extended the due date for the payment obligations to Virage to September 30, 2024. See summary in Note 16, Subsequent Events.
3.
On April 12, 2023, the Company entered into an amended and restated promissory note with Nomura, which extended the due date to September 30, 2024. See summary in Note 16, Subsequent Events.
4.
Given the uncertainty with regard to the timing and amount of claims recovery income, management implemented a reduction of operating costs in 2023 through the reduction or elimination of certain controllable expenses particularly within the budgeted costs to expand and develop new solutions through LifeWallet platform, advertising expenses and non-contingent legal fees. The Company anticipates that the reductions would contribute approximately $21.5M in savings to operating expenses over the next twelve months.

The Company has concluded that such actions alleviate the substantial doubt about the Company’s ability to continue as a going concern beyond one year from the date these financial statements are issued.
 

Note 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

Basis of presentation

These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in accordance with those rules and regulations do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the unaudited condensed consolidated interim financial statements (the “Financial Statements”) reflect all adjustments, which consist only of normal recurring adjustments, necessary to state fairly the results of operations, financial condition and cash flows for the interim periods presented herein. Prior to the Business Combination, the Financial Statements reflect Legacy MSP.

These Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 2022 Form 10-K. The year-end condensed consolidated balance sheet data was derived from the audited financial statements but does not include all disclosures required by GAAP. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.

All intercompany transactions and balances are eliminated from the Financial Statements.

Principles of consolidation

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MSP RECOVERY, INC. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company consolidates all entities that it controls through a majority voting interest or otherwise and the accompanying Financial Statements include the accounts of the Company’s wholly owned subsidiaries and these entities for which the Company has a controlling interest in. The Company also consolidates all entities that it controls as the primary beneficiary of a variable interest entity (“VIE”). Under the VIE model, management first assesses whether the Company has a variable interest in an entity, which would include an equity interest. If the Company has a variable interest in an entity, management further assesses whether that entity is a VIE, and if so, whether the Company is the primary beneficiary under the VIE model. Generally, entities that are organized similar to a limited partnership, in which a general partner (or managing member) make the most relevant decisions that affect the entity’s economic performance, are considered to be VIEs which would require consolidation, unless the limited partners have substantive kickout or participating rights. Entities that do not qualify as VIEs are assessed for consolidation under the voting interest model.

Under the VIE model, an entity is deemed to be the primary beneficiary of a VIE if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly affect the entity’s economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. Management determines whether the Company is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion at each reporting date. This analysis includes an evaluation of the Company’s control rights, as well as the economic interests that the Company holds in the VIE, including indirectly through related parties. As a result of the Business Combination, the Company consolidates MSP Recovery under the VIE model.

Estimates and Assumptions

The preparation of Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from the Company’s estimates. Estimates are periodically reviewed considering changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Significant estimates and assumptions reflected in these Financial Statements include but are not limited to Claims recovery income and Claims recovery service income recognition, recoverability of long-lived assets and cost of Claims recoveries.

Concentration of credit risk and Off-Balance Sheet Risk

Cash and cash equivalents and affiliate receivable are financial instruments that are potentially subject to concentrations of credit risk. See Note 13, Related Party Transactions, for disclosure of affiliate receivables. The Company’s cash and cash equivalents and restricted cash are deposited in accounts at large financial institutions, which at times may exceed federally insured limits. The Company has not incurred any losses on these accounts. The Company believes it is not exposed to significant credit risk due to the financial strength of the depository institutions in which the cash and cash equivalents are held. The Company has no other financial instruments with off-balance-sheet risk of loss.

Non-controlling Interests

As part of the Business Combination and described in Note 3, Business Combination, the Company became the managing member of MSP Recovery, which is consolidated as the Company controls the operating decisions of MSP Recovery. The non-controlling interest relates to the Up-C Units that are convertible into Class A Common Stock of the Company at the discretion of the holder of the Up-C Unit. The Up-C Unit holders retained approximately 99.76% of the economic ownership percentage of the Company as of the Closing Date. The non-controlling interest is classified as permanent equity within the condensed consolidated balance sheet of the Company. As of March 31, 2023, based on the Class A common stock issuances during the period, the non-controlling interest of Class V Common Stock shareholders was 97.70%.

Changes in the Company’s ownership interest in MSP Recovery, due to Class V Common Stock shareholders converting their shares to Class A Common Stock, are accounted for as equity transactions. Each issuance of the Company’s Class A Common Stock requires a corresponding issuance of MSP Recovery units to the Company. The issuance would result in a change in ownership and would reduce the balance of non-controlling interest and increase the balance of additional paid-in capital.

Claims Recovery Service Income

For the three months ended March 31, 2023 and 2022, the majority of the Company’s Claims recovery service income was related to a servicing agreements with VRM MSP and MSP RH Series 01, which was entered into on March 27, 2018. As part of the Business Combination, the Company acquired rights to cash flows in the assets, after certain required returns to VRM MSP, that had been part of the servicing agreement. As part of this acquisition, the Company no longer receives service income from this agreement and consolidates the entity in which the Company acquired rights to cash flow in the assets as outlined in Note 4, Acquisitions.

In connection with the Hazel transactions discussed in Note 4, Acquisitions, the Company terminated its service agreement with MSP Recovery RH Series 01, an affiliate of Hazel.

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MSP RECOVERY, INC. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Recent Accounting Pronouncements

New Accounting Pronouncements Recently Adopted

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses. In 2016 and subsequently, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments including subsequent amendments to the initial guidance: ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825. Financial Instruments, ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief, ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. ASU 326, and ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures and related amendments require credit losses on financial instruments measured at amortized cost basis to be presented at the net amount expected to be collected, replacing the current incurred loss approach with an expected loss methodology that is referred to as CECL. This ASU is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company adopted this guidance on January 1, 2023 and it had no material impact on our Financial Statements.

Note 3. BUSINESS COMBINATION

On May 23, 2022, MSP Recovery, Inc. consummated the previously announced Business Combination pursuant to that certain Membership Interest Purchase Agreement, dated as of July 11, 2021 (as amended, the “MIPA”), by and among the Company, Lionheart II Holdings, LLC, a wholly owned subsidiary of the Company, MSP Recovery, LLC and combined and consolidated subsidiaries (“Legacy MSP”), the members of Legacy MSP (the “Members”), and John H. Ruiz, in his capacity as the representative of the Members (the “Members’ Representative”). Pursuant to the MIPA, the Members sold and assigned all of their membership interests in Legacy MSP to the Company in exchange for non-economic voting shares of Class V common stock, par value $0.0001, of the Company (“Class V Common Stock”) and non-voting economic Class B Units of the Company (“Class B Units,” and each pair consisting of one share of Class V Common Stock and one Class B Unit, an “Up-C Unit”) (such transaction, the “Business Combination”). Subsequent to the Closing Date, the Company’s sole asset is its equity interest in MSP Recovery.

As a result of the closing of the Business Combination (the “Closing”), the Company is organized in an “Up-C” structure in which all of the business of Legacy MSP and its subsidiaries is held directly or indirectly by the Company, the Company is the managing member, consolidates Legacy MSP and the Company owns all of the voting economic Class A Units and the Members and their designees own all of the non-voting economic Class B Units in accordance with the terms of the first amended and restated limited liability company agreement of the Company. Each Up-C Unit may be exchanged for either, at the Company’s option, (a) cash or (b) one share of Class A Common Stock, subject to the provisions set forth in the LLC Agreement. The aggregate consideration paid to the Members (or their designees) at the Closing consisted of (i) 3,250,000,000 Units and (ii) rights to receive payments under the Tax Receivable Agreement, discussed in detail above. Of the 3,250,000,000 Units, 3,154,473,292 Units were issued in connection with the Closing and 95,526,708 Units were designated to the Company and Opco for cancellation (“Canceled Units”). Since the Closing, the Company has issued 50,022,000 Up-C Units to certain designated persons and intends to further issue shares of Class A Common Stock in respect of transaction-related bonuses or certain other designated persons, which together with the 50,022,000 Up-C Units would be equivalent in number to the Canceled Units.

In connection with the Closing, the Company changed its name from “Lionheart Acquisition Corporation II” to “MSP Recovery, Inc.” The Business Combination is accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, the Company is treated as the acquirer for financial statement reporting purposes. The reverse recapitalization was treated as the equivalent of Legacy MSP issuing stock for the net assets of LCAP, accompanied by a recapitalization. The net assets of LCAP are stated at historical cost, with no goodwill or other intangible assets recorded.

The Company received net proceeds in the business combination transaction of approximately $23.4 million, which includes the restricted cash received as part of FEF shares as defined in Note 15, Derivative Liability. The Company incurred direct and incremental costs of approximately $79.2 million related to the Business Combination, which consisted primarily of investment banking, legal, accounting and other professional fees. These transaction-related costs were recorded as a reduction of additional paid-in capital in the condensed consolidated balance sheets. During the three months ended March 31, 2023, the Company and CF agreed to terminate their OTC Equity Prepaid Forward Transaction. As a result of this termination, the restricted cash received as part of FEF shares amounting to $11.4 million was released and paid to Cantor.

Warrants

As part of the Business Combination transaction, the Company assumed the liability related to the LCAP public warrants (“Public Warrants”) of $